Obama Wants End to ‘Deceptive’ Credit-Card Policies (Update2)

By Lorraine Woellert and Alexis Leondis

April 23 (Bloomberg) -- Executives from credit-card issuers including Bank of America Corp. and American Express Co. arrived at the White House for a meeting with President Barack Obama to argue against new limits on fees and interest rates.

Obama is pressing for consumer protections that go beyond proposals approved yesterday by a U.S. House committee and rules issued last year by the Federal Reserve.

As unemployment and unpaid credit-card bills rise, card issuers are under fire for policies that impose large late fees and boost interest rates on delinquent customers. Banks, reeling from the recession and credit crunch, say proposed restrictions will raise consumer costs, limit credit availability, and ultimately hurt more borrowers than they help.

“It means less credit available to vast numbers of Americans at the very wrong time,” said Ken Clayton, senior vice president of card policy at the American Bankers Association in Washington.

Industry leaders sought the White House meeting as they confront an outpouring of anger from cardholders and Congress. The executives are likely to hear from Obama about “some of the deceptive practices that we’ve seen,” White House spokesman Robert Gibbs said.

Understanding Fees

Credit-card issuers “are making a substantial amount of their money off of fees that people don’t understand and engaging in things that maybe are a little bit below the line,” Austan Goolsbee, Obama’s senior economic adviser, said in a Bloomberg Television interview today.

Yesterday, the House Financial Services Committee voted 48- 19 to support a package of new restrictions including fee and rate limits. The full House could vote on the measure as soon as next week, and the Senate is considering a similar bill.

“It is time to put the government on the side of consumers,” Representative Luis Gutierrez, an Illinois Democrat, told Bloomberg Television.

Treasury Secretary Timothy Geithner and economic adviser Lawrence Summers are to join Obama at the meeting set for 1:05 p.m. in the Roosevelt Room.

New Rules

“The president believes new rules of the road for the credit-card industry are needed,” senior White House adviser Valerie Jarrett said in a written statement. “We are also working with Congress on legislation that will promote simplicity, require transparency, demand fairness and ensure accountability.”

The industry is to be represented by executives from 13 companies, including Barclays Plc, Capital One Financial Corp., Citigroup Inc., Discover Financial Services, HSBC Holdings Plc, JP Morgan Chase, U.S. Bancorp, USAA Federal Savings Bank, Wells Fargo & Co., Visa Inc. and MasterCard Inc. American Bankers Association President Ed Yingling also is scheduled to attend.

At Charlotte, North Carolina-based Bank of America, the largest U.S. lender by assets, 7.8 percent of credit-card accounts were delinquent in February by more than 30 days, according to Bloomberg data. That’s up from 5.9 percent last August. Delinquencies are jumping throughout the industry in tandem with unemployment, which reached a 25-year high of 8.5 percent in March.

Charge-offs, which are loans that banks don’t expect to be repaid, increased to an average of 8.02 percent in February from 4.53 percent a year earlier.

Losses

Yesterday, Capital One, of McLean, Virginia, reported a $111.9 million first-quarter loss on higher reserves for soured loans. Bank of America reported a $1.8 billion first-quarter loss in its credit-card services unit.

As profits shrink, card lenders are raising fees and interest rates. Bank of America and Discover Financial Services plan to raise fees on transfers of card balances from 3 percent to 4 percent.

Many card issuers have received financial aid under the Treasury’s Troubled Asset Relief Program, which could give the government leverage to press for changes.

Senate Banking Committee Chairman Christopher Dodd and Senator Charles Schumer sent a letter today requesting that the Federal Reserve implement its provision to limit interest-rate increases on existing balances immediately. The Fed’s rules are supposed to take effect in July 2010.

“Credit-card providers have been aggressively raising rates on consumers now to avoid the ramifications of this rule when it goes into effect next year,” Dodd, a Connecticut Democrat, and Schumer, a New York Democrat, wrote.

Fees and Interest

Obama’s chief of staff, Rahm Emanuel, told House Financial Services Chairman Barney Frank yesterday that the White House wants any legislation to curb issuers’ ability to charge fees when customers exceed their credit limits. Obama also wants card issuers to offer longer terms for low, teaser rates.

The administration would require card companies to apply excess payments to balances with the highest interest rates, and to periodically tell customers how long it would take them to pay off their balances if they make minimum payments.

If the government keeps changing rules, it may make it harder for consumers to get credit, the bank group’s Clayton said. “As it becomes harder to engage in business, it becomes harder for new entrants because of regulatory compliance,” he told reporters. “If you can’t get new entrants, it doesn’t open up avenues for innovation or competition for consumers.”

The House bill that advanced yesterday was sponsored by Representative Carolyn Maloney, a Democrat from New York, and goes beyond rules issued by the Federal Reserve.

The Senate Banking Committee in March advanced a measure that includes a ban on rate increases for existing balances and other prohibitions. The panel approved the legislation on a 12- 11 vote, signaling that the administration and consumer advocates may need to make concessions to win enough votes in the Senate.

Defensive Posture

Still, “lenders are in a defensive posture right now,” said Linda Sherry, director of national priorities at Consumer Action, a watchdog group that tracks credit-card practices.

“They’re going to try to say that the economic recovery will take longer if Obama takes punitive action against lenders, but the Obama folks will need more of an explanation,” Sherry said in an interview.

To contact the reporters on this story: Lorraine Woellert in Washington at lwoellert@bloomberg.net ; Alexis Leondis in New York aleondis@bloomberg.net .

Last Updated: April 23, 2009 13:04 EDT

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