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White House, Congress Cracking Down On Credit Cards

Triple-threat attack on abusive lending practices

By Mark Huffman and Martin H. Bosworth
ConsumerAffairs.com

April 23, 2009

President Obama convened a meeting of top executives from 14 credit card companies yesterday at the White House. The president's attendance was meant to demonstrate the seriousness of the Administration about ending some credit card practices that consumers say are abusive.

"We had a discussion with some of the top issuers here, and what I communicated to them is that I think credit cards are an important convenience for a lot of people," Obama said after the meeting. "We think that's important, and so we want to preserve the credit card market."

"But we also want to do so in a way that eliminates some of the abuses and some of the problems that a lot of people are familiar with -- people finding themselves starting off with a low rate and the next thing they know their interest rates have doubled; fees that they didn't know about that are suddenly tacked on to their bills; a whole lack of clarity and transparency in terms of the terms and conditions of their credit cards," he said.

Obama outlined four principles he felt were essential for a working credit card market — strong protection against abusive lending practices, clear and understandable card agreements, the ability to easily "comparison shop" for cards, and greater accountability and oversight.

"I trust that those in the industry who want to act responsibly will engage with us in a constructive fashion and that we're going to be able to get this done in short order," Obama said.

On Capitol Hill, meanwhile, Congressional Democrats are implementing their own version of the full court press. While the Obama meeting was taking place, Senators Chris Dodd (D-CT) and Charles Schumer (D-NY) called for an "emergency freeze" of credit card interest rates.

Dodd and Schumer wrote Federal Reserve chairman Ben Bernanke, urging him to employ the Fed's emergency powers to make recently implemented credit card regulations permanent, effective immediately. The Fed had passed new rules restricting retroactive hikes on credit card interest rates, but the rules do not take effect until 2010.

"Over the past year, the Federal Reserve has cited the financial crisis as one of the reasons for acting quickly to implement new lending facilities and programs to protect financial institutions. It is long past time for the regulatory agencies to act with the same sense of urgency to protect consumers from the behavior of those same financial companies," the senators wrote.

A key House committee Wednesday approved a measure known as the "Credit Cardholder's Bill of Rights." It addresses a number of complaints consumers have about credit card policies, including the practice of "universal default." Universal default enables lenders to raise interest rates on an account if the borrower misses a payment on any bill, even if their credit card payments are on time.

"I heard from a woman who was one day late on her utility bill, because her husband died and she had her mind on other things, and her credit card company doubled her interest rates," Rep. Carolyn Maloney (D-NY), author of the bill, said in an interview on CNBC. "This is very unfair and shouldn't be allowed."

Since the credit meltdown last fall, many credit card companies have quickly changed the rules. Many accounts have been closed. Banks have also changed the terms of others, raising the interest rate and reducing the credit line. Consumers have been quick to point out the irony of banks receiving taxpayer "bailout" funds being less than accommodating to their customers.

But the banks see it differently. Kenneth Clayton, senior vice president of the American Bankers' Association, says the group has "real concerns" with the Credit Cardholders Bill of Rights legislation, saying it will have a negative effect on lenders' ability to offer credit to consumers.

Eventually, most of the changes in the legislation will take effect through regulatory edict, since the Federal Reserve and other regulators late last year approved them. But the banks say the delay of implementation until 2010 will give them more time to prepare.

"The Fed itself has recognized that the new rules may increase the cost of credit and make it less available for consumers and small businesses," Clayton said. "Some provisions contained in H.R. 627, the 'Credit Cardholder's' Bill of Rights,' will exacerbate these unintended consequences. For example, the amendment that restricts lenders' ability to price for risk would have this undesired effect."

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