Honest Answers about the Financial Collapse

Deregulation, Disaster, and What Happens Next
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Here’s some bad news for the many Americans who these days have to rely more than ever on their credit cards: the new ‘reforms’ passed by the U.S. Senate yesterday don’t address the most serious abuses of the greed-driven credit card industry.

Which is too bad, since if Congress doesn’t have the courage to stop credit card rip-offs now, in the middle of a financial catastrophe caused by these very companies, when will it? You know the answer.

Here are five fatal flaws in the Senate bill (which you can peruse for yourself):

There is no cap on credit card interest rates. Companies have raised interest rates for some consumers – even those with good credit – to over 30% in recent months. This is particularly outrageous in light of the trillion dollar taxpayer bailout of the credit card companies. These firms are borrowing our money from the US Treasury at a fraction of a percentage point and then turning around and loaning it to us at twenty to fifty times that rate. An amendment to cap credit card interest rates at 15% was overwhelmingly rejected by the Senate.

Companies can raise interest rates on future purchases at any time, so long as they give the cardholder 45 days notice. Consumers have the right to opt out – as they do now- but then the card cannot be used for future purchases. The bill only prevents companies from increasing interest rates on previous purchases.

Credit card companies can unilaterally changes the terms of the credit card contract. It is one of the inexplicable aspects of American law that contracts with consumers are a one-way agreement. Courts have routinely upheld the right of companies to alter the terms of fine print contracts with consumers at their leisure. How, you wonder, do they get away with that? Well, buried in the fine print when you sign up for a credit card is authorization for the company to change the deal at any time. (Try negotiating that clause out of the next credit card contract you sign.) The Senate bill allows companies to continue this ridiculous practice, again so long as they give you notice of the change.

Companies can still prevent consumers from suing them in court. Another clause buried in the fine print of credit card contracts bans consumers from suing the credit card company in court, particularly through a “class action” in which victims of the rip-off can join together rather than bring separate cases. Instead, cardholders must bring their dispute to an “arbitrator” – a private judge hired by the credit card company. By design, that system is co complex that almost no one bothers, and credit card companies evade accountability for their actions. This didn’t get fixed either.

State consumer protections laws do not apply. A series of court decisions have held that federal banking regulators supersede state consumer protection laws. The result is that consumers cannot go to court to sue banks that violate state law. This notorious obstacle should have been addressed but wasn’t.

As we noted in our March report on the causes of the current financial debacle, the nation is in the current mess because Wall Street showered Washington with over $5 billion in campaign contributions and lobbyists, and Washington did as it was told.

Despite the collapse of our economy, not much has changed. It was interesting to observe how the credit card industry tried to posture the bill as a huge defeat. But even that effort was half-hearted; a spokesperson for the American Bankers Association acknowledged as much when he told the New York Times the Senate plan was “tough, but workable.”

Scanning the web this morning, I couldn’t find anyone in D.C. suggesting that the bill did not go far enough to protect consumers.

Comments (5) Posted by Harvey Rosenfield on Wednesday, May 20th, 2009

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