Credit card companies may soon have their hands tied, as Congress proposes legislation that limits how and when card issuers can raise rates and assess fees.
A popular midway game arms you with a phony rifle and challenges you to shoot the moving targets. Our Congressional leaders don't need the midway, though-they're holding target practice right on Capitol Hill. Of course, their rifles only shoot regulatory bullets, but credit card providers may be the next to get hit.
Legislating credit cards
Representative Carolyn Maloney of New York is sponsoring legislation that would change the way credit card issuers manage your account. The bill, called the Credit Card Holders' Bill of Rights, is intended to prohibit card issuers from implementing strategies that impede the holder's ability to pay down consumer debt. Among the provisions are:
* A ban on arbitrary interest rate increases that are applied to existing card balances
* Bans on double-cycle billing and charging subprime card fees to the account
* Forbidding the practice of applying payments to low-rate balances first
* Requiring the credit card issuer to notify the borrower of rate increases 45 days in advance
* Requiring the card issuer to allow consumers to set their own credit limits
Beating out the Federal Reserve
Last December, the Federal Reserve approved similar rules for credit card issuers, but deferred their implementation until July of 2010. The delay ruffled the feathers of consumer groups, which presumably have now stirred Congress to action.
Lawmakers who support Congress' proposal say that consumers need relief now. Senate Banking Committee Chairman Christopher Dodd shed light on the urgency by arguing that existing laws are allowing card issuers to "gouge" their account holders with fees and unfair practices.
Rising consumer debt defaults
In the long run, consumers may get the best of their card issuers by not paying their bills. Rising consumer debt defaults spell big problems for the industry going forward. Fitch Ratings has reported that 60-day consumer debt past-dues ticked up to a record high of 3.75 percent in January. That was after the 18 percent increase in late payments that occurred in the fourth quarter of 2008.
The growing pool of past-due accounts is already translating into charge-offs for the issuers. In January, the charge-off rate was 7.5 percent, or 40 percent higher than it was in 2008.
Déjà vu all over again
In February of 2008, Representative Maloney introduced H.R. 5244: Credit Cardholders' Bill of Rights Act of 2008. That proposal, which included provisions that were similar to this year's version, passed the House in September of last year, but was never voted on in the Senate.
The 2009 version, H.R. 627, is currently being evaluated by the House Subcommittee on Financial Institutions and Consumer Credit. From there, it goes to general debate by the House and, later, by the Senate. Once the bill becomes law, regulatory target practice is officially over. That's when the real work of enforcement begins.
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