Combating Crippling Consumer Credit Practices
Minnesota ranks 17th in the United States for the amount of credit card debt held per borrower. Americans carry a high burden of debt service, that is, the percentage of household disposable income that goes to repay loans. Over the past decade, the rise in this measure has been steady, but not dramatic. However, for those struggling, it is at the forefront of their lives. Financial distress is most common among lower-income households: in 2004, 27% of families in the bottom fifth of the income distribution spent more than 40% of their income to repay debt. In May 2007, Minnesota passed the strongest anti-predatory lending laws in the country. These laws prohibit lenders from making mortgages that the borrower has no ability to repay, bans prepayment penalties on all subprime loans, places a 5% cap on the points and fees that can be charged—including any kickbacks from the lender to the broker, referred to as "yield spread premiums." Now the focus must shift to Minnesotans struggling to pay their basic bills and looking to find a way to pay down their credit card debt.
Al Franken focuses on four major issues and offers proposals to free working folks from the specter of disproportionate debt burdens:
1. Crack down on Pay-day lenders and cap consumer loan interest rates at 36%.
Today, Al Franken proposes a "Consumer Credit Bill of Rights":
- Impose a cap on the interest on consumer loans and payday lenders at 36 percent. In doing so, we'd be joining twelve states and the District of Columbia and save vulnerable consumers a collective $1.5 billion per year with an effective solution. The interest rates on these loans are astounding. Typical interest rates on a payday loans can be as high at 685 percent! These payday lenders cost American families $4.2 billion every year in predatory interest fees. Steps have been taken by Congress to protect military families from predatory lenders. From the beginning of my campaign I have been a strong supporter of our troops and military families who are serving our country. Military bases are targeted by payday lenders because they are full of young, financially inexperienced families trying to get by on modest pay. While military personnel are three times as likely as civilians to be victims, those same protections should be extended to all Americans.
- Requiring lenders to provide clear and plain language information about loan fees, payments, and penalties during the application process. Consumers often lack the financial literacy to understand the risks involved when using payday lenders. While payday lenders claim their loans help people during one-time emergencies, this is far from the full story. Instead lenders prey on people in need, trapping them into deeper debt. The payday lending business model is clearly designed to keep borrowers in debt—their business goals are not to provide one-time assistance during a time of financial need. As a result, borrowers are often forced to take out additional loans. It is because of this cycle of borrowing more to pay off existing debt burdens that such practices are labeled "predatory." Because they are made to customers who take out five or more payday loans per year, 90 percent of all payday loans are considered "predatory."
- Require proof of income before a cash advance is approved to a borrower. This would assure that persons using these loan products have the minimum capacity to pay back the loan. Payday lending (sometimes called cash advance) is the practice of using a post-dated check or electronic checking account information as collateral for a short-term loan. Generally to qualify, borrowers need only personal identification, a checking account, and an income from a job or government benefits, like Social Security or disability payments in order to get what is thought of as an advance on money they expect to receive.
2. Empower credit card holders to level playing field with big banks.
In the face of hard economic times, consumers are struggling to make their minimum credit card payments and prioritize how they make payments on multiple loans and credit cards. The average American carried 4 credit cards and the average Minnesotan carried 4.9 cards. Over 18% of Minnesotans carried 10 or more cards. When you add the pressure of increasing interest rates, unilateral changes, mandatory arbitration clauses and unreasonable fees – for many Minnesotans, this is just too much. We must reform our credit card laws.
Today, Al Franken proposes a "Credit Card Customer Bill of Rights" to address these issues:
- Banning "universal default" practices and prohibiting unilateral changes to repayment terms. We must absolutely ban universal default—the industry practice of allowing one lender to change interest rates when they are informed that their customer has defaulted with another lender, even though the customer has not defaulted with the first lender. In addition to privacy concerns, it is unconscionable that credit card companies can use information about other credit card payments, debt burdens generally, and purchases made to alter interest rates and repayment terms after the fact. Most borrowers expect a late payment or high outstanding balance to ding their credit. However, when Minnesotans are struggling to make payments, the last thing they need is a shift from the normal terms to default terms -- the terms and rates given to those who have missed payments on a loan.
- Require credit card companies promptly give proper credit to payments made and are not allowed to charge interest on late fees. Credit card companies should not be able to charge interest in cases where a portion or all of an outstanding balance has been paid within a certain payment period. Additionally, there should be an absolute prohibition upon credit cards for lumping fees in with purchases and cash advances for the purpose of calculating interest.
- Require proof of income for applicants seeking to apply for a credit card. In the case of an individual with an insufficient income, that application must have co-signer who has the required income level. For years there have been concerns about college students wracking up credit card debt. A big part of the problem is that as young adults, they are not financially literate enough to use their credit cards responsibly. The number one reason students drop out of college is credit card debt. More than 1.5 million college students in the U.S. are expected to drop out of college in 2008 due to money issues. That's 8.4% of college students who drop out because of financial issues.
- Individual credit limits will be strictly tied to the proof of income. Currently there is no proof of income required to verify the claim of income one inputs on a credit card application. College students are often urged to fill in the cost of tuition as it is money that flows on their behalf. As a result of this lack of verification, consumers are often extended credit limits that are far beyond what they are able to handle. This is the beginning of a cycle of indebtedness that could be avoided or at least minimized. These predatory practices are the root of the problem and are themselves significant contributors to the growth of consumer bankruptcies.
- Remove the "fine print" by requiring "plain language" disclosure of credit card terms and that those documents are sent to all customers in 12 point font. Disclaimers and terms of credit card contracts are often presented in very small font as well as in complicated legal and financial terms. In order to be accessible to the average credit card holder, this language must be both easily understood and presented in a font size that can be read by the average consumer.
- Prohibit credit card companies from imposing mandatory arbitration clauses. I would require disclosures from credit card companies such as providing detailed information about the long-term costs of paying only the minimum balance every month. In order to use a credit card, a consumer must sign away their right to bring a case against their credit card company in a court of law. If one is unwilling to submit to the mandatory arbitration clause, credit card companies have the right to refuse to issue a credit card.
- Requiring credit card companies to inform consumers how much they would have to pay every month in order to eliminate their balances within three years. It is imperative that consumers who are interested in paying down their credit card debt are given the necessary information to know how they could do that. Consumers deserve a path to emerge from debt, not a steep downward spiral.
3. Repeal the bankruptcy bill from 2005
Today, Al Franken wants to spotlight the failure of the bankruptcy bill and put the following provisions into place to protect the average consumer:
- Repeal this unfair, big bank oriented bankruptcy bill. It does not work for Minnesotans. President Bush signed the bankruptcy bill into law on April 20, 2005 and applied it to cases commenced on or after October 17, 2005. Many of the bill's provisions were explicitly designed to make it "more difficult for people to file for bankruptcy" under the guise of preventing abuse in the filing of bankruptcy. It was written by and for the benefit of credit card companies and has been opposed by a wide variety of groups, including consumer advocates, legal scholars, retired bankruptcy judges. For example, now instead of 6, it takes 8 years before a debtor could liquidate their debts through bankruptcy.
- Require prioritization of child support and alimony payments over credit card debt for those filing for bankruptcy. I find it socially irresponsible that the bankruptcy law prioritizes the repayment of credit card debt over unpaid child support, forcing spouses owed alimony and/or child support to fight with credit card companies and other lenders for their unpaid support.
- Provide exemption in bankruptcy law for individuals who can prove they filed for bankruptcy because of medical expenses. However, the vast majority of bankruptcies were not the result of irresponsible consumer choices, instead they were related to medical expenses and job losses--more than half of bankruptcies were attributable to unpaid medical bills. This specific carve-out will create a debt forgiveness framework that will allow them to regain work to repeal this unfair, big bank oriented bankruptcy bill. It does not work for Minnesotans. I will rollback the provisions that made it harder for hard working consumers to regain their footing.
