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Financial Follies: Is the Fed Encouraging Credit Card Company Foot-Dragging?

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A couple of financial follies follow-ups:

On Tuesday, I wrote about how, in December, the Federal Reserve approved new rules curtailing some -- but by no means all -- of the more egregious practices of the credit card industry. But, surprisingly, the rules are not scheduled to go into effect until July 2010. Why, I wondered, this 18-month long delay before making the banks clean up their acts?

Sen. Robert Menendez, one of the real leaders in the Congressional battle for credit card reform, had the same question. Looking for answers, he sent letters to the CEOs of the six biggest credit card issuers, urging them not to wait. "Because of the great danger facing our economy," he wrote, "it is important that you institute the protections, as outlined in the recent regulations, as soon as possible."

Blogging on HuffPost, Sen. Menendez reports that five of the companies responded "and all but one claimed it was too much of a burden to do it any faster."

To hear the credit card companies tell it, curbing such practices as raising interest rates on pre-existing balances, and implementing rules allowing consumers a reasonable amount of time to make their credit card payments is no easy feat.

"Compliance with the new rules," wrote American Express's President of the Consumer Card Services Group Jud Linville in response to Menendez, "is an enormously complex undertaking that will take us some time to fully implement. Because the new requirements are so tightly interrelated, it would be difficult to implement some of the rules in isolation of the others."

Citi Cards Executive VP John Carey agreed: "A radical transformation of the industry business model will be required to sustain industry health under the new regulations... None of these changes can be made hastily if the industry is to act prudently and responsibly."

(Here are the PDFs of the letters: American Express, Citi, and Capital One.)

But what would be imprudent or irresponsible about deciding immediately -- today -- that there will be no increases on pre-existing balances, or that monthly statements will be mailed at least 21 days before the payment due date (two requirements of the new rules)? What about those changes are "so tightly interrelated" to the other new rules that they couldn't happen "in isolation" without the whole house of credit cards tumbling down?

Yet the bankers warn of dire consequences. "It would be impractical," according to Citi's Carey, "to implement new rules immediately without imposing significant risk to the systems, not the least of which might be serious inconvenience for our cardmembers."

You mean more seriously inconvenient than cardmembers having their interest rate jacked up to 29.99 percent if they miss a single payment?

To be fair, as Capital One President Ryan Schnieder pointed out to Menendez, the Fed's own Director of Consumer and Community Affairs, Sandra Braunstein, said that "considering everything that needs to be done and the interconnectedness of the different rules, we think that 18 months is a very reasonable time period. In fact, 18 months is a challenge."

Maybe so. But considering how many families are currently struggling with the "challenge" of making ends meet, and how many will sink further into credit card debt between now and July 2010, it doesn't make sense to -- as the president put it in another context -- "...make the perfect the enemy of the essential."

Card members falling behind need relief, and they need it now. Those changes that can be made now, should be made now (some credit card companies are already in compliance with a number of the new rules; and doing so "in isolation" didn't destroy the industry).

What's more, the rules the Fed adopted in December had been proposed in draft form in May 2008 -- so it's not as if the banks hadn't been forewarned. But something tells me they spent the seven months between May and December trying to derail the new regulations as opposed to getting a head start on getting their ships in order.

Congress needs to make sure the credit card companies are not dragging their feet -- and "passing reform into law," as Menendez puts it, "is the most effective way to do it."

PS: I want to thank the hundreds of HuffPosters who posted such great comments on my last credit card post (please keep them coming, as I intend to stay on this story). One commenter, Exdittos, raised an important point: "While they've been raising the Price of money to unconscionable 30-ish percentage, the Cost of money has dropped to ZERO. They get all the money from the fed reserve they care to cart away, and then they charge now essentially INFINITE markup. The scale of this fraud defies the mere imagination."

It's a compelling argument, one raised at a National Press Club luncheon last week when a questioner asked Fed chair Ben Bernake, "Isn't there something very wrong when banks can borrow at the Fed's window at less than one percent, but are charging credit card holders interest rates as high as 29 percent?"

Bernake didn't directly take on the point about cheap money for banks but high interest for customers. But, in his letter to Sen. Menendez, Capital One's Schneider argues that credit cards are typically not financed by money received by the Fed but by packaged credit card debt sold to Wall Street as securities -- so the drop in the prime rate has not eased the burden on lenders. "Capital One's funding in the securitization market," says Scheider, "is not tied to the Prime rate or any similar index... Thus, notwithstanding decreases in the federal funds rate, when credit losses rise as they have done so dramatically, pricing for our market-based funding rises as well."

What he doesn't say is that the market for "credit card receivables" is another example of Wall Street creativity gone awry -- and that the hunger for ever-greater profits motivated many credit card companies to offer cards to risky borrowers and to allow customers to accumulate higher and higher amounts of debt. The greater the debt, the more there was to sell off to investors -- consequences be damned. So it's more than a little disingenuous for the bankers to now be blaming "the securitization market" for the credit industry's woes.

Too often, the banks lent irresponsibly and marketed over-aggressively and are now asking their customers -- even their "non-delinquent" customers -- to pay the price.

PPS: Last week, in writing about the foreclosure crisis, I mentioned the ongoing battle in Congress over cram downs (which allow bankruptcy judges to modify the terms of home loans). The House is now expected to pass legislation allowing cram downs (with passage possibly coming as soon as today), with the Senate taking up the matter next month. Elsewhere, a Florida judge ruled yesterday that mortgage providers must negotiate with borrowers before foreclosing on their homes. And HuffPost's Ryan Grim reports today that Sen. Chuck Schumer announced "that two-thirds of the nation's mortgage providers -- the ones associated with major banks that have taken bailout funds -- have voluntarily agreed, during negotiations with Treasury officials, to work to refinance loans for borrowers who are under water."