Riding on a wave of anti-bank and pro-consumer sentiment sweeping the country, the U.S. Senate today passed unprecedented credit card industry reforms designed to help millions of families struggling to pay credit card debt.
Surprise interest rate hikes, shifting due dates and times for monthly payments, marketing credit cards to minors and college students, and excessive fees would be outlawed under the Senate’s Credit Card Accountability, Responsibility, and Disclosure (or Credit CARD) Act. The bill passed with strong support from President Barack Obama, who held a town hall meeting on credit cards in New Mexico last week and brought card company executives to the White House in April with a stern warning that “any time any reason rate hikes and late fee traps” had to end.
“It is the first time ever that we’ve dealt with reforms in the credit card industry. It’s a major step forward,” said Sen. Christopher Dodd, the Connecticut lawmaker who sponsored the bill with Sen. Richard Shelby, the ranking Republican on the Senate Banking Committee. The bill had solid GOP support with only four Republicans and one Democrat voting against the legislation. (See how they voted.)
“The credit card industry is finally being called to account,” longtime Sen. Carl Levin, a Michigan Democrat, said of the passage.
Banks warn of consequences
Reaction from the banking community echoed past warnings of reduced credit.
“This bill fundamentally changes the entire business model of credit cards by restricting the ability to price credit for risk,” Edward Yingling, president and CEO of the American Bankers Association trade group said in a statement released after the vote. “What has been a short-term revolving unsecured loan will now become a medium-term unsecured loan, which is significantly more risky. It is a fundamental rule of lending that an increase in risk means that less credit will be available and that the credit that is available will often have a higher interest rate.”
He added: “While the recent Federal Reserve rule also contained restrictions on pricing card credit for risk, this bill goes much further in this and other areas. We are concerned that the Senate bill will have a dramatic impact on the ability of consumers, students, and small businesses to obtain and use credit cards.”
Consumer groups react
Consumer groups applauded the Senate vote.
“The dirty little secret in the credit card industry is that the 50 million Americans who pay their credit card off at the end of the month are bad for their bottom line. They would like these folks to join the 100 million Americans who carry balances and get hit with abusive fees,” Pamela Banks, senior policy counsel for Consumers Union, the nonprofit group that owns Consumer Reports magazine, said in a statement. “The credit card industry would like nothing more than trap these customers in a similar cycle of debt. That is precisely what they have already been doing and will keep on doing until the government steps in and stops them.”
Stronger consumer protections
The Senate bill provides more consumer protections than a version of credit card card reforms passed April 30 by the U.S. House of Representatives. The Senate bill rewards cardholders for good behavior by decreasing their APRs if they’ve paid their bills on time for six months if their interest rate was raised for a previous late or missed payment. Retroactive interest rate increases are banned except when the cardholder is more than 60 days late paying a credit card bill. The credit card issuer must review the cardholders’ account six months after increasing the interest rate and, if the review warrants it, return the APR to the previous, lower level. The Senate bill also allows fines up to $5,000 for individuals affiliated with a card issuer who violate the act.
|Credit card reform and you|
The House bill — the Credit Cardholders’ Bill of Rights — sailed through in a 357-70 bipartisan vote. It allows retroactive interest rate hikes if an account holder is more than 30 days late paying a bill. Both bills also allow interest rate hikes 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. Both bills also prohibit interest rate hikes during the first year of a new account.
Other provisions of the Senate bill include:
- 45 days’ advance notice of significant changes in credit card terms.
- Banning universal default and double-cycle billing.
- 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.
What’s the next step?
The House may vote as soon as Wednesday on the Senate version. Dodd indicated after the Senate vote that the House must pass the bill with no further amendments.
“As passed by the Senate, the bill maintains the core provisions of my Credit Cardholders’ Bill of Rights, and I commend Sen. Dodd for his skill and fortitude on the Senate floor. I’m certain with the help of Speaker [Nancy] Pelosi and Chairman [Barney] Frank we will be able to get this to the President’s desk this week as he has asked,” said New York Rep. Carolyn Maloney, sponsor of the House credit card bill. Obama had asked to sign credit card legislation into law by Memorial Day.
Although the House and Senate versions are similar in offering more consumer protections than those included in federal credit card rules scheduled to take effect July 1, 2010, the bills take different approaches to timing.
The House bill would take effect 12 months after enactment or by June 30, 2010, whichever comes first. A provision to give consumers 45 days’ advance notice of interest rate increases would take effect 90 days after enactment.
Most of the Senate bill provisions would take effect nine months after enactment — except for the requirement to give 45 days’ advance notice of major changes in terms (which takes effect 90 days after enactment) and reduction in interest rates after six months of good payments and gift card expiration (which take effect 15 months after enactment).
If signed into law by Memorial Day — as Obama desires — the bulk of the legislation would start by February 2010 with 45-day advance notice requirements beginning by the fall. The majority of consumer protections in the Senate bill would begin about four months sooner than the federal rules’ July 1, 2010 start date.
Like the federal credit card rules, the House and Senate bills provide protections only for consumer credit card accounts. Business and corporate credit cards are not covered by the federal rules or the proposed law. A proposed amendment that would have extended consumer protections in the act to businesses with fewer than 50 employees died without going to a vote.
Not everything about the Senate credit card bill deals with credit cards. One provision — added as an amendment by an Oklahoma Republican — allows visitors to U.S. National Parks and refuges to carry legally licensed firearms. That measure passed 67-29.
Reactions to the Senate bill restricting credit card practices
Rep. Carolyn Maloney
New York Democrat
“Today is a victory for all credit cardholders. With Senate passage, we have begun to finally level the playing field between credit card issuers and card holders,” Maloney said. “Let’s be clear about what is being done: we are banning practices that have been labeled as unfair and deceptive by the Federal Reserve. It’s time for card issuers to behave in a fair and above-board manner with American consumers.”
President and CEO of the American Bankers Association
“This bill fundamentally changes the entire business model of credit cards by restricting the ability to price credit for risk. What has been a short-term revolving unsecured loan will now become a medium-term unsecured loan, which is significantly more risky … While the recent Federal Reserve rule also contained restrictions on pricing card credit for risk, this bill goes much further in this and other areas. We are concerned that the Senate bill will have a dramatic impact on the ability of consumers, students, and small businesses to obtain and use credit cards.”
U.S. Sen. Carl Levin
“Credit card companies crossed line after line with outrageous practices and underestimated the ability of this Congress to turn public outcry into public policy … Millions of Americans will benefit now that some balance of power is being restored between card holders and card issuers.”
U.S. Sen. Christopher Dodd
Senate Banking Committee Chairman, Connecticut Democrat
“This is a victory for every American consumer who has ever suffered at the hands of a credit card company … My bill that the Senate passed today will insist on consumer protections that are strong and reliable, rules that are transparent and fair, and statements that are clear and informative. I want to thank President Obama for working with me to get this over the finish line, and I urge my colleagues in the House to act quickly to pass this bill so we can get it to his desk as soon as possible.”
U.S. Sen. Harry Reid
“This bill cleans up the fine print so consumers can’t get blindsided by their credit card companies. This bill will not only level the playing field and keep the rules consistent from beginning to end – it can also save families thousands of dollars a year.”
See related: Credit card reform and you, Obama signs credit card reform bill into law, Interactive timeline: How the credit card reform bill became law and when its provisions take effect, House easily passes credit card reform, Feds: Close interest rate loophole in new credit card ruels, New credit card rules don’t cover business, corporate credit cards, House OKs Credit Cardholders’ Bill of Rights, House committee OKs Cardholders’ Bill of rights, Credit Cardholders’ Bill of Rights passes 1st legislative hurdle, Federal banking regulators finalize sweeping rule changes for credit cards, House again weighs Cardholders’ Bill of rights, What the new credit card rules mean for you