Gretchen Morgenson Calls for Greater Protection (?) of High-Risk Consumers of Credit

Thom Lambert —  18 January 2010

Gretchen Morgenson doesn’t want poor people to have access to consumer credit. At least, that’s what I think she’s saying in her rambling NYT column this week.

Congress and federal regulators have recently taken a number of actions that will make it tougher for riskier customers to access consumer credit. First there was the Credit Card Accountability Responsibility and Disclosure Act, which precludes issuers from charging fees for services like telephone payments, requires a number of disclosures and advanced warnings, and makes it harder for issuers to raise interest rates and charge over-limit fees. Then there are the new Fed regulations set to go into effect next month. Those rules, which implement the Credit Card Act, preclude credit card issuers from raising interest rates for the ensuing twelve months after an account is opened, and then only on new charges, not on existing balances. By limiting an issuer’s ability to reprice credit based on changes in a customer’s risk profile, the Credit Card Act and Fed rules will make it harder for risky consumers to access consumer credit.

But all these things aren’t enough for Ms. Morgenson. She’s upset that issuers catering to higher-risk consumers are finding other sources of revenue:

An example is Alliance Data Systems, a big issuer of private-label credit cards like those that specialty stores offer. It has decided to levy a $1 monthly surcharge to customers who choose to receive account statements by mail. Proof, yet again, that if you close the door, they will come in through the window. And if you close the window, they blow through the door.

Ms. Morgenson sees Alliance’s $1 charge for assembling, printing, and mailing a paper bill (as opposed to posting the bill on the Internet) as inconsistent with the thrust of the new Fed regulations and the Credit Card Act, and she calls on regulators to “pursue companies flouting the spirit or the letter of the new rules.” Never mind that the small and seemingly justified charge is consistent with the actual terms (as opposed to the amorphous “spirit”) of the new regulations. Never mind also that those new rules have effectively forced Alliance to impose this slight charge if it wants to continue servicing high-risk consumers without raising interest rates. Indeed, Ms. Morgenson recognizes that Alliance caters to riskier customers and is generally compensated via penalty fees rather than higher interest rates:

William Ryan, an analyst at Portales Partners in New York, said the $1 statement fee wasn’t a surprise, given Alliance’s business model. “A disproportionate part of Alliance Data Systems’ yield comes from penalty fees,” he said, “so by default they would be more proportionately impacted by the Credit Card Act than an American Express that caters to higher-end customers.”

Ms. Morgenson thus seems to acknowledge that if the law is enforced as she’d prefer an issuer like Alliance must either charge higher interest rates or up-front service fees, cater exclusively to higher-end customers (a la American Express), or shut down. (She might say that Alliance could also just reduce its revenues, but doing so would probably drive its capital elsewhere.) All these options would make it harder for poorer and riskier consumers to access consumer credit.

But that doesn’t bother Ms. Morgenson. She admits that she prefers a paternalistic “nanny state” to “the pirate state that brought this economy to its knees.” I wonder if the high-risk consumers she’s trying to protect share her views?

Thom Lambert

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I am a law professor at the University of Missouri Law School. I teach antitrust law, business organizations, and contracts. My scholarship focuses on regulatory theory, with a particular emphasis on antitrust.

One response to Gretchen Morgenson Calls for Greater Protection (?) of High-Risk Consumers of Credit

  1. 

    Those high-risk consumers probably don’t, but it was their bad judgment that got us into into trouble in the first place. Some people shouldn’t get much credit, period. It doesn’t matter whether they want it, or whether for any individual lender it’s no big deal to give it.

    If you see a gambling addict at the casinos in Vegas, we all have enough common sense these days to throw him out rather than give him another credit application. Codifying that common sense for the consumer world is what we need to do.