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Monday, September 29, 2008

Cardholder bill of rights sails through House

In an attempt to regulate what it regards as abuses and unfair practices in the credit card industry, the U.S. House of Representatives passed HR 5244, the Credit Cardholders' Bill of Rights, by a vote of 312 to 112. This legislation would protect cardholders from arbitrary interest rate increases and unfair fees.

The bill, introduced by Rep. Carolyn Maloney, D-N.Y., and Rep. Barney Frank, D-Mass., would remove upfront fees on subprime credit cards (high interest cards issued to consumers with poor credit history), interest rate increases on existing card balances, and late fees on payments mailed at least a week before the due date.

"This bill will eliminate retroactive interest rate hikes, late fees that push cardholders over their credit limits, and double-cycle billing, among other reforms," Maloney said.

One-sided contracts

HR 5524 amends the Truth in Lending Act (TILA) of 1968 to prohibit a creditor from using information in a consumer report or any change in a consumer's credit score as the basis for increasing the annual percentage rate of interest on a consumer's outstanding credit card balance. TILA is a federal law that mandates clear disclosure of the lending arrangement and all credit card fees.

Maloney, who chairs the House Financial Institutions and Consumer Credit Subcommittee, said that she firmly believes the free market works best when consumers are empowered to make their own choices. "HR 5524 will help foster fair competition and free market values," she said. "A card agreement is supposed to be a contract, but what good is a contract when only one party has the power to make decisions?"

On thin ice

But according to Adam Atlas, Payments Attorney, the real question relating to this bill is how much less money banks will earn if HR 5524 becomes law.

"If it turns out that the [elimination] of these fees represent, say, half a percent of the overall growth revenue of credit card issuers, there isn't a problem," he said. "But if these fee cutbacks represent a significantly larger percentage, then this law could be another blow to banks that are already on thin ice. With everything that's happening in the industry, I don't think they can afford to lose any of those revenue streams right now."

The legislation, however, may have a more difficult time in the U.S. Senate. Members are focused on passing a $700 billion rescue package for failing financial companies. This package makes action on HR 5524 reportedly unlikely in the near future.

Level the playing field

In mid-September 2008, Tamara Draut, Vice President for Policy and Programs at Demos, a non-partisan public policy research and advocacy organization, sent a letter to members of the House of Representatives urging full support of HR 5524.

Draut appealed to Congress to support the bill as written and to reject any further amendments that would, according to her, weaken the bill and its efforts to protect cardholders from abusive lending practices. "It has been two decades since the credit card industry was deregulated," Draut stated in her letter.

"And under that shield [of deregulation], credit card companies have shifted the cost of credit to individuals least able to afford it, while at the same time reporting some of the highest profits in the entire banking sector. HR 5524 would level the playing field between the borrower and lender by putting an end to some of the most arbitrary, abusive and unfair credit card lending practices," she added.

However, Atlas believes that this law could actually be good for the payments industry. "It may allow cardholders to start spending more money than they would otherwise spend. If a consumer saves $40 in late fees, that means they have $40 more to spend at our merchants, so in a perverted kind of way it's good for us," he added. end of article

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