WASHINGTON — A deal announced Monday between Senate Banking Committee Chairman Chris Dodd and Sen. Richard Shelby, the panel's top Republican, is likely to speed passage this week of a bill designed to rein in credit card practices.
Though the banking industry continues to lobby against the legislation, it is expected to pass the Senate with a large bipartisan vote, giving it critical momentum as lawmakers turn to reconciling differences with the version the House approved on April 30.
"We are certainly on track to get this done by Independence Day," said Jaret Seiberg, an analyst with Washington Research Group, a division of Concept Capital. "The politics of the credit card bill are so populist that it's hard for any member in this environment to oppose it."
After a Senate Banking Committee vote last month failed to win any Republican support and lost one Democrat — Sen. Tim Johnson of South Dakota — political analysts had predicted that Dodd would have to soften his bill in order to get it through the Senate.
But the deal struck between Dodd and Shelby is actually tougher in some areas than the earlier version of the bill — and goes beyond federal regulations set to go into effect in mid-2010.
It incorporates changes sought by the Obama administration, including a requirement that card companies get customers' permission before charging over-the-limit fees.
Analysts said Shelby compromised in part because the issue had become politically unstoppable. The Obama administration has put an increased emphasis on card reform during the past month, including holding a high-profile meeting at the White House with card companies. On Saturday, Obama made the issue a focus in his radio address to the country.
Observers said Republicans were better off trying to win minor concessions than opposing a bill.
"Do you try to get something in exchange for your support, or do you watch it get enacted despite your objections?" Seiberg said. "When you have an issue that is as populist as this, you might as well go along for the ride. Politically that makes a lot more sense."
The bill also would make it tougher for borrowers under 21 to obtain credit cards. These borrowers would have to get a parent to cosign for the card, or prove that they had sufficient income to cover their credit limit.
The bill did soften a requirement that would have barred card companies from increasing interest rates on existing balances. Under the Dodd-Shelby deal, issuers could increase rates if a consumer was 60 days late, though they would have to re-evaluate the customer's account in six months and reduce the interest rate increase if the consumer's credit improved. By comparison, the House bill would give card issuers the right to raise rates if a customer was 30 days late.
The Senate bill would allow issuers, a year after an account is opened, to consider reasons unrelated to the borrowers' account when increasing rates on new charges. That provision is similar to wording in the House bill and in rules promulgated by the Federal Reserve Board last year.
The bill remains very similar to rules adopted last year by the Fed and other regulators. These take effect in July 2010 and will ban double-cycle billing and universal default. The Dodd-Shelby bill would become effective nine months after enactment, however, likely speeding up the timetable for reforms. The banking industry has argued that they would not be ready in time if implementation is required before July 2010.
The Dodd-Shelby bill would also speed implementation to 90 days after enactment a provision from the House bill requiring card companies to give borrowers 45 days notice before rate increases, giving the customer time to close the account and pay off the balance at the current rate.
The Dodd-Shelby deal also retains a revised provision that would require regulators to impose parameters ensuring that fees are reasonable.
Shelby defended his decision to compromise on Monday, arguing that card reform was overdue. But he said he remained concerned about increasing the cost of credit and sought changes to the bill that would force the Fed to keep tabs on the legislation's impact.
"Many business practices of credit card companies are simply untenable, particularly under difficult economic circumstances," the Alabama lawmaker said in an e-mail to American Banker. "Should this legislation become law, it is crucial that Congress carefully monitor its implementation and effect. … For this reason, I included a provision for the Fed to report back to Congress every two years on the cost and availability of credit."
With banks so unpopular given the blowback from the financial crisis and bailout, banking lobbyists said Monday that they feared any amendment to the bill offered during debate late Monday and Tuesday could move the bill even further away from the industry's interests.
Banking lobbyists are particularly wary of amendments that would target interchange fee systems or impose blanket usury caps, which may be offered by Sens. Dick Durbin, Kit Bond or Bernie Sanders.
Several banking and credit union groups wrote a joint letter Monday opposing an interchange amendment from Durbin that would let merchants offer consumers discounts for certain specific credit or debit cards.
"If enacted into law, the amendment would drive credit unions and smaller banks out of the card business, reducing the availability of credit and consumer choices and hurting the economy," wrote the trade groups. "If the Durbin amendment is adopted, the economics of offering card products will dramatically change and many credit unions and community banks would be likely to leave the business - and consumers and our overall economy would suffer."
Industry representatives said they are gearing up to fight the Durbin amendment and others like it. "Adopting these kinds of egregious amendments, whether it's a rate cap or on interchange, with no contemplation of the serious ramifications they may have for consumers and the economy is only going to make matters worse," said Ken Clayton, the head of card policy for the American Bankers Association.
He argued that such aggressive legislation gives banks incentives to increase rates and cut credit lines. "We think there will be a dramatic impact on the ability of consumers, students and small businesses and others to get credit. We are very concerned about that," he said.
But consumer groups praised the bill. "This is a really positive step forward," said Susanna Montezemolo, a vice president for federal affairs for the Center for Responsible Lending.
Montezemolo also countered industry arguments that the bill would increase the cost of credit and reduce access. She contended it would provide significant protections for consumers by ensuring they are not trapped into obfuscating rate and fee schemes.
"What we are finding right now is that there are a lot of abusive practices that people aren't aware of until they get into their credit card," she said. "This bill makes huge headway in ensuring a fair credit card marketplace and creating consumer access to responsible credit."
