Obama Moving Against Abusive Credit Card Practices

President Obama called 14 bank executives to a White House meeting today [2] to talk about questionable practices in the credit card industry. There’s no doubt that some predatory credit card interest rates, fees and penalties will be prohibited. The question is, how strong will the regulation be and how soon will it take effect?

Before taking up the current political situation, let’s remember how we got here.

Through the late 1970’s, credit cards were primarily a convenience for customers and retailers so neither had to deal with cash or personal checks. Regulation by states kept credit card practices modest, straightforward, and reasonably fair.

Then in 1978, the U.S. Supreme Court ruled [3] that states could not limit credit card interest rates simply because the card was used in-state. Rather, the law of the state where the bank was headquartered controlled interest rates. A race-to-the-bottom quickly occurred, with South Dakota and Delaware leading the charge to permit high interest rates. That’s why Citibank’s credit card subsidiary is headquartered in South Dakota and Bank of America’s is in Delaware.

Through the 1980s and 90s, Congress, states, and the Supreme Court continued to wipe out credit card regulations based on an assumption that deregulation was good for consumers. Today we know that unfettered deregulation is a disaster for both consumers and the economy as a whole.

I mention this bit of history because it demonstrates that today progressives are not trying to impose regulation, we’re working to restore regulation. (That message framing makes a substantial difference to American voters.)

Over the past few years, consumer advocates—including our friends at Demos [4], SEIU [5], U.S. PIRG [6], Consumers Union [7], and Center for Responsible Lending [8]—have decried a series of practices by credit card companies that are simply unfair to customers. For example, credit card companies routinely:

• Hike interest rates any time and for no reason.
• Apply newly-increased interest rates to prior existing balances.
• Impose major penalties for minor transgressions.
• Impose late fees even when it is proven that payment was mailed on time.
• Impose finance charges on balances repaid on time.
• Market and issue cards to young people who are clearly unable to repay debt.

Following a long decision-making process, the Federal Reserve in December 2008 approved new regulations [9] to ban some abusive credit card practices. But the Fed’s rules are not only too limited—they don’t even take effect until July 1, 2010. That’s why Congress and President Obama are working on two more comprehensive bills.

The first is H.R.627 [10], the Credit Cardholders’ Bill of Rights Act, sponsored by Rep. Carolyn Maloney (D-NY). This legislation passed the House in September 2008 with bipartisan support—a vote of 312 to 112, with 84 Republicans joining 228 Democrats—but it was never taken up by the Senate. Yesterday, with Chairman Barney Frank leading the charge, the House Financial Services Committee approved [11]the Maloney bill by a vote of 48 to 19. Rahm Emanuel told Frank that the White House is interested in amendments to strengthen the measure and House Majority Leader Steny Hoyer said that the bill may come to the House floor as soon as next week.

The second bill is S. 414 [12], the Credit Card Accountability, Responsibility and Reform Act (Credit CARD Act) sponsored by Senator Chris Dodd (D-CT) who is the Chairman of the Committee on Banking, Housing, and Urban Affairs. Dodd’s legislation is more comprehensive than Maloney’s—and unlike the House legislation, it does not currently have any Republican support. The Senate committee approved [13]S. 414 on March 31 with a straight party-line vote of 12 to 11.

All this seems like a difficult but conventional legislative battle. But there is one twist. The banks are using federal bailout money to lobby against these commonsense credit card reforms.

The Washington Post reported [14]two days ago that:

Top recipients of federal bailout money spent more than $10 million on political lobbying in the first three months of this year, including aggressive efforts aimed at blocking executive pay limits and tougher financial regulations, according to newly filed disclosure records. The biggest spenders among major firms in the group included…Citigroup and J.P. Morgan Chase, which together spent more than $2.5 million in their efforts to sway lawmakers and Obama administration officials on a wide range of financial issues. In all, major bailout recipients have spent more than $22 million on lobbying in the six months since the government began doling out rescue funds, Senate disclosure records show.

That’s just disgraceful. We’ve given the banks hundreds of billions of dollars to offset their business failures. It’s long past time for them to shoulder some public responsibility and end the kind of predatory banking practices that got us into the current financial crisis.