Bank of America Gets Bailout, but Will Consumers?
Distressed Credit Card Holder Shares His Woes With Lawmakers
By Z. BYRON WOLF
March 24, 2009—
In one room in Capitol Hill today, lawmakers were discussing plans to help clear American banks of the enormous debt on their balance sheets. But in another room, lawmakers were hearing from individual Americans drowning in debt of their own -- with no plan in sight for a bailout.
There is no danger that the debt carried by Douglas Corey, a 44-year-old single father from Rhode Island, is going to cripple the American economy the way toxic assets have at America's premier financial institutions.
But for Corey, that same credit that Treasury Secretary Tim Geithner and Fed Chairman Ben Bernanke want to get flowing is a big part of his own economic problems. And nobody is talking about cleansing anything from his books.
Geithner and Bernanke told Congress Tuesday about the new Obama administration plan to "cleanse bank balance sheets of troubled legacy loans and reduce the overhang of uncertainty associated with these assets," which should make it possible for banks to float more credit into the economy.
Geithner and Bernanke repeated, as they have many times this year, that propping up the banking industry and insurance giant AIG getting credit flowing were imperative to guarding the U.S. economy from even deeper doldrums.
Corey received much credit from banks over the years. But when he fell on hard times, Bank of America, which has received $45 billion in taxpayer funds to keep credit flowing, doubled his interest rate.
"Senators, I find myself in the same circumstances that many parents are facing today: few job prospects, a stack of bills and the challenge of facing off against financial goliaths. There are many of us in the middle class -- the unemployed -- who may have overstepped our budgets, but although we struggle to make our payments, we make them," Corey told a Senate subcommittee.
It all started with a mistake. Corey, who was carrying thousands of dollars in debt but would not disclose the exact amount, had had a Bank of America credit card for six years and couldn't remember missing a payment. But he was on vacation and inadvertently sent less than the minimum payment in August 2008. The next month he paid the "minimum payment" listed amount on his bill instead of the "pay this" amount. There was $125 between the two amounts listed.
Interest Rate Hikes
The month after that, in October 2008, the same month that Bank of America got its taxpayer bailout, Corey's interest rate more than doubled from 12.75 percent to 28.99 percent. His monthly interest payments, he said, went from $360 to $792 plus a $39 late payment fee.
Making matters worse, Corey -- who said he had never missed a credit card payment in 19 years -- lost his job. Bank of America would not lower the rate until he made six months of payments at the new rate.
When Corey called again in December, he said Bank of America credited back almost $800 in interest that had been charged. But when he asked for another rebate in January, he was denied. But he said he was given the opportunity to buy an increase in his credit limit for $150.
By this point, Corey had made the six months of minimum payments. Days after, he called Bank of America to get back to this old rate. They lowered his credit limit by $13,000 because Corey had not yet started a new job but the bank would not lower his interest rate.
In the meantime, Corey had also fallen behind in his mortgage payments. He has since caught up, but he told the lawmakers the burden of the higher credit card rate made things more difficult during the recession.
"As a salesperson I understand the importance of making a profit, and banks are entitled to make profit, but what is enough? Over the last six months I have paid a staggering $1,600 more in interest versus what I would have paid at 12.74 percent. Their policies and actions are having a devastating effect on consumers that are hardest hit by our country's economic hardships," Corey said.
Bank of America said it does not comment on the specifics of any particular customer.
"All I can say is that our practices are fair and balanced. The safety and soundness of our business is serving our customers needs and providing credit to creditworthy customers," said Betty Riess, a spokeswoman for Bank of America.
Sen. Sheldon Whitehouse, R-R.I., is pushing a bill that would shut predatory lenders out of bankruptcy proceedings, keeping them from getting repayment. It would also roll back a "means test" enacted as part of bankruptcy reform in 2005 that keeps wage earners over the median income from filing Chapter 7 bankruptcy.
"It would be hard to believe that a trillion-dollar industry ... would be doing this accidentally," Whitehouse said, calling the practices of credit card companies predatory.
Another witness, Adam Levitin, a professor at Georgetown, tied the taxpayer bailout of the banking industry to the debt Americans owe banks on credit.
"The federal government is effectively funding credit card loans," Levitin said of the taxpayer bailouts of banks.
"If the federal government is ultimately going to be the owner of credit card loans, it should have a say in the terms of those loans," Levitin argued.
Saving Credit Card Holders?
Sen. Dick Durbin, D-Ill., talked at the hearing about his proposal to cap credit card interest rates at 36 percent -- a similar cap is in place for members of the military.
Another idea floated by Democrats is the so-called credit cardholders bill of rights, which passed the House of Representatives in 2008 but not the Senate. It could see action again this year and would guard against companies imposing arbitrary rate increases and excessive fees as well as requiring more disclosure from lenders on accounts.
Durbin, at the hearing today, said most cardholders don't realize that paying just the minimum amount can, in some instances, never pay down the credit card debt.
"The minimum monthly payment is a life sentence to this debt that they can never get out from under," Durbin said.
Even witnesses and lawmakers who argued against the government meddling in the credit card industry at this hearing had stories about changing interest rates. Sen. Jeff Sessions, R-Ala., said when his mother died, he neglected to pay her $25 credit card bill on time and ended up paying a $40 late fee.
David John of the Heritage Foundation argued against any new laws to protect consumers but said that he had missed a payment by a day only to see his rate double. He said he had talked the company into lowering the rate and now pays online instead of through the postal service.
John said more rules would hurt low-income and first-time borrowers, who rely on credit, because the rules would drive more reputable lenders out of that market.
"They're going to raise their credit standards so fewer and fewer people are going to qualify for these types of products," he said.
ABC has contacted Bank of America to comment on Corey's testimony. Meanwhile, Bank of America CEO Ken Lewis told the Charlotte News and Observer that he hopes the bank will pay back taxpayers early for the $45 billion in TARP funds accepted by Bank of America, perhaps by the end of 2009. Lewis said he hopes Bank of America will make a $30 billion profit in 2011.
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