Credit-Card Bill Advances, But 'Cramdown' Fails

Two consumer-oriented pieces of legislation opposed by the financial services industry suffered radically different fates in Congress Thursday.

A credit card reform bill with enhanced consumer protections was approved in the House by a wide margin, while a so-called cramdown bill—which would let homeowners use bankruptcy court as an alternative to the foreclosure process—was defeated in the Senate.


The difference may be as simple as the level of pubic support from the White House at a time when relations between the administration and the financial services industry are deteriorating amid tension over TARP money, bank stress tests and executive pay.

“There will be a credit card bill,” predicts one well-placed industry source. “It makes sense. Everybody in America understands the issue. If you had to pick a legislative fight, with this you win.”

“For the second time in a week Wednesday, the Obama administration made credit card reform a high profile event, throwing its considerable support behind the legislation, whose provisions include greater transparency and disclosure, protections against fees and penalties and limits on rate increase in particular cases.

Treasury Secretary Timothy Geithner Wednesday met with members of congress, consumer groups and others supporting credit card reform. The Treasury Secretary and the president himself met with credit card industry executives at the White House a week ago.

The credit card legislation—whose sponsors include key committee chairs Sen. Christopher Dodd (D-Conn.), Rep. Barney Frank (D-Mass.), and Carolyn Maloney (D-NY)—now goes to the Senate, where approval is also likely, assuming some level of compromise on the differing proposals. The Senate may take up the bill as early as next week.

Sen. Richard Durbin’s (D-Ill.) cramdown proposal took a less conventional route amid serious headwinds.

The Senate majority whip managed to get a vote on the measure Thursday—as an amendment to a major piece of housing legislation—having struggled to get a stand-alone bill out of the Senate Judiciary Committee, but it was defeated by a vote of 51-45. Almost a dozen Democratic senators voted against it. In contrast, the House earlier this year, passed a watered-down version, which is said to have greater appeal.

Though credit card reform appears to have wide appeal within Congress, the House and Senate versions vary enough that some compromise is expected.

Dodd’s version of the legislation,“The Credit Card Accountability, Responsibility and Disclosure Act," is considered tougher on business than the Maloney-Frank house version, known as the “Credit Cardholder’s Bill of Rights Act", which has many similarities to new Federal Reserve rules that take effect in July 2010.

Differences aside, the credit card legislation has also become something of a high profile and symbolic battle between Democrats and big banks amid the broader drama of the government’s extensive efforts to prop up the financial services industry.

“What you're seeing is a lot of political grandstanding,” says veteran banking analysts Bert Ely of Ely & Co. “This a battle that has been going on for years, with ebbs and flows. Some see this an opportune time to take it up again.”

Like previously imposed limits on executive compensation, the credit card measures are being pushed on the banks partly on the grounds that they have benefited from taxpayer support through the TARP program.

“So many people are hurting and many of the firms have received TARP money," says Rep. Brad Sherman (D-Calif.), a senior member of the House Financial Services Committee.

Similar legislation has failed before, but Sherman likes the chances this time around.

“The only reasons you wouldn’t have a strong bill become law is the 60-vote requirement in the Senate,” says Sherman, who also supports cramdown but it realistic about its chances and wary of its potential negative impact on interest rates. “The TARP money could be one of several factors that add up 60 [votes]," he added.

Another factor, as was the case with the crackdown on executive compensation, is strong public support.

Senate Majority Leader Harry Reid (D-Nev.) Monday said the legislation “will not be real easy to do, but polling numbers indicate that almost 90 percent of the American people want us to do something with credit cards, so it is something we have to do.”

Business opposition also happens to be less virulent than with the cramdown legislation, even if both measures present some of the same concerns.

Kathleen Day of the Center for Responsible Lending, says, “there seems to be a lot of momentum for that [credit card legislation] because everyone has a bad story about a credit card company.

That may be, but with relations between the government and industry strained, it may have come down to the President picking his horse then resorting to the bully pulpit to get it through the Senate.

"Yes,” says Sherman. “It is good policy, good politics and a good use of the President's time.”