While I generally prefer for government to minimize its interference in the free market, there is one industry which has gone completely renegade on us - the credit card industry. And on May 19th, 2009, the U.S. Senate administered a richly-deserved hiding to the bloodsucking credit card predators, voting 90-5 to pass HR627, to amend the Truth in Lending Act to establish fair and transparent practices relating to the extension of credit under an open end consumer credit plan, and for other purposes. Additional media coverage and analysis posted by Time, CNNMoney, and the New York Times.
I am pleased to report that Alaska's two senators, Democrat Mark Begich and Republican Lisa Murkowski, were among the 90 voting "Yes". The five contrary votes were cast by Lamar Alexander (R-TN), Bob Bennett (R-UT), Tim Johnson (D-SD), John Kyl (R-AZ), and John Thune (R-SD). Four more senators abstained (one Minnesota Senate seat still unsettled). The New York Times notes that there are a disproportionate amount of credit-card servicing jobs in South Dakota, which may explain their delegation's No vote.
-- Complete roll call vote results HERE.
-- Full text of HR627 HERE.
The Christian Science Monitor thoughtfully summarizes the resultant changes:
-- Hidden fees. It bans arbitrary interest-rate increases and hidden fees, such as charges for paying off a credit-card bill over the telephone.
-- Full disclosure. It requires clear disclosure of the terms of credit-card agreements and any changes made to them.
-- Universal default. It bans the practice of “universal default,” which allows companies to dramatically raise interest rates on a credit card if the consumer is more than 30 days late on any other payment.
-- Freeze on rate increases. It prohibits companies from increasing rates on a cardholder in the first year and requires promotional rates to last at least six months. Rate increases must be periodically reviewed and decreased if the cardholder pays the minimum balance on time for six months.
-- Delays in payment. It prohibits companies from assessing late fees if the card issuer has delayed crediting the payment.
-- Same-day payments at local banks. It stipulates that payments made at local branches must be credited the same day.
-- Credit-limit fees. It bans credit-card companies from charging fees when users exceed their credit limits, unless the cardholder has specifically agreed to allow over-limit transactions. In this case, all penalty fees must be reasonable and proportional to the overcharge – that is, no huge rate increases for a purchase that barely tipped the credit limit. If the cardholder has not agreed to allow over-limit transactions, they would simply be rejected.
-- Early-morning deadlines. It prohibits issuers from setting early-morning deadline for credit-card payments.
-- Statements and notifications. It stipulates that credit-card statements must be mailed 21 days before the bill is due. Previously, the requirement was 14 days. Consumers must now be given 45 days notice of any fee, rate, or penalty increases.
-- Application of overpayments. It mandates that payments over the minimum be applied first to the credit-card balance with the highest rate of interest. Card-companies typically apply extra payments to balances with the lowest rate of interest.
-- Fair disclosure. It requires issuers to disclose the time and total interest costs it would take to pay off credit card balances, if consumers pay only the required minimum.
-- Protections for young cardholders. It provides special protections for consumers under the age of 21. These applicants must have a co-signer who is willing to accept responsibility for payment or proof that he or she has means to repay any credit extended. In cases of joint liability, the co-signer must approve in writing any increase in the credit limit.
Three issues not addressed by the bill include caps on interest rates or fees, the requirement to resolve disputes via arbitration rather than litigation, and interchange fees.
This bill may seem like overkill, but every provision contained therein addresses a specific abuse by the credit card industry. The industry would promote incentives like "points", cash-back rewards, and "air miles" for preferred customers, then cry poverty and gouge the customers for more fees to make up for it. Indeed, because the credit cards companies collect $15 billion each year in penalty fees, comprising 10 percent of their total revenue, the companies actually have a vested financial interest in harvesting more penalty fees. So they kept changing the ground rules to induce and even entrap consumers into penalty situations. The BoycottCitibank website documents a particularly egregious episode. Consequently, they deserve this oversight.
Predictably, the big operators are responding with a combination of pleas and threats. Bankers were already irate about the measure from the beginning, asserting that Congress was unfairly meddling in restricting card interest rates and fees. And a statement attributed to CEO Edward Yingling was issued by the American Bankers Association. "We are concerned that the Senate bill will have a dramatic impact on the ability of consumers, students, and small businesses to obtain and use credit cards". So in other words, they're already threatening to raise fees and limit card availability across the board.
But if the big banks and credit-card issuers raise their rates, this could create opportunities for smaller banks. “Our banks are going to learn to live with the restrictions,” said Steve Verdier, director of congressional relations at Independent Community Bankers of America, after the vote. “But if the big banks make their products even less friendly than they already are, I’m hoping that consumers will rediscover the value of getting credit cards from community banks.
Hat tip to Lisa Murkowski and Mark Begich for voting the right way on this issue.