WASHINGTON - Lawmakers and two regulators challenged the premise that improving disclosures would be enough to fix problems in the credit card industry, saying more action is necessary to protect consumers.
At a House subcommittee hearing Thursday, several lawmakers said the Federal Reserve Board's recent proposal to improve disclosures was a good first step, but they criticized the central bank for not going further in using its power to ban unfair and deceptive practices.
"What I keep hearing you saying is the Fed hasn't done squat, and they continue to do squat," Rep. Mel Watt, D-N.C., told top officials from the banking and thrift agencies.
Rep. Carolyn Maloney, the chairwoman of the House Financial Services financial institutions subcommittee, noted that only the Fed has rule-writing authority to ban deceptive practices under the Truth-in-Lending Act.
She asked whether other regulators should also be granted such ability. "Would you support a legislative change that granted you the similar authority to that of the Fed to regulate substantive abuses by credit card issuers for whom you have the authority to supervise?"
Comptroller of the Currency John Dugan, Federal Deposit Insurance Corp. Chairman Sheila Bair, and Office of Thrift Supervision Director John Reich said they would welcome the additional power, but only one federal regulator - Ms. Bair - indicated she would use it. And New York State Banking Department Superintendent Richard Neiman said he would use similar powers if they were granted.
"We do think we should have rulemaking authority," Ms. Bair said. "As a practical matter … it should be done on interagency basis, but having that authority would … allow us to initiate a rulemaking and have a seat at the table."
Lawmakers are weighing whether legislation is necessary to restrict certain practices such as universal default, fees for paying bills online, and retroactive interest rate hikes. Rep. Maloney said she was planning a meeting of regulators and issuers to create a "gold standard" for credit card practices that regulators could enforce.
She called the Fed proposal "a step forward and long overdue" in an interview after the hearing. "But I'm concerned that even the best disclosures will not be enough to resolve some of the serious issues consumers are facing."
During the hearing, the New York Democrat asked regulators whether the Fed's Reg Z proposal, unveiled May 23, went far enough.
Ms. Bair said regulators or lawmakers may need to go further. "I am not convinced that fuller disclosure will completely address … problematic practices that are increasingly complex and difficult to explain."
In written testimony, she cited such practices as universal default, double-cycle billing, and applying payments first to balances with lower interest rates as "questionable."
Mr. Neiman, testifying on behalf of the Conference of State Banking Supervisors, also said more should be done, and he cited specific dubious practices.
"I would go after many of the abusive practices … that we talked about today: universal default, double-cycle billing, late fees after credit limits are exceeded," Mr. Neiman said.
He urged the committee to pass legislation that would allow state officials to examine state and national banks, or at least to create a national standard governing abusive practices.
House Financial Services Chairman Barney Frank has planned a full committee hearing for next week on how to restore state consumer protections that federal regulators have preempted.
Other regulators were coy about whether they supported taking additional steps to rein in the card industry.
Gov. Frederic Mishkin of the Fed said that he did not know if more action was needed, but that the central bank "will consider if other steps need to be taken."
He also said that he expected the Reg Z proposal to help. "Consumers have to have information to be able to make informed decisions. … The benefit to that is that competition can then begin to work."
Rep. Maloney did not appear content with that response. Later in the hearing, she accused the Fed of stalling.
"Why are you not moving forward with guidance on credit cards?" she asked. "You have the authority to do it. From your testimony, it sounds like you have no intention of coming forward with guidance or a regulation."
Mr. Dugan also stopped short of endorsing legislative changes.
"A lingering question, of course is this: Can improved disclosure be sufficient to address the fundamental issues raised by current credit card practices? We certainly hope so," he said.
But several lawmakers said they cannot ignore the plethora of constituent complaints they receive about credit cards.
Rep. Spencer Bachus of Alabama, the full committee's ranking Republican, offered several examples of struggling constituents in his district, and said he failed to understand why credit card companies engaged in certain practices. For example, he expressed disbelief that issuers have any economic reason to apply payments to balances with the lowest interest rate first.
"Part of your duty is to listen to consumers," Rep. Bachus told the regulators. "When they come to you with the complaint that their payments are going to the balance with the lowest interest rates - which is always unfavorable to them - is there any public interest argument that you can give them why that should be so?"
Mr. Dugan responded that the OCC had taken steps to ensure banks disclose their payment process adequately, but Rep. Bachus said that disclosure was not sufficient.
"Even if you make that clear … it seems to me that this practice just increases default rates, increases consumer debt loads," he said.
Rep. Bachus continued that line of questioning later with industry representatives, asking John Carey, chief administrative officer of Citigroup Inc.'s Citi Cards, whether his company applied payments to the balances with the lowest interest rate.
"At Citi, we do apply to the most inexpensive balance," Mr. Carey said.
Rep. Bachus responded that doing so effectively could keep a consumer in debt. "Doesn't it make it more likely he will default?" he asked.
Mr. Carey acknowledged that Rep. Bachus had "made a very good point" about payment policies. "There ought to be an industrywide solution to that problem."
