Reform of the credit card industry's more abusive practices took center stage on Capitol Hill yesterday, as the House Financial Services Committee held a hearing on the "Credit Cardholders' Bill of Rights," legislation sponsored by Rep. Carolyn Maloney (D-NY) that would limit interest rate hikes and hidden fees on credit card accounts.
"The playing field between card companies and cardholders has become very one-sided in recent years. Yet, more and more Americans are turning to their credit cards to help pay bills, buy groceries, and make ends meet in this troubled economy," said Maloney, who serves as chairwoman of the Subcommitee on Financial Institutions and Consumer Credit.
"Instead of looking the other way while Americans fall deeper into debt, Congress can and should take swift action to reform major credit card industry abuses and improve consumer protections for cardholders," she said.
The committee heard testimony from both representatives of the financial services industry and citizens sharing their stories of credit card problems, as well as Sen. Carl Levin (D-MI), who has held several hearings on credit card lending and billing practices and pushed similar legislation in the Senate.
"Credit card issuers like to say that they are engaged in a risky business, lending unsecured debt to millions of consumers, but it is clear that they have learned to price credit card products in ways that produce enormous profit," Levin said.
"Credit card issuers make such a hefty profit that they sent out 5 billion pieces of mail last year soliciting people to sign up. With profits like those, credit card issuers can afford to give up abusive practices that treat consumers unfairly."
Moving the goalposts
Among the provisions in Maloney's bill would be the prohibition of interest rate hikes for credit card holders in good standing -- those who pay their bills on time and do not incur late fees.
Such was the case for Steven Autrey of Fredericksburg, VA, who testified that in 2007, his Capital One Visa card's interest rate skyrocketed from 9.9 percent to 15.9 percent, with no explanation and despite only one late charge in his payment history -- a complaint shared by many other Capital One cardholders.
Autrey contacted Capitol One, who told him that changes in the financial environment would necessitate the rate hike, even for accounts in good standing like his. He testified that the lender would let him keep his current interest rate, but only if he closed his account, a move which could harm his FICO credit score and make new purchases more difficult.
"The NFL does not allow one team, in the midst of the fourth quarter, to unilaterally move their end zone 20 yards just because they don't like the point spread. The rules are laid out before the kickoff, and the umpires enforce the same rules for both home and visiting teams for the whole contest," Autrey said. "It's time for legislation at the federal level that tells the credit card industry, 'Game Over' to unilateral, one-sided, contract changes."
Regulatory baby steps
John Carey, chief operating officer for Citigroup's CitiCards division, agreed that the industry had not done enough to minimize penalties as a result of lending unsecured credit. Carey referenced Citigroup's decisions to abandon "universal default" rate hikes, where the lender raised interest rates if the borrower was late paying other bills, and "any time any reason" rate hikes.
"We hoped and expected that these points of differentiation would lead customers to vote with their feet...[but] we have been disappointed with the results we have seen so far," Carey said. "The problem is that customers cannot recognize the difference between us and our competitors."
Carey advocated adoption of the Federal Reserve's proposed changes to credit card disclosure agreements, which simplify the language and terms and extend the time between an announced rate hike and its implementation from 15 days to 45.
But consumer advocates at the hearing testified that even better disclosure agreements did not go far enough in remedying the role credit cards play in America's multibillion-dollar consumer debt.
Consumer Federation of America's Travis Plunkett said that delinquencies in credit card payments were steadily increasing due to high gas prices, the erosion of home equity as a payment method, and other increased utility costs, and that credit card companies continued to reap strong profits even in the face of general economic loss.
"Borrowers who pay off their balances in full and on time each month do not earn as much profit for the industry," Plunkett said. "With revolving debt nearly quadrupling since 1990, credit card companies' profitability should remain strong."
