The Wall Street Journal

Politics & Economics: Credit-Card Issuers on the Spot; Democrats to Scrutinize Impact of Fine Print on Middle Class

Christopher Conkey, January 25, 2007

Washington -- Democrats in congress are bringing the credit-card industry in for fresh scrutiny, renewing a push to protect consumers from lurking fees, interest-rate spikes and other hazards of the fine print.
Today, Senate Banking Committee Chairman Chris Dodd is to hold a hearing on disclosure, marketing and billing strategies of credit-card firms, the first in a series of hearings on how the industry affects consumers. Meanwhile, a Homeland Security and Governmental Affairs subcommittee headed by Sen. Carl Levin, a Michigan Democrat, has launched a probe into misleading credit-card practices.
In a study requested by Mr. Levin, the Government Accountability Office recently noted a jump in the number of consumers facing interest rates over 25%, big increases in average fees charged for late payments or exceeding a limit and inconsistencies in how credit- card companies disclose fees to consumers.
The flurry of activity marks a shift for the credit-card industry, which generally enjoyed favorable treatment on Capitol Hill under Republican rule. As recently as two years ago, Congress was more focused on the effect delinquent borrowers had on lenders, and it passed a landmark law making it harder for borrowers to erase debts by filing for bankruptcy. Banks cheered, and consumer advocates fumed.
With Democrats now in control of the agenda, the microscope is being focused on how terms offered by banks and credit-card networks burden many consumers. At the least, congressional scrutiny likely will encourage some issuers to move away from practices Mr. Dodd says "trap consumers in a hole of debt from which they may never recover."
This could be good news for many cardholders since only 30% or so pay their balances off in full each month, according to the Nilson Report, a newsletter that tracks the card industry. The Office of the Comptroller of the Currency, the federal regulator that oversees many major banks and card issuers, says it receives more complaints about penalties, rate adjustments and other credit-card practices than any other issue.
Still, it is unclear how far Senate Democratic initiatives will go for now, due to a lack of Republican support and uncertainty over who will make the party's case in the House. Sen. Richard Shelby, the Alabama Republican who is the ranking member of the Senate Banking Committee, hasn't thrown his support behind any of the Democratic proposals. Massachusetts Rep. Barney Frank, chairman of the House Financial Services Committee, has credit cards much lower on his priority list than Mr. Dodd.
In some cases, Democrats may resurrect amendments that were defeated in the bankruptcy-bill battle of 2005. Sen. Robert Menendez of New Jersey wants to make it harder for lenders to target college students, Sen. Daniel Akaka of Hawaii wants issuers to clearly disclose consequences of only paying the minimum amount due each month and Rep. Mark Udall of Colorado wants to make it easier for consumers to opt out of interest-rate increases.
Consumer groups say they hope to restrict three other practices prevalent among credit-card companies: applying payments to low- interest balances before high-interest ones, limiting consumers' ability to bring legal suits by including mandatory arbitration clauses in user agreements and implementing "retroactive" rate increases, where a higher interest rate is applied to an old balance.
Industry officials say many card issuers have already started moving away from some practices that irk consumer groups, and they point to benefits card users are enjoying in an increasingly competitive market. "Interest rates are down, credit is more widely available and consumers have control over whether they're going to pay these fees," said Ken Clayton, managing director on card policy for the American Bankers Association, a trade group in Washington.
The GAO report found the average interest rate charged on many cards it examined was considerably lower than in previous periods, and not all fees are rising. Even Mr. Dodd -- a presidential candidate who has pushed the issue as something that affects the middle class -- and his colleagues are quick to emphasize the vital and growing role credit cards play in the economy. They also point out that consumers who make purchases with credit cards generally have "zero liability" and other fraud protections that consumers who pay with cash, checks or some debit cards don't.
Both sides of the debate agree on the need to make rates, terms and fees more discernible to consumers. "All of us think it's important to focus the discussion on disclosures," said Desiree Fish, a representative of American Express Co. A number of bills are likely to address the issue, and the Federal Reserve is updating disclosure requirements for card issuers. But some critics fear a focus on tweaking the fine print could detract attention from more-sensitive issues, like policies triggering fees and interest-rate increases.
For now, consumer groups will have to settle for the hearings and sending warnings to lawmakers. Among them: The average household now has credit-card debt of $7,753, up from $6,086 five years ago, according to the Nilson Report.  Robert D. Manning, director of the Center for Consumer Financial Services at the Rochester Institute of Technology, plans to testify at today's hearing on how the slumping housing market will exacerbate many households' debt burden.  He also plans to share personal frustration. After missing a payment over the holidays, he said, the interest rate on one of his cards was raised to 32.4% from 3.9%. "When I paid off my bill, they wouldn't lower the interest rate," he said. "I said 'Where's the risk? I paid it off!"'


This story ran on The Wall Street Journal on January 25, 2007.