“Things were a lot better for the average person in this country when we had usury caps,” Rep. Louise Slaughter (D-N.Y.), head of the House Rules Committee, said in a statement announcing her bill. “Watching how credit card companies have exploited people by increasing rates up to 30 percent and more is criminal and this bill will allow us to put an end to this practice.”

Massachusetts Democratic Reps. John Tierney  and Michael Capuano will co-sponsor the bill.

They have a tough road ahead, for several reasons. (1) Even though it was the finance industry that was primarily responsible for the recent global economic meltdown, there’s a growing reluctance on Capitol Hill to apply strict new regulations just as the banks are re-stabilizing — a circumstance the banks are already celebrating. (2) Although Congress was successful in passing sweeping credit card reforms in May, an amendment to cap interest rates at 15 percent was killed in the Senate. And (3) the banks aren’t going to allow Congress to squeeze a profit source without coming up with creative ways to make up the difference elsewhere. This, The New York Times reported yesterday, is what’s happening in Australia, where card issuers have responded to new regulations by attaching new fees to airline tickets, among other purchases.

“[I]f regulators limit one fee or rate, banks are likely to find another way to keep revenue flowing,” The Times wrote.

“The industry has tried to make one last grab at their customers’ pocketbooks,” Dodd said, just before asking for the consent of Republicans to pass the bill unanimously.

No dice. Sen. Thad Cochran (R-Miss.) objected “on behalf of several senators on this side of the aisle.” There’s no word yet which other lawmakers he was referring to.

House Democratic leaders have already passed even stronger legislation that would expedite all the credit card reforms in the previously passed bill — not just the ban on hiking rates for existing balances. Dodd hasn’t signed on to the Senate version of the bill.

It’s worth mentioning that the Democrats — folding to pressure from the banks — were themselves responsible for delaying those reforms, which were initially proposed to go into effect much earlier  this year.

Senate Majority Leader Harry Reid (D-Nev.) has asked members of the Banking Committee for their consent to move the bill directly to the Senate calender without the panel addressing it first. The move is an indication that Democratic leaders want the option to consider the bill at any time, though it doesn’t guarantee that they’ll do so.

There’s no word yet from Banking leaders if that consent has been granted. Still, the strategy is significant because if Republicans want to block the motion, they’ll have to go on the record to do so.

The legislation, sponsored by Sen. Mark Udall (D-Colo.), is designed to tackle a problem the Democrats themselves created.

The credit card reform legislation that Democrats pushed through Congress in May aims to eliminate the most abusive practices adopted by credit card issuers. It bans, for example, a number of hidden fees and prohibits companies from applying rate hikes to existing balances. Yet most of those reforms don’t take effect until late February. To beat the deadline, many companies have raised fees and rates while it’s still legal to do so.

So now Democrats, themselves responsible for delaying the reforms, are trying to get them installed more quickly. The House on Wednesday passed a bill to bump up the implementation date to Dec. 1. The Udall bill proposes the same expedited timeline.

Stay tuned…

The House approved legislation today to have its previously passed credit card reforms take effect next month, rather than three months later.

The bill is designed to fix a problem the lawmakers themselves created. Earlier in the year, Democratic leaders bowed to the wishes of the credit card issuers by granting them a long window to implement the reforms. Indeed, most of the changes aren’t scheduled to take hold until late February. Many banks have taken full advantage of the delay, hiking fees and rates — even on existing balances — to pad their profits ahead of the law.

Under the House bill, sponsored by Rep. Carolyn Maloney (D-N.Y.), the reforms will go into effect Dec. 1. The lower chamber passed the bill 331 to 92.

“I believe the card issuers have heard the message loud and clear today: their practices can no longer be tolerated,” Maloney said in a statement following the vote.

But that depends. The Senate would still have to pass the bill in order for it to become law. And at the rate the upper chamber is moving, Dec. 1 doesn’t seem that far away.

“[N]o sooner had it been signed into law, but credit card companies were looking for ways to get around the protections this Congress and the American people demanded,” Dodd said in a statement. “This bill would end those abuses and further protect customers today.”

But Dodd’s bill, by carving out the retroactive rate-hike reform, doesn’t go nearly as far as several separate proposals to expedite all of the credit card reforms passed earlier in the year. The House Financial Services Committee approved that legislation last week, and an identical Senate bill appeared the same day.

Calls and emails to Dodd’s office seeking comment on the larger expedited reform bill were not returned last week. His newly introduced proposal explains why.

So after some Democrats initially delayed the implementation date until next year — a naked bow to the banking industry — others are now trying to change the implementation timeline so the reforms take effect sooner.

Indeed, the House Financial Services today is marking up legislation to do just that. The bill, sponsored by Reps. Carolyn Maloney (D-N.Y.) and Barney Frank (D-Mass.), would expedite the reforms so that they kick in Dec. 1 — 12 weeks earlier, for most provisions, than the existing law.

Boosting the effort, Sen. Mark Udall (D-Colo.) today introduced an identical proposal in the upper chamber.

Outside of the legislative effort, Democrats have been urging the Federal Reserve, which is responsible for implementing the legislation, to expedite the reforms on its own. But Fed Chairman Ben Bernanke told lawmakers this week that, while the quicker start date “could provide benefits for consumers, the [Fed] continues to believe that, given the breadth of the changes required by the [law], card issuers must be afforded sufficient time for implementation to allow for an orderly transition.”

In a letter to Rep. Spencer Bachus (Ala.), senior Republican on the Financial Services Committee, Bernanke also claimed that expediting the reforms unilaterally would steal an opportunity from the public and the card companies to comment on the change.

That response riled Sen. Charles Schumer (D-N.Y.), who said this week that if the Fed doesn’t make the changes, “we should quickly pass legislation in both the House and Senate to do so.”

Stay tuned…

Now, some other Democrats want to expedite the same rules their colleagues delayed. Reps. Carolyn Maloney (D-N.Y.) and Barney Frank (D-Mass.) have introduced legislation to bump up implementation date for most of those reforms from late February to December 1. The House Financial Services Committee, headed by Frank, has scheduled a hearing on the bill next Thursday.

iStockphoto

Credit card holders hit with arbitrary interest rate hikes in recent months might be stuck with the extra burden, despite the high-profile congressional effort this year to protect consumers from such increases.

Illustration by: Matt Mahurin

With most of Congress’ sweeping credit card reforms not taking effect until next year, some card companies have reportedly taken to raising rates — while the law still allows it — on even reliable borrowers. Rather than attacking those discretionary hikes head on, however, Congress sidestepped them, punting any protections for those card holders to the fancy of officials at the Federal Reserve, who are currently drafting rules for implementing the reforms. That punt could create a loophole for card companies to exploit — a possibility that’s raised concerns about the ultimate effectiveness of the law to protect the most responsible card holders from new rate increases, and left consumer groups anxiously awaiting the Fed’s interpretation of the statute.

It wasn’t supposed to happen this way. Enacted in May, the new law is designed to protect consumers from the most abusive practices of the credit card industry — practices like hidden fees, short payment windows and interest rate hikes applied to existing balances. Beginning next August, it will also require card companies to review rate hikes periodically to determine whether changes in market conditions, customers’ credit risks, “or other factors” should result in reducing the rates previously increased. The provision is designed to remedy the near-universal trend of companies raising rates when customers are deemed to be risky bets, but almost never reducing them again if conditions change and the risks are eliminated.

Yet the provision’s “other factors” clause is so vague — purposefully so, some experts say — that consumer advocates have been left wondering how successfully it will protect card holders from arbitrary rate hikes.

“The statute as written is so ambiguous that you really don’t know what it means or how it’s to be applied,” said Pamela Banks, policy counsel at Consumers Union. The “other factors” language, Banks added, is “a catch-all” which regulators could interpret to be “any number of things.”

A lenient interpretation of the provision, if it allowed arbitrary hikes to remain, would be an expensive one for many card holders — not least of all because any rate hikes installed before February may apply not only to new purchases, but to existing balances as well.

Lauren Saunders, managing attorney at the National Consumer Law Center, said that ambiguity has left advocates “concerned whether the [regulations] under this law will give it any teeth.” Consumers whose rates were increased for specific risk or market reasons — meaning, factors pegged to external indexes outside the banks’ control — might benefit from the bank reviews when those conditions no longer exist, she said. But in cases when the motivation for the increase is more nebulous — even arbitrary — the law offers no guidance.

“The problem is that a lot of these rate increases are not that mechanical,” Saunders said. “If the reason for the increase is amorphous or discretionary, then this review isn’t going to do a lot of good.”

A congressional staffer familiar with the bill conceded that the language leaves plenty of room for interpretation. “There are factors issuers must consider,” the staffer said, “but not specific circumstances.”

The questions surrounding the rate-hike review provision have only been confused by the timeline for setting the credit card reforms into place. Sponsored by Sen. Christopher Dodd (D-Conn.) and Rep. Carolyn Maloney (D-N.Y.), the original legislation was written to take effect this year. Yet most sections were delayed until February after intense lobbying from the powerful finance industry. The banks have taken advantage of the delay, with some of the nation’s largest credit card companies raising rates and fees — often to the surprise of responsible borrowers — to beat the implementation date.

Anticipating that trend, Democrats added 11th-hour language requiring that the banks’ rate-hike reviews apply to all increases imposed since the start of 2009. The retroactivity was “a concession to the fact that they didn’t put this thing into effect right away,” said Linda Sherry, director of national priorities at Consumer Action. “It was already known that there was going to be this interim period where [rates] would be played with.”

For their part, credit card issuers have denied the charge that the recent slew of rate and fee hikes reflects anything but sound business strategy amid the economic downturn. Irving Daniels, vice president for banking and securities at the Financial Services Roundtable, said the industry has simply been forced to protect itself in the face of rising unemployment and “general economic risk.” The rate hikes have “absolutely” been a function of these external factors, he said, not any effort to milk profits ahead of the reform law.

Not convinced by the industry’s argument, Dodd in July sent a letter to Washington’s leading finance regulators, including Fed Chairman Ben Bernanke, requesting their “diligent attention” to the section of the reform bill requiring the rate-hike reviews to be retroactive.

“[T]he look-back provision will serve as a deterrent only if it will be implemented and enforced effectively,” Dodd warned.

Later that month, the Fed issued an interim credit card rule, which recognized the rate-hike review provision, but left any details to the imagination. For rate increases beginning at the start of this year, the rule states, the card issuer “must review the account at least once every six months and consider changes [in credit risk, market conditions and other factors] in subsequently determining whether to reduce that rate.” That’s different than saying, however, that certain of those factors would require the companies to reduce that rate.

In the eyes of some on Capitol Hill, the enforcement of the provision is a kind-of test for the Fed, which doesn’t have a strong record, in the eyes of some Democrats and consumer advocates, of enforcing some of the bank regulations that Congress has enacted over the years.

Indeed, many Democrats and consumer advocates are pushing for the creation of an independent authority — the Consumer Financial Protection Agency — to oversee the finance industry, including credit card issuers. Dodd, who chairs the Senate Banking Committee, and House Financial Services Chairman Barney Frank (D-Mass.) have voiced hopes to pass that legislation as part of a larger finance reform package this year. Dodd spokeswoman Justine Sessions said Friday that the lawmakers retain that goal, although with thorny health care and climate change proposals remaining on the year’s legislative calendar, the odds that Democrats have the time to squeeze in another controversial proposal into the mix are slim.

Meanwhile, stakeholders on all sides of the debate remain in-wait for the Fed’s guidelines. Although several provisions of the reform bill launched last month, most won’t take effect until February, with the Fed set to issue proposed rules on those sections in the coming weeks. Other elements of the bill, including the new rate-hike review requirement, don’t take hold until next August. The Fed is issuing a separate set of rules, at a later date, to address those provisions. Few think that Congress has left the agency with an easy job.

“The Fed will have an interesting dilemma,” said Banks, of Consumers Union. “We’ll have to see how they handle it.”

Rep. Carolyn Maloney (D-N.Y.) has a bill that would require banks to make some of these disclosures, but with health reform and climate legislation certain to consume the rest of the year in Congress, The Times is urging federal regulators to take these steps instead:

First, banks must be barred from automatically enrolling customers in overdraft programs. This must be a service that customers opt in to — and only after they are provided full information about the fees and the penalties they will incur. These disclosure statements must meet the same rules laid out in truth-in-lending laws, since overdraft charges are essentially short-term loans.

Banks must also be required to warn customers in real time when a debit card charge will overdraw their accounts — and what fees they will incur if they still decide to proceed with the purchase.

This will require new technology. But there is almost no chance that the banks will invest in it unless they are legally required to do so.

“Until that happens, buyers beware,” The Times warns. “That cup of coffee may be even more expensive than you realize.”

Or did they?

In a letter today to the Federal Reserve and other key financial regulators, Senate Banking Committee Chairman Christopher Dodd (D-Conn.) called on the officials to examine a section of the new law, which doesn’t take effect until next February, requiring the companies “to review every six months any account where the interest rate has been raised since January 1, 2009, and reduce the rate if the review indicates that the cardholder has become less risky or the circumstances that warranted the increase are no longer present.”

In addition to any future interest rate increases, all interest rate increases that have taken place this year will become subject to the mandatory 6-month review. I ask you to immediately notify all credit card companies under your respective jurisdictions that they will be held accountable for all interest rate increases during this time period and will be subject to the review requirement once it takes effect.

Numerous reports in recent weeks have indicated that card issuers have raised rates and lowered limits on even their most reliable customers. If Dodd is right here — and if the law is enforced — those customers may very well see there rates reduced to prior levels in February. Of course, the companies can still make out like bandits in the meantime.