Lending Reform Legislation: Strange But Proper Bedfellows

One of the promises that supposedly enticed many who supported Bankruptcy “Reform” in April of 2005 to vote as they did was that since the financial industry had basically gotten what it wanted in the bill, something would be done about abusive lending practices “later.”

“Later” was meant to mean during the 109th Congress. “Later,” as anyone could have predicted (and yours truly did), never happened.

Thanks to the 109th’s inertia, this gives the 110th’s new majority a chance to work on, pass, and take credit for credit card abuse legislation such as that advocated by the quite liberal Center for American Progress (CAP) and identified/reviewed yesterday by Jeff at Credit/Debt Recovery (web link not available, though the American Bankruptcy Institute has a “cold fusion” link that doesn’t work and will hopefully get fixed; Dec. 2 — here it is). The problem is that CAP, though its rhetoric is a bit over the top, is advocating common-sense measures that both I and Jeff agree with, and that I believe any free-marketeer with a sense of perspective should support.

The key measures:

(1) enact legislation to ban retroactive application of interest rate increases so credit card companies can no longer raise a customers’ interest rate and then apply that higher rate to earlier purchases;

Basically, what reformers want is to say that “a deal’s a deal.” So of course I agree with this, with the “exception” that if the customer agrees to a variable rate pegged to a lending index (e.g., “Prime Plus 2%”), that rate CAN go up with the index, even on previous purchases. This is consistent with how other variable rate loans are treated. I also believe that if a borrower’s credit situation deteriorates, the lender should be able to lower credit limits and close accounts (i.e., prevent future charges) at their discretion, with adequate notice.

(2) ban the practice of universal default to prevent credit card companies from changing the terms of a card based on a customer’s experiences with another issuer.

Doh. I’ve been railing about the outrageousness of “universal default” for quite some time. As Moderate Mainstream has roughly said (but I can’t find the link for the exact quote), “Your landlord doesn’t raise the rent because you’re late with your electric bill.” (Don’t give ‘em any ideas.)

(3) ban what it deems to be abusive and excessive fees (such as unilateral over-the-limit fees when the issuer approved the over-the-limit transaction, and processing fees when consumers pay their bill by phone or online).

What Jeff said here is really good: “It’s an act of fraud for a creditor to approve a purchase and then charge the consumer a fee for going over the limit. I’m a little less sure about processing fees. If it’s a lot cheaper for the creditor to process payments by mail, I don’t see why they shouldn’t charge a fee for payments by phone. That is, if the consumer is talking to a live operator.”

I would go a little further and say that if finance charges are the only reason you went over your limit, and you pay your balance down below the limit by the next due date, there is NO justification for an over-the-limit fee.

The last two of CAP’s ideas, to improve disclosures and strengthen the FDCPA (Fair Debt Collection Practices Act), don’t grab me. Disclosures won’t end up being as complex or lengthy if the first three items are enacted; some of the disclosure ideas I have seen ether have a “cure worse than the disease” look to them, or appear to be close to babysitting. The biggest problem with debt collectors is that they violate existing laws, which I believe are adequate if enforced; making the penalties for continuing to do that tougher would make more sense that piling on additional laws that would also be ignored without tougher penalties.

If a Democrat-majority Congress passes legislation limited to these five items, President Bush would be out of his mind to veto it. Otherwise the prediction I made last year when I suggested that he veto bankruptcy “reform” might actually come totally true:

As a political calculation, the (bankruptcy) bill is a disaster that has the potential to jeopardize much of the rest of the GOP agenda during the rest of your presidency, cause the GOP to lose the White House in 2008, and leave the party of Lincoln in the political wilderness for years to come.

Veto sensible lending reform, and it will indeed be “hello, wilderness” time.