Obama Eyes Credit Card Clampdown
Democrat to Examine Stricter Regulation of Credit Card Interest Rates
By TEDDY DAVIS and SUNLEN MILLER
June 16, 2008 —
When Sen. Barack Obama, D-Ill., spoke about the credit crisis last week, he gave only a hint of the kind of reforms he might seek if elected president.
One of the more ambitious ideas he is considering, according to a campaign spokeswoman, would be to restore government regulation of credit card interest rates. The government has not been involved in interest rate regulation for 30 years, after a Supreme Court ruling blocked states from effectively engaging in the practice.
Obama would "examine ways to more strictly regulate interest rates, and believes such regulation should be done carefully to ensure that we do not harm consumers with unintended consequences," Obama spokeswoman Jen Psaki told ABC News.
Stricter regulation of interest rates would likely provoke a titanic struggle with the credit card industry, which would argue that the government should not meddle in the free market. But advocates of re-regulating interest rates argue that this change is needed to prevent more families from falling into bankruptcy.
As part of his "Change That Works for You" tour, Obama held a roundtable talk in Chicago last week with three consumers apparently gouged by the credit card industry. He was joined at the event by Harvard law professor Elizabeth Warren, the nation's leading advocate of re-regulating credit card interest rates.
"The key is that you need to break the cycle of no regulation," Warren told ABC News. "Currently, the states can't regulate and the federal government won't. So there are two ways to fix that: Either let the states do the regulating or put some regulation in at the federal level."
"Do one or do the other," she said, "because if you do neither, it's the Wild West out there."
Harvard Law School professor David Wilkins introduced Warren to Obama when the Democratic senator from Illinois was getting ready to run for the U.S. Senate in 2004.
Warren, who teaches bankruptcy law at Harvard, said that her first talk with Obama focused on the impact of the Supreme Court's 1978 Marquette decision, which opened the door for banks to "export" interest rates from one state to another.
In her 2003 book, "The Two-Income Trap," Warren explained that the Marquette decision meant that a bank that set up lending operations in South Dakota could issue loans at borrowing rates as high as 24 percent to a family living in New York and circumvent New York's cap of around 12 percent.
After the court's 1978 ruling, banks in South Dakota (and other states with lax lending laws) could collect profits from New York families, and the New York legal system was powerless to stop them.
"The impact of the ... decision was the first conversation he and I ever had," Warren said of Obama. We talked about "the way consumer protections unraveled and the way in which states effectively were barred from protecting their own citizens."
Warren says that she has not directly discussed the reimposition of usury laws with Obama, but she hopes that he will take up the cause if elected.
"I never asked him the question about what precisely do you want to do about it," said Warren. "But I do know that he understands it, and I know that because he told me before I could tell him."
If Obama goes beyond studying ways to more strictly regulate interest rates to actually proposing such changes, credit card companies are sure to argue that such a move would dry up credit for higher-risk borrowers.
Warren dismisses such arguments.
"That is the most astonishing claim that I can imagine a corporate representative making," said Warren. "Let me retranslate it: 'If I can't trick these people and fool these people about the actual cost of credit, then I can't make a profit off of them, and I will stop lending it."
"To state the question is to answer it," she continued.
"The truth is," she said, "I think there is a profit to be made in lending to low-income working families. ... There are lenders who do it every day."
While Obama's current reform package stops short of telling credit card companies what interest rates they can charge, his proposals still go much further in challenging the industry than anything offered by Sen. John McCain, R-Ariz.
For starters, he is proposing to create a five-star rating system for credit cards.
Under the Obama plan, the Federal Trade Commission will assess the degree to which credit cards meet consumer-friendly standards. A credit card's rating will depend on measures such as the spread between the card's introductory rate and the maximum rate allowed.
Obama is also promising to ban rate changes on past debt.
"If a credit card company wants to raise interest rates, then that new, higher rate should apply to the debt you add going forward, not what you already owe," Obama said last week.
He also wants to prohibit "universal defaults," a practice in which a credit card company raises the interest rate on someone who has made every payment on time but who has a problem or late payment with a different creditor.
David Sirota, author of "The Uprising: An Unauthorized Tour of the Populist Revolt Scaring Wall Street and Washington," is disappointed that Obama has not already called for re-regulation of credit card interest rates, and he worries that he might seek a "middle way" between what Sirota called "the profiteers and the people."
But the liberal columnist is hopeful about the inclusion of Warren at last week's Obama event.
"There are a lot of candidates who would not want Elizabeth around them," said Sirota. "Having Elizabeth at an event with him is a very good signal."
ABC's John Santucci contributed to this report