What to Expect As New Rules on Credit Cards Take Effect

From the Wall Street Journal

Credit-card users get new protections this week, the first of a series of federal actions that constrain card issuers from changing terms on customers.

Starting Thursday, banks must comply with parts of the recently passed Credit Card Act of 2009 by mailing bills at least 21 days before their due dates and providing at least 45 days’ notice before making a significant change to their rates or fees. Currently, banks are generally required to mail billing statements at least 14 days in advance and provide a 15-day notice of altered fees or rates. The new rules also will bar banks from increasing fees and rates without warning when a consumer misses a payment or exceeds a credit limit.

Consumers also will be allowed to avoid future interest-rate increases and pay off any outstanding balance over time under the original rate terms. Currently, if a consumer gets hit with a penalty rate, for example, they aren’t given the option to reject the rates.

The bulk of the legislation’s key provisions will take effect in February 2010, including limits on interest-rate increases on existing balances. The following July will see the introduction of new disclosure rules, drafted and approved by the Federal Reserve Board and other banking regulators.

In anticipation of the legislation, major card issuers have been raising interest rates and fees, reducing credit lines and closing accounts. Banks say the changes also are being driven by the weak economy, which has resulted in higher losses and funding costs. Earlier this month, for example, American Express Co. notified its Blue, Optima and co-branded credit-card customers that it was raising interest rates by an average of two to four percentage points. Other changes to these cards, which take effect with customers’ October billing statements, include higher rates and fees for cash advances and late payments. American Express also eliminated fees for customers who exceed their credit limits, months before the legislation clamps down on a host of card fees.

Favoring Variable Rates

Other issuers, such as Bank of America Corp., J.P. Morgan Chase & Co.’s Chase Card Services and Discover Financial Services, recently converted customers’ fixed rates to variable ones. The changes will make it easier for issuers to bump up the rates they charge without notifying customers. By contrast, banks must currently notify fixed-rate card holders of any change in rates.

Banks are also paring back their rewards programs. Citigroup Inc., for example, has started adding annual fees to some of its rewards cards, such as the Citi Diamond Preferred Rewards card. Under the Discover More Card rewards program, customers can earn an additional 5% back on purchases in categories that rotate quarterly; for the third quarter, however, the cap on purchases that qualify for the cash-back bonus was lowered to $300 from $400. Meanwhile, Chase last fall scaled back the bonus opportunities on its no-fee Chase Freedom cards. For Chase Freedom card customers wanting to earn a fixed 3% bonus for spending in the grocery, gasoline and fast-food categories, Chase now levies a $30 annual fee.

While the new legislation will help eliminate sudden rate increases and force more disclosure, the banking industry has said the restrictions will reduce available credit. The cost of borrowing also will rise, companies say, since they will have to be more careful about giving credit. Average interest rates on credit cards rose slightly to 14.43% through May, according to the Federal Reserve, although rates are still below historical levels of 18% and 19% that were typical 20 years ago.

According to Consumer Action’s 2009 credit-card survey, which looked at 39 cards from 22 financial institutions, rates and fees began climbing this spring. The advocacy group said more credit cards now come with minimum cash-advance fees and higher balance-transfer and foreign-transaction fees.

“There’s no question that issuers are taking advantage of this window before it closes to make as many changes as freely as they’ve been accustomed to,” said Ruth Susswein, Consumer Action’s deputy director, national priorities.

Changes to card terms are causing some consumers to alter their spending patterns.

After Bank of America raised his 7.9% fixed rate to a 13.9% variable rate last spring, Mark Nilles paid off his remaining balance, shopped around for another card and canceled his BofA card. In the future, the Arvada, Colo., hydrologist said he plans to rely on savings or shorter-term, fixed-rate loans instead of credit cards to pay for one-time expenses.

“It made me reassess everything that I was doing credit-wise,” said Mr. Nilles.

More Fudge Room

For now, consumers should check their statement due dates to make sure they’re getting the required additional time to pay their bills. Some people may want to adjust any automatic debits coming out of their checking accounts to make sure they’re not paying their bills sooner than they need to, said John Ulzheimer of Credit.com, a consumer-education Web site. “This gives you a little more of a fudge period,” he said.

Consumers are likely to find better credit-card deals if they also have a checking account at the bank. Under Chase Card Services’ Chase Exclusives program, for example, Chase Freedom card holders who also have checking accounts at the bank can earn up to 10% more points on their spending.

The bank also rolled out a new credit card, “Slate From Chase,” that automatically refunds the 12th month’s interest charges each year if customers enroll in the bank’s AutoPay program from a Chase checking account.

Meanwhile, for a limited time, Citi is offering some customers an additional 2% cash-back bonus on qualified spending on Citi credit cards if customers also have a banking relationship at the company.

Write to Jane J. Kim at jane.kim@wsj.com

Opinion – Voices Sunday, May. 31, 2009 Senate whiffs on bankruptcy, mortgage reform

Special to the Ledger-Enquirer


One of the worst votes the U.S. Senate has made recently was on April 30, when it defeated the bill that would have allowed bankruptcy judges to modify home mortgages to reflect the true value of the home, rather than what that value might have been earlier.

This one vote would have saved more people’s homes from foreclosure, and them from the streets, than any foreclosure protection legislation that has been proposed, and it would have done it without costing a penny of taxpayers’ dollars.

The way it works is this: If you buy an item and finance it, you have entered into a “secured” transaction. That means whoever loaned you the money, or financed your purchase over time, has a security interest in the item purchased, i.e., if you don’t pay, they can come and get it. In other words, the property stands good for the debt.

This is of extreme importance in lending transactions, for people are more inclined to pay a secured indebtedness than an unsecured one, where someone just lends you $100 on your promise to pay.

It assumes even more importance in the event of bankruptcy, where secured creditors can repossess their security if you do not pay them, whereas unsecured creditors have a lower priority and are often left out in the cold. This is an oversimplified example, but it is close enough for government work.

The problem arises when you attempt to determine how much of an indebtedness is truly “secured,” which is coming into play a lot more often under present economic conditions.

For example, if you bought a house for $200,000, paid $20,000 down and signed a mortgage for $180,000, the creditor was owed on a secured basis $180,000. The rub comes when, with a crashing real estate market, the house is now worth only $150,000. (This is what is often referred to as being “upside down” or “under water” in a transaction: You started out “right side up” or “on top of the water,” because the thing you bought was worth more than you owed, but now it is not.)

Should all $180,000 of the indebtedness still be considered secured, even if the creditor after foreclosure could get only $150,000 for the house?

Reason would tell you that this indebtedness is secured only up to the value of the property, and that the remaining $30,000 is unsecured and would very rarely be collected after foreclosure

The legislation our Senate defeated, with the votes of our four senators from Georgia and Alabama, would have changed the bankruptcy law to allow the judge to declare that the creditor was still owed $180,000 in the above example, but only $150,000 was secured and the remaining $30,000 was unsecured

This would reflect reality. And it would also allow that bankruptcy judge to lower the debtor’s monthly payment to an amount which would reflect the real value of the property, and/or reduce the interest rate being charged and/or extend the length of the mortgage, say from 25 to 30 years. The debtor would have a better chance of paying the reduced monthly payment than the higher payment based on the now unrealistic, exaggerated value it originally had. The remaining $30,000 would still be owed the creditor, with a higher probability of being eventually paid, but in the lower priority unsecured claims category.

While most of our bankruptcies being filed presently are caused by catastrophic medical expenses and/or credit card debt, those types of indebtedness are unsecured claims. Over 46 million Americans are presently without health insurance, many because of layoffs from their jobs. Hardly a week goes by without my receiving half a dozen offers from credit card companies, begging me to take out another “pre-approved” credit card. I am not defending not paying your debts, but a lot of folks find themselves in financial difficulty for causes other than moral failure.

(This does not even take into consideration that many foreclosures are caused by adjustable rate, or “teaser” rate mortgages where the creditor “adjusted” the interest rate, and therefore payment, upward. While I agree the borrower should have understood what he or she was signing, at least recognize the lack of knowledge and/or sophistication of most borrowers compared to the banker or other lender.)

The whole thing becomes ridiculous when you realize that if I had a beach house, or a second home in the mountains, or a yacht, or an apartment building I had bought as an investment, or lived in a duplex I owned that had become “upside down”, the bankruptcy judge could “cram down” the portion of the indebtedness that was truly secured to its true value, and my payments would be reduced accordingly.

Not so for a single family home — the one thing that it is most important for them to keep, the one thing the loss of which will put them all, including the kids, out on the street. Still we talk about “family values.”

The irony of the situation is that this legislation would be in the best interest in most cases for the banks or other mortgage lenders to accept the reduced payments. If, under the present situation, they insist on the full value, which requires payments the debtor cannot afford, they will have to foreclose and end up with a house that they would be lucky to sell for the reduced $150,000, not to mention attorneys fees for the foreclosure, real estate commissions, fix up costs, etc. they will have to pay.

They would be much better off if they took the lesser monthly payments and kept their customers in the home, continuing to make payments, although admittedly for a lesser amount but for perhaps a longer period. And, best of all, if this legislation had passed, it would have encouraged lenders to modify these loans before the homeowners were forced into bankruptcy.

This would certainly be better for the community and neighborhood, for foreclosed homes, often with untended yards and “For Sale” signs in front of them, have a negative impact on the value of surrounding homes and the whole neighborhood. It would be better for local taxpayers, too, for the tax assessment after foreclosure would be based on the $150,000 foreclosure sale, not the $200,000 it was before foreclosure. Local tax collections would be less, meaning everyone else would have to pay more.

Lastly, the adoption of this legislation would not have cost the American taxpayer one penny. No stimulus money, no government program paying part of the homeowner’s mortgage to the bank, just allowing the bankruptcy judge to do for the home what he or she has the authority to do with that yacht.

It lost by a vote of 51-45, with 12 Democrats joining all of the Republican senators in defeating it. Even though President Obama had “talked the talk” by saying it was a key part of his plan to reduce the tide of home foreclosures, he did not actively lobby for the bill, which had previously passed the House with a wide margin.

What could have been a “win-win” for the homeowners, communities, neighbors, the American taxpayer and, in many instances whether they could see it or not, the creditors became a “lose-lose” for everyone except the banking industry lobbyists and those who receive their campaign contributions.

Milton Jones of Columbus is a retired attorney, former state legislator and former member and chair of the University System of Georgia Board of Regents.

A Times Editorial Banks win, homeowners lose in Senate

Article from the St. Peterburg Times          Tampabay.com

The score: Banks 1, Homeowners 0. That is because the U.S. Senate has caved in to the banking lobby and refused to allow bankruptcy judges to modify primary residential mortgages for homeowners facing foreclosure. This would have been the best way to prevent hundreds of thousands of foreclosures, because the threat of court-mandated modifications would have prodded more banks and loan servicers into negotiating in good faith with struggling homeowners. President Barack Obama, who claimed to support the idea, didn’t fight hard enough for it and the banks won.

The Senate defeated an amendment last week to give bankruptcy judges the power to alter the terms of home mortgages. The opponents who sided with the mortgage industry over homeowners included 12 Democrats and 39 Republicans — including Florida Republican Mel Martinez. You would think a senator from the state with the second highest mortgage foreclosure rate in the country last year would have seen the wisdom of giving bankruptcy judges more discretion. Florida Democrat Bill Nelson showed commendable backbone, standing up to the banking lobby and voting for the amendment.

The banks fought hard to send this modest initiative down in flames and prevent federal judges from lowering interest rates, extending payment periods or reducing principal — known in banking parlance as “cramdown.” Primary residential mortgages are the only type of loan that cannot be restructured in bankruptcy court.

Majority Whip Richard Durbin of Illinois, who was the measure’s chief champion, declared that banks “are still the most powerful lobby on Capitol Hill. And they frankly own the place.” Many of these banks, including Wells Fargo, Bank of America and JPMorgan Chase, are recipients of taxpayer-funded bailout money. Essentially, they are using taxpayers’ money to fight against a public policy that would have helped many taxpayers — including many in Florida. And the Senate let them win.

House Passes Bill Imposing New Rules on Credit-Card Industry

From the Wall Street Journal

Obama Expected to Sign Measure Soon

WASHINGTON — The House overwhelmingly approved legislation Wednesday imposing new restrictions on credit-card companies, sending the measure to President Barack Obama to sign in the coming days.

The 364-61 approval, following the Senate’s 90-5 vote Tuesday, will ban several of the industry’s most profitable practices and require clearer disclosure to cardholders about the interest they are paying.

Mr. Obama has pledged to sign the measure, which would take effect in late February 2010. One of the toughest provisions: Cardholders won’t see interest-rate increases on existing card balances unless they are 60 days late on payments. And if the customer pays on time for six months after that, the prior rate must be reinstated.

The new rules also would ban some fees, provide more notice for customers to pay bills and require clearer disclosures. For instance, credit-card statements will have to tell customers how long they would need to wipe out their balance if only paying the minimum each month, and how much interest they would incur along the way.

The legislation will force broad changes in the credit-card business, many of which were under way after the Federal Reserve approved similar — though less stringent — regulations in December. Industry officials say the most stringent elements of the legislation will constrain their ability to adjust prices for the riskiest consumers. Card companies have said they are considering shorter introductory rates, higher interest rates and more annual fees for some consumers as a result of the new restrictions.

By blocking many practices that aggravate consumers, however, lawmakers said the new provisions would help the economy in the long run.

“Consumers will have more money to invest in the economy instead of paying off debt,” said Rep. Carolyn Maloney (D., N.Y.), who co-wrote the legislation.

Over the past year, credit-card issuers have seen their losses mount as customers default on their bills. Many companies have been protecting themselves by raising rates and cutting credit lines in recent months, even for customers who pay their bills on time, at the same time the government stepped forward with expensive bailouts of the financial sector. “It absolutely inflamed the public,” Ms. Maloney said.

The industry found itself isolated on the issue as other business interests — and most Republicans — stepped forward to support the card legislation. But some members warned it could lead to unintended consequences, such as cutting credit to more consumers as card companies aim to protect their bottom lines.

“We don’t need to take away consumers’ credit opportunities at a time when the market is already contracting from the economic recession,” said Rep. Jeb Hensarling (R., Texas), who said he backed the clearer disclosure about terms.

The credit-card bill included an unrelated measure, attached in the Senate by Sen. Tom Coburn (R., Okla.), to allow loaded firearms on federal parks in areas where state and local laws would already allow it. The House carried out an unusual separate vote on the gun provision, which passed 279-147, allowing members to object to it while still putting their names on credit-card legislation.

Senate Approves Bill to Overhaul Credit Card Industry

News from FOX NEWS

The overwhelming bipartisan vote of 90-5 was lawmakers’ way of telling Americans that they haven’t been forgotten amid a recession that has left hundreds of thousands jobless or facing foreclosure.

The Senate voted on Tuesday to prohibit credit card companies from arbitrarily raising a person’s interest rate and charging many of the exorbitant fees that have become customary — and crippling — to cash-strapped consumers.

The overwhelming bipartisan vote of 90-5 was lawmakers’ way of telling Americans that they haven’t been forgotten amid a recession that has left hundreds of thousands jobless or facing foreclosure.

With the House on track to endorse the measure by week’s end, President Barack Obama could see a bill on his desk by the end of the week.

“We’ve got too many hard-working families in Massachusetts struggling to keep their heads above water, and the last thing they need is to get whacked with unfair credit card fees,” said Sen. John Kerry, D-Mass.

If enacted into law as expected, the credit card industry would have nine months to change the way it does business: Lenders would have to post their credit card agreements on the Internet and let customers pay their bills online or by phone for free. They’d also have to give consumers a chance to spare themselves from over-the-limit fees and provide 45 days notice and an explanation before interest rates are increased.

Some of these reforms are already on track to take effect in July 2010, under new rules by the Federal Reserve. But the Senate bill would put the changes into law and go further in restricting the types of bank fees and who can get a card.

For example, the Senate bill requires anyone under 21 seeking a credit card to prove first that they can repay the money or that a parent or guardian is willing to pay off their debt if they default.

Senate Rejects Mortgage ‘Cramdowns’ by Judges

WASHINGTON — President Barack Obama lost his first big legislative fight Thursday when the Senate failed to pass a measure that would allow bankruptcy-court judges to reduce the value of some mortgages.

The defeat of the bill, which was a central part of Mr. Obama’s plan to help homeowners, came as the House voted 357-70 in favor of a measure that would cap the fees credit-card companies can charge. The credit-card measure now goes to the Senate, where it is likely to pass.

Small banks and credit unions had opposed letting judges reduce a mortgage to reflect a home’s market value — known as a “cramdown” — despite weeks of wooing by Democrats. Some opponents said they wanted to signal to Mr. Obama their dwindling tolerance for what they described as continued government intervention in private business, particularly businesses that didn’t precipitate the nation’s mortgage crisis. The measure failed a vote that would have moved it forward by 45-51.

Mr. Obama had described cramdown as a “stick” in the carrot-and-stick approach he sought to take with banks, as part of the administration’s effort to aid eight million homeowners whose properties are headed toward foreclosure. The measure would be in effect only until 2012, and could be used only after a homeowner had tried to rework the mortgage directly with the bank.

Sen. Dick Durbin (D., Ill.) had pushed for the cramdown measure. Along with many Republicans, a dozen moderate Democrats also voted against the bill. The House in March had passed the cramdown legislation by a vote of 234-191, along party lines.

Big banks, including Citigroup Inc., Bank of America Corp. and Wells Fargo & Co. were early supporters of a Senate compromise even as big-bank lobbying groups opposed it. Community bankers and two major credit-union groups also declined to support the measure, saying it would give too much power to judges.

“It’s hard enough to deal with bankruptcy judges, much less giving a bankruptcy judge the power to change the terms of a contract,” said Cam Fine, chief executive of the Independent Community Bankers Association, a group wooed by the administration. He said his group represents 8,000 community banks.

The House credit-card bill that passed Thursday would ban retroactive rate increases by credit-card issuers and rein in some interest-charging practices. For example, companies would have to give consumers 45 days’ notice before raising interest rates.

—Sudeep Reddy contributed to this article.

Write to Elizabeth Williamson at elizabeth.williamson@wsj.com

Cramdown Slamdown Three cheers for obstructionism.

Wall Street Journal Editorial

The power of a united minority was on beneficial display yesterday, as Senate Republicans defeated the budget bankruptcy “cramdown” bill. Credit goes to Arizona’s Jon Kyl and Minority Leader Mitch McConnell, who kept their party together to beat destructive legislation that had easily passed the House and was one of President Obama’s housing priorities.

The cramdown would have allowed bankruptcy judges to rewrite contracts to reduce the amount that people owe on their mortgages. But a bipartisan majority understood that relief for today’s troubled borrowers would be paid with higher rates on the next generation of homeowners, as lenders priced the added risk into mortgage contracts.

A dozen Democrats joined Republicans in the 51-45 vote, and even Pennsylvania turncoat Arlen Specter gave his former GOP comrades an assist. Speaking for millions of renters and nondelinquent borrowers, Mr. McConnell said that the vote “ensures that homeowners who pay their bills and follow the rules won’t see an interest-rate hike at the whim of a bankruptcy judge.”

Prior to the vote, the Associated Press described the looming defeat as “the first major legislative setback for the popular president.” Illinois Senator Dick Durbin and New York’s Chuck Schumer also did their worst to pass the bill, including some arm-twisting of politically vulnerable bankers. Their defeat is a victory for healthy credit markets and, let us hope, a sign that Americans do not want to throw out all the rules of our market economy.

The victory is also an example of Republicans helping the economy and thus saving Democrats from their own worst instincts. Liberals were so intent on helping troubled homeowners that they were willing to punish the profits of the very banks they say they want to lend more to new mortgage borrowers. May we have more such virtuous “obstructionism.”

‘Cramdown’ Lacks Votes

This article appeared in the Wall Street Journal.

By ELIZABETH WILLIAMSON

WASHINGTON — President Barack Obama’s proposal to give homeowners new relief in bankruptcy court appears headed to defeat in the Senate Thursday, barring a last-minute compromise.

As of late Wednesday, a measure allowing judges to reduce the mortgages of homeowners in bankruptcy court, known as “cramdown,” didn’t have the 60 votes needed to pass a procedural vote in the Senate, where Republicans still have the numbers needed to block legislation. The measure lacks the support of some Democrats as well, amid opposition by community banks and credit unions.

The president and many Democrats see cramdown as important relief for millions of people whose homes are worth less than they owe on their mortgages, in some cases because they signed up for dubious loans with escalating payments.

The measure, once part of a more sweeping housing bill to be considered Thursday, will now likely be voted upon separately. Sen. Dick Durbin (D., Ill.), the Senate’s second-ranking Democrat, has been working to find a compromise on the measure, a key part of Democrats’ agenda to help homeowners.

But as of Wednesday night, Sen. Durbin and fellow negotiators had been unable to sway enough moderate Democrats and Republican opponents.