Friday, March 28, 2008

Dear Republicans, Credit Card Industry Goons, Democrats Who Voted for the Bankruptcy Bill, etc.: I Told You So.

I've been railing against both the credit card industry and the bankruptcy "reform" act for years now. Here's, in relevant part, what I said in March 2005 (in a blog comment, along with a variety of less temperate things):

Third, how about abusive practices as to consumers as well as to the democracy? The fact that the credit card companies DELIBERATELY TARGET THE FINANCIALLY UNSOPHISTICATED -- as can be seen most dramatically by setting foot on most any college campus (especially large state universities) about the start of the academic year, when they sucker college freshmen into signing up for these cards, on no income or credit history, and get them mired in debt right from the start -- gives them no claim to any moral high ground. These are predatory lending practices -- and this is before we even get into predatory mortgage loans, payday loans, etc. Any industry that deliberately targets the unsophisticated and inexperienced for deals that they don't have an understanding of should be punished, not supported with legislation.

In July 2005, I said the following in an editorial for the Oregon State Bar magazine:

On the other hand, the finance industry will benefit richly. Advocates of the act repeatedly claimed that all consumers, except the highest-risk borrowers, would benefit as finance industry profits were passed on in the form of lower interest rates, yet they have been unable to explain why the record profits of the credit card industry in recent years were accompanied by increased interest and fees. Credit card industry profits in 2004, measured by return on assets, were at their highest since 1988. If past behavior is any guide to future behavior, the profit increases attributable to this act will similarly not be passed on to consumers.

Ironically, the credit card industry has driven much of the supposedly "irresponsible" behavior that they and their Congressional allies condemned. Every fall, college campuses are saturated with credit card company representatives giving out t-shirts and beer coolers to induce college freshmen with no income, no work history and no financial education or experience to accept credit cards. Not surprisingly, those students frequently incur huge debt loads. In 1997 and 1998, Oklahoma college students Sean Moyer and Mitzi Pool committed suicide because they were overwhelmed with credit card debt. (Bankruptcy "reform" will increase this "irresponsibility": with less bankruptcy risk, lenders have even more incentive to exploit students.) Even off-campus, widespread "irresponsibility" is a myth. A recent study by professors at the Harvard Law and Medical Schools showed that fully half of bankruptcies were related to medical expenses, not "irresponsibility."

It's now three years later. What's happened? Well, let's see...

MBNA almost immediately blew up and got acquired by Bank of America.

The credit card companies largely continued their practice of "universal default," where a default on some other obligation (i.e. to someone completely different) triggers an increase in credit card interest rates.

Interest rates continued to rise through 2006. They started to level off around the end of 2006/beginning of 2007 (source: the fed), and have been dropping recently, but only thanks to the fed's reduction of interest rates generally, not, because, say, the risk of default is lower because of this new bankruptcy law. In fact, the average rate for all accounts is higher now than it was in 2005, when the bill was passed, even though the federal funds rate is the same as, or lower than, most of 2005.

At best (so far as I can tell by eyeballing without serious quant work), the rates have been generally following the funds rate, not decreasing (contra the predictions made by the bill's advocates).

How about the demand side? Did the bankruptcy bill, by increasing the cost of credit, restrain "irresponsible" borrowing? Weeelllll, at the end of 2005, revolving consumer debt was 825 billion dollars. In January 2008, it was 947 billion dollars. (source: the fed again) Some of that might just be the W-and-housing-caused economic death spiral, but it doesn't look good for the bankruptcy bill proponents.

So what about the housing blowup? Well, some market-types think the bankruptcy "reform" bill contributed to it.

Nov. 8 (Bloomberg) -- Washington Mutual Inc. got what it wanted in 2005: A revised bankruptcy code that no longer lets people walk away from credit card bills.

The largest U.S. savings and loan didn't count on a housing recession. The new bankruptcy laws are helping drive foreclosures to a record as homeowners default on mortgages and struggle to pay credit card debts that might have been wiped out under the old code, said Jay Westbrook, a professor of business law at the University of Texas Law School in Austin and a former adviser to the International Monetary Fund and the World Bank.

``Be careful what you wish for,'' Westbrook said. ``They wanted to make sure that people kept paying their credit cards, and what they're getting is more foreclosures.''

Washington Mutual, Bank of America Corp., JPMorgan Chase & Co. and Citigroup Inc. spent $25 million in 2004 and 2005 lobbying for a legislative agenda that included changes in bankruptcy laws to protect credit card profits, according to the Center for Responsive Politics, a non-partisan Washington group that tracks political donations.

The banks are still paying for that decision. The surge in foreclosures has cut the value of securities backed by mortgages and led to more than $40 billion of writedowns for U.S. financial institutions. It also reached to the top echelons of the financial services industry.

* * *

Even as losses have mounted, banks have seen their credit card businesses improve. The amount of money owed on U.S. credit cards with payments more than 30 days late fell to $7.04 billion in the second quarter from $8.37 billion two years earlier, according to data compiled by Federal Deposit Insurance Corp.

In the same period, the dollar volume of repossessed homes owned by insured banks doubled to $4.2 billion, the federal agency said. New foreclosures rose to a record in the second quarter, led by defaults in subprime adjustable-rate mortgages, according to the Mortgage Bankers Association in Washington.

`Let the House Go'

People are putting their credit card payments ahead of their mortgages, said Richard Fairbank, chief executive officer of Capital One Financial Corp., the largest independent U.S. credit card issuer. Of customers who are at least three months late on their mortgage payments, 70 percent are current on their credit cards, he said.

``What we conclude is that people are saying, `Honey, let the house go,''' but keep the cards, Fairbank said Nov. 5 at a conference in New York sponsored by Lehman Brothers Holdings Inc.

The new bankruptcy code makes it harder for debtors to qualify for Chapter 7, the section that erases non-mortgage debt. It shifted people who get paychecks higher than the median income for their area to Chapter 13, giving them up to five years to pay off non-housing creditors.

No Help Left

The court-ordered payment plans fail to account for subprime loans with adjustable rates that can reset as often as every six months, said Henry Sommer, president of the National Association of Consumer Bankruptcy Attorneys. Two-thirds of debtors won't be able to complete their payback plans, according to the Center for Responsible Lending.

``We have people walking away from homes because they can't afford them even post bankruptcy,'' said Sommer, a Philadelphia- based bankruptcy attorney. ``Their mortgage rates are resetting at levels that are completely unaffordable, and there's nothing the bankruptcy process can do for them as it now stands.''

* * *

Washington Mutual spokeswoman Libby Hutchinson in Seattle, JPMorgan spokesman Thomas Kelly in New York and Bank of America spokesman Terry Francisco in Charlotte, North Carolina, declined to comment on the bankruptcy law.

``The law had an unintended consequence of taking away a relief valve that mortgage borrowers used to have,'' said Rod Dubitsky, head of asset-backed research for Credit Suisse Holdings USA Inc. in New York. ``It's bad for the mortgage borrowers and bad for subprime investors because it means more losses.''

The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 was the biggest overhaul to the code in more than a quarter of a century. The old law, the Bankruptcy Reform Act of 1978 that was signed by President Jimmy Carter, had loosened requirements for debt forgiveness.

Lobbying Effort

Financial companies began a coordinated lobbying campaign for bankruptcy reform in 1998 when the American Financial Services Association, a trade group representing credit card companies, joined the American Bankers Association to form the National Consumer Bankruptcy Coalition.

Campaign contributions from the coalition and its members totaled more than $8.2 million during the 2004 election that gave Bush his second term in office. Two-thirds of the donations were given to Republicans who supported the bankruptcy changes, according to the Center for Responsive Politics.

The group, later renamed the Coalition for Responsible Bankruptcy Laws, has since disbanded. Its members included Washington Mutual, JPMorgan, Bank of America, Citigroup, MasterCard Inc., and Morgan Stanley.

Ford Motor Co., General Motors and DaimlerChrysler also were members. They won provisions in the new code that changed the way car loans are treated in bankruptcy.

Reform the Reform

Congress may soon take action to ``reform the bankruptcy reform,'' Zandi said. The House Judiciary Committee is working on legislation to let bankruptcy judges restructure home loans by lowering interest rates and reducing mortgage balances to reflect current market value.

Banks including Washington Mutual, Citigroup and Wells Fargo & Co. sent a letter to the committee opposing the change, saying such restructurings should be done privately.

Countrywide Financial Corp., the largest U.S. lender, said last month that it will modify $16 billion worth of adjustable-rate mortgages. Washington Mutual said in April that it will spend $2 billion giving discounted rates to help customers with subprime loans refinance at better terms.

So far, most lenders have been reluctant to change loan agreements. About 1 percent of mortgages that reset in January, April and July were modified, according to a Sept. 21 Moody's Investors Service report that surveyed 16 subprime lenders that account for 80 percent of the market.

Congress probably will approve at least a limited measure to permit loan modifications, said Westbrook, the University of Texas law professor.

``They are going to have to figure out some way to address the problem,'' Westbrook said. ``I don't think our economy or our consciences can handle the number of foreclosures we'll see if they do nothing.


And students? Still being suckered:

A new survey, The Campus Credit Card Trap, from the U.S. Public Interest Research Group (PIRG), finds widespread student support for restricting aggressive marketing practices on campuses. The survey also describes strategies banks use to gain access to students — about a quarter of whom say they’ve used their credit cards toward tuition costs.

“Banks are marketing aggressively through a variety of channels. They’re calling students on the phone, they’re mailing to students, and they’re using a combination of on-campus and off-campus tables where they give away products, ranging from offers for sandwiches, offers of food and pizza, all the way up to iPod shuffles,” said Edmund Mierzwinski, consumer program director for U.S. PIRG. The organization manages the “Truth About Credit” campaign.

“We are asking campuses across the country to change the way they either market on campus to students directly or the kinds of exclusive marketing arrangements they have to provide students with a university-branded credit card,” Mierzwinski said.

The survey, of more than 1,500 students at 40 campuses in 14 states, found broad support among students for limiting credit card marketing on campuses. Eighty percent said they supported at least some limits. There was strong support for restricting access only to promotions for cards with fair terms and conditions, and opposition to colleges’ sharing or selling lists containing student contact information. “Many credit card companies encounter no difficulty in securing information of current students at colleges for marketing purposes,” the report notes. “It is also true that some state public records laws compel public universities and colleges to sell their lists of student information as public records, to anyone.”

The issue of sharing or selling student data has attracted a lot of attention in Iowa, in particular, due in part to a September Des Moines Register series on the subject. The U.S. PIRG report devotes significant space to the University of Iowa-branded Bank of America card marketed to students ("Imagine the convenience of being able to purchase supplies for your classes, without worrying about carrying a lot of cash"), and the roles of the university and Alumni Association in providing the bank with contact information for undergraduates. University alumni associations, like Iowa’s, benefit financially from the affinity, or university branded, credit cards, by lending the university’s name in exchange for fees.

In an interview Thursday, Steve Parrott, the spokesman for the University of Iowa, said the terms of the agreement with Bank of America have since been renegotiated. They are no longer providing student information to the bank, he said. But, he added, under Iowa law, any information in the directory not restricted by individual students, staff or faculty is publicly available under state open records laws.

Nor, under the new terms of the agreement, Parrott added, can the bank directly market to students on campus through tabling at the student union, for instance.

In the U.S. PIRG survey, about three-quarters (76 percent) of students said they’d stopped at a table to either apply or consider applying for a credit card — with the best strategy for getting students to stop being free gifts (T-shirts, Frisbees, food, etc.). Notably, the possibility of banning free gifts gets less support from students than all the other restrictions on campus marketing practices proposed.

Mierzwinski added that in some cases, even when colleges might impose limits on commercial vendors, companies can gain access by renting table space on campus from student groups — either for a certain set fee for the day or for a dollar or two per credit card application completed.

The survey found that 25 percent of student respondents had paid at least one late fee, 15 percent had paid at least one over-the-limit fee, and 6 percent had at least one card that had been canceled for non-payment.

New York Attorney General Andrew Cuomo recently began investigating colleges’ ties to credit card companies. And the Ohio Attorney General, Marc Dann, has been working with Ohio State University’s law school to challenge deceptive credit card marketing practices on campus. In 2007, his office filed suit against Citibank, Elite Marketing, and Potbelly Sandwich Works for alleged deceptive practices because advertisements on Ohio State’s campus promising free Potbelly fare didn’t include the catch, Dann said — that students complete a credit card application first.

None of this -- casual review of the data subject to complicated causal processes, a study conducted by advocates of the side I agree with, etc. -- is particularly strong evidence for the proposition that the credit card companies are still gleefully screwing people. But there's no evidence at all that anything's gotten better after the bill.

Told you so.