Although the Senate Banking Committee voted for the first time to adopt comprehensive credit card reforms Tuesday, the close margin cast doubt on its odds for enactment.

The 12 to 11 vote included no Republicans, and one Democrat, Sen. Tim Johnson of South Dakota, voted against it.

To enact the bill, observers said, Senate Banking Committee Chairman Chris Dodd (D-Conn.) will need to temper it significantly.

"The vote in the committee is a sign of weakness, not a sign of strength," said Brian Gardner, an analyst with KBW. "The bipartisan vote was against it. … I'm not sure how much Senator Dodd is willing to negotiate on this and compromise. I suspect the longer this process goes along, the less likely legislation becomes law."

Dodd emphasized after the vote that he was willing to cut a deal.

"My inclination is always to try and come to some agreement when we can," the Connecticut Democrat told reporters after the hearing. "This is going to be difficult. I knew that. … Unless you bring it up and push it, you never get people to sit down. So people worked all weekend with offers and counteroffers back and forth as late as 11 o'clock last night. It didn't come together, but we got closer, and my intention is to continue working."

Still, if Johnson's vote is any indication, Senate passage could be a heavy lift.

Dodd needs at least 60 votes to guarantee passage, and he will need the help of nearly all Democrats and at least a few Republicans.

But Johnson said it was a mistake to push a bill before new rules from the Federal Reserve Board and other regulators go into effect next year.

The bill would "harm the credit card consumers, not help," he said. "At a time when Americans are already seeing their credit card interest rates rise and their credit limits decrease, this legislation could mean that even fewer consumers get credit and lines of credit are greatly reduced."

Johnson also said he was willing to sit down to see if a compromise could be reached.
Dodd's bill would go further than the card regulations finalized by the Fed, which would define several common practices like double-cycle billing and universal default as unfair or deceptive. The regulators' rules would not go into effect until mid-2010, but Dodd's bill would take effect nine months after enactment.

His bill also includes provisions designed to protect college students from card debt. It would require issuers to ensure that borrowers under 21 have the ability to repay, have a parent co-sign or pass a credit counseling course.

Unlike the Fed proposal, Dodd's bill also would add several fee restrictions. It would ban charging interest on fees, prohibit fees for paying bills and restrict over-the-limit charges.

The committee also agreed to amendments that would require parental consent to increase credit lines for younger borrowers, ban most fees on gift- and prepaid- cards, and promote financial literacy.

Johnson is not the only Democrat opposing the bill. Sen. Tom Carper, a former member of the Banking Committee, said the measure raises concerns about cutting off credit from consumers.
"In moving forward, I want us to be cautious that we do not cause an unintended consequence of having less available credit for families who need access to credit during these tough economic times," the Delaware Democrat said in an e-mail to ASR sister publication American Banker.

Observers said Democratic opposition could doom the bill's chances. "The fact Johnson voted no is probably the end of it as far as its prospects in the full Senate are concerned," said one industry lobbyist, who did not want to be named. "That it comes against the backdrop of unanimous Republican opposition, that's what seals the deal."

Still, Sen. Richard Shelby of Alabama, the panel's lead Republican, expressed a willingness to support the measure if Dodd made some changes.

During the vote, he cited a 16-page analysis submitted to the committee by the Fed that said banks would need an 18-month window to update their systems to handle the new rules. The analysis also said the areas in which Dodd's bill went further might constrict access to credit.
"We must be extremely careful not to further weaken our nation's economy by unnecessarily choking off access to credit," he said.

He also demonstrated room to negotiate.

"I would support making firm the prohibition on double-cycle billing," Shelby said. "I would also support banning the practice of universal default on existing balances. In addition, I believe we could and should reach an agreement on some description for credit cards issued to young adults and some limits on fees charged to consumers. Finally, I believe we should codify the final rules into statute to ensure they become permanent and not subject to the whim of future regulators."

He also said he has concerns with completely eradicating a bank's ability to increase interest rates on new charges based on risk.

"I cannot abandon the premise of risk-based pricing altogether," he said. "I believe we must preserve risk-based pricing for prospective balances. Otherwise, financial institutions will need to limit credit or be forced to operate in an unsafe and unsound manner."

But Dodd argued that risk-based pricing never works in a consumer's favor. "I have yet to see a case where risk-based pricing has actually dropped a rate on a consumer," he said. "So if you do have risk-based pricing, it's got to work both ways."

Dodd also said he was encouraged by Shelby's comments that there may be a way to win Republican support.

"I was very impressed by what Senator Shelby had to say … so that becomes the basis for which we might sit down and try to work this out," he said.

Though the banking industry continues to oppose the bill, lawmakers did add a sweetener during the vote. Sen. Mike Crapo, R-Idaho, and Sen. Bob Corker, R-Tenn., added a measure that would more than triple the Federal Deposit Insurance Corp.'s permanent borrowing authority from the Treasury Department, to $100 billion.

It would also let the Federal Deposit Insurance Corp. (FDIC) borrow as much as $500 billion temporarily in consultation with the White House and the Fed. It would also raise the National Credit Union Administration's borrowing authority to $6 billion and give it temporary authority to borrow as much as $18 billion.

The banking industry is anxious to pass the FDIC provisions, because the agency has said it would cut a planned 20-basis-point premium on all institutions in half if it had a bigger Treasury cushion.

The House is pushing its own measure. The House Financial Services financial institutions subcommittee is scheduled to vote today on a bill from Rep. Carolyn Maloney, D-N.Y., that would codify the Fed rules and speed up implementation.

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