Banks Build Better Mousetrap

Is there truly any reason to trust financial institutions these days?

Developments within the credit card space have exposed the true colors of these institutions . . . not that there was ever any doubt. Recall how consumer outrage at rapidly rising interest rates on credit cards pressured Washington to rein in the usurious business practices of the financial industry.

New legislation was badly needed as banks clearly utilized abusive business practices. The Wall Street Journal highlighted these developments in writing on May 21st, Credit-Card Fees Curbed:

“Credit cards are a tremendously valuable and useful tool for consumers, providing them with relief during critical moments,” said Senate Banking Committee Chairman Christopher Dodd. “This is a very important industry….We just want it to work better.”

The legislation marked a major defeat for the credit-card industry, as lawmakers complained that consumers are being hit with tricks and traps on their cards.

Well, while the legislators were in the front room having the photo ops, the bankers were in the back room building a new and better mousetrap, at least from their perspective.

The Los Angeles Times sheds light on how Credit Card Firms Try End Run Around New Federal Rules:

Banks are quietly changing the terms of millions of credit card accounts as they brace for a tough new law that will limit rate hikes.

The law would restrict interest rate increases unless a credit card has a variable rate. So at least two major lenders are switching their cards with fixed rates to — you guessed it — variable rates.

“It’s completely unfair,” said Linda Sherry, a spokeswoman for Consumer Action. “It’s an end run around the intent of the new law.”

That law is the Credit Card Accountability, Responsibility and Disclosure Act, which President Obama affixed with his signature in May. Its various provisions will be phased in between next month and February.

Who are these two major lenders? Bank of America and JP Morgan Chase. Given the size of their operations, watch every other credit card issuer set the same trap.

How exactly does the trap work? The banks try to baffle consumers with bull*%!# while sticking their hands ever deeper into our wallets. The Los Angeles Times highlights:

Los Angeles resident Victoria Afonina received a letter from Bank of America the other day informing her that “as a result of a change in our business practices, your annual percentage rate will use a variable rate formula based on the U.S. prime rate.”

“If the prime rate changes,” it said, “your APR will vary accordingly.”

Afonina, 44, told me she had to read the letter several times to understand what BofA was saying.

She said she’d been a cardholder with the bank for about five years and had enjoyed a relatively low fixed rate of 9.9% any time she carried a balance.

“When I finally understood what they were saying, and that my rate could change every month, I was shocked,” Afonina said. “I’m a good customer. Why are they treating me like that?”

Good question.

“The change from fixed to variable rates allows us to better manage our business as market conditions change,” said Betty Riess, a BofA spokeswoman.

And those new federal rules. . . ?

“Legislative and regulatory changes that limit our ability to re-price for risk were a factor in our decision,” Riess acknowledged.

How could Washington possibly write legislation which allows banks to set these traps and negate the very spirit of the law? Are they that stupid? Are the bank lobbying efforts that strong? Are legislators more concerned with the photo op and headlines than truly protecting consumer interests?

Yes, yes, and yes.

In the meantime, Sense on Cents strongly encourages you to pay down your credit card balances as quickly as possible so you will not be subject to this usury!!

About Larry Doyle 522 Articles

Larry Doyle embarked on his Wall Street career in 1983 as a mortgage-backed securities trader for The First Boston Corporation. He was involved in the growth and development of the secondary mortgage market from its near infancy.

After close to 7 years at First Boston, Larry joined Bear Stearns in early 1990 as a mortgage trader. In 1993, Larry was named a Senior Managing Director at the firm. He left Bear to join Union Bank of Switzerland in late 1996 as Head of Mortgage Trading.

In 1998, after 15 years of trading and precipitated by Swiss Bank’s takeover of UBS, Larry moved from trading to sales as a senior salesperson at Bank of America. His move into sales led him to the role as National Sales Manager for Securitized Products at JP Morgan Chase in 2000. He was integrally involved in developing the department, hiring 40 salespeople, and generating $300 million in sales revenue. He left JP Morgan in 2006.

Throughout his career, Larry eagerly engaged clients and colleagues. He has mentored dozens of junior colleagues, recruited at a number of colleges and universities, and interviewed hundreds. He has also had extensive public speaking experience. Additionally, Larry served as Chair of the Mortgage Trading Committee for the Public Securities Association (PSA) in the mid-90s.

Larry graduated Cum Laude, Phi Beta Kappa in 1983 from the College of the Holy Cross.

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