Back in the day, the music of James Brown prompted many listeners to tap a toe or two. One particular JB song, "There Was a Time," is as relevant today as it was before – particularly when it comes to how America's banks changed over the years. There indeed was a time when bank profitability was derived from its investments in communities and neighborhoods. There was also a time when many people believed that banks would treat them fairly.
Just as James Brown passed on, so did many of the banking practices of yesteryear. Today's bank customers often harbor a deep and broad resentment as to how these institutions operate. Perhaps a new research report on credit cards from the Center for Responsible Lending (CRL) will enlighten and encourage those now leading our financial institutions to change their ways again. Predatory Credit Card Lending, the latest research from CRL, finds that bank practices that benefited consumers also enhanced financial stability. Conversely, financial institutions focused on maximizing short-term gains through deceptive terms and penalty fees wound up being more financially at-risk.
The report states in part, "Predatory products seemed profitable in the short term and seemed to help fuel economic growth; but led to a disproportionate escalation in losses when housing markets slowed and the economy soured. Our new research shows this has also been true in the credit card arena."
CRL examined prevalent marketing and pricing practices before the Credit Card Accountability, Responsibility and Disclosure Act (CARD Act) took effect. The analysis of the connection between credit card practices and actual company performance during the recent economic downturn was based on data from the top 100 credit card issuers. After tracking credit losses from 2006 through 2010, CRL found:
· Credit card issuers that engaged in a deceptive or abusive tactic tended to have multiple offenses;
· The larger the financial institution was that was engaged in these misleading practices, the worse their practices tended to be.
· In general, regional or smaller banks and credit unions tended to have clearer and fairer pricing; and
· Common sense curbs on abusive lending benefit everyone — customers, investors, shareholder and ultimately taxpayers.
These findings also suggest that despite current efforts to weaken or dismantle the Consumer Financial Protection Bureau, the public and private sectors would be well-served by more and better policing of credit cards and other forms of predatory lending such as overdraft and payday loans.
High-cost penalty fees and rising interest rates became the risk, instead of mitigating it, according to CRL. The report concludes, "This study shows that measures to stop deceptive and unfair lending practices promote market transparency and enhance the health of lenders –and the economy – in the long term."
There was a time when bankers understood that taking care of its customers was just good business. Maybe, in the words of James Brown, they will get back on the good foot.
Charlene Crowell is a communications manager with the Center for Responsible Lending.