By Scott Talbott

The second session of the 111th Congress is under way. Mid-term elections are looming for the entire House and one-third of the Senate. The dynamics have changed with the Chairman of the Senate Banking Committee, Chris Dodd (D-CT), announcing that he will retire at the end of this year. Additionally, Massachusetts elected a Republican, Scott Brown, to fill the seat of the late Sen. Ted Kennedy (D-MA). This reduces the Democrats' majority to 59 Senate seats, one less than is need to override filibusters.

Last year, Congress enacted a new credit card law to place new restrictions on card issuers. The key provisions of the CARD Act became effective on Feb 22, 2010. The House has passed legislation to modernize the regulatory framework, including creating a new standalone consumer protection agency. The Senate is currently working on its version of the regulatory restructuring bill.

Credit Card Law Goes Effective

The President signed the CARD Act into law on May 22, 2009. The bulk of the law was made effective on Feb. 22, 2010. The key provision affecting pricing is the prohibition on lenders from applying increased APRs to the outstanding balance on a credit card account. Additionally, the Federal Reserve Board has issued a final rule amending Regulation Z (Truth in Lending) to implement the CARD Act. The final rule was also effective on Feb. 22, 2010. Among other things, the Federal Reserve's final rule:

• Prohibits interest rate increases during the first year after an account is opened and increases in rates that apply to an existing credit card balance
• Prohibits the issuing of a credit card to a consumer who is younger than the age of 21 unless the consumer has the ability to make the required payments or the application is co-signed by a parent
• Requires creditors to obtain a consumer's consent before charging over-limit fees
• Limits fees associated with subprime credit cards
• Prohibits double-cycle billing
• Prohibits creditors from allocating payments in ways that maximize interest charges

Regulatory Modernization

Chairman Barney Frank (D-MA) moved a regulatory reform bill, the Wall Street Reform and Consumer Protection Act of 2009, through the House Financial Services Committee, and the entire House passed it by a vote of 223-202 on December 12, 2009.

The House bill:

1. Creates a new standalone Consumer Financial Protection Agency (CFPA), the jurisdiction of which the card markets will be under. The new CFPA will strip existing federal banking regulators of their existing consumer protection powers and amass them under the CFPA. The new regulator would have authority over 16 different existing lending and disclosure laws, many of which cover the card markets, like Truth in Lending, Fair Credit Reporting Act, Equal Credit Opportunity and the Fair Debt Collection Practices Act.
2. Establishes a Financial Services Oversight Council to identify financial firms who are systemically significant.
3. Creates a $150 billion pre-funded Systemic Dissolution Fund, paid through assessments on large financial institutions, to finance the unwinding of failed institutions.
4. Establishes a Federal Insurance Office. Unlike banking and securities, the business of insurance is only regulated at the state level. This provision would create an office in the federal government that focuses on insurance.

During the floor debate, the House members discussed the following issues:

• Preemption – An amendment was adopted during floor consideration that would provide limited preemption of state consumer protection laws for national banks and federal thrifts. Large banks operate in all 50 states, so they argue that one national standard is needed to ensure efficiencies and avoid confusion by consumers. Consumer groups argue for the need for each state to be able to write its own consumer protection laws.
• Secured Creditors – An amendment was agreed to that would require creditors, during the bankruptcy of a large financial institution, to accept a 10-percent cut in the liability owed to them. The amendment excludes transactions with depositories, Government Sponsored Entities (GSEs) and credit unions; securities with a duration of 30 days and securities issued by Treasury or U.S. government agencies, such as government-sponsored enterprises or the Federal Reserve. The amendment is designed, according to its supporters, to ask creditors to police their borrowers.
• Mortgage Cramdown – An amendment to give bankruptcy judges the ability to modify the terms or "cramdown" a mortgage was defeated.

Congress will focus on regulatory reform for the balance of the year.

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.