Inflation Pressures Are Easing but Rate Cut Forecast Remains Uncertain

The New Year is beginning where the old one ended -- with uncertainty about when – or whether – the Federal Reserve will begin cutting interest rates.

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Subcommittees in the House and Senate have approved measures expanding credit card protections for consumers and eliminating many now common industry billing and marketing practices.

In the House, the Financial Institutions Subcommittee of the Financial Services Committee voted to send a “Credit Card Bill of Rights” for card-holders to the full committee, which is expected to endorse the measure and send it to the floor for final approval.  

Before a voice vote approving the bill, the subcommittee accepted on key amendment extending its effective date from 90 days to one year after enactment or until June 30, 2010, whichever is later.  The longer implementation period matches the schedule for the new credit card regulations the Federal Reserve has approved, addressing one of the major concerns credit unions and other financial institutions have expressed about the proposed credit card bills.  The delay represented “a significant victory” for credit unions, Ryan Donovan, vice president of legislative affairs for the Credit Union National Association (CUNA), said in a press statement.  Industry executives testifying at hearings on the legislation, he noted, had emphasized the need for adequate time to reprogram their computer systems and otherwise adjust to the new policies and procedures the legislation mandates.   

Rep. Carolyn Maloney (D-NY), the bill’s sponsor, agreed with consumer advocates that the demand for more time was “a delaying tactic” designed to avoid as long as possible restrictions financial institutions oppose.  But Rep. Luis Gutierrez (D-IL), who proposed the longer timetable, was persuaded by the industry’s arguments.  

“I, too, think the industry should move as quickly as possible to implement these long overdue changes,” Gutierrez, who chairs the Financial Institutions Subcommittee, said before the panel’s vote. “But I think a one-year implementation period that will not exceed beyond July 1, 2010, is more realistic.”

The subcommittee defeated several other bids to limit the reach and soften the impact of Maloney’s bill, including a credit union proposal for a 21-day billing cycle rather than the 25-day cycle the legislation requires and two amendments proposed by Rep. Jeb Hensarling (R-TX).  One would have delayed implementation of the legislation until the Fed certifies that the new requirements would not boost consumers’ credit card interest rates, as industry executives have warned; the other would have allowed issuers to increase rates retroactively, on existing charges, if borrowers failed to make their minimum payment 3 times in a 12-month period.   

The House bill, which Maloney has been trying to advance for the past two years, mirrors in key respects the regulations the Federal Reserve has adopted, using its authority under the Federal Trade Commission Act to define “unfair and deceptive acts or practices.”  The Maloney bill and the Fed’s rules bar double-cycle billing and universal default (where a default unrelated to the credit card can trigger an increase in the card rate); prohibit issuers from increasing the rate on existing card balances; and require them to give consumers 45 days’ notice before raising interest rates on future purchases.    

The measure approved by the Senate Banking Committee goes even further.  In addition to retaining an earlier implementation date (nine months after enactment) the legislation bans penalty fees that are not justified by a company’s direct costs, requires issuers to apply payments to a consumer’s highest-interest-rate balances first, and limits their ability to impose higher rates on “high-risk” borrowers. 

In an effort to secure the support of credit unions and  banks, or at least to soften their opposition, Dodd added to his bill provisions establishing a five-year timetable for restoring the National Credit Union Share Insurance Fund and increasing the NCUA’s borrowing authority from $100 million to $6 billion, with additional emergency borrowing authority up to $18 billion.  A separate provision triples the FDIC’s permanent borrowing authority to$100 billion, with an emergency cap of up to $500 billion.  

Despite those sweeteners, financial institutions continue to oppose the bill, and the slim (12-11) party line vote suggests that the measure will face tough going in the Senate, where some moderate Democrats may join Republicans in opposing it, putting the 60 vote margin needed to prevent a filibuster beyond reach.   

Sen. Tim Johnson (D-SD), the lone Democrat on the Banking Committee to oppose the measure, signaled the coming floor battle, arguing that the restrictions on card issuers “would harm consumers, not help them.  In the current economy many consumer are already feeling the pinch of tight credit policies,” Johnson said during the Banking Committee debate.  Increasing the regulatory burden on credit card issuers “could mean even fewer consumers [will be able to] get credit, and [many existing] credit lines will be greatly reduced.”   

Sen. Richard Shelby (R-AL), the influential ranking member on the Banking Committee, made the same point, warning about the risk of adopting policies that “further weaken our nation’s economy by unnecessarily choking off access to credit.”  But Shelby also signaled his willingness to compromise and his support for some of the legislation’s key features, including a “firm prohibition” on double-cycle billing and a ban on universal default.  Shelby also said he would be willing to support some restrictions on credit card promotions targeting “young adults,” which Dodd’s bill would severely limit.  But he drew the line firmly against provisions limiting risk-based pricing policies, arguing that bankers need the tools to manage their risks.   “Otherwise,” he told American Banker, “[they] will need to limit credit [to consumers] or be forced to operate in an unsafe and unsound manner.” 


It’s not hard to understand why credit card issuers are resisting legislation that would curb abusive practices; a recent study by the pew charitable Trusts concluded that virtually every card in the country has at least one feature that would be deemed “unfair and deceptive” under the regulations the Federal Reserve has approved that would be codified and expanded by pending legislative proposals (see related item above). 

Based on a review of 400 cards offered by 12 of the country’s largest issuers, the study found widespread examples of practices that “place American consumers at risk of sudden, potentially drastic price increases [that] can seriously impair a household’s stability and spending power.”  

Not only are these common industry practices harmful to consumers, the study found, they aren’t essential to the credit card industry, the profitability of which could be sustained “with the adoption of transparent, predictable pricing practices….Strong universally applicable laws provide the surest means of protecting cardholders and eliminating pressures for issuers to compete through unfair and deceptive practices,” the study argued.   

The study urged Congress to “act now” to enact legislation barring practices the Fed has defined as “unfair and deceptive,” and to go beyond the Fed rules to prohibit entirely or restrict penalty interest rates and to bar mandatory arbitration requirements in card holder agreements. Additionally, the study recommended that legislators require issuers to adopt “responsible and transparent” fee structures and apply payments to the highest-rate balances first.  

The federal regulations targeting unfair and deceptive practices won’t take effect until the middle of next year, the study notes.  “Meanwhile, millions f American families will pay hundreds of thousands of dollars each in unanticipated fees and charges as a result of these unfair practices.”  Immediate Congressional action is needed, the study said, because “only Congers’ can prevent these burdens from straining household budgets.”  


Americans don’t have much confidence in the ability of financial institutions retailers or government agencies to ensure the security of their personal data.  A recent study commissioned by CA Inc. found that only 8 percent of the respondents think their personal data is adequately protected.  More than half (58 percent) think financial institutions don’t spend enough on on-line security; 68 percent and 72 percent or the respondents, respectively, had the same complaint about government agencies and retailers.   

The survey results indicate clearly that “it doesn’t take much to shake consumer confidence,” Lina Liberti, vice president of CA Security management, said in a press release.  

On the other hand, it is equally clear that consumer concerns about data security are well-founded.  Nearly one-quarter of the respondents said they have been victims of identity theft, and nearly half said they know someone who has been victimized.  A separate study commissioned by the Identity Theft Resource Center of San Diego (ITRC) found that reports of data breaches increased by 50 percent last year compared with the year before, putting more than 3.5 million consumers at risk of identity theft.  The ITRC calculated 656 reported breaches last year, 37 percent of them at businesses and 20 percent at schools. 

Human error – loss or theft of laptops or inadvertent posting of private information on-line – was the single largest cause of data breaches, according to the ITRC report, responsible for 35 percent of the incidents.  Computer hacking and the theft of software accounted for 19 percent of the reported breaches.  

These statistics probably understate the extent of the problem, according to Lind Foley, co-founder of ITRC, who told the Wall Street Journal that many companies either don’t report breaches at all or don’t disclose the number of consumer records exposed.  


Consumer advocates and payday lenders have found some common ground:  Both oppose proposed federal legislation imposing restrictions on the sort-term, high-cost loans marketed primarily to lower-income consumers.  Payday lenders think the restrictions are too severe and will impede their ability to offer an alternative source of credit to borrowers who need it; consumer advocates think the proposed curbs don’t do nearly enough to protect vulnerable consumers from the “debt trap” they say payday loans create.  

The legislation at issue, sponsored by Rep. Luis Gutierrez (D-IL), chairman of the Financial Institutions Subcommittee of the House Financial Services Committee, would impose a 15 cents-per-hundred dollars limit on the fees payday lenders could charge.  Consumer advocates point out that actually represents an APR of 391 percent, well in excess of the rate caps imposed by several states that have moved aggressively to regulate payday loans. 

Industry executives argue that most payday loans are short-term – two weeks or less – so the annual rate computation is misleading.  The Gutierrez bill, which also prohibits automatic “rollovers” of payday loans “goes too far,” D. Lyn DeVault, president of the Community Financial Services Association, an industry trade group, said in a press statement.  The bill, he added, reduces the maximum rates set by 24 states, “but does nothing to protect lenders from having their fees cut from the bottom end, even to the point of extinction in any state.”

The CFSA argues that the bill would preempt state laws, to the detriment of the industry trade group representing the payday loan industry, but consumer advocates counter that it would undermine successful consumer protection initiatives in many states. 

“While the rate cap authorized by this bill does not preempt lower state caps,” Jean Ann Fox, director of financial services for the Consumer Federation of America, testified at a recent hearing, the Congressional sanctioning of “triple-digit payday rates,”  she argued, will undercut momentum for state laws restricting payday operations.   

Testifying on behalf of several consumer advocacy groups, Fox added, “This legislation authorizes a predatory loan model that is the norm for state payday loan regimes and f ails to provide substantial new protections in the states where payday lenders now operate under safe harbor carve-outs from state usury or small loan laws.” 

In a subsequent interview with American Banker, Fox suggested that while publicly opposing the Gutierrez bill, the payday industry privately supports it as a less detrimental alternative to more stringent measures adopted by many states and proposed in other pending federal legislative proposals.    “I have no doubt [payday lenders] would be very pleased if Congress gave this bill a seal of approval,” Fox said.  

Industry executives say that is hardly the case, noting that the CSFA is planning to raise more than $1 million from members to finance a lobbying campaign to block the bill.  The industry also opposes an alternative bill, backed by consumer advocates and sponsored by Rep.  Jackie Speier (D-CA) in the House and Sen. Dick Durbin (D-IL) in the Senate, that would impose a blanket 36 percent cap on all forms of consumer credit.  “That would shut the industry down period,” an industry spokesman told American Banker.   

Gutierrez, for his part, says he is not trying to undermine stronger state payday loan restrictions, as consumer advocates contend, but to craft federal legislation that can win approval, to extend protections to all consumers, not just those in states that have enacted payday lending laws. 

If the status quo continues, Gutierrez said in a press statement, “[Consumers in] some states would have adequate protections from payday lenders, and others would continue to be at the mercy of the most unscrupulous actors in the industry.”   


Remember avian flu?  Well, hardly anyone else does, either.  The fear that a flu afflicting birds would morph into a human virus that could infect millions and cause medical and economic chaos worldwide, has largely receded, as reports of human avian flu infections have declined and concerns about global economic ills have dominated the headlines.   

But a recent report by the Government Accountability Office (GAO) warns that a pandemic of some kind remains a viable and serious global threat, making the contingency planning the GAO and international health experts have been urging more of a priority than it has become for businesses and federal, state and local government agencies.  

Financial industry regulations require credit unions and banks to develop contingency plans for dealing with a pandemic, but previous reports have found that many institutions have not complied fully with those directives.  The new GAO study found that of the 23 recommendations the agency has made for the National Pandemic Implementation Plan, only 13 have been implemented. “Continued leadership focus on pandemic preparedness remains vital,” the GAO said, “as the threat has not diminished.”