It’s one of the central components of the Democrats’ plans for reforming the finance industry this year, and among the most vital, supporters say, for protecting consumers from abusive lending practices in a tumbledown economy. Yet as Congress advances legislation reining in the most abusive credit card traps, both the House and Senate proposals have been watered down in recent weeks so that the protections likely won’t help card users for more than a year.
The delay — a concession to the banks, who oppose the changes — means that Congress’ reforms likely won’t arrive anytime sooner than the Federal Reserve’s new credit card rules, scheduled to take hold in July 2010. It also leaves consumers hung out to dry at an unwelcome time, as the recession deepens, unemployment rises and card issuers raise fees and interest rates on even their most reliable customers. Many observers wonder why, if some credit card practices are indeed unfair and deceptive — some say criminal — Congress isn’t acting more quickly to eliminate them. Some consumer advocates say the delay is yet another example of lawmakers prioritizing the banks above working families amid the downturn.
“While we expect the Fed to be weak and buckle under bank pressure, there is no excuse for Congress pandering to the banks and delaying implementation of legislation to stop practices that hurt working families,” Ed Mierzwinski, consumer program director at the U.S. Public Interest Research Group, wrote in an email. “Every day of delay is millions of dollars in unfair fee income. Every day of delay means more families cannot buy things to stimulate the economy (or save to buy things later), as they are forced to pay usurious credit card interest rates.”
The debate arrives as Democratic leaders are pushing legislation to restrict some of the finance industry practices that have been largely blamed for the current economic turmoil. Credit card reform is just one item on a list that also includes proposals to tighten regulations on mortgage lending and grant homeowners the option of bankruptcy to prevent foreclosure. But the power of the finance industry to sway Congress is never to be underestimated. Indeed, the mortgage bankruptcy bill has been stalled in the Senate for weeks, and reportedly faces an uncertain future despite robust support from Democratic leaders, including President Obama. The delay in the credit card reforms is just the latest example of what happens when leadership goals smack headfirst into political reality — and a lobbying juggernaut.
That spells bad news for credit card users, as banks in recent weeks have installed a series of fee and rate hikes to churn profits in a struggling economy. In many cases the increases come without any warning to consumers, and they often apply to balances accrued even before the hikes arrive.
“Unfortunately the way the market place is working, [card users] could use more protection, not less,” said Graham Steele, an attorney at Public Citizen’s Congress Watch. “Consumers need relief now, and yet these bills are being weakened.”
It wasn’t supposed to be this way. When the Fed announced its new consumer protections late last year, Democrats applauded the changes but decried the drawn-out timeline for putting them in place. Some cited the need for legislation precisely because the delay meant that the reforms wouldn’t arrive in time to help consumers weather the recession.
“This is a good first step, but consumers can’t wait,” Rep. Carolyn Maloney (D-N.Y.), sponsor of the House proposal, said in a December statement reacting to the Fed’s reforms. “Congress should act sooner to protect American consumers by giving credit card protections the permanence and force of law.”
Maloney’s bill — which would essentially codify the Fed’s new rules by eliminating hidden fees, giving card users longer notice to pay bills and prohibiting card companies from applying interest rate hikes to existing balances — was originally written to take effect 90 days after the bill passes. But a bipartisan group of lawmakers amended the bill earlier this month, pushing the effective date to either 12 months after passage or July 1, 2010, whichever comes first. The House Financial Services Committee passed the bill easily on Wednesday, and it’s expected to hit the House floor next week.
Similarly, a Senate proposal was passed out of the Senate Banking Committee late last month. Sponsored by Banking Chairman Chris Dodd (D-Conn.), the proposal would have taken hold immediately after passage — until it was altered in committee to push the effective date nine months later.
Given the usually snail’s pace of Congress — and the difficulty of passing controversial proposals through the Senate — Democrats and consumer advocates are pointing to the Fed’s implementation timeline as the earliest the reforms will likely take hold.
“We’re not optimistic,” Steele said of the congressional efforts. “At this point, July 2010 is looking good, which is sad to say.”
Industry representatives maintain that the Fed’s timeline, now 14 months away, is onerous enough without Congress stepping in to expedite it. Peter Garuccio, spokesman for the American Bankers Association, said the changes will require card issuers to reprogram computers, retrain call-center employees, verify the legality of the new policies and rework marketing strategies.
“It’s not as if they’re saying you just have to put smiley faces on the credit card statements,” Garuccio said. “Anything that requires [issuers] to move more quickly is not going to be easy.”
Scott Talbott, senior vice president for the Financial Services Roundtable, an industry group, echoed that message, arguing that the looming reforms represent the most sweeping reforms to the credit card industry in nearly 30 years. “These are massive changes requiring countless man-hours,” Talbott said.
Many Republicans are backing the industry, arguing that consumer trial-and-error remains the best way to weed out the bad players in the credit card market. Rep. Jeb Hensarling (R-Tex.) said Wednesday that there’s “a dizzying array” of card options, and a consumer who doesn’t like one should try another.
“The consumers’ best friend is a competitive marketplace,” Hensarling said.
On Wednesday, House lawmakers did succeed in expediting one element of the Maloney bill when the Financial Services Committee approved a provision requiring card companies, beginning 90 days after the bill’s passage, to warn customers 45 days in advance of rate hikes. Debating the measure, supporters rejected the argument that the banks need more time to implement the change. “They can change the interest rate like that,” said Rep. Luis Gutierrez (D-Ill.), snapping his fingers, “and their computers like that. [They] can go from 18 to 25 to 30 [percent], and they compute the bill so easily. What’s so difficult about 90 days?”
Yet it was Gutierrez who, as chair of the Financial Services consumer credit sub-panel, sponsored the measure to delay the effective date of the Maloney bill from three months to 12. Asked about the discrepancy Wednesday, Gutierrez said he was considering the concerns of the banks and the consumers, as well as the advice of Fed officials, who have recommended that July 2010 is an appropriate deadline for the new rules to be in place. He also predicted that Congress likely won’t get a bill to the president until much later in the year, meaning that there would be little difference between a 90-day implementation period and the July 2010 timeline he sponsored.
“It’s a little messy,” Gutierrez said.
But with many banks taking advantage of the current rules by hiking rates, some powerful lawmakers are threatening to squeeze the timeline if those trends persist at the expense of consumers.
“If we get a lot of reports from our constituents that there is this effort to get in under the wire, please remember that the effective date is not going to be set until we finally send a bill to the president,” Financial Services Chairman Barney Frank (D-Mass.) said Wednesday. “If it turns out there is a flood of efforts to sort of evade this before it happens, then I think you may see a shorter [implementation] time period.”
The Wall Street bailout is also playing a factor in the debate. On Tuesday, Elizabeth Warren, the Harvard law professor who chairs the congressional panel overseeing the Troubled Asset Relief Program, grilled Treasury Secretary Tim Geithner about whether it’s appropriate for bailout beneficiaries to turn around and hike fees and interest rates on their customers. “People are angry that, even if they have consistently paid their bills on time and never missed a payment,” Warren said, “their TARP-assisted banks are unilaterally raising their interest rates or slashing their credit lines.”
Geithner evaded the question, but the issue is very much on the administration’s radar. Indeed, President Obama on Thursday will meet with executives from the country’s largest credit card issuers — including Citigroup, Bank of America and JP Morgan Chase — to clarify his intent to back Congress’ credit card proposals. It’s also widely expected that the administration will offer amendments on the House floor to strengthen the Maloney bill, including a provision forcing card companies to clarify how long it will take customers to eliminate balances if they pay only the monthly minimum due.
Even if the congressional changes don’t arrive before the Fed’s new rules, the law isn’t without advantages, advocates say. Codifying the consumer protections make the reforms tougher to reverse if, for example, a Fed chairman somewhere down the line was opposed to them.
“It’s much easier to change a federal rule than a law,” said Pamela Banks, policy counsel at Consumers Union.
Some lawmakers echoed the importance of passing legislation for the sake of permanence. Frank quipped that, if the Fed were to alter its rules without the law in place, the banks would undo the changes much more quickly than they claim they can put them in place.
“The speed with which people are able to act … is proportional to their desire to act,” Frank said. “The more you don’t want to do something, the harder it is to get done.”