Pataki Supports Credit Card Companies, Dumps Consumers
This summer New York legislature passed a straightforward piece of legislation to help consumers: credit card companies would be banned from using universal default clauses. This would have put New York in the forefront at striking back at one of the credit industry’s most profitable tactics—charging more whenever the company thinks you’ll have nowhere else to go.
Governor Pataki just vetoed the bill.
Looking for political cover, the governor claims the bill had “technical” problems. Consumer advocates said his argument was a sham. Let’s face it—the governor didn’t work to get the bill and he didn’t say “make these changes so that I can support it.” In a choice between consumer interests and credit industry interests, the governor chose the industry.
Governor Pataki has given his stamp of approval to a deceptive practice that costs consumers millions of dollars in inflated interest payments. Let’s be clear here: the company raises the interest rate—the amount the covers the time value of money plus the risk you wouldn’t pay—on all the money already borrowed. No other creditor gets to do this. If someone loses her job or gets sick, the mortgage company can’t increase the rate, nor can the car financer. But credit card companies can raise the interest rate on money already borrowed—even for customers who are meeting every single term in their current credit agreement.
Anyone who gets into a dispute over whether a cell phone payment was late and suddenly discovers that the interest rate on her credit card has been boosted to 29% can send a personal thank-you to the governor.
Pataki is just trying to get his approval ratings down in the same range as Alan Schlesinger, the Republican candidate for Senator in the neighboring state of NY. Somehow Pataki's staff still exists in this cloud cuckoo land dream that Pataki has a ghost of a chance of chasing for the Presidential nomination. This little incident just shows how bought and paid for Pataki truly is.
August 22, 2006 8:06 PM | Reply | Permalink
As I am sure you know, credit card debt is an unsecured loan unlike a home mortgage or an auto loan. Therefore, the industry believes it is justified in raising interest rates.
It does not, however, justify the credit card industry's practice of applying the default rate to all your credit cards due to one late payment on one card.
By the way, which bank(s) will put Pataki on their board after he leaves office?
August 22, 2006 8:23 PM | Reply | Permalink
Anyone who gets into a dispute over whether a cell phone payment was late and suddenly discovers that the interest rate on her credit card has been boosted to 29% can send a personal thank-you to the governor.
I like this idea. Maybe we could even expand it to other elected officials? It seems like this is an issue where we wee folks have a definite stake and should be taking any opportunity to make our voices heard.
(Admittedly, perhaps Ms. Warren intended this solely as emphasis, but it just might work!)
August 22, 2006 8:53 PM | Reply | Permalink
I'm not sure why credit card companies would be more justified in raising interest rates than secured creditors. My mortgage rate is locked down as per contract; as interest rates rise, the interest rate I pay doesn't change. But if my house loses value, I can go upside-down on the loan and end up owing more for the property than it's worth -- the bank wins then. I'm sure the bank would like to raise my interest rate right now, but my contract with them doesn't allow it.
Credit card companies write their contracts so they get to win no matter what happens, then get politicians like Pataki to push back against consumer-friendly legislation that tries to even the score.
August 22, 2006 10:03 PM | Reply | Permalink
As a certain senator would say, "Welcome to America, (....)" Supply your own demeaning epithet.
So I guess the point is that these guys send out ads & contracts & pre-written checks to every living organism in this country offering low low rates. Think about it. If they are doing this, what in the world qualifies them to judge risk??? Essentially they are making their business moron-proof, and I guess Pitaki knows it needs to be moron-proof.
dc
August 23, 2006 4:53 AM | Reply | Permalink
I've been thinking about this in the corporate context - i.e. is there a comparable situation whereby a company would be forced to pay higher interest on outstanding debt following a change in credit quality.
With bilateral loans, there are sometimes "step-up" clauses - usually triggered by changes in the interest-cover ratio (but definitely not triggered by something largely outside the borrower's control, such as its credit rating). But otherwise it is hard to imagine a company would agree to a universal default-type clause; and in any case, the threat of a higher cost of borrowing in the future is sufficient incentive for the company to keep on repaying.
Universal default also makes a mockery of any suggestion that the initial rate you get charged is based on some kind of statistical analysis on the probability of default. Indeed, if the lender can simply reset, virtually at will, the cost of borrowing, he might as well start at a base rate fractionally more than the rate of inflation and ratchet it up if they can claim borrowers are in difficulty.
A final thought, on the legislative side, is that in the UK, they have an "Unfair Contract Terms Act", which includes a statutory "fairness test" as follows:
"A term is unfair if contrary to the requirement of good faith it causes a significant imbalance in the parties' rights and obligations under the contract, to the detriment of consumers."
"Good faith" is a test of openess, which basically means that, eg, a credit card provider would have to tell you what a universal default clause means. And I would vouch that anyone who is told straightforwardly what the clause implies, would reject it for the same reasons a company would reject an equivalent clause.
August 23, 2006 5:03 AM | Reply | Permalink
Crissie, While credit card debt is technically not secured debt, the nature of it has changed somewhat as the result of the bankruptcy "reform" bill.
With some limitations, credit card companies can now attach the value of a debtor's residence in court. I've long assumed that one of the bankruptcy bill's major benefits accruing to credit card companies is that they now can justify extending more credit to homeowners.
In effect, credit card debt owed by homeowners is secured.
LOL -George Pataki will be welcomed by every bank in New York State after he leaves office. Look for wonderful opportunities in real estate to open up to him, too.
August 23, 2006 8:39 AM | Reply | Permalink
Two points:
1. It is an unsecured debt so the risk of repayment goes up if a person has adverse lifestyle changes. For a mortgage or car loan the collateral is still there to cover the loan. I'm not justifying the practice, just trying to say why the banks think this is the appropriate response.
2. The level of interest has risen to usurious rates over the past 30 years. It used to be that only mob-related loan sharks charged 30% interest, now it is Citibank (perhaps I repeat myself). With the rise of religious appeals as a justification for social policy it seems surprising that none of the current religious leaders have taken a stand against usury. It is, after all, condemned in all three major western religions. Islam doesn't permit charging interest at all.
So does morality only extend to those areas which don't affect the bottom line?
The arguments about the degree or risk that the credit card companies are subjected to is disproven by their own financial reports. Bad loan write offs usually amount to 2-4%, so that this is all the premium that would be needed to cover the risk. For many banks credit card interest and fees now amount to over 50% of their profits, dwarfing their regular loan business.
--- Policies not Politics
Daily Landscape
August 23, 2006 8:48 AM | Reply | Permalink
In response to your first point...
Wouldn't it make sense for the cc co's to distribute the risk that any one customer might lose their job, by charging a slightly higher fee for everyone, always?
It seems as though the cc co's have instead resorted to taking money when people have no where to go. And its a crying shame that our elected officials are on their side.
August 24, 2006 5:56 AM | Reply | Permalink
Prof. Warren, I've got a question for you:
Why doesn't the government start its own credit card company to compete in the market along side of the private credit card companies? The gov't could calculate a debtor's risk and offer a modest interest rate without gouging consumer/voters. The gov't could also distribute risk across large regions of the country.
Who knows, maybe the profits could be used to increase the amount of money available for federally secured school loans - which would help the country earn more money to pay off credit card debt.
Wouldn't this be a free market-based approach that would reduce personal debt, encourage savings, encourage eduction and encourage increases in our government's efficiency (which helps economic growth)?
What do you think? Are there legal hurdes to starting such an idea?
August 24, 2006 6:15 AM | Reply | Permalink
Re: With some limitations, credit card companies can now attach the value of a debtor's residence in court
This far more the exception than the rule. It applies only to high-value homes that the debtor has owned for less than two years. And there was a bit of abuse in that area, with wealthy debtors sinking their assets into million-dollar homes in Florida and other states with very liberal exclusionary laws then declaring bankruptucy with few reamining attachable assets.
August 24, 2006 6:47 PM | Reply | Permalink
I thought the threshold for attaching the value of home was $125,000. I.e., Any value above $125,000 could be attached. In NY, $125,000 is not considered a high value home.
August 26, 2006 8:26 AM | Reply | Permalink
I think it applies to $125K in equity. However, I think when I talked to some attorneys from Syracuse last year at the
NACBA
convention last year in San Diego, they told me that New York's state law was even less generous than that. I remember how shocked I was at how puny New York's protections were. Oklahoma is considered to have the 3rd best exemptions in the country (behind Texas and Florida).Come to think of it, maybe I should reconsider that job with the federal government in Albany I am interviewing for on Wednesday.
Find the Truth. Do Justice.
August 27, 2006 5:21 AM | Reply | Permalink
No, no. We need all of the dedicated and talented help we can get in New York. Besides, working in Albany will be interesting, given the likely changeover to a Democratic administration after eight years of Republican rule.
Here's a tip: James Odato at the Albany Times-Union is a well-informed and helpful reporter. He once telephoned me about a letter I sent to the paper about Charlie Gargano and passed on a bit of useful information.
As for me, I should become more informed about the provisions of the bankruptcy bill since I complain about it all of the time.
I'm still livid about Rep. Steve Israel's (D-NY) support of the bill even though Peter King is now my representative. Rep. Carolyn McCarthy is on my shitlist, too, for the same reason.
August 28, 2006 7:48 AM | Reply | Permalink
No, no. We need all of the dedicated and talented help we can get in New York. Besides, working in Albany will be interesting, given the likely changeover to a Democratic administration after eight years of Republican rule.
Here's a tip: James Odato at the Albany Times-Union is a well-informed and helpful reporter. He once telephoned me about a letter I sent to the paper about Charlie Gargano and passed on a bit of useful information.
As for me, I should become more informed about the provisions of the bankruptcy bill since I complain about it all of the time.
I'm still livid about Rep. Steve Israel's (D-NY) support of the bill even though Peter King is now my representative. Rep. Carolyn McCarthy is on my shitlist, too, for the same reason.
August 28, 2006 7:48 AM | Reply | Permalink
As an FYI. The reason why religious leaders don't challenge usurious rates is because if they start getting involved in politics they stand to lose their non-profit status. Preachers and ministers are not allowed to preach politics from the pulpit. When you are a minister, anytime you speak, it is from the pulpit. The so called religious leaders that speak out on TV do not operate as non-profit organizations and do not have congregations. They are self appointed representatives of the religious right. Most Christians don't agree with them, in reality.
What is taught, however, is biblical principles about borrowing. So if congregations started listening to their pastor's teachings on borrowing, then credit card companies wouldn't have the power they have. Our society has desensitized everyone so much, everyone thinks it is no big deal. They don't understand the monster that has been unleashed over the last few decades.
Jim Anderson
The Truth About Credit
August 30, 2006 4:24 PM | Reply | Permalink
I'm not an expert on tax exempt status, but I think all that is forbidden is explicit support for specific candidates and/or legislation.
So, preaching against usury in general terms would seem to be permissible. Church leaders give sermons against abortion without running afoul of the law all the time. I think that the Calvinist tradition in the US which equates work with religious goals has desensitized people to this issue.
--- Policies not Politics
Daily Landscape
August 31, 2006 9:06 AM | Reply | Permalink
There is a big difference between teaching biblical principles and teaching to influence public policy. Trying to influence legislators is taking an action that influences their congregation on political views, because they are leaders. Those who do speak out, do not represent the majority of christians. Though privately, many preachers agree from a principled standpoint with some of the ideas put out by the "religious right" they don't believe the solution is to influence legislators.
In the case of usury, it is taught to be wrong, and always has. It is our society that has desensitized the public into thinking it is harmless if you just are careful with it. So what christians would do if they followed biblical teaching, they would not borrow unless it was necessary to eat. Not so they can have a car, or own a home, or provide convenience in making purchases.
With credit cards, it isn't just the borrowing. It is the "vow" made through a contract. The contract is essentially one that a christian who understands and follows the biblical principles of keeping your promises, would not sign. That is because they cannot control whether they default. Partly because they can't see the future (which is partly what makes borrowing bad), but also because the terms of default are beyond their control. There are many other reasons why an individual would find it extremely difficult to fulfill a contract under their terms, beyond the fact they change them at will. Many of the terms are hidden behind the highly complex legal jargon (that goes beyond reason), that even attorneys find it difficult to determine the consequences behind them.
If christians followed biblical principles on this issue, the credit cards and predatory lenders would have no market. I think that is where the real solution resides, not influencing lawmakers. They tend to fail us consistently. However, the public discussion of this may help people make better decisions going forward.
Jim Anderson
The Truth About Credit
September 1, 2006 11:12 AM | Reply | Permalink