Debit Cards and Colleges; An Unholy Alliance

Colleges are courting the Devil - the Debit Card Devil. Debt counseling and money management are urgently needed on Campus! Hard pressed for funds, Colleges are resorting to "quiet" side deals to the detriment of its students. By this time most students are aware of some of the traps in credit cards, especially the killer default interest rates. The implication or at least the inference drawn by most people is that Debit Cards Are Safe:. THEY'RE NOT!

During the summer break, students and their parents, guardians, sponsors etc. should pay attention to the increasing use of, and demand for, Debit Cards on College Campuses by the Colleges themselves. The furor over credit card interest and fees has quieted (for now) but a more insidious replacement has arisen; Debit Cards.

A PIRG study, demonstrates that debit card using students have traded a headache for an upset stomach (I realize that shows my age but...). I was a banker for 18 years and ran failed banks and S&Ls for FSLIC and then FDIC. That part of me wants to delve into the extent the colleges have accepted payoffs for signing contracts with Debit Card Issuers that expose their students to legitimized financial crimes; transaction fees, overdraft fees, annual fees, a fee for being late paying a fee...

The Consumer Finance Protection Board ("CFPB") should jump into this mess but it has its hands full, especially with a Congress beholding to the Banking industry. In the meantime States' AGs could take up the fight. It will be easier than the Student Loan problem which is not getting any better in the near and maybe distant future. Here there are no issues with Federal agencies being the card issuers.

Every college, with an agreement with a debit card issuer, should be forced as part of disclosure regulations to explain, in plain English, with documentation provided, how much the college is receiving and what "arrangements" were made with the administration, development office, and financial aid office for starters.

Oh, and maybe, as a mandatory Freshman year course, all colleges should have a 1 credit course in financial management covering topics like budgeting, all forms of plastic, the full cost of attending school, and the probable length of time it will take to pay back student loans. In fact, maybe the college should have to credit each debit card user with student loans, at least one-half of the fees the college received to the Student's student loans

Author's Copyright by Richard Isacoff, Esq, July 2012

rii@isacofflaw.com
http://www.isacofflaw.com/

Interesting Interest Rates

30 Year Home Mortgage Rate Hits 17% Prime Rate at 16%+ Savings account interest reaches 12% Ancient post depression history NO - 1982

The graph above shows the history of the Prime Rate (interest rate charged to a bank's least risky and best customers) - compare those rates to what you pay for credit cards, auto loans, and mortgages, for a real eye-opener

Here is a little chart of the Fed Funds Rate (the interest rate the Federal Reserve Banks charge member Banks to borrow - single day loans), the 30 Year Mortgage Rate, the Daily Savings Account Rate, and the 1 Year CD Rate (all averaged for the respective year) :

1982: Fed Funds 12.25% Mortgage 17% Savings 12%

1989: Fed Funds 9.17% Mortgage 11% Savings 8.5%

1995: Fed Funds 5.9% Mortgage 7.9% Savings 4.75% 1 Year CD 7%

2000:Fed Funds 6.42% Mortgage 8.1% Savings 5.5% 1 Year CD 6.625%

2005:Fed Funds 3.33% Mortgage 5.9% Savings 2.35% 1 Year CD 3.25

2007:Fed Funds 5.04% Mortgage 6.3% Savings 4.25% 1 Year CD 4.9%

2008:Fed Funds 1.85% Mortgage 6% Savings 2.5% 1 Year CD 2.5%

2009:Fed Funds .25% Mortgage 5.1% Savings 0.5% 1 Year CD 2%

Why are all of the numbers important? They show the level of inflation, the cost to consumers for borrowing, and perhaps most significantly, the profit the banks are making on money. For example, in 1982, while mortgages were 17% plus points, banks were being charged 12.25% by the Fed and paying 12% to depositors. Keep in mind that a deposit in a bank is nothing more than a customers loan to the bank for the rate of interest being paid on the savings account or CD.

At that time, there was a 5% margin between the cost of money and the rate that could be charged to consumers for a mortgage. The MARGIN narrowed to 2%+/- for the next 27 years; then at the height of the crisis, the margin grew to 5% again. So, in inflation and in recession, the Banks made the same margin. Rates were so stable that savings bank bankers were called "3-6-3" bankers: take it in at 3% (savings deposits) lend it out at 6% (mortgage) and go home at 3 (afternoon) (That was the time before securitization of mortgages).

There are two lessons to be gleaned from the figures other than the fact that Banks make money: 1. When the Cost of Funds (to Banks) is low Banks charge what the market will bear. It is a "free market", unlike the regulated days of the 60s and 70s, and Banks can take advantage of this era. 2. The current interest rates are so low, that as to Banks, there is almost free money. This will not stay so cheap for Banks.

With the interest rates so low, and Banks making 5% on mortgages, and more than 3% on Prime Interest Rate loans (the rate charged to the best customers (those with no risk of default - like GM, right?) why are Banks charging 19%-30% for credit card debt? This is the primary debt for consumers beyond a mortgage. The Banks are making an obscene 15% to 25%+ on the average borrower's credit card balance!!

What is worse, in anticipation of the new laws which prohibit card issuers from arbitrarily raising interest rates because of a one time-one day late payment, or because a payment was a day late on A DIFFERENT CARD, Interest Rates on credit cards have jumped 10%-20% and credit limits have been reduced by 50%-75%.

The next post will deal with the profits being made by banks in real dollar terms. Why is any of this important? The so-called recovery is only in the financial markets. Unemployment is soaring, the dollar is weak (to be explained next post) and the average consumer has seen no relief. Oh, and in case anyone has missed the news, foreclosures are still going strong.

Author's Copyright by Richard I. Isacoff, Esq, November 2009

http://www.isacofflaw.com/

They're Back!!! (With a Vengence)

Our favorite charities are back in business, but this time not asking for handouts - just taking the money from us. CitiBank/CitiFinancial/CitiGroup (well, you get the idea), Bank of America, JPMorgan Chase, Goldman Sachs, Smith Barney (whatever the full name is now), and a cast of other "BANKS", reported huge profits for the 2nd quarter or 2009. That must mean that the financial crisis that threatened life on the planet is now past! Well, yes and no or maybe, but we are not at all certain yet.

It is true that there were record earnings at some of these banks and they all did great, but it is where that got there profits that is disturbing, more so than the fact that after pleading for a bailout, they are ready to give out huge bonuses again. Little of the profits came from "banking" as consumers and small to mid-size businesses understand the term. Bank of America and CitiXxx had huge one-time profits from the sale of assets and from "investment banking". Ah ha you say - "banking is how they made money"! Not so quick grasshopper.

"Investment banking" is to "banking" (as most of us understand the word) as Burger King(R) is to a cooking a barbecued hamburger in your back yard. Char-broiled but to a different scale. Buying and selling securities, selling short, trading in commodities, dealing in derivatives, buying other businesses - and selling its assets at a profit, is what investment banking is. Making loans to small and mid-size business, or to people (unclean) is what it IS NOT.

Keep in mind that Goldman Sachs was one of the top firms that put mortgage loans into packages (securitization) and sold them at huge profits. When the value of mortgage-backed securities (MBS) began to crash Goldman "sold short. They "gambled" that the price would go down FAST and that they would fill the order to sell MBSs at the lower price. They made a small fortune while the rest of us lost millions in our 401Ks, IRAs, and had all credit stopped.

So, almost none of the money received from the government and from other financial incentives given during the crisis, went to new home mortgages, was used to modify existing mortgages to stop foreclosures, was used to keep the "mom-and pop shops" in business, or was loaned to small and mid-size firms to help them through the cycle so they would not have to lay-off 50% of their staffs, creating a nearly 10% unemployment rate. The rate of job losses is slowing, but still increasing in numbers.

The promised home loan modification process is not yet functioning. Mortgage modifications are more difficult to get than they were a month ago. Businesses keep laying-off workers because they have no business because other companies have had to minimize operations and they have reduced staff which has caused more foreclosures which has killed the building trades which has caused bankruptcies which has prevented many companies from being paid which has...

There are those economists and financial types who say now - "see, the free-market system is working". They were many of the same experts who cried foul at the bailout of AIG and Bank of America and Citi. The "free-market system" needed some help because of the lack of regulation in the late '90s and through 2007 that led to the crash from which we are trying to recover.

We have reached the point that we now know you cannot put CheezeWiz(R) back into the can.

Author's Copyright by Richard I. Isacoff, Esq., July 2009

http://www.isacofflaw.com/
rii@isacofflaw.com