Our Credit World Without Personal Responsibility

The New York Times wrote an irritating editorial last week that epitomizes the attitude American culture is taking towards personal responsibility. One of the proposed regulatory changes is a Consumer Financial Protection Agency to stop “abusive” practices by firms offering financial products. The CARD Act has already been passed into law, restricting credit card companies operating practices, and raising the cost of credit. And the NYT wants more.

The NYT argues that banks are being abusive with overdraft charges and should be more transparent with their notification practices. They argue that it is wrong to charge high fees when people over spend their accounts. They cite stats that say banks will collect more than $38 billion this year in overdraft charges. But why is this a problem?

Do banks list in contract terms for bank accounts when people sign up what the overdraft charges are? Yes.

Do banks send out notifications when the terms of contracts change, giving people a chance to move banks if they don’t like new rules? Yes.

Should the people who fail to keep track of their finances and overspend their accounts be held personally responsible for their own errors? Yes.

Why are banks the victims here? It isn’t just this, it’s the whole attack on abusive practices from banks. There are times when banks break the law, or when product managers bully clients, sure. Those are criminal acts. Punish them accordingly. But just because a bank charges $35 if you overdraft your account doesn’t mean they are suddenly in the wrong.

The NYT tells this story to make its point:

One college student whose bank records were analyzed by the center made seven small purchases including coffee and school supplies that totaled $16.55 and was hit with overdraft fees that totaled $245.

The Times would like to paint the bank as the one in the wrong here for the high charges by painting their “evil” corporate ways against the backdrop of someone “just getting coffee” and the all important “school supplies”. But what is the reality? Person A did not have enough money in Bank account Z. Person A committed the money of Bank Z to various retail outlets. Bank Z, following the agreement they had with Person A from the start, paid the retail businesses, but charged fees because they were giving up their own money instead of Person A’s money. In cold hard facts the bank isn’t wrong, though anecdotally they look like Mr. Potter.

The Times supports laws that would require banks to warn customers in real time when a debit charge to their account overdrafts. They support legislation that would force banks into more transparency. But is using the power of the state the right way to go? No, that will just force banks to do the minimum necessary and allow people to not have to take charge of their own finances? With online banking how hard is it to check the level of your checking account each morning before you head off on your day?

If more transparency and better notification of pending overdraft fees is really important, then a grassroots effort can make that known to banks. Banks can use this as a competitive advantage. Very few laws have been passed forcing companies to “Go Green” but they are doing it anyway to gain customers. The same can happen here, with Citigroup trying to win back customers by offering services like The Times wants shoved down everyone’s throats. Then Bank of America and Wells Fargo would follow suit to keep customers from leaving them. And if customers didn’t flock to Citigroup, then maybe its because the laws The NYT’s likes really don’t matter that much to everyone. So why would we want the supposedly all knowing state to force us into them, likely raising the cost of checking accounts? It is all just so ridiculous.