Legislation Targets Retroactive Rate Changes on Credit Cards

By Rosalind S. Helderman
Washington Post Staff Writer
Sunday, March 22, 2009

Maryland could become the first state in the country to make it illegal for credit card companies to retroactively change their interest rates, a practice that can force people who owe money further into debt.

The legislation passed the House of Delegates last week, and its prospects in the state Senate probably will be boosted by a national mood that has turned powerfully against banks and in favor of struggling consumers.

The bill would prohibit card companies that change their rates from applying the new rate to debt a consumer already has incurred. Card companies often do that now when a computer detects that a customer has missed a payment on a different card or loan. Even if the customer decides the new rate is too high and cancels the card, the new rate can be applied to debt the customer already has.

Federal regulations adopted in January would establish similar protections nationwide in July 2010. But if the Maryland bill passes, it would go into effect this summer, giving state consumers the safeguards a year early.

The bill's sponsor, Del. C. William Frick (D-Montgomery), said thousands of Marylanders could be helped during that time, as layoffs and the recession cause more of them to fall behind on credit-card payments.

"As consumers are facing tighter and tighter budgets, they're relying on these agreements," Frick said. "They can't afford having their agreements changed for missing a different payment -- or for no reason at all."

The Maryland Bankers Association has vowed to fight the proposal in the Senate, but the chairman of the committee that will hear the issue said he supports the concept.

"Consumers shouldn't be getting ripped off," said Sen. Thomas M. Middleton (D-Charles), who predicted that the bill is a good bet to pass his chamber in some form.

Banking Association President and Chief Executive Kathleen Murphy said she does not believe that states have the authority to regulate the federally chartered banks that issue credit cards. Maryland could face a lawsuit if it tries, she said.

She also said the measure is written so broadly that it applies to any contract businesses have written with consumers.

She said lenders who fear that they cannot take risk into account when setting rates probably will be even less willing to offer credit in Maryland, at a time when the economy is being sapped by a credit crunch.

"If you cannot consider the risk that certain cardholders have, everyone will end up paying," Murphy said. She estimated that 6 percent of borrowers are affected by the current practice of changing interest rates.

That figure is hardly comforting to Blonethia Vann, a government procurement analyst from Waldorf. Vann said she has been trying to pay off $14,000 on her MasterCard. Each month, she pays on time and more than the minimum required.

But Vann recently received a letter informing her that her interest rate will rise in April from 10.99 percent to 12.49 percent on new charges and on the existing balance.

"I didn't have an option of whether or not I agreed with that," she said. "The way they raise the interest rate, you start to think it's not realistic to think you can ever pay the card off."

Frick sponsored a similar measure last year, but it did not clear a committee vote in the House. The idea is attractive this year as elected leaders look for ways to show constituents that they are working to help them.

"There's this realization that the financial-services industry engages in a lot of unfair and abusive practices, and this stuff is not only bad on its own terms, but it can create a real systematic risk to the economy," said Adam Levitin, an associate professor at Georgetown University Law Center who writes about credit issues.

Only Nevada has a bill that approaches Maryland's sweeping proposal, Levitin said. There, the law applies only to banks that hold state charters. Most consumers hold credit cards from federally chartered banks, which would be covered under Maryland's legislation.

Levitin said consumer advocates do not challenge a bank's right to consider a customer a risky investment, refuse to extend him additional credit and raise his interest rate if he takes on more debt. But the retroactive application of new terms is unfair, they say.

Levitin said the law's breadth might help it pass legal muster because it does not target credit-card companies exclusively. The state attorney general's office has said the proposal would not violate federal law.

"We all hear horror stories about this," said Del. C. Sue Hecht (D-Frederick), who is pushing for the measure. "It feels good to be able to push back and help the little guy."

Staff writer John Wagner contributed to this report.

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