Credit Card Regulation Looming?

Credit card companies must be experiencing a sense of deja vu as they watch–just three months after the main terms of the Credit CARD Act of 2009 were implemented–U.S. Senators squabble about how best to regulate them. But it’s no delusion. Legislators really are working on far-reaching reforms that could prove as challenging for the industry as anything contained in the last round of credit card regulation.

Three amendments are currently under consideration in the Senate, and the success of any one is likely to bring on an epidemic of peptic ulcers among bank executives.

Credit Card Rates a Target

Perhaps the main target that reforming Senators have set their sights on is credit card rates–two of the three key amendments focus on them.

The first, sponsored by Senators Thad Cochran (R-MS) and Sheldon Whitehouse (D-RI), seeks to hand back to each state the right to control the interest rates (including credit card rates) paid by its citizens. If the legislation succeeds, it reverses the legal situation created by a 1978 Supreme Court judgment that said that the laws of the home state of a lender applied to lending made in other states. This prompted credit card companies to move their headquarters to states (Delaware and South Dakota spring to mind) where there were no usury laws.

The other amendment aimed at credit card rates was proposed by Senator Bernard Sanders (I-VT). This has, at least, the virtue of simplicity in that it would place a nationwide cap of 15 percent on the rates payable on balances.

Other Proposals

The third proposed reform aimed at credit cards concerns so-called “interchange” or “swipe” fees paid on every transaction by merchants for the privilege of accepting the card. These currently amount to anything between one percent and three percent of the value of the goods or services bought. That’s a cut that adds up. In 2008, it generated $48 billion. Senator Richard J. Durbin (D-IL) is proposing that the Federal Reserve should be tasked with keeping such fees “reasonable and proportional.”

A fourth and fifth amendment concern not credit cards but credit scores. The first would oblige the big-three credit bureaus to provide a free credit score to each consumer each year. At the moment they only have to provide a free credit report.

The last relevant amendment would prevent employers from obtaining credit reports or credit scores on existing or potential employees other than in closely defined, exceptional circumstances. This ban would apply even if the individual consents to the check.

Credit Card Deals at Risk?

Presumably, card issuers will marshal similar arguments against the first three proposals as they deployed against last year’s legislation. They’ll say that if they can’t charge interest in line with risk then they’ll have to issue fewer cards to risky customers. And they’ll say that capping interest rates for those risky customers will force them to increase their revenues from creditworthy customers.

As for interchange fees, they’re likely to argue that these currently fund most credit card rewards programs, and that the latter will be at risk if that revenue stream is dammed.

Is Now the Time for a Credit Card Application?

It’s not yet clear whether existing customers will have an advantage if credit card rewards programs have to be reviewed. But it can’t do much harm to sign up now for the scheme that would suit you best.

So, to whom should you address your credit card application? Well, as usual, it depends on your individual needs.

Published 05/14/10 (Modified 03/24/13)