WASHINGTON U.S. President Barack Obama signed into law on Friday sweeping reforms that restrict credit card interest rates and fees, marking a victory for Democrats trying to help recession-weary consumers and a setback for banks seeking to retain sorely-needed revenues.
The law is expected to hurt profits of major card issuers such as Citigroup Inc, Bank of America Corp, JPMorgan Chase & Co and Capital One Financial Corp. Banks say the changes may cut the flow of credit to consumers because it will make it more difficult for issuers to set rates based on the risk their customers pose.
"With this bill we are putting in place some common sense reforms designed to protect consumers," Obama said at a signing ceremony at the White House.
"We're not going to be giving people a free pass and we expect consumers to live within their means and pay what they owe. But we also expect financial institutions to act with the same sense of responsibility that the American people aspire to in their own lives," he said.
Enactment marks the crest of a backlash against the card industry after years of rate and fee hikes and aggressive marketing programs that have angered consumers, analysts said.
The law largely codifies a set of rules issued by the Federal Reserve last year and puts them into effect in February 2010, five months sooner than the Fed had planned.
It also represents the first major financial regulation reform completed by Obama as he tackles a rewrite of the rules of banking and the markets to better protect consumers and investors, and prevent another credit crisis.
The same day Obama signed the law, banks were also hit with a one-time $5.6 billion fee by the Federal Deposit Insurance Corp to replenish its dwindling deposit insurance fund. The FDIC could impose additional fees later if needed.
A SIMPLER PRODUCT
The American Bankers Association, which represents the biggest credit card issuers, said the law will transform the credit card industry.
"It will be a very different product, a lot simpler product which is what people want," ABA President Ed Yingling told Reuters. "It does change the economics. It's now a longer-term loan, it's not a short-term loan any more."
The law sharply restricts credit card issuers' ability to raise interest rates on existing balances, to charge certain fees and to slap cardholders with penalties. Cardholders will now get a 45-day notice before their interest rate is changed.
The industry could potentially lose about $15 billion in penalty fees each year, according to White House estimates.
The new law will also help consumers carrying card balances as long as they don't fall behind on payments by more than 60 days. After 60 days, their rates may increase.
Americans owed more than $945 billion in credit card debt in March. The amount has fallen during the current recession but credit card indebtedness is still about 25 percent higher than a decade ago.
The reforms won wide backing among lawmakers, who said constituents were tired of hidden charges from card issuers -- especially from those U.S. banks that received billions of dollars in taxpayer bailouts.
"Today is the day we finally make credit card companies accountable to their customers and responsible for their actions," said Senate Banking Committee Chairman Christopher Dodd who shepherded the bill through the Senate.
RATES MAY RISE
But banks say the reforms come at a cost.
Banks have repeatedly warned higher interest rates are likely to result because it will be more difficult to set rates based on the risk that customers pose. The higher rates mean less credit available for consumers, they say.
The industry is already experiencing heavy losses from the 90 million households that carry cards. The losses are expected to worsen as the year goes on.
"A lot of consumers have a false sense of security they're going to get relief," said Curtis Arnold, founder of CardRatings.com in Little Rock, Arkansas. "The average rate now is 13.8 percent, and I could see it going north of 15 percent by early next year."
Issuers can try to make up lost revenue from customers who are new or have good credit -- about one-third of U.S. cardholders generally pay their bills on time.
Banks may also reduce credit limits, or make it harder to obtain card-affiliated rewards, Arnold said. And others may return to charging an annual fee, now charged by only one in five cards, he said.