A major clash of ideals is brewing in Washington, D.C. as lawmakers and regulators last week introduced policies that would change the way credit card portfolios are managed.
Industry analysts warned that the changes could have profoundly negative effects on the credit card industry as a whole, while one lawmaker said the changes are not happening fast enough.
Sen. Christopher Dodd (D-Conn.) introduced the Credit Card Accountability, Responsibility and Disclosure Act (C.A.R.D. Act), which is aimed at stopping credit card practices that Dodd said overburden consumers with debt and hamper their abilities to move up the economic ladder. Also, the Federal Reserve was expected to propose its own similar regulations last week.
The changes struck Barclays Capital as profoundly negative for the credit card industry as a whole.
"Investors in credit card ABS need to be keenly aware of legislative and regulatory risk, particularly given the highly charged political atmosphere on Capitol Hill regarding consumer protection," wrote Barclays analysts last week.
As far as how the changes relate to securitization, the legislative and regulatory proposals warrant close attention because they impact card issuers' abilities to change the borrower interest rates as a response to deteriorating credit. Increasing the cost of funding can improve portfolio yield, and thus excess spread, Barclays wrote.
Overall, the C.A.R.D. ACT from Dodd strengthens credit card industry regulation and supervision, restricts issuers' abilities to increase in interest rates and terms at any time and for any reason, requires fairness in the application of card payments, protects the rights of financially responsible card users, prohibits rates and fees that have been deemed exorbitant and unnecessary, provides enhanced disclosures of card terms and conditions, and ensures adequate safeguards for young people, according to a statement from Dodd's office.
In terms of managing interest rates, the legislation would prohibit credit card issuers from raising rates on cardholders in good standing for reasons unrelated to the cardholder's behavior with respect to that card. Among other restrictions, it would prevent issuers from changing the terms of a credit card contract for the length of the card agreement.
The legislation also puts tighter restrictions on marketing the cards to young people. Among other proposals, it would require issuers that solicit to those younger than 21 to obtain the signature of a parent, guardian or other individual who will take responsibility for the debt.
Dodd's legislation also calls for stronger oversight of the industry, saying that banking regulators should evaluate the policies and procedures of card issuers to ensure compliance with card requirements and prohibitions; improve data collection related to rates, fees and profits and provide each federal financial regulator with the authority to prescribe regulations governing unfair deceptive practices by banks and savings and loan institutions.
"We are concerned that the changes outlined in this legislation would have serious, unintended consequences such as unfairly raising the cost of credit for consumers - even those who have a track record of managing their credit well," according to a statement from Edward Yingling, president and CEO of the American Bankers Association.
Dodd's legislation comes as word circulated throughout the banking industry that the Federal Reserve planned to introduce proposals that closely mirror some of the proposals in Dodd's legislation which are likely to be toughest on card issuers. Among them, double cycle billing would be prohibited, along with the card industry's practice of repricing the current balances within their portfolios for any reason. The Federal Reserve would also restrict the way that card issuers allocate principal payments among balances with different finance charges. The Fed had not introduced those changes at press time, but was expected to do so by May 2.
Meanwhile, Rep. Carolyn Maloney (D-N.Y.), who introduced The Credit Cardholder Bill of Rights legislation in February, says she supports the proposals from Dodd, but that consumers cannot wait for a repeat of the regulators' abysmal track record on mortgage regulation.
"These are the same regulators who gave us the subprime mortgage crisis," Maloney said in an emailed statement. "I'm not holding my breath on them delivering effective or timely regulation any time soon."
The regulators cannot even agree on what needs to be done to improve the relationship between credit card issuers and users, she said, noting that the Federal Deposit Insurance Corp. fully supports her bill, the Office of the Comptroller of the Currency completely opposes it, while the Office of Thrift Supervision credits the reforms, but wants to go ahead with them on their own terms.
"The plain truth is that the consensus for regulatory action is unlikely any time soon," Maloney said.
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