Credit Card Bill Passage Sparks Debate on Impact

While debate continues over the Bush Administration’s proposed $700 million bailout package, the U.S. House took time this week to pass HR 5244, known as “The Credit Card Holders Bill of Rights,” by a 312 to 112 vote, despite the objection of bankers and other opponents who say the legislation will lead to higher fees and charges for credit cards.

The legislation eliminates retroactive interest rate hikes, late fees that push cardholders over their credit limits, and double-cycle billing, among other reforms, according to Rep. Carolyn Maloney (D-N.Y.), who sponsored the bill along with Rep. Barney Frank (D-Mass.).

Maloney said in a statement, “This historic legislation will help working families who face their own credit crunch as a result of what the Federal Reserve itself calls ‘unfair,’ ‘deceptive,’ and ‘anti-competitive’ credit card practices. It’s now abundantly clear that in the area of consumer credit, the same lack of reasonable regulations, transparency and prudent lending has led to a level of pain on Main Street that matches or exceeds the pain on Wall Street.”

House opponents of the bill were tied up in the debate over the proposed bank rescue package and were unavailable for comment.

But the American Bankers Association, the trade association that represents the majority of the nation’s banks, said the legislation, “while well-intentioned, will increase the cost of credit for consumers and small businesses across the country, result in less access to credit for consumers and businesses alike, and may further roil the securities markets – all at a time when our economy can least afford it.”

Bankers contend that credit card issuers will have to increased fees and interest rates in order to cover the higher risk of the proposed new rules. Additionally, fewer consumers would qualify for cards and those that do qualify would see lower credit limits.

The risk to card issuers would be higher under the bill, bankers have argued, because the legislation would no longer permit card issuers to reprice interest rates when a cardholder’s financial situation changes. For example, a cardholder who started getting later with payments – often an indicator of eventual default – could no longer be forced to start paying higher rates until it was time to renew the card.

ABA President Edward Yingling added, “Legislation resulting in higher prices to consumers makes little sense at any time, let alone when global markets face the degree of turmoil that confronts them today.  By limiting their ability to manage risk in making loans, this bill will force lenders to increase prices for everyone to compensate for that added risk.  That’s unfair. Sometimes things that appear attractive on the surface often come with too high a price tag.  Increasing prices for consumers, reducing low-cost credit alternatives for small businesses, and causing more ripples in the securitization market make little sense.”

The bill now goes before the Senate where its future in the current Congress is uncertain, given the focus on the banking bailout package in advance of a Congressional recess for elections.