WASHINGTON - A bill moving through the New York legislature barring the application of universal default to cardholder accounts would apply to a broader set of practices than similar bills that have passed or are under consideration in other states.
Both houses of the state legislature passed the bill this week, and it is expected to be sent to Gov. Eliot Spitzer soon for his signature. Though similar to a bill then-Gov. George Pataki vetoed last year, this year's version goes beyond prohibiting issuers from increasing a borrower's interest rate solely because a cardholder is delinquent on another credit account - the most common definition of universal default.
This year's version of the bill also would ban card companies from using any decline in the cardholder's credit score to increase interest rates. Industry representatives say that provision is too restrictive.
"It goes beyond the scope of the practice of universal default … by impacting the ability to make a decision based on credit record," said Mike Smith, the president of the New York Bankers Association. "We feel this is not reasonable and not in line with the national practice."
But Assemblyman Peter Rivera, who sponsored the bill, said the new language is necessary for consumer protection, and that he felt "confident" that Gov. Spitzer would sign the bill.
"I'm banking on the fact that we have a new governor and he will be more consumer conscious than other governors have been," Assemblyman Rivera said.
Whether Gov. Spitzer supports the bill is unclear. Christine Pritchard, a spokeswoman for the governor, said he will "review the legislation" when it is delivered to his office, and the New York State Banking Department said it was also reviewing the legislation.
"We are not coming out with a recommendation right now," a spokeswoman of the department said. "We are still reviewing the full copy with the new language."
But industry lawyers said if Gov. Spitzer signs the bill, it could put the state's banks at a disadvantage against those in other states and those with national charters.
"It would limit a creditor's ability to lend money and create significant safety and soundness concerns," said L. Richard Fischer, a partner with the law firm of Morrison & Foerster LLP.
Ronald R. Glancz, a partner at Venable LLP, noted that the bill would not affect national banks or federal thrifts, which do not have to follow state consumer protection laws.
"This New York law would be preempted by the National Bank Act, and I suspect the majority of issuers of credit cards are national banks," he said.
Mr. Smith said he was concerned more state banks would switch to a national charter if the bill were enacted.
"This bill will further distance New York in terms of the state charter," he said. "The use of credit records is fundamental. We are concerned this law will further encourage institutions to move away from the state charter."
But Assemblyman Rivera said he is not too worried about preemption for now.
"There's a whole bunch of discussion going on with the federal government, but they really haven't moved on this yet, so until they move, state government can respond to it," he said. "We may have a problem - I'm not saying we do - with nationally chartered banks, but I think what this does is it sets the standard. Other states are watching this bill, and I'm sure once we pass it, other states are going to pass it, as well."
National banks that do not follow the law "will have a blot in their eye if they try to go around this bill by their federal charter," Assemblyman Rivera said.
Several issuers, including Citigroup Inc., recently rolled back or eliminated their use of universal default in light of complaints by consumer groups. Lawmakers on Capitol Hill also have expressed concern, with some introducing legislation that would ban that practice and other controversial ones. But so far those bills have yet to gain traction.
There has been activity in other states; roughly 12 have proposed similar legislation this year to ban universal default. Last month, Nevada became the first of those states to enact such legislation this year.
The Nevada law defines universal default as a clause that allows an issuer to increase the interest rate if the cardholder makes a late payment to another issuer or creditor.
That definition is consistent with how most of the industry defines universal default, Mr. Fischer said, and it does not raise the concerns posed by the New York bill.
The Nevada law "is one that would certainly cause a lot less concern," he said. "The Nevada law is a good law. It's absolutely fine."
Salvatore Marranca, the president and chief executive officer of Cattaraugus County Bank of Little Valley, N.Y., said he fears that other states would follow New York's lead if Gov. Spitzer signed the bill. His bank issues credit cards, but he said it does not practice universal default.
"It's history that New York has been a leader in bank reform but sometimes also the leader in overregulation," he said. "There is some history of some states piggybacking on New York."
