Consumer Advocacy

Someone claiming to be a "consumer advocate" told the Senate Banking Committee that to make things "fair", There should be an annual fee on credit cards for those that do not carry a balance.

Let's take a look at the twisted logic:

In a Senate hearing targeting credit card practices, one consumer advocate suggests an annual fee might lighten the load on those who pay high penalties.

In most instances today, it would be silly to pay an annual fee for a credit card simply because most cards don't have them anymore. But in a Senate Banking Committee hearing examining credit card practices this week, one consumer advocate suggested those who pay their balances in full every month (about half of all cardholders) should pay a small annual fee to credit card companies.

Why? To pay their fair share.

Those who carry balances on which they pay interest and fees are subsidizing cardholders with no revolving balance who may even be in rewards programs, said lawyer Michael Donavan of Philadelphia-based Donavan and Searles. He represents those who have unwittingly fallen into many of the sandtrap fees and penalties embedded in hard-to-understand credit card agreements.

Restoring small annual fees on cards used by "non-revolvers" would bolster revenues for card issuers, who then in turn might not make life so expensive for those with revolving balances.

But, Donovan testified, "it's not a question of financial literacy and never will be." The problem as he sees is it is the ability of credit card issuers to change the terms of the agreement with just 15 days' notice.

"The credit card is one of the only contracts in common law anywhere in which the superior bargaining entity can change its terms at anytime for any reason," Donavan said. "If they can change the contract on an existing balance, then they will always have an unfair advantage."

What Donavan is proposing is nothing but socialist nonsense. A law requiring an annual fee would do two things:

1. Penalize the prudent
2. Reward the spendthrifts

Had it not been for Donavan's complaint about credit card companies being able to change contract terms at will for any reason, a reasonable person might have wondered if he was a banking industry shill rather than some sort of consumer advocate. His concern over contract changes seems to indicate otherwise. But if Donavan really wants to be a consumer advocate I think he should pursue the legality of those contracts and take a good hard look at current bankruptcy laws instead of attempting to punish the prudent. If anything, Donavan should be encouraging those with balances to pay them off rather than punish those who do.

There is no need to punish the prudent anyway. After all credit card companies make a profit off card transactions by charging merchants a processing fee on every transaction. Enough is enough.

Credit Card History

In 1996, the U.S. Supreme Court in Smiley vs. Citibank lifted the existing restrictions on late penalty fees. In response fees have soared.

Usury Laws

According to BankRate.com there are Few protections left for consumers.

Some states don't have usury caps, and in those that do, federal law usually supersedes state law when it comes to setting rates and fees.

This trend began in the late 1980s. Most big banks packed up and moved their credit card operations to "debtor-friendly" states such as Delaware, said Steven Palmer, managing partner and a specialist in usury law at Palmer, Allen & McTaggart, a corporate law firm in Dallas.

The lure was "being able to charge higher fees," Palmer said. "When some of the banks left Texas, several of the credit card operations were spun off. Mercantile National Bank became Mcorp and they transferred to Wilmington, Delaware. That became Lotmus, which is now FirstUSA. [Mish note: FirstUSA became Bank One in a merger. Then Bank One merged with JPMorgan/Chase].

No limit on rates in 26 states

There are 26 states that have no limit on what bank credit card issuers can charge for interest rates, according to the American Bankers Association. Issuers in 27 states have no limit on what they can charge for annual fees.

California, Delaware, South Dakota and Tennessee are among the states offering the least protection. These four states currently have no maximums on the following:

· delinquency fees
· cash advance fees
· over-the-limit fees
· transaction fees
· stop payment fees
· ATM fees
· mandatory grace period

Consumer Protection

If that was not enough "juice" to squeeze in and of itself, the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 attempts to make consumers debt slaves forever. Some provisions of the new law as referenced in the above link are as follows:

• Increasing the amount of paperwork which must be filed by every debtor, requiring pre-filing Credit counseling and post-filing financial education for debtors whose debts are primarily consumer debts, increased filing fees, and increasing attorney obligations in a manner that, collectively, will increase the cost of filing for bankruptcy.
• Making it more difficult for individuals to receive a Chapter 7 discharge. A means test is to be imposed on would-be filers to test if they have enough disposable income to fund a Chapter 13.
• Making Chapter 13 less attractive by, amongst other things, requiring five year payment plans (for above median debtors) rather than the three year plans that were previously the norm.
• Allowing creditors to pursue collection remedies without court permission in various circumstances such as offsetting tax refunds, pursuing tax and domestic relations litigation in all respects except the final turnover of assets from the estate, establishing wage assignments in domestic relations actions, repossessing vehicles and personal property subject to loans or leases 45 days after the first meeting of creditors in cases where no court action has been taken regarding that property, and allowing evictions that completed the court process prior to the filing of the petition or involve endangerment to property or drug use to proceed.
• Requiring that debtor counsel conducts an investigation of their clients' filings and be personally liable for them, not present under prior law. In addition, bankruptcy filings will now be subject to audit in a manner similar to tax returns.

Exactly what consumer protections can anyone find in the above law? I suggest there are none. In fact, whenever "protection" of any kind is listed in any bill there is a near certain guarantee that it provides anything but protection for whatever is supposedly being protected.

Consumer advocates wanting to do something worthwhile might attempt to get the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 rewritten or better yet scrapped altogether.

That "consumer protection" law was as one sided as things can get. Not only do credit card companies get to charge rates that can only be construed as usury, they justify those high rates because of default risk, then they manage to get legislation passed to minimize the risk of default while still charging enormously high rates.

To top it all off, some "consumer advocate" comes along proposing socialist claptrap that things would be more "fair" if credit card companies would just charge everyone still more fees.

This sequence of events is exactly the kind of nonsense one sees when a problem is not rectified at the source. The source is poor legislation in the first place. In an attempt to fix problems with poor legislation, additional legislation cresting new problems (usually without fixing the original problem) is put on top of it. The process continues over years and years until someone comes along proposing a misguided "solution" that amounts to making everyone pay still more.

Two possible ways to fix the general problem

1. Eliminate all corporate lobbying and corporate campaign contributions
2. Eliminate the middleman

Number one should be self explanatory. If Senators and Congressmen did not get campaign contributions and wining and dining by corporate lobbyists, perhaps they could think on their own and do what is needed instead of what corporations want. As it stands now, bills may as well be written by the corporate lobbyists with the deepest pockets, because in practice that is exactly what is happening. That brings up solution number two.

Number two is not self explanatory but the middleman in this case is a bunch of Senators and Congressmen who can not think for themselves. Instead they pass legislation written by corporate lobbyists. Every bill is so loaded up with provisions written by lobbyists that those voting do not even understand what they are voting on. Heck, not only do they not understand what is in the legislation, in many instances they have not even read the bills they are passing in the first place. The way around this problem is to simply eliminate the middleman and instead directly elect corporate lobbyists. That way, when someone runs for office you know how they will vote.

To make idea number two idea work a full disclosure law would be needed. Such a law would require statements from candidates like the following: My direct sponsors are the NRA, Pfizer, and Exxon Mobil. My indirect sponsors are the "Citizens For Wonderfully Clean and Ozone Free Air" and the "Coalition for Fruitful and Responsible Gun Legislation". Please note that the former is 100% funded by Exxon Mobil and the latter is 100% funded by the NRA. Rest assured that any legislation I pass will be in the interests of my direct sponsors. If and only if my direct sponsors do not have a position on any particular issue, will I be allowed to vote according to my conscious. Should there be a conflict of interest between sponsors, the sponsor contributing the most money to my campaign will get the nod. "

Note: The above example in italics is pure sarcasm. There is no such thing as "Citizens For Wonderfully Clean and Ozone Free Air" nor is there a "Coalition for Fruitful and Responsible Gun Legislation". Any resemblance of those names to actual corporate names is unintended and purely accidental. Thus Exxon Mobil and the NRA support no such organizations that I am aware of.

Since neither of those solutions is likely anytime soon I simply ask those who purport to be consumer advocates take a position that actually benefits consumers. Is that too much to ask?

Mish addendum:
Those who agree or disagree with this post can email their comments to Donovan and Searles at their "contact us" form:

Please feel free to reference this blog
Consumer Advocacy
http://globaleconomicanalysis.blogspot.com/2007/01/consumer-advocacy.html

Or simply put this insanity in your own words.

Mike Shedlock / Mish
http://globaleconomicanalysis.blogspot.com/