Obama pledges protections for credit-card users
The deep recession and the public’s anger with banking institutions are giving the Obama administration and congressional Democrats potent weapons to push through credit card reforms that the consumer lending industry has held at bay for decades.
Still-rising unemployment, continuing troubles among homeowners and new evidence that Americans have suffered a staggering erosion of family wealth over the last two years have all contributed to a unique opportunity to crack down on alleged abuses by credit card companies.
Seizing the moment, President Obama called top industry executives to the White House on Thursday and demanded an end to the widespread practices of jacking up interest rates and adding unexpected fees to customers’ bills.
“There has to be strong and reliable protections for consumers, protections that ban unfair rate increases and forbid abusive fees and penalties,” Obama said.
“The days of any-time, any-reason rate hikes and late-fee traps have to end.”
In the past, the credit card industry, its lobbyists and its allies in the financial services industry have repeatedly stymied efforts by liberal Democrats and consumer groups to impose new restrictions on how companies operate.
What may tip the balance this time is public attitude -- feelings like those of Wilma Erwin of Garrison, Ky. A Discover card customer for 18 years with a record of paying her bills on time, the retired school principal got a notice April 15 that her card’s 10.99% rate would jump to 15.24%.
“It made me angry, and that’s unusual for me,” Erwin, 64, said. “It’s against everything that America was built on, saying to the valued customer that you get the slap with everyone else who’s not paying their bills.”
She said she planned to pay off the $2,080 balance and, unless Discover continued to honor her current rate, would cancel the card and seek a better deal or just use another card issued by a rival company.
Discover Financial Services is among 540 institutions that received money from the Treasury Department’s Troubled Asset Relief Program, which was designed to encourage lending by boosting capital levels of financial institutions. Discover got $1.2 billion in taxpayer funds last month.
Another recipient is Bank of America Corp., which has collected about $45 billion in TARP and other government aid while hiking cardholders’ interest rates and cutting credit lines on some cards.
The companies defended their actions.
Discover said only a small percentage of its customers were being hit with the rate hike.
“The repricing is being undertaken in response to economic conditions -- not because of customer payment behaviors,” the company said.
A Bank of America spokeswoman said, “We are taking a more aggressive look at accounts to control risk given the current environment.”
As early as next week, House Democrats expect to act on a bill that would make it harder for the industry to slap new fees and rates on cardholders while also requiring clearer disclosure of the costs and risks. The bill would codify and expedite rules already proposed by the Federal Reserve Board but would not be implemented until 2010.
Legislation pending in the Senate would go further, barring lenders from imposing interest rate increases on consumers’ existing balances.
The credit card industry, its lobbyists and its allies in the financial services industry are fighting back hard, contending that a rash of new government rules and restrictions could put a crimp in consumer credit just when families need it most.
Edward Yingling, president of the American Bankers Assn., said after the meeting with Obama that the industry already was laboring to carry out the rules proposed by the Federal Reserve despite concerns that they would be “likely to shrink credit availability and result in increased rates for some consumers.”
Any additional regulation should be crafted to “achieve the right balance between enhancing consumer protections and ensuring that credit remains available to consumers and small businesses at a reasonable cost,” he said.
The House bill drew some bipartisan support when it was approved by the Financial Services Committee this month. But the more restrictive Senate bill, sponsored by Senate Banking Committee Chairman Christopher J. Dodd (D-Conn.), was approved on a party-line vote.
Dodd is facing political flak at home for perceptions that he is too cozy with the financial interests his committee is supposed to regulate.
Democrats are counting on the economic crisis -- and its effect on the financial welfare of many voters -- to bolster their cause.
According to a report released Thursday by the Center for American Progress, a left-leaning Washington think tank, family wealth -- the total value of everything a family owns -- dropped by 22.8% in constant dollars between June 2007 and December 2008.
That would be the fastest decline since the Federal Reserve began collecting this information in 1952, the report said, with $15 trillion in family wealth evaporating from the June 2007 peak of $81 trillion.
In the face of such declines in families’ financial security, supporters of tighter restrictions on credit cards contend that, at the very least, banks should make the terms of credit card agreements more transparent, along the lines of nutrition labeling now applied to foods: “written in plain language” and presented to card users “in plain sight,” as Obama put it.
The president said he wanted to address “people finding themselves starting off with a low rate and the next thing they know their interest rates have doubled; fees that they didn’t know about that are suddenly tacked onto their bills -- a whole lack of clarity and transparency in terms of the terms and conditions of their credit cards.”
Consumer advocates and other opponents of the industry’s practices expressed delight that Obama had stepped out on the issue, about which he had been largely silent.
“His comments are outstanding,” said David Arkush, director of Public Citizen’s congressional watchdog unit. “He goes beyond even what the bills in Congress do” in demanding more disclosure and oversight of credit card agreements.
Republicans argued it was hypocritical of Obama to take credit card company CEOs to the woodshed when his own policies were heaping debt onto U.S. taxpayers.
“If the president is really concerned about consumers, he and congressional liberals should stop enacting legislation that saddles Americans with mountains of debt that they will have to pay for years to come,” said Michael S. Steele, chairman of the Republican National Committee.
Jaret Seiberg, a nonpartisan analyst for the Washington Financial Services Bulletin, predicted that growing congressional and White House concern would put pressure on credit card companies to hold back voluntarily on interest rate and fee increases.
“We believe credit card banks are likely to give in to pressure to voluntarily refrain from raising rates or imposing some fees in order to ensure more onerous legislation does not emerge from Congress,” Seiberg said in a memo to his clients.
The debate has surfaced at a time when consumers and small businesses are increasingly sensitive to the costs of using credit cards but also increasingly dependent on them to finance their expenses.
The White House estimates that credit card debt has increased 25% over the last 10 years.
That jump in debt has come even though, according to research by the nonpartisan Pew Charitable Trusts, 93% of credit cards allow the issuer to raise interest rates at any time.
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Becky Yerak of the Chicago Tribune contributed to this report.
