Credit-card issuers face new setback in Senate

WASHINGTON (Reuters) - The Senate is expected to vote this week on a measure that would allow states to limit credit-card interest rates, spelling more risk for large banks that are already reeling from several legislative defeats.

Democratic Senator Sheldon Whitehouse said his proposal is likely to come up for a vote in the next several days as the Senate wraps up work on the largest rewrite of financial regulations since the 1930s.

"I think it's got a chance of passage," Whitehouse told reporters. "I don't see any reason why someone in Mississippi or Idaho is any less screwed by an out-of-state bank gouging them 30-plus percent interest rates than someone in Rhode Island or Illinois."

The amendment would allow states to set usury caps on the interest rates charged by credit-card issuers located beyond their borders. Many states have usury laws that cap interest rates far below the punitive rates that some issuers charge delinquent customers.

That could crimp the profits of national credit-card issuers like JPMorgan Chase and Bank of America, which base their credit-card subsidiaries in business-friendly states that have thinner consumer protections.

Community banks and other state-chartered lenders must currently comply with their states' usury caps.

The U.S. Supreme Court in 1978 ruled that state usury laws do not apply to banks that are based elsewhere.

Card issuers suffered a surprise setback last week when the Senate voted to limit the fees they charge merchants on debit-card transactions. That measure was sponsored by the Senate's No. 2 Democrat, Dick Durbin, who also supports Whitehouse's amendment.

Card issuers also face new restrictions under a law passed last year that would ban arbitrary interest-rate increases and require penalty fees to be proportionate to a cardholder's violation.

Analysts say the broader financial-reform bill has taken on an increasingly populist tone amid widespread public disgust with Wall Street.

Whitehouse said it is not clear whether his measure has enough support to pass, especially if Democratic leaders require it to get 60 votes in the 100-member chamber.

"I think 60 makes it a tough slog," Whitehouse told reporters.

The amendment has 16 co-sponsors so far, including one Republican, Thad Cochran.

Senate leaders are expected to wrap up debate on the bill and push for a final vote this week. After that, it must be reconciled with a similar bill passed by the House of Representatives in December before President Barack Obama can sign it into law.

The House version does not allow states to impose their usury caps on out-of-state banks.

(Editing by Leslie Adler)