More Evidence For Reining In Credit-Card Companies

The Senate is expected to vote either later today or Friday on a credit-card reform [1] bill. As debate continues on that bill—and as President Obama ratchets up the pressure with a town hall meeting on the subject—a recent report by the Center for Responsible Lending [2] shows just why tough legislation is needed.

The center did what it called a "quick sampling" of actions taken by credit card companies after the Federal Reserve Board announced a series of rules that will take effect in late 2010 designed to curb some of the companies' most onerous practices—rules that Sen. Christopher Dodd, D-Conn., who is leading the reform effort in the Senate, has maintained don't go far enough and don't go into effect quickly enough.

What the center found is that the major card isuers—Citigroup, Bank of America, JP Morgan Chase, Capital One, HSBC, Discover, American Express, and Wells Fargo—"all continue to apply a customer's monthly payments to the least costly balance first, leaving the most expensive to continue to grow. None have changed their policy of imposing interest rate hikes for any reason, any time. Additionally, there is no evidence that any of these companies has expanded the period of time between when monthly bills are sent and when late fees apply."

What the card issuers have done is modest at best. For example, some issuers have ended the infuriating practice of considering a payment "late" because the payment was processed in the afternoon of the due date instead of the morning. In some cases, consumers are being given more advance warning of a rate hike.

But as for the rate hikes themselves, there's no evidence of banks taking steps on their own to bring these under control. The center estimates that 10 million card holders have received rate hikes in the past few months. That does not count rate hikes and fee increases on borrowers who have made late payments. It's not clear what the average rate hike is on borrowers who are paying their bills on time, but the report says "we know that many cardholders have seen increases of 10 percentage points or more over their existing rate."

The bill that is moving through the Senate, James Ridgeway notes in a commentary [3] today on Mother Jones, will do some good for consumers. For example, companies will be barred from raising interest rates on a delinquent user's existing balance until the delinquency exceeds 60 days. Card users who face a penalty rate can have their rate reconsidered for lowering to their original rate after six months of on-time payments. The bill ends the practice of "universal default," in which companies raise credit card rates on accounts paid on time because another account was not. Disclosure would also be better.

But the Senate on Wednesday flatly rejected measures that would cap interest rates, even though, as Ridgeway points out, such a measure has broad consumer support and is hardly radical.

"Credit unions have been under [such a] law for 30 years which says the maximum rate is 15 percent except under unusual circumstances, in which case it goes up by 3 percent," said Sen. Bernie Sanders (D-Vt.), one of the measure's cosponsors. "We want to do for private banks what we have been doing with credit unions." Laws against usury were common in many states until they were essentially abolished by a banking-law loophole in the early 1980s. "The problem with instituting a new usury law is politics," Warren said. "The credit industry hires a lot more lobbyists than the consumer advocacy groups, and the creditors have been almost uniformly opposed to any usury laws."

Odds are that the credit-card bill will pass the Senate this week by a comfortable margin. But that passage will not repudiate the statement by Sen. Richard Durbin, D-Ill., that bankers "frankly own this place [4]." It at best says that they have been knocked off-stride by the populist reaction to their greedy overreach.