Credit Card Reform Tests Banking Industry Sway

May 04, 2009 | Last updated: July 31, 2020

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Last week, as the Senate was poised to kill legislation allowing homeowners the option of bankruptcy to prevent foreclosure, Sen. Richard Durbin (D-Ill.) provided a grave assessment of Congress’ relationship with the finance industry.

“The banks — hard to believe in a time when we’re facing a banking crisis that many of the banks created — are still the most powerful lobby on Capitol Hill,” Durbin told a Chicago radio station. “They frankly own the place.”

Illustration by: Matt Mahurin Illustration by: Matt Mahurin

To what extent Durbin is correct will be on display this week when the Senate takes up legislation reining in the unfair and deceptive practices commonly used by credit card companies. The proposal, sponsored by Senate Banking Committee Chairman Chris Dodd (D-Conn.), would prohibit rate hikes on existing balances, give cardholders longer notice to pay their bills, and prevent card companies from charging fees when customers pay their bills on time. The bill, which has the strong backing of President Obama, has a good chance of passing, but not before the consumer protections are diluted to the satisfaction of at least some moderate senators on both sides of the aisle — lawmakers whose support Dodd will need to overcome a Republican filibuster.

A similar credit card reform proposal, sponsored by Rep. Carolyn Maloney (D-N.Y.), passed the House easily last week, but the Senate bill goes even further to protect card users from unexplained fees and surprise rate hikes. The question now on the minds of many anxious consumer and lending advocates is this: How strong can Senate Democrats keep those consumer protections and still have the bill pass the upper chamber?

Standing in their way will be the powerful finance industry, which opposes both chambers’ bills and maintains tremendous influence over Capitol Hill lawmakers. Indeed, the Dodd proposal barely squeaked out of the Senate Banking Committee in March, with Democratic Sen. Tim Johnson of bank-friendly South Dakota joining every Republican in siding with the industry to oppose to the bill.

Edward L. Yingling, president and CEO of the American Bankers Association, said last week that the congressional proposals raise “serious concerns” for the group.

“The ABA strongly believes that any additional legislative efforts should strive to achieve the right balance between enhancing consumer protection and ensuring that credit remains available to consumers and small businesses at a reasonable cost,” Yingling said in a statement following passage of the House bill. “We continue to believe that more work needs to be done to achieve that balance.”

Complicating the Democrats’ efforts, Washington policymakers have gone to great lengths — and spent billions of taxpayer dollars — to stabilize the finance industry in recent months. Many of the reform proposals governing the banks — even if they’re done to protect consumers — would likely threaten banks’ profits at the same time Congress is asking them to increase their lending — a dynamic that’s fueled opposition to the credit card reforms and other related proposals.

Then there’s the issue of political contributions. In the 2008 election cycle, the finance industry — including the insurance and real estate sectors — gave more than $463 million to congressional lawmakers, according to the Center for Responsive Politics — more than the contributions from the health care, transportation, agriculture, electronics and defense sectors combined.

“That’s why Congress still listens to these people who created this mess to begin with,” said Kathleen Day, spokeswoman for the Center for Responsible Lending, an advocacy group. “Money.”

As further evidence of the industry’s sway, the banks chalked up an enormous legislative victory last week when the Senate killed the proposal empowering bankruptcy judges to reduce, or “cramdown,” the terms of primary mortgages to prevent foreclosure. The vote was clear indication that, despite the economic difficulties faced by Wall Street — not to mention the series of bailouts propping it up — the finance industry still gets much of what it wants on Capitol Hill.

The issue of credit cards, however, might prove to be an exception. Obama has gone to great lengths to push for new consumer protections this year, calling executives from the nation’s largest card issuers to the White House last month to clarify his support for the congressional reform efforts. That display contrasts sharply with the administration’s stand on the mortgage bankruptcy bill. While Obama supports cramdown as an element of the administration’s foreclosure-prevention efforts, he also didn’t go out of his way to twist lawmakers’ arms to pass the measure. The final vote was evidence of that tepid support: The cramdown proposal fell a whopping 15 votes shy of defeating a Senate filibuster. Twelve Democrats joined every Republican to kill the bill.

There are murmmerings on and off Capitol Hill that Democrats viewed credit card reform as the more certain victory politically, and therefore have put more weight behind it than they did behind cramdown. There was also a fear that homeowners who took advantage of bankruptcy to save their homes would, in the process, also wipe away any outstanding credit card debts — a potential double blow to the banks that stoked opposition to the proposal.

“The administration is really making a concerted effort [on credit card reform],” said Graham Steele, an attorney with Public Citizen’s Congress Watch. “Cramdown was a much tougher ask to begin with. Everyone’s got credit cards and [the companies] are preying on even the responsible borrowers now. No one has any sympathy for that.”

For consumers, there’s a great deal hinging on what credit card reform provisions the Senate can pass. The Maloney bill in the House, for example, allows card companies to hike rates on existing balances when the borrower is more than 30 days late on a payment. The Dodd bill, by contrast, prevents retroactive rate increases in all cases. An analysis conducted by The National Consumer Law Center found that roughly 10 million Americans would still be vulnerable to those retroactive hikes if Maloney’s version of the provision were adopted instead of Dodd’s.

“Families who are over 30 days late are often the very ones in the most financial trouble due to this dire economy,” Chi Chi Wu, NCLC Staff Attorney, said in a statement. “Doubling the interest rate on purchases they may have made years ago when the rate was lower only shoves these distressed families deeper in the hole and makes it impossible to climb out.”

Dodd has been working with Sen. Richard Shelby (R-Ala.), the senior Republican on the Banking Committee, in an attempt to forge a compromise, with the Senate expected to take up the bill as early as Wednesday. Neither Dodd’s nor Shelby’s office responded to requests for comment last week.

Despite the powers aligned against them, consumer advocates remain optimistic that a strong credit card bill is possible from the Senate. Lauren Saunders, managing attorney at the National Consumer Law Center, expects that the bill would retain the most significant consumer protections, including the total ban on retroactive rate hikes and age-limit requirements that would prevent card companies from targeting college students.

“There will be some compromises,” Saunders predicted, “but it won’t be gutted.”