New federal credit card rules that took effect Monday promise to outlaw the most egregious practices of the credit card industry that have plunged customers into insurmountable debt. The Credit Card Accountability Responsibility and Disclosure, or CARD, Act includes new protections for customers under twenty-one and makes it illegal for credit card companies to retroactively increase rates and charge certain types of misleading fees. But many credit card companies have already been trying to find ways to bypass these new rules by reinstating annual fees, cutting credit limits and hiking interest rates. Credit card issuers established or expanded the use of at least eight hidden charges to circumvent the rules, according to a report from the Center for Responsible Lending. [includes rush transcript]
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AMY GOODMAN: New federal credit card rules took effect on Monday. They promise to outlaw the most egregious practices of the credit card industry that have plunged customers into insurmountable debt. The Credit Card Accountability Responsibility and Disclosure Act, or CARD, includes new protections for customers under twenty-one and makes it illegal for credit card companies to retroactively increase rates and charge certain types of misleading fees. Americans pay an estimated $15 billion a year in penalty fees. President Obama welcomed the new rules, calling the CARD Act “an unprecedented step in [his] administration’s ongoing efforts to strengthen consumer protections and enact meaningful financial reform."
But many credit card companies have already been trying to find ways to bypass these new rules by reinstating annual fees, cutting credit limits, and hiking interest rates. Credit card issuers established or expanded the use of at least eight hidden charges to circumvent the rules, according to a report from the Center for Responsible Lending.
Well, for more on the CARD Act, what it means, what we can expect next from the credit card industry, I’m joined here in New York by Robert Manning. He’s the author of Credit Card Nation: The Consequences of America’s Addiction to Credit and the founder of Responsible Debt Relief Institute.
We welcome you to Democracy Now! Your assessment of this act that has just been passed?
ROBERT MANNING: You know, this would have been a great bill when it was first discussed about seven or eight years ago, but in the depths of this recession and the fact that there is no usury law and there are not any fee caps, and the fact that the banks had nine months to creatively increase the real cost of borrowing, for most Americans that are struggling so much to pay their bills, they’re going to be shocked at how limited the help is, offered by the CARD Act.
AMY GOODMAN: What do you mean?
ROBERT MANNING: Well, it’s one thing to be able to be told how long it’s going to take you to pay off your bill. It’s another thing to find out that your interest rate’s been doubled from 15 percent to 29.9 percent.
AMY GOODMAN: That can happen under this current act?
ROBERT MANNING: Well, no, it’s happened already in the nine months preceding the implementation of the act. So the positive benefits are going to have to be quite a bit into the future for those people who get new card accounts or who have paid down their current balances substantially.
AMY GOODMAN: So what do people have to watch out for now?
ROBERT MANNING: Well, I mean, the key issue here is that, yes, there are some important provisions, but — for example, there’s a forty-five-day time period that you can accept or reject and close your account if, for example, your interest rates have doubled. On the other hand, this is a fee-driven industry now. The effort to disconnect risk and lending and transfer that risk to investors means that banks make more and more of their money, as you mentioned, $15 billion in late and penalty over-limit fees. Banks are going to be charging annual fees. They’re going to be — literally any benefit that you get is going to come with a fee. And, of course, those people who enjoy loyalty reward point programs will find that they’ve been diluted substantially.
AMY GOODMAN: I was interested in how you talk about young people being targeted, that over the next five years banks will pay the largest 250 universities nearly $1 billion annually for exclusive marketing rights on campus.
ROBERT MANNING: Yeah. This is a real controversial issue, in terms of the CARD Act, where the banks and the universities are supposed to reveal these secret agreements that are —- not even faculty senate committees are allowed to see, review or approve these very secret and confidential contracts between universities and credit card companies.
AMY GOODMAN: You tell the story of a twenty-two-year-old boy who commits suicide because of his credit card debts.
ROBERT MANNING: And in fact this is really a terrible tragedy across many campuses, where so many students are either taking extreme actions, such as they don’t want the shame of going home, of having to drop out of school, and they literally freak out in their dorms and hang themselves.
AMY GOODMAN: Tell us about him.
ROBERT MANNING: In this particular case, Sean O’Donnell, Janne O’Donnell’s son, he was a National Merit semifinalist, a smart guy. And he got very much embroiled in credit cards, enjoyed campus life, and he took on more jobs to pay it down. He dropped out of school. He moved home. He paid it down. He was going to pawnshops, trying to keep up with his credit cards. And he thought his career as a lawyer was going to be over, now that he had dropped out of school, and he literally took his own life at that point.
AMY GOODMAN: You also talk about the decline of community banks and the increase of pawnshops and check cashing services.
ROBERT MANNING: Yeah, and this is really the institutional aspect that’s neglected about banking deregulation. What happened with the end of Glass-Steagall laws and when Citibank, orchestrated by then-Secretary of Treasury Rubin, who became vice president of Citibank, with the merger with Travelers Group, what happened now was this cross-marketing vision of the trillion-dollar company that was too big to fail. And the objective here was to get middle— and upper-middle-class households and bundle a wide array of services — insurance, car, auto loan, mortgages, student loans, brokerage fees, etc.
As a result, it meant more disadvantaged communities. Your local community bank that didn’t have access to those more profitable services, they saw their bottom lines suffer sharply. They ended up essentially going into mergers. And what it’s meant for people of color and lower-income households is that unless they have access and the capability of buying many different services, banks closed in their neighborhoods, mergers occurred and branches were shut down, and in many cases they were replaced by a cash checking store or a pawnshop, that their lines of credit were funded by the major banks that bought out the community banks.
AMY GOODMAN: How did Citigroup and other financial conglomerates profit from the credit card industry?
ROBERT MANNING: Yeah, you know, it’s hard to believe, but Citibank and some of the others haven’t learned, because twenty years ago Citibank was also technically insolvent and was on the verge of being regulated out of existence by federal regulators, and they put all of their resources into the credit card gold rush. And that was because the end of the federal usury law, based on a 1978 Supreme Court decision, meant that they could move their headquarters, which they did, from New York to Sioux Falls, South Dakota, and literally there was no limit of what interest rate they could charge. And with that in place and then the ’96 Supreme Court decision that lifted the right of states to regulate penalty fees, that meant that there was far more money to be made lending money to people than there was making products and services.
AMY GOODMAN: Talk about the use of credit cards over time and how — the history of them and especially how it has changed over the last thirty years.
ROBERT MANNING: Yeah, the extraordinary issue is, if we look at the history of America’s cultural attitudes towards credit and debt, is that we viewed savings as an attribute to be valued, prudence and stewardship of resources. And people in debt were viewed as people who just couldn’t manage their personal finances. And Benjamin Franklin was very clear in Poor Richard’s Almanack, that a penny saved was a penny earned.
What we saw was the major mass marketing campaign of the ’80s and ‘90s, where the profitability of finance to consumers was far greater than lending money to big banks, that this essentially became turned on its head. And so, those people who were most creditworthy were those who were least likely to want to demonstrate that they needed credit. And that’s where you see the color-coded credit cards emerge — you know, the gold card, the platinum card, even the black card. These were for people that wanted to show their friends and colleagues that they didn’t need credit; it was a convenience.
Today, of course, now with declining real income and the cost of living in America today, what we’ve seen is that greater inequality in America has been masked by greater access to credit. And, in fact, these last two recessions are the first recessions where we’ve seen a lack of improvement in wages, which has fostered greater dependence on high-cost credit for families to survive.
AMY GOODMAN: And the lobbying by banks for greater access to consumer behavior information about it?
ROBERT MANNING: Yeah. You know, what we’re seeing more today is —-
AMY GOODMAN: We’ve got twenty seconds.
ROBERT MANNING: —- is behavioral profiling. And one of the big civil rights issues today is that your credit history is being used for so many different reasons than ever before, like getting a job, and we’ve got no control over quality of your personal financial behavior that’s being used by corporations to make decisions on your behalf.
AMY GOODMAN: I want to thank you, Robert Manning, for your work. Credit Card Nation is his book, The Consequences of America’s Addiction to Credit. He is the founder of the Responsible Debt Relief Institute.