Date: 3/31/2009
LAURIE KELLMAN
Associated Press Writer
WASHINGTON (AP) — Democrats in Congress are taking a swipe at credit card issuers and their increasingly creative reasons for raising fees on strapped consumers, sparking a well-financed duel over how to crack down on alleged abuses.
Striking the right balance between getting credit moving again and protecting consumers who depend on it is a long and complex process and nowhere near complete. But lawmakers were hoping to advance consumer-friendly legislation before they head home for Easter at the end of the week and face their constituents – 12.5 million of whom are out of work.
“Right before this break coming up I thought it was a good time to try to deal with it, get it done,” said Senate Banking Committee Chairman Christopher Dodd, D-Conn.
His panel led the way Tuesday by narrowly voting to send the full Senate a bill that would ban some of the many reasons credit card issuers raise interest rates and fees on consumers, raising the hackles of industry advocates who say such limits would ultimately cost consumers more money.
“Making this credit available is a very risky business and the committee’s action today will unfortunately make it harder, not easier, for banks to continue doing so,” said American Bankers Association’s Kenneth J. Clayton.
The answer, according to some Republicans, is prosecuting predatory lenders and requiring issuers to more fully disclose agreements in language that consumers can easily understand. They point out that new rules by the Federal Reserve, designed to accomplish some of the same goals, take effect next year without punishing an industry suffering from the recession or putting credit out of reach for higher-risk borrowers.
“This legislation will take us back to an era when competition was limited, working families who needed help were denied access to credit cards and everyone paid interest rates one-third higher than today’s, regardless of whether they paid their bills on time,” said Rep. Jeb Hensarling of Texas, the top Republican on a House subcommittee that takes up the issue Wednesday.
Democrats rattle off examples of some in the industry that have exploited the needy: The college student or elderly consumer who was offered and accepted lines of credit they plainly could not afford; the economically viable consumer stunned by bigger-than-expected monthly payments, inflated under an obscurely written agreement or for hard-to-understand reasons.
Research released Tuesday by the Pew Safe Credit Cards Project exploring the online offers of the 12 largest credit card issuers — 88 percent of outstanding credit card debt — show that borrowers face tough terms on credit cards.
All 100 percent of those cards allowed the issuer to apply payments “in a manner which, according to the Federal Reserve, is likely to cause substantial monetary injury to consumers,” the research showed. A slightly smaller group — 93 percent — of cards allowed issuers to raise any interest rate at any time by changing the account agreement, Pew said.
“Disclosure is no longer enough. The credit card industry has found ways around disclosure,” said Sen. Chuck Schumer, D-N.Y. “No average consumer can hope to keep up with all the changes that have been made.”
“We should not, however, legislate by anecdote,” warned Sen. Richard Shelby, R-Ala.
Dodd’s bill — similar to the House measure to be considered Wednesday — would force the industry to comply this year with some of the same rules approved by the Fed now slated to take effect in 2010.
Dodd’s proposal, approved by the panel 12-11 on Tuesday, would bar so-called double-cycle billing, when a card issuer computes interest charges on outstanding balances from more than one billing cycle. It also would ban “universal default,” the practice of raising a cardholder’s interest rates when that consumer has problems paying other creditors. And it would prevent card issuers from changing the terms of a contract as long as the card holder pays on time.
Shelby said he supports some of those goals. But he voted against the bill, as did every other Republican on the panel, in part because he said it would prohibit card issuers from pricing according to an existing card holder’s past and potential behavior.
That, Shelby said, would amount to abandoning risk-based pricing altogether.
“All financial transactions should be based on risk. Nothing else,” Shelby said. “Risk, the ability to pay back.”
“But the rates always go up,” Dodd replied. “I don’t know of an example where risk-based pricing has rewarded a consumer.”
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On the Net:
The Senate bill is S. 414. The House version is H.R. 627. They can be accessed at http://thomas.loc.gov.
Pew Safe Credit Cards Project: http://www.pewtrusts.org/our_work_detail.aspx?id616
Copyright 2009 The Associated Press.