Congress Looks To End Credit Abuses

Congressional Democrats have learned at least one lesson from the mortgage crisis: A sign of economic weakness buried on the business pages can quickly balloon into a political problem on the front pages.

Now, as subprime problems trickle into other types of consumer loans, credit card companies may be the first to feel the effects of increased congressional scrutiny.

“It is appropriate for us to take some action,” House Financial Services Committee Chairman Barney Frank (D-Mass.) said at a recent hearing on the credit card industry. “As I look back at the subprime and the decision of Mr. Greenspan not to do anything for a long time, I wish we had been able, more vigorously, to pre-empt him.”

Congress, candidates and regulators at the Federal Reserve (Alan Greenspan is the past chairman) are pursuing dozens of different legislative remedies to curtail abusive practices in the credit card industry.

On Wednesday, Senate Banking Committee Chairman Chris Dodd (D-Conn.) introduced a bill aimed at stopping predatory practices by the card industry. On Friday, the Fed is expected to announce its own rules cracking down on abuses.

“Americans do not deserve to be pushed down the economic ladder by credit card companies,” Dodd said. “It’s wrong, it’s unfair, and it must end.”

Democrats believe the issue is an election-year winner, offering their candidates a way to get out in front of the current economic turmoil and target an industry reviled by consumers. Both Democratic presidential rivals — Illinois Sen. Barack Obama and New York Sen. Hillary Rodham Clinton — have plans addressing credit card abuses.

The new focus thrills consumer advocates, who have pushed for increased regulation of the credit card industry for at least a decade.

“We are reaching critical mass,” said Travis Plunkett, legislative director of the Consumer Federation of America. “It’s still a long shot that a bill would clear both houses, but it’s not unthinkable.”

But just as legislation designed to deal with the mortgage crisis faced a wall of opposition from bankers, brokers and home builders, Congress will face resistance from card issuers. Bank lobbyists are buckling down for a long fight against tighter regulations.

“The net effect of these provisions will be to increase prices, reduce access to credit, reduce choices for consumers at a time when the economy can least afford higher costs,” said Ken Clayton, card policy counsel for the American Bankers Association.

The banks, backed by some Republicans, stress that members of Congress should not base their legislation on anecdotes. The argument implicitly rebuts first-person testimony several consumers gave recently before the House Financial Services Committee.

Although their free-market arguments sound similar, credit card lobbyists stress the differences between widespread credit card defaults and the wave of foreclosures.

“Credit cards are a highly regulated industry,” Clayton said. “The parallel doesn’t work.” 

Subprime loans were packaged into complex securities and traded on Wall Street, without appropriate accounting for risk factors. When the loans went bad, the entire financial system felt the effects.

While the banks will certainly sustain losses from credit card defaults, fewer expect the effects to reverberate as severely on Wall Street.

In part, that’s because credit card securities avoided some of the exotic packaging used to bundle the risky home loans. Plus, in some ways, a bad economy is good for card issuers. The worse the economy gets, the more money cards pull in through fees and late payments from delinquent consumers.

Consumers, however, will almost certainly get slammed as they turn to cards to pay for higher costs of food, gasoline, mortgages and other items.

Already, an increased numberof cardholders are paying their credit card bills late, subjecting them to additional fees.

Credit and debit card delinquencies rose to 4.38 percent in March, according to an ABA survey — the highest level in the past 18 years.

And with less credit available, desperate consumers inevitably turn to more expensive ways of getting money, such as payday loans.

“Credit card debt now consumes a sizable portion of a family’s income. Money that families are forced to devote to deceptive billing practices and hidden fees is money that is not being spent on goods and services that could help bolster our struggling economy,” said Rep. Carolyn Maloney (D-N.Y.), chairwoman of the House Subcommittee on Financial Institutions and Consumer Credit.

Maloney has introduced legislation to create a Credit Cardholders’ Bill of Rights.

Her measure would allow cardholders to pay off their old balances at the existing interest rates, even if their rates change, something some cards don’t currently permit. Consumers would have three billing cycles after any rate increase to cancel their cards.

Credit card issuers typically apply payments first to the debt with the lowest interest rate, a situation that ends up charging consumers more in interest payments. Maloney’s bill would mandate that consumers pay off their highest-rate debts first.

The bill does not set any rate caps, price controls or fees — a tactic Maloney took, in part, as a way of gaining support from Republican committee members and fiscally conservative Democrats. Dodd’s new bill mirrors much of her approach by also avoiding caps.

Consumer advocates, however, believe her bill doesn’t go quite far enough. They support more proscriptive proposals by Sens. Carl Levin (D-Mich.) and Robert Menendez (D-N.J.). Eleven major consumer groups endorsed Menendez’s proposal last month.

Levin’s bill would cap interest rate increases for late-paying cardholders at 7 percent. The proposal would also ban issuers from charging interest on their fees and applying higher interest rates to older debts.

Menendez’s bill is the most far-reaching. It includes many of Levin’s proposals, along with some more aggressive regulations prohibiting issuers from changing the terms of the card agreement and banning them from increasing a cardholder’s interest rate based on financial information unrelated to their card agreement.

Last summer, the Fed announced a relatively uncontroversial proposal requiring issuers to better disclose terms and conditions to cardholders.

The Treasury Department’s Office of Thrift Supervision, which regulates federal banks, is separately drafting its own stricter card controls. Deputy Director John Bowman testified recently that his agency’s authority is “adequate” to address abuses in the industry.

Card issuers are urging Congress to wait for the Fed to come out with its proposal.

But congressional aides working on the issue believe congressional oversight is necessary. The Fed, they anticipate, will address only uncontroversial issues.

One likely rule would eliminate double billing, the practice of charging consumers on billing cycles preceding the most recent one, something done by very few companies.

“The notion that the legislative body should defer to the regulators gets it backwards,” Frank said. “The regulators get their instructions from the Congress.”