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Federal Reserve Truth in Lending Rules Needs To Go Back To Grammar School

I have received a big response to my recent arti­cle about credit card bills and whether or not con­sumers are being over­charged. A lot of frus­trated read­ers have pri­vately e-mailed me with their own very strong over­charg­ing suspicions.

For­tu­nately, the credit card over­charg­ing prob­lem can be fixed with sim­ple solu­tions that can be imple­mented imme­di­ately. Every day gram­mar school kids learn three basic lessons which if applied to bank credit card billing will instantly solve the prob­lem. The three lessons are…

  • Show your work
  • No free do overs
  • What’s good for the goose is good for the gander.

Banks need to “show their work” and tell their cus­tomers how they got to the answer. It isn’t good enough to get an answer with­out explain­ing how they got it.

Show­ing their work means putting on credit card state­ments columns that show the actual daily bal­ance and the deb­its and cred­its that were used to cal­cu­late the bal­ance. Cur­rently, banks show the monthly aver­age daily bal­ance that is sub­ject to finance charges but not the actual daily bal­ance that is used for the calculation.

There is a big dif­fer­ence between show­ing the monthly aver­age bal­ance and the actual daily bal­ance, and that dif­fer­ence pre­vents con­sumers from fig­ur­ing out whether or not they were over­charged. With­out the daily bal­ance cal­cu­la­tion (and the daily finance charge which is included in the daily bal­ance) banks aren’t show­ing their work.

My daugh­ter always gets points taken away for not show­ing her work. Banks should have reg­u­la­tory points taken away as well.

Some of the read­ers who e-mailed me asked me to try to rec­on­cile the finance charges on their bill. One reader had a bal­ance of approx­i­mately $2,500 on her Sep­tem­ber bill. She sent in a pay­ment to the credit card com­pany of approx­i­mately $3,500 which resulted in a credit bal­ance, i.e., the credit card com­pany owed the reader money because of over­pay­ment. The Sep­tem­ber pay­ment was sent in to the bank right after the bill was received and cred­ited to the account approx­i­mately 15 days before the due date. Dur­ing the month of Sep­tem­ber my reader used her credit card and charged approx­i­mately $3,500 of pur­chases (no cash advances). Based upon the con­tract she believes she shouldn’t have had a finance charge on her Octo­ber bill. But, the credit card com­pany said that she had an aver­age daily bal­ance of approx­i­mately $1,500 and she owes approx­i­mately $15 in finance charges. While $15 isn’t a lot, she can’t recal­cu­late the aver­age daily bal­ance to fig­ure out how the charge was incurred and sus­pects that she wasn’t given credit for her over­pay­ment of the pre­vi­ous bill. More­over, she believes that since she paid her pre­vi­ous bill in full and before the due date she shouldn’t have incurred any finance charges.

Another reader told me that despite him and his wife pay­ing all of their credit card bills in full every month and upon receipt, his last bill had a charge of $69 on approx­i­mately $800 of pur­chases. Look­ing at the bill it is clear that the credit card com­pany cal­cu­lated finance charges from the date of pur­chase despite the con­tract say­ing that if pay­ment in full was made on time there wouldn’t be any finance charges. And, a one month charge of $69 on $800 of pur­chases is close to 100% com­pound inter­est. It’s a pretty good guess that the bill is in error.

Just like when our kids get answers wrong on a test or make an error in a game that counts, there needs to be a penalty for the error of over­charg­ing. Refunds for over­charges don’t cut it. Refunds are like free do overs and every kid knows that when they take a test or play for keeps there are no free do overs.

Free do overs are for learn­ing expe­ri­ences. Credit card banks aren’t sup­posed to be in the busi­ness of learn­ing. They are already sup­posed to know what they are doing and take respon­si­bil­ity for their errors.

Dol­lar for dol­lar refunds pro­vides no incen­tive for banks to try to get it right when they bill their cus­tomers. Instead of dol­lar for dol­lar refunds, I think refunds should have added to them an amount equal to what­ever the high­est finance and over­draft fees that the bank would have charged a cus­tomer that over­drew his account by the same amount. Since each bank has a dif­fer­ent set of penalty charges, each bank will have a dif­fer­ent penalty for mak­ing mistakes.

Ban­ning free do overs by charg­ing banks penal­ties and giv­ing the penalty to their cus­tomers seems pretty fair to me.  After all, I believe “what’s good for the goose is good for the gander”.

In prac­tice that means if your bank charges and over­draft fee of $35 per over draft (with a max­i­mum of 7 charges per day) plus 24.9% inter­est, then your bank will have to pay for its mis­takes at the same rate, i.e., $35 per mis­take (with a max­i­mum of 7 charges per day) plus 24.9% inter­est. And, if banks don’t own up to their mis­takes and refuse to credit con­sumer accounts on a prompt basis, fees should accrue at $1,000 per day (after a 30 day grace period to fix the error). With real money on the line I am pretty sure that banks to get it right the first time they send out a bill.

On Sep­tem­ber 29th the Fed­eral Reserve Board pro­posed amend­ments to Reg­u­la­tion Z (truth in lend­ing) and while the pro­posed reforms are a good first step they need to do more and go farther.

It’s a shame that sim­ple gram­mar school lessons seem to be rev­o­lu­tion­ary ideas for banks. Show your work, no do overs and what is good for the goose is good for the gan­der shouldn’t be con­tro­ver­sial con­cepts that need a lot of thought to implement.

Posted in: BANKS, economy, Federal Reserve, Finance, Politics, Public Policy, REGULATION, Regulatory Reform

2 Comments

  1. Ljiljana R.

    I have a friend who, every day when he comes back from work sits at his com­puter and put all of the recites from that day on his computer’s spread sheet. I asked him once why he is “wast­ing” his time and he said that he checks his bal­ances every day and com­pere with his bank. Nat­u­rally I asked why and he responded that some days bal­ances don’t match for dol­lar or two. I said so what, who cares. And he noted that because of mil­lions of igno­rant peo­ple like myself, banks make extra mil­lions of dol­lars a day. I guess you con­firmed his sus­pi­cions. And i still can’t believe it is true. I def­i­nitely will start check­ing bal­ances every day.

    P.S. I was talk­ing about per­sonal bank­ing. I guess banks get in that cash flow from every direc­tion pos­si­ble. Do you think it’s hap­pen­ing in every coun­try or just here?

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