BOSTON -(Dow Jones)- 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