credit cards

Many Free Checking Accounts Disappearing Due to Dodd-Frank Financial “Reform” Law

by Hans Bader on September 22, 2010

in Economy, Legal, Politics as Usual, Regulation, Sanctimony, Zeitgeist

The so-called financial “reform” bill that passed Congress — the Dodd-Frank Act — is wiping out many free checking accounts, since many banks can’t afford its red tape unless they either charge a monthly fee, or require a minimum balance of well over $1,000.

Ted Frank’s bank is now charging him a $15 monthly fee and $0.50 per check on his formerly free checking account, thanks to the consumer “protection” red tape in the Dodd-Frank Act, which was recently signed into law by the president.

Earlier, the same thing happened with credit cards, where a law passed by Congress in 2009 had the effect of reviving annual fees and wiping out many cash-back and rewards programs.  Congress passed a law called the CARD Act of 2009 (Credit Card Accountability Responsibility and Disclosure Act) that resulted in some of my wife’s previously-free credit cards charging her an annual fee, or chopping her rebates on purchases (she canceled those cards, and used other cards instead; but some cardholders don’t have other cards without annual fees).  Many, but not all, credit cards have reinstated annual fees or canceled rebates and rewards programs thanks to the CARD Act.  The law effectively forces responsible people to subsidize irresponsible people.  Passed in the name of consumer protection, it actually ripped off many consumers.

Senate Passes Financial “Reform” Bill, 59-39; Will Wipe Out Jobs and Increase Credit Card Costs

by Hans Bader on May 21, 2010 · 2 comments

in Bailout Watch, Deregulate to Stimulate, Economy, Employment, International, Legal, Politics as Usual, Precaution & Risk, Regulation, Sanctimony, Zeitgeist

The Senate has just passed a 1,500 page financial “reform” bill that deliberately leaves unreformed the corrupt mortgage giants that spawned the financial crisis–while wiping out jobs and potentially driving up fees for many credit cardholders.

In a party-line vote, Senate Democrats earlier blocked any reform of Fannie Mae and Freddie Mac, the corrupt, government-sponsored mortgage giants that even Obama administration officials admit were at the “core” of “what went wrong” in the financial crisis.

(Obama received $125,000 in contributions from these mortgage giants as a Senator, second only to the corrupt Senator Chris Dodd, who is retiring this year due to his financial scandals, yet is the chief drafter of the financial “reform” bill.)

Business groups warn that the new rules will wipe out jobs and slow the economic recovery. “If you want to drive capital out of the United States, this is your bill,” said Thomas Donohue, president and CEO of the US Chamber of Commerce.

The bill also increases banks’ costs by restricting the ability of banks to enter into contracts charging retailers for the convenience of using credit or debit cards to collect payment from customers.  When Australia did this credit card holders suffered, as banks passed on the increased costs to them by hiking annual fees and getting rid of cash-back, rebate, and rewards programs.  (Ironically, recent interest rate hikes are partly the product of a law recently passed by Congress, the CARD Act, which forces responsible people to bear the costs of irresponsible borrowers.)

In the Wall Street Journal, Professor Todd Zywicki notes that such provisions harm consumers: “This is exactly what happened when Australian regulators imposed price controls on interchange fees in 2003: Annual fees increased an average of 22% on standard credit cards and annual fees for rewards cards increased by 47%-77%. Card issuers also reduced the generosity of their reward programs.”

The so-called financial “reform” bill would also give government officials the ability to nationalize businesses that they claim are at risk of failing — and block meaningful judicial review of such seizures by shareholders alleging violations of their constitutional rights.  (That will increase the ability of presidents to shake down businesses for donations to their political allies, since a business in danger of being seized by the government will try to curry favor with government officials.)  The bill’s House architect, Barney Frank, boasts that it will create “death panels” for American companies (this is the same Barney Frank who for years blocked any reform of the corrupt mortgage giants Fannie Mae and Freddie Mac).

Mortgage giant Fannie Mae is getting another $8.4 billion in federal bailout money, after the Obama administration earlier lifted a $400 billion limit on bailouts for Fannie Mae and Freddie Mac, two mortgage giants known as the Government-Sponsored Enterprises (GSEs).  The other GSE, Freddie Mac, is getting $10.6 billion more in bailouts.  Soon, they will be receiving much more: “Late last year, the Obama administration pledged to cover unlimited losses through 2012 for Freddie and Fannie,” reports the New York Times.

At the direction of the Obama administration, Freddie Mac ran up more than $30 billion in losses to bail out mortgage borrowers, some of whom have high incomes.  Federal regulators sought to make Freddie Mac hide the resulting losses from the SEC and the public.)  By contrast, the Republican alternative, rejected by the Senate, aimed “to wind down, and break up” the mortgage giants and “limit taxpayer exposure” to their losses.

The Obama Administration showered the mortgage giants’ executives with $42 million in compensation.

Fannie and Freddie helped spawn the mortgage crisis by acting as loan toilets, buying up risky mortgages and thus creating an artificial market for junk.  “From the time Fannie and Freddie began buying risky loans as early as 1993, they routinely misrepresented the mortgages they were acquiring, reporting them as prime when they had characteristics that made them clearly subprime.”  They paid their CEOs millions, and engaged in massive accounting fraud — $6.3 billion at Fannie Mae alone — to increase the size of their managers’ bonuses.  As Government-Sponsored Enterprises, they were exempt from the capital requirements that apply to private banks, so they did not have enough reserves to cover their losses when their mortgages started defaulting.

Banking expert Peter Wallison, who warned for years about the risky practices of Fannie and Freddie, said the financial “reform” bill would lead to “bailouts forever,” contrary to Obama’s claims.

Government pressure on banks to make loans in economically-depressed neighborhoods was a major cause of the mortgage crisis.  That pressure will increase under the financial “reform” legislation.  Legislators approved Obama’s proposal to create a new consumer “protection” agency.  But it may harm rather than help consumers.  Why?  “The agency would be in charge of enforcing the Community Reinvestment Act, a law that prods banks to make loans in low-income communities.”  It would do so without regard for banks’ financial safety and soundness, even though the Community Reinvestment Act was a key contributor to the financial crisis.

LibertyWeek 81: CPAC 2010 in Review

by Richard Morrison on February 22, 2010

in CEI Projects, Environment, Global Warming, Podcast

Richard Morrison, Jeremy Lott and Marc Scribner collaborate to give you Episode 81 of the LibertyWeek podcast. We cover the political adventures of CPAC 2010, Toyota’s chilly reception in Washington, the crackdown on credit cards, rising uncertainty about sea levels and the peeping laptops of high school officials.

Congress Mulls More Credit Card Restrictions, in Legislation Likely to Backfire on Consumers

by Hans Bader on January 5, 2010 · 3 comments

in Deregulate to Stimulate, Economy, Legal, Politics as Usual, Precaution & Risk, Sanctimony

Some in Congress want to impose interest rate ceilings on credit cards and restrictions on interchange fees.  Australia tried the same thing, and it backfired, harming consumers by forcing credit card companies to increase annual fees on responsible credit cardholders and scale back rewards programs.  (Ironically, recent interest rate hikes are partly the product of a law recently passed by Congress, the CARD Act, which forces responsible people to bear the costs of irresponsible borrowers.)

As law professor Todd Zywicki notes in the Wall Street Journal, the proposed legislation would harm both consumers and small businesses, since it would

reduce the quantity and quality of credit cards by restricting credit availability and cutting back on product innovation or ancillary card benefits. This is exactly what happened when Australian regulators imposed price controls on interchange fees in 2003: Annual fees increased an average of 22% on standard credit cards and annual fees for rewards cards increased by 47%-77%. Card issuers also reduced the generosity of their reward programs by 23%. Innovation, especially in terms of improved security and identity-theft protection, was stalled. Card issuers also increased their efforts to attract higher-risk customers who generate interest and penalty fees to offset lower interchange revenues from lower-risk transactional users.  The most important pro-consumer innovation in payment systems of the past two decades has been the general disappearance of annual fees on most credit cards. Cardholders now carry and use multiple cards at little or no cost. The consequences for consumer choice and competition have been profound—card issuers compete for consumer business literally every time they open their wallet to make a purchase.  Annual fees are essentially a tax on card-holding. Policies that produced a return of annual fees would strangle this process of competition by making it more expensive for consumers to hold multiple cards and to switch cards easily. Small businesses, three-quarters of which rely on credit cards, would also have to pay more to maintain access to multiple credit lines, stifling the most potent engine of economic recovery.

Earlier, Congress and the President misguidedly attempted to reduce burdens on irresponsible credit card borrowers, through a new law, the CARD Act of 2009 (Credit Card Accountability Responsibility and Disclosure Act), that backfired and resulted in the return of annual fees, bizarre interest rate hikes for some responsible borrowers, and the elimination of many cash back and rewards programs.

All these bailouts are taking their toll on the economy.  Economists and real estate experts say a $75 billion mortgage bailout program devised by the Obama administration is actually harming the economy, the housing market, and the construction industry.

LibertyWeek 75: Credit Cards, Government-Style

by Richard Morrison on January 4, 2010

in CEI Projects, Podcast

Richard Morrison, Jeremy Lott and Marc Scribner get together to bring you Episode 75 of the LibertyWeek podcast. We take on Ben Bernanke’s recession theories, Canada’s struggle to provide affordable energy, the high cost of government-regulated credit cards, bringing booze to Salt Lake City and the FDA’s critics on the left.

Obama’s Recent $75 Billion Mortgage Bailout Fails: Harmful to Economy, Housing, and Construction, Say Economists and Real Estate Experts

by Hans Bader on January 4, 2010 · 2 comments

in Bailout Watch, Deregulate to Stimulate, Economy, Legal, Politics as Usual, Regulation

Economists and real estate experts are saying that a $75 billion mortgage bailout program designed by the Obama administration has backfired and harmed the housing market, reports The New York Times:

The Obama administration’s $75 billion program to protect homeowners from foreclosure has been widely pronounced a disappointment, and some economists and real estate experts now contend it has done more harm than good. . .experts argue the program has impeded economic recovery by delaying a wrenching yet cleansing process through which borrowers give up unaffordable homes and banks fully reckon with their disastrous bets on real estate, enabling money to flow more freely through the financial system.

That “’has the effect of lengthening the crisis,’ said Kevin Katari, managing member of Watershed Asset Management. . . ’We have simply slowed the foreclosure pipeline, with people staying in houses they are ultimately not going to be able to afford anyway,’ and ‘banks have been using temporary loan modifications under the Obama plan as justification to avoid an honest accounting of the mortgage losses still on their books,’” delaying a recovery in the housing market and the construction industry.

The failed mortgage bailout is reminiscent of the government’s attempt to reduce burdens on irresponsible credit card borrowers, through a new law, the CARD Act of 2009, that backfired and resulted in the return of annual fees, bizarre interest rate hikes for some responsible borrowers, and the elimination of many cash back and rewards programs.

Earlier, the government pushed through billions more in other mortgage bailouts, to bail out even reckless high-income borrowers, and forced financial institutions the government took over in the name of fiscal responsibility, like Freddie Mac, to run up billions in losses bailing out irresponsible borrowers.

Banks will now be pressured to make even more risky loans. The House has approved Obama’s proposal to create the so-called Consumer Financial Protection Agency. Government pressure on banks to make loans in economically-depressed neighborhoods was a key reason for the mortgage meltdown and the financial crisis. Yet Obama’s disturbing proposal would empower the new agency to enforce the Community Reinvestment Act without regard for banks’ financial safety and soundness.  The Community Reinvestment Act was a key contributor to the financial crisis.

The mortgage crisis was also caused by the reckless government-sponsored mortgage giants Fannie Mae and Freddie Mac, and by federal affordable-housing mandates. But Obama’s proposed financial rules overhaul does absolutely nothing about Fannie Mae and Freddie Mac, admits Obama’s Treasury Secretary, tax cheat Timothy Geithner, even though he admits that “Fannie and Freddie were a core part of what went wrong in our system.”

Worse, the Obama Administration lifted the $400 billion limit on bailouts for Fannie and Freddie, so that they could continue to buy up junky mortgages at taxpayer expense, and showered their executives with $42 million in compensation.

Obama’s financial-regulation plan is “largely the product of extensive conversations” with two lawmakers responsible for the corrupt status quo, Chris Dodd and Barney Frank, and it expands the reach of regulations that have been used by left-wing groups to extort pay-offs from banks.

Regulation of the Day 93: Predatory Lending

by Ryan Young on January 2, 2010 · 1 comment

in Deregulate to Stimulate, Economy, Regulation, Regulation of the Day

Congress has used the financial crisis as an excuse to regulate what it calls “predatory lending.” As so often happens, its new regulations have had unintended consequences.

A bank in South Dakota, in order to comply with the new rules, is charging 79.9 percent interest for one of its low-limit credit cards. The pre-regulation rate was 9.9 percent.

The Credit Card Accountability, Responsibility and Disclosure Act of 2009 makes it illegal to charge annual fees greater than a quarter of a card’s limit. For small-balance cards, the allowable fees are tiny now. That leaves banks with three options:

-1. Lose money. The Wall Street Journal correctly notes that “Banks can’t be expected to give money away, even if Congress is in the habit of doing just that.” So this option is unlikely.

-2. Stop offering low-limit cards. This will hurt people who need them, such as people with low incomes, people with bad credit records, and young people who are trying to establish a credit record.

-3. Charge higher interest rates to make up for the money lost in fees. This is exactly what is happening here with the 79.9 percent rate for a $250-limit card.

If the bank calculated correctly, the 79.9 percent rate will be roughly a wash compared to the earlier high-fee, low-rate policy. But different customers will be paying. The people who incur a lot of interest-rate charges are usually the people who can’t afford them. And they’ll be paying a lot more than they were before the CCARD Act.

People who can afford to pay their balances on time often don’t pay little or no interest interest anyway. The 79.9 percent rate doesn’t really affect them. And now their annual fees have gone way down. The CCARD Act is, completely unintentionally, a wealth transfer from poor people to richer people. Congress is actively hurting the very people it intended to help.

Bank of America to Impose Annual Fees on Some Credit Cardholders, Thanks to New Credit Card Law

by Hans Bader on October 20, 2009 · 1 comment

in Bailout Watch, Legal, Politics as Usual, Sanctimony

Bank of America recently announced that it will impose annual fees on some of its cardholders.  This is in response to the CARD Act (Credit Card Accountability Responsibility and Disclosure Act of 2009), which effectively shifts costs to responsible people from irresponsible people, forcing banks to increase charges to responsible credit card holders.

The CARD Act has also wiped out many cash-back and rewards programs and rebates on credit cards, something earlier chronicled here.  Despite that fact, its passage was trumpeted by President Obama and liberal congressional leaders, who are engaging in a form of class warfare against financially responsible people.

Earlier, the government pushed through $250 billion in mortgage bailouts, to bail out even reckless high-income borrowers, and forced financial institutions the government took over in the name of fiscal responsibility, like Freddie Mac, to run up billions in losses bailing out irresponsible borrowers.  It also pushed through $70 billion in auto bailouts to enrich the United Auto Workers union, bailouts that ripped off taxpayers and pension funds and illegally diverted funds from the bank bailout to an auto bailout.  (The bailouts would not even have been necessary if the companies had obtained regulatory relief and greater wage concessions, and may not even succeed, requiring billions more in taxpayer dollars by 2010.)

In today’s Washington Post, Allan Sloan writes about how the government has deliberately ripped off responsible people to bail out irresponsible people over the last year, by spending trillions of dollars to force down interest rates.  That has resulted in extremely low interest rates on savings accounts and bonds, while also, to a lesser extent, reducing interest rates paid by irresponsible borrowers, despite their rising default rates.

LibertyWeek 63: Suing the Government into Honesty

by Richard Morrison on October 5, 2009

in CEI Projects, Features, Podcast, Zeitgeist

Your host Richard Morrison welcomes guest co-host Jeremy Lott and Editorial Director Ivan Osorio for Episode 63 of the LibertyWeek podcast. We start with CEI’s FOIA fight with the U.S. Treasury, 7-Eleven’s attempt to give consumers a big gulp of government and the solution to a jobless recovery. We then move on to union pension politics, Ireland’s regrettable embrace of EU hegemony and some scantily-clad Olympic News.

New Credit Card Regulations Wipe Out Cash Back and Rewards Programs, Punish Responsible People

by Hans Bader on August 21, 2009 · 10 comments

in Economy, Legal, Politics as Usual, Regulation, Sanctimony

If your credit is good, or your credit card balance is low, you may soon pay more on every credit card bill. Why? Congress passed a misguided new credit card law, the Credit Card Accountability Responsibility and Disclosure Act of 2009. As a result of it, you may end up paying an annual fee. And you may end up losing your percentage rebates, your cash back, or your rewards program.

The new law arbitrarily limits credit card companies’ ability to increase rates on credit card balances, even when a cardholder’s balance has been rapidly increasing — meaning that a sensible bank might raise the interest rate, because a rising balance drives up the risk that the credit card company won’t get paid what it’s owed. (Increasing numbers of credit cardholders have run up big balances in recent years, then failed to pay them off).

In response to the new law, some credit card companies are starting to charge annual fees on their credit cards to protect themselves against potential losses. Others will likely drop their rewards programs, or stop giving customers’ percentage rebates on credit card purchases. For example, I and my wife get 3% to 5% back on most of our credit card purchases.

One of my co-workers just emailed me that he has recently been notified that he will be charged an annual fee on what he calls “the best reward card I ever found.” It’s the same card I use for many of my purchases.

The new law is supposed to “protect” cardholders. But what it really does is transfer wealth from people who pay off their credit card bills at the end of every month, (or have good enough credit that the credit card company would not likely have increased their interest rate anyway) to people with bad credit who have run up big balances.

If you make it harder for credit card companies to charge risky people higher rates than responsible people, they’ll increase rates for everyone, or make it harder for people to get credit cards in the first place.

That’s how it used to be, a generation ago, before the Supreme Court ruled in 1978 that states couldn’t restrict the interest rates charged by out-of-state credit card companies (in the Marquette National Bank case). States set strict limits on how much interest credit card companies could charge their citizens — even those who were high-risk borrowers with bad credit. As a result, many people couldn’t even get credit cards, and the vast majority of consumers got charged an annual fee.

That ended after the Supreme Court said states couldn’t regulate credit card companies outside their borders. That killed off most state regulation, since most credit card companies moved to states like South Dakota that didn’t restrict interest rates. As law and economics professor Todd Zywicki notes, consumers benefited enormously from this: “The effect was to unleash an era of extraordinary competition and pro-consumer financial innovation. Marquette spurred competition and innovation, leading to vast improvements in payment card services for consumers along with the elimination of annual fees on cards, lower interest rates, and the beneficial uncoupling of retail and credit transactions, thereby permitting the rise of the Internet and small businesses.”

The new federal law imposes some of the same archaic burdens that existed before 1978, and it will have many of the same bad results.

As economists and banking experts have noted, state credit regulations “often backfire, hurting the very consumers that they are intended to protect by making credit more expensive and less available.” State interest-rate ceilings, for example, “dry up the flow of credit to the low-income and high-risk borrowers” and force some “borrowers to turn to loan sharks and disguised loans.”

In other countries which restrict credit card interest rates more, it’s much harder to get a credit card, annual fees are rampant, and rewards programs basically don’t exist. My wife is from France, where there are stricter limits on the interest banks can charge credit cardholders. As a result, she never could get a credit card in France, even though she always had money in the bank, and never missed a payment on anything. She finally managed to get a debit card, but was charged an annual fee for it.

Only after she came to America, which has less regulation, did she manage to get a credit card. Her credit cards came with rebates and no annual fee. But thanks to the regulations in the new credit card law, she may soon lose her cash back and get charged an annual fee.

Earlier, the government pushed through $250 billion in mortgage bailouts, to bail out even reckless high-income borrowers, and forced financial institutions the government took over in the name of fiscal responsibility, like Freddie Mac, to run up billions in losses bailing out irresponsible borrowers.

Now, it’s applying the same destructive, redistributionist philosophy to credit cards.

Commercial lawyer John Hinderaker notes, “Congress has just enacted new credit card regulations intended to limit banks’ ability to collect money from distressed or incompetent customers. The New York Times explains the consequences:

‘It will be a different business,’ said Edward L. Yingling, the chief executive of the American Bankers Association, which has been lobbying Congress for more lenient legislation on behalf of the nation’s biggest banks. ‘Those that manage their credit well will in some degree subsidize those that have credit problems.’

“The competent subsidizing the careless . . . Of course, the new rules will cause banks to lose interest in extending credit . . .

The industry says that the proposals will force banks to issue fewer credit cards at greater cost to the current cardholders.

These are not the only counterproductive lending regulations on the horizon. There are also proposals in Congress to create a new bureaucratic agency to pressure banks to make risky, low-income loans — even though such forced lending contributed to the mortgage meltdown. “The agency would be in charge of enforcing the Community Reinvestment Act, a law that prods banks to make loans in low-income communities.”

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