Tag: credit cards

  • Interchange Week on the Slips

    Posted by

    Adam Levitin

    Let’s call this interchange week. With efforts to bring the Credit Card Fair Fee Act to vote in Congress picking up steam, I’m going to do a few postings on different aspects of the interchange debate this week. Coinciding with this, the printer proof of my recent article on the economics and origins of interchange is available on SSRN (spoiler: interchange and merchant restraints are less about network effects than about evading TILA, usury laws, and branch banking restrictions).

    So as a primer for the rest of my posts, who’s up for some good ol’ fashion credit card network economics?

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  • Citibank Says Credit Market Doesn’t Work

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    Elizabeth Warren

    Citibank announced yesterday that it might take back its highly-publicized promise to abandon universal default. The promise drew praise when it was announced, and it also helped Citibank and other lenders fight off any new regulations. After all, if the industry would regulate itself, Congress wasn’t needed. This was just another example of the genius of the free market–better products will prevail, increasing consumer wealth. But it seems the market didn’t work so well.

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  • Have You Already Lost?

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    Elizabeth Warren

    The reasons to dispute a credit charge are many–mistakes, failure to credit a return, identity theft, a lost payment that triggered penalty interest and fees, etc. Maybe the company will be nice and settle, or maybe the charge will be small an the customer will grumble and pay.  But if you had a serious dispute you wanted to pursue, have you already lost? 

    Business Week has a cover story this week about credit card disputes are settled through arbitration.  The focus is on NAF, an arbitration outfit that, by its own accounting, arbitrated 18,075 cases between a business entity and a California consumer. The score?  Business won 18,045, and consumers won 30.   

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  • Credit Card Debt Absent the Mortgage Bubble

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    Adam Levitin

    We tend to view credit card debt and mortgage debt in isolation, but its important to remember that the two are highly fungible. This means that when consumers leveraged up with mortgage debt in recent years, the were partially deleveraging their card debt. This means that but for the mortgage bubble, we’d be seeing much higher levels of credit card debt (and that’s where we’re headed).

    The mortgage bubble of the past few years was largely a refinancing bubble, not a purchase money bubble (much less a first-time homebuyer bubble). When people refinanced, they were not just refinancing their mortgages. They were also refinancing their credit card debt. Or, more precisely, they were converting their unsecured high interest credit card debt into lower interest, but secured, mortgage debt. There was a brilliant framing in the subprime pitch—pay off your 22% CC debt with a 9% mortgage. Seems like a no-brainer when pitched that way. There were some folks who refinanced multiple times, each time paying off thousands, if not tens of thousands of dollars of credit card debt (and other non-mortgage debt).

    This has an important implication that has escaped notice.

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  • Proposed Fed/OTS/NCUA Credit Card Regulations

    Posted by

    Adam Levitin

    [Updated  5.4.08.  Updated language, largely comparing Regs to pending legislation, is in brackets.]

    This afternoon, the Federal Reserve, Office of Thrift Supervision, and National Credit Union Administration unveiled a set of new, proposed unfair and deceptive practices (UDAP) rules under section 5(a) of the Federal Trade Commission Act.  A copy is available here.  Other materials are here.  It’s not light reading–269 pages. 

    Some of the proposed rules are quite favorable for consumer interests.  Others do not go far enough, however, and perhaps most importantly, there are several major issues that the proposed rules simply do not address. From an initial perusal, the gist of the rules (and what’s missing) seems to be as follows (below the break):

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  • Credit Card Redlining

    Posted by

    Adam Levitin

    Several months ago, when I was a scarcely tolerated guest blogger, I wrote a post that asked (What Determines) What’s In Your Wallet? The point was to highlight how little we know about what determines what credit card offers a particular individual receives. I suggested that there was a danger of red-lining in the credit card industry based at least on what solicitations one received. (I got a bunch of indignant e-mails about this emphasizing that federal law prohibits discriminatory lending…as if no one ever violated the law. Ah, Camelot.)

    Well, now comes an empirical study from Ethan Cohen-Cole, an economist at the Boston Federal Reserve that indicates that there is redlining in the credit card industry. Residents of black neighborhoods are less likely to receive less consumer credit than residents of white neighborhoods, all things being equal:

    This paper’s principal observation is that remarkably, in spite of identical scores and identical community characteristics, our individual in the Black neighborhood receives less consumer credit (e.g. fewer credit cards) than the individual in the White area. That is, in spite of the fact that both have been assessed to have similar risks of nonpayment, as determined by the credit score, the person living in the Black area has less ability to access credit.

    And if there is less available credit card credit, where do people in black neighborhoods turn for credit?

    To be sure, a single empirical study is just that and one can quibble about methodology, but wow! Talk about opening up a new front in credit card regulation. I’ve got to think that if this study gets some attention it is going to cause Congress to ask some questions. Of course, the study says nothing about the terms of the credit, but if I had to take a guess…well, what would you think?

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  • My Very Own Risk-Based Repricing Experience

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    Adam Levitin

    People sometimes assume that I have a personal issue with credit cards because I write a lot about the card industry and often argue that its practices are harmful to consumers and to general welfare.

    I really don’t. I just think they are an amazing laboratory for examining contractual relationships and bargaining power. Frankly, I’m surprised that more people don’t study them, because they are the most ubiquitous type of consumer contract and are at the very core of the network of contracts that makes up our consumer economy.

    This week, however, it got personal. I fell into the card industry’s billing practice traps. And the funny thing is that this is because the card issuer screwed up. In the end I don’t actually owe any money (alas, there’s still some issues to resolve)–but I could have very easily ended up paying a lot of money I didn’t owe. The ridiculous twists and turns in my saga are illustrative of the serious problems that exist with credit cardholder agreements and why there needs to be legislative limits placed on the terms of these agreements.

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  • The Future of Consumer Credit…Today

    Posted by

    Adam Levitin

    Paige and Jeremy have had some wonderful posts this last week, and although I have not been deputized to be their official host, I want to thank them for really pushing the behavioralist perspective.

    I want to take up the final question Paige and Jeremy posed, however. They ask “Will the terms of consumer credit improve (lower interest rates, more frequent flyer miles) or worsen (higher late fees, more invasive collections practices)?”

    We already know the answer, because the future is here today.

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  • The Credit Cardholders’ Bill of Rights

    Posted by

    Adam Levitin

    We at the Slips have been remarkably silent about the proposed Credit Cardholders’ Bill of Rights, easily the most major proposed credit card legislation in a long time, perhaps since the Truth-in-Lending Act of 1968. I think we’ve all been expecting each other to take the lead in piping in. It’s high time we started a discussion on this legislation, so here goes (warning, this is a long post, but this is a hugely important issue).

    The Cardholders’ Bill of Rights takes aim at some of the most troubling and odious practices of the card industry. The proposed legislation has lots of features (summarized here), but the most important is that it would prohibit or limit a number of card issuer billing practices that are substantively unfair or that consumers rarely know about even if disclosed: (1) universal cross-default clauses; (2) any-time, any-reason rate changes; (3) retroactive application of interest rates without a opportunity to cancel the account first; (4) two-cycle billing; (5) unlimited applications of overlimit fees in a single billing cycle; (6) give consumers the ability to opt-out of overlimit transactions; and (7) require pro rata application of payments to balances accruing at different interest rates.

    These terms and practices may not be familiar to all readers of the Slips, so let me briefly explain each in turn, because chances are some apply to at least one of your credit cards.

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  • The Future of Bank Fees

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    Elizabeth Warren

    The Brits may be showing us the future on bank fees.  First, the pain:  British banks charge an average of $57 for an overdraft, about 70% more than US banks.  Second, the response:  A movement has swept across Britain to sue banks over the fees, claiming they are unfair.  The top five banks have already refunded $810 million, and the litigation marches on.  A huge test case is pending.

    Consumer advocates claim that the cost to the bank of providing overdraft service is about $9 per transaction.  The litigation focuses on the applicability of consumer protection laws to bank services in the UK, but I confess that this makes me think about plain old contract law. The banking relationship is based on a contract, so what happened to the long-established contract principle that damages for breach must be reasonably related to actual or anticipated harm? Common law distinguishes a "penalty," which is unenforceable, from a more moderately priced liquidated damage clause, which is OK. $9 v $57 looks like a penalty unrelated to actual costs.  And, for the US banks, isn’t the same true?  If an overdraft costs about $9 (processing, risk, etc.), doesn’t a charge of $35 look like a penalty?

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