Just days after the surprise passage of an amendment to regulate interchange, bankers are bracing for the possible addition of an even stronger measure that would hold them to the interest rate limit in the cardholder's state.

If enacted, the amendment from Sen. Sheldon Whitehouse, D-R.I. to the regulatory reform bill would upend the credit card business, which depends on the ability to export rates across state lines.

"It would lead to a very balkanized, and random, system of credit card interest rates," said Robert Litan, a senior fellow at the Brookings Institution. "It would mean that people that have identical credit histories in different states could be subject to very different interest rates. … It would irrationally discriminate based on where you live."

Although related attempts to address usury by setting a federal rate cap have failed in the past, banking industry representatives were near panic Monday because they feared the amendment may have sufficient support.

With a vote on the amendment expected today, lobbyists were vigorously arguing it would destroy the credit system.

"It would wreak havoc on the entire consumer credit markets," said Ed Yingling, the president and chief executive of the American Bankers Association. "The way it's written, if you had a consumer credit contract, either existing or in the future, you would have no idea if the interest rate and fees would be enforceable, because all the consumer has to do is move to another state and everything is different. … It's going to be very hard to make a lot of loans."

Whether the amendment will prevail is unclear. The measure may need 60 votes to pass, a standard that would likely kill its chances.

"It's tough enough when you are up against the big banks around here even at 50," Whitehouse told reporters Monday. "And I think at 60, that makes it a pretty tough slog." Still, Whitehouse said he was optimistic.

"It's got a good chance," he said. "We are here to push it, because I think it has bipartisan appeal."

He was backed by Sen. Richard Durbin, who successfully won passage of the bank-opposed interchange amendment last week. Though Durbin warned that retailers helped him win the necessary support, he was optimistic about Whitehouse's chances.

"Our success last week is an indication that credit card giants can be successfully challenged," Durbin said. "I hope Sheldon has the same success."

Banking industry representatives said they were not sure where the votes would fall.
"There are just so many issues, you can't get a vote count, because it's just coming so fast and furious, senators themselves haven't focused on a lot of it," Yingling said.

It was unknown whether Banking Committee Chairman Chris Dodd supported the measure, which so far has 16 co-sponsors, including one Republican, Sen. Thad Cochran of Mississippi, which greatly increases its odds of passage.

The amendment would undo existing law and Supreme Court precedent that allow banks to export rules on interest rates and related fees from the state where they base their operations.
That rule encouraged credit card companies to seek out states like Delaware and South Dakota, where the laws are relatively lenient. If the amendment were enacted, card companies and any other lender that offers nonmortgage consumer credit would have to comply with the interest rate rules in each individual state where they do business.

"It's going to lead to the rationing of credit," Litan said. "People that live in the states with tight interest rate controls because they happen to be temporarily anti-bank will end up finding it even more difficult to get credit than it is now. … People already are complaining that credit card issuers are cutting credit card limits. This would just aggravate the problem."

L. Richard Fischer, an attorney at Morrison & Foerster, said that if the Whitehouse amendment were enacted, lenders would stop offering credit in states with the strictest usury rules and lowest populations. He said before the 1978 Marquette National Bank of Minneapolis v. First Omaha Service Corp. decision, which first allowed credit card rate exportation, bankers used to avoid making loans in states with tough rules.

"When this happened before, what the large lenders did right off the bat is they eliminated" states in the middle of the country, like Kansas, Iowa and Wisconsin, Fischer said.

Whitehouse scoffed at that argument, arguing that before 1978, the system worked well.

"Frankly, if you look at the harm that has been caused by the race to the bottom and the failure of consumer protections that ensued, it far outweighs the advantages," Whitehouse said. "I am confident they will adapt, and if a state disagrees and wants to have 30% rates marketed to its citizens, there is nothing in the bill that would prevent them from doing that."

Ed Mierzwinski, the consumer program director at U.S. Public Interest Research Group, which supports the amendment, said it was a matter of fairness.

"Whitehouse is necessary because the Marquette and subsequent decisions it would overturn have led to banks hiding in a few bank-friendly havens that have allowed unlimited fees and interest to punish consumers," he said.

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