U.S. Tightens Screws On Credit Industry

With the government cracking down on credit card companies' ability to increase rates and impose penalties, some wonder just how lenders will make up for the vast amounts of revenue they stand to lose.

And as credit card issuers ponder the ramifications of the proposed rule changes passed by the Senate Tuesday, they may face more bad news.

The Obama administration, trying to rein in abuses exposed by the financial crisis, is considering creation of a regulatory commission to protect consumers of financial products such as credit cards and mortgages, according to administration and industry officials.

These officials said the administration has been exploring such an approach in meetings over the past few days with executives of the financial services industry.

On Tuesday, the 90 Senators passed what's being called a credit card bill of rights, reports CBS News White House correspondent Bill Plante.

Under the proposed legislation, which is expected to be signed into law by the end of the week, lenders would have to give 45 days notice before a rate increase, extend promotional rates for at least six months, place bans on rate hikes on new cards during the first year and deny cards to anyone under 21 unless they can pay off their bills.

Proponents of the bill think it will be a boon for consumers.

"Well, first of all, this is a great day for consumers," Sen. Chris Dodd, D-Conn., told Early Show co-anchor Harry Smith. "It couldn't get much rougher on consumers, when you can raise rates from 5 percent to 24 percent and take credit limits from $32,000 down to $4,000 overnight for being three days late for the first time in 40 years, as happened to a Connecticut couple."

But that leaves credit card companies with a potential gaping hole in their revenues. Penalty fees accounted for up to 70 percent of credit card companies' revenues as recently as 2005, Moneywatch.com editor-at-large Jill Schlesinger told CBS' The Early Show Wednesday.

That could mean increases in other fees that would largely affect customers who regularly make prompt payments - called deadbeats by the credit card industry because they provide lenders with no additional revenue, Schlesinger said.

"How are you going to replace $12 billion? I'll snap up and give you an annual fee. Interest will get charged the day you start that transaction, not a few weeks later. And maybe those rewards programs get cut back. If you're a good payer, the so-called deadbeat, you might get hurt in this legislation," Schlesinger told Early Show co-anchor Maggie Rodriguez

Even with the legislation, there will be a nine-month window before the effects are seen, creating a possible loophole. Consumer groups are concerned the credit card companies will use the time to hike up interest rates and fees while they can, reports CBS News business correspondent Anthony Mason

There were also elements left out of the bill, including proposals to impose caps of 15 percent and 36 percent on annual percentage rates for credit cards and other loans. (Read more from CBS News investigative producer Laura Strickler.)

Meanwhile, the proposal for a new regulatory body could set off a turf war among federal agencies such as the Securities and Exchange Commission and the various bank regulatory agencies.

There was also a discussion of the proposal at a dinner Tuesday at the Treasury Department attended by Treasury Secretary Timothy Geithner and Lawrence Summers, director of the president's National Economic Council.

An administration official who confirmed that the dinner had taken place said no final decisions had been reached.

An industry official said the administration supported the concept that has already been introduced in legislation by several senators. This official said the administration may offer its own approach to the issue.

Geithner has said extensive changes were needed to make sure that the current financial crisis, the worst in seven decades, is never repeated.

The officials who spoke late Tuesday did so on condition that their names not be used because the administration was not ready to unveil a proposal.

Treasury issued a statement late Tuesday that called the dinner "one of a series of meetings with a wide range of relevant constituencies and experts" to seek views on regulatory reform.

"Tonight's outreach meeting was largely attended by academic experts and former government officials. Other meetings have been held with consumer and investor groups and a wide range of financial services and market participants," the Treasury statement said. "No decisions have been made but the administration is actively seeking various viewpoints as it puts together its framework."

The proposal the administration was considering would centralize the enforcement of laws that protect consumers of financial products, such as credit cards, mortgages and mutual funds. That effort currently is spread across a number of federal and state agencies, including the Federal Reserve, the SEC and the Federal Trade Commission.

Under one possible approach, some federal banking agencies might be combined and some powers over consumer products might be consolidated into a new body.

A leading proponent of the commission approach has been Harvard University professor Elizabeth Warren, who currently is serving as the head of the Congressional Oversight Panel for the government's $700 billion financial rescue effort.

Warren argued in a 2007 article that the government needed to do a better job of protecting homeowners who take out mortgages and consumers of other increasingly complex financial products.

Democrat senators introduced legislation earlier this year that would create a commission like the one proposed by Warren.

Some industry groups already have expressed opposition to the plan.

The Financial Services Roundtable, which represents some of the biggest institutions in the country, has argued that it would be a mistake to separate the regulation of financial products from the regulators who oversee the institutions selling those products.

It was unclear whether the administration will propose creating a new federal agency to house the commission or placing the commission under an existing agency.

The administration is expected to unveil its proposal in the next few weeks as it pushes ahead with a sweeping effort to overhaul the government's financial regulatory system.

The administration already has put forward some broad principles for financial regulatory overhaul, including creation of new powers to allow authorities to take over major financial institutions that represent a threat to the system.