Former Federal Reserve Economist Tells Lawmakers to Slow Down

/PRNewswire/ -- As lawmakers begin meeting next week to mull over legislation aimed at averting another financial crisis, a former Federal Reserve economist cautions that such sweeping reform could have serious unintended consequences. "This is very ambitious and hugely complicated legislation that is being done very fast," says Robert Bliss, who is now a professor at Wake Forest University Schools of Business. "Some of the changes are positive, but others could create bigger problems than the ones they are trying to solve."

A House-Senate conference committee will try to reach a compromise on the financial regulatory reform bills passed by the House in December 2009 and the Senate a few weeks ago. Headed by Senator Chris Dodd and Rep. Barney Frank, the committee will work to reconcile the two versions with the goal of passing a final bill by July 4th. Among the issues the committee will be seeking to resolve is the regulation of the over-the-counter derivatives market, expanded audits of the Federal Reserve Board, and the creation of a new consumer protection agency.

But rather than trying to pass such sweeping legislation with an eye toward the November election, lawmakers would be better off taking more time to seek expert opinion. Bliss said lawmakers would benefit from bringing in more business and economic experts to advise them rather than approaching the legislation as a political issue. It also is important to take the reform's worldwide implications into account.

"The legislation and these proposals are entirely domestic, and the financial system is entirely international," said Bliss, who formerly served as a senior financial economist at the Federal Reserve Bank of Chicago.

"Although the 2008 financial crisis started in America, it impacted Europe because their banks were buying our subprime mortgages, and now we're looking at a situation where there's a major financial crisis brewing in Europe and that's going to feed back in the U.S. financial markets and our economy," he added. "In today's global markets, we can't have our heads in the sand about the reform's international implications."

Despite the inherent risks involved, Congress is likely to pass the legislation in the weeks ahead. "The financial crisis of 2008 has passed, and now we're talking about a response to it," Bliss said. "But the consequences will continue to play out well into the future."

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Governor Signs Legislation Creating Tax Reform Council

Governor Sonny Perdue yesterday announced that he has signed House Bill 1405, legislation creating the Special Council on Tax Reform and Fairness for Georgians. The Governor was joined by House Speaker David Ralston and Lt. Governor Casey Cagle.

“Throughout my term and during this challenging economic time, we have transformed state government by implementing efficiencies and cost-savings measures in our agencies,” said Governor Perdue. “This legislation sets up a framework that will allow for a serious examination of our tax code and ensure that it works for Georgians.”

The members of the council, as specified in the legislation, are Governor Perdue, Dr. David Sjoquist of Georgia State University, Dr. Jeffrey Humphreys of the University of Georgia, Dr. Roger Tutterow of Mercer University, Dr. Christine Ries of Georgia Tech, the 2010 chairperson of the Georgia Chamber of Commerce, the 2010 Georgia chairperson of the National Federation of Independent Business and two members each appointed by the Lt. Governor and Speaker of the House.

The Special Council on Tax Reform and Fairness for Georgian will conduct a study of the state’s current revenue structure.  Following their study, the Council will make a report of its finding and recommend legislation to the Speaker of the House and the Lieutenant Governor.

Under the legislation, the Council will make a recommendation to the Special Joint Committee on Georgia Revenue Structure.  The Special Joint Committee will then write a bill which will be voted on by the General Assembly without amendments.

This process is similar to the federal Defense Base Realignment and Closure (BRAC) Commission from the mid-2000s.

NFIB/Georgia, the state’s leading small business association with 7,900 members statewide, praised the legislation

“This is a big victory for small business,” NFIB Georgia State Director David Raynor said. “Small business is the heart and soul of Georgia’s economy and one of the challenges facing our entrepreneurs and small, family businesses is high taxes. We thank the governor for signing HB 1405 into law, and we thank the House and Senate leadership for making NFIB/Georgia a part of the reform process. The decision to put the chairman of the NFIB/Georgia Leadership Council on this council shows us that our elected officials understand the crucial role small business plays in Georgia’s economy and will play in its recovery.”

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Consumers Union Urges Fed to Require Banks to Roll Back Recent Unfair Credit Card Interest Rate Hikes

/PRNewswire/ -- After Congress passed legislation last year reining in some of the worst credit card lending practices, many banks responded by hiking interest rates before the new rules went into effect, including on customers with perfect bill paying records. Now Consumers Union, the nonprofit publisher of Consumer Reports, is calling on the Federal Reserve Board to require banks to roll back those unfair interest rate hikes and to put stronger limits on the size of penalty fees and interest charges.

The Fed has already proposed new regulations that would limit penalty fees and require banks to reconsider interest rate hikes imposed during the year leading up to the enactment of key CARD Act protections on February 22, 2010. But the proposed regulations don't go far enough according to Consumers Union and should be strengthened to ensure consumers are more likely to see their old interest rates reinstated and don't face unfair penalty fees and charges in the future.

"Last year's shameful frenzy of credit card interest rate spikes has saddled millions of Americans with high cost debt, including many consumers who always paid their bills on time," said Lauren Bowne, staff attorney for Consumers Union. "The Fed should undo that damage by requiring banks to lower interest rates for customers who were treated unfairly before the new credit card protections went into effect."

The Fed's proposed regulations would require banks to review interest rate hikes made on customers between January 2009 and February 22, 2010 and to reduce those rates "as appropriate." But under the proposal, banks are allowed to keep secret their review process with no oversight by the Fed.

Banks could keep the higher interest rate if the reason for the old rate hike still exists, or if the bank decides to come up with a new reason for the higher rate. Banks would not be required to start this "look back" process until six months after the regulations go into effect - in other words, starting in late February 2011.

Consumers Union urged the Fed today to strengthen the rate review proposal by:

-- Requiring banks to reinstate the old interest rate if the reason for
the rate hike would not have been allowed under the new protections
afforded by the CARD Act.
-- Requiring banks to disclose the methodology they use to review rates
and to report to the Fed twice each year the number of rate increases
reviewed and the number of rate reductions that result.
-- Requiring banks to begin reviewing rate increases on August 22, 2010,
when the rate review provision goes into effect.


Thousands of consumers have contacted Consumers Union over the past year to complain that their credit card interest rates were raised unfairly. Many consumers reported that their banks acknowledged that interest rates were raised because of the economy or a change in market conditions and not because of anything wrong done by the consumer. Other consumers reported that their interest rates doubled or tripled after they were a day or two late making their payment or for other minor mistakes. Before the new credit card protections started on February 22, banks were allowed to raise interest rates on existing balances at any time for any reason.

Starting on February 22, banks were prohibited from raising interest rates on a credit card customer's existing balance unless the customer has a variable rate card, a promotional rate has expired, or if the customer is more than 60 days late making the minimum payment.

The Fed also has proposed regulations required by Congress under the CARD Act that are meant to ensure penalty fees and charges are "reasonable and proportional" to the customer's violation of the credit card contract. However, the Fed's proposed rule only applies to penalty fees such as those imposed for going over the limit or being late with a payment and not penalty interest rates.

Under the Fed's proposal, penalty fees would be allowed only if a bank can show the fee is a reasonable proportion of the total cost to the bank caused by the customer's violation of the credit card agreement or if the bank proves that the fee amount is necessary to deter the same kind of violations in the future. The rule also proposes a complicated "safe harbor" provision which allows a bank to pick a permissible fee amount without doing the cost or deterrence analysis.

Consumers Union urged the Fed to broaden its proposed regulation so it extends to the size of penalty interest rate hikes in addition to fees and to limit those rate increases to no more than seven percentage points above the non-penalty interest rate. Consumers Union called on the Fed to simplify and strengthen the "safe harbor" provision for penalty fees by setting it at five percent of the violation or no more than $10.

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Fed Fixes for Overdraft Fall Short, Strong Reform Crucial, CRL Tells Congress

/PRNewswire/ -- Congressional proposals to rein in abusive overdraft practices are long overdue, Center for Responsible Lending executive Eric Halperin told the House Financial Services Committee today.

Halperin, who is director of CRL's Washington office, gave full support to legislation aimed at reforming bank overdraft programs, which cost consumers $23.7 billion last year and are among the most predatory lending products on the market.

"Charging people a $35 fee for a small, debit card transaction is unacceptable," said Halperin, director of CRL's Washington office. "It doesn't save them bounced check fees, it simply skims money from their account and puts them in a bind."

Overdraft fees shot up 35 percent from 2006 to 2008. Banks and credit unions drive up the fees through unfair and costly practices such as automatically approving a debit card transaction even if it overdraws an account and then charging a fee that is often higher than the shortfall itself. Also, instead of recording transactions in the order they are made, financial institutions typically reorder them to increase the number of overdraft fees a customer incurs.

Federal bank regulators, including the OCC and the Federal Reserve Board, have recognized the abusive nature of these practices for years but failed to use their oversight authority to rein them in. The FRB finally is weighing a rule that would take a small step forward, but the Overdraft Protection Act of 2009, (H.R. 3904), under consideration in the House, and similar legislation in the Senate would offer real, substantive reform.

Both bills would give consumers an informed choice on whether they want to pay for high-cost overdraft coverage. They would also limit the number of fees a bank could charge each month and year, and they would require that fees be reasonable and bear some relationship to a bank or credit union's cost of covering a shortfall. And both bills would ban the widespread practice of triggering avoidable overdraft fees by re-ordering customer transactions to maximize overdrafts.

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