Senate-Passed Bill to Drop Cap on Stores’ Interest Rates Gains

After a fiery hearing, an Assembly committee Wednesday approved a Senate-passed bill to eliminate the maximum interest rate that retail stores can charge their credit card customers for a three-year trial period.

Sponsored by the California Retailers Assn. and carried by Sen. Ralph C. Dills (D-Gardena), the measure would allow retailers to charge whatever rate the market would bear. It was sent to the Assembly floor by a 12-4 vote of the Ways and Means Committee.

Current Limits

Retailers currently are limited to charging an 18% annual credit card interest rate on unpaid balances up to $1,000 and 12% on higher balances.

Backers of Dills’ bill argued that lifting the interest rate limit would increase competition among retailers and that consumers would benefit. But opponents replied that it would cost Californians at least $150 million a year in extra interest charges.

At one point in the debate, a verbal clash erupted between Assemblywoman Maxine Waters (D-Los Angeles), who opposes the bill, and Assemblyman Ross Johnson (R-La Habra), who supports it.

Johnson said low-income people--not considered “credit worthy” by mainstream merchants--are forced to deal with merchants who are able to offer credit to low-income customers because they charge exorbitant prices for poor quality goods. Johnson and the retailers association argue that doing away with the interest rate cap on retail charge accounts would encourage merchants to extend credit to these low-income customers.

Waters, whose district includes a portion of Watts, accused Johnson of “not knowing what the hell you are talking about. You’re full of crap.”

“I’m entitled to make my statement,” Johnson replied. “We’ll see who’s full of crap.” “Yea, it’s you,” Waters shot back.

Assemblyman Tom McClintock (R-Thousand Oaks) criticized the Consumers Union as “hypocritical” for opposing the bill because he said the legislation would allow consumers “to shop for credit” and obtain the best possible deal.

Ten Republicans, including Johnson, and two Democrats voted for the bill. Four Democrats, including Waters, voted no.

Interest charged by banks on their credit cards, such as Visa and Mastercard, is already unregulated and would not be affected by Dills’ bill, which previously passed the Senate by a 26-12 vote.

Speaking in favor of the measure, Bob Shillito of the retailers association, told the committee that some consumers cannot get the credit they need under the “artificial interest rate ceiling.”

“Retailers are forced to deny credit,” Shillito said, “and increase prices to recover credit losses.” He added that 16 other states, including New York, have removed the ceiling, “and none have abandoned it for it works to benefit consumers. Let us try this experiment.”

Report Due in 1991

The legislative analyst would have to report to the Legislature by March 31, 1991, on the change in retail credit rates charged under the deregulated environment.

A representative of the attorney general’s office, Jeffrey J. Fuller, opposed the bill, predicting, “All (retail credit card interest) rates will go up.” Judith Bell of the Consumers Union agreed, adding, “The fact is that consumers do not shop for retail credit.”

Rudolfo Aros of the Western Center on Law and Poverty said, “This bill would impose a greater burden on the poor, who have limited financial resources to begin with.”

California’s six largest department store chains say they are losing money on charge accounts.

According to the latest retailers association figures available, the chains collected $312 million in finance charges in 1986 but spent $407 million administering the charge accounts for a net loss of $95 million.

Chains Affected

The six chains were May Co., Robinson’s, Carter Hawley Hale, Montgomery Ward, Mervyn’s and Macy’s of California.

In 1982, the Legislature allowed the maximum retail charge account interest rate to increase to 19.2% after the department stores complained that they were losing large sums of money due to increasing costs.

The higher rate was extended several times, but last year Gov. George Deukmejian vetoed a bill to keep it in place until 1989. That dropped the interest rate cap back to 18%.