Credit Card Industry Reform Proposed by Senators

U.S. Senators criticized the credit card industry in a hearing of the Senate Banking Committee last week for unfair practices and for failing to disclose information to consumers in a clear and understandable way. Noting that the new federal bankruptcy law helps financial companies, Senate Democrats are calling for laws to help people better understand that only making minimum monthly payments on their credit card can lead to a lifetime of debt.

According to USA Today, Senator Paul Sarbanes, D-MD, listed some blatant practices by credit card companies such as excessive late-payment fees that can double or triple interest rates. He also cited excessive and misleading mail solicitations to college students and seniors as egregious. Sarbanes disputed claims that individuals are responsible for acquiring excessive credit card debt at high interest rates. He said that credit card issuers may lead consumers into excessive credit card usage through 'misinformation or clever statements.'

Senators also criticized federal banking regulators for allowing credit card companies to use marketing tactics that target vulnerable groups of people, such as students and seniors. Timothy Spence of Hearst Newspapers reported that Senator Christopher Dodd, D-Conn., said, "Issuers have turned credit cards into wallet-sized predatory loans." Dodd wants to curb credit card marketing to people under 21 and limit the power of banks and other credit issuers to make arbitrary changes in interest rates.

The Truth in Lending Act is the federal law governing disclosures concerning consumer credit, including credit cards. The Truth in Lending Act is associated with the Federal Reserve Board of Governors' Regulation Z. A review of Regulation Z began in December 2004. The Federal Reserve is reviewing statements from consumer and industry groups about changes to the regulation. The proposed revisions are expected to be published in 2006. These revisions may be influenced by the outcome of the Senate hearing.

Statistics underscore the need for industry reform. Fewer than 20 percent of people pay their full credit card balances each month and the average U.S. household carries approximately $7,300 in credit card debt.

Reaction from consumer advocates to the hearing has been mixed, but most consumer groups see the hearing as a step in the right direction. Linda Sherry, editorial director of Consumer Action, a non-profit consumer group founded in 1971, testified before the committee and shared the following observations with Curtis Arnold, CardRatings.com's public relations director:

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It was an unusual and very welcome opportunity to air the pro-consumer viewpoint about unfair credit card practices before receptive members of the Senate Banking Committee. It was heartening to note the obvious interest and concern on the part of these lawmakers about anti-consumer practices such as sky-high penalty rates and universal default rate hikes. I think it is fair to say that the senators who were present really hung on every word of testimony. I walked away with high hopes that the committee can muster the will to promote positive changes in credit card industry practices. I hope the committee will consider another session on this vital consumer issue.

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Dr. Robert Manning, author of Credit Card Nation: The Consequences of America's Addiction to Credit, also testified, but his viewpoint is not quite as optimistic. Dr. Manning shared the following comments with Curtis Arnold, CardRatings.com's public relations director:

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The good news is that there is bipartisan Congressional agreement that contemporary credit card policies are designed to confuse consumers and to extract as much money from them as possible. Such egregious policies as universal default, bait and switch, double billing, residual billing, and incomplete reporting of credit limits represent the worst of the unregulated financial services industry.

Unfortunately, while both the Federal Reserve and OCC acknowledged that there are some problems with bank credit card policies, they are not prepared to actively pursue reforms in the consumer interest unless there is a more compelling "clear and present" danger that affects the banks' financial solvency. That is, the need to save some banks from their own avarice policies that could lead to serious financial difficulties such as Providian Bank's 12% delinquency rate in 2000. Instead, the emphasis of regulators is to improve consumer disclosures rather than to reform outrageous bank practices. Sad to see the emasculation of the last line of defense of consumers. And, it will get worse with the appointment of the new head of the OCC.

Bottom line is that consumers will not get any relief from Congress or the Courts which are upholding the government's affirmative position on Federal Preemption. Instead, we will be hearing more platitudes for the magic of the marketplace where high risk consumer groups will continue to enjoy triple digit APRs. Some bills will be introduced to limit the aggressive marketing campaigns in high school and college because some Members of Congress have school-aged children. Then, in the ultimate insult, we are told that financial literacy is appallingly bad, that public schools do not have the resources to teach personal finance classes, and that banks will have to fill the void to "educate" our youth about the perils of consumer credit and debt.

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Click here for more information about the hearing.

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