The word “loan shark” evokes an image of a scar-faced guy in a smoky back room, handing out money at high interest rates, then sending thugs to break your legs if you don’t repay on time.
Banks aren’t quite this threatening, but credit card issuers have been enjoying just about the same freedom to impose any terms they like on American consumers. Unlike other industries, which are heavily regulated by the Consumer Product Safety Commission, the Environmental Protection Agency, the Food and Drug Administration, etc., the watchdogs who should have been regulating banks have been more than lax in carrying out those duties.
The Federal Reserve had the power under the Home Ownership and Equity Protection Act to curb abuses in mortgage lending, and the Truth in Lending Act gave it the authority to curb credit-card abuse. However, the Fed has not been a friend to consumers.
The new regulations imposed under the Credit Card Accountability Responsibility and Disclosure Act will curb some of the abuses in the credit card business. The problem is, only current “loan shark” practices were addressed – and some of those were not fully reined in.
For instance, banks will still be allowed to increase your interest rate and lower your credit limit – they just have to give you 45 days’ notice instead of 15.
Financial analysts now wonder what kind of schemes the banking industry will come up with to replace revenue lost as the new regulations come into effect.
Some believe that the creation of a new agency is the answer, and are in favor of setting up a Financial Product Safety Commission. This commission would be charged with watching all consumer-credit products. Along with mortgages and credit cards, it would oversee payday loans, car loans, installment loans, credit reporting, and consumer privacy.
One of its functions would be to require true disclosure. Manipulative “fine print” policies would be a thing of the past, because if the terms were too complex for the average consumer to understand, the Commission would have the authority to ban that program.
This commission would also have the authority to ban credit terms considered unsafe for consumers. An example of such terms would be the pre-payment penalties which have so often been imposed on consumers taking high interest mortgage loans. These terms were buried in the fine print, which home buyers were too often encouraged not to read at closing.
The question remains – would a Financial Product Safety Commission actually protect credit consumers? Or would it become just another Federal agency, funded by taxpayer dollars, but doing nothing to protect those taxpayers from the legitimized loan sharks known as the banking industry?
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