November 2009 Archives

"The Card Game," which airs tonight at 9 p.m. New York time, might tempt you to strangle a banker or two -- an easier target than the other major culprit: our national preference for buying now and paying later.

Americans use credit cards for about 100,000 transactions a minute, the show says. While individuals bear responsibility for profligate spending, credit-card companies have made it easy to go deep in the hole.

Host Lowell Bergman interviews Shailesh Mehta, former chief executive officer of Providian Financial Corp. and a pioneer of "stealth pricing" and other creative strategies that earned his company around $1 billion a year.

Mehta, a suave guy who lives in a slightly miniaturized copy of the White House, illustrates how easy it is to put yourself in debtors' prison. He opens a card offer from Bank of America Corp. boasting an introductory annual percentage rate of zero. Next to an asterisk is small print that lists the APR as "11.9, 15.9 or 19.9" percent. Take your pick.

Many card holders are also unaware of various fees that can turn that little piece of plastic into a truly toxic asset.

Subprime Lending

Martin Eakes, head of the Center for Responsible Lending, says credit-card debt played a role in the economic meltdown.

"When the subprime lending was really taking off, it was largely a mortgage product to refinance credit card debt," he says.

Robert McKinley, CEO of CardWeb.com, says some consumers even refinanced their homes to pay off their credit cards. Then "they would go out and charge them back up again."

In another dose of bad news, McKinley notes that debit cards "can be under certain circumstances even more expensive that credit cards."

The chief trap is overdraft protection, which isn't always free. A consumer named Josette Wermuth explains that a stalled deposit meant she couldn't cover a $7 pizza purchase. The bank covered it for her, but charged a $33 fee, which the show says is the equivalent of an annual interest rate of more than 24,000 percent.

Overdraft Charges

Some lenders also process larger charges first, even if they occurred later in the month, which can empty an account and create numerous overdraft charges (or opportunities, if you're doing the lending.)

So who's going to fix this mess? While Congress passed reforms in May limiting the practice of arbitrarily changing interest rates, Harvard Law School professor Elizabeth Warren says the reforms are "a modest step" and that the industry "instantly set to work on how they could run around them."

Warren, head of a congressional oversight panel assigned to oversee the bank bailouts, is backing a new Consumer Financial Protection Agency that would have regulatory powers across the lending world. That would include payday lenders, whose storefronts outnumber Starbucks' 2-to-1, according to the show.

Several big dogs are opposing the plan, including U.S. Senator Richard Shelby, a Republican from Alabama who calls it a "radical departure from the way we have regulated."

No matter what reforms are devised, Mehta agrees that the industry will find a way around them. Bankers, he says, have a mindset of "tell me the rules, and then I'll outsmart you all."

Faced with new credit card restrictions, lenders are touting debit card loyalty programs. But many come with fees that may not be worth it for consumers.

-- Could debit cards be the next cash cow for banks? If banks have their way, they will.

Americans have conducted more transactions and spent more money using debit cards than credit cards this year -- the first time that's ever happened.

Next year, consumers are expected to spend $1.64 trillion with their debit cards, nearly two-thirds more than in 2006, according to the payments industry trade publication The Nilson Report.

And there is no indication this growth is slowing down anytime soon. Not only are Americans increasingly reluctant to take on more debt, but banks are expected to become more stingy with credit cards once new federal legislation takes effect next year, which could make the debit card the preferred form of payment for many consumers.

This hasn't gone unnoticed by large and small banks, who are currently looking for ways to wring any extra dollars out of their business at a time of severe loan losses.

"Banks, just like airlines and local governments, are looking for fee income to fill the revenue gap," said Greg McBride, senior financial analyst with Bankrate.com.

What is shaping up to be an area of focus for lenders are loyalty or rewards programs for debit card users.

A concept that has long been associated with credit cards, increasing numbers of banks have looked to such programs as a way to generate more fees from consumers.

5 evil things credit card companies can (still) do

Atlanta-based lender SunTrust (STI, Fortune 500), for example, launched a tiered series of travel debit cards in June that allow consumer and business account holders to earn miles with Delta Air Lines.

Just this month, Wells Fargo (WFC, Fortune 500) expanded its Cash Back program, saying it would allow customers to apply their debit card rewards toward paying down their home equity loan.

And Minneapolis-based U.S. Bancorp (USB, Fortune 500), which has offered debit card rewards as early as 2002, announced last week it was now making its own FlexPerks program, which allows cardholders to earn travel, cash or merchandise rewards, available to many of its consumer and small business account holders.

"We do find our customers are very interested in earning something," said Lynn Heitman, senior vice-president for retail payment solutions at U.S. Bancorp.

Of course, consumers don't necessarily have to pay for the privilege of having, or using, a debit card. Or at least not upfront.

If you've heard about all the bank failures -- 122 this year -- you've got to be wondering about the safety of your money.

Which banks failed this year

Five banks failed Nov. 6. The largest was San Francisco's United Commercial Bank, the main operating subsidiary of UCBH Holdings, which received $299 million in government help through the Troubled Asset Relief Program last year. Looks like taxpayers won't be getting that money repaid.

It really does make you wonder about protecting your money. Here's what you should know:

Know what's protected

Money parked in bank accounts is usually protected by the Federal Deposit Insurance Corp. , but that doesn't mean all your money is safe. The FDIC insures checking accounts, savings accounts, certificates of deposit and retirement accounts placed in deposits at insured institutions.

You can ask your bank whether it's FDIC-insured. By the way, money that is placed in a money market deposit account as part of your checking is protected, but don't confuse that with a money market mutual fund , which is not.

Know what's not protected

Not every dollar sent to your bank is protected, including holdings in mutual funds (stock, bond or money market mutual funds ), annuities, stocks, bonds, Treasury securities and other investment products.

And what about that prized ring passed down by Grandma or other contents in a safe-deposit box at your bank? Those aren't protected either

WASHINGTON -- Consumer advocates on Tuesday urged Congress to move forward on legislation to curb bank practices under which a cup of coffee bought with an overextended debit card can turn into a $40 expense.

Banks last year collected nearly $24 billion in overdraft fees, more than double the level of 2004, and much of that comes from those least able to pay -- the poor, the young, minorities and seniors -- witnesses said at a Senate Banking, Housing and Urban Affairs Committee hearing on abusive overdraft policies.

In the midst of a recession, said Michael Calhoun of the Center for Responsible Lending, "abusive overdraft practices are making the dire financial situations faced by many families even worse."

Overdraft fees are charges when a customer writes a check, uses a debit card or withdraws money from an ATM for an amount larger than the account holds. Nearly half the $24 billion total comes from debit card and ATM overdrafts.

People have a responsibility to spend within their means, said Sen. Chris Dodd, D-Conn., chairman of the committee and author of legislation that addresses excessive overdraft charges. But current programs "encourage consumers to overdraw their accounts and then slam them with too high fees."

Jean Ann Fox of the Consumer Federation of America said the median maximum overdraft fee for the largest banks is now $35. That means an uncovered $5 debit card purchase at a coffee shop could easily turn into a $40 charge.

Dodd added that banks can also charge multiple fees in a day from a consumer who unwittingly makes several purchases with an overdrawn card.

One of Dodd's constituents, Mario Livieri of Branford, Conn., described how he was charged $35 when he was $2.17 short on a $200 check. In the week that it took the bank to notify him that he was overdrawn, he had withdrawn another $100 from the ATM, racking up another $140 in charges. He was repaid $35 after he complained, but had to pay the rest. He stressed that he never signed up for overdraft protection. "It's legal, it shouldn't be and it certainly isn't fair."

Calhoun said his group estimates that 50 million Americans overdraw their accounts annually, with the consumers most likely to be hit by penalty charges being lower-income, non-white or young account holders.

Younger consumers more likely to use a debit card for small transactions pay $3 in fees for every $1 borrowed for debit card overdrafts, Fox said. She said students and young members of the workforce pay about $1 billion a year in fees.

Dodd's legislation would allow consumers to "opt-in" for overdraft protection on ATM and debit card transactions when they open an account. It would also limit the number of overdraft fees a bank can charge per month and year, require that fees be proportional to the cost of processing the overdraft and require that customers be notified when they overdraw their account so they don't make further uncovered transactions. Rep. Carolyn Maloney, D-N.Y., has proposed similar legislation in the House.

The Federal Reserve last week also announced a rule, to take effect July 1, under which banks would have to secure their customers' consent before charging large overdraft fees on ATM and debit card transactions.

If a customer chooses not to participate in overdraft protection, any debit or ATM transaction that overdraws their account would be denied.

Several large banks, including Bank of America Corp., and JPMorgan Chase & Co., have said they plan to reform their overdraft policies, and John P. Carey of Citigroup North America Consumer Banking told the Senate hearing that Citibank declines ATM or debit transactions when funds are insufficient and thus does not charge overdraft fees.

He said his bank supports the legislative goal of protecting consumers from unnecessary overdraft fees. But he urged flexibility, saying, for example, that a person stranded overseas without cash should have the choice of accessing $100 from an ATM machine knowing that it will cost him $135.

He also said that limiting the number of fees a bank can assess could remove a deterrent for those who intentionally and fraudulently create overdrafts.

Most pundits saw it coming: a wave of frenzy as credit issuers scramble to get their ducks lined up before the new provisions called for in the CARD Act of 2009 kick in.

Once the provisions of the new law steps into effect in August of 2010, card issuers will no longer be able to raise interest rates retroactively on existing credit card balances. In response, card issuers are doing one of two things, according to The U.S. News and World Report: Many card issuers are simply raising interest rates before the new law steps into effect. In addition, card issuers are switching many of their fixed-rate credit cards over to variable cards. This will allow them to take advantage of a loophole in the law, which continues to allow interest rate changes on cards with variable interest rates.

Although many experts feel it was the new bill that lit the fire beneath the card companies, card issuers blame the current economy and argue that the increase in rates is necessary to compensate for an increasingly risky lending environment.

Whatever the true motives may be, expect card issuers to continue to tighten terms and the credit card landscape to be increasingly perilous to navigate. More than ever, it's important for cardholders to be proactive and take measures to protect themselves. Here are three ways to protect yourself against unfavorable changes to terms:

1. Keep your credit solid: A high credit score is an asset in any economic climate, but these days, it is a must. If you can maintain a high credit score and keep your credit reports impeccable, you should be able to remain, for the most part, immune to the cyclone of changes

2. Be selective about where and how you use your card: Card companies watch for certain purchase behaviors. When you use your card for a cash advance, it triggers a red flag. Also, avoid purchases with what creditors call "questionable merchants:" places such as pawn shops, tire retreaders, and marriage counselors; even charging all your grocery purchases to your card may not be such a good idea.

3. Vote with your feet: There are hundreds of banks and financial companies issuing credit cards, and if you don't like the terms your card issuer are offering, you can always apply for a new credit card. In addition to applying for a credit card online, also condider looking into credit cards issued by small credit unions, which often offer cards with more cardholder-friendly terms and greater service.

Objecting to a provision of the overdraft bill capping fees for covering insufficient funds at one per month and up to six per year, Citigroup Inc. (C) warned that as a result banks could stop paying overdrafts altogether, according to prepared testimony of John Carey, the chief administrative officer of Citigroup's North America Consumer Banking department.

"It is impossible for banks to predict which customers will be responsible for those losses, so a very real result may be that banks eliminate payment of overdrafts," Carey said in his remarks.

Banks have faced withering criticism from consumer groups over the fees they charge customers who make purchases without enough funds to cover their cost. In 2008, banks charged their clients $23.7 billion in overdraft fees, according to the Center for Responsible Lending. And most of those fees are incurred by a small percentage of consumers, the Federal Deposit Insurance Corporation found in a December 2008 report: 75% of customers made no overdrafts in the year-long period. It was the people with five or more annual overdrafts who paid 93% of the fees, according to the FDIC.

Consumer advocates noted that the people most likely to be charged repeated overdraft charges are those least likely to be able to afford them.

"In fact, limiting banks to one fee per month gives banks a financial incentive to limit unfunded purchases and withdrawals," Jean Ann Fox, Consumer Federation of America's director of financial services, said in her prepared remarks.

Consumer organizations and Citigroup also split on when banks should be required to get clients' consent to participate in overdraft programs, which few banks require now. The bill would require banks to obtain written consent before charging clients fees for overdrafts incurred with debit cards or ATM withdrawals.

Citigroup would prefer requiring consent at the point when the consumer is trying to make the withdrawal or purchase without sufficient funds. A consumer who has opted-out of any overdraft protection might not want to always be bound to that, Carey said. Consumer groups said instituting an opt-in provision at the transaction time would require further research.

The bill also proposes restricting fees to a "reasonable and proportional" amount rather than as a deterrent to dissuade customers from making such transactions.

WASHINGTON (Reuters) - The U.S. Federal Reserve stepped up its consumer protection efforts for the second time in less than a week on Monday, proposing to limit the ability of gift card issuers to impose excessive fees.

The Fed proposed banning any fees for the first year, and limiting gift card issuers to one fee per month if the card is not used for at least a year. It also requires clear disclosure to the consumer about possible penalties.Last week the central bank banned overdraft fees on automated-teller-machine and debit-card transactions unless consumers have actively selected an overdraft protection service.

"The rules would protect consumers from certain unexpected costs and would require that gift card terms and conditions be clearly stated," the Fed said in a press release.

The rules would also prohibit the cards from expiring before five years have passed from the date the card was issued or five years from the date additional funds were added to the card.

Gift cards are essentially an interest free loan to the issuer from the purchaser.

The Fed has come under fire in recent months for not taking an active role in its duty to protect consumers.

The Obama administration has proposed creating a separate Consumer Financial Protection Agency that would focus exclusively on consumer issues. Congress still has to approve its creation.

The Fed has stepped up consumer protection efforts since that agency was proposed. In September it proposed credit card rules that would shield customers from costly fees.

It also said it would investigate consumer complaints against financial companies that are not banks and barred mortgage brokers from earning more when they sell high-cost loans.

Senate Banking Committee Chairman Christopher Dodd has proposed stripping the Fed of its authority to regulate banks, calling the institution's performance as a regulator an "abysmal failure."