Credit card legislation gaining momentum, but not enough to beat Fed rules

Exclusive analysis for FinReg21 by Darrell Delamaide

Amid reports that banks are raising credit card fees and rates on consumers, legislation to provide consumers with greater protection is gaining some momentum in Congress – but perhaps not enough to make a difference.

After the Senate Banking Committee narrowly approved a bill from its chairman, Sen. Chris Dodd of Connecticut, just before the spring recess, the House Financial Services committee will mark up its credit card “bill of rights” next week. That bill, sponsored by Rep. Carolyn Maloney (D-N.Y.), received subcommittee approval before the recess as well.

While Maloney expressed confidence that credit card legislation would be on the president’s desk by the end of the year, it seemed doubtful that any new laws would go into effect before similar rules approved by the Federal Reserve become effective on July 1, 2010.

The final legislation is likely to mandate an implementation period of nine months (the Dodd bill) to a year (the Maloney bill). And, while the sponsors claim that their bills are tougher on credit card operators than the rules drawn up by the Fed and other banking regulators under the Federal Trade Commission Act, it’s hard to know if the final version of the legislation will differ significantly from the regulatory rules. Given the narrow partisan vote on the Senate bill in committee – it passed by 12 to 11 – the majority will have to make some concessions if the bill is to get final passage.

These Federal Reserve rules, announced in December, include many of the measures consumer advocates have sought for years:

• To protect consumers from unexpected interest charges, including increases in the rate during the first year after account opening and increases in the rate charged on pre-existing credit card balances.
• To prohibit banks from imposing interest charges using the "two-cycle" billing method.
• To require that consumers receive a reasonable amount of time to make their credit card payments.
• To prohibit the use of payment allocation methods that unfairly maximize interest charges.
• To address subprime credit cards by limiting the fees that reduce the amount of available credit.

The House bill seeks to add further protections, such as shielding cardholders from misleading terms and empowering them to set limits on their credit.

Both House and Senate bills want to limit issuance of cards to minors (the House bill’s restrictions apply to those under 18 and the Senate’s to those under 21) and call for greater enforcement of credit card protections by banking regulators.

The Dodd bill seeks to end credit card contracts that allow the issuer to raise interest rates “any time, for any reason.” It also prohibits reliance on the “universal default” concept, whereby issuers penalize cardholders if they are in arrears on any payments even if they remain current on the card account. The bill also seeks to eliminate other excessive fees and charges by prohibiting credit card companies from charging more than one over‐limit fee per billing cycle, charging a fee to allow a consumer to pay a credit card debt (“pay to pay”), and charging interest on credit card transaction fees.

If legislation is not moving fast enough to curb some credit card practices, the strings attached to the government’s bank bailout may have an impact sooner. The chairman of the Congressional Oversight Panel for the Troubled Asset Relief Program said recently that the panel is looking into increases in credit card fees and rates by TARP recipients.

However, another panel member, New York State banking superintendent Richard Neiman, told Reuters that rules on credit card policies should be left to Congress and not linked to whether banks accept TARP funds. Neiman and former New Hampshire Sen. John Sununu added a dissenting view to the last COP report, saying the scope of the report went too far afield from the panel’s core mission of evaluating TARP’s effectiveness.

But Warren has been a longtime advocate for credit card reform and has been outspoken as COP chairman, so it is likely that the panel’s May report will also recommend curbs on some credit card practices.

Parallel legislation for a financial products safety commission was also introduced in both houses of Congress last month. The new agency would monitor all forms of consumer credit, including credit cards, as well as payment systems such as debit cards.

The concept got an endorsement from President Barack Obama when he appeared last month on Jay Leno’s show. “When you buy a toaster, if it explodes in your face there's a law that says your toasters need to be safe,” Obama said. “But when you get a credit card, or you get a mortgage, there's no law on the books that says if that explodes in your face financially, somehow you're going to be protected.”

However, it remains to be seen whether this new agency is a priority for either the administration or Congress amid a welter of more pressing financial issues.