The past two years have brought about a slew of new consumer protection laws. While these laws and regulations are generally well thought-out, in our opinion they are years late and in many cases a bit toothless.
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Slow moving regulators cause proliferation of bait and switch products
Even after consumer abuses become apparent, there are often years of bureaucratic red tape before the Federal Reserve Board of Governors (tasked with regulatory oversight on consumer protection), or Congress (the law makers) act.
To be fair, the Federal Reserve Board usually conducts in-depth surveys and studies before enacting regulation that can severely harm a specific financial industry. For example, recent overdraft law changes and debit card interchange regulation may severely hurt banks that heavily rely on overdraft fees. For example, TCF Financial has about $300 million in fee revenue per year at risk, so the bank’s $100 million profit in 2009 looks destined to decline.
However, given the slow pace at which regulators move, competition inevitably leads to a familiar theme:
1. Creating banks create a financial product that sounds great to the consumer, but is loaded with shrouded costs.
2. Creative banks take massive market share as consumers eat up their product.
3. Competing banks are forced to copy those moves to keep customers.
4. Everyone in the market ends up peddling the financial product with the same shrouded costs Let’s take a look at some examples, along with how regulators have responded, and how banks are evolving to exploit loopholes.
Regulators block left, the financial industry weaves right
Credit card interest rates. Consumers like low rates. So card companies have become the masters of offering upfront low rates, which mysteriously become much higher rates. Universal default, applying interest payments to the lowest APR balances first, and hair trigger interest rate hikes were among the practices that were regulated in the CARD Act.
However, post-regulation, banks have started trying to get consumers to sign up for small business cards or “professional” cards instead, which don’t fall under CARD Act rules. They have also been raising ongoing APRs for new customers, since their ability to raise rates on existing customers has been diminished.
Overdraft fees. Checking account overdraft fees got so out of hand, that they comprised 74 percent of service charges on deposit accounts in 2006. The Federal Reserve responded by banning involuntary overdraft protection. Yet, pushy sales tactics at banks are somehow convincing over half of consumers to opt into the fee structure anyway, despite the fact that it costs these customers more than an unscrupulous payday loan.
A day late and a dollar short
Credit counseling. A number of unscrupulous “nonprofit” debt relief agencies have been in business for years, charging huge upfront fees for consumers to enroll in debt management plans. They enticed consumers by overpromising on what they could reasonably deliver in terms of negotiations with creditors. The FTC reacted only recently, by banning the upfront fees and requiring fees to be based off of quantifiable metrics, thereby reducing the motivation to bamboozle beleaguered consumers. But given the sheer number of nonprofit counseling agencies out there, and the loads of money they spend advertising to debt-riddled consumers, why didn’t the FTC act sooner?
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Gift cards deposits. Gift card issuers were making a mint off of idle and expiring gift cards until the August 22, 2010 phase of the CARD Act. Now, gift cards cannot charge fees without 12 months of inactivity, and can’t expire before 5 years. While the regulation also covers gift certificates and prepaid cards, it missed the mark by not addressing the rapidly growing reloadable prepaid debit card market.
The reloadable market is growing so quickly that it saw the IPOs of two big contenders, GreenDot and NetSpend, just this year. Amazingly, this booming 10-year-old market geared toward unbanked Americans has managed to dodge the most basic regulatory regimes. Participation in the consumer protections offered by the Electronic Funds Transfer Act is purely voluntary, which means that reloadable prepaid issuers aren’t required by law to reimburse card users for fraud.
Debit card interchange. PIN debit processing fees rose from about 0.20 percent to well over 1 percent over the past 10 years, as Visa used their monopolistic clout in the credit card market to force merchants to accept ever-higher rates. Many claim that this indirectly resulted in higher consumer prices everywhere, which is why Senator Durbin stepped in earlier this year to regulate these fees. Now, banks are busy begging and suing the Fed, because they claim that they cannot turn a profit without this revenue. If that fails, expect inventive new fees galore.
They’re running up a downward escalator
Regulators do seem to get it right in the end, so hats off to them. However, some of the brightest minds in the country are hard at work devising “mitigation strategies” for the financial industry. In all likelihood they are already devising new ways of earning money that won’t be regulated for another 10 years, and by the time Congress reacts, they will already be two steps ahead. And the cycle continues.
Tim Chen is the founder of NerdWallet.com, which helps consumers find the best credit card for them.