Congress’s Credit Card “Reform” Left Consumers Unprotected

Last May, members of Congress and many consumer advocates were hailing the new credit card reform law as a great boon for consumers.

I didn’t share the exuberance, as I wrote at the time. 

Six months later, it’s clear that Congress rolled over for the financial industry on key points.

The new law doesn’t address the most serious abuses of the greed-driven credit card companies – there’s no cap on interest rates, for example.

Worse, it opened up a loophole that let the pigs run wild for another nine months: Congress wrote the bill so that it takes effect next year but left Americans defenseless to all sorts of shenanigans by the credit card companies until then.

Now, Members of Congress claim to be “fuming” that the credit card companies are jacking up rates and fees before the new law kicks in, reports   “This is what many of us feared about a law that didn’t take effect right away,” complains Senator Chuck Schumer in a press release that rings just a bit hollow, given that Schumer is one of Wall Street’s darlings.

The law should have been made retroactive, of course; I dealt with this very issue when I wrote Proposition 103, the California law that reformed the insurance industry. Instead, Congress gave the industry a pass on this and other kinds of thievery.

Here’s an updated list of what’s missing from the “Credit Card Act of 2009.”  If you agree that Congress didn’t get the job done the first time, email your congressional reps and tell them so.

1. The new law isn’t retroactive.

The new law was signed by President Obama on May 9, but doesn’t take effect till February 22, 2010. Meantime, it’s been a turkey shoot for the industry. For example, the new law says that starting February 22, the companies generally can’t raise the interest rate you have to pay on an existing balance. So they’re raising those rates now. Some people are seeing their interest rate double at the same time their credit line is being slashed.

Making the reforms retroactive, or at least freezing everything in place until the new law took effect, should have been a no-brainer for Congress. That’s what I did when I drafted Proposition 103, which required auto and property insurance companies to roll back their rates the day after election day. I knew the greed-driven insurance companies would try to raise their rates just before the election to offset the rollback. So Proposition 103 required them to go back to the rates that were in effect one year before Election Day and then cut them 20%. It also froze each company’s insurance rates until they put the refund checks in the mail, so that if an insurance company sued to bock the refunds (which they did), they could not increase their rates in the meantime. Worked good.

Public outrage over the credit card debacle has got members of Congress worried. House Financial Services Chair Barney Frank has introduced a bill to move up the effective date of parts of the new law to December 1 of this year, but industry lobbyists are resisting furiously. They claim they need more time to re-program their computers.  (It sure didn’t take them long to program the rate increases into their system.)

But Frank’s “standstill” bill won’t undo the damage already done. Congress should legislative a retroactive freeze on all interest rates and fees for purchases, balance transfers, etc., back to the rates in effect on January 1 of this year.

2. There’s no cap on credit card interest rates for new purchases, or balance transfer fees.

The new law will let credit card companies raise your interest rates as much as they want when you make new purchases, so long as they give you 45 days notice. Consumers have the right to opt out of the rate increases, but then the card can no longer be used for future purchases.

It’s been widely publicized that the new law bars the old practice of raising the interest rate on your existing balances for just about any reason.  Not exactly. The new law contains some special exceptions that allow the companies to raise your rate on existing balances, too. For example, they can switch you from a fixed (flat) interest rate to a “variable” interest rate and then that rate can go up with no notice. Or if you are sixty days late on a payment, they can raise your rate for six months at least. Or if you got a special promotional rate of six months, they can raise your rate after that. (Warning: don’t be enticed by a special six-month deal to lower your rate on your existing balances. The way I read the new law, they can jack the rate up as much as they want after the deal expires.)

The real problem is that the new law does not limit how high your interest rate can go.  There is no cap.

This is particularly outrageous in light of the trillion-dollar taxpayer bailout of the credit card companies. These firms are able to borrow our money from the US Treasury at a fraction of a percentage point and then turn around and loan it to us at twenty to fifty times that rate.

Last May, an amendment to cap credit card interest rates at 15% was overwhelmingly rejected by the Senate. Tell your member of Congress you are tired of overpaying to borrow your own money.  Also tell them to place a cap on “balance transfer” fees – there isn’t one in the new law.

3. Credit card companies can unilaterally changes the terms of the credit card contract.

It is one of the inexplicable aspects of American law that contracts with consumers are a one-way agreement. Courts have routinely upheld the right of companies to alter the terms of fine print contracts with consumers. How, you wonder, do they get away with that? Well, buried in the fine print when you sign up for a credit card is authorization for the company to unilaterally change the deal at any time. (Try negotiating that clause out of the next credit card contract you sign. LOL.)

A “change in terms” clause reads something like this: “We reserve the right to change the terms and conditions of this agreement at any time…”

Sometimes, the company never even tells you what the change is. You have to go online and dig through a web site to read what the company says you are obligated to do, even though you never agreed to it.

In other words, heads they win, tales you lose.

The Credit Card Act doesn’t place any limits on these clauses. Congress should prohibit credit card companies from changing the terms of their contract with you unless they disclose exactly the change they are proposing and you freely give them permission to do so. If you don’t agree, you shouldn’t be required to give up the deal the credit card company originally made with you.

4. Companies can still prevent consumers from suing them in court.

Another clause buried in the fine print of credit card contracts bans consumers from suing the credit card company in court, particularly through a “class action” in which victims of the rip-off can join together rather than bring separate cases.

Instead, cardholders must bring their dispute to an “arbitrator” – a private judge hired by the credit card company. By design, that system is co complex that almost no one bothers, and credit card companies get to evade accountability for their actions.

Some state courts, such as in California, are invalidating “mandatory arbitration clauses” that require consumers to forfeit their legal right to bring a class action lawsuit. Lately, some of the big arbitration firms have pulled out of the credit card business. But the Credit Card Act didn’t address arbitration clauses, and so millions of Americans still have no legal leverage when a credit card company mistreats them.

Congress should bar these clauses in credit card contracts.

5. State consumer protections laws do not apply.

A series of court decisions have held that federal banking regulators supersede state consumer protection laws. The result is that consumers can’t go to court to sue banks that violate state law.

This notorious obstacle should have been addressed but wasn’t.

Congress should overturn rulings by federal agencies that prevent the courts from enforcing state consumer protection laws.


I’m not saying that Congress’s credit card reform was worthless; to the contrary, it contains some desperately needed fixes. One of my favorites: it requires that late fees or other penalties be “reasonable and proportional.” (The Obama Administration is expected to issue regulations that define “reasonable”; it will be interesting to see how much latitude the regulators give the industry.)

But given that the credit card companies survived the crash only because Congress gave them billions of dollars of our money, what consumers ended up with could hardly be called a “quid pro quo.”

There’s a simple reason why Congress failed to include these crucial protections in the Credit Card Act. It’s the same reason lawmakers failed to stop the speculators and swindlers before they crippled our economy. As we noted in our March report on the causes of the current financial debacle ("Sold Out"), the nation is in the current mess because Wall Street showered Washington with over $5 billion in campaign contributions and lobbyists, and Washington did as it was told. A few months ago, Senator Dick Durbin of Illinois candidly admitted that the Money Industry was in control of Congress: “Frankly they own the place,” he said.