Let’s start with a story ripped from today’s headlines:
In Cleveland, for example, a municipal court judge tossed out a case that Discover Bank brought against one of its cardholders after closely examining the woman’s credit card bill.
According to court papers, Ruth M. Owens, a 53-year-old disabled woman, paid the company $3,492 over six years on a $1,963 debt only to find that late fees and finance charges had more than doubled the size of her remaining balance to $5,564.
When the company took her to court to collect, she wrote the judge a note saying, "I would like to inform you that I have no money to make payments. I am on Social Security Disability….If my situation was different I would pay. I just don’t have it. I’m sorry."
Judge Robert Triozzi ruled that Owens didn’t have to pay, saying Owens "has clearly been the victim of (Discover’s) unreasonable, unconscionable and unjust business practices."
Read the whole thing.
Now, that is the rationale behind the new bankruptcy bill, laughingly called "The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 ".
Consumer Protection? Don’t be fooled. All the bill will do is close the loophole on people like Ms. Owens. In other words, it is so credit card companies, who already make a huge fortune off of people, can squeeze that last penny out of everybody.
I mean, are credit cards companies hurting because people are declaring bankruptcy? Nope. Take a look at this chart here on the right. Credit card companies profits are skyrocketing. Yet all this bill does is give protection to the credit card companies.
Let’s look at some more info about the credit card industry, this time from the Washington Post:
Penalty interest rates usually are about 30 percent, with some as high as 40 percent, while late fees now often are $39 a month, and over-limit fees, about $35, [Cardweb CEO Robert] McKinley said. "If you drag that out for a year, it could be very damaging," he said. "Late and over-limit fees alone can easily rack up $900 in fees, and a 30 percent interest rate on a $3,000 balance can add another $1,000, so you could go from $2,000 to $5,000 in just one year if you fail to make payments."
According to R.K. Hammer Investment Bankers, a California credit card consulting firm, banks collected $14.8 billion in penalty fees last year, or 10.9 percent of revenue, up from $10.7 billion, or 9 percent of revenue, in 2002, the first year the firm began to track penalty fees.
That’s a $4 billion increase in penalty revenue in two years in case you’re keeping score at home.
And you have to love this: that penalty rate of 30-40% can be imposed for missing a single payment — in fact, in can be imposed for missing a single payment on a different account, like your telephone bill — but a card spokesman said this was perfectly reasonable because it was "clearly disclosed on account applications." Something tells me that their idea of "clearly disclosed" is a wee bit different from most people’s.
Bottom line: credit card companies now make half their profits from penalties and late fees. They actively seek out customers who are likely to miss payments and end up in a penalty fee spiral, and they make a fortune from them.
In a normally functioning market there’s at least a small incentive to limit loans to these high-risk customers, namely the possibility that they might go bankrupt. And what does this bankruptcy bill now before Congress do? It is a brazen attempt to remove even that small but annoying incentive to act responsibly.
Credit card companies want the ability to make risky loans, but they also want federal protection that protects them from bearing the risk that goes along with making those loans. That’s a pretty cushy setup, as long as you can buy yourself enough politicians to make it happen.
And apparently they can. This is corporate welfare at its worst. Look at some of the amendments that were attached to the bill — ones that actually might help consumers — and looked how badly they failed to pass:
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S.AMDT 16 to protect servicemembers and vets — VOTED DOWN 58-38
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S.AMDT 17 to protect the elderly — VOTED DOWN 59-40
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S.AMDT 28 to protect people whose own medical problems caused their debt — VOTED DOWN 58-39
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S.AMDT 29 to protect homeowners with medical debt — VOTED DOWN 58-39
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S.ADMT 31 to limit the amount of interest charged to 30% — VOTED DOWN 74-24
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S.AMDT 32 to protect people whose debt is incurred from being caregivers to ill/disabled family members — VOTED DOWN 60-37
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S.AMDT 37 to protect people whose debt was incurred through identity theft — VOTED DOWN 61-37
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S.ADMT 38 to protect people from predatory lending practices — VOTED DOWN 58-40
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S.ADMT 49 to protect employees & retirees from corporate practices that rob them of their earnings/retirement savings when the business files for bankruptcy — VOTED DOWN 54-40
Source.
There’s much more to write about. But I will leave it to John Podesta from ThinkProgress.org, whose strategy memo is reprinted below the fold.
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