This past month, Washington regulators continued to take actions that sought to defend the rights of consumers in a worldwide card market that touts a rate of about 10,000 transactions per second.
In June, a subcommittee hearing called “Improving Credit Card Consumer Protection: Recent Industry And Regulatory Initiatives,”
produced statements from House Finance Committee member Carolyn Maloney, D-NY, who unfolded the sentiment that seems to be pervasive in the halls of Congress nowadays.
Said, Congresswoman Maloney, “Even though credit cards are indispensable to most working Americans, credit card complaints far outnumber all other complaints about banks filed with federal regulators in recent years. In the wake of our first credit card hearing last month, this subcommittee has received a flood of correspondence from individuals with credit card complaints. The complaints mostly center on what consumers see as arbitrary and unfairly high interest rates and penalty fees; confusing practices that constantly change in the issuer’s favor; and impossible barriers to getting help to sort through a problem, even when the issuer has caused it.”
Maloney went on to explain that this position and statement by the subcommittee comes at a time when more related news has emanated from
Federal agencies. She explains that this hearing was timely as it
was set shortly after the Federal Reserve released its new “Reg Z” (Truth in Lending Act) for public comment. This is the first revision of Reg Z in over 25 years, and according to Maloney, is “long overdue and much awaited.”
“I think it represents a considerable improvement over the present situation,” said Maloney, “in which a long outdated rule struggles to keep up with an electronic financial universe it was not designed for.”
New, proposed changes include new stipulations regarding credit card advertising, billing and consumer updates.
Among the major improvements are a 45 day notice period, vs the
present 15 day required period of notice prior to a change.
Creditors would be required to be more explicit with larger type, and “reader friendly” boxes regarding their credit terms.
They would need to clearly explain any additional terms and conditions that apply for sub-prime lending rates, such as account set-up, and other fees that might not be readily apparent to the person using the card.
The 45 day notice period applies to increases in interest rates, and requires display of a “Schumer box”, or table that explains all the
charges that a consumer is liable for. This box would be provided
not only at solicitation but at account opening and at changes in terms. This in turn, would prohibit the use of the term “fixed rate”
for rates that aren’t fixed, and reorganization of the Schumer Box to be useful, understandable and meaningful to consumers.
“More systemically,” says Maloney, “I doubt that disclosure can be enough to protect consumers when the issuer can change any of the terms of the contract at any time and in any way. That is the case for a surprisingly large number of cards, in which consumers are completely at the mercy of issuers. Many issuers can and do change the interest rate, the penalties, over limit fees, how rates are calculated, the payment date and many other features. Under the new rule, they will have to tell consumers about most of these changes in advance, but that really doesn’t help even the most savvy customer unless they move to a card whose terms are more secure.”
The rule is in a 120 day comment period as of this writing. The
rule itself was a priority issue as federal regulators state that credit card complaints outnumber all other bank-related grievances these days.
At the same time, interchange fees that would apply to those in the transaction supply chain are coming to the attention The Senate Banking, Housing and Urban Affairs Committee who plans to air a hearing on interchange practices within the year. State governments are making movements, with nine states thus far having introduced legislation to control interchange fees as well as to control disclosure to explain in plain English, the fees consumers are paying for.
Specific industries recognize the need for some oversight. Many industry consultants are building in ways to combat interchange fees, particularly where the margins are slim and the transaction fees are
rising. “Independent grocers and regional chains have been
battling the problem of escalating payment fees for years now, without much action from our nation’s lawmakers,” said Ray Carlin, President and CEO of Plano, Texas – based store Next Retail Technologies. “Since these grocers are our single business focus, their problems are our problems. So we’ve stepped up with a revolutionary solution that strips layers of costs out of their operations and helps improve their competitiveness.” But other industries at large see the actions of regulators and agencies as reactionary to a burgeoning problem. These actions come as no surprise to many in the industry.
“Typically in a democratic environment, the focus tends to shift to regulations and control of issuers in terms of protecting consumers,”
says Ron Wince, CEO of Guidon.com who is an expert on electronic transactions and processing and works with financial services and banking companies.
Wince says that such actions parallel the proliferation in transactions as consumers increasingly use card transactions for everything under the rainbow.
“Electronification of transactions and processing will continue to grow,” says Wince. “Taking out steps via paperless environments and imaging will still be big due to efficiency gains and the ability to leverage global back offices for processing in India, Singapore, etc. This will be on the minds of the Congress as they see a continued shift in jobs to these areas in the name of cost cutting.
Likely we will see stiffer regulations around disclosures and relief for consumers on fraud and theft.”
According to Wince, consumers will no doubt be the benefactors of change in light of comments and actions that Congress and the Senate
seem to be taking. Says Wince, “this might make times tougher for
issuers.”
“Risk will likely be pushed more onto the issuers and away from consumers,” he adds. “This will require banks to take a look at how they manage risk and it will require them to make sure they maintain compliance if changes take place.”
Undoubtedly, there are risk limitations for consumers no matter what stances regulators take. This risk often comes from security risk.
“Simply changing disclosure statements can add significant cost for some of the larger banks,” he adds. “It is nearly impossible to completely remove the risk from the consumer; even if everything works as it should, creative criminals will find ways to commit fraud. As a result, the cost for fraud will grow as more reliance on electronic transactions grows. Consumers will be inconvenienced by stolen identity, etc. Issuers of credit cards and banks will undoubtedly bear the cost of fixing this but the pain will be felt at the personal level over a long period. “
Wince also feels that more and more actions will be taken by agencies, politicians and their committees and subcommittees with regard to an emergent topic making national news regarding financial
transactions: sub-prime lending.
“This is in the news but it has not been addressed adequately,” says Wince. “I think there is another round of failures and impacts to consumers yet to take place and Congress is not moving quickly to address it. They are distracted with so many issues - Iraq, War on Terror, upcoming elections - that I have a pessimistic outlook on their ability to get anything done in this area until after the damage is done.”
On another front, many Federal legislators were outraged in 2005 when Wal-Mart Stores, Inc. submitted an Industrial Bank Application Package to the Federal Deposit Insurance Corporation (FDIC) to form Wal-Mart Bank as a Utah industrial bank.
For the most part the Feds have kept banks and commercial organizations largely separate, however commercial organizations who apply to operate a financial services function called an Industrial
Loan Corporation or ILC have been on the rise. FDIC Chairperson,
Sheila Barr, stated that such rapid growth raises “potential risks”.
This past January, Congress enacted a moratorium on ILC applications to give Congress some time to ponder the issue. Finance Committee Chair Barney Frank D-MA and Paul Gillmor R-OH, have introduced the Industrial Bank Holding Company Act of 2007 which aims to block new ILCs and allow the FDIC to have greater powers over existing ones.
It is expected to have some resistance in the Senate.
So the past month or so, has seen a continuation of activity and sentiment by Federal legislators to insure that the consumer is protected and insulated from any practice that would not allow them to make informed financial decisions.
John Dugan, the United States Controller of the Currency, said it best when he testified this past month when he testified: “effective disclosure provides three important consumer benefits: informed consumer choice; healthy card issuer competition to provide consumers the terms they want; and increased transparency that makes it more difficult for issuers to withstand public criticism of practices that are especially aggressive. But, consumer disclosures for credit cards have not kept pace with significant changes in the market over the past decade or so that have affected credit card terms, practices, and pricing structures.”
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