How The CFPA May Effect Credit Cards

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.