The more complex a regulation, the more likely it will induce gaming and unfairness.
Original sin: Complicated rules are likely to have been carefully designed from the outset, like congressional earmarks, to favor special interests. Here's an example from the 2009 Card Act.
This law contains 34 mentions of something called "open-end (not home-secured) consumer credit plans"—hereafter, OE(NHS)CCP. (Pronounce it "own-uh-skip" if that helps.) Most of the restrictions and requirements imposed by the Card Act, such as "ability to pay," hit only those cards that are OE(NHS)CCP. So, whose cards, and which ones, fit through the resulting loophole, by falling outside the definition of OEN(NHS)CCP?
According to the Fed's Regulation Z, which puts the Truth in Lending Act into practice, an OE(NHS)CCP imposes a "finance charge" (as well as meeting some other criteria). So, to avoid many regulatory requirements, avoid imposing "finance charges."
But don't assume you know what a "finance charge" is. Maybe no one does. The Fed makes this up as it goes along.
A "finance charge," according to the Fed, includes cash advance fees as well as foreign transaction fees. So, any card charging only foreign transaction fees, even if it charges nothing else, is still subject to the (roughly) 34 restrictions imposed by the Card Act. Otherwise, in the absence of other "finance charges," you're exempt from all those restrictions—and lots of others that were in effect prior to the Card Act.
Does that matter? Yes. Example:
The Card Act limits total first-year fees on an OE(NHS)CCP card to 25% of initial credit limit. Does this consistently protect consumers?
No, it's nonsense. Some cards have APR's of over 30%. Regulators have encouraged banks to make payday loans with APR's way over 100%. So, where's the logic of adding a rule to restrict first-year fees (not rates) on some (but not all!) cards to 25%? What's the logic of regulators going to court against First Premier about this, losing—and then not changing the regulation? Pure cynicism.
The absurdities at the market's top end are worse. American Express' Green and Gold charge cards impose a foreign transaction fee. Hence they are OE(NHS)CCP. And since their credit limit is zero, or may go to zero during the first year ("no preset spending limit"), Amex can't charge any first-year annual fee. Twenty-five percent of zero is zero. Amex charges substantial annual fees starting in year two.
Unlike Green and Gold, Amex's Platinum card imposes a $450 first-year fee—with no foreign transaction charges.
Amex Platinum also has no initial credit limit. Amex gets the $450 (not a "finance charge") by skipping the foreign transaction charges. It's also exempt from "ability to pay" and a lot more.
Absurd as the 25% restriction is, if it were applied to all credit cards (hence all charge cards) then the law and regulation would be less complex, much clearer and fairer. In that case, if Amex didn't want to assure these supposedly affluent Platinum customers at least $1,800 in credit for a year in return for their $450 fee, it could honor the same restriction that First Premier, Capital One and everyone else has to honor—and not charge them the $450 annual fee.
But most of the implications of the 25% fee limitation are not nearly so obvious. Would a fee imposed for every presentation of a card to an ATM constitute a "finance charge," if most of these presentations result in a cash advance (rather than, say, changing the PIN or depositing a cash payment)? The Fed says cash advance fees are finance charges. How about a fee for making payments by manual or automatic debits to a checking account—which mightn't occur if there were no extensions of credit?
Furthermore, Amex Green and Gold shouldn't be able to charge any foreign transaction fees in the first year, since these fees are capped at $0 (same math as above). But they do charge them, according to the Account Agreement. A company spokeswoman explains that having "no credit limit" means the Card Act's 25% first-year fee cap doesn't apply. I leave this to the class-action lawyers.
So, why has this weird, super-complex, mutating cancer of OE(NHS)CCP metastasized into 88 places in Reg. Z, when it's not even defined in TILA, the underlying law? What is the sense of it, what is it in aid of?
Did the exclusion of some cards, initially mostly Amex cards, from "credit card" rules result from happenstance, or an Act of God? I doubt it. Like intricate earmarks that don't name the intended beneficiary, this could accommodate some lobbyist or contributor.
Those who think that bankers are born crooked and therefore always resort to abuse and trickery should consider the possibility that we learned this at the feet of our masters, Congress and the regulators.
Andrew Kahr is a principal in Credit Builders LLC, a financial product development company, and was the founding chief executive of First Deposit, later known as Providian.