RISMEDIA, May 27, 2009-(MCT)-President Obama recently put forth law designed to rein in a credit card industry widely condemned for snaring consumers in financially crippling traps.
When the new law takes full effect next February, card issuers will no longer be able to impose sky-high penalty interest rates on customers whose payments arrive a day or two late. Consumers will still face late fees, but they will have to be 60 days late to be pushed into default.
Barred, too, will be retroactive changes in terms affecting cardholders who had committed no infractions at all. In urging Congress to act, Obama sharply criticized those sorts of “any-time, any-reason” rate increases that can suddenly double or triple the interest rate on a customer’s existing balance. Many consumers complained that such tactics amounted to bait-and-switch.
Critics say the credit card industry’s outrageous practices caused its fall from grace even as it made Visa, MasterCard and American Express into synonyms for the good life and enabled U.S. consumers to build up nearly $1 trillion in balances on revolving credit accounts.
The credit card industry did not accept defeat quietly. To the end, it argued its detractors did not understand the sophisticated business model it had evolved: pricing credit according to risk, and repricing it continually as consumers’ circumstances changed.
One thing both sides agree is the new law reflects a shift in the political pendulum-away from the laissez-faire lending environment that allowed practices that federal regulators and lawmakers ultimately deemed unfair and deceptive, and toward a more regulated marketplace.
Advocates representing consumer groups and lenders both said the bipartisan success of the legislation, which will force credit card companies to revamp their business models, was a sign of the political moment.
They said the credit crisis, economic meltdown and bank bailouts made credit card lenders a politically juicy target and undercut the finance industry’s vaunted ability to get its way in Washington.
“There was a need for Congress and the president to appear tough on banks, and an easy and politically expedient way to do that was to crack down on card issuers,” said Mark J. Furletti, a credit card company attorney at Philadelphia’s Ballard, Spahr, Andrews & Ingersoll L.L.P. and a former researcher at the Philadelphia Federal Reserve Bank’s Payment Card Center.
To be sure, the industry has hardly lost its clout. Less than a month ago, Congress disappointed the same consumer groups that pushed for credit card reforms when it refused to allow bankruptcy judges to adjust, or “cram down,” the principal owed on primary residential mortgages.
Supporters said allowing judges to reduce mortgages to the level of a home’s actual market value-as they already can do with commercial properties, vacation homes and autos-was crucial to stemming the foreclosure crisis and the collapse of housing prices around the country. Bankers said it would reduce the availability of credit and raise its cost for everybody-the same arguments they made against the new credit card rules.
Why the difference? One reason is that the cramdown proposal was opposed by a broad group of lenders, including credit unions and community banks. Far fewer lenders remain in the credit card business, which became increasingly consolidated in the 1980s and ’90s as it turned to costly marketing and pricing models based on the now ubiquitous FICO score. But a bigger distinction was the difference between troubled homeowners and card users.
Rightly or wrongly, opponents of the cramdown proposal portrayed those who would benefit as irresponsible people willing to walk away from their debts. “They were able to paint them as deadbeats,” said Ed Mierzwinski, consumer program director for the U.S. Public Interest Research Group. That did not work in the fight over credit card abuses, because such a wide swath of victims was affected.
Some were responsible citizens who got into trouble with credit card debt because of a personal crisis such as a job loss or medical problem-much like the profile of consumers who get in over their heads and eventually wind up in Bankruptcy Court.
Advocates such as Mierzwinski say the connection is not coincidental. As such borrowers struggled to stay afloat, their credit card lenders may have sounded sympathetic. But the lenders’ risk models showed they were more likely to default, so they were socked with rate increases even if they had managed to stay current on their cards. If treading water is tough at 12%, it is even tougher at 29%.
But it was another category of borrowers who surely became the industry’s worst nightmares. People like Larry Hrebiniak. A management professor at the University of Pennsylvania’s Wharton School, Hrebiniak was among tens of thousands of consumers who complained in recent years about sudden and unexplained changes in interest rates and other credit card traps.
Six years ago, Hrebiniak was a fairly typical “convenience user” of credit cards, like about 4 in 10 Americans, including a MasterCard from MBNA (now part of Bank of America Corp.). He paid off its balance every month, enjoyed an interest rate of 8%, and had a credit limit of $15,000.
His mistake? He decided to use of some of his MBNA credit to pay off some unusually large expenses over several months. His balance went as high as $10,000, and suddenly his rate jumped to 15.99%.
Hrebiniak complained to MBNA and bank regulators. Both reached the same conclusion: It was a contractual matter between Hrebiniak and his bank, and the terms of Hrebiniak’s card allowed MBNA to raise his rates at any time for any reason. All that mattered was whether it was properly disclosed.
But complaints like Hrebiniak’s kept coming, and two years ago key regulators decided it was time to act.
In new rules scheduled to take effect in July 2010, the Federal Reserve finally declared that disclosure was not enough and said it could bar practices such as “any-time, any-reason” rate increases under its authority to stop unfair and deceptive trade practices.
Now Congress and the president have gone further. The 33-page law that Obama signed mostly takes effect in nine months and bars a whole slew of traps that credit cards’ critics have identified over the years-including irritants such as vanishing grace periods, shifting due dates and the imposition of “over-limit” fees on customers who would rather just have a purchase declined.
To Travis Plunkett, who pushed for the new rules on behalf of a coalition of consumer groups, perhaps the most remarkable aspect of the turnaround was how it ended-with protections being added, not taken away.
Plunkett said congressional debate usually “gives industry lobbyists and special interests more time to work their magic” to weaken proposals. “But in this case the dynamic was the opposite. Public anger was so high, and concern in Congress was so broad, that the overall impact was to strengthen the bill.” Hrebiniak said he was happy lawmakers had acted, even if it took a crisis to push them.
“A lot of people have been yelling against the issuers of credit cards for years,” he said. “But I think it all resonated, it all came together, when the economy collapsed.”
Hrebiniak said he expected the market to adapt to the new rules. Despite card issuers’ recent dire warnings, he said he expected competition to keep offers flowing to creditworthy customers. At the same time, he said the new law would not be a panacea for financially stressed borrowers.
“Despite these protections, there are a lot of people who still can’t handle credit,” he said.
New credit card rules include:
-Cardholders must be 60 days late before considered in default.
-Except in cases of default, rate changes will generally apply only to new purchases, not existing balances.
-Banks must send a bill at least 21 days before it’s due.
-Payments received by 5 p.m. on the due date must be counted as on time.
-Lenders must give 45 days’ notice before raising rates. (Consumers may opt out and pay under the old terms.)
-Payments above the minimum must be applied first to highest-interest portion of the balance.
-People under 21 must offer proof of income or have a co-signer to obtain a credit card.
-“Over-limit” fees cannot be triggered by purchase unless cardholder agrees that lender should permit such a purchase.
-Gift cards cannot expire in less than 5 years. Inactivity fees must be prominently disclosed.
(c) 2009, The Philadelphia Inquirer.
Distributed by McClatchy-Tribune Information Services.