House of Cards: The Plastic Conundrum

A new batch of rules was put into place by the Office of Thrift Supervision (an agency of the U.S. Treasury) Thursday to help protect consumers from the poor practices of credit card companies. Among other changes, all credit card companies will be required to give at least 45 days notice if any policies are altered, they have to give consumers a reasonable amount of time to make payments, and they can raise interest rates on existing balances only after payments are 30 days late.

But the big story with these new rules is that they won’t take effect until July 2010 – 18 months from now.

So with the economy where it is and with the credit markets being one of the main reasons, why isn’t the Office of Thrift Supervision being tougher on these companies? Why are these rules not being implemented immediately? Because the credit card companies don’t know how to run an honest business – so it’s going to take a while.

These corrupt practices by credit companies did not start back in 2005, but they were certainly perpetuated with the passing of the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA). This law made it more difficult for consumers to file for Chapter 7 Bankruptcy- where all their debts were forgiven – so more would have to file for Chapter 13 Bankruptcy – where they would still have to pay back a portion of their debt. Not surprisingly, credit card companies spent more than $100 million lobbying for this law.

Make no mistake about it, despite its rosy name, the BAPCPA is not consumer-friendly; it assumes consumer abuse in more cases, provides more exceptions to discharge (forgiving all debts), and it allows credit companies to pursue collection without court permission. And if that wasn’t bad enough, what happens after a person finally does go bankrupt? The credit card companies are able to send them piles of credit card offers – all at high interest rates.

Many of these companies may claim they’re making these offers to help the consumer–to give them a chance to rebuild their credit. But more often than not, these consumers go right back into the cycle of debt – buying things they can’t afford and making token payments from time to time as their interest builds to an uncontrollable level–and the credit card companies know that. So really, the BAPCPA was just a way for credit card companies to make more money from newly-bankrupt individuals and not lose as much money from those who would have normally filed for Chapter 7 Bankruptcy.

A key lobbyist for the BAPCPA was the Delaware-based MBNA corporation, who donated to the campaigns of 15 key Democrats—including home-state Senator and Vice President-elect Joe Biden, earning him the nickname Senator Biden (D-MBNA). After months of lobbying, those 15 Democrats finally decided to sit down with their Republican friends and get the law passed. [MBNA has since been acquired by Bank of America.]

So when the Office of Thrift Supervision came out with these new laws, credit card companies didn’t know what to do. They aren’t used these new, consumer-friendly rules. They don’t know what it’s like to have the customer be the number-one priority.

You see, most businesses have a simple business model–create a product, sell the product, and serve the customer. All of the top businesses in the world follow this model with any variations being specific to their own industry. But these credit card companies, they created a product – loaned money – and sold the product – charged interest – but they forgot about their customers. They targeted many individuals who were not good risks. They charged 29.9 percent interest rates, similar to what mafia loan sharks charge on a monthly compounded basis. They increased interest rates without informing consumers and without reason. They paid their executives an insane amount of money (Some 2007 earnings: David Nelms, Discover, $21.8 million; Ken Chenault, American Express, $53.2 million; Rich D. Fairbank, Capital One, $37.4 million; Ken Lewis, Bank of America, $99.8 million). Simply put, they were greedy, manipulative, and deceptive.

The credit card industry needs some time to get everything in order. It takes a long time to tear down decades worth of greed, replace the foundation, rebuild every aspect, and work back into the once-filled niche. The House of Cards has fallen, and those responsible will be under our protection for 18 more months. I wish the same could be said for consumers.