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How The CFPA May Effect Credit Cards

by Jason Steele

This year has already been a big year for the credit card industry.    The CARD act was signed into law, the most sweeping change to credit card regulations in a generation.     Supporters of that legislation, like myself, and detractors as well realized that the banks would work quickly to adapt to the letter of the law, but not it’s spirit.

Since the passage of CARD, it has become all too clear that banks will find new ways to make a profit, using every trick and trap that is legally available to them.   Some argued that this was a flaw in the CARD act, but I see it as a imperfect aspect of any such regulation.  Legislation, once passed, is largely static, whereas bank policies are completely fluid.

Now, the Obama administration is supporting far reaching legislation that will address the concern that the CARD act protections will be circumvented.    The proposed Consumer Financial Protection Agency was originally conceived as the financial equivalent of the Consumer Products Safety Commission.    This agency  was set up in 1972 to help protect consumers from the unreasonable risks and dangers in manufactured consumer products.

The idea was that if something was inherently unsafe, the product could be recalled before people where physically injured.    With a Financial product, the danger is not physical, but economic.    Instead of ending up in the emergency room, dangerous financial products can lead to debt and even bankruptcy.

What CFPA Would Do

The Consumerist has a quick breakdown of the provisions currently included in the proposed legislation.    They include restrictions on mandatory binding arbitration, a provision that is often included in the fine print that denies consumers access to the courts and places disputes in the hands of arbitrators that are often accountable only to the industry.

According to the Consumerist, “The CFPA would also have the authority to designate fees, charges, or behaviors as unfair, deceptive, or abusive practices, and ban them as the agency sees fit. So if Bank of America, for example, dreams up a new way to screw you that wasn’t banned by the recent credit card law, the CFPA could review it, ban it, and start ringing up the fines. Fines for violating these bans range from $5,000 to $25,000 per day.”

This is great news, as the CARD act would go from being a static set of rules, to a dynamic regulatory framework.    The CFPA would also review credit card contracts, marketing material, practices and costs to assure competition and fairness in the marketplace.    You know competition is lacking when every credit card contract contains identical provisions.     States would also be allowed to regulate further than the Federal Government, a feature that is sometimes lacking from national regulators.

The Consumerist article points out that the legislation does not contain a cap on excessive interest rates, known as Usury

How Does It Look?

Like the CARD act the CFPA is going through the legislative process where is is susceptible to industry lobbyists seeking to weaken it’s effectiveness.   The CARD act was passed during a time of unprecedented bank industry turmoil when lobbyists were at the weakest point.   Unfortunately, the CFPA is being debated at a slightly more favorable moment in history.    It is still likely to pass, but it remains to be seen if there will be any teeth in this law.    As we learned from the CARD act debate, the proposed legislation can differ substantially from what goes to the President.    So far, President Obama is pushing this bill with the weight of the White House, so I would put money on something passing later this year.   If it does, 2009 will become a landmark year that changed the way that the financial industry conducts business in this country.

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3 Responses to “How The CFPA May Effect Credit Cards”

  1. Credit Card Chaser Says:

    This is a good thing as long as the power is not abused. If the overseers truly do put a stop to unfair and deceptive practices then that is of course a good thing. However, if they get too carried away and controlling (as government is prone to do) then their rigid regulations will only end up hurting consumers as banks are forced to pull certain products or lower rewards and other benefits to make up for the high cost of doing business.

  2. interloper Says:

    One comment regarding a statement caught my eye:

    You know competition is lacking when every credit card contract contains identical provisions.

    Actually, this indicates the presence of competition, not the lack thereof. Here’s an oversimplified example:

    Suppose Company A offers a credit card. Also suppose this is the only credit card available to consumers. Company A can pretty much put whatever onerous demands and restrictions it wants on the users. Although tightening restrictions and raising fees will cause some people to drop Card A, the result would still be a larger user base than with competition.

    Now Company B comes along and offers a card similar to Card A, but with slightly lower fees or less restrictions. Some (probably large) number of users would drop Card A and switch to Card B, as well as some new users would directly join Card B.

    Company A would have to loosen restrictions and/or lower fees to match B, if they wanted to maintain membership and reduce churn. If they wished to grow their membership, for example to make up for the customers they lost to Card B, then they would also have to continue down this path. Or they could take it even further, loosen things more, and try to lure some people back from B while also adding new customers.

    When companies C through F join the fray, several rounds of adjustments would occur amongst all the companies. Towards the end, all would be offering similar terms and conditions, if not exactly the same t&c.

    (Remember, the companies still have to be profitable. That’s why it’s not a race all the way to the bottom of reducing or eliminating all fees and conditions. Below a certain level, the companies will decide it’s not profitable or worth it.)

    Of course, the market is dynamic, and not static. Situations change for consumers and companies, and continual adjustments will be made.

    Look at what Bank of America is doing. If these new annual fees don’t cause “too many” customers to drop their card, expect other banks to start adding these fees as well. If customers flee en-masse, then expect BofA to drop the fees.

  3. FB @ FabulouslyBroke.com Says:

    For me, the easiest would be just to live as if you don’t need a credit card.

    Get out of debt, stay out of it, and never carry a balance.

    That way, even if they charge 50% interest, you aren’t affected.

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