By Nancy Trejos and Binyamin Appelbaum
Washington Post Staff Writers
Thursday, December 18, 2008
When the federal government approves new rules banning "unfair and deceptive" practices today by credit card companies, it will hand a victory to consumer groups who have long complained of lax oversight of the $970 billion industry.
Even with all its lobbying power, the credit card industry was not able to beat back the most sweeping overhaul in decades. Financial companies and trade groups argue that regulators are overreacting to problems in ways that will limit the availability of credit to customers.
Today's move by Federal Reserve, the Office of Thrift Supervision and the National Credit Union Administration is the first of what could be many attempts to further regulate the industry, as several members of Congress plan to codify the Fed's regulations next year and perhaps pass even more stringent rules. It also represents a significant shift in the thinking of the regulatory agencies, which still are run by Republican appointees. Analysts note that regulators have stepped back from an emphasis on educating customers about what they should do, primarily through disclosures, in favor of telling companies and customers what they can and cannot do.
"It just shows how the world has changed," said Brian Gardner, who follows financial regulation issues for the investment bank Keefe, Bruyette & Woods.
"Eighteen months ago the Fed was focused on disclosure and transparency, and now they're coming out with a prescriptive, rules-based guidance. It's a whole different world."
The three agencies declined to release the final draft of the regulations. But the version made public in May would, among other things, prevent banks from raising interest rates on existing balances unless a payment was more than 30 days late, charging late fees without giving the borrower a reasonable amount of time to pay and applying payments so that debts with higher interest rates are repaid last. Sources said regulators would give card issuers until mid-2010 to comply with the rules.
Consumer advocates argue that the changes are necessary because borrowers are having a hard time keeping up with payments. The latest Fitch Retail Credit Card Index, released this month, shows that 60-day delinquencies have increased by nearly 24 percent since August to 4.8 percent.
"If the rule is adopted largely as it was proposed it could help improve the economic stability of many families," said Travis Plunkett, legislative affairs director of the Consumer Federation of America. "When companies sharply increase interest rates, that could have a devastating effect on the financial stability of credit card holders."
By limiting banks' ability to manage risk, regulators would be forcing the institutions to withhold credit, raise interest rates or eliminate such programs as zero percent balance transfers to compensate for it, industry officials and analysts said. That could prolong the credit crunch, damp consumer spending and stall an economic recovery, they said.
"Every proposal needs to be looked at in terms of its effect on credit availability," said Ed Yingling, president of the American Bankers Association. "They need to be concerned that on the one hand they're encouraging banks to lend more and on the other hand you have a series of policies that tell banks to lend less."
Based on data collected from a group of banks, Oliver Ireland, a partner in the financial services practice at the law firm Morrison & Foerster, predicted that the amount that the industry stands to lose in annual revenue, if the rules go into effect as proposed, would be about $12 billion.
"You have to think if that cash flow gets cut off you're going to have to replace it by some other means or compensate for it by some other means," he said. "The principal means available to card issuers are to increase prices or to cut back on credit in a way that can reduce losses going forward."
In written comments submitted to the three agencies in August, Gregory Baer, deputy General Counsel of Bank of America, said that according to industry data, credit lines would drop by an average of about 21 percent, taking $931 billion of available credit out of the market.
J.P. Morgan Chase officials declined to comment yesterday but said in their written comments that industry losses could result in a nearly 12 percent increase in annual percentage rates to an average of 16.58 percent.
Several consumer advocates and members of Congress said the card companies were trying to scare regulators into watering down the rules. They also pointed out that in recent months, banks have been amending terms on existing accounts while scaling back on credit card offers.
"Who are they kidding? They're already raising rates and cutting credit lines," said Rep. Carolyn B. Maloney (D-N.Y.), whose Credit Cardholders Bill of Rights, which mirrored the Fed's proposals, passed the House in September but was not voted on in the Senate. "They've fought these regulations tooth and nail, even before this crisis. Now, even though the cost of money is at record-breaking lows, they're complaining."
Maloney and other members of Congress said they intended to propose bills next year that would make into law the rules being voted on today.
Sen. Christopher J. Dodd (D-Conn.), who proposed a bill this year that would have extended even more protections to consumers, said that for the next Congress, credit card reform would be a top priority for the Senate Committee on Banking, Housing and Urban Affairs, which he leads.
"To restore our economic stability, we must stop credit card companies from ripping off their customers and driving them into deeper and deeper debt," he said. "While I expect the Federal Reserve's rules to be a significant step forward in addressing this issue, I believe we need a strong law in place to protect consumers from unfair credit card practices including 'anytime any reason' rate increases, universal default, excessive and unreasonable fees, and marketing targeted to young consumers."