Senator Chris Dodd takes on the credit card industry

There may be a new playbook for the credit card industry in America. President Obama summoned representatives from 14 banks that issue credit cards to the White House for talks last week. But the legislative engine behind these changes is Senator Chris Dodd, Democrat from Connecticut, who has been pushing credit card regulation for a long time.

In this interview on "The Takeaway," the Senator talks to John Hockenberry about the proposed changes to credit card accountability, responsibility and disclosure that he hopes to push through Congress. This bill would offer new consumer protections, including banning practices such as "any time, any reason" interest rate increases.

John Hockenberry: Let’s talk about first of all about what can be done here. I thought credit cards were already regulated.

Senator Chris Dodd: Well, not really. They are to some degree, I suppose. But some of the rates they charge, you would have gone to jail, this is what would’ve been called usurious rates, almost organized crime rates. What do they call it … loan shark rates, a few years ago. About a year or so ago the Federal Reserve Bank at long last issued some regulations on credit cards which were very positive and moved us in the right direction. But of course those regulations can be changed overnight with a new administration. They don’t go far enough and they don’t go into effect until July of next year. As a result, I’ve tried for over 20 years, but frankly the credit card industry has been very strong, that I’ve never been able to get more than 20 or 30 votes on some of the things that we’re now very close to achieving, which will provide some of the protections that some of your callers have been raising concerns about. And that’s the good news, and I’m grateful the President today is meeting with these credit card companies and issuers, and is going to be supporting, I think, some strong legislative efforts we hope to be able to take in the next few weeks that will finally put some very strong consumer protections on the use of credit cards.

Hockenberry: Now, of course, the credit card industry includes some banks with very familiar names, but it also includes some institutions that have less familiar names. But let’s talk, for instance, about Citibank and Bank of America, we’ve heard those names this morning. It seems to me that on paper the government has assisted Bank of America to get into a situation where it gets money from the Federal Reserve, from the TARP, at about what interest rate, Senator?

Senator Dodd: The rate is, I don’t know, what is it. Four, five, six percent? Something like that. It’s very low.

Hockenberry: Is it even that high?

Senator Dodd: It might not even be that high.

Hockenberry: I think it might be one percent or something, it’s practically free money they’re getting from the TARP, and they’re charging on their Bank of America credit cards interest of 18, 19, 20 percent.

Senator Dodd: To give you an idea, just since March of last year, between March of last year and February of this year, 70 million accounts had their interest rates raised. I’m told that’s like one out of four families. In many cases, the rates were raised, you can read through all the fine print, but at the end of the fine print you’ll commonly find the following language “We reserve for ourselves the right to raise rates at any time for any reason.” And so the stories are not just anecdotal that you’ve heard and that I’ve heard over and over again of people who for years … I had a couple from Connecticut the other day, they were three days late for the first time in 18 years, small business, Samantha Moore and her husband. They did a press conference with me I don’t mind using their names; they wanted them to be used. They were three days late, got a notice that their fees went up from 11 percent up to something like 20 percent and they reduced their credit lines from $31,000 down to $4,000. This is a small business family. So all of the sudden they’re finding not only an increase in rate, but all of the sudden their credit lines have substantially dropped, which means they can borrow less in a critical time. Also putting their credit rating at great risk. If they go over that $4,000, then of course they’ll start getting terrible credit reports and their business is put in further jeopardy. It’s just one example of what goes on every day.

Hockenberry: It’s a great story, but I have to say, Senator, you helped create this situation. When the TARP is available to Bank of America, they get more free money. They can raise interest rates and get more money on the back end. Wouldn’t it have been better to just let Bank of America go down? Let the people default on their balances? They pay less of a penalty for that, maybe there’s a credit card hit or a credit rating hit, but the banks don’t get this windfall profits.

Senator Dodd: We’re drifting off a little bit. The reason for the TARP money was to keep the financial system in play.

Hockenberry: Credit cards are part of the financial system.

Senator Dodd: Well that’s part of it. Credit cards are a great vehicle for some people if they’re properly used and maintained and that is with the banks not charging outrageous rates and so forth, they can really be a great help to people. I’m not opposed to credit cards at all. But there’s a difference here in talking about whether or not you’ve got any banks at all for a financial system to operate, and whether or not credit card issuers are charging rates, and fees, and penalties which are excessive. And I think they are and that’s why we’re passing the legislation.

Hockenberry: What’ the interest rate that you think is appropriate for credit cards?

Senator Dodd: You can see, credit unions, I think, have a cap of 12 percent, 12 or 15 percent. They never go above that. I think that’s a law that doesn’t allow them to go in excess of that. And certainly you can see where people incur great risk of something that a lending institution might want the opportunity to raise some rates. But to raise rates in the level we’re talking about here, as I said, a few years ago those were illegal rates. You could go to jail for charging those rates.

Hockenberry: Even if we do cap it at 12 percent, and again you’re going to be considering a whole range of regulations, isn’t there a fundamental contradiction here in the fact that to get the economy moving again, the Fed, Bernanke, Tim Geithner, you, Barney Frank, are saying we need more credit. We need people to borrow. We need banks to lend. That also runs the risk of getting us back into this situation where people get easily indebted with too-easy credit and we’re back into this bubble situation once again.

Senator Dodd: Obviously people need to borrow, we understand that. People need to consume, we understand that.70 percent of our GDP depends upon consumption. And clearly credit needs to flow again and that’s not working. In order for our financial system to work there needs to be some responsibility. I’m not exculpating, that is, forgiving consumers. Consumers need to be careful as well. But obviously, if you’re losing your job, a major healthcare problem hits the family, and you don’t always have the option of being responsible about this. You’re trying to make ends meet and keep your nose above water. Obviously if you can get credit moving, people can borrow, businesses borrow as a regular matter, for paying their employees, buying inventory. Then they rely on revenues coming in to meet those responsibilities. The financial system and the credit flow is absolutely critical for our economic well-being and stability and confidence-building. So obviously that’s what we’re trying to do. There are various efforts being made by the Obama administration. And I applaud them for trying. The other side is just saying no to everything. That’s a good political answer, but it doesn’t get you very far. So I admire what Geithner is trying to do here. It’s not perfect, it hasn’t worked as well as you or I would like it to work. But we’re seeing some signs that things are getting better. Not great, but some signs of moving in the right direction. And I think that’s what people are looking for and why people, at least at this point, are being supportive of President Obama’s efforts.

Hockenberry: But I think people have the impression that the government is a better advocate for bankers than it is for consumers like the people whose stories you just told.

Senator Dodd: That’s one of the reasons we’ve been talking about this top-down stuff over the last couple of months, and it’s about time we started talking about bottom-up. That is, how do we help consumers meet their responsibilities, not be saddled with over-excessive costs of credit cards and the like. See if we can deal with foreclosure mitigation so people can stay in their homes. Get the rates down, get some of the principle reduced, so we don’t end up with the 10,000 foreclosures a day we’re seeing in this country. I think those measures are critically important.

Hockenberry: And it’s on the agenda, legislatively. Senator Chris Dodd, thank you for joining us from his district of Connecticut. His home state of Connecticut. Thank you, Senator, Dodd.

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