The new regulations, unveiled by the Federal Reserve on Thursday, will prevent credit card companies from increasing interest rates on existing balances; prohibit banks from applying interest to balances already paid; and offer consumers more time to make payments before fees kick in. The changes, which take effect in July 2010, constitute the most sweeping credit card reforms in 30 years.
In the eyes of many Democrats and consumer advocates, however, the changes fall short. Rep. Barney Frank (D-Mass.), chairman of the House Financial Services Committee, said Monday that the new rules are good first steps, but they don’t go far enough — and don’t come fast enough — to protect consumers struggling during the recession.
“There’s still room for improvement,” Frank said in a phone interview with The Washington Independent, sister site of The Colorado Independent.
Some Democrats want to take additional steps to prohibit companies from hiking rates for consumers having problems (a late payment, for example) with some other card or line of credit, a practice known as “universal default.” Critics of the companies’ marketing practices also want to see more done to prevent banks from targeting youngsters, who tend to be more reckless spenders than other groups.
Ed Perlmutter (D-Golden), a member of Frank’s committee, is taking a more sanguine approach than his chairman. In a statement, Perlmutter noted:
I am encouraged to see the [Federal Reserve] use its authority to take a strong regulatory stance during these tough economic times. … These credit card regulations are clearly needed to ensure consumers are treated fairly. However, in these tough economic times, it is clear our country must learn how to save more and use credit less.
“The regulations regrettably leave in place many blatantly unfair credit card practices that mire families in debt,” Sen. Carl Levin (D-Mich.) said in a statement. Sen. Christopher Dodd (D-Conn.), chairman of the Banking Committee, agrees, vowing to reintroduce legislation next year to plug the gaps.
Yet additional reforms probably won’t come easily, particularly in this recession. The economic downturn has already forced the federal government to front trillions of dollars to prop up the nation’s sputtering financial institutions, and industry supporters in Washington will likely resist any changes that could further harm the banks’ bottom lines.
Not insignificantly, the nation’s finance institutions perennially rank among the top contributors to congressional lawmakers on both sides of the aisle. In the 2008 election cycle, for example, the industry donated roughly $188 million, according to the Center for Responsive Politics. Nearly $35 million came from commercial banks alone.
Yet consumer advocates argue that Congress shouldn’t prioritize bank profits above consumer protections. Graham Steele, a consumer lobbyist with Public Citizen, said the banks will do just fine. “This won’t substantially change the way the banks do business,” he said, adding that Congress should take further steps to rein in abusive lending practices. “The way that [banks have] been haphazardly lending money has got to change,” Steele said.
In September, the House passed legislation to prohibit universal default and other abusive lending practices, but credit card reform has hit a wall in the Senate. Though Dodd is well-placed to push his reform bill, several Democrats on his banking panel — including Sens. Tim Johnson of South Dakota and Thomas Carper of Delaware — have been strong industry supporters, according to Steele.
President-elect Barack Obama has also been critical of many practices adopted by the industry. In a campaign speech delivered in July, Obama said that some consumers rack up debt based on “reckless decisions,” but others have been victims of their lenders.
Many more Americans aren’t falling into debt because they made an irresponsible decision; they’re falling into debt because credit card companies are pushing them over the edge. For too long, credit card companies have been using unfair and deceptive practices to trick Americans into signing agreements they can’t afford. The contracts you sign when you get a card have gone from being one-page-long a few decades ago to more than thirty-pages-long today. And they’re often filled with traps and fine print that only a credit card executive could understand. These companies have been crossing the line to boost their bottom line.
As a senator for Illinois, Obama had co-sponsored the Dodd bill earlier this year.
The debate arrives as more [and more] consumers are reliant on the convenience and availability of credit cards to pay their bills. And the companies know it. Synovate, a market research company, estimates that American households will receive 4.2 billion credit card solicitations in the mail in 2008. That’s down from 5.2 billion in 2007, but the figure still represents almost 30 solicitations per U.S. household.
Industry representatives are already bracing to fight additional credit card restrictions.
Edward L. Yingling, president and CEO of the American Bankers Association, warned last week that the new rules could hike costs for everyone. “With the uncertainty facing our financial system,” Yingling said in a statement, “it’s absolutely vital for policymakers to understand the full impact of these regulations on consumers and the economy before judging their success or further restricting the marketplace.”
Frank is undeterred. “They said that last year,” he said, “and we passed the bill anyways.”