“Giving customers the chance to choose whether they want ‘overdraft protection’ is important,” Senate Banking Committee Chairman Chris Dodd (D-Conn.) said in a statement, “but we need to do far more to protect customers from abusive bank products. We still need to stop the excessive fees, repeated charges, lax notification, and processing manipulation that have become standard in these so-called overdraft ‘protection’ programs.”

Rep. Carolyn Maloney (D-N.Y.) just weighed in with an identical message.

While these rules are a good, solid step forward, they don’t eliminate the need for Congressional action on this issue. The Fed still allows institutions to charge an unlimited quantity of overdraft fees, would do nothing to make fees proportional to the amount of the overdraft, and would not address the manipulation of posting order of charges to accounts. Under the Fed’s new rule, a $5 cup of coffee could still become a $40 cup of coffee after an overdraft fee is added!

Both Dodd and Maloney have introduced legislation that goes a good deal further to protect consumers from overdrafts than the Fed’s new rules. Aside from the opt-in stipulation, those bills would also: (1) cap the number of fees at one per month and six per year; (2) require banks to warn customers at the counter if a purchase would overdraw their account, allowing them to opt out; (3) require that the charge be proportionate to the banks’ cost to process the transaction; and (4) prohibit banks from reordering purchases in order to maximize the number of overdraft fees.

The Fed’s new rules don’t tackle any of those things.

“The final overdraft rules represent an important step forward in consumer protection,” Fed Chairman Ben Bernanke said in a statement. “Both new and existing account holders will be able to make informed decisions about whether to sign up for an overdraft service.”

Threatened with congressional reform, some banks have already taken it upon themselves to operate more transparent overdraft protection programs. But the banking industry on the whole has opposed the idea, arguing that the overdraft protections benefit consumers by allowing them to make purchases even when accounts have run dry.

The industry has good reason to oppose the changes. Overdraft fees — which now top $30 apiece, on average — have evolved into a $38 billion-per-year money-making venture for the banks, according to Moebs Services, an Illinois-based financial research firm.

The Fed’s new rules take effect next summer.

Finance leaders in both chambers of Congress have introduced legislation to protect consumers from overdraft abuses. Aside from requiring customers to opt-in to the protection program, those bills also cap the number of overdraft fees allowed per year and prohibit banks from manipulating the chronology of purchases in order to maximize the number of overdraft fees — items the Fed’s new rules don’t address.

No word yet if the sponsors of those bills — Rep. Carolyn Maloney (D-N.Y.) and Sen. Chris Dodd (D-Conn.) — are satisfied with the Fed’s reforms or will keep pushing forward with their own, stronger consumer protections.

On several key points, though, Dodd breaks sharply from the White House. Most notably, the Senate Banking Committee chairman wants to create yet another agency to police Wall Street, rather than expanding the powers of the Federal Reserve in that role, as Treasury Secretary Tim Geithner has argued is necessary.

The Washington Post examines the significance:

[O]n key points Dodd’s bill breaks with the administration and with the House version of the legislation. The administration favors increasing the Fed’s regulatory powers and preserving the regulatory responsibilities of the Federal Deposit Insurance Corp. Dodd wants to strip both agencies of their powers.

Dodd’s differences with the House and the administration could reduce the chances that Congress can complete work on financial reform by the end of the year, a stated goal of Democratic leaders.

“Dodd,” the Post added, “said he hopes to begin the formal process of approving his bill during the first week of December.”

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.”

Commercial and Administrative Law Subcommittee Chairman Steve Cohen (D-Tenn.) (left) speaks at Thursday's hearing on foreclosures. (YouTube: RepCohen)

The Obama administration has all but abandoned it, and the Senate has already voted it down. But a proposal to allow struggling homeowners to escape foreclosure through bankruptcy got a boost Thursday from a small band of House Democrats convinced that voluntary mortgage modifications aren’t alone solving the housing crisis.

They have a point. Despite White House efforts to entice mortgage lenders and servicers to alter the terms of mortgage loans at their own discretion, participation in the program has been meager. As a result, hundreds-of-thousands of homeowners continue to face foreclosure months after the program took effect. That instability in the housing market has, in turn, stifled federal efforts to heal the banks and get them lending prolifically again. In the eyes of some Democratic lawmakers, the combination of trends is evidence enough that Congress needs to return to its bankruptcy proposal to save the homes that the voluntary strategy is not.

Illustration by: Matt Mahurin

“We need to be prepared to act more aggressively to help distressed homeowners,” Rep. Steve Cohen (D-Tenn.), chairman of the House Judiciary Subcommittee on Commercial and Administrative Law, said during a hearing on the topic Thursday. “Evidence suggests that encouraging voluntary modifications alone is, at best, minimally effective in helping financially struggling borrowers stay in their homes. We can and should be prepared to do more.”

On one level, that’s a strange sentiment coming from House Democrats, who already have done more. Indeed, the lower-chamber in March passed legislation empowering bankruptcy judges to reduce, or “cramdown,” mortgage rates and principal balances in order to prevent foreclosures — an avenue available to consumers to save vacation homes, boats and practically any other material asset, but not primary homes.

Yet there’s also no mystery why House Democrats decided to highlight the issue once more: No one else is doing it.

Indeed, while observers on both sides of the debate deemed Senate passage a sure thing, something strange happened last spring. The Obama administration — which had endorsed cramdown in February, arguing that it would provide a vital stick to accompany the financial carrots it was offering lenders — grew silent on the issue. Without a push from the White House — and with enormous opposition coming from the finance industry — the Senate in April killed the proposal, with 12 Democrats voting against the measure.

And the administration’s neutrality on the topic seems to be continuing. Although the Treasury Department was invited to testify at Thursday’s hearing, it declined to send a representative — an episode that Rep. Zoe Lofgren (D-Calif.) deemed “shameful.”

Asked to explain the absence, Treasury spokeswoman Meg Reilly declined. Reilly also declined to weigh in on the Treasury’s current position on cramdown in general.

Not that the White House isn’t aware that it’s current foreclosure-mitigation efforts are coming up short. A few hours after the House hearing, Treasury Secretary Tim Geithner and Housing and Urban Development Secretary Shaun Donovan distributed letters to mortgage servicers urging greater participation in the voluntary modification program.

“Much more progress is needed,” the officials wrote. “We believe there is a general need for servicers to devote substantially more resources to this program for it to fully succeed and achieve the objectives we all share.”

There have been other signals that further efforts are needed to contain the housing crisis. Last week, the administration expanded eligibility for homeowners to refinance troubled mortgages, opening the program to those who owe as much as 125 percent of their home’s value. Previously, eligibility was limited to homeowners underwater only up to 105 percent. The change was acknowledgment that home values in some areas have fallen so precipitously that many homeowners were finding themselves ineligible to refinance under the lower ceiling.

On Capitol Hill, there remains some hope that lawmakers will return to the issue this year. After the Senate voted down the measure in April, cramdown sponsor Sen. Richard Durbin (D-Ill.) vowed to use every opportunity to bring the proposal up again. Durbin’s office said this week that that commitment stands. But with the Senate facing a tough legislative schedule in the months ahead — including plans to overhaul the health care system and tackle climate change — chamber leaders are quickly running out of chances to take up additional measures sure to attract such controversy.

That’s bad news for the nation’s homeowners, who continue to struggle at historic rates. Indeed, more than 321,000 homeowners filed foreclosure paperwork in May, up 18 percent from a year ago, according to RealtyTrac, an online foreclosure database. That one-month tally is more than the 270,000 loan modifications that have been offered in the four months since the Obama plan launched. And with overall unemployment numbers continuing to grow, those foreclosure numbers are expected to rise.

“We are not even at the peak of the crisis,” Alan White, a housing expert at the Valparaiso University School of Law, warned lawmakers Thursday.

In every way, Thursday’s debate rehashed the ideological arguments that swirled around cramdown earlier in the year. Democrats, siding with struggling homeowners, blamed the lenders for doing too little to alter the terms of mortgages to prevent foreclosures. While Republicans, rallying for the banks, argued that homeowners should buck up and accept responsibility for signing on the dotted line.

Rep. Trent Franks (Ariz.), senior Republican on the Judiciary subpanel, said he was “troubled,” “puzzled” and “disturbed” by the Democrats’ attempts to revive the cramdown proposal, which he said “died a deserved death in the Senate.”

“No one mandated borrowers to enter into mortgage contracts,” Franks said. “Is no one to be held accountable in America anymore for entering into a contract?”

Yet cramdown supporters countered that the stabilization of the housing market is not important merely for the benefit of struggling homeowners, but for their neighbors — whose homes lose value with each nearby foreclosure — and for the health of the larger economy as well. Relying on the mortgage industry to volunteer the changes, they argue, is recipe for slower recovery.

“Unless homeowners have leverage to force a favorable result,” said Irwin Trauss, an attorney with Philadelphia Legal Assistance, “lenders will continue to avoid the meaningful modifications that are necessary to keep folks in their homes.”

Some Democrats aren’t impressed.

Sen. Carl Levin (D-Mich), who heads a Senate investigative panel, issued a statement this afternoon saying the regs are “a good first step” but don’t go nearly far enough to rein in the industry’s abusive practices:

The regulations regrettably leave in place many blatantly unfair credit card practices that mire families in debt. Legislation is needed to stop abuses such as charging interest on debt that was paid on time, pay-to-pay fees, and universal default.

Rep. Carolyn Maloney has such a bill. In a statement released today, the New York Democrat applauded the Fed’s changes, but said they won’t come quickly enough to help consumers during the recession. “Congress should act sooner to protect American consumers by giving credit card protections the permanence and force of law,” she said.

Republicans had opposed Maloney’s bill, largely on the grounds that federal regulators were working to craft similar changes. During numerous hearings on the proposal, they claimed that Congress should wait for those regs to arrive before pushing forward with legislation — a notion soundly rejected by Democrats.

“The notion that the legislative body should defer to the regulators gets it backwards,” Rep. Barney Frank (D-Mass.), chair of the House Financial Services Committee said during an April hearing on Maloney’s bill.

Now that the regs have arrived, Republican critics can’t lean on that wait-and-see argument any more. Still, with the banks struggling in the downturn, Maloney and her supporters might have a tough time convincing colleagues that 2009 is the right time to cut into profits further — even in the name of helping consumers.