Credit Card Companies and Legislators: A Grand Canyon of Mutual Misunderstanding

The U.S. House voted yesterday to bring forward the provisions of the Credit Card Accountability, Responsibility, and Disclosure Act (Credit CARD Act). If passed by the Senate (and few would today place a bet on the likelihood of that), the Expedited Card Reform for Consumers Act would implement regulations very soon that are currently due to take effect only in February 2010. In particular, they would greatly restrict a card issuer’s ability to increase credit card rates or vary credit card terms and conditions.

As the two sides–legislators, and lenders–face off, their sheer blank-eyed, mutual incomprehension would be almost comical were it not so potentially harmful.

Credit Card Regulation Always Bad; Government Interference Always Evil

On the one hand, credit card companies believe absolutely that they have done nothing wrong. A period of grace between the signing of the Credit CARD Act, and its implementation has been used most constructively to ensure full compliance with the new law. As a statement from the American Bankers Association put it earlier this week:

The CARD Act represents the most sweeping reform of the credit card industry in decades and banks are working diligently to implement its provisions by next February, as Congress required. But this is an enormous task, requiring the complete reworking of internal operations, risk management models, funding calculations, employee training, and computer coding, all of which are necessary for servicing hundreds of millions of accounts every day.

Accelerating the time frame for implementation of the CARD Act will be extremely difficult, if not impossible, for card issuers.

Credit Card Regulation Always Good; Credit Card Companies Always Evil

Meanwhile, some legislators say that they have been inundated with complaints from constituents who claim that they’ve been gouged by their credit card companies during the grace period between the signing of the act and its pending implementation.

Rep. Carolyn Maloney (D,NY) commented yesterday:

Card companies have redoubled many of the abusive practices that brought Congress to pass my original reforms last Spring. Rather than use the time–time they asked for–since the bill’s signing in May to prepare for the changes, they’ve raised rates and fees with absolutely no regard for the dire position of millions of their customers.

I believe the card issuers have heard the message loud and clear today: their practices can no longer be tolerated. These reforms are crucial changes which level the playing field between card issuers and card holders.

The Good, the Bad, and the Evil

As is usual in such matters, both sides are both right, and wrong. It would have been totally impossible for the industry to have complied instantly with the Credit CARD Act’s requirements, so legislators had no choice but to provide a lengthy grace period.

But it was obvious from the start that credit card companies–already shaken by what seemed at the time to be a near-complete financial meltdown–were genuinely spooked by the prospect of new regulation. The idea that they would not take advantage of the grace period to protect their shareholder’s interests, and their profitability, lies somewhere on a continuum that has naivety at one end and stupidity at the other.

Allowing an unpoliced grace period before the implementation of financial services regulations is like installing a shark tank in a children’s petting zoo. The outcome is unlikely to be pretty, but you can’t really blame the shark.

Published 11/05/09 (Modified 04/23/12)