SCHUMER, HARKIN: EVEN WITH CREDIT CARD REFORM LAW IN EFFECT, FEDERAL RESERVE REFUSES TO CRACK DOWN ON HUGE INTEREST RATE SPIKES; SENATORS PRESS BERNANKE TO FULLY ENFORCE LAW BY IMPOSING LIMITS ON PENALTY RATES IMMEDIATELY
In June, Fed Proposed Rules To Implement Credit Card Act Passed By Congress Last Year--But Fed Left Out Curbs on Penalty Interest Rates
Left Unchallenged, Card Issuers Can Continue To Double Or Triple Cardholders' Interest Rate If They Fall 60 Days Behind On Their Payment
Senators Insist Law Covers This Abusive Practice; Promise Legislation If Fed Fails To Act
U.S. Senators Charles E. Schumer (D-NY) and Tom Harkin (D-IA) revealed Tuesday that when the Federal Reserve implemented Congress' landmark credit card reform law last month, it omitted any curbs on interest rate hikes assessed on cardholders who fall behind their payments by more than 60 days. These customers often face a doubling or tripling of their rate - exactly the type of abusive practice that Congress was seeking to stamp out with last year's milestone reform law. In response, Schumer and Harkin pressed Federal Reserve Chairman Ben Bernanke on Tuesday to reverse his decision to leave this practice untouched and immediately propose new regulations curbing such steep hikes. In a letter to Bernanke, the senators said it was clearly Congress' content for this type of practice to be reformed under the Credit Card Act. "We are writing you to express our strong disappointment about the Fed's decision not to regulate penalty interest charges. Penalty interest charges are a dangerous source of abuse where consumers can quickly fall victim to interest charges that spiral out of control. Credit card companies can still double or triple the interest rate when a consumer falls two months behind on payments," the senators wrote. In their letter, the senators pointed to Section 149 of the credit card reform law, noting that it explicitly limited penalty fees and charges to "reasonable and proportional" amounts. The Fed has ample authority, the senators continued, to rein in the practice of socking cardholders with excessive interest rate hikes after their accounts are past due by just 60 days. But while the Fed has not shied away from fully implementing a number of other interest-rate reforms spelled out in the law-including a ban on rate increases in the first year of a cardholder's agreement and a requirement that the card issuer provide 45 days notice before a rate increase can be assessed in later years--the Fed has maintained that reforms to so-called "penalty interest rates" fell outside its authority under the "reasonable and proportional" provisions of the statute. In their letter, Schumer and Harkin said that if the Fed continued to cling to this restrictive interpretation, they would pursue the legislation on their own clarifying the Fed's authority to regulate this practice. "If the Federal Reserve adheres to its previous interpretation that this provision somehow precludes you from implementing curbs on these abusive practices, we plan to seek legislation making explicit the Fed's authority in this area. We hope this is not needed. But during these difficult economic times, consumers need to be protected from further credit card abuse," the senators wrote. A copy of Schumer and Harkin's letter appears below. July 20, 2010 Honorable Ben Bernanke Chairman, Federal Reserve Board 20th Street and Constitution Avenue, NW Washington, DC 20551 Dear Chairman Bernanke, We commend you and your staff on the new rules issued by the Federal Reserve Board last month pursuant to the Credit Card Act passed by Congress in 2009. Some of the worst practices of credit card companies, such as late charges and other penalties are finally reined in. Banks can no longer charge a late fee larger than the payment due, inactivity fees, or multiple penalty fees for a single violation. However, we are writing you to express my strong disappointment about the Fed's decision not to regulate penalty interest charges. Penalty interest charges are a dangerous source of abuse where consumers can quickly fall victim to interest charges that spiral out of control. Credit card companies can still double or triple the interest rate when a consumer falls two months behind on payments. It was the clear intent of Congress in the Credit Card Act of 2009 that penalty interest charges be subject to the "reasonable and proportional" provision of Section 149, which states that "[t]he amount of any penalty fee or charge...in connection with any omission with respect to, or violation of, the cardholder agreement, including any late payment fee, over-the-limit fee, or any other penalty fee or charge, shall be reasonable and proportional to such omission or violation." We respectfully ask the Federal Reserve to issue rules regulating penalty interest charges pursuant to the "reasonable and proportional" standard of the Credit Card Act of 2009. If the Federal Reserve adheres to its previous interpretation that this provision somehow precludes you from implementing curbs on these abusive practices, we plan to seek legislation making explicit the Fed's authority in this area. We hope this is not needed. But during these difficult economic times, consumers need to be protected from further credit card abuse. We appreciate the work you and your staff are doing, and we look forward to working with you on these important issues. Sincerely, Senator Charles E. Schumer Senator Tom Harkin