EXTERIOR: WHITE HOUSE GATES
BEN: Hey Ben Popken here with Meghann Marco, Consumerist.com, we’re here at the White House—
MEG:—invited to the White House—
BEN:—to talk credit card reform with Austan Goolsbee, senior economic adviser to Obama. We asked for your questions about credit card reform and we brought them here, so we’re gonna find out what’s in store for the future of plastic in America.
INTERIOR: CONFERENCE ROOM
MEG: So, as you know, we here at Consumerist, we make our living explaining the perils of the credit card industry to consumers, so why are you guys trying to put us out of business by reforming the credit card industry?
AUSTAN: No no no, we’re trying to help you, that’s exactly, we’ve been listening to you for this long and it’s clear as the President said, there’s nothing wrong with a credit card industry where people can get access to credit, and people ought to pay their bills, but what we’ve gotten into is this situation where you’ve got some players engaging in clearly deceptive practices and predatory practices where consumers don’t have full information about what they’re getting themselves into, and where the industry’s made more than $15 billion in penalty fee income last year. So what they’ve done is just turned what use to be fees for penalties into really a profit center. And we’ve got to get away from a model like that.
MEG: So we’ve got a question from Consumerist reader Jason. He wants to know, why can banks be allowed to change APR on existing balances? Shouldn’t the new APR only be applied to the balances and purchases moving forward from the date of the change?
AUSTAN: Yes, Jason’s totally right, that is one of the central elements in the Obama views, is that in a series of practices like changing the interest rate on money you already, loans you already took essentially, that it doesn’t make any sense, that we oughta get rid of that.
BEN: Along those lines, James Robrahn asks, “How’s it that the banks are getting billions in TARP funds and then they turn around and they’re cutting off people’s credit lines and raising interest rates in this time of crisis?” What’s going to be done about that?
AUSTAN: When you’re in a crisis mode, it’s clear financial institutions are pulling in credit in all sorts of forms, that’s why the financial rescue was needed, it’s been a big effort of the administration, trying to get the lines of credit back flowing, to consumers, through credit cards, to small business, to a whole bunch of areas.
BEN: And what are some of those steps that are going to unlock credit for consumers?
AUSTAN: Well a lot of the steps to unlock credit are more macro in nature, as I said, it would be relatively difficult to go legislate, for the government to go figure out, here’s a credit-worthy individual, you should go give them a loan, is much harder. So the things that they’re doing is we’ve go the financial rescue in place, we’ve had a series of efforts where the government’s trying to unlock consumer credit, student loan credit, automobile credit, small business credit, through the buying up of securitization, buying up various investments, which, they’ve tried to make it more appealing for people to get into that market. It has been met with some success, though we are certainly wanting to expand those markets now.
BEN: Up until now, basically, credit card companies have said, well we don’t regulation, we just need more disclosure. So, this is a new change of tactics. So I’m kind of wondering, you know, why don’t we take that up? why don’t we go with disclosure and do it like they do in Canada and cigarettes? You buy a box of cigarettes in Canada and you have a picture of a dessicated lung on the box and it says you smoke these and you will die. So with credit cards, you put a picture of a family evicted from their foreclosed house and it can say, if you use this improperly, it will lead to your financial ruin? Why doesn’t the administration push for something like that?
AUSTAN: Meghann, is he Canadian?
BEN: Clearly. I’m Clearly Canadian.
AUSTAN: The President totally agrees with the importance of disclosure, and disclosure and transparency. Which are related but not the same thing. I mean, I have a PhD in economics, I can’t understand a lot what’s in the contracts under your credit card, and my eyesight is not sufficient to even be able to read it a lot of the times. So, the President’s program is based on plain language, and reasonable disclosure. So disclosure plus transparency’s important… I don’t think that’s all the President’s fully on board with that’s all let’s do. I think he thinks we need that, but in addition, there are certain practices, that, even with disclosure, they’re relatively hard to explain, and the credit card companies have engaged in gaming the system so that they just need to be prohibited. So, setting your payment date to be on a Sunday, so that you literally can’t pay on the payment date, it either has to come in early or else it’s late and you get a penalty fee. Or setting the payment time to be noon, so even if it comes in but it came in in the afternoon oohp! You had a late fee, you add another 15 dollars. So there are a series of practices, be it the form of penalty fees, raising interest on loans you already took out, a variety of other things that the President thinks we need to do more than just disclosure and transparency.
MEG: Is this bill gonna stop those guys who give away the free t-shirts in college? Because, as you know, college students are frequently shirtless, and they this resource. So how is that going to affect college students?
AUSTAN: The issue of students, and not just students, young people of all types and access to credit is a very vexed issue, as we all know. On one hand, there are a lot of people who are really… credit constrained when they’re young, and they would like to have access to borrow money, and don’t want to be forced into borrowing from even worse sources of credit. At the same time, the credit card companies it’s clear have engaged in some pretty over the line practices. At the least, we need to start by agreeing that there ought to be sensible underwriting standards for young people. You know, there are a series of things that are alleged, like credit card companies making gratuity payments to the leaders of universities in order to get them to sign them up as the only credit card company. There are a variety of things we ought to look into, because I think it’s a pretty serious problem if you got people coming out of school, usually already in heavily indebted situations, just as the nature of having to pay their tuition. They got access to credit and they can do deceptive practices and be put in a very bad situation that it takes them years to really recover from.
BEN: Some are arguing that if we increase regulation, the current card companies are going to have to decrease the amount of credit that’s available to be giving out to people, which with the case of kids it sounds like that’s probably a good thing. But also for those who have credit, it may make it more expensive for them. Is there a concern that with this regulation, it might push people, if they can’t get access to credit, they could be pushed to other things like payday loans, overdrafting their checking account, loan sharks?
AUSTAN: We do want to make sure that people have access to credit, and they aren’t being pushed to loan sharks, and they aren’t being pushed to pawn brokers or something that’s even worse than what’s happening on credit cards. That said, you hear from, you know, American Bankers Association or other industry spokespeople the argument that “well, if we can’t charge you the 15 billion dollars of penalty fees, then we’re gonna have to charge you the money some other way, and you don’t want us to have to charge you some other way.” Look, the credit card companies have made huge profits in recent years, and a lot of those profits have come from deceptive practices. And they shouldn’t be doing those practices. And if we’re going to choose between two models, one in which they say, “these are our true fees, and these are our true interest rates, here is what you actually will pay,” and alternative B is they say, “You’re not gonna have to pay anything, and you sign up for it, and then you start getting bills, and you have no idea what the heck is that? Between those two, the first one is by far the better system, and I really don’t think that we have to choose between honesty and a viable business. I think it’s just not true. And we’ve kinda gotten into this scenario where they say, “This is a carjacking! Well, you know, if you didn’t want to be carjacked, you didn’t need to take your car, you don’t need to be driving, and you should’ve locked your windows and, you know, made them bulletproof.” That kind of logic pushes you the wrong way. I mean the loans of credit cards are by far the most riddled with these kind of criticisms, and complaints to the Better Business Bureau and to Consumerist and wherever, they’re much more so than other forms of consumer credit, small business credit.
MEG: Ok, this is a question from reader Johnathan. He wants to know, “Why are credit card terms the only contract I can find that are subject to unilateral dictation of changes in terms?
AUSTAN: The credit card companies reserve the right to change the terms. Uh – there are other contracts that have that feature. There are certain things in credit cards which are even more questionable. Like they reserve the right to change the interest rate on loans you already took out. So when you make a purchase, you have a balance, something happens, your rate goes up, they apply it to stuff you already bought. This is a very iffy type of a contract. Similarly, the print is barely readable, the language is not in English, it’s in kind of “Bank-o-nese,” which you really need a law degree—you probably need more than a law degree. Most lawyers can’t even read it. And it gives them the right to administer fees of their choosing, for behaviors of their choosing, and the argument that they give in response when they you get the fee and complain is, “Well if you don’t like it you should have read the contract.” Or, “You should go find a new credit card.” Those two explanations are deeply not satisfying. That’s why two central themes in the President’s plan are: it’s got to be in plain language, and then a second focus of the President’s plan is prohibiting certain practices, which are just over the line, like, changing interest rates on balances you already incurred, and things like that.
BEN: That feature struck me in particular because when the bankers defend it they say that they’re repricing risk, but as far as I understand, a risk is something that could happen in the future. But if it’s already happened, then where’s the risk and why are they repricing for it?
AUSTAN: You know, the thing is, getting in the insurance business of insuring things that didn’t happen, is a great business. Because it just means you pay us. And that is the situation a lot of credit card companies are in. “Well, you know, we have to be compensated for the risks,” but this is already debt, they already took it out! You had a deal at a certain interest rate, and they’re going back and changing it. In addition, there are certain practices, that even with disclosure they’re very hard to explain. And the view from the Federal Reserve, as well as Congress, as well as the President has been, we gotta address those. So, as an example, if you’ve got two different kinds of debt, some has a high interest rate and some has a low interest rate. The credit card companies have, and you make a payment, the credit card companies will apply your payment automatically to the low-interest rate one. Leaving you the debt of the high-interest one so they get more money off of you. You can explain, what the Federal Reserve found, is you can explain this to people, but a lot of people still don’t quite get what you’re saying, so it’s far better, it’s a far better idea to simply require them to pay down the highest [interest] one first.
BEN: All these different practices you’ve been describing, it sounds like we’re talking about a game where it’s rigged for the house from the outset, and the rules are always changing, and you can never know them, and with credit being so important for consumers, and consumer spending driving 70% of the economy, how did we let it get this bad in the first place?
AUSTAN: It’s not there’s something wrong with credit cards. There’s a perfectly viable business that consumers can benefit from, that the banks can profit from… all the President is saying is let’s be completely above-board, transparent, and honest with what we’re doing, and not engage in certain kinds of practices that are really preying on the lack of knowledge and the lack of understanding on the part of the consumer. Penalty fees to discourage a certain kind of behavior, everyone understands that. Penalty fees where we design it so you can’t get out of paying the penalty as a way we’re going to use just to make money… now I think we’ve gone into a space where we don’t want to be.
MEG: We have a reader question about going over the limit, which is a big fee that everyone is really upset with. The reader asks, “Credit cards allow you to go over the limit and chare you fees for doing that rather than having a clerk reject your credit card for being over the limit. Isn’t there a way to opt out of these services? And shouldn’t there be a simple way to do so?”
AUSTAN: It’s another one of these tricks is that your credit limit is $10,205. Now, you better remember how much you’ve spent for the whole month because when you get to that, it doesn’t reject it. They just send you a fee that says, “Oh, you wen’t over your limit! You didn’t know, but you went over it.” So the President has said, well we ought to do, for example, is have an opt-out box you can check that says “If I get to my credit limit, reject my thing when I try to buy it!” “No no no, you can’t buy it, you’re over your limit.” This is again one of those “Is it reasonable to expect people to know exactly where they are relative to their limit? And when the limits are changing around unilaterally anyway, strikes me, again, as preying on the lack of information on the part of the customer.
BEN: A lot of our readers are interested in these mandatory binding arbitration clauses, and these class-action waivers. Is Obama concerned about that? And are we going to do anything about them? Because that’s another case where we’re stripping consumers of their power. Credit card companies are basically afraid to get into a real court with a consumer.
AUSTAN: The thought of thousands upon thousands of people having to go to court to sue to deal with various credit card problems, because you could see that being unappealing, you can see a role for arbitration. On the other hand, a lot of accusations that these mandatory arbitrations are with firms who are representing themselves to the credit card companies as, they are doing double-duty as debt-collection agencies, as well as mandatory arbitration… if you’re a consumer going to mandatory arbitration with a firm whose job it is to collect money from consumers, to give back to banks, that strikes me as a difficult situation. It’s not an obvious thing. If you ban mandatory arbitration, you will end up with thousands more lawsuits, and that’s not obviously in the consumer’s interest, but on the other hand I think we do gotta be mindful of some of these abuses.
BEN: Right, another one of those, what seems to be an abuse, or at least definitely a conflict of interest, I don’t recall the specific study but they found that basically the arbitrators that were returning judgements in favor of the credit card companies most often got the most business. Will there be space maybe, because obviously what we have isn’t working and chucking it is probably not a good idea either, could we see a mandatory arbitration reform bill down the line?
AUSTAN: That’s an interesting idea, I was going to say, maybe this is due for a Consumerist expose of this stuff. I don’t know which of those is true, I mean, I’m not a lawyer, we’d need to really get the credit lawyers in, to look at this, but I have seen these allegations that you’re speaking of, of mandatory arbitration, of the firms selling themselves to the bank as “We never give the customer anything, hire us as your abitrator!” That seems problematic. If that’s actually what’s happening, it seems like something’s ripe for reform.
BEN: I saved our best, our hardest, question for last. And I don’t want any wiggling. I want a straight answer out of you Goolsbee. What credit card does Obama use?
AUSTAN: What card he uses… does the President get to use a credit card?
BEN: I don’t know, does he have to give that up along with his Blackberry?
AUSTAN: Yeah, he might.
BEN: Well, thank you very much, Mr. Goolsbee, for speaking with us.
AUSTAN: My pleasure. Anytime.
BEN: We learned a lot about credit card reform, what’s in store, what new protections are gonna be added, what we’re looking for to get this credit card game and make it a little fairer for consumers. Ben Popken, Meghann Marco, Consumerist.com, thanks.
(Photo, Video: Brian Goldstein)