Tag: credit

  • Why Is the Government Paying High Interchange Fees?

    Posted by

    Adam Levitin

    The American Banker (subscription required) reports that Senator Dick Durbin has "added an amendment to an appropriations bill that would require credit card payments accepted at government agencies to be given the lowest available market interchange rates, which typically can only be negotiated by large supermarket chains."

    The amount of money at stake is relatively small–perhaps $28 million/year. But it is rather astonishing that the US government doesn't already get rock-bottom interchange rates. If interchange is supposed to reflect the merchant's risk (an argument sometimes made), the US government should be getting the risk-free rate. It hasn't been. Frankly, I'm not sure why the government should settle for getting the best rates available to large supermarket chains-that's not a risk-free rate. If interchange is about risk-based pricing, surely supermarkets should pay a premium over the government?

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  • Interchange Theory: Simultaneous Rent-Extraction from Both Merchants and Consumers

    Posted by

    Adam Levitin

    Todd Zywicki and I have been having a back and forth on interchange in several forums.  Todd and Joshua Wright had an op-ed in the Washington Times, I responded with a letter to the editor, and then Todd came back with a blog post. I posted a detailed response to Todd in the comments to his post, but I will repost the core of the response here.  

    In his blog post, Todd says that he can't understand my argument that in the credit card world there are economic rents (supracompetitive prices) being extracted from both merchants and consumers.  Todd thinks the only possible economic rents story is one of merchants being charged too much and consumers too little.  (Todd does not endorse this story, but he at least gives it theoretical credence.)  Therefore, Todd believes that any reduction in interchange income must be offset by an increase in consumer charges.

    What follows is a brief outline of my argument that the current credit (and debit) card system simultaneously extracts economic rents from both merchants and consumers.  The corollary to my argument is that interchange regulation actually produces reductions in the economic rents paid by both merchants and consumers; it does not result in costs being shifted form merchant to consumer, but instead results in reduce profits for card issuers and card networks.  To this end, I present a rough sketch of the net impact of interchange reform in Australia; as surprising as it is, I do not believe this has been done before.  

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  • Bogus Statistics: The Banking Industry’s Go-To Lobbying Tool

    Posted by

    Adam Levitin

    Fake statistics have been a central feature of the banking industry's lobbying strategy on every major consumer credit issue since the 2005 bankruptcy amendments. 

    In 2005, there was the phantom $400 bankruptcy tax used to push through the BAPCPA.  Then there was the Mortgage Bankers Association's 200 basis point interest rate increase claim about cramdown.  For credit cards, there was no fake statistic, but a pseudo-academic study funded by the American Bankers Association.  (In retrospect, lack of a scare number was a major strategic mistake for the industry.) 

    Now we have the latest installment in the parade of phony numbers:  an American Bankers Association-funded study about the likely impact of the Consumer Financial Protection Agency (CFPA) on consumer credit cost and availability and economic growth.  The study is by David Evans of LECG and Joshua Wright of George Mason Law School (Wright may be familiar to some Credit Slips readers from his blog comments in the past). 

    There's a lot of tendentious claims in Evans and Wright's study, but the heart of it are some very precise claims as to the impact of the CFPA on the cost of consumer credit (160 basis points), the demand for consumer credit (2.1% decrease), and the net job creation (4.3% slower).

    How, you might ask, did anyone possibly arrive at such precise predictions based on legislation that does not create any substantive regulation of the credit industry, but would merely transfer largely existing powers to a new agency? 

    The short answer:  just make up the numbers.  I kid you not.  Evans and Wright selectively chose a study on the impact of a different regulation (interstate banking restrictions) on credit cost.  They briefly argue it is analogous to the CFPA Act, which they claim will have double the impact.  (Why double?  Why not?)   Then they take that number and multiply it by an elasticity metric for the demand impact.  And for the coup-de-grace, they take a misleading number on net job creation and conjecture with no basis that it would be reduced by 5%.  These numbers are presented as "plausible, yet conservative" assumptions. 

    There's a lot of room for good faith disagreement about methodology, but Evans and Wright's numbers don't come close to passing the straight-faced test.  (Even the Mortgage Bankers Association had some facially plausible basis for their cramdown claim.)  I am still shocked that two serious scholars would attach their names to this study. My short critique of their study is here. 

  • The Banks, Private Equity, and the Fate of Consumers

    Posted by

    Adam Levitin

    The New York Times has an interesting op-ed about private equity investment in banks. Long story short: banks need money now, and private equity is one of the last remaining sources of capital available. PE investment strategy is to buy a control stake, maximize efficiencies, and resell the company in 5-7 years. Because current bank regulations require that an entity holding beyond a certain threshold of a bank’s stock either register as a bank holding company (which subjects it to various regulation, including disclosure requirements) or forgo involvement in the bank’s management, PE firms are reluctant to invest in banks. Private equity is about control and lack of transparency. PE smells a great buy in banks, however, so PE shops are pushing federal banking regulators to relax the regulations. Their argument: without us, the banks will fail and/or credit will contract, and this will be on your heads, banking regulators, so beggars can’t be choosers.

    The Times rightly notes that PE shops shouldn’t get special treatment and if banks fail, well let that be a lesson to their investors and creditors to monitor lending practices better in the future. Depositors are largely protected by FDIC insurance.

    But there’s another worrisome angle left unmentioned in the Times editorial. Because PE shops are simply trying to maximize efficiencies in the short-term in order maximize their return on exit, they aren’t concerned about the long-term safety-and-soundness of banks. If the company blows up after the sale, the PE shop doesn’t really care. This could spell bad news for consumers. If a PE shop buys a bank and sets out to maximize revenue/cut costs, it will likely start milking the consumer cow much more vigorously. And this means PE shops might be tempted to push all sorts of abusive, but very profitable lending practices. This is quite concerning, and if federal bank regulators do loosen the investment requirements for PE, it should be with very explicit commitments to maintaining best practices vis-a-vis consumers. Of course, once the camel’s nose is under the tent, these commitments could start to look a lot like the ones on human rights that China made the International Olympic Committee.

  • Usury Bill

    Posted by

    Adam Levitin

    This week Senator Richard Durbin (D-IL) introduced a federal usury bill, S.2387, the Protecting Consumers from Unreasonable Credit Rates Act. I haven’t found a copy of the bill yet, but according to Durbin’s website, the the bill:

    • Establishes a maximum interest rate of 36% on all consumer credit transactions, taking into account all interest, fees, defaults, and other finance charges.
    • Clarifies that this cap does not preempt any stricter state laws.
    • Applies civil penalties for violations including nullification of excess charges, fines, and prison.
    • Empowers attorneys general to take action for up to three years after a violation.

    There are four major points to make about this legislation. First, it would restore an important element of democratic political accountability to consumer protection in financial services. Second, it would significantly restore states ability to protect their own citizens. Third, it offers a solution to the problems of financial products being structured so as to avoid APR disclosures and to catch consumers with hidden fees. And fourth, it represents a very important first step in a legislative process of rethinking the model of credit industry regulation.

    [Hat tip to Dan Ray for the link to the text.]

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