Credit card reform legislation aimed at protecting consumers passed overwhelmingly in the Senate on Tuesday.
The bill, if approved by the House and signed into law by President Barack Obama, would block credit card companies from arbitrarily raising card holders’ interest rates and charging exorbitant fees.
Critics of the industry have argued that credit card companies have engaged in a pattern of exploiting vulnerable consumers desperate for credit.
After months of bailouts for banks, car makers and now possibly insurance companies, the Senate, by a 90-5 vote, evidently saw credit card reform as a way to send a message to constituents that they matter, too.
Banking Committee Chairman Christopher Dodd (D-Conn.), said credit card company practices have amounted to “an assault on the American consumer that is growing by the hour.”
Consumer advocates applauded the Senate move.
“The Credit CARD Act will restore some much-needed fairness to a credit card industry that is largely out of control,” said Robert Borosage, co-director of the Campaign for America’s Future, an activist group. “For far too long, credit card companies have exploited their own customers with misleading information and usurious interest rates.”
The House is expected to approve the bill later this week, and Obama could sign it by the end of the week.
The legislation gives the credit card industry nine months to change the way it does business: Lenders would have to post their credit card agreements on the Internet and let customers pay their bills online or by phone without an added fee. They’d also have to give consumers a chance to spare themselves from over-the-limit fees and provide 45 days notice and an explanation before interest rates are increased.
Some of these changes are already on track to take effect in July 2010, under new rules being imposed by the Federal Reserve. But the Senate bill would put the changes into law and go further in restricting the types of bank fees and who can get a card.
For example, the Senate bill requires those under 21 who seek a credit card to prove first that they can repay the money or that a parent or guardian is willing to pay off their debt if they default.
The legislation would not cap interest rates as some lawmakers had hoped. It also wouldn’t prevent lenders from finding new ways to drain customers' bank accounts or keep consumers from spending money they don't have.
But it would give spenders more flexibility and outlaw many of the surprise costs associated with credit cards at a time when money is tight in most households. For example, under the bill, a cardholder would have to opt to be allowed to go over a credit limit. If customers don’t agree and the bank authorizes a charge that would push them over their limit, the lender couldn't levy an over-limit fee.
Another benefit for consumers is limiting a practice known as "universal default," when a lender sharply increases a cardholder’s interest rate on an existing balance because the customer is late paying that bill or other, unrelated bills. Under the new legislation, a customer would have to be more than 60 days behind on a payment before seeing a rate increase on an existing balance.
The banking industry opposed the overall measure and said it could restrict credit at a time when Americans need it most. Banking officials defended their existing interest rates and fees on grounds that their business -- lending money to consumers with no collateral and little more than a promise to pay it back -- is very risky.
Writing in the Wall Street Journal , Mark Calabria, director of financial regulation studies for the Cato Institute, said the new laws would force consumers who need credit to turn to nefarious lenders.
“Credit cards allow the un- or under-employed to spend now out of future expected income. To limit credit solely to the financially stable leaves those most in need outside of our formal financial system, instead forcing such households to borrow from less efficient, and often more costly, sources, such as friends and family, or pawn-shops and loan sharks,” Calabria wrote.
