WASHINGTON – The U.S. Senate voted overwhelmingly Tuesday to rein in credit card rate increases and excessive fees, hoping to give voters some breathing room amid a recession that has left hundreds of thousands of Americans jobless or facing foreclosure.
The bill, sponsored by Senate Banking Committee Chairman Christopher Dodd (D-Conn.), was endorsed 90-5; with the House on track to endorse it as early as Wednesday, the measure could hit the desk of U.S. President Barack Obama by week’s end.
“We said that big banks can no longer take advantage of hardworking Americans,” said Senate Majority Leader Harry Reid, D-Nev.
If enacted, the credit card industry would have nine months to change the way it does business: Lenders would have to post credit card agreements on the Internet and let customers pay their bills online or by phone without an added fee.
Consumers would also get the chance to spare themselves from over-the-limit fees, while card issuers would be required to orovide 45 days notice and an explanation before interest rates are increased.
Some of the changes are already on track to take effect in July 2010, under new rules being imposed by the Federal Reserve. But the Senate bill would put the changes into law and go further in restricting the types of bank fees and who can get a card.
For example, the Senate bill requires those under 21 who seek a credit card to prove first that they can repay the money or that a parent or guardian is willing to pay off their debt if they default.
The legislation would not cap interest rates, as some lawmakers had hoped. It also wouldn’t prevent lenders from finding new ways to drain customers’ bank accounts or keep consumers from spending money they don’t have.
But it would give spenders more flexibility and outlaw many of the surprise costs associated with credit cards at a time when money is tight in most households. For example, under the bill, a cardholder would have to opt to be allowed to go over a credit limit. If customers don’t agree and the bank authorizes a charge that would push them over their limit, the lender couldn’t levy an over-limit fee.
Another boon for consumers is limiting a practice known as “universal default,” when a lender sharply increases a cardholder’s interest rate on an existing balance because the customer is late paying that bill or other, unrelated bills. Under the new legislation, a customer would have to be more than 60 days behind on a payment before seeing a rate increase on an existing balance.
Even then, the credit card company would be required to restore the previous, lower rate after six months if the cardholder pays the minimum balance on time.
The banking industry opposed the overall measure and said it could restrict credit at a time when Americans need it most. Banking officials defended their existing interest rates and fees on grounds that their business – lending money to consumers with no collateral and little more than a promise to pay it back – is very risky.
“What has been a short-term revolving unsecured loan will now become a medium-term unsecured loan, which is significantly more risky,” said Edward Yingling, president and CEO, American Bankers Association.
“It is a fundamental rule of lending that an increase in risk means that less credit will be available and that the credit that is available will often have a higher interest rate.”