Jewish World Review

JWR's Pundits
World Editorial
Cartoon Showcase

Mallard Fillmore

Michael Barone
Mona Charen
Linda Chavez
Greg Crosby
Larry Elder
Don Feder
Suzanne Fields
James Glassman
Paul Greenberg
Bob Greene
Betsy Hart
Nat Hentoff
David Horowitz
Marianne Jennings
Michael Kelly
Mort Kondracke
Ch. Krauthammer
Lawrence Kudlow
Dr. Laura
John Leo
David Limbaugh
Michelle Malkin
Jackie Mason
Chris Matthews
Michael Medved
Kathleen Parker
Wes Pruden
Sam Schulman
Amity Shlaes
Roger Simon
Tony Snow
Thomas Sowell
Cal Thomas
Jonathan S. Tobin
Ben Wattenberg
George Will
Bruce Williams
Walter Williams
Mort Zuckerman

Consumer Reports

Bait-and-switch offers should be outlawed | (KRT) It's trendy nowadays to talk about "the moose at the table" as code for something obvious and disturbing that everybody somehow manages to ignore. An earlier generation called it "the elephant in the drawing room."

A shark in the mailbox might be a better metaphor for today's topic: bait-and-switch tactics on credit-card rates.

Consumers are getting snared and bitten while government officials engage in helpless small talk about whether card companies' practices have been adequately disclosed.

There's no question they should be better disclosed. Recently, cardholders won an important victory on that very point when a federal appeals court in Philadelphia ruled that a "reasonable consumer" might be misled by a mailing that prominently offers a "fixed" interest rate while hiding the fact that the card issuer can raise it anytime for any reason.

But I've come to realize that better disclosure won't cure the problem any more than knowing the name of an illness protects you from getting it. These bait-and-switch offers should be outlawed.

Donate to JWR

I plead guilty to ignoring that obvious conclusion myself. In January, I gave Consumer Watch's first fine-print award to Chase Manhattan Bank for luring a Philadelphia schoolteacher with a "zero-percent" balance-transfer offer that morphed into a 22.9 percent loan once she was on the hook for $12,000.

Chase said the fine print in her credit-card agreement allowed the switch.

Guess what? Chase has gotten better. The cover letter to one of its recent offers includes a warning that teaser rates won't hold "if any loan or account with us or any other creditor is past due."

But that's not enough. Congress and banking regulators need to find a way to prevent borrowers from paying higher rates than they signed up for, especially when they've dutifully met their obligations to that creditor.

Since January, I've heard from a steady stream of cardholders outraged about sudden changes in rates. In many cases, the only trigger seems to be that they've used increasing amounts of their available credit - enough to lower the three-digit "credit score" that lenders use to predict a borrower's statistical likelihood of default.

But the way these contracts are written, card issuers often need no reason at all to raise rates.

In the case before the appeals court here last week, Bucks County, Pa., resident Denise Roberts had signed up for a fixed-rate 7.99 percent Fleet Bank MasterCard, responding to an offer stressing that it was "NOT an introductory rate" and that the rate "won't go up in just a few short months."

A year later, it did - to 10.5 percent - for no reason beyond the bank's desire to increase its revenue from her account as its cost of funds was rising.

Overturning a district judge's decision in Fleet's favor, the appeals court said the circumstances may have violated the federal Truth in Lending Act, and the lower court should hear the case.

After a similar appeals court ruling here last year, Fleet agreed to pay back $3.8 million to thousands of customers who were assessed a $35 annual fee after signing up for a "no annual fee" card.

It's a good thing that lawyers are out there trying to force these practices out of the fine print. Congress passed the Truth in Lending Act in 1969 because it saw clear and comparable statements of key terms as crucial to making the market work for consumers shopping for the best offers.

But in an increasingly concentrated market, in which all the major card issuers have adopted similar tactics, even perfect disclosure - which of course we'll never see - wouldn't be enough.

There was a glimmer of hope last month when Republicans such as Spencer Bachus, the Alabaman who chairs the House Financial Services subcommittee on financial institutions, joined a bipartisan effort to outlaw one of the most troublesome credit-card practices: "repricing" debt based on information from credit reports.

Bachus proposed amending the Fair Credit Reporting Act to bar card issuers from using credit information to raise customers' rates, unless they were delinquent on the account in question or 60 days past due on another debt.

He scoffed at the banking industry's usual defense - one echoed by regulators such as Federal Reserve Chairman Alan Greenspan - that the "repricing" practices in question are crucial to protecting the banking system from unnecessary risk.

"Are we actually saying here in America that to maintain the financial safety and soundness of institutions, we have to allow baiting and switching?" Bachus asked.

"Mr. Greenspan talks about increasing risk. When you increase a low-income American's interest rate up to 19.9 percent, aren't you increasing his risk?"

Bachus took a brave stance but was shot down: The committee rejected his proposal on a 44-22 vote.

Lenders should be free to quit extending further credit to customers who no longer seem as creditworthy as they once were, or to offer them new credit only at a higher rate.

But to change the terms after the fact - to raise the price people pay for money they've already borrowed - is unfair and unconscionable. And it may sink those consumers who already were barely staying afloat.

Congress or bank regulators should put a stop to it.

Every weekday publishes what many in Washington and in the media consider "must reading." Sign up for the daily JWR update. It's free. Just click here.

Comment by clicking here.


© 2003, The Philadelphia Inquirer Distributed by Knight Ridder/Tribune Information Services