House Passes Credit
Card Bill,
Sending It to
President
By Nancy Trejos, from
the Web, May 20, 2009
The House today gave final approval
to a bill that would prohibit credit card companies from arbitrarily raising
interest rates on existing balances and charging certain fees.
With a 361-64 vote, the House ensured that President Obama will be able to sign
the bill into law by Memorial Day, as he requested.
The House had approved a more diluted credit card reform bill last month but
chose to send the stonger Senate version to the president instead. The
Senate overwhelmingly passed its bill, written by Banking Committee Chairman
Christoper J. Dodd (D-Conn.), yesterday.
"This cements a victory for every American consumer who has ever suffered at the
hands of the credit card industry," Dodd said. "Many Americans depend on
credit cards to get by in this economy, and today they have won a giant victory
that ensures they are protected from practices that would drive them further
into debt, while also making our economy stronger."
The landmark credit card legislation will force the $960 billion card industry
to reinvent itself and consumers to rethink the way they use plastic.
The bill will prohibit card companies from raising interest rates on existing
balances unless the borrower is at least 60 days late. If the cardholder
pays on time for the following six months, the company would have to restore the
original rate. On cards with more than one interest rate, issuers will
have to apply payments first to the debts with the highest rates, which would
help borrowers pay off their cards more quickly.
Treasury Secretary Timothy F. Geithner yesterday said the bill "will help create
a more fair, transparent and simple consumer credit market."
Card executives said the changes will force them to charge higher rates and
annual fees to delinquent customers and those in good standing.
"This bill fundamentally changes the entire business model of credit cards by
restricting the ability to price credit for risk," said Edward L. Yingling, the
chief executive of the American Bankers Association. He said that lending
would become more risky and that, "It is a fundamental rule of lending that an
increase in risk means that less credit will be available and that the credit
that is available will often have a higher interest rate."
Scott Talbott, senior vice president of government affairs for the Financial
Services Roundtable, an industry group, said available credit could be reduced
by as much as $2 billion. Those with the weakest credit histories would be
hardest hit.
The House's passage of the bill came after an unrelated amendment allowing
visitors to national parks to carry guns passed on a separate vote of 279-147.
This morning, White House Spokesman Robert Gibbs said Obama would sign the
legislation even if the amendment, introduced by Sen. Tom Coburn (R-Okla.), were
included.
When credit cards were introduced about 50 years ago, issuers practiced a
one-size-fits-all approach of charging an annual fee and roughly the same
interest rate of about 18 percent to everyone. As the industry became more
deregulated in the 1980s, around the time that credit scores were introduced,
issuers were able to separate the risky from the not-so-risky borrower and
tailor the terms of card contracts.
The money they made from customers who did not pay their bills in full each
month became an important revenue source. The industry makes $15 billion
annually from penalty fees, and one-fifth of consumers carrying credit card debt
pay an interest rate above 20 percent, according to figures cited by the White
House and compiled from the Government Accountability Office and the Federal
Reserve.
To make up for the lost revenue, card issuers will turn to those customers who
pay what they owe in full and on time every month, analysts said. Gone
will be the days when creditworthy customers enjoyed the benefits of low
interest rates and cards that offer rewards such as frequent flier miles and
cash back, they said. Annual fees, which had been banished to cards with
rewards programs, are likely to return. Offers for zero percent balance
transfers are likely to become more rare.
"This industry will start looking more like a one-size-fits-all pricing approach
which dominated in the '80s -- 18 percent interest and a $20 annual fees," said
David Robertson, publisher of the Nilson Report, which covers the industry.
Customers who pay in full each month will have "to start picking up the slack,
to start pulling their weight."
Consumer advocates and legislators pointed out that the legislation still allows
issuers to raise interest rates for future purchases as long as they give 45
days' notice. It also does not set any interest rate caps, allowing
issuers to charge new customers any rate they want.
"This ominous we're-going-back-in-time threat doesn't make a whole lot of
sense," said Travis B. Plunkett, legislative affairs director at the Consumer
Federation of America.
Bruised by a rise in delinquencies and a record percentage of debtors they have
had to write off, some of the biggest players in the card industry, including
Bank of America, Capital One and Chase, have already been increasing interest
rates and cutting credit limits even on customers who pay on time.
Credit card issuers have come under fire for such any-time, for-any-reason
interest rate increases at a time when consumers are buckling under the weight
of debt. Outraged consumers have complained of mistreatment from the same
companies that have been receiving federal bailout money.
The bill would also restrict the ability of college students to get credit cards
and require card companies to make contracts easier to understand and available
online.
It would also codify changes already made by the Federal Reserve. In
December, the Fed banned certain unfair and deceptive practices. But those
do not go into effect until July 2010.
The legislation passed today, which goes further than the Fed's new rules, would
become effective nine months after signing.
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