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Vague Law Threatens to Solidify Abusive Credit Card Rate Hikes



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.”

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