Like it or not (banks won’t but consumers will) credit card reform is coming.

Rep. Carolyn Maloney (D-NY) with backing from Rep. Barney Frank (D-MA), chair of the House Financial Services committee, introduced the Credit Cardholders’ Bill of Rights while the Stop Unfair Practices In Credit Cards Act was introduced last May by Senators Carl Levin (D-MI) and Claire McCaskill (D-MO).

There you have it. Both the senate and house are sponsoring credit card reform. One version or other is sure to pass in 2009.

Keeping Card Companies Honest

MSNBC is reporting Bill would keep credit card companies honest.

Could it be? Is Congress really ready to put an end to the credit card industry’s most abusive practices? A bill introduced a few weeks ago by Rep. Carolyn Maloney (D-NY), would change the way most credit card companies do business and provide significant consumer protection for every cardholder.

“In recent years the playing field between credit card companies and credit cardholders has become very one-sided,” Maloney said. “A credit card agreement is supposed to be a contract, but what good is a contract when only one party has the power to make decisions?”

The Credit Cardholders’ Bill of Rights Act of 2008, known as H.R. 5244, would protect cardholders from arbitrary interest rate increases and unfair fees. Maloney, who chairs the House Financial Institutions and Consumer Credit Subcommittee, is quick to point out that her bill does not have any price controls. It does not cap rates or fees.

“I firmly believe the free market works best when consumers are empowered to make their own choices,” she says. “This bill helps foster fair competition and free market values.”

My Comment: Some aspects of this legislation have little to do with the free market, but then again many of the abuses it is attempting to correct have nothing to do with the free market either. For example, the Bankruptcy Reform Act of 2005 attempted to make people debt slaves forever, even after bankruptcy. That legislation fueled a massive increase in predatory credit card lending that would not have occurred in a free market where lenders would have been more concerned about the credit risks they were lending to. Legislation on top of legislation is where we are today, each attempting to undo previous wrongs. The best thing to do would be to scrap everything and start over, but realistically that is not going to happen.

The rules keep changing

Chances are the contract you have with your credit card company gives it the right to change the terms of the deal at any time and for any reason with just 15 days written notice. That includes increasing your interest rate.

“No other business in America could raise the price on something after you purchased it,” says Travis Plunkett, legislative director at the Consumer Federation of America. “But that’s exactly what credit card companies do when they increase your interest rate on an outstanding balance.”

My Comment: I am not a legal scholar but self modifying one sided contracts written in fine print no one could possibly read seems questionable at a minimum.

And then there’s “double-cycle billing.” It lets the bank charge interest on balances you’ve already paid. Here’s how it works. Let’s assume you had a credit card bill of $1,200 and you paid off all but $100. With double-cycle billing you’ll be charged interest on the entire $1,200 the following month, not just on the $100 you carried over.

“That seems unfair to us and it seems unfair to a lot of consumers,” says Consumers Union’s Jeannine Kenney.

My Comment: I agree this is a complete ripoff, and Discover Card is one of the biggest offenders. I have talked about 2-cycle billing on several occasions, most recently in Read the Fine Print On Credit Cards. However, is the problem here a matter of consumer education or a matter of legislation?

Credit Cardholders’ Bill of Rights

Here is Rep. Carolyn Maloney’s Credit Cardholders’ Bill of Rights

The Credit Cardholders’ Bill of Rights takes a moderate and balanced approach to reforming major credit card industry abuses and improving consumer protections without resorting to price controls, rate caps, or fee setting.

1. Cardholders Deserve Protections against Arbitrary Interest Rate Increases.

  • Requires card companies give cardholders 45 days notice of any interest rate increases.
  • Gives cardholders the right to cancel their card and pay off their existing balance at the existing interest rate and repayment schedule if they get hit with an interest rate hike; gives cardholders 3 billing cycles after the rate increase to say no to these new terms.
  • Prevents card companies from retroactively increasing interest rates on the existing balance of a cardholder in good standing for reasons unrelated to the cardholder’s behavior with that card (the so-called “universal default” rate increase).
  • Prohibits card companies from arbitrarily changing the terms of their contract with a cardholder, banning the so called practice of “any-time, any-reason repricing.”

2. Cardholders Who Pay on Time Should Not Be Penalized.

  • Prohibits card companies from charging interest on debt that is paid on time during a grace period. This prevents the so-called “double-cycle billing” practice.
  • Prohibits card companies from slapping fees on the remaining interest-only balance of a cardholder who has paid hisher bill on time.

3. Cardholders Should Be Protected from Due Date Gimmicks.

  • Gives cardholders time to pay their bills by requiring card companies to mail billing statements 25 calendar days before the due date (14 days is the current minimum).
  • Requires that payments made before 5 p.m. EST on the due date are considered timely.
  • Directs card companies to provide on every statement, a phone and internet address that a cardholder can access for payoff balances.
  • Prohibits card companies from charging late fees when a cardholder presents proof of mailing his or her bill within 7 days of the due date.

4. Cardholders Should Be Protected from Misleading Terms.

  • Prevents card companies from using terms such as “fixed rate” and “prime rate” in a misleading or deceptivemanner by establishing single, set definitions of those terms.
  • Gives cardholders who get pre-approved for a card the right to reject that card up until the moment they activate it without having their credit adversely impacted.

5. Cardholders Deserve the Right to Set Limits on Their Credit.

  • Requires card companies to offer consumers the option of having a fixed credit limit that cannot be exceeded.
  • Prevents card companies from charging over-the-limit fees on a cardholder with a fixed credit limit.

6. Card Companies Should Fairly Credit and Allocate Payments.

  • Directs card companies to fairly allocate payments on balances at different interest rates. Many card companies currently require cardholders to pay off a lower interest rate balance first.

7. Card Companies Should Not Impose Excessive Fees on Cardholders

  • Limits the amount of “over-the-limit” fees card companies are allowed to charge to 3. Some card companies currently charge limitless fees for going over credit limits.

8. Card Companies Should Not Give Subprime Credit Cards to People Who Can’t Afford Them.

  • Requires that all fees for subprime cards, whose total fixed fees over a year exceed 25 percent of the credit limit, be paid up front before the card is issued.

9. Congress Should Provide Better Oversight of the Credit Card Industry.

  • Improves existing data collection on industry profits, as well as card fees and rates; requires this information to be presented to Congress every year.

Payback For A decade Of Greed

The pendulum has reversed. This is just the initial stages of reversal. The proposals are what they are and they do not have to make sense. Many won’t. However, consumers are fed up and a Congress far more sympathetic to consumers’ desires is going to be elected.

And as disgusting as two-cycle billing is, I would not legislate against it. There is a choice. Consumers do not have to choose Discover Card or any other 2-cycle lender.

But when banks purposely mail out statements at the very last minute (which they do), change terms for little reason (which they do), require receipt by noon even when their normal mail delivery is 2:00PM (which they do), and charge absurd overlimit fees instead of disallowing transactions (which they do), this is what happens. I have no sympathy for the banks when legislation over-reaches in the other direction.

Treat people fairly instead of what you can get away with and this kind of reaction does not happen. For cash strapped banks, such legislation could not come at a worse time. But this is just a start. A reform of bankruptcy reform is bound to happen as well.

Credit card and other reforms are coming. Banks better get used to the idea.

Mike “Mish” Shedlock
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