Roxana Araujo is a financial crimes investigator for Florida's Office of Financial Regulation. It's her job to sniff out unscrupulous lending practices and help ordinary families avoid being taken advantage of by financial institutions. So it must have been odd for her to find herself seated next to Treasury Secretary Tim Geithner, describing the confusion and frustration she felt trying to understand why the interest rates on two of her credit cards had been increased without warning. But many readers will be all-too-familiar with that feeling of helplessness in the face of rising interest rates despite having always paid the credit card bills on time, as had Ms. Araujo.
Sometimes, you don't have to be a financial regulatory professional to know you're getting screwed.
Pushback against egregiously unfair lending practices in the credit card market is mounting. And it looks like Washington is finally getting the message. On Thursday, the House of Representatives passed the Credit Cardholders' Bill of Rights by a landslide vote of 357-70. The bill, championed by Rep. Carolyn Maloney (D-NY), would enact basic standards that eliminate some of the most exploitative practices in the business. Card companies will no longer be able to retroactively raise the interest rate on existing balances--except under limited circumstances, such as a 30-day delinquency. (This will put an end to "any time, any reason" rate increases) When the credit card companies do increase an interest rate, they will be required to give customers 45 days' notice. In addition, interest may only be tallied on balances in the current billing cycle, statements will be mailed earlier in the billing cycle, payments will always be allocated to the portion of the balance with the highest interest rate, and hefty fees for over-limit transactions will be banned unless cardholders explicitly permit it ahead of time.
When the free-marketeers were in charge, deregulation was the reigning political philosophy. Rules were scarce and enforcement even scarcer. The last time Congress imposed new regulations on the credit card market was the 1988 "Schumer Box."
Things have changed. Last week, the big card companies were called on the carpet at the (White House, where the President announced, "The days of any-time, any-reason rate hikes and late-fee traps have to end." And Thursday in the House, over 100 Republicans voted with Democrats to swiftly usher in the end of the freewheeling era in the credit card market.
Well, not so fast. Unfortunately, there is a 12-month lag between enactment and implementation. Congress is essentially outlawing these practices as harmful to consumers and then allowing them to continue for a year. Indebted Americans cannot wait a year for fair treatment when every day brings more bad news for the family bottom line.
Demos, a non-partisan public policy research and advocacy organization for which I work, has conducted has demonstrated through research that in a market with almost no rules, low-income families and households of color pay disproportionately high costs for credit card borrowing, in the form of painfully high interest rates and excessive penalty fees. And when the economy slows and unemployment rises, more and more families are forced to rely on credit card debt to cover shortfalls in income. In short, the absence of basic regulation in the credit card market is making this recession deeper for those already on the bottom.
This is the message we took to the Treasury on Wednesday, when Secretary Geithner invited Demos and other stakeholders in the consumer advocacy and civil rights communities to meet Ms. Araujo and discuss principles for credit card reform. Besieged borrowers cannot hold on for another year. Still reaping the consequences of the subprime debacle, banks are openly increasing interest rates and fees on their credit card customers in order to cover losses in other areas. As lenders turn the screws on cardholders, delinquencies have reached an all time high.
Financial Services Committee Chairman Barney Frank warned during debate on the House bill that if banks appeared to be gouging customers in the run-up to the new rules, he would seek a quicker implementation in the final negotiations with the Senate, which may take up its version of the measure as soon as next week.
"I work as a financial crimes investigator and so I knew what to look for," Ms. Araujo told us on Wednesday. "A lot of other people do not." Let's hope Members of Congress can recognize abuse when they see it and act quickly to snuff it out.
Caleb Gibson, a Harvard graduate, is the Advocacy and Legislative Coordinator at Demos, a non-partisan public policy, research and advocacy organization founded in 2000. Caleb comes to Demos from the U.S. Senate, where he served for many years both as a legislative aide and as a speech writer.