Action and Reaction on Credit Card Rates and Fees

The Obama Administration has made several announcements detailing the purview of the Consumer Financial Protection Agency, a new agency which would regulate the credit card and mortgage industries. The President recently sent the guidelines, which would regulate the fees, terms, and interest rates on a variety of consumer products, to Congress stressing the urgency of its approval.The new agency consolidates the duties of consumer protection into a single agency versus the handful of different regulators that share those duties currently. Two of the major responsibilities of the agency would be to police the credit card legislation which was approved by Congress in May and to create a series of easy to understand mortgage products. The operative words for both tasks are “plain vanilla” as the agency seeks to create financial products that are straight forward instead of the convoluted sets of rules, terms, and conditions commonly found in those products today.The passage of the credit card bill and the creation of Consumer Financial Protection Agency were both vehemently opposed by the industries to be regulated. The consensus argument among these industries was that the proposed regulation would make borrowing more expensive, restrictive, and more difficult for consumers. Elizabeth Warren, chair of the Congressional Oversight Panel, has been dismissive of the lending industries’ self serving pleas to allow them to continue lending without oversight saying the combination of the new bill with oversight from the new agency could reduce the costs associated with credit cards and other lending vehicles. She told Reuters recently, "…with straightforward products and simple disclosures, the markets for these products will change dramatically.”Much to the chagrin of Ms. Warren and other members of Congress, the new bill phases in its restrictions between now and February leaving the lenders with plenty of time for reaction to the plan. Contrary to Warren’s statement of lower costs for consumers, credit card companies are already making it more expensive for consumers and have another seven months of free reign to raise interest rates, cut borrowing limits, and increase fees.Sen. Charles E. Schumer (D-N.Y.) has been requesting that the Federal Reserve step in using its emergency powers to limit interest rate increases to no avail. "This is what many of us feared about a law that didn't take effect right away," Schumer said. "It was never going to take this long for the credit card companies to get ready for the new reforms. Instead, issuers are using the delay in the effective date to wring more dollars out of their customers. It is against the spirit of the law, and it is just plain wrong."Here’s a list of some of the increases imposed by the credit card companies in reaction to Congress’ action: * Chase will raise the minimum payment requirement to 5% from 2% on some of its customers starting in August.* Balance transfers at Chase and Discover have already been increased to 5% of the total, up from 3% and 4%, respectively* Bank of America raised fees on balance transfers and cash advances to 4% from 3%The expectation by industry watchers is that these types of increases will continue until the bill goes into effect. Credit card companies have rationalized the increases saying that the restrictions on interest rate increases limit their ability to manage risk. If they can’t raise interest rates on the riskiest borrowers in their portfolios to manage that risk, they are going to raise rates on the entire portfolio.A major aspect of the increasing risk for credit card companies is the decrease in the collective credit score of borrowers across the country as foreclosures, wage reductions, and job losses increase as a result of the deepening recession. Charge-offs at credit card companies are hitting at record breaking levels with June losses reaching 10.44%, as reported by Fitch Ratings. Many of the same lenders have been taking losses on mortgage portfolios as well. Losses on mortgages prompted many of the lenders to start raising rates on credit cards the fourth quarter of 2008. It was those increases, many without prior notice to card holders in good standing, which gave added incentive to Congress to pass the credit card bill some six months later. Of the six majors, Citi has put in the largest interest rate hikes across the board for increases on credit card purchases and monthly balances.As the Congress and the credit card companies continue their battle, the big losers, at least during the gaping eight month hole between passage and implementation of the law, will be the credit card holders. Free to go about business as usual until the beginning of 2010, the credit card companies are likely to continue to raise every possible rate and fee they can as many of those charges will be considered as benchmarks once the law finally goes into effect. For many consumers, the proposed protection in the bill may arrive too late. Chase’s minimum payment increase will raise the monthly obligation on a $20,000 balance from $400 to $1,000, a tough pill to swallow for consumers already struggling to make payments. For those that can transfer their balances away from Chase to avoid the increased minimum payment, higher balance transfer charges will hit them for making the change.Members of Congress have been expressing their irritation at the credit card companies’ actions, calling them "unfair and deceptive”.  Rep. Carolyn B. Maloney (D-N.Y.) fumed, "Capricious actions like these are why Congress overwhelmingly passed, and President Obama signed, my credit card reform bill: to level the playing field on behalf of consumers." It may be well intended but what consumers will see while waiting for the field to be leveled will be higher fees and interest rates, in some cases dramatically so. As those costs ramp up, and each month goes by, the question many will be asking is why Congress is allowing to the credit card companies another seven months to jack up every possible charge that can be put on a monthly bill.