What We Need in Consumer Credit Reform
By: Rene Velez April 1st, 2010
In case anyone has noticed, we are in fact behind the curve in a number of reforms. The next reform president O’bama has to take task to is Financial Reform. This is a very complex task. Ultimately, we have to balance placing safe guards to protect the country and the public but not strangle the wonderful system our capitalist system has in creating innovative products and in allocating capital. This is no easy task and is riddled with political mind fields.
Yes We Need Reform
Before anyone starts to talk you into the corner with the speech about; “we only need self regulation”, here is the just of that. HAVE THEY BEEN ASLEEP FOR THE PAST TWO YEARS! (Yes I am shouting.) The simple truth is that as a capitalist myself I do believe in the free market system. However, I also am not altered in my state of mind as to believe we do not need controls and safeguards. Having a financial system without regulatory controls is like hiring Madoff to be the Chairman of the Federal Reserve and have his accountant who handled his audit run Wall Street. Its like building a beautiful 1200 horsepower dream machine cruiser and simply dispense with providing the driver with a steering wheel and a braking system. What we currently have not only is proven not work, it is not in step with the global market place we are a part of. Although I would love to get into the complex I will try t limit myself to just the consumer aspects I have though of.
What Consumers Need
(1) Bank service charges need for removed from inactive accounts: The act of a bank charging you say $12.00 for having an account as inactive is usurious. So it is when they charge you a fee for a minimum balance. I recognize the need to know what accounts need to be closed but there are more effective ways to do so rather than chase customers away simply because they have a nest egg in some bank account.
(2) Bank Service Charges for Electronic Payments and Transfers: How many businesses get wire transfers as payment for the goods and services thay provide. To think that the bank making the transfer and the bank receiving the funds both are making a service charge for a simple bank transfer is also usurious. Think of it, if you get paid $1,000 via bank transfers or wire and both banks involved each charge $15.00 that’s a total $30.00 charge for that transaction. Effectively a 3% fee for that transaction. Is this the way to create the global market place of the future. That is a higher rate than check cashing stores charge to cash checks. And these check cashing stores typically cater to illegal transactions, tax avoidance schemes and fraud. To make matters worse is that every electronic transactions processed by consumers and businesses alike essentially are performing the accounting and bank processing function for these transactions saving the banks billions of dollars. No where in that 3% calculation is there an offset for what consumers are saving banks for utilizing cost saving technology in conducting their banking business.
(3) We need a complete revision of the consumer credit reporting and consumer credit scoring techniques. How is it possible that a person who is exercising prudent financial management and who recognizes that they have too many credit cards and decides to payoff and close a couple of credit cards gets penalized by a temporary lower credit score. This is insane. This is driven by capitalist that are bent on self destruction by having you stay in debt and buy there products. Of course there is a lot more that needs to be done. The standards for removing frivolous credit checks, for removal of errors and the improvement of consumer credit scores also needs to be reformed. This is another place where credit reporting agencies do not operate for the interest of consumers but rather for the interest of big industry. We saw gross negligence in the rating agencies that governed over rating mortgage securities and there are abuses here too.
(4) We need a complete overhaul of credit cards. The usurious rates given to people with good credit is impeding our economy. How is it possible that someone with a FICO credit score of 780 out of 800 get a credit rate of 29.95%.? This is just bad capitalism. And to think that the CEO’s of these organizations get million dollar compensation packages for making the stock look good. This at the expense of the economy and the country. We need to reward good creditors with a good credit and payment practices. Not drive them out of the market.
(5) Since deregulation of the banking industry in the 80’s banks have increasingly made a significant amount of revenues while raising bank fees and employing technology. However there is still a great deal of inefficiency built into the system. Consider the consumer or small business who has a bank account and a credit line. Firstly, the bank should already have a considerable history knowing the value of the bank account by seeing the transactions that flow through the account. Secondly, to have obtained that credit line there is a considerable application package that must be assembled to secure that credit. Typically an application, 2 years of personal and business tax returns, personal financial statements, business financial statements and whatever else they fee is required to ascertain your credit. Then they must comply with the Patriot Act and again we must supply many of the same documents. If you apply for another loan, say an equipment loan start chopping down more trees to produce the paper work to supply pretty much the same paperwork you have already given for the credit line and in the Patriot Act reporting requirements. This is a terrible inefficient way to conduct business. Just as we would benefit from a central healthcare information system, we would benefit tremendously with centralized credit information system that dispenses with the paper shuffling, secure creditor information, reduce both banking and business operating costs and yield better transparency for quality credit decisions. We claim to be the most technologically advanced capitalist system in the world and yet we are operating at a less than efficient level.
(6) We need to make some credit evaluations by credit card companies and other lenders “prohibited transactions”. It is appalling to think that credit card companies are analyzing how you spend your money to make determinations on your credit worthiness. Here is an example. As the economy turned south in 2008 credit card companies began scanning your buying habits to see if you were changing your buying habits from Saks Fifth Avenue to Target or Wal-Mart as a way to determine if your financial situation was in worse shape and cut your credit limit. This is needs to be a prohibited conduct. This measure of credit worthiness is akin to making credit decision because you are a single mother, an African American living in a poor neighborhood. Essentially Warren Buffets credit would be cut simply because he doesn’t own a personal yacht and hasn’t bought a new home since the 1960’s. This is simple and outright discrimination. It crucifies people for being financially responsible in difficult times.
(7) To spur our economy we need to consider a uniform interest rate for major consumer purchases. Such as automobiles, homes, boats, tractors, appliances. The idea is simple. Consumers need not be duped by facing difficult credit decisions when for example you buy a car. The dealer should not be able to give me a better rate and less of a hassle in obtaining that credit than I could get by simply going to my bank who already knows me and my credit history. The decision to finance major capital goods should ultimately be decided on the quality and reputation of the seller and the product and not on finance juggling. Ultimately, this not only cheats the consumer but it also impedes our economy. This system is designed to cheat the uninformed and uneducated. It is in fact financial discrimination.
I could go on and on with grotesque abuses of consumer credit and poor banking policy and administration. I will try to add to this list as time provides. Needless to say we have our work cut out in front of us and we as consumers need to speak up and make ourselves heard. We must not be bullied and intimidated by Capitalist that have skewed and abused their and our free capital markets. Our capital markets should serve the consumers and small businesses that make up 70% of the US economy. You can rest assured that there will be vocal and intimidating discussions on the matter. But we must not back down. I do not have an issue with some business leaders making multi- million dollar compensation packages. However, not when they are applying abusive creative money making and shareholder value appreciation schemes that ultimately sink our economy and treat consumers as economic slaves. I do believe that there is a way to hold the top talent in our financial industry accountable to our consumers and to our economy and also create shareholder value. The minds and intellect are there, they simply have been misled and become market bullies.
The Business Sector
Without getting into this on this writing, we do need Wall Street reform. Mortgages, creative financial instruments such as derivatives, CDO’s , trading in futures and the perpetual transferring of risks through insurance and hedges all need tight regulatory reform and transparency. We really need to take a look at risk concentrations, insurance products that transfer risk, pricing of these creative financial products and the establishment of proper markets for products that do not have a public market.
Further, the disclosure & reporting of hedge funds and the licensing and regulatory compliance of investment pools that individually and collectively have profound effects on our financial markets, our banking system and insurance busineses all have to be looked at carefully.
In addition we need to change how regulatory audits are performed. As a CPA it is literally amazing that Madoff's CPA was able to perpetuate such a vast fraud of the financial statements and that this CPA was virtually unknown both to the CPA societies and to the regulatory agencies that were supposed to read his financial statements.
There is too much here to chew so I will leave it at that, for now.
By: Rene Velez April 1st, 2010
In case anyone has noticed, we are in fact behind the curve in a number of reforms. The next reform president O’bama has to take task to is Financial Reform. This is a very complex task. Ultimately, we have to balance placing safe guards to protect the country and the public but not strangle the wonderful system our capitalist system has in creating innovative products and in allocating capital. This is no easy task and is riddled with political mind fields.
Yes We Need Reform
Before anyone starts to talk you into the corner with the speech about; “we only need self regulation”, here is the just of that. HAVE THEY BEEN ASLEEP FOR THE PAST TWO YEARS! (Yes I am shouting.) The simple truth is that as a capitalist myself I do believe in the free market system. However, I also am not altered in my state of mind as to believe we do not need controls and safeguards. Having a financial system without regulatory controls is like hiring Madoff to be the Chairman of the Federal Reserve and have his accountant who handled his audit run Wall Street. Its like building a beautiful 1200 horsepower dream machine cruiser and simply dispense with providing the driver with a steering wheel and a braking system. What we currently have not only is proven not work, it is not in step with the global market place we are a part of. Although I would love to get into the complex I will try t limit myself to just the consumer aspects I have though of.
What Consumers Need
(1) Bank service charges need for removed from inactive accounts: The act of a bank charging you say $12.00 for having an account as inactive is usurious. So it is when they charge you a fee for a minimum balance. I recognize the need to know what accounts need to be closed but there are more effective ways to do so rather than chase customers away simply because they have a nest egg in some bank account.
(2) Bank Service Charges for Electronic Payments and Transfers: How many businesses get wire transfers as payment for the goods and services thay provide. To think that the bank making the transfer and the bank receiving the funds both are making a service charge for a simple bank transfer is also usurious. Think of it, if you get paid $1,000 via bank transfers or wire and both banks involved each charge $15.00 that’s a total $30.00 charge for that transaction. Effectively a 3% fee for that transaction. Is this the way to create the global market place of the future. That is a higher rate than check cashing stores charge to cash checks. And these check cashing stores typically cater to illegal transactions, tax avoidance schemes and fraud. To make matters worse is that every electronic transactions processed by consumers and businesses alike essentially are performing the accounting and bank processing function for these transactions saving the banks billions of dollars. No where in that 3% calculation is there an offset for what consumers are saving banks for utilizing cost saving technology in conducting their banking business.
(3) We need a complete revision of the consumer credit reporting and consumer credit scoring techniques. How is it possible that a person who is exercising prudent financial management and who recognizes that they have too many credit cards and decides to payoff and close a couple of credit cards gets penalized by a temporary lower credit score. This is insane. This is driven by capitalist that are bent on self destruction by having you stay in debt and buy there products. Of course there is a lot more that needs to be done. The standards for removing frivolous credit checks, for removal of errors and the improvement of consumer credit scores also needs to be reformed. This is another place where credit reporting agencies do not operate for the interest of consumers but rather for the interest of big industry. We saw gross negligence in the rating agencies that governed over rating mortgage securities and there are abuses here too.
(4) We need a complete overhaul of credit cards. The usurious rates given to people with good credit is impeding our economy. How is it possible that someone with a FICO credit score of 780 out of 800 get a credit rate of 29.95%.? This is just bad capitalism. And to think that the CEO’s of these organizations get million dollar compensation packages for making the stock look good. This at the expense of the economy and the country. We need to reward good creditors with a good credit and payment practices. Not drive them out of the market.
(5) Since deregulation of the banking industry in the 80’s banks have increasingly made a significant amount of revenues while raising bank fees and employing technology. However there is still a great deal of inefficiency built into the system. Consider the consumer or small business who has a bank account and a credit line. Firstly, the bank should already have a considerable history knowing the value of the bank account by seeing the transactions that flow through the account. Secondly, to have obtained that credit line there is a considerable application package that must be assembled to secure that credit. Typically an application, 2 years of personal and business tax returns, personal financial statements, business financial statements and whatever else they fee is required to ascertain your credit. Then they must comply with the Patriot Act and again we must supply many of the same documents. If you apply for another loan, say an equipment loan start chopping down more trees to produce the paper work to supply pretty much the same paperwork you have already given for the credit line and in the Patriot Act reporting requirements. This is a terrible inefficient way to conduct business. Just as we would benefit from a central healthcare information system, we would benefit tremendously with centralized credit information system that dispenses with the paper shuffling, secure creditor information, reduce both banking and business operating costs and yield better transparency for quality credit decisions. We claim to be the most technologically advanced capitalist system in the world and yet we are operating at a less than efficient level.
(6) We need to make some credit evaluations by credit card companies and other lenders “prohibited transactions”. It is appalling to think that credit card companies are analyzing how you spend your money to make determinations on your credit worthiness. Here is an example. As the economy turned south in 2008 credit card companies began scanning your buying habits to see if you were changing your buying habits from Saks Fifth Avenue to Target or Wal-Mart as a way to determine if your financial situation was in worse shape and cut your credit limit. This is needs to be a prohibited conduct. This measure of credit worthiness is akin to making credit decision because you are a single mother, an African American living in a poor neighborhood. Essentially Warren Buffets credit would be cut simply because he doesn’t own a personal yacht and hasn’t bought a new home since the 1960’s. This is simple and outright discrimination. It crucifies people for being financially responsible in difficult times.
(7) To spur our economy we need to consider a uniform interest rate for major consumer purchases. Such as automobiles, homes, boats, tractors, appliances. The idea is simple. Consumers need not be duped by facing difficult credit decisions when for example you buy a car. The dealer should not be able to give me a better rate and less of a hassle in obtaining that credit than I could get by simply going to my bank who already knows me and my credit history. The decision to finance major capital goods should ultimately be decided on the quality and reputation of the seller and the product and not on finance juggling. Ultimately, this not only cheats the consumer but it also impedes our economy. This system is designed to cheat the uninformed and uneducated. It is in fact financial discrimination.
I could go on and on with grotesque abuses of consumer credit and poor banking policy and administration. I will try to add to this list as time provides. Needless to say we have our work cut out in front of us and we as consumers need to speak up and make ourselves heard. We must not be bullied and intimidated by Capitalist that have skewed and abused their and our free capital markets. Our capital markets should serve the consumers and small businesses that make up 70% of the US economy. You can rest assured that there will be vocal and intimidating discussions on the matter. But we must not back down. I do not have an issue with some business leaders making multi- million dollar compensation packages. However, not when they are applying abusive creative money making and shareholder value appreciation schemes that ultimately sink our economy and treat consumers as economic slaves. I do believe that there is a way to hold the top talent in our financial industry accountable to our consumers and to our economy and also create shareholder value. The minds and intellect are there, they simply have been misled and become market bullies.
The Business Sector
Without getting into this on this writing, we do need Wall Street reform. Mortgages, creative financial instruments such as derivatives, CDO’s , trading in futures and the perpetual transferring of risks through insurance and hedges all need tight regulatory reform and transparency. We really need to take a look at risk concentrations, insurance products that transfer risk, pricing of these creative financial products and the establishment of proper markets for products that do not have a public market.
Further, the disclosure & reporting of hedge funds and the licensing and regulatory compliance of investment pools that individually and collectively have profound effects on our financial markets, our banking system and insurance busineses all have to be looked at carefully.
In addition we need to change how regulatory audits are performed. As a CPA it is literally amazing that Madoff's CPA was able to perpetuate such a vast fraud of the financial statements and that this CPA was virtually unknown both to the CPA societies and to the regulatory agencies that were supposed to read his financial statements.
There is too much here to chew so I will leave it at that, for now.
Posts
No comments:
Post a Comment