Visa, Discover, American Express and Mastercard…all familiar brands in the U.S-have a competitive stake in the $1.5 trillion credit card industry. Once again, Frontline goes undercover to reveal the shenanigans and esoteric schemes that may place a permanent cloud over this industry, if appropriate legislative action is not taken sooner vs. later.
This excellent program asked the hard questions from credit card industry experts and insiders. More importantly, the compelling interview with Andrew Kahr, who revolutionized the industry, with sophisticasted APR mechanics and other “innovative” business models. Further, the most stunning revelation was “This practice is called the “universal default” clause and increasingly is becoming a standard clause in credit card agreements. According to credit card executives, the logic behind universal default is that the bank is not being unreasonable in raising rates when it has reason to believe that the risk of being repaid by the customer has increased (Frontline, 2006).”
According to American Bankruptcy Institute (ABI), non-business related filings for the first two quarters of 2006 totalled 263,660 filings. These statistics also include other US territories-Puerto Rico, Virgin Islands, Guam, and District of Northern Marina Islands. ABI was founded on Capitol Hill in 1982 to provide Congress with unbiased research and testimony on insolvency issues. For more than two decades, ABI has been an active participant in the legislative process. “Because of ABI’s unique role as a neutral source for reliable information on the state of the law and emerging trends, members of Congress and their staff regularly call on the Institute for assistance in understanding the implications of systemic change and to help in drafting legislation language (ABI).”
According to Dan Goetz of the Courier Journal, non-business related bankruptcies have actually dropped under the new bankruptcy law. Due to an extensive lobbying campaign by the credit card industry, it is now more difficult for individuals to liquidate their debt under Chapter 7 of the US bankruptcy code. “The changes were aimed, the industry said, at what it called the 5 percent to 10 percent of Chapter 7 filers who made enough money to pay off at least some of their bills if given more time but who used liquidation to write off their debts and escape responsibility for their spending habits.”
What is alarming about this particular scenario, are the esoteric schemes mitigated by the credit card industry, to attract customers to their respective brands, by offering 0% APR. Hence, a customer misses one payment, there are drastic changes to the customer’s APR. This has been one of the primary debates in contract law and pending legislation. Credit card industry insider Andrew Kahr appeared to be on the defensive during his interview with Frontline. Especially, surrounding the issue of a bank’s profitability and “universal default.”
One of the most compelling moments during the interview, was Kahr’s response to Frontline question: “One last question: The OCC [Office of the Comptroller of the Currency] recently set out guidelines. Among the things that they were issuing the guidelines about were the repricing of accounts — “increasing a cardholder’s annual percentage rate or otherwise increasing a cardholder’s cost of credit when the circumstances triggering the increase, or the creditor’s right to effectuate the increase, have not been disclosed fully or prominently?” Kahr responded, “It says [to me] that there is a concern if there hasn’t been adequate, fair disclosure. To me, if I am going to have universal default, I want the customer to know it, and I want him to know that he is getting a better rate going in, because we don’t expect him to become less responsible in his payment behavior than he has been up to now.”
In my opinion, Kahr’s response is less than genuine. His motivation and loyalty for one, is not to the credit card consumer…but to the financial institutions [his clients]. Concerning adequate disclosure: even if the language in the small print is vague in the consumer’s credit card contract. Why would Kahr’s motivation change, due OCC’s late involvement (e.g., Providian)? Elizabeth Warren, a law professor at Harvard Law, appears to agree. “Oh, the federal regulators have been very active recently. But the way they’ve been active is, they have been suing the state regulators to tell them to keep their hands off the credit card companies. In other words, our regulators are there, many of them. … [But] most of them are political appointees, and most of them see their principal job as protecting the safety and soundness of the banks, and that means seeing that the banks are profitable. Their customer is not the American family; their customer is the profitable bank that issues credit cards. That’s who they are designed to protect, and that’s who they are protecting.”
As a result, credit card consumers [including myself] should become more savvy, when discerning the fine print of credit card contracts. In hindsight, if a consumer is concerned with his or her Fair Issac & Company credit score (FICO)…an algorithm that evaluates a consumer’s credit risk and financial behavior, stay tuned. My gut feeling is that, this is just the beginning of a very bumpy ride for both the consumer and the financial institutions.
References
Frontline. (November 28, 2006). The Secret History of the Credit Card. Television Program aired on PBS.
American Bankruptcy Institute. [Online]. Bankruptcy Filing Statistics-Non-business . Retrieved from Filingshttp://www.abiworld.org/AM/Template.cfm?Section=Non-business_Bankruptcy_Filings1 on November 29, 2006.
Goetz, D. (October 25, 2006). Personal bankruptcies drop under new law
State, national numbers fall, but it’s unclear who’s not filing. Retrieved from http://www.courier-journal.com/apps/pbcs.dll/article? on November 29, 2006.
