By Scott Talbott

This year has seen a large effort by policymakers, Congress and federal banking regulators to impose significant new restrictions on credit and debit card practices. These efforts are influenced by the fact that 2008 will be a contentious election year and a wave of populism has swept through Congress. In addition, federal banking regulators have been accused of being too lax in their oversight of the subprime mortgage market and may want to avoid a similar accusation with regard to their oversight of cards.

In general, both the legislative and regulatory efforts focus on increasing disclosures to cardholders and imposing restrictions on current card policies and practices that are perceived in Washington to be “abusive” to the cardholder. One additional proposal would ask banks to report their customer’s card receipts to the IRS. The challenge to policymakers is to balance any new restrictions against maintaining the competitive marketplace and the benefits of risk-based pricing. As policymakers attempt to protect consumers, they must be careful to avoid limiting access to or increasing the cost of credit. Overregulation could result in a tightening of credit, just when Americans and the economy are reeling from the tightening due to the problems in the subprime market.

What follows is a summary of the legislative and regulatory efforts currently being made by policymakers in Washington to impose new restrictions on card practices.

New and Pending Legislation

Legislatively, bills have been introduced to restrict card practices and impose price controls on interchange fees.

One bill to restrict card practices is authored by Rep. Carolyn Maloney (D-N.Y.). She has introduced a bill, H.R. 5244, the “Credit Cardholder’s Bill of Rights,” that would place new restrictions on card practices. For example, her bill would:

• require card companies to give cardholders 45 days notice of any interest rate increase;
• prevent universal default (changing the interest rate based on a customer’s credit data other than the credit card);
• eliminate double-cycle billing;
• and dictate that payments be allocated on a pro-rata basis among the different balances with differing interest rates.
  

Senate Banking Committee Chairman Chris Dodd (D-Conn.) has introduced
S. 3526, “The Credit Card Accountability, Responsibility And Disclosure Act.”
This bill mirrors the provisions in Rep. Maloney’s bill. Before leaving for August recess, the House Financial Services Committee reported out Rep. Maloney’s bill by a partisan vote of 39-27. The next step is for the entire House to vote on the bill. This could happen in September, but time is running out in the legislative session and it is probable that Congress will take further action.

Predictably, the card industry opposes the card practices bills and consumer groups are supportive. The arguments against the two bills are that they would restrict the use of risk-based pricing, which has been instrumental in opening and extending credit to millions of low- and moderate-income Americans. The arguments for the bills are that the proposed changes are moderate and help protect consumers.

On interchange fees, House Judiciary Committee Chairman John Conyers (D-N.Y.) and Senate Majority Whip Richard Durbin (D-Ill.) have each introduced a bill, H.R. 5546 and S. 3086, the “Credit Card Fair Fee Acts,” to restrict interchange fees. The House Judiciary Committee has reported the bill out with members from both parties voting for and against the bill. The current interchange fee is paid by a merchant bank to the cardholder’s bank to process a card purchase. These bills would create an exception to the anti-trust laws and allow merchants to negotiate directly on interchange fees. Both bills have bipartisan support.

The financial services industry, including banks and credit unions of all sizes, is opposed, while merchants of all sizes are supportive. The arguments against the interchange bills are that the card industry is currently competitive and that an anti-trust exception is not the answer. The arguments for the bills are that the merchants have no ability to negotiate with the banks or the payment system providers.

Procedurally, the three card bills have taken the beginning steps, but neither the House nor the Senate has scheduled any of the bills for a vote. Time is running out for the current legislative session and the outlook for passage this year is rapidly decreasing. However, look for card practices and interchange bills to return in 2009.

Finally, tucked away in a bill to strengthen the slumping housing market is a provision to require acquiring banks and third-party processors to report the gross card sales of their customers to the IRS.

A View from Washington

This administrative provision is designed to reduce tax avoidance by merchants. The financial services industry opposes the new requirement as an unfunded federal mandate that will increase costs without reducing tax fraud. Proponents say it will increase federal tax revenues. The housing bill picked up significant political momentum and it, along with this new reporting requirement, was signed into law this session.

New and Pending Regulation

On the regulatory front, the federal banking agencies have proposed restrictive regulations on cards that are similar to the legislation offered by Chairman Dodd and Rep. Maloney. The difference is because they are in the form of proposed regulations, and not legislation, they stand a very good chance of becoming effective this year. The Federal Reserve, the Office of Thrift Supervision and the National Credit Union Administration proposed regulations to the Unfair and Deceptive Acts or Practices rule, 12 C.F.R. §227 (2008), by including Subpart C — Consumer Credit Card Account Practices Rule. 73 Federal Register 97 (19 May 2008). The proposed changes compliment Regulation Z, 12 C.F.R. §226 (2008), which was used to implement the Truth in Lending Act.

These proposed regulations will increase regulatory and compliance burdens by applying the following provisions to card practices:

• increasing the amount of time consumers have to make a payment on an outstanding bill;
• dictating how excess payments are used to pay off balances with differing APRs;
• prohibit credit institutions from applying increased APRs to the outstanding balance on a credit card account;
• preventing fees on credit holds;
• preventing double-cycle billing;
• limiting the amount of security
• deposits and fees;
• and requiring that when credit institutions make a firm offer of credit, it must disclose the criteria that will determine whether consumers receive the lowest APR or the highest credit limit.
  

In general, the card industry opposes the regulations for the same reasons it opposes the Maloney and Dodd legislation. However, procedurally speaking, regulations need only to satisfy the requirements of the Administrative Procedures Act before becoming effective, which is a much lower hurdle. So expect these regulations to become effective before the end of 2008.

As 2008 passes its halfway point and the 2008 presidential election draws near, policymakers in Washington are work­ing on imposing new restrictions on card practices. By year’s end, the financial services industry will most likely face new regulations on credit and debit cards and possibly a new reporting requirement. While legislation on card practices and interchange fees faces a longer road, the card industry could see new laws in 2009.

About the Author

Scott Talbott is a senior vice president for government affairs for the Financial Services Roundtable, a trade association representing 100 of the largest financial services firms in the country. He is based out of Washington, D.C.