Ban Sought on Arbitrary Interest Rate Changes

Lawmaker Seeks Ban on Arbitrary Rate Adjustments

Maryland could soon change the laws governing the credit industry by prohibiting companies from adjusting interest rates for what critics say are arbitrary reasons, such as a customer opening additional credit accounts.

When consumers open new lines of credit -- for example, signing up for credit cards at retail stores to qualify for discounts -- their other credit card companies are allowed to increase their interest rates without telling them.

A Montgomery County delegate is seeking to ban that practice in the state. Del. C. William Frick (D) will introduce legislation today that would prohibit credit companies from changing interest rates because of what he called "extraneous circumstances."

"We can't restrict the rates banks charge in Maryland," Frick said. "But we can use our consumer protection laws to prevent them from making these kinds of arbitrary changes."

It is unclear where the credit industry stands on the measure because it has not been filed. A spokeswoman for the Maryland Bankers Association declined to comment, as did a spokeswoman for Bank of America.

Tom Saquella, president of the Maryland Retailers Association, said retailers depend heavily on the availability of consumer credit. "We would be concerned if it in any way would restrict the provision of credit," Saquella said.

Frick said the legislation would not prevent banks or credit companies from raising interest rates or declaring customers in default if they miss a payment.

"I think the banks are going to say that they use this to protect themselves from defaults," Frick said. "But we're not leaving banks unprotected. We're just taking away one tool that is arbitrary and could lead to abuse."

Frick's bill could receive broad support in the legislature. House Speaker Michael E. Busch (D-Anne Arundel) said he backs the measure. Del. Brian J. Feldman (D-Montgomery), chairman of the banking subcommittee of the House Economic Matters Committee, which probably will vote on the bill first, will be a co-sponsor.

"I've always believed credit should be established on something that is cause-related," Busch said. "If you have a credit card and you're paying it off on a regular basis, I don't think there's any need to change your credit rating. . . . I just think it's unfortunate that [credit companies] could take advantage of people."

Given the turmoil in the credit industry and the rising rate of foreclosures nationwide, some Maryland lawmakers predicted that Frick's bill could emerge as a hot issue this year.

"There's a lot of emphasis on credit and people's houses [this session], so it could be a sleeper issue," Busch said.

One delegate is planning to testify in favor of Frick's bill after her experience with the law. While shopping for Christmas last year, Del. C. Sue Hecht (D-Frederick) said, she thought she scored a deal when she opened credit accounts at two department stores, netting 20 percent off her purchases. Hecht said she intended to close the accounts soon after.

A few weeks later, she discovered that her credit rating had tumbled. That was a surprise, Hecht said, because she pays her balances in full and on time. "We paid off our house, for heaven's sake," she said.

"Lo and behold, we found out that if you get new credit cards, that says something to these rating agencies and that affects our credit rating," Hecht said. "I was appalled. Obviously, I don't do that anymore."

Hecht said it is a little-known fact that credit companies can raise interest rates of consumers who open new accounts.

"I think it's impacting a whole lot of people thinking it saves them money when, in fact, they're harming and lowering their credit ratings," Hecht said.