the card game
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What's the Consumer's Responsibility In All This?

Martin Eakes CEO, Center for Responsible Lending

One of the solutions that people put forth is to have more disclosure. Let's figure out a way to have families who are getting mortgage or credit card loans get more disclosure of the actual terms of the loan.

And there's a statistic from the Department of Education that 24 percent of adult Americans are illiterate. So you can't do disclosure for the 24 percent who can't read and have to sign an X for their contract. They have to be able to rely on some trusted intermediary. And the basic breakdown we had over the last 15 years is that the intermediaries were really not trustworthy. They had their own incentives. ...

The critics of this regulation say you're just going to make it much more difficult for people who need their credit cards, need their credit limit, need that payday loan to pay for vital things -- food, clothing, whatever.

Nobody needs a payday loan at 400 percent interest rate. If the family was not able to make ends meet at zero percent interest, they're not going to be able to make ends meet at 400 percent interest. So it's a false illusion to think that credit or debt can substitute for income or spending discipline. The truth is some families shouldn't get credit.

I mean, it's a hard thing. It sounds bad. But if you can't afford to pay back a debt, you shouldn't get that debt. And a system that says, "We want to provide debt to everyone regardless of whether they can pay it back" --

[They] want to democratize credit?

The words all sound so good. But what you're really saying when you say that is that we want to provide debt to people we know cannot pay it back. And if that's what you're doing, and you sort of peel the shades off, you see it for what it is. It's a fraud. You're therefore keeping people in debt forever because they can't pay it off by definition.

Elizabeth Warren Harvard Law School

Elizabeth Warren

One thing a number of consumer advocates and consultants in the financial services industry agree on is disclosure doesn't work. People will still behave in the way that they behave, and you can warn them all you want. ...

It's not the government's job to become the nanny to these folks. It's not the government's job to keep people from buying too much junk on their credit cards. If the lender wants to lend it, and the borrower wants to borrow it, and somebody wants to go out and spend way too much money on iPods and sneakers, that's not a credit problem. That's between them, is my view.

The parts that I object to are the credit card instruments, the overdraft instruments, the mortgages that are designed to trick and trap people. But if people are making informed choices, then they made informed choices. I not only can live with that, I think that's how it should be. People are responsible.

If the CFPA [Consumer Financial Protection Agency] is designed correctly, what it will do is put the tools in the hands of consumers to make their choices. And then, by golly, they ought to have to live with them.

Robert McKinley Founder, CardWeb.com

Robert McKinley

Consumers vote with their feet. If an institution is charging $100 for an overdraft fee, they can go across the street and they can go to a credit union or a smaller institution and get more favorable prices.

But they haven't.

Well, they haven't, but they will. And they're already beginning to flex their muscles. With the reining in of the card business, I think eventually we're going to see a reining in of the debit card business and perhaps banking in general. It's going to happen. And it's not so much the interest rates that are being charged and the fees. It's how they're triggered. How do you get charged that over-limit fee or late fee?

How is the interest calculated? These, I think, are the more substantive issues with the credit card business than just the pure interest rate.

Bill Strunk Banking consultant

What do you say to the person who says: "Look, my wife and I have complicated finances. We move our money around between checking and savings accounts. I had no way of knowing that she had cashed a check. When I went out to use the debit card. I kept putting in the parking meters, and each time I put in the meter all day long, I didn't realize it, I got a $35 charge each time."

What would I say to that person? You need to act fiscally more responsible than you are, and you need to keep your checkbook up-to-date as much as you can. But the problem is, something like 10 percent of the people in the United States balance their checkbook. Ninety percent never do -- never.

So, how do they know what's in their account if they don't ever balance it? Electronic banking and debit cards made it more difficult for them. Why? Now you've got to keep track of that electronically. You've got to write it down somewhere to subtract it from your checkbook. That person obviously did not, so that's the reason he got overdrawn.

So, is this business dependent on the financial illiteracy of the people?

Yes. And banks are obligated to educate them to a certain degree. That's why you have to have disclosures. That's what some of these regulations are about.

Scott Talbott Vice president, Financial Services Roundtable

Scott Talbott

The credit card industry, in various interviews we've done, has been characterized as having been kind of a wild west for many years, and basically, they could never be beaten. So they could do whatever they wanted. Do you agree with that assessment?

Absolutely not. The credit card industry is heavily regulated. And they could not do whatever they want. …

I think the problem is that most consumers didn't fully understand the provisions that were in their credit card contracts. I did my own informal survey in my family. I can't find anyone who's actually read his or her credit card contract. I started to read it once and almost fell asleep.

And you're a lawyer and [an accountant].

I'm a lawyer and a CPA and a lobbyist for the industry. The language is difficult to read, and it's dense. But it's all required by law. It sets out the terms of the contract between the credit card company and the consumer. And that's … the heart of what governs the agreement. …

Now, how do we address that problem going forward? We need to change the credit card rules. The new credit card law … [is] in effect now. The rest will go into effect in February. It calls for … simplified disclosures. …

… Consumer lending advocates [say] disclosure doesn't work … because people don't bother to read it. They just trust in the company or whoever it is that's provided it to them [or the] advertising. Others say it's too difficult to understand. Most people don't understand what an APR is.

Sure.

You can make it as clear as you want to, but it's really going to keep the consumer at a disadvantage. We go on the court, but we're up against Michael Jordan. It's not a normal competitor.

I think there're a number of issues. There's a joint responsibility between the credit card industry and consumers to understand the terms of the agreement that you've signed up for, … to make it clear as possible for the consumer to understand those terms.

Now, I admit it's challenging. And that's why we're for disclosures. We're for simplifying the process. …

A gentleman we interviewed thought his wife had made a deposit, took his debit card, went to the parking meter every hour on the hour for seven hours to make sure he didn't get a traffic ticket … and wound up with six or seven debit card fees. What do you say to him when he calls the bank, and they won't do anything [for him]?

There're a number of different responses, depending on the customer and all the circumstances of any particular situation. … He's made use of that overdraft. He has had seven overdrafts. He has used the service, and there's a fee associated with that service.

If you drove over a bridge seven times and had to pay a toll, you would pay the toll because you were getting the benefit of being able to drive over that bridge.

But you would see that you drove over the bridge. He never saw that happening.

Again, we go back to good cash management and knowing the balance in your account. That's crucial. … If there are extreme cases and even not-so-extreme cases, banks are willing to work with customers now, whether it's on a mortgage, a credit card or student loan, to deal with these fees.

Timothy Geithner Secretary of the Treasury

As a country, we did borrow too much. We had a long period where many families and certainly the government was living way beyond its means. And we're going to be a stronger country in the future ... if we have less excess, less borrowing, less excess leverage in the future.

So what do you say to the consumers out there who are complaining now? Surveys show half of the consumers have had interest rate changes, have balances, cards cancelled, credit line change?

I'd say it's unfair to them, and it's typically terrifically unfair to the responsible borrower too. It's unfair to the person who was taken advantage of, was not exposed to the risk and complexity, the fees, the kind of tricks you referred to earlier in these products. But it's also unfair to the person who borrowed less, … because they're going to get caught up into this general pullback, as well. ...

So we're going to go forward into a society where consumption is no longer the American way, the way that it was before.

I think America is a very resource-rich, resilient country, and I'm sure Americans will be spending in the future. But they'll probably be ... borrowing less to finance consumption.

And savings is going to have to rise -- you're already seeing it now. Private savings in America now is positive after being negative for a long period of time. And that's a healthy, necessary shift. It doesn't mean that as we grow in the future it'll be more about investment and export, less on consumption fueled by borrowing.

But millions of Americans are going to have to [get] used to the fact that now their credit is going to be denied. There aren't going to be credit cards available the way they were before.

I wouldn't say it quite that way. We wanted a system where you're able to borrow at a level consistent with income and your capacity to pay. The credit provides an incredibly helpful, necessary function. A huge number of innovations in credit -- you know, a 30-year fixed rate mortgage is a terrifically useful … [you] borrow for college, even to borrow to finance some spike in [health care costs].

Those are fundamentally useful forms of credit, and we wanted a system where that's possible. People can borrow in a way consistent with their capacity to pay. …

But just so I have it clear, you're seeing a future where people are able to borrow less, basically?

We want them to be able to borrow responsibly, be less vulnerable to predation. And I think that's something we can achieve. I mean, this is not a complicated thing to do. It just takes will and care, and you need to be well prepared to resist and go up against the people who want to leave it as it is.

posted november 24, 2009

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