The other problem is that many of the people who are most hurt by these practices are the ones who would scream the loudest if attempts were made to restrict who can get credit. Like the interest only loans that enable people to purchase far more expensive homes than they could with conventional financing, these loans are probably really bad for most consumers but they are still very popular and trying to stop them would probably anger many of the same people that you are hoping to protect.

Maybe the answer is to better educate consumers, but even then people don't always do what they know is good for them, look at the number of people who smoke or overeat, they know it is bad for them but they still do it. Predatory lending practices seem to work the same way, most people probably know that they should not be financing some of the things that they are buying, but they still do. Any attempts to keep people away from their easy, albeit expensive , credit, would probably result in an outcry from the very people who might benefit from legislation.

Well ok, but I am having a hard time thinking of a constituency clamoring for "late fees, over-limit charges and penalty fees," which is the gist of the problem Warren is pointing out.

It happens to smart edjumacted consumers, too; they just bait and switch, put all kinds of little new "products" you may not even have "bought" when you signed up for the credit card, they come in those little flyer announcements in the bill with tons of tiny tiny legalese announcing a change in terms, seems like every month sometimes. They bet on consumers not having time to read them. I'm old enough to remember when it wasn't this way with credit cards, there were strict laws in many states about what they could do in this regard and what they couldn't (in the ancient days of the early 90's, even.)

I think your argument putting all kinds of new "exotic" lending under the same tent with this is sort of mixing apples & oranges. Possibly because you basically don't like more people having access to credit? I think it's baloney that most people enter into exotic mortgages not knowing what they are getting into--most don't take big steps like that without investigating--the "foolish" ones are just the sort of people who are willing to risk more. But few expect a $2,000 bill from Target to end up being a contract with the lender changing the rules umpteenth times, taking the consumer more time to understand and manage than a six-figure mortgage, and perhaps a team of lawyers to figure out. The problem is there's not enough oversight/regulation of consumer credit, far far less than their used to be. No ground rules, they change the rules all the time. (Sometimes, I swear you can figure out when a credit card company is having a cash flow problem in what rules and enforcements they decide to stress that month.)

Mortgages are a whole different ball game, people expect them to be complex, it's a major life decision. Indeed, one could easily argue that the 2nd mortgage industry saw a great unfilled need for people to get free of the increasingly bullshit time consuming bait and switch-the-rules predatory lending practices of a lot of consumer credit companies and people took them up on it: one loan, one set of unchanging rules regulated somewhat by the government, people so eager to get out from under the credit card company bullshit that they will put their house on the line as collateral to escape from them.

It's not just Target.

Up to 1993 I was a corporate lender for Bank of America, and I had several finance companies in my portfolio that lent both sub-prime and prime. The collaeral included cars and homes.

The sub-prime lending business is a collections buinsess. You make your marginal profit by being an effective collection agency. There are lots of ways to do this, varying by collateral, but they all come down to charging high fees and collecting collateral aggressively.

Even back then, very large companies were making good money in finance, and only moreso since then. I calculated at the time that in valuing General Motors, if you subtracted out the value of Hughes, EDS, and GMAC (the finance subsidiary) GM was worth just about zero dollars. Today, GM makes far more in GMAC than it does selling cars, so like Target, it sells cars so it has an opportunity to lend money on them as collateral via loans and leases.

If you look at the debt levels in the USA today compared to just a few years ago, the figures are staggering: everyone is leveraging up, consumers, businesses, governments. It won't end well, which is why the finance and banking industry finally made the big push to get the bankruptcy bill passed: now, consumers will become tied to their debt forever with no real means of escape. Watch for more people just dropping their debts and disappearing in response to the changes in the BK law, further eroding the stability of our society and families.

You can't solve usurious sub-prime lending practices by educating consumers. The only effective way to do it is to regulate the industry with all-in caps on lending & default rates. If you were to limit lending rates (all in) to say prime plus 3% and default rates to prime plus 8%, this would have an immediate effect on lenders limiting credit to high-default-risk consumers.

As a long aside, please note that Reg Z, the law that was created decades ago (by Democrats) to protect consumers from dishonest lending practices includes the "Disclosure Statement", that piece of paper you get when you buy a house, or a car, or any kind of consumer loan. It's the document that summarizes all the fees and rates, and shows you the all-in interest rate. This is an important document, and here's why:

If a lender gets that document materially wrong, say by mis-calculating the total amount due, fees, or the all-in interest rate, under Reg Z you are NO LONGER LIABLE TO REPAY THE LOAN. It's a huge penalty, and was designed to give lenders a real incentive to get it right and be honest.

A friend of ours (a single mother) had executed a loan with a local dentist to pay for her son's braces. It turns out the dentist just kept charging the monthly payment past the end term of the loan, and kept the braces on far far longer than either estimated or needed, and she had more than paid back the original loan. She had a copy of the Disclosure Statement, and I had a local lawyer draft a letter stating that she was due a repayment of all amounts paid since the dentist had violated Reg Z.

She got the remainder of the service for free and a rebate of 6 months of payments, and the dentist made her sign a settlement contract with a confidentiality provision.

So, go back and double-check those disclosure statements on your mortgage; if they are materially wrong, you might be in an interesting situation.

NOTE: I don't know if in any recent legislation Reg Z has been modified. The last time I looked at it (for this woman) in 2002 it had not changed.

Holding a lender accountable to laws such as Reg Z isn't as easy as it may seem.  What I found in my dispute with Citibank, that all Citibank had to do to relieve themselves of all accountability to the law concerning my dispute, was label it frivolous.  There is a loophole that allows them to make that determination upon receiving a dispute, then any accountability to resolving it in a timely basis, and not collecting on it during the dispute period, is dissolved for all practical purposes.  At least this is what transpired in the courtroom I was in.  My dispute was legitimate and not frivolous in any way.  I didn't even get a chance to present my argument in the courtroom.  I don't believe the judge even looked at my pleadings.

 I believe the laws like Reg Z and the others that are supposed to protect consumers, effectively do the opposite.  They define ways for lenders to absolve themselves, so that consumers cannot enforce their rights in court.  Big lenders have scores of attorneys that make sure it works out that way.  

Jim Anderson

The Truth About Credit

I don't apply for discount cards anymore either. They usually come with some cancellation fee

Are you kidding me!!!  A cancellation fee????!!  WTF!!

I presumed you were taking advantage of the discount at the time of purchase and then cancelling the card?  I did that as well,initially until I found out that it dings your credit report...I stopped.  Now, they charge fees to cancel?   Credit is just horrendous nowadays.  It use to be you could pay it off in 30 days without any interest charges...now they want to charge you annual fees.

Maaaannnn, credit sucks!!

I feel really sorry for young ppl and recent graduates.  They are even luring them with 'interest only' mortgages.  Young kids think that is a good idea, too!!

I wouldn't argue with your experience, although it would be interesting to know more of the facts of the case.

I've had two other experiences I didn't mention with Reg Z in my first post.

In 1991 a client of mine when I was a banker (a SoCal S&L with a finance company sub) had made a mistake (due to a programming error) on a large number of Disclosure Statements. The error was material. We were nervous as hell because these mortgages were our collateral. Our attorneys and their attorneys crafted a "solution" that involved sending out revised Disclosure Statements and asking the debtors to sign them and send them back. Ultimately, there was no loss due to the error, but the attorneys were nervous about the risk of loss.

The other experience was in 2001. A friend of mine had just re-financed her house. Just for the fun of it, I calculated whether the Disclosure Statement was accurate. It was off, but only by a small amount (around $1,000 over the life of the loan), but an amount clearly more than rounding error. And, of course, the error was in the mortgage company's favor.

I called the AG's office here in WA. They looked up the case law and determined ... as you were saying ... that the amount wasn't enough to develop a case that wouldn't be dismissed. That's why I said in my original post that the Disclosure Statement had to be "materially" wrong.

Anyway, I asked the AG attorney how he felt about a mortgage company making lots of small errors (in its favor) on thousands of loans that add up in aggregate to a large, illegal, transfer of wealth from its customer base. He acknowledged that the behavior could be actionable on a class action basis, but said that the WA AG office would not be interested in pursuing the case.

It remains an interesting question. I would imagine it would be an interesting exercise to look at a couple hundred mortgages to see what's going on in the industry.

My solution to excessive marketing of sub-prime lending is to restore the former personal bancruptcy law, and make it even more "pro-consumer".

Such a law would make lenders more cautious, and it would be relatively easy to sell it to the public.

OK, the 8-K filing is online here.

Earnings before taxes (EBT) increased (886 M - 796 M) = 90 M

Credit card contribution to EBT increased (162 M - 102 M) = 60 M

Note that in 2006 Q1,
Earnings before taxes = 886 M
Credit card contribution to EBT = 162 M

162 M / 886 M = 18.3%

So credit cards contributed 18.3% of the EBT in 2006-Q1.