Banking Law

Chris Dodd received kudos from consumer advocates for pushing the recent credit card reform bill through the Senate. After taking his bows, though, he must have heard the plaintive cry of his empty wallet, a cry that soon turned to a scream of "Feed Me! Feed Me!"

Being a consumer advocate, where did Chris turn from some ready cash? You guessed it: the payday lending business. Arthur Delaney at The Huffington Post, a place that usually goes easy on guys like Dodd, tried to run down the straight skinny and caught the payday lenders and Senator Dodd in an awkward embrace. Not that that stopped them from denials, mind you. When caught in the act, lie like you actually believe what you're saying and never back down. Eventually, the short attention span of the voter will turn elsewhere, to tonight's final American Idol episode for the season, for example.

Speaking of Dodd's credit card legislation, the credit card companies and bankers' groups have been using scare tactics about the horrible consequences that will ensue now that the credit card companies and banks can no longer gouge less credit-worthy cardholders price the risk of lending to those with less-than-prime credit. According the one line of attack, all this will mean is that those of us who pay off our credit card balances each month will have to start paying higher fees in order to "subsidize" the less creditworthy whom the card companies will no longer be able to hose charge appropriate risk-based fees and upon whom the companies will not be able to engage in such time-honored practices such as "universal default." I expect that there will be some changes to the way card companies squeeze water from stones, since the $15 billion or so that is generated by the banned practices will have to come from some other source or sources.

According to the American Bankers Association and others, card companies will now turn to "deadbeats," which is what they call folks like me. I don't carry credit card balances past the grace period. Therefore, I'm a lousy "earner" and, according to credit card company logic, it's only fair that I start paying my fair share because for too long I've been getting a "free ride" by maintaining an excellent credit score. I can see how not going into debt at ridiculously high interest rates and paying over-limit fees is unpatriotic. I feel so ashamed of myself.

And yet...

Dan Caplinger, a writer for the Motley Fool crew, a certified financial planner, a lawyer, and another credit card "deadbeat," doesn't intend to knuckle under to higher fees. He calls the attitude taken by card companies "patently ridiculous." Furthermore, he intends to react accordingly.

While it's easy to understand why card companies would like to find any way they can to earn profits, there's a simple reason why imposing fees on the customers they call "deadbeats" won't work: Unlike balance-carrying, interest-paying borrowers, we actually have a choice -- and we'll vote with our feet, happily leaving the credit card industry with even less revenue.



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...[S]purning their top customers would end up hurting banks. Customers would turn back to cash, debit cards, and other payment methods, cutting into total card revenue. And after all the effort financial institutions have made to cross-sell credit card customers into other, more lucrative segments of their businesses, do firms really think their customers will stick with them if they renege on the promises that lured them in the first place?

Sure, I expect to see more rhetoric from card companies about how great a deal I and others with sterling credit have gotten over the years. But the card companies have earned a lot of profits from me, too. If they want to shoot themselves in the foot, we'll be happy to take our business elsewhere -- and take the revenue we generate with us.

Yeah, what Dan said.