Bankers are holding nothing back in their efforts to squash a proposal designed to revamp card lending practices.
The proposal, issued in May by the Federal Reserve Board, the Office of Thrift Supervision, and the National Credit Union Administration, drew over 56,000 letters from bankers, card issuers, consumer groups, and consumers. Industry executives said the plan is unconstitutional and would limit consumer access to credit, drive up costs, and be a burden to implement.
"If enacted, it is likely to squelch the current availability of credit, resulting in higher initial interest rates, the likely elimination of non-variable rate cards, lower approval rates, and lower credit limits," Andrew Semmelman, senior vice president and associate general counsel for Chase Bank, wrote in a comment letter. The proposal "would effect a fundamental change to the established history of credit cards and the basic pricing strategies used to offer cards."
Tom Deutsch, deputy executive director of the American Securitization Forum, wrote that the proposed rule could disrupt the asset-backed securities market.
"The combination of diminished revenue streams and heightened risks that would result from the proposed rule will prompt secondary market purchasers of credit card ABS to adjust by either paying less for credit card ABS or not purchasing them at all," he wrote. "This will likely reduce the amount of secondary market capital, creating liquidity issues that could increase the cost of credit for consumers and potentially further restrict credit to consumers."
By far, the provision most objectionable to bankers would restrict rate hikes on outstanding balances. Bankers say that such repricing is fundamental to credit cards, and that the proposed restrictions would force all borrowers to pay higher rates.
"Every profit-making venture in every industry on the globe passes its operating costs on to its consumers," wrote John Finneran, general counsel for Capital One Financial Corp. "This practice defines the very essence of commerce. Issuers need to reprice because they cannot predict the long-term costs of funds at the outset of a credit relationship that may extend for years or decades, and where the amount of outstanding balance at any point in time is largely outside of the issuer's control."
Semmelman argued the limits would violate contract rights protected by the Constitution.
Regulators issued the proposal under rarely used Federal Trade Commission Act authority to define practices as unfair and deceptive.
The law firm Morrison & Foerster said a survey of lenders holding 70% of outstanding card balances found the proposal would cost the industry $12 billion of lost interest. Bank of America Corp. estimated it would reduce credit lines by $931 billion. Discover Bank said 10% of applicants currently approved would be declined.
The proposal would prohibit card issuers from increasing rates on outstanding balances unless the customer defaulted or the rate was a promotional one or a variable one tied to an index.
Christina Favilla, the president of Discover Bank, cited the insurance industry in saying lenders must be able to link pricing to the risk posed by a borrower. The proposal "is akin to making it an unfair practice for automobile insurers to raise premiums on drivers who accumulate speeding tickets or DWI convictions, and allowing adjustments only if the driver files an accident claim or stops paying premiums."
B of A disputed advocates' claims that repricings fuel defaults.
"Risk-based repricing allows us to offset increased losses and earn a similar rate of return for risky customers as we do for our average customers," Susan Faulkner, consumer deposits executive for the Charlotte company, and Lance Weaver, card services executive for B of A, wrote in their letter. "Furthermore, when we reprice customers, we find that the repricing itself does not cause any significant increase in default in other words, for two groups of borrowers with a given risk profile or score, those who accept a change in terms to a higher rate, risk-based rate do not default significantly more than a control group who are kept at a lower rate."
Faulkner and Weaver argued that the change would push customers to payday lenders.
In a letter written on behalf of a number of consumer groups, the National Consumer Law Center, disputed the claim that the rule would cut borrowers off from mainstream credit.
"To the extent that these rules restrict some credit, it will be irresponsible, unaffordable, predatory credit that deserves to be restricted," the center wrote.
Its letter called for even more limitations.
"Overall, the primary fault in the proposed rules is that they do not go far enough in encouraging responsible behavior towards those consumers who do get into trouble," the center wrote. "Decisions should be designed to help these consumers to get out of debt, not punish them so severely that they can never escape. No one would double the interest rate on a homeowner whose mortgage is 30 days late, and we should not do so for credit card borrowers. Borrowers who truly have become more risky should have their credit cut off, not extended at predatory prices."
Provisions dictating how payments should be allocated also got bankers' attention.
Amounts exceeding the minimum due would have to be applied to the balance with the highest annual percentage rate. Bankers argued that payment allocation tactics would confuse customers and complicate processing, as well as lead to higher rates and fewer promotional offers.
"We believe that the proposed rule's unfairness analysis of current payment allocation practices fails to appreciate the negative consequences of changing current practices: Promotional offers will disappear or significantly change if consumers carry promotional balances at low APRs without amortizing them," Favilla wrote. "If the proposed rule were adopted, issuers will more than likely increase the APR on these offers and reduce their availability and duration."
The proposal would extend grace periods by 7 days, to 21.
"This overly broad designation does not consider long-standing accepted practices or the different methods utilized by institutions to deliver periodic statements and by consumers to make payments," wrote Dawn Mandt, senior counsel for Wells Fargo.
Despite bankers' objections, Fed Chairman Ben Bernanke has said the central bank will finalize the rule this year.
The Fed has also proposed banning overdraft fees on depository accounts unless a bank provides a consumer with a right to opt out. In separate comment letters bankers objected to this plan as well, calling it unjustified, costly, and difficult to implement. A story in tomorrow's paper will cover those comment letters.