By Anthony Zitkus, USCM Intern
August 11, 2008

The House Financial Services Committee on July 31 reported major legislation that would prohibit the credit card industry from certain lending practices that many consumer groups and mayors consider abusive. The Credit Cardholders’ Bill of Rights Act of 2008, H.R. 5244, was passed by a vote of 39 to 27 with the support of all committee Democrats along with two Republicans. During its Annual Meeting in Miami, the U.S. Conference of Mayors unanimously supported reform of the credit card industry in order to protect consumers from controversial lending practices.

H.R. 5244 amends the Truth in Lending Act to establish fair practices relating to the extension of credit under an open-end consumer credit plan. The legislation addresses billing practices that many lawmakers consider unfair.

Sponsored by Rep. Carolyn B. Maloney (NY), with 155 co'sponsors, this bill would protect consumers from such practices as changes in interest rates and excessive fees. “If unfair credit card industry practices continue to go unchecked – just as subprime mortgages were – it will have far-reaching and detrimental effects on families and the economy” said Maloney. “This landmark legislation will help level the playing field between cardholders and card companies, and give consumers the tools they need to responsibly manage their own accounts.”

The legislation bars a creditor from changing any term of a contract or agreement of an open end consumer credit plan until contract renewal. It also requires advance notice of credit card account rate increases, which can allow the consumer to cancel the credit card without penalty and pay the remaining balance before the new interest rate is applied.

H.R. 5244 would prohibit the use of universal default, in which card companies raise interest rates because of cardholders’ behavior related to other bills. Another controversial practice that will be barred is “double-cycle billing,” when a credit card company charges interest on the entire balance even though most of the balance has been paid off.

During the committee markup, Republican members opposed the bill on the grounds that it meddles too much with pricing strategies that they claim are essential for providing low interest loans. Credit card companies argue that restricting current billing practices and risk-based pricing will raise interest rates for all card users because companies would not be able to charge high rates to risky borrowers. Companies state that restrictions can also minimize credit options to those with limited credit history and provide less access to low credit options.

While action is not expected in the Senate this year, Senator Carl Levin (MI), Chairman of the Senate Subcommittee on Investigation of the Senate Committee on Homeland Security and Governmental Affairs, has pressured the Federal Reserve Board to more aggressively regulate the credit card industry. “The current regulatory regime is totally insufficient to prevent these ongoing credit card abuses,” said Levin, who in a letter to the central bank wrote, “Stronger consumer protections and clearer prohibitions against unfair and deceptive credit card lending practices are long overdue.”

In May, the Fed stated that some credit card practices needed to be changed, and is currently drafting regulations that should be completed by the end of the year.

Unlikely to see final passage of H.R. 5244 in this Congress, Chairman Barney Frank (MA) of the House Financial Services Committee indicated that he will take up the legislation again next year and send it to the Senate.