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Populist Angst Fuels Senate Credit Card Compromise



Senate banking leaders have wrangled a bipartisan deal over controversial legislation reining in the credit card industry, setting the stage this week for likely passage of new consumer protections in the midst of a tough economy where card companies are hiking rates to bolster profits.

The Senate compromise — worked out over the weekend by bill sponsor Sen. Chris Dodd (D-Conn.) and Sen. Richard Shelby (R-Ala.), the senior members of the Senate Banking Committee — would force card companies to disclose looming rate increases, eliminate surprise fees and prohibit rate hikes on existing balances.


Illustration by: Matt Mahurin

House lawmakers passed a similar bill easily last month, but the threat of a GOP filibuster — not to mention the tremendous lobbying clout of the finance industry — has threatened to derail the legislation in the Senate, which has been a black hole for Democratic leaders trying to push bank reforms in recent years. Indeed, Dodd struggled to get his credit card bill out of the Banking Committee, with Democratic Sen. Tim Johnson, representing the banking hub of South Dakota, voting with all panel Republicans against the bill.

The Senate compromise dilutes the consumer protections slightly from Dodd’s original proposal, but it goes further than both the House bill and new Federal Reserve rules to help consumers manage their cards. As a result, the Dodd-Shelby bill has the distinction — rare among finance reforms opposed by Wall Street — of gaining approval from both Senate Republicans and the vocal community of consumer and lending-reform advocates.

“It’s not everything we wanted, but it takes strong steps to help consumers,” said Lauren Saunders, managing attorney at the National Consumer Law Center. “It’s a reasonable compromise.”

Central to that compromise, the Dodd-Shelby bill allows banks to hike rates on existing balances in cases when cardholders are 60 days late on a payment. The original bill banned all such retroactive rate hikes. The House proposal, sponsored by Rep. Carolyn Maloney (D-N.Y.), permits retroactive rate hikes if customers are 30 days late. In another break from the Maloney bill, Dodd’s proposal would allow customers to earn back lower rates by paying on time for six months straight following a retroactive rate hike.

Many of the Dodd reforms mirror those in the House bill. Under both chambers’ bills, for example, card issuers would have to provide 45 days notice before hiking rates; they must mail statements at least 21 days before the bill is due; and they would be prohibited from charging customers a fee to pay their bills. (Some companies, for example, currently charge extra to pay over the phone or online.)

Both proposals also take steps to prevent college students from racking up tabs they have no means to pay back. The Dodd bill prohibits companies from issuing cards to anyone under the age of 21 unless there is a co-signer, for example, while the Maloney bill sets strict upper credit limits on students between the ages of 18 and 21.

The Fed unveiled similar consumer-friendly reforms in December, but those changes aren’t effective until July 2010 — too far away, advocates argue, to help many consumers survive the downturn. The congressional reforms would arrive little sooner. The Dodd bill would take hold nine months after passage, while the window under the Maloney proposal is 12 months.

President Obama has been pushing hard to enact new credit card reforms this spring, urging Congress over the weekend to get a bill to his desk by the Memorial Day recess.

“You shouldn’t have to fear that any new credit card is going to come with strings attached, nor should you need a magnifying glass and a reference book to read a credit card application,” Obama said Saturday during his weekly radio address. “And the abuses in our credit card industry have only multiplied in the midst of this recession, when Americans can least afford to bear an extra burden.”

The Senate began debate on the Dodd bill Monday, with observers expecting a final vote on the measure before the week’s end. On the chamber floor Monday, Senate Majority Leader Harry Reid (D-Nev.) said the compromise puts “fairness and common sense” into the lender-borrower contract.

“In short,” Reid said, “this bill cleans up the fine print so consumers can’t get blind-sided by their credit card companies.”

The debate arrives just a few days after the Senate killed another consumer-friendly proposal allowing homeowners to declare bankruptcy to save their homes from foreclosure. Complicating that vote, lawmakers have doled out hundreds of billions of dollars to prop up Wall Street in recent months, leaving many members of Congress reluctant to harm industry bottom lines at a time when the economy’s rebound hinges largely on the health of the banks.

That the Democrats appear poised to have greater success passing credit card reforms is some indication of just how unpopular credit card companies have become, particularly as more and more banks are raising rates and fees on even their most reliable borrowers. If bankruptcy reform is tough to grasp, few voters are unfamiliar with credit cards, and Democratic leaders smell a political victory as well as a win for consumers. Indeed, observers on and off Capitol Hill say the Obama administration surveyed the political landscape, and put all its energies in passing credit card reforms in lieu of mortgage bankrupt changes. Republicans like Shelby seem ready to jump onto that populist bandwagon.

Not that this debate is over yet. The finance industry is fighting tooth and nail to water down the congressional proposals, and conservative lawmakers are likely to offer a number of industry-friendly amendments during this week’s debate on the Senate floor.

Dodd, for his part, has promised to deflect any proposals that would further dilute his bill. “While I expect some battles in the coming days from credit card companies and their allies in an effort to diminish these strict new rules,” Dodd said in a statement Monday, “I stand ready to fight against any attempt to weaken the strong consumer protections in this bill.”

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