Credit card issuers in California may soon win relief from a tough state law on late fees, but it could be a costly victory.
A plan to inoculate banks against a plague of fee-related class-action suits is reportedly being negotiated in the California Senate Judiciary Committee, where a deregulation bill had stalled earlier this year.
Banking lobbyists, who had previously insisted on letting the market set fees, have reportedly conceded that they could live with a $15 cap. The average late fee nationwide is $11.11, according to RAM Research Corp. of Frederick, Md. California bankers figure a cap sanctioned by the state would at least keep them out of court. Though they have charged only $3 to $5 per delinquency, they have been forced in class actions to return millions of dollars under a state law that requires them to show that their penalties are comparable to the costs incurred.
Compromise Likely
Banking lobbyists are still trying to tie the deregulation bill to a less controversial measure, in hopes of moving it out of the judiciary committee and onto the floor of the Senate. It's more likely, however, that the industry will have to reach a compromise with state Sen. Bill Lockyer, the judiciary panel chairman, whose chief aide has suggested a cap of about $6.
The banking lobby also is submitting statistics from banks with multistate credit card operations to show that delinquencies are lower in states where banks are permitted to charge higher fees. Skeptics have noted that state-by-state figures by the American Bankers Association show no correlation.
But even a partial victory by California banks could be costly for the industry as a whole. Federal lawmakers who have watched fees rise as credit card rates have declined could take easing of California's rules as a further reason to impose some nationwide.
Job Issue
In making their case, California bankers warned that existing law could cause thousands of card-related jobs to migrate to more lenient states. Their arguments echoed those that helped overturn late-fee laws in Virginia and Colorado.
Consumer advocates have long complained that the states are ratcheting regulations down to the "lowest common denominator."
An aide to Rep. Charles E. Schumer, D-N.Y. said that complaint is now certain to be raised in upcoming hearings on Mr. Schumer's proposal to require more prominent disclosure of credit card fees.
Consumer advocates argue that penalties of $5 to $6 are sufficient to keep potentially delinquent borrowers in line. They note that borrowers continue to pay interest on the delinquent balance in addition to the penalty. The critics accuse bankers of trying to turn penalty fees into a profit center.
"Our initial thinking is to focus on disclosure," the Schumer aide said. "If we see late fees are getting egregious, maybe that's something that needs legislation."
Interstate Rivalry
The bidding among states for card jobs has been going on for more than a decade. New York State has lost more than 20,000 jobs to states such as South Dakota, Nevada, and Delaware that had no usury laws and more favorable business climates.
More recently, Virginia accommodated Signet Banking Corp.'s expansion plans by lifting its late-fee restrictions. Colorado Gov. Roy Romer last year approved a $15 cap on late fees - a bill he had vetoed two years earlier - in hopes of attracting jobs to his state.
In California, it is unclear how much consumers benefit from the late-fee restriction, which is contained in a civil statute on unlawful liquidated damages. Bankers point out that about 50% of cards in the state are issued by out-of-state banks.
Bankers argue that stiff late fees on customers who abuse credit make it easier for out-of-state banks to offer low rates.
"The credit card industry was born in California in 1958, and it will die here unless the Legislature moves now to let the market, not judges, determine credit card pricing in California," the state bankers association declared earlier this summer after a judge ordered First Interstate Bank to refund $13.9 million to cardholders in the largest class-action award to date.
Such warnings carry considerable weight amid the Golden State's stubborn recession. Indeed, local newspapers' opinion columns have sympathized with the banks. And the banks' position has been endorsed by local economic development agencies and groups representing black and Hispanic bank employees.
But in their zeal, the bankers have sometimes exaggerated the threat of job migration. This could undercut their credibility as they try to negotiate a cap - or later when they try to convince Congress that no national consumer-protection standards are needed.
In one example, the California Bankers Association contradicted its own research in its response to the First Interstate court decision when it asserted that some 20,000 jobs were at stake. Only 4,500 of the 22,000 direct credit card jobs might be moved, according to the study, which was underwritten by Visa U.S.A.
|Nobody Knows for Sure'
James A. Clark, the association's vice president of state government relations, admitted that "nobody knows for sure" how many jobs might leave the state as a result of the unfavorable late-fee law. But he pointed out that New York State officials were skeptical about job losses, too, and didn't lift usury ceilings until it was too late.
Proponents of deregulation point out that San Francisco-based BankAmerica Corp. is issuing all new cards from a facility in Phoenix that employs about 1,500. An operation less than one-third that size remains in Pasadena, Calif., servicing only older accounts.
While Robert B. Sznewajs, executive vice president of BankAmerica's credit card division, argued forcefully for deregulation, he also said the late fee was just one element in the bank's location decision. "The legal environment is important, the work force environment is important, the quality of life is important," he said.
Philip G. Heasley, executive vice president of retail products at First Bank System Inc., Minneapolis, argued that the regulatory environment is "the No. 1 factor" in the competitiveness of a credit card operation. But he indicated the late fee was not much of a factor in the decision to move some jobs to Colorado.
