“When are consumers going to stop getting the short end in this bailout?

Credit card firms back in hot seatBy VICTORIA MCGRANE & LISA LERER | 3/4/09 4:13 AM EST

Longtime supporters of credit card reform have a new weapon in their rhetorical arsenal: the $700 billion Wall Street bailout.

“The big banks got billions of our tax dollars to rescue them from their own financial mess. Now they turn around and hit us with higher interest rates and fees on our credit cards,” read a recent alert from the Consumers Union, the publisher of Consumer Reports.

Indeed, a coalition of consumer advocates believes the time is right for cracking down on high credit card fees, abusive practices and loose regulations in the credit card industry.

“When are consumers going to stop getting the short end in this bailout? Chase, Citibank, HSBC, Capitol One and others recently hiked interest rates, with the average card rate now about 14 percent. Meanwhile, the banks are paying as little as 0 percent for overnight loans. Unbelievable,” the alert declared before prompting the reader to tell Congress to pass credit card legislation.

Consumer advocates and some Democrats have pushed for tighter credit card regulations for more than a decade, but they could not overcome resistance from card issuers, banks and financial services firms. Last year, a credit card bill sponsored by Rep. Carolyn Maloney (D-N.Y.) passed the House but died in the Senate. And in a January 2007 hearing, Senate Banking Committee Chairman Chris Dodd (D-Conn.) put the industry “on notice,” warning card issuers to halt abusive practices.

Now, in the wake of the financial crisis, advocates believe a major credit card bill has become almost inevitable.

“Critical mass for credit card reform is definitely at its highest level ever,” said Travis Plunkett, legislative director of the Consumer Federation of America. Credit card legislation has been introduced in both the House and the Senate already this year.

Credit card defaults have risen over the past year as strapped consumers struggle to make their payments. Some lawmakers see a parallel between abusive credit card fees and the predatory mortgage lending that contributed to the subprime crisis. Now, public and congressional anger at Wall Street is clearly coloring lawmakers’ attitudes toward credit card lenders as well.

A co-sponsor of the House bill, Rep. Maxine Waters (D-Calif.) assailed CEOs of major banks for raising interest rates on consumers after accepting billions in taxpayer-funded bailouts during a Feb. 12 hearing.

Addressing the eight Wall Street CEOs as “captains of the universe,” she demanded to know which of them had notified credit cardholders of increased rates. Bank of America CEO Ken Lewis said his company has raised rates on 9 percent of its customers. Two other CEOs also raised their hands in the affirmative, including the head of embattled Citigroup, which recently reached a new deal with Treasury to give the federal government control of about 36 percent of the company.

Dodd did not make this specific criticism when he introduced his own credit card legislation the same day as the CEO hearing in the House, but he believes the timing is right for credit card reform.

“Families in Connecticut and across the country are struggling to make ends meet as layoffs continue, home values plunge and lines of credit are cut or canceled,” Dodd said. “The last thing they need is further financial hardship brought on by abusive credit card practices. These practices are wrong, they’re unfair, and they must end.”

“At a time when Americans are becoming increasingly reliant on credit cards, credit card companies are being more aggressive about finding ways to charge their customers,” he said.

In the House, Maloney reintroduced The Credit Cardholders’ Bill of Rights. Her bill is sponsored in the Senate by Democrats Charles Schumer of New York and Mark Udall of Colorado. Lobbyists and advocates are also closely watching Dodd’s bill. Both bills would prohibit arbitrary interest rate increases and excessive fees.

There’s been action on the regulatory side as well. In December, the Federal Reserve passed the strongest credit card rules in decades, banning certain practices that rapidly increase penalties. The new rules also forced credit card companies to be clearer about their billing practices.

The Fed rules won’t take effect until mid-2010. That’s far too late for struggling cardholders facing default now, say consumer advocates arguing for even stricter legislation.

Banks say they are currently working to implement the new Federal Reserve rules, which they believe address most if not all of lawmakers’ concerns about credit card practices.

The lenders also warn that tougher action by Congress might backfire and force lenders to tighten credit just when consumers need it most.

“There is a serious risk that such actions could end up hurting the very people they’re trying to help because it limits the ability of card companies to lend to consumers and small businesses at the very time they can least afford it,” said Ken Clayton, managing director of credit card policy for the American Bankers Association. The trade association is leading the industry’s efforts on the credit card issue.

The bad economic environment has driven up the cost of credit card lending, despite what the Federal Reserve has done, Clayton argues.

Rising delinquencies and unemployment rates mean that fewer people are paying their bills. Moreover, investors are shying away from the secondary market for asset-backed securities — which funds 50 percent of credit card lending, he said. Lenders have been forced to turn to more expensive sources to fund lending, further driving up the cost of that credit.

The Treasury’s program to address this dynamic for credit cards, known as the Term Asset-Backed Securities Loan Facility, was just announced Tuesday. The program’s goal is to help lower the cost of credit for consumers by providing investors with financing to help them purchase certain asset-backed securities.

Lawmakers should allow the program time to work, Clayton said.

“They have to be worried that if they do something that spooks investors, it will just perpetuate the problem that they and the Federal Reserve and the Treasury Department are trying to get at.”