Credit Card Reform via the 2009 Cardholders’ Bill of Rights

[Updated] Looks like credit card reform is gaining steam as the Senate is expected to vote (and approve) the controversial bill this week. The Credit Card Reform Bill, approved by the House on April 30th, is expected to pass in Congress with more than 20 amendments to the original house version of the legislation (see below). President Obama wants to sign it into law by Memorial Day. Senate Democrats and Republicans made some critical compromises over the bill and have strengthened a number of provisions which include:

Retroactive Rating: Consumers who are paying more in interest because they have fallen behind on their credit card bills could regain their older, lower rates if they pay their bills on time for six months. Lawmakers contend that the practice of hiking rates on past balances prevent consumers from climbing out of debt, and that this provision is needed for any real reform to take place.

  • Require anyone under 21 to prove that he or she can repay the money before being given a card, or have a parent or guardian promise to pay off the debt if he or she defaults. This is aimed at lowering the soaring credit debts (and defaults) that many college students are accumulating and get burdened by throughout their working lives.
  • Bank fees if customers want to pay their bills by phone or online and prohibit over-the-limit fees unless a cardholder elects to be allowed to go over their limit.

  • Require lenders to disclose how much time it would take and how much money in interest would be paid if only the minimum monthly
    are made.

The President is a very strong supporter of credit card reform, which is good news for consumers who are angry over what many see as unfair practices. This was highlighted during a recent White House meeting where President Obama strongly suggested that credit card company executives start disclosing terms in plain English and stop charging exorbitant rates (especially given the recession and all the assistance they are already getting). While the President understood that companies need to make profits, it did not justify the rise in the national average annual credit-card interest rate standing at 12.42%, up from 11.18% last year.

“There’s no time for delay,” Mr. Obama said. “It’s time to get it done. We can’t depend on profits that depend on misleading American families–those days are over.” Americans know that they have a responsibility to live within their means and pay what they owe,” Obama said in his weekly radio and Internet address. “But they also have a right to not get ripped off by the sudden rate hikes, unfair penalties and hidden fees that have become all-too common”


Mr. Obama’s meeting sent a clear signal to the executives that credit-card legislation would be forthcoming and it would likely happen quickly. Mr. Obama told reporters that he told the executives “credit cards are an important convenience for a lot of people.” He said he expressed concerns about rates that quickly doubled after starting at low levels and “a whole lack of clarity and transparency” in terms and conditions on cards.

He also outlined four key principles and goals: an end to “anytime, any-reason rate boosts and late-fee traps”; plain-language statements without fine print and “no more confusing terms and conditions”; the availability of comparison shopping for cards and the option of a “plain-vanilla, easy-to-understand, simplest-terms-possible credit card” as a default option; and more effective oversight and enforcement against issuers that violate the law.

Credit card reform is a growing concern for American consumers who rely on credit cards for large and small purchases. About three-fourths of all U.S. households have a credit card with an average unpaid balance of $12,000. The Center for Responsible Lending this month showed that, within the last six months, the top eight credit card issuers have all increased the interest rates on existing balances for some of their account holders for no particular reason. The organization says an estimated 10 million account holders may have been impacted

If the bill and provisions become law, the new provisions won’t take effect for a year, except for a requirement that customers get 45 days’ notice before their interest rates are increased. That would take effect in 90 days.

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Long suffering credit card holders may finally get some benefit amongst all the government fiscal spending and stimulus packages. The re-introduction in Congress of the Credit Cardholders’ Bill of Rights legislation, to rein in abusive credit card practices, has set the stage for a political battle that will determine whether small business’ and other credit card users get relief soon from soaring rates and fees.

Earlier reforms to address retroactive rate increases and on double-cycle billing were already put in place in late last year through new regulations issued by the Federal Reserve and other federal agencies. However, those new rules, don’t take effect until July 2010. The latest bill specifies that new regulations would be enacted 90 days after President Obama signs the bill into law.

The Credit Cardholders’ Bill of Rights legislation, introduced by Rep. Carolyn Maloney, D-N.Y., in the House, and Senators Mark Udall, D-Colo., and Charles Schumer, D-N.Y., in the Senate. would take a number of steps to restrict credit card issuers, including:

– Banning retroactive rate increases on existing balances for cardholders in good standing. Rates could still be raised if a customer were more than 30 days late with a payment.

– Requiring 45 days’ notice of all rate increases on new charges and protect cardholders
against arbitrary interest rate increases

– Banning “double-cycle billing,” which allows fees to be charged for balances that were already paid off.

– Allowing cardholders to set limits on their credit card and cap how much they can charge to their cards, to avoid overdraft fees.

– Outlawing “universal default” clauses, which automatically hike rates on a card based on unrelated financial activity, such as being late paying another bill.

– Prevents cardholders who pay on time from being unfairly penalized and protects cardholders from due date gimmicks and misleading terms.
– Requires card companies to fairly credit and allocate payments

– Prevents card companies from giving subprime credit cards to people who can’t afford them

– Requires Congress to provide better oversight of the credit card industry [I question if this is too much government intervention]

“A credit card agreement is supposed to be a contract, but in recent years cardholders have lost the ability to say no to unfair interest rate hikes and fees,” Maloney said in a press statement. “This bill levels the playing field between card companies and cardholders while fostering fair competition and free market values.”

Credit card companies are expected to oppose the bill. The American Bankers Association, which represents several major credit card companies, says that a 90-day implementation would be too onerous for banks to put into effect. “In effect, these new regulations completely rework the current credit card system and mark the beginning of a new market structure for credit cards,” ABA President Edward Yingling said in a prepared statement.

“Precipitous action, such as the implementation period in the new bill, could have serious and detrimental effects on consumers and the economy at a time when access to credit is in particular demand.”

Industry critics don’t buy that argument

“Three months seems like plenty of time to rejigger their computer systems,” said Travis Plunkett of the Consumer Federation of America, which backs increased credit card regulation. “There are plenty of ways to allow the banks a reasonable period of time to implement the law without making consumers wait for a year and a half while they’re still dealing with practices that the Federal Reserve has determined are unfair and deceptive.”

If legislation does make it through Congress, it’s almost certain to be signed by Obama, who during his presidential campaign endorsed credit card reform. Obama singled out unilateral rate hikes and rate changes on existing debt as two industry practices in need of abolition. “Over the years I’ve been pretty pessimistic about the opportunities for federal legislation, but the prospects are really good,” he says. “Members of Congress are hearing from constituents on this issue. Sixty-thousand people wrote the Federal Reserve. This is a very big issue with the American public.”

References : NY Times,

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