Senate Credit-Card Legislation Could Crimp Issuers' Growth
13 Maggio 2009 - 11:13PM
Dow Jones News
Proposed credit-card legislation would put the brakes on the
ability of issuers to raise interest rates and impose late fees -
the very tools used by card companies to offset rising losses in
the current economic slump.
The rules being debated in the Senate would not only deprive
card issuers of crucial ammunition but also would threaten to crimp
industry growth. One way companies may respond - raise costs for
financially sound consumers. The legislation would also probably
make card companies cut back on lending to less-creditworthy
borrowers.
The new legislation comes at a time when card issuers - such as
Capital One Financial Corp. (COF), Bank of America Corp. (BAC),
Citigroup Inc. (C), Discover Financial Services (DFS) and American
Express Co. (AXP) - are reeling from losses on souring credit-card
debt amid rising unemployment and a slumping economy.
The proposed legislation makes "their business model less
resilient," says Sanjay Sakhrani, an analyst at Keefe, Bruyette
& Woods. "One of the best parts of this business was the
ability to re-price rates based on risk, and that lever will no
longer be available to card issuers a year from now."
The proposed legislation includes a bill that caps interest
rates banks can charge credit-card users. Another would ban card
issuers from raising rates on existing balances unless the consumer
is 60 days late on payment.
An amendment also being debated would make it easier for
retailers to give discounts to consumers who use cash, checks or
debit cards rather than credit cards, depriving banks of lucrative
fees associated with credit-card transactions.
The bill is tougher than legislation the House passed and goes
well beyond new Federal Reserve rules curbing credit-card practices
that will take effect July 2010. The amendments being pushed in the
Senate would add even more restrictions on banks.
Senators so far haven't reached a final agreement on which
amendments will be offered or a plan to move forward on the
bill.
Peter Garuccio, a spokesman at the American Bankers Association,
a trade group, said the legislation "represents a fundamental
change in the way card companies conduct business."
Restrictions on raising rates take away the issuers' ability to
manage risk related to borrowers with patchy credit.
Moreover, in an effort to make up for lost revenue, card issuers
could begin charging annual fees and raising rates on foreign
exchange transactions, which would affect even the most sound
borrowers. Card companies might also scale back lending to those
with shaky credit, as the risk of defaults would outweigh gains if
the card issuer can no longer raise rates to compensate for the
additional risk.
"People who have good credit may have to compensate for people
with bad credit," says KBW's Sakhrani. "People may also find credit
cards not economically viable."
To be sure, card issuers have moved quickly to hike rates ahead
of July next year, when the Federal Reserve's new rules on credit
cards kick in.
Top card companies, including JPMorgan Chase & Co. (JPM),
Citigroup, Bank of America, Capital One and American Express, are
already "raising interest rates on a larger portion of customers
than usual and increasing the number of fees they impose," Joshua
Frank, a senior researcher at the Center For Responsible Lending,
said in a research note Monday. Many cardholders have seen
increases of as much as 10 percentage points or more over their
existing rate, notes Frank.
But there is concern that card issuers acting hastily in an
effort to lessen the impact of the regulation could cause
damage.
"If they re-price too fast or too hard," KBW's Sakhrani says,
"card issuers could tip over struggling borrowers."
-By Aparajita Saha-Bubna, Dow Jones Newswires; 617-654-6729;
aparajita.saha-bubna@dowjones.com
(Jessica Holzer contributed to this report.)