Senate OKs bill to rein in credit card practices

By ANNE FLAHERTY

WASHINGTON
The Senate voted overwhelmingly on Tuesday to rein in credit card rate increases and excessive fees, hoping to give voters some breathing room amid a recession that has left hundreds of thousands of Americans jobless or facing foreclosure.

The House was on track to pass the measure as early as Wednesday, paving the way for President Barack Obama to see the bill on his desk by week's end.

"This is a victory for every American consumer who has ever suffered at the hands of a credit card company," said Sen. Christopher Dodd, D-Conn., chairman of the Banking Committee. The bill passed the Senate 90-5.

If enacted into law as expected, the credit card industry would have nine months to change the way it does business: Lenders would have to post their credit card agreements on the Internet and let customers pay their bills online or by phone without an added fee. They'd also have to give consumers a chance to spare themselves from over-the-limit fees and provide 45 days notice and an explanation before interest rates are increased.

Some of these changes are already on track to take effect in July 2010, under new rules being imposed by the Federal Reserve. But the Senate bill would put these changes into law and go further in restricting the types of bank fees and who can get a card.

For example, the Senate bill requires those under 21 who seek a credit card to prove first that they can repay the money or that a parent or guardian is willing to pay off their debt if they default.

Bankers warned the measure would restrict credit at a time when Americans need it most. They defended their existing interest rates and fees on grounds that their business -- lending money to consumers with no collateral and little more than a promise to pay it back -- is very risky.

"What has been a short-term revolving unsecured loan will now become a medium-term unsecured loan, which is significantly more risky," said Edward Yingling, president and CEO of the American Bankers Association.

"It is a fundamental rule of lending that an increase in risk means that less credit will be available and that the credit that is available will often have a higher interest rate," Yingling added.

Voting against the Senate measure were GOP Sens. Lamar Alexander of Tennessee, Robert Bennett of Utah, Jon Kyl of Arizona and John Thune of South Dakota, as well as Democratic Sen. Tim Johnson of South Dakota.

But other senators didn't want to face voters in the 2010 election without proof that they are listening to constituents crushed by foreclosure rates and joblessness. Recent reports show that the number of foreclosures jumped 32 percent in April compared with the same month last year, while the jobless rate that month rose to 8.9 percent.

The legislation would not cap interest rates as some lawmakers had hoped. It also wouldn't prevent lenders from finding new ways to drain customers' bank accounts or keep consumers from spending money they don't have.

But it would give spenders more flexibility and outlaw many of the surprise costs associated with credit cards at a time when money is tight in most households. For example, under the bill, a cardholder would have to opt to be allowed to go over a credit limit. If customers don't agree and the bank authorizes a charge that would push them over their limit, the lender couldn't levy an over-limit fee.

Another boon for consumers is limiting a practice known as "universal default," when a lender sharply increases a cardholder's interest rate on an existing balance because the customer is late paying that bill or other, unrelated bills. Under the new legislation, a customer would have to be more than 60 days behind on a payment before seeing a rate increase on an existing balance.

Even then, the credit card company would be required to restore the previous, lower rate after six months if the cardholder pays the minimum balance on time.

House Democratic leaders said they planned to move quickly. Last month, the House approved, by 357-70, a similar credit card bill by Rep. Carolyn Maloney, D-N.Y.

Complicating the issue somewhat was a measure added to the Senate bill that would allow people to carry loaded guns in national parks and wildlife refuges. That provision, sponsored by Sen. Tom Coburn, R-Okla., passed, 67-29.

House Democratic Leader Steny Hoyer, D-Md., told reporters on Tuesday that the House might vote separately on the gun proposal so as not to bog down the credit card overhaul.

If the two bills are passed separately as expected, they would be rejoined before being sent to the president as a single bill, said Hoyer, D-Md.



Credit-Card Rage
By Jessica Silver-Greenberg

David Giantomasi says he vigilantly paid his credit-card bills each month. Even if he could only make the minimum payment, he made sure to get all his monthly payments squared away. So he was shocked when the interest rate on his Chase credit card suddenly jumped to 19.99% from 7.99%. When Giantomasi called the card issuer to demand an explanation, he was enraged. He was told that overall turmoil in the credit markets meant higher rates for a number of customers.

Chase won't comment on individual cardholder accounts. "I felt completely helpless," Giantomasi recalls. "These credit-card companies are beyond the law and should be more tightly regulated."

Giantomasi isn't alone in his desire to see the credit-card industry reined in. Lured by bank come-ons that sold a debt-fueled lifestyle of lavish vacations, sumptuous restaurant meals, and carefree shopping sprees, consumers piled up unprecedented debt during the credit boom: Consumer credit-card debt has skyrocketed to almost $1 trillion, double what it was in 1996. Unpaid credit-card debt is on the rise, too, up 22% in June from a year earlier, according to reports by the major credit-card issuers, American Express (AXP), Bank of America (BAC), Capital One Financial (COF), JPMorgan Chase (JPM), Citigroup (C), and Discover (DFS). But when the housing bubble popped and the economy slammed on its brakes, suddenly many free-spending consumers were left holding the bag.

Now those same cardholders are rushing in to support rule changes proposed by the Federal Reserve Board back in May, to limit unfair or deceptive credit-card practices

New Rules on Rates
The proposed rules, which could be implemented as early as yearend, would represent the first time in over 20 years that a government agency has recommended banning certain credit-card industry practices. Regulation has been left largely to the card issuers, and the Fed and other banking regulators tended to stick to forcing card companies to disclose terms and conditions clearly to customers.

Under the proposed rules, though, banks would no longer be able to hike up interest rates on existing debt, as Giantomasi experienced. Card companies would have to split required monthly payments evenly between the high- and low-rate balances on a card. (Currently, card companies allocate payments to the lowest interest-rate balance first, which leaves a lot of cardholders unable to make a dent in balances at higher interest rates. That's a recipe for rapidly accruing interest and a feeling of helplessness about managing debt, say cardholders.) And consumers would get a longer grace period before they're slammed with penalty fees.

Many consumers say it's about time. The rules were proposed just as the U.S. economy started to tank, when many card holders were falling further behind on their payments at the same time home equity lines of credit were drying up and jobs were disappearing. Regulatory agencies came under fire to act, and Senator Carl Levin (D-Mich.) held hearings this spring to examine card company billing practices.

The proposed regulations generated more than 56,000 comments from individuals, banks, credit unions, and industry associations. That's a record number of submissions, says the Fed, beating the previous record of 45,000 submissions for a proposal that would have let financial firms assume the role of real estate brokers

Venting Rage
"Something needs to be changed to keep credit-card companies from taking advantage of people," consumer Paul Wolcott posted to the Fed comment board. Another cardholder, Cleve Prince, wrote that his credit-card debt drove him to the brink: "Credit-card companies had increased my interest rates on each one of my cards so that my only recourse was to file for bankruptcy."

Consumer advocacy organizations encouraged their members to use the public comment period as a forum to air their grievances and push for change. Consumers Union, a nonprofit consumer-rights organization, encouraged its members to write in. The group set a goal of generating 10,000 comments. "Look how many people agree," says Mark Hickney, a small business owner from Dallas.

Of course, not everyone agrees. The five largest credit-card issuing banks say that as much as consumer may enjoy lashing out, they're likely to regret the end result of the rule changes. The new regulations will curtail their ability to "price for risk," the banks say: By being able to change the rates they charge cardholders based on payment history, outstanding debt, and credit score, banks can price in the risk that each individual consumer won't be able to pay off his debt. The alternative is to cut back on low-interest offers for all cardholders, the banks say.

Banks Call Rules Misguided
"We have very real concerns that the proposal will result in higher costs for cardholders across the board," says Peter Garuccio, a spokesman for the American Bankers Assn. (ABA). If the Fed rules rob them of the right to price for risk, all consumers will suffer with higher rates overall and worse teaser rates.

In a response posted to the Fed's Web site, Bank of America, the nation's largest credit-card issuing company, summarized the industry's attitude toward the new rules: "We believe the practices the agencies are mandating are far from ideal, from the perspective of consumers, banks, and the financial system as a whole." Bank representatives held a series of private meetings with the Fed and the ABA. According to notes from the meeting on the Fed site, industry officials reiterated that risk-based pricing actually keeps rates down overall for the majority of consumers.

Consumer groups counter that the rule changes are fairly minor compared with the reforms they would like to see.

Once the 75-day comment period ends, the Fed will decide what rules to approve. Sandra F. Braunstein, who heads the Fed's consumer and community affairs division, told congressional lawmakers in April that she thought the proposal would be hammered out and finalized by the end of the year.