US credit card issuers are facing economic and political headwinds as consumer rights are now being pushed by politicians as a way of getting credit card reforms passed into law. Charles Davis reports on the new legislative onslaught facing the industry, already reeling from credit losses.
A perfect storm of consumer outrage and political pressure has renewed US Congressional interest in an omnibus credit card reform measure, which suddenly gained momentum in a Senate hearing on 12 February.
The bill’s author, Senate banking committee chairman Chris Dodd, a Democrat from Connecticut, sounded less enthusiastic about the bill than several other committee members. Ironically, this perhaps indicates that the committee’s measures may now be subject to political pressures far greater than those when the idea first surfaced months ago. Several high-ranking members of the committee pleaded with Dodd to act quickly, and more aggressively than ever, in reforming a host of credit card industry practices.
Urging for consumer protection
“Our country is in very serious credit card debt,” said Senator Daniel Akaka, a Democrat from Hawaii. “Not enough has been done to protect consumers and ensure they are able to properly manage their credit cards. We must do more to educate, protect, and empower consumers.”
Akaka said he will soon reintroduce a related credit card bill that would require issuers to show consumers how long it would take to pay off their debt when making only minimum payments and to direct them to a stable of government-approved credit counsellors.
New Jersey Democrat Senator Robert Menendez said he too has introduced a credit card reform bill, which would require consumers under 21 to give consent before being sent card solicitations, ban universal default entirely and forbid issuers from instituting retroactive rate increases. The bill would prohibit penalty interest rates higher than seven percentage points above the cardholders’ previous rate.
“Defaults are rising. Delinquencies are at a six-year high. We must stop this dangerous cycle,” Menendez said.
Fees and rates under scrutiny
As for Dodd, he re-filed his reform bill before the hearing, which would restrict how card companies increase interest rates and charge fees. The bill also seeks to ban the raising of interest rates on existing debt, and prohibit companies from charging interest on penalty fees.
Dodd predicted a bruising battle over card reform, even in the face of widespread public outrage over card industry practices and the toxic reaction among broad, bipartisan lines in Congress over the banking industry’s bail-out.
“You can see this is not going to be one of those where everyone is going to hold hands and lead in Kumbaya,” he said.
In many important respects, Dodd’s bill mirrors the regulations issued by the Federal Reserve Board in late 2008 – but those measures are not set to take effect until 2010.
Dodd, and a clear majority of the committee, felt the timetable was insufficient given the severity of the economic downturn gripping the nation.
Interchange rates back on the table
Much to the chagrin of the cards industry, Dodd unexpectedly put another contentious issue on the table: interchange rates. Dodd’s bill would require the Government Accountability Office to study interchange fees and their effects on merchants and consumers.
Dodd said interchange rates may ramp up questionable issuance practices, as issuers stand to win by bringing new card volumes into the system, leading to risky decision making. The discussion was the most pointed to date on interchange, an issue the industry long has feared would invite greater regulation.
Even more troubling for the industry are the subtle shifts within the Senate banking committee, which would seem to greatly improve the political odds in favour of the bill’s passage. Not only have Democrats gained a larger majority in Congress, but also longtime industry defender Senator Tom Carper, a Democrat from card-friendly Delaware, left the banking committee.
Public sentiment at fever pitch
The deck is stacked politically just as public sentiment in favour of reform has reached a fever pitch, with angry consumers facing increasing unemployment rates and a jittery macroeconomic picture. Dodd clearly has his hand on the political pulse.
His opening statement included this broadside: “At a time when our economy is in crisis and consumers are struggling, credit card companies in too many cases are gouging them, hiking interest rates on consumers who consistently pay on time and meet the terms of their credit card agreements.
“They impose penalty interest rates, some as high as 32 percent, and many contain clauses allowing them to change the terms of the agreement, including the interest rate at any time for any reason. These practices can mean mountains of debt for families and financial ruin in far too many cases.”
Dodd’s bill contains dozens of provisions, which would go further than the Fed’s rules in many respects. The bill allows customers who close their accounts to pay under the terms existing at the time the account is closed; requires interest rate increases to apply only to future credit card debt; and prohibits issuers from setting early morning deadlines for credit card payments.
It also prohibits interest charges on debt paid on time; requires credit card statements to be mailed 21 days before the bill is due rather than the current 14; and prohibits issuers from charging a fee to allow a credit card holder to pay a credit card debt, whether payment is by mail, telephone, electronic transfer, or otherwise.
The sheer number of credit card reform bills ricocheting around the halls of Congress may overwhelm industry efforts to succeed in fighting them all. In addition to the trio of new or reintroduced bills, there is the Credit Cardholders’ Bill of Rights, which Representative Carolyn Maloney, a Democrat from New York, reintroduced in January, and Senator Carl Levin, a Democrat from Michigan, is expected to reintroduce.
Consumer groups, sensing the opportunity, are pressing lawmakers to combine their efforts in an all-encompassing push for wholesale reforms.
The once-predictable Republican opposition to card reform seems to be weakening in the face of an angry public, so industry allies are harder than ever to find.