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Why you'll be paying less, and more, to the bank

The Federal Reserve placed a soft cap on credit card late fees last week, the latest salvo in an ongoing battle between Congress and corporations that squeeze consumers with punishing surcharges and fees.  It's a small victory for consumers, but on many other fronts in this war the news isn't nearly so good.  When you consider the way new rules are impacting checking accounts and credit card interest rates, and Congress' incredible unwillingness to take a stand on 401(k) retirement account fees,  it seems consumers are getting nowhere fast.

The rule imposing a $25 limit on credit card late fees isn't bad, although it is ironically dogged by fine print. When Congress passed the Credit Card Accountability and Responsibility (CARD) Act last year, it directed the Federal Reserve to take a crack at making late fees fairer.  The Fed issued its new rule last week.

Credit card issuers had been charging $30 to $40 per month when consumers were even a day late paying their bills. Starting in August, the top charge in most cases will be $25, saving consumers from $5 to $15. Not bad, but hardly the signal of a new age in consumer protection. And even that small victory comes with asterisks. Consumers who are late more than once can face a higher late charge. And banks can appeal to the Fed to raise the fee, as long as they justify the costs.

The Fed rule does offer one piece of unqualified good news for consumers.  Inactivity fees will now be banned. This is important, because the appearance of inactivity fees in recent months led to major confusion for consumers. For years, experts have advised cardholders never to close a credit card account because of negative effects on their credit scores.  The new fees suggested that consumers might be better off closing the cards and taking the score hit.  Now, the old advice is once again valid. Make note, however: Banks can still add an annual fee to your cards, in which case, card holders may be better off closing the accounts to save the money.

The good news ends there, however. Since the passage of the CARD Act last year, half of U.S. cardholders saw their interest rate rise or their credit limit fall, millions through no fault of their credit behavior. Consumer groups had asked the Fed to force banks to roll back those changes. On this issue, the Fed punted, saying only that it would encourage banks to "re-evaluate" the changes.

Don't hold your breath.

The American Bankers Association had a generally positive reaction to the news.

“This brings to a close the most sweeping overhaul of the industry since the invention of credit cards. Taken together, the new rules will provide consumers with numerous tools for better management of their credit costs,” said Kenneth J. Clayton, a senior vice president with the trade group.  And the Federal Reserve Governor Elizabeth Duke said in a release that the new rules require that “late payment and other penalty fees be assessed in a way that is fairer and generally less costly for consumers."

But consumers groups had a much more mixed reaction.

"This is tepid," said Kathleen Day, spokeswoman for the Center for Responsible Lending.  "It's marginally better for consumers, but why not make it great for consumers? ... Once again, the Fed just cannot stand to take a stand. (The Fed) always likes to split the difference. They can't ruffle a few feathers. They are trying to be popular with everybody, rather than do their job as a regulator. How is that working for them?"

That reluctance will almost certainly be tested during the next 12 months, when consumers slowly begin to lose free access to checking accounts. Big banks continue to rattle their sabers about this issue, which threatens to cause a gigantic shift in the American banking landscape. With billions in overdraft fee revenue disappearing when those new rules kick in on July 1, banks have begun testing various fee-based checking accounts.  Soon, simply parking $1,000 in an account or employing direct deposit for your payment will no longer earn a consumer free checking at many banks.

It's been a long time since consumers paid for checking accounts – fee-based accounts went out of favor during the early 1990s --  and the banking world has changed dramatically since.  Today, it's nearly impossible to actively participate in the economy without checking accounts, debit cards, online bill payment and all the other functions that stem from checking accounts. But some consumers who are faced with a $10 monthly fee might join the ranks of the unbanked, using money orders and cash to move around the economy.  Annual fees could also hasten the movement to smaller banks or credit unions, which already has picked up steam. Last year, more than 1 million consumers switched to credit unions, according to the Credit Union National Association. And a study by found that 39 of the top 50 credit unions offer free checking.

Banks, naturally, will give their largest customers a break.  Use multiple services at a bank and you might enjoy a fee waiver. Rather ominously, the Wall Street Journal reported recently that a Bank of America executive told analysts in April: "Customers will have a choice,... (of) bringing more relationships to us or paying a maintenance fee."

It is undeniable that banks are losing a huge chunk of money as easy overdraft fees disappear. And it's not necessarily bad that banks will be forced to charge transparent, up-front fees rather than back-end, gotcha fees to make their money. It's much more natural for consumers to compare monthly fees than overdraft fees, so the change should be positive for competition.

Switching checking accounts is non-trivial, however, and many consumers will likely just pay up. And of course, the devil is in the disclosures. How will banks communicate the new charges and the new hoops consumers must jump through to avoid them?  At the moment, it will be the Fed's job to make sure the transition is orderly and fair.

Congress could get involved, but if history serves as any guide, federal legislation and Washington's slow-moving ways don't work well for regulating granular issues like monthly fees. Credit card late fees are one good example, but the issues surrounding 401(k) fees take the cake.

It's essentially impossible for a U.S. worker enrolled in a 401(k) plan to determine how much he or she paid in fees on their 401(k) investments during a given year. But the cost can be draining 20 percent or more of a worker's retirement kitty.

The charges are disclosed in oblique ways, such as the common "expense ratio," which is expressed only as a percent to consumers.  Back in 2006, Congress' General Accounting Office found that the vast majority of workers don't understand what they are paying in retirement fees.

There are numerous measures of the cost of unexplained fees, but here's one used in that GAO report: a 45-year old worker who puts aside money in a 401(k) and overpays by just 1 percent in fees will see his available retirement funds shrink 17 percent by age 65. Here's a simpler way to look at it: if a money management company takes 1 percent of your money for 20 years, you'll have almost 20 percent less than you should 20 years later. Obviously, the longer you pay into 401(k) plans, the deeper the cuts are.  A 25-year-old could see more than one-third of his or her retirement money sucked out by Wall Street.

For years, Rep. George Miller, D-Calif., has sponsored legislation that would force investment firms to make those fees clear for consumers. Note, it would not limit the fees; it would merely make them more obvious. And every year, dutifully, Congress finds a way to ignore Miller's proposal.

This year, it looked like the legislation had a real shot. It was attached to the American Jobs and Closing Tax Loopholes Act that was passed by the House of Representatives earlier this year. But the 401 (k) portion was yanked two weeks ago by members of the Senate Finance Committee, which is considering the companion Senate bill.

"(Democratic Chairman Max) Baucus threw it out like a paper airplane," said John Wasik, author of several books on investing, including "The Kitchen Table Investor." "He didn't say why, but I think it was a bargaining chip."  

Exasperated, Miller sent a pie to each committee member last week with a one-third slice removed.

"At a time when the middle class has already lost too much of their retirement savings because of the financial scandals, they shouldn't also be losing out because of unconscionable hidden fees," Miller wrote in a letter that accompanied the pies.  "I urge you to stop Wall Street from hiding 401(k) fees by restoring the House disclosure provisions. The 50 million Americans with a 401(k)-style plan deserve a fighting chance to keep more of their retirement pie."

Clearly, the Senate doesn't agree.

Wasik said the Department of Labor, which regulates retirement accounts, is planning to come out with its own set of 401(k) fee disclosure rules within the next few months.  He's optimistic that those rules will deal with many of his concerns, but until they are published and take effect, U.S. savers will remain largely in the dark.

Which brings us back to the point at hand: Credit card fees, checking account fees, retirement fees and most other hidden charges are simply too elusive for Congressional legislation.  You wouldn't expect Congress to legislate the details of an off-shore oil drill's blow-out preventer -- only a regulator with specialized skills and the ability to act fast can provide the needed oversight.  And only an agency with the ability to set and adjust rules on the fly can prevent the gushing of Americans' money out of the checking accounts and retirement accounts to hidden fees.

That the idea behind the Consumer Financial Protection Bureau, which is part of the financial reform legislation that's now in the stretch run in Washington.  Final details about the agency's reach and influence are still in flux, but as currently constituted, it would have the ability to review the credit card and checking account rules issued by the Fed, according to Day, from the Center for Responsible Lending.  It could, for example, lower that $25 maximum credit card late fee.

"It's very inefficient to get all this stuff through Congress, and then industry just finds its way around it anyway," Day said.  "That's a bad way to stamp out bad products.  We need a new consumer protection agency."

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