HispanicVista Columnists
Betrayal of the Credit Card Class - Part 2
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By
Sal Osio, JD - From the Publisher's Corner
- June 1, 2007
- Betrayal of the Credit Card Class - Part II
- By Sal Osio, JD
On April 25 we published an advocacy report denouncing the many abuses of the banking industry cheating credit card holders charging excessive interest rates, by retroactively increasing the rates, assessing unjustifiable penalties and, in general, abusing an unregulated system aimed at enriching themselves at the expense of a defenseless credit card holder. We made the observation that the consumer victims are predominately the ethnic minorities and lower income class Americans. For our viewers convenience the commentary of April 25 follows this article.
In response to our advocacy and the complaints of consumer groups across America voicing their grievances, the Federal Reserve Board plans to revamp regulations so that monthly credit card bills are more understandable and provide 45 days notice instead of the present 15 day notice before the banks can increase interest rates. This is a ridiculous 'solution' to the unmitigated abuses. As Ed Mierzwinski, a director of the U.S. Public Interest Research Group, correctly pointed out: "Telling you that you are about to be ripped off is not a consumer protection."
It's no secret that the FRB has the banks best interests at heart. After all, their mandate is to promote and sustain a healthy banking industry. And what provides billions of dollars of windfall profits is the fall back insurance to maintain the solvency of the banks. This makes the FRB a happy camper. The additional benefit is to big business. The banks are encouraged to make more attractive loans to big business at one-third of the interest rates charged credit card holders - 8.5% prime rate versus an average 26% interest rate charged on credit cards. The assumption is that business loan defaults are 1/3rd of credit card defaults. The truth, however, is that business loan defaults exceed those of credit cards. See the statistics published by the FRB.
What the American consumer - The Credit Card Class - demands is more than transparency. It is reform.
We advocate a credit card interest rate maximum that is tied to the prime rate and reflects the comparative cost to the banking industry. Under no justifiable circumstances should the interest rate be in excess of 2X prime. Currently that interest rate would be 17%, a whopping 10% below the 'usurious' rate charged credit card holders. Further, interest rate increases should be assessed on new charges only and not on the carried balance. Such unconscionable practices allow banks to increase rates at will retroactively. Their justification is that the consumer need only pay off the credit card balance to avoid the increased rate. Preposterous but true!
We advocate a 10 day grace period on late charges, as is the practice in the mortgage industry. And we insist that any rate increases not be based on the credit card holder's other payment records. As long as the credit card holder is current on his credit card payments to the bank, the consumer should not suffer a rate increase because he missed or was late in a payment on an unrelated installment obligation. This prevailing practice is punitive and unconscionable.
Now then, where are our legislators? Our elected representatives in Congress whom we elected to protect our interests? Sadly, they are in the pocket of the banking lobby. So much for democracy and representative government.
Once more, we call for the Hispanic and the Black Caucus in Congress, whose constituents are the majority victims, to take charge and lead this crucial reform. We plead that Congressmen of all stripes place the rights of the American consumer above those of special interests. Justice and fairness should eclipse political self interest.
The April 25 report follows:
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By
Sal Osio, JD
- From the Publisher's Corner
- April 25, 2007
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One half of American households earn less than $43,000 per year according to the U.S. Census 2005 estimate. Coincidentally, 32.5% of our population is Hispanic (14.4%), African American (12.8%) and Asian, including Native and Alaskan Americans, (5.3%). The vast majority of whom, estimated at 80%, fall below the median income. The group that falls below the median household income I will refer to as the "Working Class."
The working class is the base of the economic pyramid. Above the median is the middle class, estimated at 35%, and the wealthy class, at the pinnacle of the pyramid, estimated at 15%.
The working class and the lower middle income class is an estimated 66% of US households. For the purpose of this analysis I will refer to this group - two thirds of American households - as the "Credit Card Class."
The Credit Card Class has an average credit card debt of $8,000 payable in bank interest rates averaging 18-20% per year. The combined consumer credit card spending last year is estimated at $1.5 trillion. There are over 115 million credit card debtors, known as "revolvers" by the banking industry since on a monthly basis they roll over their debt. The wealthy class credit card holder pays off his debt on a monthly basis and is known as a "deadbeat' because the bank earns no interest on the account. Last year the banks booked over $33 billion in credit card net income after taxes, by far their most profitable lending source of income. For example, one bank, MBNA, in its credit card earnings exceeded the net earnings of MacDonald's last year.
I recommend that interested readers log in to www.pbs.org - "The secret History of the Credit Card" - for a more thorough discussion of credit card abuses and the colossal negative impact on the American consumer.
The Credit Card Class bailed out the banks in the early '90's following the collapse of the real estate lending industry. And it is doing so again. In essence, the Credit Card Class is subsidizing the bad debts of business and real estate interests. This hidden tax allows lenders to offer prime rates to "credit worthy" borrowers and absorb the bad debts and below market interest rates from loans to the public sector and corporate America.
This cozy arrangement, at the expense of the Credit Card Class, is fueled by the special interest lender lobbies, mostly the banking industry, that induce elected officials to abandon their responsibility. The consumer debtor has no representation in government or special interest lobby to look out for his rights.
Banks increase credit card interest rates regularly, not due to debtor default on a credit card loan, but on the basis of small print authorization ("overextension") allowing them to do so if they feel insecure, such as a collateral credit blemish reported by one of the three credit reporting agencies. And if the borrower disagrees with the increase in interest charges, he is reminded that the choice is his. All he has to do is pay off the loan. And it gets worse, the borrower has no recourse against unauthorized or disputed charges that are reported by a bank or consumer credit lender. Once the credit reporting agency publishes the alleged default, the borrower is cooked. His FICA, credit score, is compromised and he becomes a sub-standard credit. This means higher interest rates across the board, including mortgage borrowing.
We re now witnessing the collapse of the sub-prime mortgage markets as a result of this injustice, wherein a fixed affordable interest rate is increased to a level where the borrower cannot meet the increased obligation. A default on his loan will destroy the borrower's credit so that he cannot climb out of this financial precipice. The result is the loss of his home. Is the lending industry concerned about these defaults and potential mortgage losses? Of course not. They will use this excuse to increase interest rates among the Credit Card Class, and not only offset any mortgage losses, but, in fact, make windfall profits.
Their elected representatives have betrayed the Credit Card Class. Politicians are more interested in feeding off the campaign contributions from the banking sector. After all, the little guy can't afford to feed the political ambition and insatiable appetite for power. Therefore, to get elected, and once elected, to remain in office, the politicians are dependent on the special interest contributors. Witness how Congress marched to the tune of the banking industry in enacting the Bankruptcy Reform Act, relegating credit card borrowers to the role of indentured servants in the event of their credit card default.
A voice in the darkness, that of Senator Chris Dodd of Connecticut, in his attempts to curb the many abuses of the credit card industry, has been silenced by his piers. Why? Why doesn't Congress pass legislation reigning in abusive bank practices - unconscionable (usurious) interest rates, predatory lending practices, unwarranted late payment penalties and unfair credit reporting practices? Regrettably the answer is simple: Congress has betrayed the Credit Card Class. And in so doing Congress has abdicated its obligation to the American people.
- Enough is enough! Hispanic Americans, one of the most affected groups, must stand up for its collective rights. The Hispanic Caucus must join forces with the African American Caucus, the other most affected group, and jointly, exert their political muscle in attacking these unconscionable abuses. Interest rates must be capped (how about a maximum of 5% over the prime rate?). Interest rate increases must be restricted to no more than an additional 1% interest rate, and only in the event of a direct default by the cardholder. Late penalties should be limited to a service charge of not to exceed 5% of the minimum payment due, after a 10 day grace period. Telephone collection practices should be prohibited. Tease rate inducements should be abolished. Contract terms should be in 12 point type and require the initial consent of the cardholder. And, lastly, 10% of the net profits should be set aside to help consumer education and awareness to control the addiction of credit card debt.
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- Sal Osio, JD is the publisher of HispanicVista.com (www.hispanicvista.com). Contact at: SPosio@aol.com