Wednesday, December 5, 2007

On Tuesday, the United States Senate Committee on Homeland Security and Governmental Affairs‘s Permanent Subcommittee on Investigations held a hearing titled “Credit Card Practices: Unfair Interest Rate Increases.” The hearing examined the circumstances under which credit card issuers may increase the interest rates of cardholders who are in compliance with the terms of their credit cards. It was a follow-up to a March 2007 hearing.

Subcommittee Chairman Carl Levin said in his opening statement: “Today’s focus is on credit card issuers who hike the interest rates of cardholders who play by the rules — meaning those folks who pay on time, pay at least the minimum amount due, and wake up one day to find their interest rate has gone through the roof — again, not because they paid late or exceeded the credit limit, but because their credit card issuer decided they should be ‘repriced’.”

Present to testify on behalf of credit card issuers were Roger C. Hochschild of Discover Financial Services, Bruce L. Hammonds of Bank of America Corporation, and Ryan Schneider of Capital One Financial Corporation.

Much of the 90 minute hearing focused on specific cases where interest rates were raised, allegedly because credit scores of the debtor dropped, and not because they were delinquent or otherwise behind on payments. According to Levin, this practice made it so that almost all payments went towards finance charges with almost none toward repaying the principal. This, he felt, is an unfair practice, as the credit card companies were negligent in informing their customers of the rate hikes and the reason for such hikes.

The collective credit card debt of Americans totals an estimated US$900 billion. Issuers have come under pressure to disclose their policies in regards to setting fees and interest rates. The US Truth in Lending Act requires that terms of a loan be set forth up front. Fluctuating interest rates on credit cards would, on the surface, appear to violate this act.

Roger C. Hochschild disagreed, arguing that “every card transaction is a new extension of credit … This makes it difficult — and risky — to underwrite, and price, the loan based solely on the borrower’s credit-worthiness at the time of application [for the card].”

Ryan Schneider, agreed: “The ability to modify the terms of a credit card agreement to accommodate changes over time to the economy or the credit-worthiness of consumers must be preserved.”

“Attempts to interfere with the market here … will inevitably result in less credit being offered,” warned Bruce Hammonds. “Risk-based pricing has democratized access to credit,” he added.

All three credit card executives also mentioned an ongoing Federal Reserve System review of credit card rules that already proposes a 45-day notification ahead of any rate changes.

Committee members criticized the industry for varying practices. Included in the criticism was the practice of mailing checks to card-holders, failing to notify applicants that obtaining additional cards could lower their credit score and raise their rates, and “ambushing” card-holders with raised rates.

Ranking minority member of the subcommittee, Norm Coleman said, “families find themselves ensnared in a seemingly inescapable web of credit card debt. They particularly report being saddled with interest rates that skyrocketed on them seemingly out of the blue.”