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.

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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.