House Panel OKs Credit Card Reform

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In a largely symbolic gesture, a House panel on Thursday passed legislation forcing banks to make credit cards more consumer friendly. The bill has little chance of becoming law this year, but the momentum leaves consumer advocates hopeful that reforms could arrive in 2009.

The vote in the House Financial Services Committee was 39 to 27. Two Republicans, Reps. Walter Jones (N.C.) and Christopher Shays (Conn.), broke party ranks to join all voting Democrats in supporting the bill.

The vote follows months of partisan haggling over how to reform an industry that both sides agree needs discipline. House Democrats favor the committee-passed legislation — called the Credit Cardholders’ Bill of Rights — that would add transparency to credit card contracts and curb predatory lending practices used by some issuers. Republicans prefer to defer the responsibility to regulators at the Federal Reserve, which proposed reforms in May but isn’t expected to finalize them until later this year — at the earliest.

Illustration by: Matt Mahurin

The debate largely centered on Congress’s role to shield consumers from industry abuses at a time when debts are rising. Nationwide, debt attributable to revolving credit jumped to $962 billion in May — up from $941 billion in December and $771 billion five years ago, according to a July report from the Federal Reserve.

Democrats argue that lawmakers owe their constituents the new protections, pointing to the housing crisis as a perilous symptom of congressional inaction in the face of lending abuses. Republicans counter that the Fed’s regulators have better expertise to craft those reforms. Rep. Judy Biggert (R-Ill.) warned that legislation could “duplicate or impede” the work of the Fed.

But Rep. Barney Frank (D-Mass.), chairman of the House Financial Services Committee, responded that it’s “an odd constitutional theory” that legislators should wait idle while regulators have their will. “That seems to get it backwards,” Frank said. “The principle that we defer to the Federal Reserve is not a good one.”

The saga highlights substantial partisan divisions between lawmakers as they confront the powerful finance industry. Faced with a mortgage crisis and jacked up fuel prices, Democrats have largely sought to ease the pain by targeting needy individuals. Republicans, on the other hand, have tended to protect businesses, creating echoes of the trickle-down economics debate that dominated the 1980s. With thin congressional margins, Democrats have lost most of these clashes — a dynamic adding great weight to November’s competitive elections.

Under current law, credit card issuers are required to reveal the terms of contracts to potential users. But those contracts often run pages long and veil vital provisions behind legal jargon. Many companies tout “fixed rates,” for example, while also reserving the right to raise those rates at any time. The process can leave even the most educated cardholders confused about the details.

Under the House proposal, sponsored by Rep. Carolyn Maloney (D-N.Y.), banks would have to provide 45 days written notice before raising interest rates. The bill would also force companies to send bill statements at least 25 days in advance, versus the 14 days allowed currently. Supporters say the proposal will prevent industry practices that trap the economically vulnerable in a cycle of debt from which escape is difficult.

“[U]nfair and deceptive credit card practices have made it literally impossible for consumers to borrow only what they can repay,” Maloney said in a statement Thursday.

The debate took a turn in May, when the Fed proposed several new regulations that went further than the House bill to protect cardholders. For example, the Fed’s rules would prevent card companies from retroactively applying rate hikes to existing debts, except when users have variable rate cards or fail to submit the minimum payment within 30 days — a provision then-absent in the House bill. The move stirred Maloney to adopt several provisions of the Fed’s proposal. It also opened the banks for a new line of attack.

“By seeking to write into statute what is in essence an ‘initial’ agency proposal,” Floyd Stoner, executive vice president of congressional relations for the American Bankers Assn., wrote in a July 30 letter to panel members, “the committee denies itself the benefit of the rule-making process, the comments of interested parties, and the expertise of these agencies in coming to appropriate policy conclusions.”

Republicans have joined the banks in arguing that the proposal will limit banks’ ability to base rates on the risk of the cardholder. The result, the critics contend, would be increased rates for all users. Some, they say, would likely lose their cards altogether.

“You poke into one side of the balloon,” said Rep. Jeb Hensarling (R-Texas), “it pokes out on the other side.”

This is an argument that consumer groups refute. “They’ll say that about anything,” said Linda Sherry, director of national priorities for Consumer Action, an advocacy group. “It’s their standard line. … They always wanted to have the freedom to raise the interest rate at any time for any reason.”

During Thursday’s debate, Hensarling offered an amendment allowing the banks to raise their rates retroactively when users pay late three times over the life of the contract. “At some point you have to reasonably assume that there’s a pattern,” he said.

That drew howls from Democrats, however, who wondered who hasn’t paid late three times over the course of years. The amendment died later in the day.

While the banks oppose certain elements in both proposals, they prefer the Fed’s regulation — which can be altered more easily than a law. And they don’t lack for influence on Capitol Hill. The finance industry is one of the perennial top contributors to political campaigns. For the 2008 election cycle, commercial banking has already donated more than $24 million, placing it in the top 12 industries, according to the Center for Responsive Politics, a campaign watchdog group.

Partly due to the banks’ clout — and partly because the legislative calendar is short on days — the House bill would likely go nowhere this year.

“This is not going to go through the Senate this year,” Frank said bluntly.

Republicans argue that, with the economy in shambles, the stalling is appropriate. Hensarling warned that the bill “will restrict credit at a time when we have a nation-wide credit crunch.”

But others contend that the nation’s economic downturn lends even more reason to pass the Maloney bill. Lawrence Ausubel, professor of economics at the University of Maryland, said that the recent industry bailouts undercut the argument that consumers shouldn’t also get some help.

“If Feddie Mac and Fannie Mae are getting a huge potential lifeline,” Ausubel said, “how can people say with any credibility that a consumer who missed a payment shouldn’t get a break?”