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fighting modern day usury

May 20, 2009

From Carl Hulse of the New York Times:

Despite complaints that banks and credit card companies are gouging customers by charging outrageous interest rates, the Senate on Wednesday easily turned back an effort to cap interest rates at 15 percent.

The effort by Senator Bernie Sanders, the Vermont independent, drew only 33 votes and needed 60, with a bipartisan group of 60 senators opposing it as the Senate pushed its credit card overhaul toward the finish line. Some Democrats and consumer groups have said that an interest cap is needed to put real teeth into an otherwise solid bill.

Other backers of the measure calculated that an interest rate ceiling would doom the popular legislation. The banking industry, which had some heavy-weight representatives monitoring the vote off of the Senate floor, warned that an interest rate limit could cause a sour reaction in the financial markets.

But Mr. Sanders said the card companies and banks were engaged in conduct that could get others hauled into court. He said one-third of all credit card holders are paying interest above 20 percent and as high as 41 percent.

“When banks are charging 30 percent interest rates, they are not making credit available,” said Mr. Sanders, who noted credit unions are limited to 15 percent. “They are engaged in loan-sharking.”

After the effort failed, Senator Christopher J. Dodd of Connecticut, the Democratic chairman of the banking committee, proposed that the Federal Reserve be asked to provide an analysis of how Congress could rein in interest rates.

Senators said they hoped to finish up the credit card bill as early as Thursday, coinciding with a town hall meeting by President Obama on credit card issues in New Mexico.

It looks like Sen. Durbin was right: the banks really do own the Senate.

So Sen. Sanders’ effort to cap interest rates at 15% — the same rate that credit unions are limited to — was killed in the Senate by 22 Democrats and 33 Republicans who voted against his amendment to the Credit Cardholders’ Bill of Rights Act of 2009 earlier this week. Big surprise.

The Senate did pass a version of the bill today, however, that supposedly will rein in credit card rate increases and excessive fees without a nationwide cap on interest rates. Sen. Sanders supported the bill even without the interest rate cap, calling it “a step forward in protecting consumers,” although warning, “I am going to be back on this issue of usury.” Good looking out, Bernie.

But while most are hailing this move as a giant step forward to providing more consumer protections for credit cardholders, Andrew Martin, who writes for the New York Times, cautions that the credit card companies will just hit the people with good credit even harder to make up for any lost revenue:

Credit cards have long been a very good deal for people who pay their bills on time and in full. Even as card companies imposed punitive fees and penalties on those late with their payments, the best customers racked up cash-back rewards, frequent flier miles and other perks in recent years.

Now Congress is moving to limit the penalties on riskier borrowers, who have become a prime source of billions of dollars in fee revenue for the industry. And to make up for lost income, the card companies are going after those people with sterling credit.

Banks are expected to look at reviving annual fees, curtailing cash-back and other rewards programs, and charging interest immediately on a purchase instead of allowing a weeks-long grace period, according to bank officials and trade groups.

“It will be a different business,” said Edward L. Yingling, the chief executive of the American Bankers Association, which has been lobbying Congress for more lenient legislation on behalf of the nation’s biggest banks. “Those that manage their credit well will in some degree subsidize those that have credit problems.”

As they thin their ranks of risky cardholders to deal with an economic downturn, major banks including American Express, Citigroup, Bank of America, and a long list of others have already begun to raise interest rates, and some have targeted consumers who pay their bills on time. The legislation scheduled for a Senate vote today does not cap interest rates, so banks can continue to lift them, albeit at a slower pace and with greater disclosure.

“There will be one-size-fits-all pricing, and as a result, you’ll see the industry will be more egalitarian in terms of its revenue base,” said David Robertson, publisher of the Nilson Report, which tracks the credit card business.

People who routinely pay off their credit card balance have been enjoying the equivalent of a free ride, he said, because many have not had to pay an annual fee and collect points for air travel and other perks.

“Despite all the terrible things that have been said, you’re making out like a bandit,” he said. “That’s a third of credit card customers, 50 million people who have gotten a great deal.”

Robert Hammer, an industry consultant, said the legislation might have the broad effect of encouraging card issuers to become ever more reliant on fees from marginal customers as well as creditworthy cardholders, who are dubbed “deadbeats” in industry parlance because they generate scant fee revenue.

“They aren’t charities. They have shareholders to report to,” he said, referring to banks and credit card companies. “Whatever is left in the model to work from, they will start to maneuver.”

Banks used to give credit cards only to the best consumers and charge them a flat interest rate of about 20 percent and an annual fee. But with the relaxing of usury laws in some states, and the availability of credit scores in the late 1980s, banks began offering cards with a variety of different interest rates and fees, tying the pricing to the credit risk of the cardholder.

That helped push interest rates down for many consumers, but they soared for riskier cardholders, who became a significant source of revenue for the industry. The recent economic downturn challenged that formula, and banks started dumping the riskiest and lowering their credit limits in earnest as the recession accelerated. Now, a rising chorus of consumers who pay their bills off every month is complaining of shortened grace periods, new hidden fees and higher interest rates.

The industry says the proposals will force banks to issue fewer credit cards at greater cost to the current cardholders.

Citigroup and Capital One referred comments to the ABA. Discover and American Express declined to comment. Bank of America intends to “provide credit to the largest number of creditworthy customers possible, while also remaining prudent in our lending practices,” said Betty Riess, a spokeswoman. Together with JPMorgan Chase, which has said the changes will force it to limit credit availability and raise fees, these banks comprise 80 percent of the credit card industry.

Ah, the insanity of American corporatism.

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