Congress's Redundant Credit Card Bill

Thursday, May 21, 2009

WHY, YOU MIGHT ask, did Congress pass new credit card legislation just months after the Federal Reserve Board adopted what Fed Chairman Ben S. Bernanke described as "the most comprehensive and sweeping reforms" of credit card accounts? The legislation isn't identical to the Fed reforms, but it is awfully similar. As much as anything, this is about Congress not wanting to let a ripe issue go by -- especially one with more popular appeal than, say, bailing out banks.

Redundant as the bill might be, the basic changes make sense. Credit card contracts, and all the fine print that comes with them, have become far more complex over the years; few would disagree with that. To help clarify the terms, the Fed issued a number of changes under the Federal Trade Commission Act and the Truth in Lending Act. Included were requirements for simplified language to help customers understand what they are agreeing to, requirements for a 45-day notice of rate increases (rather than 15), and summary tables of changes in key borrowing terms to make the information more obvious. The Fed also restricted the circumstances under which interest rates could be increased on outstanding balances or accounts with promotional rates; ensured that consumers have adequate time between receiving a bill and having to make a payment; prohibited double-cycle billing; and required that payments be applied to balances carrying the highest interest rates or across the board on balances carrying different rates and not just to balances with the lowest rates.

The Fed rules aren't scheduled to take effect until July 1, 2010, and Congress wanted to speed things up: That's the rationale for a legislative package. However, the time Congress has taken to put the bill together means most changes won't be phased in much sooner than the Federal Reserve rules will be. Congress also has added some measures, including penalty restrictions and disclosure requirements regarding how long it would take to pay off a debt if only the minimum amount were paid each month, as well as an absurd provision that would allow visitors to national parks to carry concealed weapons. But for the most part, the legislation is strikingly similar to what is already set to be phased in.

Increasing clarity is sensible. The new restrictions also make sense on balance, though there will be trade-offs: lending, especially to small businesses and low-income people, who happen to be the riskiest borrowers, will be negatively affected. Fortunately, Congress has resisted the bad idea of placing a cap on the interest rates that companies can charge. Overall, ending the model under which profits stem from customer confusion is a sensible reform -- even if Congress didn't need to jump into the game to get us there.

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