Credit card reform legislation passed a critical hurdle Wednesday when the House of Representatives voted 361-64 to approve a bill to protect consumers from surprise interest rate hikes, excessive fees and other practices roundly criticized as unfair and deceptive.
The vote came a day after the U.S. Senate approved the same credit card protections by an overwhelming 90-5 bipartisan vote. The legislative actions make credit card reform a lock since President Barack Obama has championed protecting consumers from credit card "traps."
"Consumers will have more money to invest in the economy instead of paying off debt," Rep. Carolyn Maloney, the New York Democrat who sponsored the House credit card bill, said just before the vote. "Americans want this bill."
The bill limits when interest rates can be hiked and requires 45 days' advance notice of significant changes in card terms -- measures designed to take the surprise out of credit card agreements. Retroactive interest rate increases will be banned except when the cardholder is more than 60 days late paying a credit card bill, when promotional or "teaser" rates expire, when the account has a variable interest rate and when the card user reneges on terms of a workout plan for debt repayment. Interest rates cannot increase during the first year of a new card account.
Obama could sign bill this week The president is expected to sign the bill into law by week's end. The new law won't provide immediate relief for millions of American families struggling to pay mounting credit card debt. The bill calls for phasing in credit card protections, with the earliest mandate -- giving consumers 45-day advance notice of significant changes in credit card terms -- starting 90 days after enactment, or by the fall. The bulk of the credit card restrictions kick in nine months after Obama signs the bill into law -- or by February 2010.
New credit card rules approved by the Federal Reserve and other regulators in December 2008 include many but not all of the same consumer protections. Those rules are not mandatory until July 1, 2010 -- allowing card issuers lead time to revamp their computer systems and business models to accommodate the changes.
Prohibiting over-limit fees unless consumers agree to allow transactions that exceed their credit limits to go through rather than be denied.
Fees for late payments, over-limit charges or other penalty fees must be reasonable and related to the violation.
Extending the life of gift cards and gift certificates so that they cannot expire within five years of activation. Banning dormancy or inactivity fees on gift cards unless there has been no activity in a 12-month period.
Banning credit cards for people under the age of 21 unless they have adult co-signers or show proof that they have the means to repay the debts. College students must get permission from parents or guardians to increase credit limits on joint accounts they hold with those adults.
Requiring that card issuers disclose how long it would take to pay off credit card balances if cardholders make only minimum payments each month and how much users would have to pay each month if they want to pay off their balances in 36 months.
The bill's provisions apply only to consumer credit cards; attempts to extend its protections to business credit cards failed.
Opponents: Reforms bad for economy Republicans who opposed the bill said the reforms come at a bad time for the economy. Credit card issuers who aggressively lobbied against passage say, as a result of the restrictions on interest rates hikes and fees, they will increase interest rates for all card users -- including those who pay their bills on time -- add annual membership fees, reduce rewards programs and cut high-risk consumers off completely. Consumers who rely on credit cards to buy groceries, gas and other necessities may struggle to make ends meet during a time of high job losses.
"This is not a solution for the ailing economy," Rep. Pete Sessions, a Dallas Republican, told his colleagues during debate on the House floor before the vote. The credit card reforms "punish those who manage their credit responsibly to subsidize those who don't."
During debate on the bill, Rep. Barney Frank, the Democratic chairman of the House Financial Services Committee, said that tightening underwriting standards and restricting who can get credit may not be a bad thing, referring to the industry's "easy credit" marketing tactics that sent preapproval letters to adults and minors regardless of whether they could repay the debt.
"If this bill means that there will be some credit cards that won't be issued -- good," Frank said. He noted analyst projections that the next big financial meltdown may come from securitized credit card debt and said tightening standards would be good for the credit card market. Moody's Investors Service, which rates credit card asset-backed securities, noted in April that more conservative risk management required by the new credit card rules might improve yields in securitized trusts. Those funds, which rely on timely credit card payments to pay off investors, have experienced record defaults and charge-offs as the economy soured.
Democratic Rep. Chellie Pingree of Maine argued that consumers need relief from card practices that cost them thousands of dollars in additional interest and fees.
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Taking a gamble "Credit card agreements are a tangle of fine print with complicated provisions that seem to keep the cardholder in debt forever," Pingree said. "These days using a credit card is like going to a Las Vegas casino. No matter how clever you are ... nine times out of 10, you're going to lose. Using a credit card shouldn't be a gamble."
The previous House vote on credit card reform -- the April 30 vote on the Credit Cardholders' Bill of Rights -- garnered overwhelming support with a 357-70 bipartisan vote. The Senate, which was considering its own version of a credit card bill, substituted the House plan with a tougher bill that included provisions for extending expiration dates on gift cards and increasing penalties on card issuers who violate the law.
A controversial Senate amendment -- to allow visitors to U.S. National Parks and refuges to carry loaded, licensed firearms -- sparked debate in the House where opponents argued a gun rights clause was not germane to credit cards and should not be included in the bill. House members voted 279-147 passing the gun amendment, which passed in the Senate by a 67-29 vote. House leaders wanted to break the gun clause out into a separate vote to allow liberal Democrats the opportunity to vote against the measure.
The road to passage of the credit card reform bill was filled with political wrangling. The White House lent its clout to urge support for the reforms and balance the powerful, well-financed banking industry lobby pressuring lawmakers to delay, water down or cancel the legislation. Consumers at home, meanwhile, called, e-mailed and wrote their Congress members with tales of rate jacking, slashed credit limits and closed accounts.
Ed Mierzwinski, a consumer advocate for the U.S PIRG consumer group, said the House vote represented in shift thinking about consumer protections. "I've been doing this work in Washington, D.C., for 20 years. For the first 19, we couldn't even get a committee vote on credit card reform."
He added: "Final passage of this historic credit card reform legislation will stop big credit card companies from cheating Americans out of their hard-earned money."
Sen. Christopher Dodd, the Connecticut Democrat who sponsored the Senate bill, called the House vote a victory for consumers: "This cements a victory for every American consumer who has ever suffered at the hands of the credit card industry."
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