Debating Financial Services Reform

WASHINGTON, D.C. - The U.S. Senate Banking, Housing and Urban Affairs Committee Tuesday aired President Barack Obama's proposal to broaden financial services reform measures before Congress to include restrictions on the trading practices and market share of commercial and investment banks.

Senate Banking Committee Chairman Christopher Dodd, D-Conn., opened the hearing saying that the financial meltdown "nearly toppled the American economy" which has lost more than 7 million jobs. "Billions of dollars in wealth and GDP are gone," he said, adding that such a crisis "can't happen again."

White House Economic Advisor Paul Volcker, also a former Federal Reserve chairman, testified before the Senate Banking pushing for prohibitions that would stop commercial banks, that both hold insured deposits and conduct investment activities, from engaging in high-risk trades.

"It's a question of what risks are going to be protected by the federal government," Volcker said, adding that the government and taxpayers do not have to shoulder risks that should be borne by shareholders.

“Hedge funds, private equity funds and trading activities unrelated to customer needs, unrelated to continuing banking relationships, should stand on their own, without the subsidies implied by public support for depository institutions,” he said.

President Obama surprised the banking industry when he signed on to Volcker's stance. Ranking Committee member Sen. Richard Shelby, R-Ala., said the crackdowns on speculative trading were "air-dropped" into the overall negotiations on financial overhaul that have been going on for months.

Shelby said the goal of final legislation should be to eliminate taxpayer exposure to private risk.

The American Bankers Association has come out in favor of establishing a systemic risk regulator that would not be involved in day-to-day operations and creating a mechanism to systemically unwind too-big-to-fail institutions, while keeping a narrow range of circumstances that would trigger government intervention.

Dodd said critics of reform proposals say the limits would not have prevented the crisis that took down Lehman Brothers. Volcker agreed but said stricter regulations would prevent future calamities.

Deputy Treasury Secretary Neal Wolin, who also testified Tuesday, supported a universal ban on all banks - not just commercial institutions - that would prevent using separate trading desks to speculate on commodities such as oil or certain securities.

President Obama's policy approach would "lay the foundation for a more stable financial system," Wolin said.

Regulatory changes discussed Tuesday were not a part of sweeping legislation passed by the U.S. House of Representatives in December. The Senate has yet to coalesce around a bill that would have to be reconciled with the House version before advancing to the President for signature into law, Dodd said.

Another hearing will convene Thursday with testimony from industry players and folks in academia, Dodd said.

Check back with Fi$callyFit for updates...

U.S. Senate Votes to Expand Homebuyer's Tax Credit and Extend Unemployment Benefits

U.S. Sen. Christopher Dodd's office announced late Wednesday that the Senate passed legislation to extend the $8,000 tax credit for first-time homebuyers and create a $6,500 tax credit for so-called "move-up" buyers who purchase before April 30, 2010.

Qualifying move-up buyers are those who already own a home that has been their principal residence for 5 years or more; are 18 years or older; have incomes of up to $125,000 for an individual tax return or $225,000 for a joint return. The homes must cost less than $800,000 and homebuyers with binding contracts as of April 30 will also qualify for the credit if they complete the transaction within 60 days.

Dodd, a Democrat representing Connecticut, was an original co-sponsor of the bill, which would provide 14 additional weeks of jobless benefits for Connecticut workers.

"This is a double victory for families in Connecticut," Dodd said. "Extending unemployment insurance benefits will help Connecticut families make ends meet in a tough economy. And thousands more middle class Connecticut residents may now be eligible to take advantage of the successful homebuyer's tax credit. By helping unemployed workers keep from falling further behind, and helping middle class families get ahead, we're taking positive steps to get our economy back on track."

Dodd was joined in announcing the Senate action by U.S. Sen. Johnny Isakson (R-GA) .

Members of the military, military intelligence, and foreign service who are on qualified extended official duty are not subject to the recapture fee and individuals who have been deployed overseas for 90 days or more in 2008 or 2009 can claim the credit through April 30, 2011.

New Credit Card Protections Taking Effect

Phases of federal legislation known as the CARD Act (Credit Card Accountability, Responsibility and Disclosure), signed by President Barack Obama in May, take effect Aug. 20 that change rules related to notification to consumers.

Credit card issuers must give card holders 45 days notice, up from 15, before any increases to interest rates, fees or finance charges; and before any other significant changes to an account. The present requirement is 15 days.

If you get such a notice, you may shop around for better rates or, under the CARD Act, you are allowed to reject the rate increase by closing down the credit card account. A caveat is that you would have to pay off the balance within five years at your existing interest rate.

There is another consumer benefit kicking in.

Card holders must receive their monthly billing statements 21 days before the due date in order for credit card companies to charge a late fee, rather than the current leeway of only 14 days.

“The new rules of the road established by the Credit CARD Act will shield credit cardholders from widespread abusive practices. New protections will give American families more time to pay their credit card bills every month, and time to shop around for a better deal if their rate is being raised,” U.S. Senate Banking Committee Chairman Christopher Dodd, D-Conn., said in a statement.

Dodd introduced the legislation to Congress.

Credit card companies, however, have been trying to offset likely drops in revenue that would result from the CARD Act provisions by eliminating fixed rates and implementing variable interest rates only; introducing annual fees on cards that did not charge them; and raising other charges such as balance-transfer fees, said Bill Hardekopf, chief executive officer of Lowcards.com and author of the Credit Card Guidebook.

Lowcards.com is a Web site that allows consumers to compare terms and rewards offered by various credit card companies and to keep up to date on credit card industry news.

Hardekopf hosted a live chat with the New Haven Register on Aug. 12 about the legislation and how credit card industry changes affect consumers.

Dodd said the first set of provisions are "important first steps" for American consumers. “Unfortunately, some credit card companies are trying to squeeze their customers before the clock runs out on ‘any time, any reason’ rate increases. These companies will be held accountable for rate hikes when the full Credit CARD Act takes effect.”

The CARD Act will go into effect fully in February 2010.

Dodd has asked Federal Reserve Chairman Ben Bernanke to enforce a provision that requires credit card companies to review accounts every six months if they raised the interest rate. If the credit card holder has improved his or her credit standing and the circumstances causing the increase no longer exist, then companies must reduce the rate.

Click here for a summary of the CARD Act.

Interest-ing

Credit Card Interest Rates Rising Ahead of Rule Changes

There are about six weeks left before some provisions of the new Credit Card Accountability, Responsibility and Disclosure (CARD) Act go into effect. The federal legislation was sponsored by U.S. Sen. Christopher Dodd, D-Conn., and signed by President Barack Obama in May.

One of the key regulations to kick in Aug. 20 applies to interest rate hikes. Credit card issuers will then be required to give consumers 45 days notice before going up on rates, a substantial increase from the 15 days required now.

Bill Hardekopf, chief executive officer of Lowcards.com, said the 45-day mandate will give approximately two cycles' worth of time for consumers to shop around and change cards if they desire.

This may be small comfort to the many cardholders who have experienced interest rate hikes over the past year, as issuers seem to be raising rates before new rules are implemented, he said.
"Issuers realized that change was coming and they have raised rates, cut limits and changed practices quickly and frequently in advance of the regulations going into effect, just as they said they would do," said Hardekopf, also author of The Credit Card Guidebook.

As of Aug. 20, credit card companies also must start mailing or delivering periodic statements 21 days or more before the payment due date in order to charge a late fee.

Lowcards.com reviewed some of the practices that credit card companies have initiated in advance of the new law.

One of the "harshest" changes reported by Lowcards.com was recently announced by JP Morgan Chase, increasing the minimum payment percentage from 2% to 5% for some cardholders, which more than doubles their monthly payment.

For example, if the balance is $8,000, then the minimum payment at 2% is $160. The payment jumps to $400 at 5%.

While a higher minimum payment forces cardholders to pay off their debt faster and thus saves them money in the long run, this increase could make the minimum payment unaffordable for some consumers and could damage their credit scores.

"If this is effective and reduces risk for one issuer, expect other issuers to follow," Hardekopf said.

Dodd, who is chairman of the Senate Banking Committee, on Thursday sent a letter to the heads of key regulatory agencies directing them to write and enforce robust rules requiring credit card companies to review rate increases imposed on their customers since January 1st of this year.

Most of the provisions of the CARD Act take effect after Jan. 1, 2010. Among other changes, the law bans practices such as universal default and sets parameters on the issuance of cards to college students.

Here are some other changes, already implemented by card companies, noted by Lowcards.com:
* Simmons Visa Platinum is moving from a fixed rate to a variable rate. The current annual percentage rate or APR will remain at 7.25%, but it will now be variable. In addition, Simmons is moving from an 8.95% fixed rate to a 9.25% variable rate. Both changes take effect today, July 10.
* IberiaBank has received attention for having one of the lowest rates available. However, the bank raised its low rate from 6.25% to 8.25%, effective June 26.
* Bank of America increased the balance transfer fee from 3% to 4% on June 1.
* Chase increased its balance transfer fee and cash advance fee to 5% effective in August. Both fees are the highest in the industry.
* Both Bank of America and Chase announced that they will be moving a number of their cards from fixed rates to variable rates.
* At the beginning of June, Chase restructured its rewards program. It launched the Ultimate Rewards, a program where cardholders earn one point per $1 spent, with no earnings cap or expiration date.

This will replace versions of its Freedom card, some of which have offered more generous cash-back rewards and bonus opportunities. The Freedom cardholders who want to keep a fixed 3% bonus for spending in grocery, gas and fast-food categories, will pay a $30 annual fee for the card.

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A New Way to Get 'Carded'

Connecticut Restricts Credit Card Marketing to College Students

Connecticut Gov. M. Jodi Rell Wednesday announced her signing of a bill that regulates credit card marketing on campuses to college students and restricts debt collection actions that can be taken by credit card companies against parents.

Rell said the new law sets strict parameters on when, where and how credit card companies may attempt to attract young adult cardholders. “Students are already burdened with education loans by the time they leave college. They risk taking on even more financial pressure when they give in to the lure of credit cards made available to them right on campus,” the governor said.

The move was lauded by state Rep. Ryan Barry, D-Manchester, House chairman of the General Assembly's Banks Committee and a sponsor of the legislation.

“College students are targeted by credit card companies because they are easy prey and active consumers. Since college students are generally new to managing debt obligations, spending can easily get out of hand and cause serious future credit rating problems,” Barry said.

House Bill 6483, An Act Concerning Credit Card Offers on College Campuses requires the Boards of Governors of Higher Education to adopt a policy, on or before Jan. 1, 2010, requiring credit card companies to register with colleges and universities before conducting any business on campus.

Provisions of the law:

· Prohibit credit card companies from marketing during orientation and class registration periods;
· Require companies to distribute credit care management education materials along with marketing information;
· Prohibit companies from offering gifts and incentives at athletics events as part of their marketing strategy;
· Prohibit colleges and universities from selling student names and addresses to credit card companies.

It also bans credit card companies from trying to collect a student’s debt from his or her parent unless the parent agrees in writing to be liable for the debt.

“Connecticut is leading the charge against unfair and deceptive credit card practices,” said U.S. Sen. Christopher Dodd, D-Conn. “These strict regulations, coupled with the tough new protections against predatory practices established by the Credit CARD Act, will go a long way towards ensuring that Connecticut college students don’t fall prey to the tricks and traps of credit card companies.”

Dodd sponsored federal legislation - the Credit Card Accountability, Responsibility and Disclosure Act - which President Barack Obama signed into law in May.

Susan Bruno, a certified public accountant and principal of Beacon Wealth Consulting LLC in Norwalk, Conn., said she has a daughter in college and believes it is a good idea for students to build a credit history responsibly.

"Credit cards have caused a sense of over-spending because it's so easy," she said.

Parents would be in a better position to teach their children financial literacy and help protect their children's credit scores if they can have access to credit card account activity, Bruno said.

"There is a question of privacy. Similarly to transcripts, we pay the tuition bills, but we don't get to see the grades. We have to ask her to show that to us," Bruno said. "How can we teach financial literacy if we don't know what's going on? You can't."

The American Bankers Association, an industry group that represents credit card issuers, said that as a co-signer, a parent would not be able to receive copies of monthly statements. But joint accounts allow both the primary cardholder (i.e. the student) and the co-signer (i.e. parent or guardian) to access the account, including online.

Joint borrowers usually designate who would receive statements, the ABA said.

The federal CARD Act bans universal default, double-cycle billing, retroactive rate increases unless the cardholder is delinquent by 60 days or more and over-the-limit fees unless the cardholder chooses to exceed the limit. It also requires credit card companies to post their card agreements online and mandates notice of 45 days before rate increases are imposed.

Anyone under 21 must show proof of ability to repay the debt before getting a card or complete a certified financial literacy course.

Card issuers also are prohibited from charging customers a fee for paying a bill by telephone or Internet.

Coming tomorrow: Some provisions of the CARD Act go into effect next month.