Truth in lending? Not even close...
In a recent post, Kevin raises a crucial question about incomprehensible contracts: “Isn’t informed consent a basic precept of a consumer-driven, competition-based market economy?”
It doesn’t end there: what about a contract where one party expects the other to agree without knowing the terms? That’s exactly what’s going on in the credit card industry.
TPM Café reader JA recently called MBNA to apply for a credit card. He asked to see the contract before he consented to open an account and was told he’d have to wait until after he agreed and the account was opened. MNBA claimed it was logistically impossible to present the actual contract up front. JA lodged a complaint with the federal Office of the Comptroller of the Currency – the agency charged with regulating national banks and the credit industry. The OCC responded that the Truth in Lending Act does not require lenders to provide a copy of the contract at the time of agreement. Mandating otherwise would take an act of Congress.
I agree with some of our more libertarian readers that, generally, borrowers are responsible for their borrowing behavior and its consequences. But if lenders won’t even let prospective borrowers review contract terms, informed borrowing is stymied and the market has broken down. Further, the marketplace can’t sort out the problem because the few powerful lenders out there all use equally egregious practices.
The lending industry (and those it funds in Congress) is fond of a rhetoric of personal responsibility. That rhetoric is hypocrisy when industry practices make responsible decision-making impossible. It’s wrong, and truly informed consumers should let the industry know they can’t get away with it.
The OCC responded that the Truth in Lending Act does not require lenders to provide a copy of the contract at the time of agreement.
This is astounding. So is one to assume that an "agreement" is not actually a contract? Or does a borrower automatically become signatorily bound to a contract that he/she has not signed or seen just by signing such an "agreement"?
I would love to see someone actually test this in court. Round up a test case where someone charges up a storm after signing the agreement, but before he/she receives the contract. Then he/she should try to wriggle out of some of the stated obligations in the contract which do not appear in the agreement. At the very least, it would make MNBA absolutely nuts.
July 6, 2005 8:39 PM | Reply | Permalink
I am not sure how much it matters that you get to see the contract in advance of opening the account. After all, most of these lenders include provisions in the contract that allow them to modify it without providing advance notice to you and without your being able to negotiate those changes. They could probably simplify their paperwork if they simply sent out a contract that says: you hereby agree that we can do pretty much whatever we want, whenever we want with regard to the shiny plastic card you carry in your wallet. If you disagree, you lose, so just do what we tell you, okay?
That would actually be more honest anyway.
July 7, 2005 6:43 AM | Reply | Permalink
Our society is based on the idea that massively large enterprises are entitled to essentially dictate the terms on which they will do business with individual consumers where consumers have little choice but to buy. Think of utilities, for example. Is credit such a commodity? Increasingly, because of the way our economy is evolving, for far too many consumers it is nothing like a luxury. It is used to meet basic needs that are increasingly out of the reach of wage earners.
The great counterweight must be community oversight - often the government. What we are seeing is simply the logical, and often quite desired, effects of a 40 year campaign to dismantle government's oversight of business.
The tide will turn one day, and we will be able to restore to consumers (read voters) some semblance of the power they are dupposed to have in our system. Indeed, the power is still there, just unexercised.
If you believe in democracy as I do, you have to believe that the people will at some point wake up and take back their society.
July 7, 2005 5:30 PM | Reply | Permalink
I recently cancelled my VISA account with MBNA. It was not done lightly as the account had a spotless near 40-year history and was almost always paid in full on the due date each month.
These are the reasons I gave them:
1. They were unable to provide debit service direct to my bank so I had to send a check every month.
2. Their interest rates and fees had grown agressively far beyond the cost of service provided.
3. They aggressively pursued a campaign to change the bankruptcy law with misleading information.
4. They had not adjusted their rates and fees to reflect the current interest rate market and the benefits which they will gain from the new bankruptcy law.
I think they are scum in the consumer market. Your story on the unavailability of the agreement before signing up is typical of their approach.
And they're still out there pushing their accounts. Give me a break!
July 8, 2005 5:03 PM | Reply | Permalink
I have been one of the more libertarian critics of this area of TPMCafe, but I completely agree that this is egregious. I think most Americans (at least those who know about contracts, etc.) would also agree this is a terrible policy. I believe that individuals are ulimately responsible for their borrowing habits and that the way to attack irresponsible borrowing is consumer education, not regulation, but in order to make informed decisions, full disclosure by the lender is required. You can teach someone everything they need to know about poker, but if they can't see their cards, even the most skilled pro is going to be hard pressed to make sound decisions.
July 8, 2005 7:26 PM | Reply | Permalink
With all the card issuers out there, it seems likely that there must be some that are relatively abuse free -- fewer junk fees, no arbitration clause, no or restrained penalty interest, contracts in advance, etc. Are there? How does one find them? There used to be an organization called Bankcard Holders of America, but I can't find an active web site. One would think that there would be enough people who care about these issues to make it worthwhile for issuers to pursue this market.
And by the way, how many people carfully read the TPMCafe Terms of Use before signing up here?
July 9, 2005 9:20 PM | Reply | Permalink
The trend towards exploitative credit institutions isn't new of course (cf. "the company store", which gladly gave credit!).
One could argue that the issuing agreement for the credit card doesn't yet create any debt. That is, one could sign the agreement, wait for the card to come along with the contract (or access to to the contract), then cancel the agreement if the contract were unacceptable. However satisfying to legalists, however, this clearly doesn't have much to do with the real world.
Another alternative worth mentioning (since someone asked about finding "better" credit-card issuers): try your bank. After all, you can walk in, sit down with a bank employee, and talk through the options and look at the contract. Many banks -- even smallish credit unions -- issue credit cards. They're just as valid as those issued by the "big boys." And while it used to be that bank-issued cards sometimes had higher fees, etc., I suspect that's not true any more, given the rapaciousness of the national issuers.
In fact, I recently cancelled a nationally-issued card after being hit by a huge "late payment" fee. Yes, my payment was in fact late. But I'm not willing to carry a card that has such exploitative terms, so I cancelled. (Of course, it's likely the more financially experienced, and thus also the more solvent customers who will do this...who also more likely pay their bills every month; I once heard what the industry calls people who pay in full every month: "deadbeats"!).
July 10, 2005 8:12 AM | Reply | Permalink
<I>This is astounding. So is one to assume that an "agreement" is not actually a contract? Or does a borrower automatically become signatorily bound to a contract that he/she has not signed or seen just by signing such an "agreement"?</I>
The trick is that you never sign the agreement. They just mail one to you. Then, the next time you make a purchase, look at the language above your signature: you will be agreeing to pay the debt according to the terms of the contract. That is the moment you are on the hook, as the agreement you got in the mail includes additional charges, rates, etc. going retroactively.
The solution? Once you get the new cardholder agreement in the mail, read it before you use your card again. If you do not like the new terms, do not use the card again. Either call up the bank and threaten to take your business away without a new agreement, or just find a new bank with reasonable opening terms.
When the new bank sends a new agreement after a few months, repeat this exercise.
Disclaimer: this is not legal advice. Your rights may be much stronger based on the law of your state, etc. Talk to a lawyer if you have a dispute with a banmk, etc., etc.
July 11, 2005 7:11 PM | Reply | Permalink
Just a bit of a financial advice ... if you decide that the terms of the card issuer warrant not doing business with them, then consider the ramifications of CLOSING the account. Your credit score is IN PART determined by the ratio of account balances to available credit. Closing an account reduces the denominator (ie available credit), thus bumping that ratio to a less desirable level, and with all thing being equal, this could lower your score. (Of course your score initially went down by your action of applying for the card.) So from a credit score standpoint, it might be wiser to just leave the account open and unused.
July 13, 2005 9:52 AM | Reply | Permalink
I'll admit I am reader JA.
I want to make a slight correction in the facts reported. I still have not heard back from the OCC on my complaint. It was mid-April when I filed it. I did hear from an MBNA representative who gave me their point of view. I also lodged a complaint with the Federal Reserve Board, and that is who responded by telling me that it would take an "act of congress" to require credit card companies to supply the contract in advance of placing an application. I followed this up with letters to my Senators. I still have not heard back from either of them on this issue. Anybody in California is welcome to inquire on this as well. It might help me be taken more seriously.
I was given the suggestion by a law student who has a leaning toward consumer protection, to play the contract shell game by giving it back to them. He suggested that when you get your credit card in the mail, with the "new" contract (the application is the original contract), rewrite it with an attorney to make it acceptable in your terms before activating the card and send it to them. Place somewhere in the agreement, inconspicuosly, that "not responding" and allowing account activation will be acceptance of your counteroffer. Wait at least a week before activating your card. This would form the contract on your terms. Do this with each contractual update you receive in the mail as well. If done correctly and well documented, it should hold up in court in the event of a dispute. ...Interesting suggestion.
July 13, 2005 2:40 PM | Reply | Permalink
Yeah, but do any of the terms apply given you were not offered the contract at the time you accepted? Can they modify they contract?
July 14, 2005 7:18 PM | Reply | Permalink
Assuming this is referring to my original post...
You would be making a counter-offer to the agreement included with the card when it came in the mail. You haven't legally accepted an agreement until you "activate" the card, though some would say it isn't accepted until you make a charge on the card. Whichever it is, you wait until you have sent your counter-offer by certified mail return receipt for proof they received your counter offer. This nullifies the original offer (the agreement sent with your card in the mail) The counter offer states that allowing activation is considered acceptance on their part. You need to wait long enough before "activating" your card to give them a chance to process your counter offer, or it might not stand.
In the case of agreement updates that they send to you periodically in the mail, modify them as you would accept them as well, and go through the same process. The only difference is that you would state in that counter offer that allowing a charge on the account is considered acceptance of the terms of the counter offer on their part. You continue to use your card as usual.
If they modify the counter offer without your knowledge, the changes are not agreed to, and are null and void if the activation is allowed, and your counter offer is accepted as sent according to the rules of contracts.
In any event, it is wise to have an attorney advise you on the process. I wouldn't have the attorney send the counter offer on attorney letterhead, that defeats your purpose. You are playing the credit card company's game. Slip it under their radar, like they do to you. Turnabout is fair play.
July 15, 2005 7:08 AM | Reply | Permalink