Fructivore Investments

The deeper I get into investing, the more I find my interests are aligned with those of our corporate overlords. Thus, even though a piece of legislation is objectively progressive and fair, I also have to view it in terms of how it tilts the power away from the fat cats. Such is the case with the recent credit card legislation. Among other things, it bans universal default clauses, prohibits credit card companies from raising rates on existing balances, and requires charges and late penalties to be reasonably related to what they cost the company.

Capital One stated that, unlike mortgage lenders, credit card companies have the ability to build expected default rates into the interest they charge their customers. The ability to raise rates on existing balances may be viewed by them as an attempt by them to fine-tune this ability. In fact, universal default, a policy by which credit card companies impose large rate hikes if their customers default on other debt payments or even utilities, is an attempt to fine tune this process, since when it comes to defaults it’s hard to stop with just one. Even the legal test for insolvency is that the borrower is not paying bills as they come due. As the credit card companies probably pointed out in their meeting with President Obama before the bill passed, the alternative is serving less customers and pushing some of them into the less-regulated, less-convenient, more loan-sharky market. More likely, however, they told him it would mean higher rates for everyone, a principle that companies have certainly demonstrated by slipping in an across-the-board rate hike before the new law comes into effect. Under the new law, they can only raise rates on existing accounts after there have been two missed payments, which is probably inadequate for the companies to protect themselves, since after missing two payments it reasonably becomes more and more likely that they will miss the next four and be written off.

Even with the new legislation in place, and credit card default rates hovering around 10%, credit card companies and pretty much all corporations have short memories. Any credit manager under pressure to produce bigger numbers will eventually roll the dice on relaxing the lending standards just a little, in exchange for a higher initial rate, even if it can’t be adjusted so easily. So, with or without this legislation, when the shock of this recession is over it should be back to business as usual, apart from greater volatility in chargeoff rates. . Oh and the bit about fees and penalties being reasonably related to the actual cost to the credit card company? Who, exactly, is going to be telling the regulators what their costs are?

So, this legislation is probably not a good thing for credit card companies, but I don’t think it will be too bad of a thing either. Long live the corporate overlords.

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law by grocca