Yet Another Bill to Cap Credit Card Rates is Doomed

The latest attempt by Democratic lawmakers to cap credit card interest rates in light of self-advantageous actions by card issuers is scheduled for Jan. 27, but this attempt is likely headed for the same fate as others have in recent months – defeat.

Rep. Louise Slaughter, D-New York, who is chair of the House Rules Committee, and Rep. John F. Tierney, D-Massachusetts, are co-sponsoring the so-called Renewing America’s Commitment to Consumers Act. The bill seeks an interest rate cap of 16 percent for credit card accounts, and a limit of $15 on penalty fees.

Last year, the Senate rejected a similar bill that would have capped credit card interest rates at 15 percent.

Introduced by Sen. Bernard Sanders, an Independent from Vermont, the legislation received 33 out of the 60 votes necessary to pass. And last November, Sen. Christopher Dodd, chair of the Senate Banking Committee, was blocked by Republicans in his effort to freeze interest rates on current accounts.

Even some Democrats might join Republicans in seeing the latest attempt for a rate limit as detrimental to small businesses and the overall economy. They will point to the Federal Reserve’s report this week that consumer credit took a record plunge of $17.5 billion in November – the largest drop since the Fed began keeping records in 1943.

The combination of customers charging less and banks continuing to tighten lending standards has already created an historic and unabated credit crunch that will be strongly cited by lawmakers and banking groups in opposition to any credit card rate cap.

Banks contend any further regulation will only further limit access to credit.

Peter Garuccio, a spokesman for the American Bankers Association, said that the nation’s recovering economy is pushing lawmakers in the direction of over-regulation. “It’s important for policymakers to take a balanced approach because the risk of pushing far is decreased access to credit,” he said.

But credit card issuers have taken advantage of a nine-month grace period before credit card reform laws take full effect Feb. 22. The Credit CARD Act of 2009 was signed into law by President Obama in May. Issuers have raised fixed rates on cards ahead of the reform’s provisions that heavily restrict such a move if a card holder pays on time.

The major credit card issuers, led by Chase, have also been converting a large segment of their card customers tovariable rates, which is immune to much of the reform. Rate hikes are permitted under the new laws when they are based on a variable-indexed interest rate.

Moreover, no reform provision addresses the margin amount added to the variable-indexed rate. Citigroup recently issued policy notices to customers in good-standing that the variable APR for purchases is being increased to the equivalent of the U.S. prime rate “plus 12.99 percent with a minimum APR of 18.99 percent.”

In its policy shift to variable rates, Chase is stating that the “principal factor we considered in amending your account is maintaining profitability on your account.”

These actions have disgusted some lawmakers and consumer groups who now want the Federal Reserve to put more teeth into the reform laws through the Fed’s power to establish specific rules behind each provision. The Fed has yet to publicly respond to these requests.