July 5, 2008

Credit Card Overhauls Seem Likely

By JANE BIRNBAUM

Consumer advocates say regulation of the credit card industry has long been without teeth. But as card holders struggle under the weight of big balances, high interest rates and fees, their pleas to lawmakers for help may well mean that the industry will face some significant regulation by early next year.

Regulators are saying, “We missed the mortgage thing by not acting quickly enough,” said Edmund Mierzwinski, federal consumer program director for the Public Interest Research Group.

The regulators are saying, “People are losing their homes because the banks were unfair. Now we’ve got the credit card industry. And people will end up in debt for the rest of their lives, and maybe we ought to do something.”

Travis B. Plunkett, legislative director of the Consumer Federation of America in Washington, agreed that the mood had changed and said he was “virtually sure” there would be some regulation soon. “The question,” he said, “is how meaningful it will be.”

Until now, credit card companies have primarily been required to disclose their lending terms to borrowers. But consumer advocates have for years been saying that disclosure is not enough.

They have been pushing the federal government to take firmer control over the industry — specifically, spelling out the circumstances under which lenders can raise and calculate interest rates and impose fees.

The proposed regulations take a big step in that direction. But they are strongly opposed by the industry, which has long beat back any regulatory constraints.

The proposals for banks and other general-use credit card issuers are coming from a couple of directions. Working with the Office of Thrift Supervision and the National Credit Union Administration, the Federal Reserve introduced its proposals in early May. It has asked for comments and expects to formalize proposals by the end of the year.

At the same time, the legislation most likely to succeed in both the House and Senate sets similar rules on consumers’ behalf. Representative Carolyn B. Maloney, the Democrat of New York who wrote the House bill, and Senator Christopher J. Dodd, the Democrat of Connecticut behind the Senate measure, said they planned to bring their measures to the floor for votes before Congress adjourns in September.

The House and Senate bills as well as the Federal Reserve require that lenders apply payments to the debt with the highest interest rate. All would ban “double cycle” billing, in which interest is charged on some already repaid debt, and all would extend the time required, currently 14 days, between a statement mailing and payment due date.

All the measures would, under various conditions, prohibit lenders from raising interest rates on existing debt. The central bank proposes that except for increases caused by changes in stated variable and introductory offers, lenders may increase interest rates only if minimum payments are more than 30 days late.

Only the Dodd bill prohibits charges for paying by mail, phone or online, and restricts marketing and offers of credit to consumers under 21.

The credit card industry continues to stand firm against regulation, especially law made by Congress. John G. Finneran Jr., the general counsel at Capital One Financial Corporation, testified in House hearings in March that “it would be unwise — especially at this time — to enact broad legislation that sets payment formulas in statute, redefines critical product features and limits the tools of risk management for consumer credit.”

Ken Clayton, senior vice president for card policy at the American Bankers Association, in Washington, contended in an interview that “regulation can have unintended consequences, including reductions of popular low introductory-rate balance transfer offers and higher prices for prime borrowers.” Fewer balance transfer offers could stifle job creation by entrepreneurs who use credit cards to borrow at the lowest possible cost, he added.

According to Cardtrak.com, a research company in Naples, Fla., the median balance among the approximately 53 million households carrying general-use card debt from month to month is about $6,700, up from $5,900 five years ago. And with the economy slowing and unemployment rising, growing numbers of card holders are unable to keep up with their payments.

Representative Barney Frank, Democrat of Massachusetts and chairman of the House Financial Services Committee, said the Federal Reserve acted last fall after the House approved legislation that would have transferred some of the Fed’s regulatory power to other agencies. “At that point, I said use it or lose it,” Mr. Frank recalled. “And subsequent to that, the Fed began using its authority, and is now proposing rules similar to those in our credit card bill.”

Tom Schlesinger, executive director of the Financial Markets Center, a research institute in Howardsville, Va., that follows the Federal Reserve, said Congressional pressure had “obviously played a role in moving the Federal Reserve away from a philosophy that rejected so-called prescriptive regulation and embraced disclosure as the principal basis for consumer protection.” Mr. Schlesinger added, “The new credit card proposals clearly suggest an increased willingness to engage in direct regulation.”

Randall S. Kroszner, a Federal Reserve governor, said the central bank began considering the need for additional rules to protect consumers last year after it reviewed the comments on its proposal for greater lender disclosure of credit card terms. “Many of these comments were submitted by consumers who indicated that in many cases, disclosure alone was not enough,” Mr. Kroszner said.

The House measure has 149 co-sponsors. Twenty of them, including two Republicans — Representatives Chris Shays of Connecticut and Walter B. Jones of North Carolina — sit on the 70-member House Financial Services Committee that must approve it before the House can vote.

Ms. Maloney said opponents had argued that her bill controls prices. “But saying so does not make it so,” she responded. “We set no caps on fees or interest rates.”

Mr. Dodd said he is hoping to get bipartisan support in the 21-member Senate Banking, Housing and Urban Affairs Committee that he heads. He said passage requires public support. “People must do something, whether organizing online or through community coalitions, or calling their elected representatives and saying, ‘I need this, it’s personal.’ ”

Lawrence M. Ausubel, an economics professor at the University of Maryland and a bankruptcy expert, called lenders’ warnings about unintended consequences “severely overblown.” Nothing in proposed legislation would prevent the card industry from continuing to be profitable, Professor Ausubel said: “One can even tell stories where it enables more consumers to emerge from financial trouble without declaring bankruptcy, so collections might go up and profits improve,” he said.

None of the bills or proposals deals with the lenders’ mandatory binding arbitration clauses that became standard in the late 1990s. Those clauses made class-action lawsuits charging lender wrongdoing almost impossible to bring, said Mr. Mierzwinski of the Public Interest Research Group.

Legislation called the Arbitration Fairness Act of 2007, written by Senator Russell D. Feingold, Democrat of Wisconsin, and Representative Hank Johnson Jr., Democrat of Georgia, ensures consumers the choice of jury trials. And in late April, the United States Court of Appeals for the Second Circuit ruled that a lower court must hear a case challenging mandatory arbitration.

Adam J. Levitin, an associate professor of law and credit specialist at Georgetown University, said the proposed rules do not go far enough.

“When the Federal Reserve or Congress tries to nip off specific abuses that the credit card industry practices, it becomes a game of Whack-A-Mole,” Mr. Levitin said. “As soon as they put the kibosh on one, the industry figures out another.

“I think this has led to an endgame of restricting card issuers to a very limited number of price points — explicit interest rates and fee categories — and letting them compete their hearts out,” he continued. “But I don’t think Congress or the Fed has recognized that reality yet, or has the political will to do it.”