Debt Collectors Go on the Offensive

The New York Times this weekend ran a piece that caught my eye, "Debt Collectors Ask to Be Paid a Little Respect." While the article first laments the rise in business that our struggling economy has brought them and the often rude response debt collectors get from consumers, the debt collectors seem to be on the offensive legally. Like the banking industry, the article notes the concern the debt collectors have about coming under the auspices of the Consumer Financial Protection Bureau (CFPB). After all, the Federal Trade Commission did not concern the debt collectors as the FTC did not have regulatory authority. The CFPB would, though, be able to write regulations to police the industry.

So, the debt collectors want some updating of their own to the Fair Debt Collection Practices Act. After all, why not? Who says consumer protection has to be just for consumers? The debt collectors are asking for access to consumers emails, cell phones and to use auto-dialers. After all, don't consumer's prefer this? My word, don't we all get enough robo-calls already on our cell phones? A robo-call system would seem to violate Section 806(5)'s prohibition on causing a telephone to ring repeatedly in any event. With the coming political season, though, perhaps the debt collectors are right that we all better get used to robo-messages on our cell phones anyways.

ACA International, the trade union for collection agencies, posted a Blueprint for Modernizing Debt Collection on its website. The Blueprint does advocate that debt collectors be permitted to call consumer cell phones (despite the additional charges imposed by some carriers), text and email consumers and even leave pre-recorded messages on cell phones. The Blueprint expressly advocates that debt collectors be permitted to communicate by any method of communication available. How about a consumer's facebook page? Linked-In? What about email accounts that are accessible by a consumer's employer? Of course, there is more there in the Blueprint that troubles me, but this area is full of difficulty for protecting consumers.

Surely, I am skeptical about allowing debt collectors unfettered access to the digital mediums available for use by consumers. The risk and cost to consumers would surely increase, with little exposure to debt collectors who violate the law (currently up to $1000 in most cases). While I am sure that the debt collectors that the New York Times spoke with are genuinely the nicest of people, I had the experience last year of having one of the not so nice debt collectors call me erroneously about a medical bill that had long been paid. Of course, the hospital apologized for the mistake, and wasn't sure how the information even was referred to debt collector. Of course, the lack of documentation that persists the industry at present becomes the first issue to tackle before erroneous robo calls and auto-mated emails flood our accounts. Can I opt-out?

- JSM

Elizabeth Warren spoke to CBS

Elizabeth Warren spoke to CBS about the Consumer Financial Protection Agency this morning.

- JSM

Warren on the New Consumer Agency

Elizabeth Warren has been speaking about the new role of the Consumer Financial Protection Agency. Who should be scared? Businesses want to know whether they should be worried about her role. For those that are making money from tricking and trapping people, the new agency will be a problem for them. She's been reaching out to business to let them know that she wants to learn about what will work and wants to "get it right." Basically, we cannot re-build an economy where families cannot pay for goods and services. She's ready to get to work getting the agency up and running.

- JSM

New Rules of Bank Fees Now In Effect

Now that August has come around, there are new rules coming online to benefit consumers. One of my favorites is the overdraft protection rules for debit cards coming into effect on August 15, 2010 for existing bank customers (See FRB: New Overdraft Rules). In the past banks often charged a $34+ fee to consumers who use their card for debit purchases or ATM withdrawals when they do not have enough money in their account to cover the cost of the purchase or withdrawal. The new rules require banks to get consumer's consent (which they should not give) for these "programs."

While the big accomplishment here is disclosure with an opt-in system to benefit consumers using debit cards, as always, consumers can still make financial mistakes that result in fees (see, WSJ, Getting Going: Ferreting Out Those Hidden Fees). For instance, just because you don't opt-in to overdraft protection, that doesn't mean you cannot overdraw your account or be charged a fee for doing so. The new rules apply to debt and ATM transaction, so consumers can still overdraw their accounts and be charged fees for check and automatic bill payments. While this system may be much superior to the previous one, consumers must still mind their balances. The new rules don't eliminate overdrafts completely, leaving some protection for transactions that consumers typically want overdraft protection.

Is this enough? One worry is that banks may push consumers into opting in or consumers may simply not understand (see, USA Today, Bank Overdraft Fees). When opening an account at Chase Bank recently, I was asked to opt-in to overdraft on my debit card. While the clerk was not pushy, I was asked if I was "sure" and did I really understand. Oh, yes, I told them. While I did not opt-in, if a consumer does opt-in the rules may not go far enough. A consumer who opts-in won't get the warning at the counter that their account is low. They will just get the fee, even for the $4 cup of coffee, rather than the ability to choose another form of payment.

All and all, this is all good news for consumers, but banks will take a hit in revenue. Wells Fargo is expecting a $500 million loss in revenue for 2010 as a result of the overdraft rules (see, Wells Fargo Sees $500 Mln). Of course, banks will find other ways to make up the lost revenue. Hopefully, the banks will clearly disclose any new fees to consumers and keep fees manageable While simple fee disclosure for me is important, those with low incomes can be faced with the choice of paying fees or not having a checking account. Some have chosen not to have accounts at all. (see, USA Today, Many Shun Bank Accounts). Consumers opting out of banking completely because the fees are either undisclosed or too high is a lingering problem beyond the reach of the new rules.

- JSM

Obama Weekly Address on Financial Regulation

In case you missed Obama's address this past weekend on financial regulation, here it is:

No more taxpayer bailouts because a financial company is too big to fail was one of the key messages. Can this really happen? I am skeptical, but I guess we'll have to wait and see what the politicians agree to. Obama is correct in his assertion that something has to change in order to prevent the same crisis from reoccurring. Apparently, there will be much more coming on this issue in the near term.

- JSM

Hooray for Bank of America's New Overdraft Rules?

Is the end of the $39 cup of coffee in sight (See How Your $4 Cup of Coffee Can Cost You)? Today, Bank of America announced that it is doing away with debit card overdraft fees and will just decline consumer transactions that result in an overdraft on their debit card (See Bank of America to End Bank Overdraft Fees). Seems that is just what consumer groups have said for some time that banks should do, but that some banks claimed they couldn't technologically do. Bank of America is crediting itself with listening to consumer preferences on debit cards and their desire to help customers avoid unexpected fees. Bank of America has turned into the kinder, consumer friendly bank? Apparently, they are even notifying customers now when an ATM withdrawl will result in an overdraft (and a $35 fee), rather than just pushing the transaction through. But not to worry, Bank of America will continue to have overdraft coverage that most consumers want on their checks and routine account payments. Rather than trying to convince customers that they really want the $39 cup of coffee, Bank of America has apparently caved on this one. Good for them. Doing the right thing by customers (even if under pressure from the Federal Reserve) is a big step. Hopefully, this will set the tone for other large banks to follow suit. Apparently Citibank has stopped charging overdrafts on debit and ATM transactions.

For those banks not doing away with these fees, the Federal Reserve's new opt-in rules on debit cards are due to come into effect on July 1, 2010. The Federal Reserve’s Final Rules came down on the side of the consumer on many issues. Because the Truth-in-Lending Act applies to credit cards, but does not apply to debit cards, the Federal Reserve’s Final Rules are under the Electronic Funds Transfer Act (15 U.S.C. 1693 et seq.) (EFTA). The thrust of the Final Rules is primarily disclosure and consent based, rather than tackling some of the troublesome banking practices involved in the processing of overdrafts for enrolled customers and the amount banks charge for overdraft services. Specifically, the Final Rules ensure that:

(1) banks cannot enroll customers in overdraft services for ATM and one time debit card transactions without their consent (an opt-in);
(2) banks do not condition the payment of overdrafts on other items, such as checks and ACH transactions, on the customer opting-in for ATM and debit card services and cannot decline overdrafts on checks and ACH transactions for this reason;
(3) banks provide the same account terms, conditions and features to customers whether or not they opt-in; and
(4) the opt-in approach applies to existing and new accounts beginning July 1, 2010.

The Final Rules specifically declined proposals regarding the practice of debit card holds, suggesting instead that banks, networks, and merchants should address this problem.

With any luck, we'll see other large banks doing away with the debit and ATM overdrafts over the coming months. Seems easy enough just to deny the transaction at the counter. Not sure I'd say this, but good job Bank of America.

- JSM

FunnyorDie.com Presidential Reunion

In case you've not seen it, former Presidents Bush, Clinton, Bush, Ford, Carter and Reagan wake up President Obama in the middle of the night to urge him to pass the Consumer Financial Protection Agency (CFPA). One of the funniest parts is President Bush commenting that he had no idea that when he put the Iraq war on his credit card, he'd be paying 28%! Here it is:

- JSM

Interchange Fees: the Silent Visa Tax

As we've seen the federal government tackle credit, debit and gift cards, new attention is gearing up toward card network interchange fees. Interchange fees are the cost of using debit and credit cards charged to merchants for use of the network (Visa, Mastercard, etc.). The fees are about $.75 for every $100 spent and more than if the consumer uses the a debit card and enters their pin number. The GAO's November 2009 report on Rising Interchange Fees found the fees are posing a problem for merchants as they comprise a larger amount of the revenue earned with some merchants complaining that the benefit of cards such as lower labor costs and increased sales are outstripped by the cost of the interchange fees. The fees are enough that some discount retailers, like Costco, don't accept credit cards, but will allow the debit card usage. Of course, retailers cannot possibly refuse to accept VISA cards, for instance, so the fees are here to stay. While the fees may be here to stay, I suspect that the size of the fees will cause them to come under regulatory supervision at some point in the not so distant future. That seems to be the common result when greed and overreaching get to a point that complaint is loud enough. With small business owners trying to keep their businesses afloat during a recession, it is easy to see why there is more compaint about the size of interchange fees.

The New York Times just did a nice video (and article) giving a pretty good overview of the tension between the networks, merchants and ultimately consumer interests.

Visit msnbc.com for breaking news, world news, and news about the economy

- JSM

Bankers Without a Clue?

Paul Krugman wrote a nice op ed piece in today's New York Times titled Bankers Without a Clue. Krugman observes disappointingly that the bankers just don't get it. In truth, comments like the financial crisis was just a perfect storm (Goldman Sachs’s Lloyd Blankfein) and that no one could have predicted its coming (Jamie Dimon of JPMorgan Chase & Co.) are pretty unbelievable. I hope that the executives of these large financial insitutions aren't and weren't really that clueless. That said, I agree with Krugman that I don't expect the banks to give much concrete advice on financial reform. The distrust the banks have of regulators (and desire to protect their own pocketbooks) has resulted in many of the banks repaying the TARP funds as soon as possible.

Bill Thomas who is Vice Chairman of the Financial Crisis Inquiry Commission has assured us that at least the questions will be asked. Question is, whether any meaningful financial overhaul will come from this?

-jsm

What the Fed's New Overdraft Rules Don't Do

Now that classes are over, I've been wanting to turn back to the Federal Reserve's new rules bank overdraft programs (See Hooray for the New Overdraft Rules). Here's a portion of an essay that I've put together for the Lydian Payments Journal:

The largest problems facing regulation of consumer depository accounts are ones created by the need to keep regulations in pace with innovation. That is, bank innovation results in products on the marketplace that are either completely new or are comprised of such variation that the products might as well be new. Services associated with debit cards are a perfect example because debit cards were not commonplace until the late 1990s. Debit cards attach to regular bank depository accounts, yet are not checks, pure ATM cards, or even credit cards. Due to the changing nature of banking products, any regulation must be flexible, rather than static. With respect to debit cards, innovation has progressed unchecked in the wake of consumer excitement for the innovation itself, without creating a parallel regulatory framework. Accordingly, any discussion of the issues consumer depository accounts should take up an examination of the relationship between consumers and banks and explore possible improvements to existing regulatory structure so it may better adapt to innovations in banking products.

Full disclosure of the benefits and detriments of the overdraft programs prior an active enrollment decision is the best approach. If under the Final Rules a consumer enrolls in overdraft protection, resolution of assent and fairness hinges upon the disclosure of the terms of the overdraft service and the practices involved in securing assent. For instance, even though Regulation DD affirmatively requires disclosure of fees, a GAO study found that consumers have difficulty obtaining account terms and conditions and complete fee information even when requested. Moreover, even if the bank discloses the fees, the government does not regulate the reasonableness of fees or the manner in which they are imposed. The terms of overdraft fees are most likely ones of “adhesion,” in that they are offered or imposed without the ability to negotiate them, “take it or leave it” terms. If the GAO is correct, then Banks often fail to disclose the terms at all, even when asked. So, will the Final Rules result in substantial changes in banking practices?

Disclosure is at the cornerstone to most consumer regulations and is the primary prong of financial regulation. The Final Rules address disclosure issues primarily through the model opt-in form that accompanies the rules (the “form”). Importantly, the form: (i) requires that banks affirmatively give customers knowledge of enrollment in overdraft services; (ii) specifies the fee amounts that a bank charges per overdraft transaction, any daily fee charged for the account being overdrawn, and any daily limits on overdraft fees; and (iii) contains information about other, less costly banking services and where the consumer can obtain more information. These changes are significant because under current practice banks enroll many consumers without their knowledge or consent and without such disclosures. Up front disclosure is a key feature of the Final Rules, especially since consumers sometimes have difficulty obtaining fee terms at many banks despite Regulation DD requirements of fee disclosure. Of course, no form is perfect and there remains the potential for consumer confusion.

Curbing bank practices that disadvantage consumers by increasing the amount of overdraft fees incurred is the second prong in the solution to the problems with overdraft protection services banks currently offer. On this point, the Final Rules fall short. Although the Proposed Overdraft Rules addressed the issue of debit card holds by reducing many of the holds from days to just hours, the Final Rules contain no restrictions on holds, leaving wide discretion for the length and size of holds. It is doubtful that a consumer who goes out to gas up the car and buy groceries will know that in order to avoid an overdraft fee caused by a two hour gas pump hold on their card, he or she may want to buy groceries before gas when account balances are low. The Final Rules also do not take up other banking practices that increase the amount of overdraft fees, such as batch reordering of transactions from largest to smallest.

The final prong of any solution regarding overdraft fees must address the size and numerosity of fees imposed for consumers who opt-in the service. While banks typically impose credit card over the limit fees on a monthly basis, banks charge overdraft fees on a per transaction basis. Some consumers may continue to believe that credit and debit cards work the same in this respect. Consumers also tend to believe that government regulation is merit oriented, rather than disclosure based. While some in Congress have urged restrictions on overdraft fees to a “proportional” amount, the Final Rules do not take up fee size (see Dodd Says Senate May Expand Beyond Fed Overdrafts). To the extent that some banks charge overdraft fees on NSFs of less than $5, the size of the fee imposed is clearly material to consumers. Some banks have altered current practices to address this issue.

While the Final Rules represent an improvement over the status quo in terms of informing consumers about enrollment in overdraft services, they do not represent a complete solution to open issues of debit and ATM overdrafts. From the industry perspective, there are genuine operational issues at some banks that will require retooling of existing systems. Much of this must take place by July 1, 2010. Despite the successes in the Final Rules, consumers should not believe that they represent a panacea for overdrafts. If they do, disappointment will follow. This type of regulation is long overdue, probably owing to the more recent development of the product and regulatory system’s inability to respond effectively and promptly to developing issues in newer products. At its simplest, a solution to the problems of consumer choice and disclosure in debit card overdrafts favors a default rule system that gives the consumers an arrangement with the lowest cost. Despite the criticisms herein, the Final Rules go a long way toward that goal.

- JSM

Back to Work on Debit Card Rules

We've been discussing for some time on the issue of debit card overdrafts (See Big Banks Alter Debit Overcharge Rules , New York Times Takes on Overdraft and How Your $4 Cup of Coffee Can Cost $34 or More), with no success on the rulemaking front. The Federal Reserve has announced, though, that rules are close to completion and will be in the form of an opt-in option for consumers (See WSJ, Fed is Near New Fee Rules). Governor Tarullo of the Fed testified last week before the Senate Subcommittee on Financial Institutions, Committee on Banking, Housing, and Urban Affairs that the rules are near completion.

Although the Fed seems poised to finally move on debit cards, Congress appears to lack faith in the ability of the Fed to get this one done. While the Fed has lingered in its rulemaking, the Center for Responsible Lending reports that overdraft fees have increased 35% in the last two years alone. Senator Chris Dodd is leading the charge for Congressional intervention on debit cards. While rulemaking has been long coming, the pressure by Congress seems to also draw attention to the Fed's inability at times to protect consumer interests as part of its core mission. The situation of debit cards is but another example of why the Consumer Financial Protection Agency is a good idea (See Debate Heating Up). This may well be enough to spur the Fed to finishing up the debit card rules. Here's a piece on the proposed legislation.

-JSM

Comsumer Financial Protection Debate Heating Up

This weekend's New York Times had a piece by Joe Nocera titled Have Banks No Shame? in favor of the Consumer Financial Protection Agency (CFPA). Nocera hits it plainly remarking the CFPA's "sole goal would be to try to keep bank — and nonbank — customers from being gouged, deceived or otherwise taken advantage of." It seems like a simple proposition. How could anyone be opposed to this? Of course, there are detractors. The American Banker's Association's (ABA) website has as one of two "urgent action alerts" the opposition of the CPFA. The ABA explains "a separate consumer regulator is not necessary and is in direct contradiction with the existing approach which recognizes that consumer protection and safety and soundness are inextricably bound and should not be separated." Not necessary is a translation of business as usual. A recent editorial at the Wall Street Journal argues that the CFPA will unleash Fifty Eliot Spitzers on the banks for the purpose of harassment. Both represent a call to defeat the CPFA. This piece simply sounds in scare tactics.

Todd Zywicki of George Mason has argued one of the more reasoned oppositions that I've seen. His basic argument seems to be that the CFPA will not increase market competition and goes beyond historical restraints on lending. Zywicki believes that credit card debit is simply in substitution for other debt that consumers have always had, the CFPA will increase the cost of credit and that most consumers understand the products (See, Zywicki Testimony). I disagree with Zywicki on a number of points, particularly with respect to complexity of and transparency in marketing of financial products and basic fairness. I don't believe that consumers understand the terms offerred on financial products or even that lenders and banks actually disclose all relevant terms (c.f., FDIC Study on Bank Overdrafts). Moreover, without a regulator whose mission it is to take up consumer issues, there are impediments to regulatory intervention in products that are not as much on the Federal Reserve's top list, such as debit card overdraft fees. Nocera pretty much sums it up well: "The sooner we can pass the thing, the better."

Here's an interview that Zywicki arguing against the CFPA:

- JSM

Obama Speech on Consumer Protection Agency

Sure, President Obama won the Nobel Peace Prize today, but he also spoke in support of the proposed Consumer Financial Protection Agency (CFPA). Interestingly, President Obama took up issues not only of mortgages, but of loans in general, even payday loans. He even mentioned one of my favorite gripes, bank overdraft fees. Moreover, he took aim at those opposed to the CFPA. From the transcript:

This agency will have the power to make certain that consumers get information that is clear and concise -- in plain language -- so they can compare products and know exactly what they're getting themselves into. It will ensure that banks and other firms can't hide behind these ridiculously confusing contracts -- pages and pages of fine print that nobody can figure out. It will have the ability to enforce and build on the credit card reforms we passed earlier this year, so that consumers aren't hit with unfair rate hikes and penalties, or hidden charges. It will require brokers to look out for the interests of families if they give advice about mortgages. And it will ensure transparency and fair dealing for other financial products, like bank overdraft services and payday loans.

Here's the video:

- JSM

Bernanke Believes Recession "Over"

Happily, Bernanke stated today at the Brookings Institute that he believes that the growth we are seeing in the economy suggests that the recession is technically over. Unfortunately, the unemployment rate, currently around 9.7%, will be slow to come down. This will leave many still struggling with the pace of a slower recovery. This is good news, for sure. Since last fall we were bracing for another "Great Depression," pehaps we can be contented with simply riding out slow economic growth. And, of course, Bernanke emphasized yet again the need for regulatory overhaul of some type. Perhaps the more times we hear this, the more likely it might be that action will follow. Let's hope.

- JSM