We all know what an uphill battle reforming abusive credit card practices has been. As a twenty-five year veteran of that fight, I know it as well as anyone. But this morning, the Senate took a big step up that mountain.
Today, the Senate Banking Committee passed the Credit Card Accountability Responsibility and Disclosure Act - legislation I wrote to stop abusive and deceptive credit card practices once and for all. Indeed, 2009 may well prove a watershed moment for credit card reform.
For people like Samantha Moore, a paralegal from Guilford, Connecticut I met a few weeks ago, it couldn't come a moment too soon. In January, she was three days late on a credit card payment - the first late payment in 18 years. For that seemingly minor transgression, she had her interest rate raised from 12% to 27% and her credit limit slashed from $31,400 to $4,500 - told that the reason for the severe penalty was that she hadn't been paying enough to other creditors and that their high credit limit exceeded their income.
Samantha was a victim of "universal default" - where credit card companies use unrelated information, like a late utility bill, to increase that family's rates.
Universal default is one of countless abusive practices credit card companies regularly engage in today that my legislation would put to an end.
Here are a few other practices the Credit C.A.R.D Act ends:
"Any Time, Any Reason" interest rate hikes. Issuers often unilaterally change the terms of a credit card contract before the term is up. One issuer "voluntarily" eliminated these hikes after Congress exposed them. They even ran ads stating that "a deal is a deal." But there is nothing binding them to that commitment, and most issuers have already gone back to the practice - one a Pew Charitable Trusts survey found in 93% of 400 cards issued by the country's largest banks and issuers. This bill makes that practice illegal.
Penalty Rates With No End. Let's say you've been a customer in good standing, and you have a reasonable interest rate of 12%. You pay your bill three days late, and you get raised to a penalty interest rate of 29.9%. Once that penalty rate increase is triggered, there is no limit on how long it will last. From that point on, you continue to pay your bill on time, but despite that, you continue to pay the penalty rate for the life of that card. The amount and duration of the penalty rate is entirely determined by the card issuer. My bill says that after 6 months of on time payment, your rate has to go back down.
Double-Cycle Billing. Say a few months ago, you had a credit card debt of a thousand dollars - and that since then, you've paid off $900 of that debt. It's not uncommon for credit card companies to keep charging interest not on a hundred dollars but on the full $1,000 for another cycle or two. The Credit C.A.R.D Act prevents that practice.
Aggressive Marketing to Young People. Recently, my seven year-old daughter received a credit card solicitation in the mail. Jackie and I laughed it off, but it brings up a serious point: young people are faced with an onslaught of credit card offers. And just as we saw in the mortgage crisis with lenders and borrowers, too often, issuers offer cards to young people without verifying any ability to repay whatsoever. This is particularly true for students, who are flooded with offers the second they set foot onto a college campus - in fact, industry officials have testified to Congress that simply being a college student is considered a "positive factor" toward the ability to pay. This bill simply says that credit card companies must take into account a young person's ability to repay before allowing them to take on what is all too often a lifetime's worth of debt.
The truth is, I've been working with advocates and consumer groups to reform credit card company practices for 25 years. For much of that time, our efforts have fallen on deaf ears. But I think this time is different.
And as we learned in this housing crisis, when companies lure people into deceptive, abusive and predatory financial agreements, it not only means mountains of debt for families, bankruptcy and financial ruin for too many - it can also prove catastrophic for our economy.
That is why I have said again and again that consumer protection must be at the forefront of our efforts to modernize our financial regulatory system. There are so many things we must do to make that possible. But none will be more important than reforming the practices of our nation's credit card companies drive so many families deeper and deeper into debt. It is one issue that quite literally touches every family in the country.
It's nice to see Senator Dodd taking on this fight, but Dodd warned that it won't be an easy fight to win. He said:
... convincing his colleagues on Capitol Hill that increasing credit card regulation is good for the economy may not be easy.
Dodd said currently the lending institutions are fighting back hard against changes to bankruptcy protections for homeowners.
"I thought we'd have an easy time getting that through," Dodd said. "As of today we're going to try to bring it up, but it's going to be tough."
"The lending institutions are pushing back very hard against these issues," he said.
OK, Senator Dodd, please tell us which of your Congressional colleagues oppose credit card reform, and we will be happy to help alert their constituents.
Right now, the bill has 17 cosponsors, so we know who IS on board. Other Congressmen should be encouraged to cosponsor the bill too, including Joe Lieberman and NY's new Democratic Senator Kirsten Gillibrand. What's more, they should be promoting it in their states and districts.
What kind of Congressman would oppose credit card reform? Let us know who they are.
I would like to put the credit card industry, issuing banks and card associations on notice. If you currently engage in any business practice that you would be ashamed to discuss before this Committee, I would strongly encourage you to cease and desist that practice.
Bankers, however, say the fees are the cost of doing business and benefit retailers.
"They are shifting the payment risk and collection cost to somebody else," says Tim Amos, senior vice president and general counsel for the Tennessee Bankers Association.
Retailers, he adds, have options.
They can shop for competing credit card processing companies or pass the cost on to their customers.
On April 10, Steve Kirkham, owner of Kingston-based Rocky Top Markets, told Tennessee legislators his credit card fees reached $130,000 in March. In April 2001, he paid $27,000.
"They are making more on a gallon of gas than I am," Kirkham told the Senate Commerce Committee.
In addition to the rising rates, retailers argue that more customers are using credit cards to combat the increasing gasoline prices, which further increases their costs.
About 70 percent of Kirkham's sales are done with credit cards compared to 45 percent five years ago, he says.
"Merchants have little or no ability to negotiate with Visa and MasterCard for lower interchange fees, and these fees are a 'hidden tax' that raise prices paid by consumers for almost every product they buy," says attorney K. Craig Wildfang, representing the plaintiffs. "Visa, MasterCard and the banks now have the burden of proving that they have set the interchange fees at the correct competitive level. Even Visa's own economists admit that they cannot satisfy this burden."
So what are we waiting for? C'mon, Congress. Let's see some action on this front.
I've posted here about credit card fees before, and I'd just like to briefly point you to an article in the Nashville Tennessean, where this fight is coming to a mini-head, as their Senate Commerce Committee is holding a hearing on a bill to deal with interchange fees. I don't know if one is coming up in Connecticut, but it would be a good idea!
Anyway, the news article offers some idea about the squeeze it's putting on small businesses.
Milton Milam estimates his Franklin retail store, Schakolad Chocolate Factory, sold $10,000 worth of Easter bunnies and other chocolates this past weekend to customers using credit cards.
Of that money, he expects to pay about $500 in fees for being able to accept plastic. That's 5 percent of Schakolad's weekend credit-card sales, more than double the percentage Milam remembers paying on the same volume of sales four years ago.
The increase in credit-card processing costs, including what are called interchange fees, has merchants such as Milam crying foul. Many want Congress to step in and give them some relief.
As I noted here a few weeks back, Sen. Dodd is one of a few senators to step up and voice their objections to the rotten current state of things. Here are some details from the article:
Processing fees paid by merchants to accept debit and credit cards, meanwhile, have been going up nationwide this decade, according to The Nilson Report, an industry newsletter. Last year, merchants paid $56.5 billion - more than double what they paid five years earlier.
On average, merchants last year paid 1.88 percent of each purchase to process the transactions, up from the 1.52 percent in 2002.
This issue is developing, and maybe not as fast as I'd like, but it's certainly not going away anytime soon. If you yourself have had a merchant credit card account and have a story to tell about dealing with the interchange fee, be sure to let the folks at Unfair Credit Card Fees know about it.
Senator Dodd has followed up his good work on the credit card industry with hearings on the predatory lending industry. Dodd came out swinging in defense of homeownership and fair lending practices:
However, it is not enough simply to create homeownership - we must sustain, preserve, and protect it as well. Yet, today, we are seeing increasing evidence that this important source of wealth for so many American families is under a grave threat from predatory, abusive, and irresponsible lending practices undertaken by too many subprime lenders.
The borrowers who are too frequently targeted for these loans are minorities, immigrants, the elderly, and the unsophisticated. For these families, failure means the loss of a home, the loss of wealth, the loss of middle class status, and the loss of the opportunity for financial security.
...
It is time for the Congress, the Administration, and the lending industry to face up to the fact that predatory and irresponsible lending practices are creating a crisis for millions of American homeowners at a time when general economic trends are good.
...
In short, the system is out of balance. There is a chain of responsibility that makes these abusive loans possible. I look forward to working with each link in that chain - the brokers, the bankers, Wall Street, the regulators, my colleagues on the Committee and in the Congress, and the Administration - to help restore this balance for the sake of the safety and soundness of the banking system; for the sake of the homeowners who are being victimized; and to make sure that subprime credit can, once again, play a constructive role in the marketplace.
As I've said before, Dodd's only hope as a presidential candidate is by using his bully pulpit in the Senate to lead by example. He has to keep showing us that he will fight for our interests in a way that other Democratic contenders are not or cannot. His recent work on the Banking Committee is evidence that he recognizes the dynamic between doing the right thing as a legislator and growing his presidential candidacy.
We all know what an uphill battle reforming abusive credit card practices has been. As a twenty-five year veteran of that fight, I know it as well as anyone. But this morning, the Senate took a big step up that mountain.
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