The Credit CARD Act of 2009 instructed the Federal Reserve to enact new regulations for gift cards. I have a love/hate relationship with gift cards; they’re convenient gifts to give when you know the recipient is a fan of a certain store. Unfortunately, the past few years have seen restrictions added to gift cards which make them unappealing. Some gift cards expire if not used within a certain amount of time, rendering the money spent to buy the card worthless. Some gift cards come with a monthly fee or an inactivity fee.
It makes more sense to simply give cash rather than a gift card, eliminating the third-parties like stores and payment processors and eliminating any limitations to its use. This avoids the issue of whether fees should be charged for these products. But some people consider the gift of cash inappropriate, more than those who consider the gift of gift cards inappropriate. Thus, the Congress and now the Federal Reserve wants to protect those who choose to buy and those who receive gift cards.
The new regulations call for an elimination of inactivity fees (until the card has been inactive for a year) and eliminations of fees for balance inquiries and transactions. All of the changes to gift cards by law do not need to be made effective until August 22, 2010.
The Federal Reserve is preparing to accept comments from the public for thirty days. You can read the full proposed regulation and in the next few days, you can begin to submit your comments to the Fed here. (Look for Regulation E, R-1377.) Here are some questions to consider as you formulate your comments:
- Are these restrictions necessary when consumers can easily choose not to purchase gift cards?
- Would better disclosure be better than restricting fees?
- There is a cost to offering gift cards; how should stores pay for those expenses if not with fees?
- Should all gift card fees be eliminated, so gift cards are as good as cash in all cases?
- Why wait until August 22? Can the new regulations be implemented sooner?
Photo credit: _rockinfree
With Congress threatening to create new consumer protection agencies to protect the public from customer-unfriendly banking practices, the Federal Reserve stepped in today to prove it is still relevant and involved with banking regulation. The Fed announced that as of July 1, 2010 for new bank accounts or August 15, 2010 for existing accounts, banks must have received permission from their customers before charging overdraft fees.
Overdraft protection will only be an opt-in service. There are some exemptions to this new rule, however. The only type of overdraft protection requiring customers’ consent is the type in which the bank covers the overdraft to cover the debit. If your overdrafts are covered by a linked savings account or credit card, you could still be charged a fee. Usually these fees are lower, such as $5 rather than $35.
Also, only overdrafts caused by transactions with debit cards or ATM cards qualify for opt-in only. If a customer writes a check that causes an overdraft when cashed, the bank is still free to charge an overdraft fee without the account holder’s permission. Banks still argue this overdraft coverage is a benefit that customers want and don’t mind paying the fee. Customers would rather have their rent or utility check go through if it costs $35 to cover the overdraft than to have their check bounce.
According to a recent survey by ING Direct, 24 percent of Americans are angry about overdraft fees. Are you angry? I can’t bring myself to get worked up about these fees, myself; avoiding them is pretty simple:
- Don’t let your bank account get anywhere close to a zero balance. Always keep a buffer in any account you use for making payments. If you get close to zero, you are much more likely to fall into a bank’s trap, including multiple overdraft fees on the same day.
- Don’t count on money you deposit into your account actually being there until you confirm that the cash is available. Sometimes check deposits take more than a week to clear, and banks can still pull back the funds for weeks after the deposit if there is a problem.
- Here are ten tips for avoiding overdraft fees.
Banks will earn almost $40 billion from overdraft fees this year, and you can be sure the industry doesn’t want to see that practically free revenue disappear. When one door closes, another opens. Banks will innovate and find news ways to collect fees. We already see Bank of America planning to charge annual fees to credit card users who pay their balance in full every month. I expect the news will be full of stories about new fees for the next year.
Photo credit: smith
Fed: banks need customer consent on overdraft fees, Associated Press, November 12, 2009
In addition to the Bill in the U.S. House that may see a vote as early as next week, the new rules by the Fed that won’t go into effect until July 2010 (unless voluntarily by individual banks), and yesterday’s meeting between the president and 13 top bank executives in which he urged them to act less like predators, there’s one more bit of news about credit cards this week.
From Bloomberg.com:
Senate Banking Committee Chairman Christopher Dodd and Senator Chuck Schumer, saying credit-card providers are “aggressively” raising interest rates, asked the Federal Reserve to immediately limit interest rate increases on existing balances.
We’ve previously reported on the recent aggressive tactics of credit card companies:
So you can be sure we’ll keep a close eye on this latest request of the Federal Reserve. Does it comply with the spirit of the “free market?” Absolutely not. Will it save many Americans from tipping over into bankruptcy or homelessness? We might just find out.
The Federal Reserve is expected to drop the federal funds rate to 0.5% today, the lowest it has ever been. When the Fed drops rates, its intent is to increase lending between banks. This drop, however, will likely have no effect on the bank’s lending practices.
This rate is just a target, and it doesn’t dictate the exact rates banks offer each other. In fact, banks have been recently offering each other rates much closer to zero, and interbank lending is still moving slowly.
When the Fed has nowhere else to go, they begin “printing money.” I hear this term in the media, and the most obvious assumption is that “printing money” means that the Bureau of Engraving and Printing speeds up their presses and pumps out more $1, $5, $10, $20 and $100 bills. At least, that’s what I thought until recently. That’s not quite how it works.
“Printing money” is what the government calls it when they raise money by buying back short-term debt from the public, call them bonds or Treasury bills. Companies and individuals can buy money from the government, money that doesn’t really “exist” until it is purchased.
The Federal Reserve Board responded to the economy yesterday by lowering the target for the federal funds rate to 1% and the discount rate to 1.25%.
The first number is the rate usually in the news. The federal funds rate is the interest rate that banks charge to lend their balances to one another. If one bank wants to loan $30m to another bank, the two companies can negotiate the rate and the lending back and charge the borrowing back the rate agreed upon. By lowering the federal funds rate target, the Fed is saying they’d like to see this interest rate around 1%. The true lending interest rate is controlled by the market, guided by the Fed.
When banks borrow money from the Federal Reserve, the discount rate serves as the interest rate for the loan.
The federal funds target rate hasn’t been as low as 1% since June 29, 2004, having reached that level over a year before on June 25, 2003. A low target rate, and the ensuing availability of easy credit, possibly contributed to today’s credit crisis. But today’s low target rate will have a different effect, according to the policy makers. They believe low rates will increase liquidity between banks and encourage more — but sensible — consumer lending.
It might not be enough. Here’s the important part of the Federal Reserve’s statement yesterday:
Recent policy actions, including today’s rate reduction, coordinated interest rate cuts by central banks, extraordinary liquidity measures, and official steps to strengthen financial systems, should help over time to improve credit conditions and promote a return to moderate economic growth. Nevertheless, downside risks to growth remain. The Committee will monitor economic and financial developments carefully and will act as needed to promote sustainable economic growth and price stability.
“Downside risks” and “will act as needed” probably signal more rate cuts to come in the future. But there isn’t much further you can go from here. The Federal Reserve could cut the target rate to 0%, but that would be a first, I believe. If banks still aren’t lending to each other at that point, the only other option is simply printing money.
Inflation would increase, making it more difficult to afford the same living standards unless inflation is accompanied by growth in salaries. The current jobs market doesn’t make salary growth seem likely.
So what does this mean for me?
The moves by the Federal Reserve don’t affect interest rates on consumer loans. Rates on long-term mortgages will not change dramatically due to changes in the federal funds rate or the discount rate. Adjustable rate mortgages might see a decrease in interest rates. Many ARMs are tied to a different rate entirely, the LIBOR. The LIBOR has been slowly decreasing, as well.
Savers are in for bad news. Interest rates offered by banks for savings account usually follow the movements of the federal funds target rate, but some banks may follow the LIBOR movements. A number of banks have decreased their interest rates recently, and I expect that to continue.
The Federal Reserve may soon become much more powerful if Treasury Secretary Henry Paulson has his way. Earlier today, he released the “Blueprint for a Modernized Financial Regulatory Structure,” which includes a number of recommendations designed to take power away from the U.S. Securities and Exchange Commission.
Paulson’s recommendations
The Federal Reserve should be able to increase liquidity by lending directly to “non-depository institutions” (such as investment banks), and to facilitate this, the Fed will have access to information at the investment banks. The government would have the power to perform on-site inspections if they so desire in an effort to quickly lend to the businesses if necessary.
Paulson wants the Federal Reserve to create a Mortgage Origination Commission to oversee and rate how states license and regulate lenders and create minimum qualification standards for licensing.
The Treasury Secretary believes the Federal Reserve should regulate state-chartered banks, payment systems, and insurance companies. The SEC would merge with the U.S. Commodities Futures Trading Commission to oversee traditional investments as well as some of the more complicated structures.
With these suggestions implemented, the government will regulate “business conduct” ensuring consumer protection, including rules for writing term disclosures across the board of financial products.
Reactions
Nomi Prins points out that the Federal Reserve has spectacularly failed recently with its attempts to stimulate and regulate, so providing more power to the agency is a step in the wrong direction.
All of the plan’s suggestions are cosmetic. Instead, let’s please have a serious discussion about the nature of the banking system structure itself: its complexity, its responsibility, and the proper role of the federal government in regulating it. The United States has had such a debate before, leading up to the landmark 1933 Glass Steagall Act. We can and should have such a sweeping debate again.
Traditional small-government Republicans would most likely agree with Nomi. The Democrats are critical of the plan as well, saying the proposal doesn’t go far enough to provide direct help to consumers and to hold investment banks as accountable as depository banks.
I agree that regulation should be consolidated for all financial firms and the same standards for reserve holdings should apply to any institution that has access to direct lending from the Federal Reserve. What do you think?
Image from Wikipedia
Treasury Releases Blueprint for Stronger Regulatory Structure [U.S. Department of the Treasury]
While I was having dinner with my father last night, the Federal Reserve lowered the interest rate at which it loans money to central banks. While my family and I were discussing the economy (among a number of other more interesting topics), Ben Bernanke was actually doing something. Will the move help? It will be good for JP Morgan Chase, who will likely use the Fed’s funds borrowed at this rate to buy its collapsed rival, Bear Stearns.
Do these bail-outs send the right message? To me, in the interest of saving our faltering economy, the message to banks seems to be, “Feel free to lend to risky customers. If the worst happens, we’ll bail you out.” The message to consumers seems to be, “Buy more on credit than you can afford as long as everyone else is doing so.”
Sunday surprise: Fed steps into credit crisis [CNN Money]
On my way into work this morning, I heard that Ben Bernanke and the Federal Reserve Board cut the target rate for banks’ short-term lending to 3.5%. This makes it more worthwhile for banks to take on more risk with their money, lending it out in cases where they’ve been tight lately. The Fed announced this change between meetings, not at a meeting as normal announcements, in response to the free-fall that the world financial markets seem to be experiencing.
It will be interesting to see how the market reacts today. You could argue that if the U.S. stock market doesn’t drop 5% as it was expected to do today without the emergency rate drop, investors don’t think that this move by the Federal Reserve will help solve the economic problems.
When the Fed rate drops, so do interest rates on savings accounts. A significant drop of three quarters of a percentage point may mean it’s time to rethink saving strategies; if you can’t earn from your savings more than you are paying in interest on debt, then it may be time to forgo extra savings to pay off loans.
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