New Pro-Consumer Credit Card Legislation Likely

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One of the issues facing any regulator is how to balance the interests of its various constituencies. Over the last twenty years, the pendulum has swung away from protecting consumers to promoting business interests. On some fronts, we are seeing pressures to move in the other direction. For example, the Vioxx case, which highlighted the FDA’s failure to intervene in the face of known health risks and dubious marketing practices, has led the agency to take a tougher stand on drug safety.

A post on Credit Slips reviews pending legislation to curb some of the dodgier practices of credit card issuers, such as increasing interest charges if a consumer has a late payment to an unrelated creditor. The proposals sound modest (and looking quickly over the bill, the post appears to have addressed the main provisions), yet the card issuers will almost certainly fight a pitched battle.

It will be interesting to observe what arguments credit card companies offer in their defense. Personally, I have little sympathy for the claim that new rules will hurt their profits. Credit cards is one of the most lucrative banking products. Similarly, banks may assert that the legislation will lead them to deny credit to certain customers. So what? Borrowing is not a God given right, and banks should exercise caution in taking on credit risk.

From Credit Slips:

The Credit Card Accountability Responsibility and Disclosure Act of 2007 or Credit CARD Act (H.R. 1461) is currently before the Financial Services Committee of the U.S. House of Representatives. The pressure to do something about abusive consumer credit practices is building, and I expect some regulatory change to come out of Washington during this congressional session. Also, as Credit Slips co-blogger Katie Porter observed, pressure also is building from the Supreme Court’s decision in Watters v. Wichita Bank (2007) that federal regulations from the Office of the Comptroller of the Currency (OCC) preempt some state consumer protection laws. Given the OCC’s rather miserable track record in consumer protection, members of Congress may step in rather than leave it to the OCC.

If you read this blog, it won’t surprise you to learn that I would support many of these efforts. But, even if you disagree with me about whether some increased credit card regulation should happen, I think it is more difficult to disagree that some increased regulation will happen….

First, the bill would require advance notice of interest-rate increases. Many consumers do not realize that the credit card companies have reserved the right to change the terms of the credit card contract, including the right to unilaterally increase the fees the credit card company charges. If a credit card company wanted to increase the interest rate on an existing customer’s outstanding balance, the company would have to give at least fifteen days advance notice of the change. The customer would then have the right to cancel the card and pay off the existing balance under the old interest rate. Of course, after cancellation, the customer would not have the right to make further charges on the card.

Second, the bill would put an end to so-called universal default clauses. Under these clauses, the credit card company reserves the right to raise the interest charged because of a change in the customer’s credit score. A universal default clause can mean that a late payment to a utility company or a landlord can result in increased credit card fees even if the customer has not made any late payments to the credit card company. The bill would require the credit card company to base its charges and interest rates based on the credit card company’s experience with the customer rather than the customer’s experience with other lenders.

Third, the bill would prohibit the issuance of a credit card to persons under the age of 18 without a parent’s signature, submission of financial information proving the minor has independent means to pay, or completion of a credit counseling course. (So much for Hasbro’s plan to market the Visa card with its Game of Life.)

Those are just some of the changes that I see as particularly noteworthy. The Credit CARD Act of 2007 would make other laudable changes that space and time do not permit for a fuller explanation. These other changes include banning credit card companies from charging “over the limit” fees when they have authorized a consumer to exceed the credit limit on the card; requiring disclosure in the credit card statement of how much the monthly payment would need to be to pay off the credit card debt in 36 months; and banning credit card companies from charging fees to customers who pay more than the minimum monthly balance or pay the credit card balance in full.

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