Congress preps for credit crackdown

Marketplace Staff May 2, 2008

Congress preps for credit crackdown

Marketplace Staff May 2, 2008


Tess Vigeland: This week, the Federal Reserve joined other banking regulators in proposing new rules for the credit card industry. Card companies would not be allowed to change the interest rate on existing balances. They also could not continue something called double-cycle billing. That’s when interest charges are heaped not just on the current bill, but the prior one as well. And those expensive overdraft “protections?” You’d have the option of opting out.

The proposals come as more and more members of Congress are urging a crackdown on the credit card industry.

Congressman Barney Frank chairs the House Financial Services Committee. Welcome to the program, Congressman.

Barney Frank: Thank you. I’m always glad to have a chance to talk seriously.

Vigeland: You have warned the Fed previously that in terms of it’s power to police credit card issuers, in your parlance, it should “use it or lose it.” Do you think it’s doing enough at this point to cut down on abusive lending practices?

Frank: I’m very encouraged by what I’ve seen so far. First, by the very fact that they acted. I said earlier this year when Chairman Bernanke testified before us on the economy that I had been on this committee for 28 years, his testimony was the first time I’d ever heard a chairman of the Federal Reserve say the words “consumer protection.” The Federal Reserve is given the power to promulgate codes of conduct for financial institutions and the code he has proposed, that the Fed has adopted — and I haven’t seen every detail — looks very much like the legislation you were talking about. We are not trying to tell the credit card companies what they can do prospectively, but they have developed a number of situations where you go out, you make purchases thinking that your interest rate is X and then they retroactively increase the interest rate on purchases you’ve already made, on debt already incurred. That’s a very unfair retroactivity. The Fed also acted in another area we’ve been working on which is overdraft protection where they do you this favor of giving you this very expensive protection without fully telling you, but in the credit card area, they have done much of what we though was important.

Vigeland: One of the Fed’s proposals would make it tougher for card issuers to change the interest rates based on other things going on with a consumer’s credit — it’s often called universal default. The Fed proposal would allow that on new transactions, but not on what’s already on your card. Does that go far enough for you?

Frank: Well, we essentially take the same position. Look, I believe in a free market and if you have adequate notice and you’re told “well, this is what it’s going to be,” then you can protect yourself. We have said that before they can raise your interest rate, they have to notify you and give you a certain period of time so you can say “OK, cancel the card; I’m not going to use it anymore.” But we should explain this universal default because it really just offends most basic principals of fairness.

Vigeland: Yeah, this is where you miss a payment on one card or say on your auto insurance or health insurance and all of your other cards jack up the rate.

Frank: Yes, and that’s what we wanted to ban by legislation and the Fed has banned by regulation.

Vigeland: The banking industry has argued that if it’s not allowed to make decisions based on an individual’s risk profile
higher interest rates for everybody and that banks will just start charging more in fees.

Frank: Well, in the first place, that assumes that they’re voluntarily charging less than they can get away with now, which is nonsense. What are they? Charities? So if they thought they could raise the rates and not lose business, they’d raise them now. Secondly, we’re not saying based on that one person’s risk profile, you can’t raise the rates going forward, but there’s no fairness in raising the rates on debt already incurred. That’s all we’re saying. And by the way, some of them say “Well, you know what? If you don’t let us do this, we might have to be a little tighter in allocating credit.” You know, it’s the same as when we put some law on the books — I hope we will, the House passed it — to make it harder to get subprime mortgages in certain circumstances and people said “Well, we won’t be able to give out as many mortgages.” Well good! They’ve given out mortgages and credit cards, frankly, too promiscuously.

Vigeland: Will you continue to press for legislation that goes beyond the Fed’s proposed changes and what would be the main element so far that regulators have not dealt with?

Frank: Well, in the credit card area, I don’t think there are a lot of those; I have to look more carefully at what they’re doing in the overcharge issue. Right now, the entire burden of late payment, no matter what caused it, falls on the credit cardholder. I think the argument for legislation is yes, if we agee these are good things, let’s make them permanent and let’s not leave them to the whim of a new Federal Reserve chairman.

Vigeland: Congressman Barney Frank chairs the House Financial Services Committee. Thank you so much for your time today.

Frank: I appreciate the chance.

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