Senate OKs Credit Card Interest Ceiling of 14% : Congress: Lawmakers lash out at banks for keeping consumer rates high as other borrowing costs decline.

The Senate, in a gesture of frustration at the nation’s banks for keeping interest rates at high levels, voted Wednesday to put a 14% ceiling on interest charges for credit card accounts.

The surprise amendment was approved by an overwhelming vote of 74 to 19 as the Senate began debate on a major bill to bolster the ailing bank deposit insurance fund.

The 14% rate compares with the current average charge of 18.94% on credit card accounts, according to Sen. Alfonse M. D’Amato (R-N.Y.), a leading sponsor of the measure.

The amendment would cap credit card interest rates at 4 percentage points over the rate charged by the Internal Revenue Service as a penalty for underpayment of taxes. The IRS rate is currently 10%.

Banks “are gouging the American consumer--nothing more,” D’Amato said. The banks are involved in a “conspiracy of silence” by refusing to lower the rates, he said.

American Bankers Assn. spokeswoman Virginia Stafford branded the D’Amato amendment as unworkable, arguing that it would result in banks’ turning down all but a handful of the most credit-worthy applicants.

“Only the credit elite would be able to qualify,” she said.

Banks are refusing to cut credit card rates despite numerous reductions in other interest rates. The Federal Reserve Board has repeatedly lowered the rate it charges banks for borrowing money and the so-called discount rate now stands at 4.5%--the lowest level in 18 years.

Meanwhile, the prime lending rate, the rate on which banks base charges on loans to preferred customers, has been falling sharply and now is at 7.5%. However, banks generally have been slow to lower the rate on their highly profitable credit card business.

President Bush Tuesday called on the banks to lower the credit card rates to encourage consumer activity and help revive the economy.

On Wednesday, AT&T;, which has the nation’s third-largest credit card operation, lowered by a full percentage point the rate it charges card customers. Earlier, First Chicago Corp. began to lower some credit card rates, as did another institution, Banc One Corp.

To become law, the D’Amato amendment would need to survive final passage of the banking bill by the full Senate, be passed by the House and signed by the President.

The amendment creates a political embarrassment for the Administration, which has a strong philosophical objection to the government’s placing ceilings on what banks--or any other business--may charge. Sen. Jake Garn (R-Utah), the senior Republican on the Banking Committee and a strong ally of the White House, said Wednesday that he is staunchly “opposed to the federal government sticking its nose in credit allocation.”

The amendment was attached to a vital piece of legislation, a measure to provide $70 billion in borrowing authority for the deposit insurance fund, which will run out of money by year’s end. The fund insures bank deposits up to $100,000.

Legislators and regulators hope the $70 billion can be repaid by the banks. However, the weak economy could precipitate an increase in bank failures, making it necessary for the taxpayer to bail out the fund.

The General Accounting Office, in its audit of the fund, warned Wednesday that the $70 billion may be insufficient. The amount of money “that will ultimately be needed to resolve failing institutions depends on current and future economic conditions, and may thus be significantly higher than the amount of funds . . . under the proposed legislation,” the GAO said.

By attaching his amendment to the banking bill, D’Amato raises a high visibility issue, the behavior of banks toward consumers during a period of economic recession.

“With over $230 billion in revolving charge debt outstanding, this bill would save consumers an estimated $7.5 billion this year alone” in excessive interest, D’Amato said. “Think of what this means for the average consumer and the economy.”

He noted that banks can borrow from the Federal Reserve system at 4 1/2% and can obtain overnight funds from other banks at approximately 5%.

“Banks should not be allowed to take advantage of consumers’ need for credit,” he said. “It is time to take more drastic measures to make credit card interest rates more competitive.”

“This is one area where the banks could help with the consumer credit costs and help get a little more lift in the economy,” said Senate Banking Committee Chairman Donald W. Riegle Jr. (D-Mich.).

There was no corresponding amendment on the other side of Capitol Hill, where the House is struggling to pass a bank reform bill after defeating a comprehensive measure just last week.

The House agreed to a rule setting the terms of debate for a more narrowly focused measure. It would provide the $70 billion in borrowing authority for the fund and provide for early intervention by regulators when banks get in trouble.

However, the fate of this bill is in doubt because it contains amendments favorable to the insurance and real estate industries but strongly opposed by banks. The House will vote today on the final terms of the bill.

The Senate will continue debate on the banking bill. But the legislation now has a new wild card--the ceiling on credit card rates.

The House approved by voice vote a noncontroversial amendment to the banking bill providing increased powers to regulators. The fight over expanded powers for banks will occur today in another amendment.

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