Wednesday, June 15, 2005

The Fed is Considering Credit Controls

In a recent blog post, I saw that the Federal Reserve Board is considering a response to credit card holder complaints. It is the first time since 1980.

It is about time that the Federal Reserve Board does something. When we apply for a credit card, we are required to disclose a lot of personal and private information. That information is kept in the bank's database and used for marketing and other purposes. We are not compensated for that disclosure because it is simply provided on an account application. Banks and credit card companies have little regard for privacy, especially after the recent Financial Services Modernization Act was passed. This law essentially dismantled the protections put in place by the Glass-Steagal Act of 1933 that prevented banks from doing both wholesale and retail banking. Now that the likes of Citibank have become financial conglomerates, in every area of financial services, privacy no longer exists as this information is shared across all areas of bank operations. Instead of this leading to lower costs that are passed on to consumers, prices for financial services have gone up in financial and legal terms.

Signing Unseen Contracts
Consumers are signing contracts that don't disclose their content until after the contract is made. The industry is using the disclosure laws as a substitute for the actual contract. There is simply one line in the disclosure that defers to a yet unseen agreement, that you are agreeing to with your application. You are not allowed to see the contract until it comes in the mail with your credit card. This would be considered dishonest in every other industry. It is simply wrong to sign a contract you haven't seen, yet we are expected to "take personal responsibility" for what we agreed to. What is worse, those contracts are so carefully crafted that it is difficult for even an attorney to completely assess the implications of the agreement. I hope the Fed puts a stop to this practice.

Illusory Contract
Black's Law Dictionary defines an illusory contract as "An agreement in which one party gives as consideration a promise that is so insubstantial as to impose no obligation. The insubstantial promise renders that contract unenforceable." I would make the argument that credit card agreements qualify under that definition. The agreements are virtually unenforceable by the consumer and the credit card company can change the terms at any time to their benefit. It is especially illusory now that "mandatory arbitration" clauses have been added. It is a well known fact that these arbitration arrangements are giving lopsided justice, and keeping credit card abuses private, as arbitration proceedings are kept out of the public record. This type of clause included in an Adhesion contract, which credit card agreements also qualify, should make the clause unenforceable, but consumers have little power to fight the force of highly paid credit card company attorneys. It is a waiving of a constitutional right, and should not be taken so lightly as it is slipped in under the radar of credit card holders and considered applicable to retroactive purchases. I hope the Fed puts a stop to this.

Consumer Abuses
The media has documented abuses quite well. These abuses are made legal by the careful crafting of deceptive and unfair credit card agreements that are slipped into envelopes with the credit card as it is issued, taking advantage of human nature. There is clearly intent to decieve. Credit card companies treat their customers as if they are simply objects in which they extract money. If they don't comply, and submit to abuse, they are punished using the credit reporting bureaus. Even when they try to comply, the credit bureaus are used as a means of extracting more money. We have been programmed to believe credit cards are a necessary form of payment, and that we have little choice but to sign their agreements. If these abuses do not stop, things will only get worse. It is killing the financial health of our country, and will eventually cause us to lose our position of strength in the world. I hope the Fed does something to stop this.

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