Credit-Card Reform Bill Introduced in the Senate
April 1, 2008

Warning that the nation’s collective credit-card debt threatens to be the “next subprime loan crisis,” Sen. Robert Menendez (D-N.J.) introduced legislation on March 12 to curb and control a litany of practices of the credit-card industry. While praising the NSBA-supported Stop Unfair Practices in Credit Cards Act of 2007 (S. 1395), introduced by Sens. Carl Levin (D-Mich.) and Claire McCaskill (D-Mo.), and the Credit Cardholders' Bill of Rights Act of 2008 (H.R. 5244), introduced by Rep. Carolyn Maloney (D-N.Y.), Menendez claimed his legislation would be the “high watermark bill.”

While generally supportive of Menendez’s bill, NSBA is highly concerned with one of the bill’s sections. On a positive note, the Menendez bill, the Credit Card Reform Act of 2008 (S. 2753) includes most of the credit-card reforms called for by NSBA. The bill would:

  • Prohibit the practice of universal default,
  • Prohibit the practice of double-cycle billing,
  • Prohibit the retroactive application of interest rate hikes
  • Limit the interest rate percentage increases that card issuers can impose on holders (to seven percentage points),
  • Prohibit extra interest charges on card debt that the cardholder already paid in full,
  • Require penalty fees to be reasonably related to the cost that the issuer incurs as a result of the consumer's action,
  • Prohibit late fees if an issuer’s action caused a delay in crediting a payment, and
  • Stipulate that payments made by the postmarked date would not be subject to a late fee.

    • The bill also would force card issuers to abide by one of the most basic tents of the free market by prohibiting them from unilaterally altering the terms of a credit-card agreement while it is in force.

    The bill seeks to improve the disclosure practices of the credit-card industry. It requires issuers to spell out their loan agreement terms more clearly in advance and bans “bait-and-switch” tactics by requiring “pre-approved” credit card offers to be true offers, which spell out the actual interest rate, fees, and amount of credit a cardholder is being offered.

    Unfortunately, the bill does not conclude there. In an attempt to save consumers from themselves—-likely aimed primarily at students and seniors-—section 6 of the legislation would require credit-card companies, before issuing a credit card, to verify an applicant’s ability to pay. The ability to pay would be based on an applicant’s current and expected income, current obligations, and employment status, using a formula provided by the Federal Reserve Board.

    The effect of such a provision on America’s small-business community could be deeply damaging, as it effectively could preclude credit cards as a source of funding for small-business owners. Considering that 44 percent of small- and mid- sized business owners identify credit cards as a primary source of financing-—more than any other source, including business earnings—-such a move could hold dire consequences for America’s economy, which is highly reliant on small-business job creation.

    An ardent proponent for credit-card reform, NSBA urges Congress to remain vigilant of any unintended consequences arising from the enactment of credit-card reform legislation. If legislation has the affect of greatly restricting the availability of credit-card capital to America’s small business--which the Menendez bill surely would do--the effects on the economy could be highly adverse and the effects on individual entrepreneurs and communities could be devastating.

    NSBA already has met with Menendez’s staff to relay its concerns with section 6 of the bill, and will continue working on ways to appropriately address the problem.

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