May 12 2009

SHELBY ON CREDIT CARD REFORM LEGISLATION

“Mr. President, I rise in support of the Dodd-Shelby substitute amendment.

“Mr. President, nearly every adult American has at least one credit card.   They provide convenience, access and service.  They have become an essential tool for conducting financial transactions in this country. 

“The existing rules governing credit cards, however, no longer strike the right balance between the interests of credit card companies and the consumer.  Credit card contracts are unclear at best and thoroughly confusing at worst.  Card issuers raise rates for unclear reasons, use billing methods that consumers do not understand and assign fees and charges without warning.  The bill seeks to remedy this by providing consumers with greater transparency, fairer terms, and more certainty in their dealings with the card issuers.

“During the Committee markup of this bill, I made it clear that I shared many of Chairman Dodd’s goals with respect to this issue.  For example, I supported prohibiting double-cycle billing, banning the practice of universal default, limiting certain fees and placing some restrictions on credit cards issued to young adults.  I also thought consumers deserved more and clearer disclosure regarding the terms of their agreements.  Finally, I expressed the view that we should codify the Federal Reserve rules in a statute to ensure that they become permanent and not subject to the whims of future regulators. 

“At the markup, however, I indicated that there were some areas where Chairman Dodd and I disagreed.  Most notably, the original draft would have prohibited card issuers from using risk-based pricing for existing cardholders both retrospectively and prospectively.  I did not think it was wise to abandon the concept of risk-based pricing.  Without the means to price for risk, the credit card companies would be forced to impose significant costs on all users of credit because they would be unable to account for the particular risks of an individual borrower.  It would also be much more difficult for card issuers to innovate and create new products and services.

“Mr. President, I believe that credit should be priced according to the risk profile of each individual.  Consumers that prudently manage their use of credit deserve to be rewarded with lower prices and better terms.  Moreover, they should not be forced to subsidize the bad habits of others.  I also believe that markets must have the freedom to adapt to new circumstances and consumer demands.

“In the weeks since the mark-up, I worked with Chairman Dodd to craft a compromise that allowed for the use of risk based-pricing.  The Dodd-Shelby amendment allows card issuers to price risk but requires that they consider both positive and negative changes in the consumer’s risk profile when setting rates and terms.  This means that consumers will pay more when their credit risk goes up and can have their rates reduced when it goes down.   

“Mr. President, in total, the Dodd-Shelby substitute amendment reflects a broad, bipartisan compromise on many of the issues that I raised.  It prohibits double-cycle billing, the practice of universal default and places restrictions on credit cards issued to young adults.  It limits certain fees, provides more robust disclosure and provides consumers with statutory certainty.  It also preserves the fundamental concept of risk-based pricing which is vital to the ongoing function of the credit card market.

“I am hopeful that this legislation has struck a better balance between the needs of consumers and the credit card companies.  I am also hopeful that this balance in design ultimately results in a balance in fact.  To ensure this, I asked that we include a provision that requires the Federal Reserve to track the impact this legislation has on the cost and availability of credit and to report its findings to Congress.  Over time, if the Federal Reserve finds that we have not achieved that balance in fact, we will be made aware and should not then hesitate to make the necessary changes.  

“Mr. President, this legislation addresses some practices that are simply unnecessary.  It gives consumers the chance to have a more equitable relationship with the credit card companies.  It also preserves the basic framework necessary to maintain the function of a very important marketplace.  I look forward to working with Chairman Dodd on this bill, and I urge my colleagues to support the substitute amendment.”