By Scott Talbott, The Financial Services Roundtable

The 2009 and the 111th Congress are both well under way. The Dow has dropped precipitously, and consumers and businesses are both struggling with the recession, job losses and high debt levels. Policymakers in Washington are responding to the economic pressure by focusing on helping consumers: Congress has passed a stimulus bill and is further considering actions in consumer arenas while President Obama is in the process of rolling out a mortgage relief plan to help troubled homeowners.

The political mood in Congress and the country towards financial institutions is captured by the Chairman of the House Financial Services Committee, Barney Frank (D-MA). “We’re in a situation now where people perceive the federal government as being nicer to the banks than they deserve,” he said. “That means that efforts to try to write some consumer protection get less political opposition.”

Update on UDAP

At the end of 2008, the joint rule proposed by the U.S. Federal Reserve Bank, the Office of Thrift Supervision and the National Credit Union Administration that imposed new restrictions on credit cards under the Unfair and Deceptive Acts or Practices Act (UDAP) is now final and will become effective in July 2010. These final regulations will increase regulatory and compliance burdens by applying the following provisions to card practices:

• Increasing the amount of time consumers have to make a payment on an outstanding bill

• Dictating how excess payments are used to pay off balances with differing APRs

• Prohibit credit institutions from applying increased APRs to the outstanding balance on a credit card account

• Preventing fees on credit holds

• Preventing double-cycle billing

• Limiting the amount of security deposits and fees

• Requiring that when credit institutions make a firm offer of credit, it must disclose the criteria that will determine whether consumers receive the lowest APR or the highest credit limit.

UDAP Part II — Congress Responds

Even though the UDAP regulations are final, Chairman Frank has stated that his work on reforming the regulatory structure will include cards and will include stronger consumer protections. In late April, the House of Representatives passed U.S. Rep. Carolyn Maloney’s (D-NY) bill, H.R. 627, the Credit Cardholders’ Bill of Rights Act of 2009, by a vote of 327-70. The bill codifies the Fed’s UDAP credit card regulations. The committee added a number of amendments that increased disclosures, limited credit limits for cards issued to students and required an opt-in for over-the-limit-fees.

The full Senate is working on its S. 414, the Credit Card Accountability, Responsibility and Disclosure Act of 2009. This is Chairman Chris Dodd’s (D-CT) credit card reform bill that the Banking Committee reported out by a vote of 12-11. The vote in the Committee went along party lines with the exception of U.S. Sen. Tim Johnson (D-SD), the only Democrat to vote against the bill. The major provisions, opposed by the industry are:

• Requires interest rate increases to apply only to future credit card debt

• Requires payments to be applied first to the credit card balance with the highest rate of interest, to minimize finance charges

• Requires that payment at local branches be credited same-day

• Prohibits the charging of interest on credit card transaction fees, such as late fees and over-the limit fees

• Requires issuers to lower penalty rates that have been imposed on a cardholder after six months if the cardholder commits no further violations

• New restrictions on fees and expiration dates on gift cards or prepaid cards

• Places new restrictions on applications from people under 21

Other Issues

Interchange Fees: Last year the House Judiciary Committee reported out a bill to create an anti-trust exemption and allow merchants to negotiate directly with banks on interchange fees. During the vote in the committee, significant numbers of both parties voted for and against the bill, which is an unusual result. For 2009, the interchange issue is still nebulous.

The issue was also raised during the previously mentioned March credit card hearing, but an interchange bill has not yet been introduced. Supporters on both sides of the issue have taken out ads to promote their viewpoints. Due to the bipartisan opposition, it will be difficult to move an interchange bill on its own, so watch for supporters who may try to attach it to another bill.

Internet Gambling Rules: In 2008, the U.S. Treasury and the Federal Reserve finalized joint rules to implement the Unlawful Internet Gambling Enforcement Act of 2006. The Act prohibits gambling businesses from knowingly accepting payments in connection with unlawful Internet gambling, including payments made through credit cards, electronic funds transfers and checks.

The joint final rules require U.S. financial firms that utilize certain payment systems to establish and implement policies and procedures that are reasonably designed to prevent payments to gambling businesses in connection with unlawful Internet gambling. For purposes of the rule, unlawful Internet gambling would generally cover the making of a bet or wager that involves use of the Internet and that is unlawful under any applicable federal or state law in the jurisdiction where the bet or wager is initiated, received or otherwise made. These final rules will be effective as of Dec. 1, 2009.

The financial services industry has a number of concerns with the law and the joint final rules; namely that they place the industry in the role of enforcer, rather than as an intermediary. The industry is also concerned that the rules are vague, do not provide adequate safe harbors and that the implementation time period is too short.

Chairman Frank is preparing a bill that would end the current ban of Internet gambling. The card industry supports this legislation.

Heartland Breach: Last year, Heartland Payments Services announced one of the largest data breaches on record that compromised its 250,000 businesses, millions of card customers and 100 million transactions a month. The breach was caused by a piece of malicious software that was planted on Heartland’s payment processing network and recorded data as it was being sent for processing to Heartland by thousands of the company’s retail clients. Committees of jurisdiction are exploring the matter. The industry could see new security requirements imposed on it as Congress works to protect consumers, with possible responses from the government — including more law enforcement activity and better sharing of information. The card industry is wary of broad, industry-wide, one-size-fits-all encryption mandates.

Interest Rate Caps: A number of bills have been introduced to set the maximum interest rate for a consumer transaction. These bills cap the rate at 36 percent or a set percentage plus the current yield on the 30-year Treasury bond. The bills would amend section 107(a) of the Truth in Lending Act (15 U.S.C. 1606(a), which defines “applicable annual percentage rate.” The bills include any costs and fees incurred in connection with the extension of such credit. Our industry is opposed to these bills.

As the recession wears on and the spotlight focuses on financial services, the 111th Congress is working to increase restrictions to protect consumers. The challenge will be to separate politics from policy to ensure adequate safeguards for consumers, without stifling the cost or availability of credit.

About the Author 

Scott Talbott is a senior vice president for government affairs for the Financial Services Roundtable, a trade association representing 100 of the largest financial services firms in the country. He is based out of Washington, D.C.