Onus is on Democrats to restore fairness to the lending system

February 28, 2007|By Jose A. Garcia

NEW YORK -- Democrats have taken control of Congress at a time when credit card companies and banks are up to their monthly statements in profits, thanks to the sky-high interest rates and penalty fees paid by the increasing number of Americans turning to credit just to make ends meet.

Although Democratic legislators have pushed to increase the federal minimum wage and lower student-loan interest rates in an effort to alleviate the financial burden on the middle class, it should be remembered that both Republicans and Democrats helped American families get in this predicament. Now, Democrats should turn their attention to restoring fairness in lending relationships.

During the past 30 years, Congress enabled an almost total deregulation of the financial services industry. Fees and interest charges have climbed steadily - and bank assets have increased even more.

In 1994, President Clinton signed the Interstate Banking Bill, which facilitated the consolidation of the industry as never before. In 1999, Congress passed the Financial Services Modernization Act, which helped to create one-stop financial mega-markets. Unfortunately, Congress forgot to "modernize" the Community Reinvestment Act - which was designed to encourage banks to meet the credit needs of all community members - to include these new, nondepository financial monsters.

As profits rose, predatory practices started to become the modus operandi for many banks. When the Supreme Court essentially nullified consumer protection laws that capped the annual percentage rates credit card issuers could charge, lending companies started adopting loan shark-like interest rates.

How did America's families fare? As balances rapidly accumulated, Americans spent more and more of their paychecks trying to eliminate debt instead of preparing for retirement or sending their children to college. At the same time, many families saw wages decline and turned to credit to cover essentials. Many families also cashed out their home equity to largely pay down balances - to the tune of $800 billion in the last five years alone.

In the past, bankruptcy had often been an essential lifeline - and a last resort - for rebuilding a household's financial security. That all changed in 2005, when President Bush signed the Bankruptcy Reform Act, with significant support from Democrats. This made it much more difficult to restructure or discharge high credit card debt. Strapped American families are left treading water in a sea of increasing fees and penalties.

As a first step, Congress should reintroduce the Credit Card Reform Act, which would prohibit credit card companies from excessively raising interest for events unrelated to the payment history on an account; restrict excessive late fees; and ensure that companies do not offer credit to high-risk borrowers.

Democrats should remember that the consolidation of the banking industry happened under the aegis of both parties. Rectifying the damage done to American families over the past few decades requires leadership.

Jose A. Garcia is senior research and policy associate in the Economic Opportunity Program for Demos, a nonpartisan public policy think tank. His e-mail is jgarcia@demos.org.

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