To listen to bank lobbyists, one would conclude that Elizabeth Warren, recently appointed an adviser on consumer protection to President Obama and Secretary of the Treasury Geithner, must be a really bad person incarnate. They were planning to pull out all the stops to prevent her confirmation by the Senate as the head of the new consumer protection bureau at the Federal Reserve. President Obama's appointment of her as an adviser does not require Senate confirmation.
What Warren and the new consumer protection bureau can, and hopefully will, do is stop the lunacy in the banking system. The baseline reason for today's economic problems isn't the federal deficit, or the tax system, or the exchange rate between the yuan and the dollar, or the Fed's printing of trillions of dollars, or the new health insurance legislation. The baseline problem is that the banking system made a shipload of really stupid, indefensibly idiotic mortgage loans. Bankers loaned money without verifying borrowers' income, assets, or employment, and paid scant heed to credit histories. All many borrowers really needed was a pulse and a signature. Bankers utterly disregarded lending standards and risk management, blithely assuming that the risks associated with the lending insanity would be passed to the investors that bought this toxic financial waste. Because of the way the mortgage market worked, higher compensation was paid to mortgage bankers and brokers for underwriting riskier loans than for 30-year fixed rate mortgages to people who had downpayments and might actually repay the loans.
The end result was the accumulation of almost incalculable amounts of systemic risk, risk that exploded and imposed trillions of dollars of losses on banks, homeowners, businesses, laid off workers, and taxpayers. Sure, some (although not all) of the borrowers who took out nutty loans had some idea of what they were getting into. But they knew of their individual risks--that the interest rate might rise, that there would be a balloon payment at some point in the future. What they didn't know--and what nailed many of them and all of the rest of us--was that the entire system was poised for a fall because the indescribably imbecilic lending had taken place on a large-scale, nationwide basis. Indeed, even the most knowledgeable federal banking regulators were either clueless, in denial, or both when it came to the systemic risk presented by the morons of mortgage lending. We're still paying the price for this disaster and will do so for years to come. The absence of consumer protection left us all without protection.
The new bureau shouldn't just impose ritualistic disclosure requirements. When borrowers arrive at the closing and find thousands of pages of documents to plow through, disclosure requirements amount to regulatory failure. The new bureau should substitute its judgment for the dysfunctional judgment of bankers (and borrowers, too, since some of them were complicit in taking out loans they realized were foolish but took anyway in order to gamble on the real estate market rising). There was a fundamental market failure in mortgage lending, and sound regulation can fix such failures. Imagine banking without federal deposit insurance if you question this notion.
Mortgage loans are already unavailable to many less creditworthy borrowers, and rightfully so. It does them--and we taxpayers--no good if the banking system accumulates a mountain of bad loans that strip defaulting homeowners of their savings, credit ratings, and pride, and taxpayers of funds badly needed for other priorities. With today's tight underwriting standards and the overall unwillingness of banks to lend, it's unlikely that the new consumer protection bureau can reduce the availability of credit a whole lot. What it may do--and this is probably what bankers fear the most--is that as the economy recovers the consumer protection bureau may prevent the banks from returning to the highly profitable insanity in which they reveled earlier this past decade. Amen, say the rest of us.
Consumer protection in this case isn't about a bunch of liberals on federal salaries singing, "If I Had A Hammer." It's about imposing and enforcing prudential consumer lending requirements on banks that protect us all. Not just borrowers with eighth grade educations, or workers whose native language isn't English, but also the most well-educated, well-read, and wealthy of Americans, because we all have a stake in the well-being of the financial system.
Showing posts with label consumer protection. Show all posts
Showing posts with label consumer protection. Show all posts
Monday, September 20, 2010
Thursday, June 21, 2007
Debit or Credit?
If you have the choice of a debit card or a credit card, which should it be? The answer basically depends on your individual preferences. If you want a mechanism to make you live within your means, a debit card limits you to what's in your bank account. However, watch out for the temptation to tap into any overdraft protection you might have on your checking account--that's really nothing more than a line of credit with interest charges. And you have to monitor your bank account's balance continually, because debits that cause overdrafts are subject to overdraft fees. If you're the type to charge even your mid-afternoon coffee, a small charge that causes an overdraft can result in a fee much larger than the charge itself.
On the other hand, if you have an uneven income and/or uneven expenses, having the credit line provided by a credit card may be a convenience. The alternative would be to have a pool of savings that you could dip into as and when you needed it. But not everyone can set aside enough money to create that pool of cash. And for large purchases, credit cards are a must, unless you have a lot of cash saved up.
When it comes to theft or fraud, though, the rules tilt in favor of using a credit card. In general, your responsibility for unauthorized charges on a credit card is limited to $50, and some credit card companies waive even that. For debit cards, the limit is $50 if you report the loss of the card within two business days. But it goes up to $500 if you report the loss of the card after two business days. And if you're more than 60 days late reporting the loss of the card, you could be responsible for every penny in your bank account, plus the maximum amount of any overdraft protection on your account.
So how likely is it that you'd wait more than 2 days, or 60 days, before reporting the loss of a debit card, you ask? Not likely if someone pinches your wallet and you discover the loss minutes or an hour or two later. But that could be enough time for a clever crook to drain your bank account. Or, what if you use the debit card to buy something over the Internet, and a sleezemeister in a distant time zone steals your debit card number? You may not realize that you're in trouble until checks start bouncing and your bona fide charges are refused at the checkout lane. By then, your bank account could be empty and your overdraft protection entirely burned up. And all the legitimate checks and electronic payments you tried to send will bounce.
It could take the bank as many as 10 days to restore the funds to your bank account (because they'll want to investigate and make sure your claim of unauthorized use of the card is accurate). Unless you have a second bank account somewhere (preferably at a different bank for the sake of safety), you will have no cash, as in zero, zip, nada. And if this is a joint bank account for you and your spouse, you could be looking at a night or two on the living room couch.
Then, there's the question of all those checks and electronic payments that are bouncing. Maybe the bank will restore your funds eventually. But what about all the fees that other people are charging you for bouncing a check, or being late in making payment? You'll be late because you have to get them to resubmit the check to the bank after your account is restored, or because you'll have to resend the electronic payment after there's some money in the account to send. Ideally, everyone will be nice to you and not impose these fees. But you'll have to do a lot of explaining, and maybe a little begging and pleading.
With a credit card, your cash remains untouched, your legitimate checks and electronic payments won't bounce, and you're liable for $50 max. Yes, you'll have to contact the credit card company, and the sooner the better. But your worst case scenario is an argument with them about whether you owe them $50 or not, and many won't even hassle you over that.
Ultimately, the choice of credit or debit is a matter of personal preference. But if you prefer debit, be very, very careful with the card. Don't let others see your PIN. Don't use the card for Internet purchases. And keep track of your bank account balance. With a credit card, you have to rely on something else to control your spending besides the purchasing power of the card.
With either kind of card, you have to look over your monthly account statements carefully. These days, you never know if your card number has been stolen and a few charges quietly slipped onto your
account. A clever crook might do that to reduce the chances of detection. If you're not careful, you could be stuck with those charges, not because you'd necessarily be required to pay them but because you simply didn't notice them.
For more personal finance ideas, go to http://howtomakeamilliondollars.blogspot.com/2007/09/festival-of-under-30-finances.html.
Crime News: Stolen Homer Simpson statue recovered. http://www.wtop.com/?nid=456&sid=1171977. Whew. We're so relieved.
On the other hand, if you have an uneven income and/or uneven expenses, having the credit line provided by a credit card may be a convenience. The alternative would be to have a pool of savings that you could dip into as and when you needed it. But not everyone can set aside enough money to create that pool of cash. And for large purchases, credit cards are a must, unless you have a lot of cash saved up.
When it comes to theft or fraud, though, the rules tilt in favor of using a credit card. In general, your responsibility for unauthorized charges on a credit card is limited to $50, and some credit card companies waive even that. For debit cards, the limit is $50 if you report the loss of the card within two business days. But it goes up to $500 if you report the loss of the card after two business days. And if you're more than 60 days late reporting the loss of the card, you could be responsible for every penny in your bank account, plus the maximum amount of any overdraft protection on your account.
So how likely is it that you'd wait more than 2 days, or 60 days, before reporting the loss of a debit card, you ask? Not likely if someone pinches your wallet and you discover the loss minutes or an hour or two later. But that could be enough time for a clever crook to drain your bank account. Or, what if you use the debit card to buy something over the Internet, and a sleezemeister in a distant time zone steals your debit card number? You may not realize that you're in trouble until checks start bouncing and your bona fide charges are refused at the checkout lane. By then, your bank account could be empty and your overdraft protection entirely burned up. And all the legitimate checks and electronic payments you tried to send will bounce.
It could take the bank as many as 10 days to restore the funds to your bank account (because they'll want to investigate and make sure your claim of unauthorized use of the card is accurate). Unless you have a second bank account somewhere (preferably at a different bank for the sake of safety), you will have no cash, as in zero, zip, nada. And if this is a joint bank account for you and your spouse, you could be looking at a night or two on the living room couch.
Then, there's the question of all those checks and electronic payments that are bouncing. Maybe the bank will restore your funds eventually. But what about all the fees that other people are charging you for bouncing a check, or being late in making payment? You'll be late because you have to get them to resubmit the check to the bank after your account is restored, or because you'll have to resend the electronic payment after there's some money in the account to send. Ideally, everyone will be nice to you and not impose these fees. But you'll have to do a lot of explaining, and maybe a little begging and pleading.
With a credit card, your cash remains untouched, your legitimate checks and electronic payments won't bounce, and you're liable for $50 max. Yes, you'll have to contact the credit card company, and the sooner the better. But your worst case scenario is an argument with them about whether you owe them $50 or not, and many won't even hassle you over that.
Ultimately, the choice of credit or debit is a matter of personal preference. But if you prefer debit, be very, very careful with the card. Don't let others see your PIN. Don't use the card for Internet purchases. And keep track of your bank account balance. With a credit card, you have to rely on something else to control your spending besides the purchasing power of the card.
With either kind of card, you have to look over your monthly account statements carefully. These days, you never know if your card number has been stolen and a few charges quietly slipped onto your
account. A clever crook might do that to reduce the chances of detection. If you're not careful, you could be stuck with those charges, not because you'd necessarily be required to pay them but because you simply didn't notice them.
For more personal finance ideas, go to http://howtomakeamilliondollars.blogspot.com/2007/09/festival-of-under-30-finances.html.
Crime News: Stolen Homer Simpson statue recovered. http://www.wtop.com/?nid=456&sid=1171977. Whew. We're so relieved.
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