Landmark Credit Card Reform Bill Moves to House Floor

by Zack Kaldveer, California Progress Report

One of the most important Federal consumer protection bills in recent memory ‘ "The Credit Cardholders’ Bill of Rights Act"
(H.R. 5244) –  won approval on Thursday, July 31st,  by a vote of 39-27
in the US House Financial Services Committee. This represents an
enormous victory by consumer, civil rights, labor and community groups
over the largest banks in the world on a regulatory issue that is at
the core of their income ‘ marking the second defeat for the credit
card industry in the past few weeks.  The bill now moves to the floor
of the House of Representatives for an historic vote in the next few

If enacted, H.R. 5244 would help tens of millions
of Americans avoid increasing and undeserved debt while beginning a
long overdue effort by Congress to prevent a second "subprime like
meltdown" that would send our economy into an even deeper recession.
The source of this emerging economic meltdown is our nation’s growing
credit card debt crisis – and H.R. 5244 (D-Maloney) marks the first
time in our nation’s history legislation is being considered that would
curb predatory credit card lending practices.

The Consumer Federation of California strongly supports
"The Credit Cardholders’ Bill of Rights Act" because it would
reestablish the fundamental principles of fairness and fair play to an
industry that has become synonymous with deception and greed. CFC has
joined forces with the coalition leaders of this effort, including the
Consumer Federation of America, Consumers Union, SEIU, and USPIRG
(among others) in calling on the House to approve this critically
important legislation.

California’s 8 Congressional Representatives on the Financial Services Committee split their vote, with the 4 Democrats voting ‘Yes’ and the 4 Republicans voting ‘No’:

Voting YES on H.R. 5244 (Pro-Consumer)

D ‘ Maxine Waters, CA

D – Brad Sherman, CA

D – Joe Baca, CA

D –  Jackie Speier, CA

Voting No on H.R. 5244 (Pro Credit Card Industry)

R -Edward R. Royce, CA

R -.Gary G. Miller, CA

R – John Campbell, CA

R – Kevin McCarthy, CA

California State Legislature Inaction and the Need for H.R. 5244

to Americans for Fairness in Lending, in California the average median
amount of revolving debt per person (i.e. 95% of which is credit card
debt) was $1657. Unfortunately the State Legislature has done next to
nothing in addressing the predatory lending practices of the credit
card industry – making H.R. 5244 all the more important for California

California college students are especially
vulnerable ‘ and experience some of the most deceptive and aggressive
credit card industry sales techniques. In 2000, Governor Gray Davis
vetoed one of the few attempts made by the state legislature to take on
credit card companies. The bill (D- Joseph Dunn) would have required
all California State Universities and Universities of California to
"adopt policies to regulate the marketing practices used on campuses by
credit card vendors."

The problem of student credit card debt was a
serious one at that time, and has become exponentially worse in
California today.  A new report by CALPIRG found ‘the
average student receives nearly 5 credit card offers a month and nearly
two in three students reported that they had at least one credit card.
Fifty-five percent of cardholding students said they used their card
for day-to-day expenses. Reflecting escalating college costs, 55
percent said they charge their books and nearly one-quarter said they
pay their tuition with a card. On average, freshmen had a balance of
$1,301 and seniors had more than twice that, $2,623.

Credit cards are marketed to students using free
gifts and introductory teaser rates. The use of aggressive marketing
techniques obscures students’ ability to be scrutinizing consumers when
considering a credit card contract. Seventy six percent of students
reported stopping at tables on campus to apply for credit cards, and
nearly one-third were offered a free gift to sign up.’

America’s Growing Credit Card Debt Crisis

consumers charged more than $1.8 trillion to over 691 million credit
cards in 2005. In 2004, the revenue generated from credit card fees
alone was $24 billion. According to the Federal Reserve, consumers pay
at least $85 billion annually in interest on credit card and other
revolving debt. The average household with debt carries approximately
$10,000-12,000 in total revolving debt and has approximately nine
cards. Americans now owe a staggering $915 billion in credit card debt,
over triple the amount in 1989.

A 2007 report from Congresswoman Carolyn B. Maloney’s office entitled, ‘Forever in Debt Anti-Competitive Credit Card Practices and their Impact on the Economy’
found that credit card debt is increasing and more American consumers
‘using their credit cards to stay afloat’ than ever before.

‘ Revolving credit debt during the first quarter of 2008 was $956.6 billion.

About half (46.2 percent) of U.S. households held credit cards with
balances, according to the 2004 Survey of Consumer Finances (SCF).

‘ Among these households, the median revolving credit card balance was $2,200.

‘ A large share of disposable income goes to service overall debt’14.1 percent in the first quarter of 2008.

Deregulation and the Creation of a Predatory Industry

did we get into this mess? The answer to that question should sound
familiar to anyone that has followed the subprime mortgage crisis: a
deregulated lending environment gave these companies free reign to
construct the terms, rules, and practices of the credit card agreement
without meaningful regulation. The industry has used this unfair and
undeserved advantage over the consumer to generate outlandish profits
at the expense of increasingly indebted Americans.

Americans are hurting. While wages remain stagnant, gas prices are
skyrocketing, families are being thrown out of their homes, workers are
losing their jobs, and health care coverage has become a luxury item
many Americans can no longer afford. The credit card industry has
become experts at taking advantage of this need for increased credit by
employing complex pricing structures, resulting in a maze of
exorbitantly high interest rates and exploitative fees difficult even
for highly educated consumers to understand.

Anti-competitive Credit Card Practices

Maloney’s report meticulously lays out the myriad of ways the credit
card industry hoodwinks the consumer – thereby trapping them in an
inescapable cycle of debt. Some of the ‘conditions’ that many consumers
unknowingly agree to include:

‘    Applying fees or penalty interest rates as high as 30 percent if cardholders pay late or exceed credit limits.

‘    Raising a cardholder’s interest rates for actions the consumer takes with other creditors, including utility companies, or mortgage lenders.

‘    Allowing issuers to increase their interest rates at
‘any time, for any reason,’ which may leave the credit cardholder
scrambling to find another credit card to transfer the balance on the
credit card that just increased its rates.

‘    Charging interest not only on the current balance
due, but also on the previous month’s charges ‘ otherwise known as.
‘double-cycle’ or ‘two-cycle’ billing. This occurs even when the
previous month’s balance has been paid off and creates a large burden
on consumers whose balances fluctuate from month to month.

The report concludes with the following sobering analysis:

current economic downturn poses a significant threat to the well-being
of American families, who are likely to rely more heavily on their
credit cards to make end meet. As credit card indebtedness rises and
families find themselves under increasing financial difficulty,
practices by credit card companies are adding to household’s financial

As the complexity and availability of financial
instruments have increased, new consumer protections have become
increasingly important’not just for families, but also for the economy.
As credit card defaults increase, the risks to the already weakened
financial system will grow. Moreover, unfair practices by card issuers
will cause families to spend more to service their debt, instead of
making new purchases that would boost our sagging economy. The
unchecked practices by credit card issuers will only exacerbate the
current financial crisis.’

H.R. 5244: Establishing Common Sense Consumer Protections

believes it would be unconscionable to sit idly by while credit card
companies bleed working families dry precisely at a time they face
unprecedented economic hardships.

H.R. 5244 would curb abusive and unfair credit card lending practices by:

‘    Stopping unjustifiable interest rate increases on
existing balances by banning the practice in cases that are based on
the consumer’s supposed problem with another creditor or a drop in
their credit score even though they are meeting their obligations with
their credit card company.

‘    Ending bait and switch contract clauses in which issuers give themselves the right to raise fees or interest rates at any time for any or no reason.

‘    Requiring that cardholders be given a 45-day notice of any interest rate increase on an account.

‘    Preventing issuers from playing costly games with consumer payments by
requiring them to ensure that cardholders receive the full benefit of
any promotional low interest rate offer that is made by requiring
issuers to apply payments to the highest interest rate balance in these

‘    Stopping ‘double cycle’ billing, which requires consumers to pay interest on debts they’ve already paid off.  

‘    Prohibiting the marketing and sail of credit cards to children under 18, thereby protecting a generation of young Americans from being locked into debt by the credit card industry.

no means is H.R. 5244 a perfect bill. Additional provisions that would
enhance consumer protection not yet addressed include: a ban on
universal default rate hikes; a prohibition on retroactive application
of any rate hike to prior balances; a ban on over-limit fees when the
transaction exceeding the limit is approved by the issuer; a
requirement that the size of penalties charged by issuers be directly
related to actual costs incurred; and protections against low-credit,
high-fee cards.

Nonetheless, it would institute a host of critical
consumer protections while establishing a long overdue precedent which
makes clear that the credit card industry is no longer immune to basic
government over-site and regulation.

CFC is urging California’s Congressional Delegation
to heed the call of the 80 to 90 percent of recently polled Americans
that believe credit card practices are unfair, as well as the record
56,000 consumers that have flooded the Federal Reserve
Board with credit card complaints urging the adoption of the Board’s
proposed credit card rule.

Call Your California Congress Member ‘ Urge Them to Support H.R. 5244!