Banks Seek to Void New Credit Card Law
A group of banks is suing the state of California in an effort to block a new credit card disclosure law that is set to go into effect in July.
The law, which the Legislature passed last fall without industry opposition, is aimed at telling consumers just how much it costs to leave a revolving balance on credit cards over time.
Every California credit card customer would get a few standard examples of the cost of credit with each monthly bill. The disclosure is likely to read something along the lines of: Based on a 17% credit card rate and a 2% minimum payment, it would take 40 years and cost $16,305.34 to pay off a $5,000 revolving credit card balance.
Cardholders who pay only minimum payments for six months or more would get additional personalized disclosures, labeled “minimum payment warning.” This warning would calculate the long-term cost of credit by using the cardholder’s actual balance and the rate on the card.
Led by the American Bankers Assn. and Citibank, banks sued late last month to block implementation of the law, charging that the statute “is a paternalistic, but misguided and unlawful effort.” Neither the bank group nor Citibank, owned by New York-based Citigroup Inc., could be reached Monday for comment.
Chase Manhattan Bank issued a statement saying: “The law seeks to regulate financial institution’s lending practices. The law’s constitutionality is the subject of this litigation. We believe the law is unconstitutional.”
Ironically, the law was largely structured by the banks that are now suing, said Shelley Curran, a policy analyst with West Coast regional office of Consumers Union, a consumer advocacy group.
Gov. Gray Davis vetoed a stronger bill that passed the Legislature in 2000, requesting that the bill be toned down.
The new law largely mirrored a memo titled “Citigroup Amended Proposal,” which was provided to The Times.
“The governor signed a good consumer protection bill,” said Davis spokeswoman Hilary McLean. “It’s disappointing that the financial institutions that helped craft the law now have buyer’s remorse.”
The banks contend in their suit that the intent of the law was to coerce them to boost minimum monthly credit card payments to 10% of the balance due--most banks now commonly require minimum monthly payments of roughly 2%--or be forced to make the disclosures the law requires.
Dictating monthly payment amounts would violate national banking laws and the U.S. Constitution, the suit says.
“They’ve turned the whole issue on its head ... ,” Curran said. “This is so disingenuous.”
The new law requires banks to provide standard disclosures explaining what a consumer would pay in total interest and principal based on sample balances of $1,000, $2,500 and $5,000.
Alternately, the bank could choose to do disclosures based on the actual rate the consumer would be paying on their specific card.
A hearing on the bank’s suit, filed in U.S. District Court in Sacramento, is slated for later this month.
Curran said she believes banks oppose the law because cardholders might pay off their credit card balances more quickly if they knew what it cost them to carry a balance, and that could cost banks millions of dollars in lost interest.
