House of Cards

Nearly two months ago, this column chronicled a financial misadventure whereby I got stuck paying $70 in overdraft fees to Bank of America because I had overdrafted my account by $6. In case you can’t remember that far back, the mood was outrage. I had been automatically enrolled in a so-called service—of which there is no opting out—that charges $35 for transactions you make when you have no money left in your checking account.

Some senators were agitated, too. There was heavy talk of legislative action starting in September when it was reported that banks expected to draw $38.5 billion this year in “overdraft protection services,” 90 percent of which was coming from 10 percent of checking accounts. It’s the people who can least afford it who subsidize the rest of us.

Big banks were less enthusiastic about changing the rules. In a year when the economy was slumping and consumer spending was way down, overdraft fees had become more profitable than traditional banking for half of America’s banks. After losing more than $300 million in the third quarter last year, Visa made a big push for its Visa check cards—basically just glorified debit cards—and recently announced netting more than $500 million this quarter.

Following months of criticism from consumer advocacy groups, the Federal Reserve, which is the body in charge of regulating this sort of activity, finally got its act together and issued a new set of rules last Thursday restricting overdraft services to come into effect July 1. In case you missed the announcement, the new rules require banks to obtain the express approval of cardholders before signing them up for overdraft protection and to explain the policies in easy-to-understand language.

But the regulation ends there. Recurring payments, like utility bills, or anything you pay for with a check will still be subject to overdraft fees. Think about all the other beneficial changes that could have been made. Overdraft protection is extremely helpful for some people (myself not included), but the new rules leave you to choose between getting ripped off and not having any protection at all. Suppose, as one bill floating around Washington proposes, that, rather than a $35 flat fee, overdraft charges were proportional to the size of the overdraft—or that you were permitted a limited number of overdrafts each year at a reasonable rate. The Fed regulation doesn’t preclude these measures from being considered by Congress, but it makes immediate action on a bill that had a questionable amount of support to begin with far less likely.

Admittedly, I would rather have these rules than no rules, but the episode is a good reminder of how difficult it can be to pass effective financial regulation, even for something as minor and clearly exploitative as overdraft protection services. It doesn’t make you optimistic about ever setting good rules on credit cards, whose effect on our society is far more pernicious. Credit-card regulation passed last spring was a good start but ultimately does little more than limit banks’ ability to market credit cards to students and require them to warn you before they do something like raise your interest rates from 19 to 30 percent in the space of one month, even if you haven’t missed a payment, just because the issuer claims to have identified heightened systemic risk.

The last time we got close to writing drastic regulation on credit or debit cards was in 1991, when 74 senators voted in favor of a 14 percent interest-rate cap on credit cards. George H. W. Bush had given a fundraising speech in New York where he talked about lowering credit-card rates, a bullet point that had been included at the last minute by his chief of staff but hadn’t been approved by his economic advisors. Support from a Republican president lent congressional Democrats the air cover to move a bill that received no more than 30 minutes of debate on the Senate floor before passing by a vote 74-19, a vote seemingly bereft of partisanship. Perhaps the measure had taken them so much by surprise that senators hadn’t entirely accounted for the political ramifications of a bill that clearly enjoyed their visceral support. In any event, intense industry pressure convinced lawmakers to abandon the effort and left them trying to explain that, while they favored lower rates, they weren’t sure that caps were the way to accomplish that.

Some Americans, and certainly the banks, don’t see a need for tighter regulation of credit and/or debit cards. If people can’t stop themselves from spending money at the mall, they should have to suffer the consequences, even if the shape those consequences might take is never entirely clear. That’s one theory. Another line of reasoning: Much of what governs people’s behavior when it comes to credit and debit cards are poorly designed rules, which allow things like overdraft services to systematically take advantage of people’s laziness or bad habits. Either way, the outcome is predatory. There is no other word to explain the fact that Americans carry an average of eight credit cards and as much as $10,000 in unpaid balances and that, as a country, our collective credit-card debt now tops $960 billion. To shame that these costs fall on the shoulders of those who are least well positioned to shoulder them.

Clay A. Dumas ’10, a former Crimson associate editorial editor, is a social studies concentrator in Lowell House. His column appears on alternate Fridays.