Democratic Congress Passes Credit Cardholders' Bill of Rights

For anyone who has experienced universal default, where a credit card company raises its interest rate based on any change in your credit report, even if that change is unrelated to that company… or wondered why their payment due date has shrunk from 21 or more days to just 14… for anyone who has paid off their credit card in full and then got a bill the next month for interest accrued the previous month… for anyone who has been upset that payments are always applied to the lower-interest balance first… good news is on the horizon.

Yesterday, 228 Democrats and 84 Republicans in the U.S. House of Representatives voted to support The Credit Cardholders' Bill of Rights (H.R. 5244). The bill now heads to the U.S. Senate for its consideration.

Not unexpectedly, banks such as Bank of America, JPMorgan Chase, Citigroup, Capital One Financial Corp and Discover Financial Services oppose the bill. With the markets in turmoil and drowning from the collapse of the U.S. housing and subprime mortgage markets, the legislation could limit their credit card revenue by limiting the fees they can charge for practices that consumer advocates say are designed to hurt or deceive consumers. The White House also opposed the legislation, which seeks to curb unfair and deceptive credit card practices, saying it would constrain banks' ability to price risk.

Summary of the H.R. 5244 bill

111 Republicans and 1 Democrat voted "nay." How did your representative vote on H.R. 5244?

Senate Passes "Common Sense Legislation" Regarding Credit Card Receipts

The Credit and Debit Receipt Clarification Act – a bill that says a business that printed an expiration date on a receipt over the past 18 months cannot be found in violation of the Fair Credit Reporting Act as long as the merchant truncated the customer's credit card to no more than the last five digits (and complied with other FCRA requirements) – has passed in the U.S. Senate.

The bill was sponsored as H.R. 4008 in the House by Financial Services Committee member Representative Tim Mahoney, D-Fla., and as S. 2978 in the Senate by Banking, Housing and Urban Affairs Committee member Senator Charles Schumer, D-N.Y.

The decision was hailed by businesses and restaurants and is expected to nullify the more than 300 class action lawsuits that contended that FACTA required merchants to both truncate the credit card number and leave off the expiration date. The lawsuits sought fines as high as $1,000 for each non-compliant receipt and were so potentially damaging that a number of retailers threatened to file bankruptcy. Plaintiffs did not need to demonstrate any real or actual damage caused by the violation or even that the companies had willful intent to cause harm.

Merchants said their interpretation of the law was that they needed to do one or the other, but were not mandated to do both. Most reasoned (and some experts concurred) that the expiration date was of little value without a full credit card number.

According to a release issued by the National Retail Federation and the National Council of Chain Restaurants, the new legislation would protect merchants from lawsuits for expiration dates printed between the time the FACTA rule went into effect and the time the measure is signed into law. But merchants will still be required to both truncate card numbers and leave off expiration dates going forward.

“The continued proliferation of these lawsuits is an unnecessary drain on resources during a time of financial uncertainty in the nation’s economy,” NCCR Vice President Scott Vinson said. “Experts have said truncation of credit card numbers by itself is sufficient to prevent credit card fraud or identity theft regardless of whether the expiration date is printed on a receipt. Retailers and restaurant owners nationwide are delighted that Congress has passed this common sense legislation and look forward to seeing it signed into law as soon as possible.”

President Bush is expected to sign the measure shortly.

Your Turn: FTC Seeks Comments on Credit-Based Insurance Scores

As part of its efforts to fulfill its obligations under the Fair and Accurate Credit Transactions Act of 2003 (FACTA), the Federal Trade Commission and the Federal Reserve Board have been conducting ongoing studies on the effects of credit-based insurance scores on the availability and affordability of financial products such as credit cards, auto loans, mortgages and property insurance.

With the completion of its study on the effects of credit-based insurance scores on consumers of auto insurance, the Federal Trade Commission now is focusing its attention on the effects of credit-based insurance scores on homeowners insurance. A press release issued today seeks public comment on any evidence the FTC and Board should consider in conducting the study.

It's no secret that credit scores have long been used by the insurance industry to calculate what your premiums are for auto or property insurance. Consumer advocates have argued that basing premium costs on credit scores disproportionately affects minorities in a negative way. According to the FTC, the results of their investigation into the use of credit scores in underwriting auto insurance policies showed a correlation between insurance scores and the likelihood of filing an insurance claim. The FTC also stated that the use of credit information did not result in racial or ethnic discrimination. Insurers claim that more than 50 percent of policyholders have a lower premium because of good credit.

A number of states, however, have introduced legislation to ban the use of credit in homeowners and auto insurance underwriting. Rep. Luis Gutierrez (D- IL) introduced a bill in Congress (H.B. 5633) that would amend the Fair Credit Reporting Act (FCRA) to prohibit auto and homeowners insurance companies from using credit information for underwriting if the FTC concludes insurers’ use of credit information results in racial or ethnic discrimination or represents a proxy for race or ethnicity.

If you would like to comment, click here for instructions. The deadline for comment is June 18, 2008.

The Fed Proposes Aggressive Restrictions on Abusive Credit Card Practices

In a move that is stunningly pro-consumer, the Federal Reserve Board has proposed tough new policies to curtail the types of abusive credit card practices that have been the subject of recent Congressional hearings.

These practices, which include arbitrary increases in credit card interest rates for existing balances, applying payments only to balances with the lowest interest rate rather than the highest rates and double-cycle billing (charging interest on debt that has already been paid), would be changed under the new, stricter policies. In addition, banks may also be required to give customers advance notices as well as the ability to opt out of overdraft programs.

The rules could go into effect by the end of this year.

The banks are already in an uproar over the proposed rules, which could affect more than 10,000 financial institutions. Industry representatives have begun threatening exhorbitant annual fees, elimination of balance transfers and increased interest rates. According to lobbyists, the restrictions would eliminate credit or make it more expensive to get credit.

The biggest source of angst for banks is the issue of universal default, which allows banks to increase a customer's interest rate for any reason, including defaults on other credit cards or loans, slight drops in credit scores or an increase in banks' cost of funds.

Eliminating universal default, known in bank lingo as "risk-based repricing," is a key component of a number of bills on Capitol Hill. The Fed's proposal would allow banks to raise rates when a consumer defaults on that account, and to consider "outside factors" to raise rates for new transactions. However, banks would not be allowed to use such factors to raise rates on existing balances.

According to On Wall Street, Citigroup and JPMorgan Chase & Co. announced they would no longer do universal default; however, Bank of America still uses risk-based repricing, and Capital One reprices its customers when their cost of funds rate increases.

Consumer advocates are applauding the Fed's aggressive stance. A vote is expected today.

Consumers Silenced in Testimony on Unfair Credit Card Practices

On March 13, registered Republican Steven Autry had planned to share his experience with Capital One before the House Financial Services Committee's hearings on H.R. 5244, a proposal to ban unfair and deceptive credit card practices:

"My relationship with Capital One goes back to 1999, when I was solicited with an offer for a Visa card with a "fixed" 9.9% rate card. I applied over the phone, and was approved. The card was used for both purchases and balance transfers in a positive relationship with Capital One for eight years until July, 2007. That's when Capital One advised me in a billing insert that my "fixed" rate of 9.9% was being raised to 16.9%. No reason or explanation was given – I was not late on payment, and had not utilized the entire credit limit. This was a unilateral change to the terms of our agreement.

"In August, of 2007, I wrote a letter to Mr. Richard D. Fairbank, Chairman, President, and CEO of Capital One, at the McLean, Virginia home office. My written statement will contain a copy of Capital One's response which includes the line, 'Unfortunately, changes in the interest-rate environment or other business circumstances may require us to increase rates, even for fixed-rate accounts in good standing.'"

Neither Steven nor the other three credit card victims who were invited to testify actually did. Congressman Spencer Bauchus (R-AL) and the credit card companies led the rally to muzzle the consumers by demanding they agree to publicly release all of their private financial records – or not be able to testify. (Bauchus, not surprisingly, has been generously funded by the financial services industry.)

The bully tactic worked. Representatives from Capital One, Chase and Bank of America spoke for hours about how fair and consumer-friendly their practices were, citing "facts" without any supporting data. Yet the consumers who flew in to testify were silenced by the threat of the financial institutions being able to expose anything they wanted about the consumers or smear them after the hearings were over.

Rep. Mark Udall (D-CO) railed on behalf of his constituent Susan Wones, who traveled to D.C. to tell lawmakers about how her credit card company doubled her interest rate to 25 percent without notice and despite her record of paying her bills on time. Susan holds a high credit score rating, pays her bills on time and doesn't exceed her credit card limit.

"None of the consumer witnesses objected to signing releases that would allow the committee to verify the facts concerning their individual stories, and I must say that I found the Financial Services Committee’s insistence on a broad waiver of privacy rights to be both unnecessary and counter-productive," Udall said in a release. "Narrowly drawn waivers could have been drafted by Committee staff weeks ago, instead of waiting until the eleventh hour to prevent consumer testimony. What happened today is emblematic of why so many Americans are fed up with Washington."

Rep. Maloney has promised to hear the voices of these consumers. Time will tell if that does indeed happen.

For now, we have Steven's written testimony, which holds this analogy:

"The NFL does not allow one team, in the midst of the fourth quarter, to unilaterally move their end zone 20 yards in their favor 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. It's time for legislation at the federal level that tells the credit card industry, 'Game Over' to unilateral, one-sided, rule changes."

View the archived webcast and read the prepared testimony of the witnesses who appeared before the Subcommittee on Financial Institutions and Consumer Credit.

CapOne and BOA Credit Card Ripoff

If you have a Capital One or Bank of America credit card, you may be in for a surprise when your monthly bill arrives.

Hundreds of thousands of credit card holders - many of whom have never missed a credit card payment and were in good standing - have been informed that their interest rates will be doubled - some to as much as 28 percent - without any explanation of the increase.

The big banks have been sending notices to consumers advising them of this change over the past month. In fine print, Bank of America has offered customers the option of not using their cards any longer and paying off their existing debt at the current interest rate - but in order to take advantage of this option, customers must "opt out" of the change by writing to Bank of America. There is no opt-out telephone number, nor does Bank of America provide a form or a return envelope. And consumers don't have much time to respond. Letters received in late January had deadline dates of Feb. 19 or Feb. 29. Those who threw away the notice thinking it was junk mail or who fail to respond by the due dates will see their rates automatically rise on existing and new balances.

It's a legal - but sneaky - trick, as many of the big credit card issuers have provisions in the fine print that they can raise rates for any reason at any time. And with losses piling up in the subprime mortgage sector and increasing credit card chargeoffs, it's an easy way for banks to generate revenue.

But most people don't have a secret stockpile of money laying around that they can use to pay off their credit card balances - which means that once again, the credit card companies will win big at their customers' expense.

All this is happening despite the continued cuts in the Federal funds rate, which influences the interest that consumers pay for credit cards, home equity lines and car loans. The rate was reduced this year by 1.25 percentage points and currently stands at 3 percent.

Look for continued legislative efforts this year by Congress to curb these unfriendly practices.

Rep. Maloney Introduces Credit Cardholders' Bill of Rights

The wave of legislation designed to protect consumers from unfair credit practices continues in the House of Representatives. Yesterday, Rep. Carolyn Maloney (D-NY) introduced the "Credit Cardholders' Bill of Rights Act of 2008" (H.R. 5244), which aims to amend the Truth in Lending Act and abolish predatory lending practices and abuses.

The Bill of Rights includes provisions that:

• protect cardholders against arbitrary interest rate increases (such as universal default and "any time any reason" price hikes) and require a 45-day notice of any interest rate increases
• prevent cardholders who pay on time from being unfairly penalized (eliminating double-cycle billing and fees on interest-only balances)
• protect cardholders from due date gimmicks (requiring card companies to mail statements 25 days before the due date - 14 days is the current minimum - and prohibits charging late fees if provided with proof of mailing the bill within 7 days of the due date)
• shield cardholders from misleading terms (such as "fixed rate" vs. "prime rate")
• empower cardholders to set limits on their credit (creating a self-selected credit limit that cannot be exceeded, thereby eliminating over-the-limit fees)
• require card companies to fairly credit and allocate payments (many card companies require that payments be allocated to lower interest rate balances first)
• prohibit card companies from imposing excessive fees on cardholders (limits the number of over-the-limit fees to 3)
• prevent card companies from giving subprime credit cards to people who can't afford them (requiring that fees for subprime cards whose total fixed fees over a year exceed 25% of the credit limit be paid upfront before the card is issued)
• require Congress to provide better oversight of the credit card industry (improves data collection on industry profits and fees, and provide an annual accounting to Congress)
• contain NO rate caps, fee setting or price controls (a concession to the card companies)

Maloney, who chairs the House Financial Institutions and Consumer Credit Subcommittee, said, "A credit card agreement is supposed to be a contract, but in recent years cardholders have lost the ability to say no to unfair interest rates hikes and fees." The bill "levels the playing field between card companies and cardholders while fostering fair competition and free market values. It sets no rate caps, fees or price controls, nor does it dictate any business models to card companies."