THE CREDIT CARD FACTOR : House Backs Off Plan to Limit Interest Rates

Congressional leaders, worried by a jittery stock market, backpedaled rapidly Monday away from a proposal--strongly opposed by the Bush Administration and bankers--to put a ceiling on the interest rate charged for credit cards.

“We’re going to slow down,” House Speaker Tom Foley (D-Wash.) told reporters, rejecting any immediate action to follow the Senate, which voted last week to establish a ceiling on rates that credit card issuers can charge consumers. “I am personally increasingly reluctant to see us move rapidly into some formal cap.”

The action came after Friday’s 120-point plunge in the Dow Jones average of industrial stocks, which some analysts and bank industry officials blamed on Senate passage of a measure that would immediately cap rates--now averaging 19%--at 14%.

A House subcommittee canceled a meeting Monday at which a vote had been expected. Instead, Rep. Esteban E. Torres (D-La Puente), the subcommittee chairman, prepared a bill calling for a nine-month study of the issue and giving Congress the authority to impose a cap if needed.

Any rapid imposition of a cap would not be prudent “given the volatility of the marketplace,” said Torres, who heads the consumer and coinage subcommittee of the House Banking Committee. He will discuss his plan with the House leadership today and hopes for a successful vote this week.

“There’s enough clamor from consumers that we need a much more equitable rate,” Torres said.

His proposal would have the General Accounting Office and the Congressional Budget Office begin a study on Jan. 1 of competition in the credit card field. Congress could then vote to impose a rate ceiling if the study says the rates on credit cards are artificially high. Critics of the industry note that seven of the 10 biggest card distributors all charge 19.8% interest.

In the Senate, meanwhile, Minority Leader Bob Dole (R-Kan.) said alternatives are being developed to replace the controversial cap.

“There’s been a lot of gnashing of the teeth, (with) a lot of bankers calling in saying they may have to go out of business,” Dole said. “A lot of it is scare tactics, but there may be a certain amount of truth. Congress should not involve itself in the marketplace.”

The Bush Administration emphasized again its strong opposition to any legislation mandating interest rate ceilings.

“The legislative remedy is not the right course--just as we wouldn’t propose legislation to tell the Fed (Federal Reserve) where to peg interest rates,” White House press secretary Marlin Fitzwater said Monday.

“We have urged the Congress not to pass this, and I suspect they won’t, when they’ve had a chance to look at all the ramifications,” he said.

A cap on credit card interest rates would force banks to cut off cards to large numbers of people, with the result that “only the rich people get to keep their credit cards,” Fitzwater said.

“What happens is people who may need credit the worst would be the first to be cut off by credit card companies facing profit losses due to interest rate drops,” he said. Congress may not be aware of this, and it may lead them “to take a serious second look,” he said.

However, bankers were still fearful Monday about the possibility of some legislation giving the President power to impose an interest rate cap.

“I hope they are sobering up in Congress,” said Joe Belew, president of the Consumer Bankers Assn. “They seem to have backed off to some degree today.”

But the banking industry is nervous about the proposal from Torres because it would cause serious problems for the sale of securities backed by credit card bills, Belew indicated. There would be considerable difficulty and uncertainty in selling the securities if Congress gives itself the power to cut the interest rate for the credit card bills, he said. The value of the securities is based on the credit card bills, and a ceiling on interest rates would sharply reduce the value of the credit card paper, therefore cutting the value of the securities.

The Bush Administration expressed a similar distaste for the Torres plan with its study and a possible cap at a later time. “We oppose any of those kinds of artificial constraints that try to dictate the market activities,” Fitzwater said.

The cap was adopted on an overwhelming Senate vote, 74 to 19, soon after President Bush had called on banks to lower the rates voluntarily. Many of the senators who voted for the interest rate cap were trying to send a signal to the banks to be more cooperative in preparing the major bank reform bill, Dole said Monday.

He was referring to bank lobbyists’ active role last week when the House for the second time rejected a major measure to allow banks to expand across state lines and to provide aid for the financially troubled Federal Deposit Insurance Fund. Many banks helped kill the bill because it contained amendments that would restrict banks’ efforts to enter the insurance and real estate businesses.

“If the banking community can help get us a reform bill, we can help get them more flexibility” on the issue of interest rate cap, Dole said.