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STATEMENT: Strongest Legislation Yet to Rein in Out-of-Control Costs Announced by Senator Menendez

"Credit Card Reform Act" Will Put the Brakes on Wild Interest Rate Hikes, Changes in Terms of Agreements and Extreme Penalties

WASHINGTON — As an increasing number of Americans fall victim to out-of-control credit card costs and as the credit card market begins to resemble the subprime mortgage market from when the foreclosure crisis began, U.S. Senator Robert Menendez (D-NJ) today announced a sweeping plan to put an end to deceptive practices and irresponsible marketing. The Credit Card Reform Act goes beyond any other current legislative proposal in curtailing skyrocketing interest rates, curbing sudden changes in credit card agreements, and restricting issuance of cards to consumers who don't have the ability to make payments, along with other deceptive practices undertaken by some credit card companies.

The Credit Card Reform Act has the backing of 11 major consumer groups and unions, which have signed a letter of support to Senator Menendez. Joining him to announce the legislation today were representatives from the Consumer Federation of America, National Consumer Law Center, Consumer Action, Demos and NCLR. Also joining the announcement was East Rutherford, New Jersey resident Tarek Salib, whose personal story of a skyrocketing interest rate represents the hundreds of calls and letters that have flooded the Senator's office from consumers struggling because of deceptive credit card practices.

Senator Menendez said, "Too many families feel like their credit card contracts are booby-trapped. Credit card companies use a layer of fine print to conceal all kinds of trap doors: take one false step, then your credit rating plummets and your interest rate shoots through the roof. This bill that represents the strongest, most comprehensive effort yet to end some of the most egregious practices of credit card issuers, while making sure that Americans young and old don't so easily fall into financial traps. The big principle behind this bill is: companies should be clear about the rules up front, and shouldn't change them in the middle of the game.

"We cannot allow predatory and deceptive practices in the credit card industry to continue as we did in the subprime mortgage market. We cannot allow the credit card problem to become the next foreclosure crisis."

Travis B. Plunkett, Legislative Director, Consumer Federation of America said, "The Consumer Federation applauds Senator Menendez for introducing important legislation to stop credit card companies from using traps and tricks to unjustifiably increase fees and interest rates. As the economy teeters on the brink of recession and many debt-choked families find it harder to get by, it is high time that credit card companies use some responsibility in the way that they extend credit and price their product."

Lauren K. Saunders, Managing Attorney, National Consumer Law Center said, "American families struggling in today's economy shouldn't be slapped with huge, retroactive interest rate increases that bury them deeper in debt instead of helping them to manage their finances and keep their homes.  Credit card companies often increase rates on purchases already made for no apparent reason other than to make up for their loses in the mortgage market or to punish a consumer for minor slips such as paying late a couple of times.  That's just not fair."

Linda Sherry, Director of National Priorities, Consumer Action said, "It's outrageous that companies claim they are using sound risk-based pricing principles when they hit consumers with exorbitant hair-trigger fees and enormous, unjustified rate hikes-at any time, for any reason. It makes no sense to increase the interest rates of customers who are having a hard time with their debt load while still allowing them to go over-limit. This system is broken and Consumer Action supports Sen. Menendez' efforts to fix it."

Caleb A. Gibson, Advocacy and Legislative Coordinator, Demos said, "Due to steady deregulation of the credit card industry, financial bargaining power has been heavily tilted toward the lender, making it harder for families to get out of debt and back on the path to savings.  Since 1989, credit card debt has shot up by 315 percent — to over $900 billion dollars — while savings rates have dipped to their lowest point since 1934.  It is time for Congress to stand up against usurious practices and give families a real chance to get ahead."



The Credit Card Reform Act would end some most egregious credit card practices that continue to lure Americans young and old into financial traps, such as excessive fees, retroactive rate increases, universal default, unilateral changes to credit card agreements, and deceptive credit card offers. 

Creates Opt-In for Underage Consumers
Requires credit card issuers to receive "opt in" approval from young consumers under age 21 before they mail credit card solicitations to these consumers. 

Prohibits Unilateral Changes in Credit Card Agreements
Prohibits credit card issuers from changing the terms of the credit card agreement.

Prohibits Universal Default
Prohibits credit card issuers from increasing a cardholder's interest rate based on activity unrelated to their credit card agreement--for example, a late payment on another bill or a change in credit score.

Ban on Retroactive Rate Increases
Prohibits interest rate increases on existing balances.

Limits Penalty Interest Rate Increases
Limits penalty rate increases to a seven percentage point increase.

Limits Late Payment Fees
Requires issuers to state clearly on a billing statement the postmarked date and the amount of the late payment.  Does not allow late fees or other adverse consequences for payments made by the postmarked date. 

Makes Fees Reasonably Related to Cost 
Requires that any penalty fee, such as a late payment fee or over-the-limit fee not exceed an amount that is reasonably related to the cost that the issuer incurs as a result of the consumer's action.

Requires Verification of Ability to Pay
Credit card issuers may not offer credit or raise credit limits to consumers unless they determine that the consumer will be able to make the scheduled payments under the terms of the agreement based on their current income, obligations, and employment status.  The Federal Reserve would provide the appropriate formula for determining ability to pay.

Ban on Deceptive Credit Card Offers
Stops bait and switch tactics by requiring pre-approved offers to be a true, firm offer containing the material terms such as interest rate, fees, and amount of credit; requires such offers to be honored by the issuer.

Bill is endorsed by: Center for Responsible Lending, National Consumer Law Center, Consumer Action, Consumer Federation of America, National Council of La Raza, Consumers Union, U.S. Public Interest Research Group, Demos,  Service Employees International Union, and National Association of Consumer Advocates.