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December 15th, 2009

The Consumer Wheels Are Spinning in Washington



Washington’s transition from their seemingly unwavering support of Wall Street to a new dedication to the American consumer has been rather slow, but the momentum is picking up. While the House of Representatives passed a bill on Friday that included the creation of the Consumer Financial Protection Agency (CFPA), President Obama met with the nation’s largest banks yesterday, asking them to step up their lending to consumers — both homebuyers and small business owners alike.

Perhaps ironically, the president’s plea to the banks comes at the same time many of them have (or are working hard to) paid back TARP funds in order to get out from under these kinds of pressures:

If the banks came hat in hand to Washington a year ago to assure their survival, they returned on Monday in a much stronger position to deal with the government. As they scurry to repay the government and escape its influence over their operations, they have been fighting elements of legislation to regulate their industry more tightly.

One of those “elements of legislation” is the CFPA. Industry groups like the American Bankers and Mortgage Bankers Associations have both expressed their displeasure over portions of the agency, according to National Mortgage News. Despite this resistance, President Obama had strong words for the banks in particular, if they chose to balk at new consumer protections:

“I made very clear that I have no intention of letting their lobbyists thwart reforms necessary to protect the American people,” Mr. Obama said in remarks after the meeting. “If they wish to fight common sense consumer protections, that’s a fight I’m more than willing to have.”

Washington won a battle over “consumer protection” earlier this year when portions of the CARD Act went into effect in July. The Act is designed to protect consumers from unscrupulous fees and charges by the credit card companies (which has backfired to a degree). The remaining portions of the legislation will begin in February of 2010.

It was brought to our attention this morning that one of the groups championed by the president just yesterday, has been partially left out from the protections in the CARD Act: small businesses. According to SmartMoney.com’s Aleksandra Todorova, the exclusion of small business from these protections will only be magnified come February.

Some large banks are actually making it harder for small business owners to get access to affordable credit, for example, when they choose to list business debt alongside personal debt in credit reports:

However, in November, [small business owner Byron] Hebert learned that the cards had one big downside: Capital One was reporting the accounts on his personal credit report. Listing his business’ debt alongside and in the same manner as his personal debt gave the impression to anyone who checked his credit that he was overextended, Hebert says.

Capital One spokesman Steve Schooff says reporting the accounts to both the consumer and commercial credit bureaus is “standard industry practice.”

When a highly-utilized business credit card appears on a person’s individual report, the negative effect could snowball quickly. For example, the addition of $20,000 of business debt to the $20,000 Hebert already owed on his personal credit cards led Bank of America to close one of his personal credit cards and cut the limit of another, from $35,000 to $9,900, just $200 above his balance. As a result, Hebert’s credit score, once in the high 700s, fell to the low 700s.

With one major legislation down (the CARD Act), and one to go (CFPA), the wheels of consumer protection are certainly spinning in Washington. We haven’t been shy about highlighting the downsides of the CARD Act, and the latest revelation doesn’t improve our opinion of it. While the CFPA still has a journey in front of it before it can become law, we’re concerned that consumer protections that may actually be useful and needed won’t make it through the process.

Do you think that Washington’s efforts will be enough to protect consumers?

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About the HSH Blog

HSH.com's daily blog focuses on the latest developments in the mortgage and housing markets. Our mission is to relate how changes in mortgage rates and housing policy, as well as the latest financial news, impacts consumers, homebuyers and industry insiders alike. Our 30-plus years of experience in the mortgage industry gives us an edge as we break down the latest changes in an ever-changing market.

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Tim Manni

Tim Manni is the Managing Editor of HSH.com and the author of their daily blog, which concentrates on the latest developments in the mortgage and housing markets.

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