by by Leona Rusenblum

illustration by by Max Dunfey

If the credit card industry is ignored in the current sub-prime crisis and bailout package, there's "a new financial meltdown" looming on the horizon­­--at least according to Rhode Island's Senator Sheldon Whitehouse's September 22 Senate address. The Senator has been joined by the majority of the House of Representatives in the worry that companies that extend credit to individuals with no credit or poor credit--only to slam them with high interest rates and late fees--are creating a situation with consequences eerily similar to the current sub-prime crash.

Though credit card companies have always turned a profit with hidden fees, variable interest rates and penalties for late payments, Whitehouse and others are convinced that the current situation is worse than ever before. According to a letter to the US Senate written by a coalition of consumer, civil rights, small business and labor organizations on September 24, "Rising mortgage costs have also pushed families to pay for necessities on their credit cards, such as food and medical care. Media reports indicate that some families are even forgoing payments on their mortgage loans in order to maintain a means of paying for these necessities." In one example reported by the Providence Journal in July, a woman faced compounded interest rates of 23-29 percent because she was forced to put her mortgage payments on her credit cards and was then penalized for being unable to pay her credit card bills on time.
The reason that Whitehouse, other lawmakers and economic pundits fear a credit card crisis stems from the fact that credit card debt is distributed and sold to investors in the same way that sub-prime mortgage loans infamously were. Investment banks package credit card debt as 'bundles' of securities and sell them to investors. And in the same way that subprime mortages were attractive to investors due to the high returns that come from high interest rates on risky investments, credit card borrowers with poor credit provide seemingly quick and easy ways to exponentially expand investment capitol. Therefore, credit card debt is owned by many investors, and too many credit card defaults would damage credit card companies as well as the banks, portfolios and hedge funds that have invested in the securities.
Despite these hypotheses, according to a September 16 article in Marketwatch, "the national credit card delinquency incidence rate (the ratio of borrowers 90 or more days past due) continued to decline for the second quarter in a row." The picture is mixed, however, with evidence in the same Marketwatch report that while delinquency rates may have fallen, "national credit card debt per credit card borrower increased 2.63 percent to $1,717 from the previous quarter's $1,673, and 8.6 percent compared to the second quarter of 2007 ($1,581)." According to Federal Reserve data, credit card debt was $211 billion in 1989. This year it is up to $951.7 billion, an 8.2 percent increase from a year ago.
This fear of a new round of institutional implosion that Whitehouse addressed in his speech also has also been worrying Congresswoman Carolyn Maloney, Democrat of New York. She introduced the Credit Cardholders Bill of Rights as a bill in the House of Representatives back in February, and put the bill up for a vote in the House on September 23. The bill was passed by a 312-112 margin, with only one Democrat (Herseth Sandlin of North Dakota) voting against. And North Dakota, as the state with no laws against usury (defined as the lending or practice of lending money at an exorbitant interest), is the favored headquarters of credit card companies. Alex Swartsel, spokesman for Senator Whitehouse, told the Independent that the Senator "also plans to introduce legislation that would restore to the states the ability to enforce usury laws to defend their citizens against credit card abuses by lenders based in other states."
According to her press materials, Maloney's bill protects cardholders against the misleading terms and billing methods currently employed by companies. Swartsel explained that "Representative Maloney's bill (H.R. 5244) takes an approach similar to that of Senator Dodd's Credit Card Accountability Responsibility and Disclosure Act of 2008 (S. 3252), of which Senator Whitehouse is an original cosponsor. Both H.R. 5244 and S. 3252 would prohibit some of the most egregious practices of the credit card companies, such as "double-cycle" billing, a practice under which banks charge interest even on debt paid on time."
A 'Credit Cardholders Bill of Rights' is also a component of the Obama-Biden economic platform. Their version of the bill, according to their press materials, would ban unilateral changes, apply interest rate increases only to future debt, prohibit interest on fees, prohibit "universal defaults" and require "prompt and fair crediting of cardholder payments."
As consumer advocacy and civil rights groups are pressuring the Senate to include a version of the Credit Cardholders Bill of Rights in the Wall Street bailout package, all eyes will be on Biden to see how he straddles the divide between his record on credit card companies and his current platform. According to an August New York Times profil, MBNA (a major credit card corporation based in Delaware) is Joe Biden's single biggest supporter, having donated $214,000 since 1989.
In addition to questionable dealings over the sale of Biden's house to a senior MBNA executive and the hiring and pay package of Biden's son, the senator has also come under fire for his staunch support of the 2005 law that made it significantly more difficult for consumers to declare bankruptcy. Championed by MBNA and other credit card companies, as well as senators including John McCain, the bill is said to have contributed to the spiraling effects of the sub-prime crisis as debtors could not declare bankruptcy in order to avoid foreclosures. Obama has been campaigning on the need to revise the bill in order to protect citizens suffering during hard times, and has attacked McCain for his support of the bill.
With all the pressure on the Senate to reach an agreement on the bailout package, it seems unlikely that the Credit Cardholders Bill of Rights will be passed right now as part of the deal. As seen by the dramatic market reaction to the House failure to pass the bailout package on Monday, the need for haste is likely to limit the scope of debate on the bailout legislation, making it harder to insert an extra provision like this one. Swartsel added, "While Senator Whitehouse would be inclined to support H.R. 5244 if it were brought to a vote in the Senate, it has not been included in the financial recovery package. It's unclear whether the inclusion of this measure would have had any effect on the outcome of the vote in the House."
Even though this issue may not be passed into law during the legislative process over the crisis, the statements of Senator Whitehouse and the rest of the Rhode Island delegation are adamantly committed to the idea that the bailout cannot simply involve Wall Street, but must include 'Main Street' as well. As US Representative of Rhode Island Patrick J. Kennedy put it in the Providence Journal on September 20, "I cannot go home to Rhode Island and say I'm going to vote for something to bail out AIG, Bear Stearns, Merrill Lynch, I can't go home and see middle-class families paying double-digit rates on credit cards to these very banks we're bailing out ... They're not going to buy that."

LEONA ROSENBLUM B'09 is made of solid gold.