Wednesday, March 25, 2009

Reining in the Credit Card Industry

By Marc Korman.

I have only been married ten months and I am not used to paying bills for two yet. So a few months ago I was a few days late in paying one of the bills for a credit card my wife and I share. A BA, Masters, and half complete law degree had not prepared me for the ensuing fees, interest payments, and balance adjustments. I am not alone, as two articles in the Sunday Washington Post made clear.

In the Sunday Business section, the paper discussed the national changes coming to credit card rules. The Federal Reserve recently required credit card companies to make some changes that will begin to take effect in mid 2010. Among the highlights of the rules, credit companies will no longer be able to allocate payments to the balances with the lowest interest rates first, allowing balances with higher interest rates to continue accruing. The rules will also impose new notice requirements for interest rate increases. More information is available here.

Happily, my own state Delegate and the rest of the General Assembly are not just waiting for the feds, as discussed in the Metro section. The House of Delegates recently passed Delegate Bill Frick’s HB 1048. The legislation amends state contract law to limit the ability of credit card companies to:

1. Reserve the right to change material terms. Under current law, if a credit card company reserves the right to change material terms of the agreement, they can increase the interest rate on an existing credit card balance without an explicit provision allowing them to do so. If a cardholder cannot pay off the balance immediately, they are stuck with the new interest rate on the existing balance. HB 1048 would require the credit card companies to be more explicit if they are reserving the right to alter the rate on existing balances.

2. Trigger a default penalty based on another obligation. Currently, credit card companies can apply penalties to one credit card bill based on problems you have with other credit cards. So even if you pay your Visa bill each month, if you default on your American Express bill Visa can apply a default penalty.

Delegate Frick’s bill passed the House of Delegates 136-1 and now heads to the Senate for action. But it is not without controversy. There are questions about whether state action is preempted by the federal government in this area. But some legal uncertainty is no reason to oppose the bill. In 2006, Maryland passed breakthrough healthcare legislation requiring employers with more than 10,000 employees in the state to demonstrate that 8% of wages be applied towards employee healthcare. Courts found that the law was preempted by the federal government, but it helped advance the issue. One of the companies affected, Wal-Mart, has since revamped its employee healthcare practices. Although not perfect, their current policies are a major improvement of their old policies.

Similarly, even if Delegate Frick’s bill is later struck down by a court, credit card companies need to feel the pressure that their customers are tired of practices that abuse and confuse us. The new Federal Reserve rules and HB 1048 will increase the pressure on credit card companies and convince them to rein in their practices.