On Feb. 22, 2010, two of President Obama’s officials linked up from the White House for an online town hall meeting, answering questions from CreditCards.com readers. Answering questions was Austan Goolsbee, from the Council of Economic Advisers; Jesse C. Lee, director of White House online programs, relayed the questions.
This is a transcript of that conversation; you may also view the video.
Jesse C. Lee: Hey everybody, my name is Jesse Lee. I’m the White House Online Programs Director. We are happy to welcome readers of CreditCards.com today for a chat with Austan Goolsbee here of the Council of the Economic Advisors — he’s been one of the point people on our policy on credit card reform which the President signed last year. It’s kicking in today, so we wanted to take some questions on exactly how this works, how this is going to affect your relationship with your credit card company. And maybe I’ll toss it over to Austan for just some quick remarks on the day, and we’ll get right into your questions.
Austan Goolsbee: Yeah, it’s a pretty big day. Thanks, Jesse, and thanks, everybody, for, you know, taking the time. The credit card legislation that we passed last year and the rules that are going into effect today really start to reverse the trend that we’ve seen in the credit card industry where some credit card companies began engaging in even deceptive practices or turning fees and penalties into a business model where they collected more than $20 something billion of fees last year, and so I think it’s going to be a good day for the American consumer, and it’s fitting in with our broader financial regulatory reform agenda. Let’s try to prevent the kind of excesses and practices that got us into the biggest mess since the Depression.
Lee: All right. Thank you. So we’ve been taking questions for about a week, but there’s also a live chat going on right now on CreditCards.com, which I’m keeping an eye on, and we’ll be taking as many questions from that as we can. So let’s start from when they came in a couple of minutes ago during chat. Let’s see. Jessica Whait asks how will enforcement of the act be handled? If a consumer feels that the issuer has not complied, what is the reporting process?
Goolsbee: Well, basically, the bank regulators of the bank that issues the credit card are the ones charged with enforcement. Now, that is why the administration has pushed for a single consumer financial protection agency to make it easier. But for most credit cards, it’s the OCC, and if you go to the OCC’s website, or there’s a website called, I believe, dealwithmybank.gov, in which if you feel that they are breaking the laws that we’re going to talk about here today, if you say, hey, wait a second, they’re not supposed to be able to raise the interest rate on balances I already charged, for example, that’s forbidden as of today. If they did that to you anyway, that’s where you’d report it, and I think you’re going to see heightened interest in that issue from a regulatory perspective.
Lee: All right. One of the questions we got over the last week was from Chad in Utah, and this kind of touches on the question of, you know, what’s the role of personal responsibility in this. It says, “what makes the White House think that the new disclosure rules will really prevent people from making bad choices or borrowing too much money, tell me where else disclosures have worked.”
Goolsbee: Well, I think there are a lot of places disclosures have worked, so rather than go through a list of those, let’s think for a second about what’s happening with this credit card reform act. It’s got two styles of things. There are many different rules that it puts in place, but there are two styles of rules. The first are certain practices that various credit card companies engaged in that were at the least sneaky, and in many cases outright deceptive. So it says they have to send you a bill at least 21 days before the due date. They can’t raise the interest rate in the first 12 months of a card, offer you a teaser rate and then pull it back, you know, five days after you got the card. The annual fee, if it has an annual fee, can’t exceed 25 percent of the initial credit limit of the card. So, a series of prohibitions of the kind of activities that companies had engaged in that are very hard for people to figure out that they exist. And then the second style of thing it does, as Chris – Chris right, from Utah?
Lee: It was Chad.
Goolsbee: Chad. As Chad pointed out, it also puts a big emphasis on disclosure and transparency so you can hold your credit card company accountable. So if they’re going to raise the rates, they have to tell you 45 days in advance we are going to raise your rate for this reason, you have the right to cancel your card, to switch to a different card, etc.
Now, this isn’t intended to change the basic dynamic of a credit card, which is somebody gives you a loan and you’re supposed to pay the money back.
Lee: All right. And by the way, one of the benefits we have here doing these chats is that we get some instant feedback. I think it was Rob that pointed out that it’s not dealwithmybank.gov.
Goolsbee: Help with my bank.
Lee: So there you go. All right.
Goolsbee: That illustrated my mentality, it’s helpwiththebank, not dealwiththebank, it’s helpwithmybank.gov.
Goolsbee: That’s where you go if you, for any of the practices I’m describing, if you feel like, hey, wait a minute, that’s supposed to be illegal and my bank is doing that, if you go to helpwithmybank.gov, that’s where you can inquire about it, you can report it, you can do any of those things.
Lee: All right. And I think that’s good teamwork, Rob. One of the questions we just got was from Judith Anna. She asks, “As these things usually go, the credit card companies are already creating new ways to gouge the consumer. Will there be follow-up addendum rules to plug the new greedy grabs that they create to get around this bill?” And this is the kind of question we get with a lot of the reforms we try to pass around here, so…
Goolsbee: Sure, OK, so I’d say a couple of things. It’s a good style of question, there’s an insight in it, which it says, OK, well, look, they came up with this stuff and now we’re going to get rid of a lot of these things, what if they start doing a whole bunch of new things. We’ve got 10 or 12 really significant practices and a significant change in the balance of power of regular people vis-a-vis their credit card company, which I think are really important, and I invite anybody to go look at them, and I think you’ll agree with me they’re very important steps that are being taken.
Several of the things we’re doing, like requiring the credit card companies to put out their documents in plain language, leave open the possibility of enforcement, that the principle of the rule can be enforced in a way that just a specific letter of the law, you know, they might get into some technicality. And I do think that the emphasis the administration has put on consumer financial protection shows you we’re trying to think about the current difficulty that we’ve got consumer protection and looking out for consumers in seven or eight different agencies, various kinds of financial regulators, and it would be better if we had one streamlined process to do that. But we’re going to enforce these 10 or 12 major rules that we’re talking about here, we’re going to have a different style of regulation, which allows us to stay after them and say, well, wait a minute, you’re engaging in a new deceptive practice. And number three, as part of broader regulatory reform, I think we’re going to definitely keep a watchful eye on maintaining the balance of power.
Lee: All right. And, yeah, plenty of questions coming in on the chat and keep them coming.
Goolsbee: Getting real-time fact checking, that’s kind of disturbing here.
Lee: That’s transparency for you. All right, well, so, another thing that CreditCards.com has going here is they’re doing kind of an instant poll of the people in the chat, and the question they’ve asked is, I’m afraid that the new law will make it more difficult for me to get credit. And you kind of see the results here where…
Goolsbee: A lot — you know, 58 percent or something in some form agree.
Goolsbee: OK, look, so the issue of tightened credit, it’s not a secret to anybody in this country that’s had to go out and try to get a loan, dealing with a credit card, try to get a mortgage or any of those things, that credit to consumers in the midst of the worst credit crunch since 1929 has not been an easy place to be.
I do not believe that there is any convincing evidence that doing things like preventing them from being able to charge you interest retroactively on balances you already incurred or engaging in a series of sneaky practices in which they administer fees that you didn’t know about. I guess the way to say it is, if that’s the only way that they make a business model, then we’ve got a really pretty fundamentally broken credit system. I believe that it’s not — what we are describing here is not changing the balance of who is creditworthy in any way. What we’re trying to do is require credit card companies to disclose what their practices are, that there’s nothing wrong with charging fees for being late on your payments, people, it is their responsibility to pay back their bills. But if you have to, for example, notify the customer how long will it take for them to pay off their balance if they just make the minimum payment, and they have to put that on your bill, why would that lead them to tighten the credit on you? It doesn’t — I don’t think that that makes sense. So I think that better disclosure and transparency in many ways is going to make this market operate better, because when we’re operating in a land of the sneaky, a lot of bad things can happen, because people just don’t understand what they’re up against.
Lee: All right. You touched on this earlier, but we’ve got a couple of questions asking for follow-up. Somebody asked can you please elaborate on how the card act will help young people specifically.
Goolsbee: OK. So for young people, as you know, I’m — I’m on leave as a professor at the University of Chicago, so you — anybody who is in or around schools, colleges, high schools, any of those circumstances, knows that there are some credit card companies who target that group specifically, and there has been a problem — there have been at least a few problems where they get people who will not be able to pay the bill are very likely to run into difficulty, and they kind of can’t get — they get off on a bad foot at the very beginning of their credit rating, that they are going to get them in trouble, expecting the parents to pay, et cetera. So what it specifically does for underage customers, for anybody under 21, there is a heightened rule of documentation or a requirement of an official co-signer on the card, so that we are less likely to get people into situations where they’re signing up for cards and they get on the treadmill where they kind of can’t get off.
Lee: All right. Now we’ve gotten several questions about this. Jeff says, “I run a small business and our credit card fees that we pay to banks for transactions have doubled in the last two years. Any chance we could regulate those fees like most countries do?” And in general, we’ve got a bunch of questions about how this affects small businesses.
Goolsbee: OK. I would say a couple of things, not knowing more detail about that specific small business. There are some kinds of fees that, as of today, they can’t have fees like that anymore, including restrictions, as I’ve said, on fees if you go over your credit limit, that they have to give you the opportunity to stop the charges rather than charging you for going over your limit and applying a fee, that there would be a limit on the annual fee, that it can’t be more than 25 percent of your credit balance, and a series of a few others. I think it’s important that we think about the fees, because as I outlined at the beginning, they collected some $20-something billion in fees last year, and there are some companies that appeared to have tried to turn sneaky fees into a business model, rather than just using we’re making you a loan, you pay it back with interest, as the business model for a credit card. So I think focus on fees is a major component.
On small business, a lot of small businesses use credit cards as their financing. Now, I want to just make a plug for the rest of the Obama administration program on dealing with financial and job market matters, that we’ve got numerous aspects trying to increase credit to small business, either through use of TARP resources to give money to local and community banks to make more lending to small business, the president has called for a tax credit to encourage small business and reward small businesses for hiring new people or for expanding their payroll, cutting the capital gains rate to zero for small business owners. So a series of things outside the credit card world we’re doing to try to stimulate the economy, small business specifically. In the case of credit cards, small business will be protected by the same kind of disclosure requirements and forbidding of fees that individuals are, but it doesn’t go further than that specifically on small business.
Lee: All right. This could probably be a very simple one, but Moe S. asks, “Are these reforms permanent or do they expire after a certain time period?”
Goolsbee: No, no, they are permanent. Some of the permanent reforms relate to things that are time limited, like if they offer you a teaser rate — that has to stay in place for 12 months. But these reforms are definitely permanent.
Lee: All right. One of the questions that we’ve gotten a few times, which is reasonable, but it’s a tough one in any kind of situation like that, is in the time between when this bill got signed and now, it seemed like a lot of credit cards kind of, you know, saw it coming and jumped ahead and tried to raise up rates as much as they could get away with now. I mean, is there anything to do about that or was there any way to prevent that?
Goolsbee: I think it was — there needed to be a transition period. We’ve actually seen — you may find it hard to believe, but we documented many of the biggest banks publicly announcing that they would start abiding by the rules before the rules went into effect. Now, it is my understanding that there are some credit card providers who said, we got to try to get out there and get as much money as we can before these rules come into effect, and if that is, I can see that’s frustrating. We’re going to end those practices where we are going to give the opportunity that you can cancel the card, change the card to someone else if ever they want to raise fees further, and one of the core components of this is no raising rates on past balances. So that will still apply now, so they can try to raise the rates on stuff that — that has happened thus far. But if you have a balance coming forward, they can’t go do anything to essentially the contract you already signed with them.
Lee: All right. Let’s see. The questions are flying fast and furious. I want to get one of these that —
Goolsbee: Not furious. Fast and friendly.
Lee: All right, yeah, very friendly. Let’s see. All right. You just asked — Steve had been asking about the existing balances and existing accounts, I think you just touched on that. You know, I think another question we’ve gotten is why not just flatly put a cap on interest rates that credit cards can charge.
Goolsbee: OK. So the — as I said, the centerpiece of the laws that are coming in today have two parts. One is getting rid of fees and practices that are very difficult for consumers to understand or where they engage in something sneaky. The second is on a series of things like rate increases, that they give power to the consumer, in plain language to the consumer that they can decide, you know what, I don’t want to deal with this card, if they want to jack my rate up to 30 percent or whatever, forget them, I’m going with somebody else. We haven’t engaged in the government getting into the business of declaring these folks are creditworthy, these folks are not, here’s the rates that you have to charge, instead it’s the borrowers have a responsibility to pay, the credit card company has a responsibility to disclose and to deal with customers honestly and let them operate, so I think that’s the style that we came at it.
Lee: Gotcha. Well, another question we got, we asked early on, somebody had a question about personal responsibility, and, you know, is this bailing out people that kind of by their own doing got into trouble. The kind of flip side that we’ve heard from several people now is, you know, a lot of people are out of a job, a lot of people are — you know, find themselves in, you know, frankly, health issues, you know, health reform is another issue we’re obviously dealing with now, and really it’s just kind of by no fault of their own, it’s because of the economy that they find themselves, you know, deep in debt. Is there any kind of way that, you know, the White House approached that differentiation between those who are kind of irresponsible and those who, you know, no fault of their own?
Goolsbee: Well, yes and no. Here’s what I would say about that. This, and again I invite everybody to go on and read the changes that we made last year that are coming in place today. I think you will agree that these 10 or 12 fundamental practices that credit card companies will not be allowed to engage in any longer, and the requirements of disclosure and transparency that allow you to hold your card company accountable are really important, they’re important that they do these things. This credit card reform bill is not going to fundamentally change, however, the basic relationship of a credit card, which is you’re taking a loan and you’ve got to pay back — you’ve got to pay your bills.
There is no question that through unemployment, through getting sick and the massively high cost of health care, that a variety of things, have people getting into financial trouble. Health care costs in particular can often lead to personal bankruptcy. I don’t think we expected, and it wouldn’t be realistic to expect, the credit card reforms to fundamentally change that. It’s not going to pay your bills for you, you still got to pay your bills. What this thing is about is trying to re-establish a level playing field balance of power of you with the credit card company, that they got to tell you here’s how it’s going to operate, if we are going to jack up rates on you, they got to notify you in advance, you have the opportunity to say, whoa, wait a minute, this is not appropriate, I don’t want to do business with you. For the things like dealing with unemployment, health care costs and things that might drive you to personal bankruptcy, that’s where really economic recovery is the only — I think is the only answer. We’re not going to be able to do that as part of this reg reform.
Lee: Right, right. OK, so what — this might be a little in the weeds, I don’t know if you’ll know this off the top of your head, but one of the debates that’s going on in the chat is this question of, you know, you might be able to quit your credit card if they, you know, kind of do you wrong as it were, but some people are contending that that will have negative effect on your credit card score if you do so.
Goolsbee: Well, your FICO score relates to — I mean, it’s a complex formula — but it relates to how much debt you have. If you cancel credit cards, that can reduce your FICO score, though you can sign up for new cards at the same time you’re canceling old cards, and this gives you the opportunity to switch out of somebody who is engaging in abusive practices. The thing that I’ll just say to anybody thinking about this, I think if you contemplate it, you know you want this ability to do this, that you don’t just get the bill — right now, remember, under this, as of yesterday — if you got your bill, they could jack up your rate and they could apply that higher rate to balances you already incurred, so you open the bill and say what in the world is this, and now they cannot do that. They’re not allowed to raise rates on things you already, balances you already have, and if they are going to raise your rates, they got to notify you 45 days in advance. So let’s say you got two different cards. If they tell you, I’m going to raise your rates, OK, well, you know, you can choose where you’re going to take your business and what cards you’re going to use.
Lee: All right, thanks, that sounds like some reasonable practical advice. I think we’ve got time for one more question. I think we’ve managed to cover kind of the most frequently asked ones, except for one, which is that some people are observing that, you know, a lot of people are now using debit cards more than credit cards, and that can come with its own kind of set of, you know, traps and what not. Is there anything that addresses that in this bill or is that something that might be a future concern?
Goolsbee: Look, the issue of debit cards is important. These are really credit card rules. There is some on debit cards, and in any consumer financial protection agency which the administration has backed, one clear point of that is to deal with — let’s call it responses to regulation — that if we put in sensible oversight and then that leads people to shift, let’s say you start seeing new shenanigans by companies in the area of debit cards, that we have the ability to look at those practices and say, whoa, wait a second, you know, this is abusing customers in this way or that way, I think that would be something that we would be able to take a look at.
Lee: All right, well, again, I’m sorry if we couldn’t get to your question, as I see a new poll just opened up, but…
Goolsbee: Yeah, how are we doing in this poll?
Lee: Well, I…
Goolsbee: Oh, no, this is a what have you experienced.
Lee: They switched it up. I can’t claim that you…
Goolsbee: Look, the thing is what this poll is, which of these have you experienced in the past year? My card issuer cut me, cut my credit limit, etc., and what you can see is that a large fraction of at least the people here on this survey have experienced exactly the kinds of things that the credit card reform is going to prevent. OK? So getting interest rate jack-ups on previous balances, having massive fees when you sign, having teaser rates that they give you and then you sign up, and a month later they jack the rate back up, all of that kind of thing is why we did this. And I think if you go look at these reforms that are coming in place today, I think you will be if not pleasantly surprised, you will be happy that this is now the law of the land.
Lee: That’s right. And, you know, somebody just asked if there was a good website to learn more about this. I’ll say there is a blog post up right now at whitehouse.gov/blog. It will lead you to more information from the White House. It will lead you to a USA Today piece that came out, that, you know, gives a kind of more objective — nobody is more objective than us, but objective take on what’s in there. And, yeah, thanks so much to CreditCards.com for, you know, helping us out with this, it’s been a great chat, it’s great to talk to people that are, you know, as Austan says, living with this stuff and dealing with it day to day. And thanks, Austan, for doing it.
Goolsbee: Thanks, Jesse. And thanks everybody for sending in questions.