NEWS RELEASE
March 19, 2009
ABA Media Contact: Peter Garuccio    
(202) 663-5452
E-mail: pgarucci@aba.com

ABA TESTIFIES ON CREDIT CARD AND OVERDRAFT PROTECTION LEGISLATION
Emphasizes breadth of new card regulations, challenges of implementation

WASHINGTON – The American Bankers Association urged lawmakers today to consider the impact of newly enacted credit card regulations before moving forward with legislation regarding credit card practices.

Testifying before the House Subcommittee on Financial Institutions and Consumer Credit, ABA Senior Vice President and General Counsel for Card Policy Kenneth J. Clayton emphasized that regulations recently adopted by the Federal Reserve, Office of Thrift Supervision, and National Credit Union Administration expand consumer protections, fundamentally change companies’ business models, and require a complete overhaul of the credit card industry. 

“Regulators have taken unprecedented action in response to consumer concerns over credit cards,” said Clayton.  “These changes have forced a complete reworking of the credit card industry’s internal operations, pricing models and funding mechanisms.”

Specifically, Clayton noted that the rules effectively eliminate practices such as “double-cycle billing,” “universal default” and payment allocation methods that pay off low-rate balances first.  He also noted that the new rules contain several consumer protection enhancements such as extended time for repayment, limitations on up-front fees, 45-day advanced notice before higher rates may apply, and simplified communications between card issuers and customers.

“In sum, the regulation covers the core issues sought to be addressed by H.R. 627, the ‘CreditCardholders Bill of Rights,’” he said.

Clayton further stated that card companies are committed to implementing the new rules as soon as possible, but stressed that doing so is an enormous undertaking, requiring companies to redesign entire risk and operating models that support hundreds of millions of accounts. 

In the notice the three federal agencies submitted to the Federal Register, the regulators emphasized the need for sufficient time for implementation and suggested that too short a period would be a detriment to consumers.  H.R 627 would require the rules to be implemented within 90 days of the bill’s enactment.

“This simply cannot be accomplished in three months,” said Clayton.  “We believe it would be a mistake to move the time period for compliance up in such a dramatic fashion and that such an action will cause undue harm to both consumers and the broader economy.”

If such a proposal were enacted, Clayton said the likely outcome would be operational problems that create billing mistakes and confusion for millions of Americans, a significant pull-back in available credit to protect against underwriting risk that has yet to be adequately assessed, and a potential for an increase in the cost of credit.  This would come at a time when the economy can least afford it.

Clayton also testified on H.R. 1456, the “Consumer Overdraft Protection Fair Practices Act.”  He noted that overdraft protection provides a significant benefit to millions of consumers every day by keeping checks from bouncing and transactions from being denied.

“Consumers value banks’ practice of paying overdrafts,” said Clayton.  “While this service may cost the customer money, as there are fees associated with its availability, in many cases it would cost the customer more to endure the inconvenience, embarrassment, and fees charged by the merchant or payment recipient were the payment to be declined.  It is important to remember that this cost is completely avoidable and consumers can take numerous steps to keep track of their balances and manage the risks associated with over-drafting their accounts.”

Clayton raised concerns that H.R. 1456 would pose operational challenges for banks by requiring significant expansion and modification of network systems and that it may have the effect of reducing the availability of overdraft protection for consumers. 

“This legislation may force banks, including community banks, to refrain from offering overdraft services until the technology catches up with the reality,” he said.  “In effect the bill could prohibit overdraft protection even for customers who want the service.”

Finally, Clayton said that legislation in this area is premature given that the Federal Reserve has issued a proposed rule that addresses the very issues contemplated by H.R. 1456.

“We would urge Congress to refrain from acting and let the regulatory process be completed,” he said.

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For a copy of Clayton’s full testimony click here

The American Bankers Association brings together banks of all sizes and charters into one association. ABA works to enhance the competitiveness of the nation's banking industry and strengthen America’s economy and communities. Its members – the majority of which are banks with less than $125 million in assets – represent over 95 percent of the industry’s $13.6 trillion in assets and employ over 2 million men and women.