56,000 People – and One Guest Blogger – Can’t be Wrong

When the Federal Reserve asked for comments on its proposal to prohibit credit-card issuers from engaging in “certain unfair or deceptive acts,” it had no idea what it was getting into. The draft rules generated approximately 56,000 comments, most of them from angry consumers. This is an overwhelming response to what is known in legal jargon as a “Notice and Comment Period,” a regulatory tradition that is usually about as exciting as it sounds. While many of these were form letters that people had clipped or copied from advocacy materials, a large percentage were from individuals sharing their own stories. That is a lot of effort on the part of a lot of people.

The New York Times has published a helpful editorial about the proposed rules and the overwhelming response to them. From a Credit Slips perspective though, the most interesting part is that it cites guest blogger Ronald Mann. And the editorial board didn’t just call him up for a quick quote. The editors actually read and digested his article Bankruptcy Reform and the Sweatbox of Credit Card Debt.  They even provide a link.  In this article Professor Mann argues that the real reason credit-card companies benefit from BAPCPA is that they get more time to collect penalty interest and assorted late fees as distressed borrowers wait longer to file for bankruptcy. What’s so interesting about this framework is that it takes something that people used to characterize as a side effect – the piling on of interest and fees when borrowers default – and places it front and center, arguing that it is now the distressed borrowers, rather than the paying customers, who are at the heart of the credit-card issuers’ business model – and their lobbying efforts.

The paper is quickly becoming a classic in the field. It’s one of those rare articles that takes the same events all of us were looking at and frames them in a completely new way. So it’s especially exciting to see it prominently featured in the mainstream press. The academic debate is shifting from one where we think of defaulting borrowers as something lenders need to protect themselves from to one where we see defaults as something issuers actively solicit and worked to enshrine in law. If this point can penetrate into popular discussion, we’ll be making some real progress.

Comments

[meli]

I am also thrilled that this line of inquiry is gaining some traction. This "business model" is at the heart of so many transactions today that the consumer is under siege.

The only thing missing from this analysis is the complicit nature of the credit rating agencies. Just as the big three rating agencies (moody's, s&p, fitch) "enabled" the credit crisis, the FICO people are enabling these credit card issuers in their efforts to target these people.

It slips into commentary, once in a while, even in the MSM, that these FICO scores don't work, and don't tell anyone anything about 'liklihood' of default. Then it slides out of view.

More attention to this issue would be productive.

[Judge Roy Bean]

There are some additional subtleties to the way CC companies prey on consumers - from almost four years ago when we were all in shock over $2.00 gas:

http://loansharks.blogspot.com/2004/10/double-whammy-shark-bites.html

Try the math!

[Marsha Keeffer]

This is exactly why financial institutions issuing credit cards pushed so hard for the bankruptcy reform laws under the Bush administration, making it more difficult for consumers to file for bankruptcy.