The Credit card Accountability
Responsibility and Disclosure (CARD) Act aims to do two things:
1. Help out consumers to
make sure they don't get ripped off by banks and ensure they can spend a bunch
more money they don't have to help the economy.
2. Increase the
borrowing authority of the Federal Deposit Insurance Corporation (FDIC) from
$30 billion to $500 billion and the NCUA from $100 million to $18 billion
And
here's what it will achieve:
1. Force banks to rip
off consumers even more and ensure they have less credit to spend to help out
the economy.
2. Make the FDIC and
NCUA even more attractive policy tools than they are now.
Let's
start with the credit cards:
Some of the most significant changes are:
Issuers can't charge punitive interest rates for late
payment until payment is 60 days overdue.
So, if you are short on money, no hurry to
pay off your credit card, because the bank can't create any incentive for you
anyway.
Credit card issuer must review the cardholder's account six
months after increasing the interest rate, and return the interest rate to the
previous lower level if the cardholder has been on-time with payments.
So, if the bank thinks you are high risk,
or interest rates go up, and the issuer increases the interest rate, then just
make payments on time and the interest rate goes down again! Awesome!
A ban on universal default (if one credit card goes into
default, all others are considered to be in default)
So, if you are headed for bankruptcy, just
blow the credit limit on one card at a time.
Sure, you'll have to pay punitive interest rates one (after it's two
months overdue) but the others will be just fine. If you have ten credit cards with $15,000
limit on each one, just buy gold bullion with them one at a time until you have
155 ounces of gold, stash it in a safe place, and declare chapter 13. There's nothing the bank can do about it --
except cancel all your credit cards in a hurry!
The issuers' response to these changes is
pretty obvious. Bank risk management
systems will be adjusted to make sure that risky customers get less credit,
those with multiple cards get an aggregate credit limit instead of an
individual card limit, and interest rates will be set higher on new cards to
allow for interest rate rises.
All this will make credit cards harder to
obtain, make expanding credit limits much harder, and will result in issuers drastically
reducing credit limits between now and February when it becomes law.
The net effect of course is that because of
the higher risk these provisions imply, banks will extend less credit to fewer consumers
at a higher cost, and spending will decrease.
This is no doubt the opposite of what the
bill intended, but hey, this is the government we're talking about!
And
onto section 603…
Now, even though this is ostensibly a
credit card act, the government did its usual trick of sneaking a few hundred
billion bucks into the back of the bill.
In this case, it was section 603 -- the
last section -- just in case some senator decided to actually try reading the
bill from page 1.
The FDIC stuff is pretty obvious. Since the government increased the amount
insured in banks from $100,000 to $250,000 and included money market deposits
as well, there has been no increase in FDIC reserves. However, the 1,567% increase seems a bit on
the steep side when the guarantees only covers about 150% more.
That's largely because the FDIC -- like nearly
every other government financial corporation -- has become a policy tool to
offer numerous guarantees as a part of the $26 trillion spending and guarantee
orgy of the past year. Incidentally,
this bill subtly widened the FDIC's powers of authority to help it act a bit
more like a policy tool and less like a bank deposit guarantor. I'm sure we'll see the government exploiting this in the months to come.
The NCUA is a lesser known entity, and with
just a $100 million in borrowing authority, it's hardly worth mentioning.
But shooting that up by 18,000% should help
it gain a bit of sun and be useful as yet another policy tool.
So wtf
is the NCUA??
National Credit Union Administration
This body, founded back in 1934, supervises
credit unions.
Because credit unions don't participate in
derivatives and mortgage loans, they haven't needed as much money... until
now.
The NCUA also administrates the National
Credit Union Share Insurance Fund -- the credit union equivalent of the
FDIC. As with the FDIC, the NCUSIF has
extended it coverage to $250,000 to December 31 this year. Then in May, the Helping Families Save Their
Homes Act (helping mortgagees remain bankrupt act) extended this by another
four years.
The extra $17.9 billion should be more than
enough to tide it over, unless the government knows something about using the
NCUA as a policy tool that we don't -- more than likely!
Anyway, well done the government on this
boondoggle… getting it half right -- even by accident -- is a big improvement
in my books!
