Congress turns from bank bailouts to helping consumers

The nation’s deep economic slump is giving new impetus to moves on Capitol Hill to help consumers weather the crisis.

Targets include credit card companies that raise fees retroactively, payday loans that rack up annual interest rates as high as 391 percent, and predatory mortgage lenders that set millions of families on a road to foreclosure.

To date, much of the policy focus in Washington has been the rescue of the embattled financial services sector. The next marker will be the release of stress tests for the nation’s 19 largest banks, expected Thursday.

But with public approval of banks and bailouts in the tank, Congress wants also to build up a record helping Main Street, even if it means taking on issues long opposed by the financial services industry.

“Ninety percent of the American people want us to do something about credit cards. We’re going to take on the banks,” said Senate majority leader Harry Reid, in a briefing on Thursday. “We’re focusing on Main Street, not Wall Street.”

Credit card holders want action

Last week, the House passed by a vote of 357-70 a Credit Cardholders’ Bill of Rights. The bill accelerates the timing of new rules by the Federal Reserve, issued in December after 66,000 consumers (a record) sent in comments backing the changes.

“A contract with the credit card companies is probably the only one in the world where [companies] can change the terms, any time, any reason. And this bill will ban some of the most outrageous abuses, such as raising interest rates retroactively on existing balances,” said Rep. Carolyn Maloney (D) of New York, who sponsored the bill.

The proposed law requires credit card companies to provide 45 days notice in advance of raising interest rates and to disclose the impact of the change on credit card balances. This provision is effective 90 days after the bill is signed into law.

Other changes include more time to pay down credit card balances. The House bill requires statements to be mailed at least 21 days before due date, up from 14 days. It prohibits unilateral changes to contracts and it sets conditions for retroactive interest-rate increases. It requires that credit card providers keep low-interest teaser offers in place at least six months before hiking rates. It bans the practice of changing due dates for payments.

Recession adds to urgency

“Many families are turning to their credit cards because they’ve lost their jobs. Therefore, it is very important that we enact this to stop unfair and deceptive practices and give tools to consumers during these troubled times to better manage their finances,” Ms. Maloney said in a briefing after the vote last week.

Consumer groups hailed the bill as ending a long drought in Washington for consumer protection. A similar bill passed the House last year, but was never taken up by the Senate.

“Until Maloney’s bill passed the House last year, no bill -- no bill! -- opposed by the credit card companies even had a vote in a congressional committee, let alone won,” said Ed Mierzwinski, consumer program director for U.S. PIRG, the federation of state Public Interest Research Groups in Washington.

On April 23, President Obama met with credit card executives in the White House and called for their cooperation in clarifying and reforming the process. Many are also recipients of taxpayer help through the Troubled Asset Relief Program. These include: American Express, Bank of America, Capital One, Citigroup, and JPMorgan Chase.

At the urging of the president, the House amended the bill to mandate the disclosure on each credit card bill of the long-term costs of paying only the minimum balance. Another provision requires credit card issuers to apply payments over the minimum balance to the debt with the highest interest rate first. Both were accepted by voice vote.

But most of the provisions of the new law will not take effect until July 2010 or a year after the law is enacted. Comparable Federal Reserve rules will not take effect until July 2010.

Freeze on interest rates called for

Some lawmakers and consumer groups want to move up the timeline. In the Senate. Banking Committee chairman Christopher Dodd (D) of Connecticut and Sen. Charles Schumer (D) of New York are asking the Federal Reserve to impose an emergency freeze on interest rates of existing credit card balances effective immediately.

“It’s not fair that credit card companies can change interest rates at will. This traps consumers in debt. It’s almost like they encourage people to go over their credit limit, then charge them a fee for it. It’s the magic of compound interest in reverse,” says Kathleen Day, a spokeswoman for the Center for Responsible Lending, a watchdog group on predatory lending.

It’s a balancing act for the federal government, because many of the troubled banks now receiving federal assistance are also those that face cuts to profits, as new consumer protections take hold.

The American Bankers Association cautions that new consumer protections could disrupt economic recovery efforts by further stressing already troubled financial institutions.

“As policymakers are aware, it is vitally important to maintain access to credit at this difficult economic time,” said Edward Yingling, ABA president and CEO, in a statement after the House vote on credit card reform.

“This is especially true for credit cards, which serve as a driver of economic activity and are relied on by consumers and small businesses as a way to bridge short-term financial gaps,” he said. There is “more work” to be done to achieve a balance between “enhancing consumer protection and ensuring that credit remains available to consumers and small business at a reasonable cost,” he said.

Congress aims at mortgage fraud

Next week, the House takes up the Fraud Enforcement and Recovery Act, passed by the Senate last week. The act amends the federal criminal fraud statute to specifically include “mortgage lending business” and it expands the scope of money laundering crimes to cover all the proceeds of illegal activity, such as gross receipts, not just the profits.

The bill also authorizes $245 million a year to hire federal investigators and prosecutors to fight financial fraud.

“Mortgage fraud has reached near epidemic levels in this country. Reports of mortgage fraud are up 682 percent over the past five years, and more than 2,800 percent in the past decade,” said Sen. Patrick Leahy (D) of Vermont, chair of the Senate Judiciary Committee, who sponsored the bill. “And massive, new corporate frauds, like the $65 billion Ponzi scheme perpetrated by Bernard Madoff, are being uncovered as the economy has turned worse, exposing many investors to massive losses.”