House Financial Services Committee Holds Hearing on Credit Card Interchange Fees Act of 2009 and Expedited CARD Reform for Consumers Act of 2009

Today, the House Financial Services Committee held a hearing to discuss the Credit Card Interchange Fees Act of 2009 (H.R. 2382) introduced by Rep. Peter Welch (D-VT) on May 13, and the Expedited CARD Reform for Consumers Act of 2009  (H.R. 3639), introduced by Rep. Carolyn Maloney (D-NY) on September 24.  Briefly, H.R. 2382 would amend the Truth in Lending Act to prohibit specified electronic payment system network practices, particularly involving interchange fees, and would direct the Federal Trade Commission (FTC) to prescribe regulations to, among other things, ensure that the rules, terms, and conditions to which a merchant or consumer is subject under an agreement with an electronic payment system network are neither unfair nor deceptive to consumers and merchants, nor anticompetitive.  H.R. 3639 would effectively move up the implementation date of the remaining provisions of the Credit Card Accountability Responsibility and Disclosure Act of 2009 (Credit CARD Act) from February 22, 2010 and August 22, 2010, respectively, to December 1, 2009.

In his opening remarks, Chairman Barney Frank (D-MA) lauded Bank of America's recent commitment not to implement changes to consumer credit card account terms ahead of the February 22 effective date of the Credit CARD Act, and emphasized the importance of moving the implementation date up to December 1, 2009, in light of recent practices to change cardholder terms since signing of the Credit CARD Act in May 2009.  In response, Rep. Jeb Hensarling (R-TX) stated that, before Congress considers either H.R. 3639 or H.R. 2382, "we need to take a very careful look at where we are in the economy," and that he is "very concerned" about the impact and "unintended consequences" of both pieces of legislation on small businesses that rely on credit and credit cards, noting that the Credit CARD Act in particular is a "bad bill" by "eroding risk based pricing" in the industry.

Testifying before the Committee were the following witnesses:

Panel One:

• Rep. Peter Welch (D-VT)
• Rep. Bill Shuster (R-PA)

Panel Two:

• Kathy Miller, Board Member, Vermont Grocers’ Association
• David Evans, Lecturer, University of Chicago Law School
• Mark Caverly Executive Vice President, Local Government Federal Credit Union on behalf of CUNA and the Electronic Payments Coalition
• Ed Mierzwinski, Senior Fellow, Consumer Program, U.S. PIRG
• Ann D Duplessis, Liberty Bank, Senior Vice President, Retail Banking, Marketing and Sales on behalf of the Independent Community Bankers of America
• Mallory Duncan, Senior Vice President and General Counsel, National Retail Federation on behalf of the Merchants Payments Coalition

Panel Three:

• Ruth Susswein, Deputy Director, National Priorities, Consumer Action
• Kenneth J. Clayton, Senior Vice President and General Counsel, ABA Card Policy Council, American Bankers Association
• Todd McCracken, President, National Small Business Association
• Anthony Demangone, Senior Compliance Counsel, National Association of Federal Credit Unions
• Nick Bourke, Manager, Safe Credit Cards Project, The Pew Charitable Trusts

Rep. Welch and Rep. Shuster, as co-sponsors of H.R. 2382, both expressed concerns about "monopolistic" practices surrounding credit card interchange fees, in particular the need to "level the playing field between consumers, small businesses, and credit card companies" through greater transparency and the prohibition of "unfair and abusive practices when it comes to interchange fees." Rep. Shuster expressed particular disdain toward credit card companies that have increased interchange fees to subsidize "premium" credit card reward programs at the expense of certain consumers and merchants. 

The witnesses on Panel Two were clearly split on their view of the practicality and value of interchange fees. Ms. Miller described the "huge burden" interchange fees have on the profitability of small businesses, and the "lack of control" over the fees assessed when her business receives credit cards as a form of payment.  Mr. Mierzwinski endorsed the legislation as "address[ing] anti-competitive credit card company practices that keep merchant interchange fees higher than the market should allow and also prevent merchants from offering consumers lower-priced choices." Likewise, Mr. Duncan "enthusiastically" endorsed H.R. 2382 as a means "to bring some fairness to the interchange fee system," describing interchange fees as an "on-going antitrust violation" and "cartel" costing merchants and consumers "tens of billions of dollars annually."  Rep. Hensarling expressed particular concern over Mr. Duncan's "antitrust" accusations and left open the question why, if interchange fees are an "antitrust" violation, the courts have not taken action.

Mr. Caverly, on behalf of the Credit Union National Association and the Electronic Payments Coalition, strongly opposed H.R. 2382 on the grounds that interchange fees provide "more competition in the issuing market," consumers will "either pay more for cards and banking services or, even worse, have fewer options for cards," and if  a merchants' financial responsibility for the card system is "reduced unreasonably by legislative interference," amounts will be "padded to the merchants’ earnings and not experienced as savings by consumers."  Similarly, Ms. Duplessis said that H.R. 2382 places a "burden" on consumers, while acknowledging that the payment card system is "not cost-free to operate, and it is not self-sustaining," noting interchange is a "key component to maintaining the viability of the system, while ensuring that costs are allocated fairly between consumers and merchants." In response to questions from Committee members, Ms. Dupliessis noted that the proposed legislation may "eliminate the consumer protections inherent in the current payment card systems," by allowing merchants to “prefer” large issuers' credit cards over smaller issuers' cards.

Panel Three shifted focus to the proposal to fast track the implementation of the Credit CARD Act.   Ms. Susswein noted that her organization, Consumer Action, strongly supported H.R. 3639’s earlier effective date for the Credit CARD Act and described actions taken by card issuers since its passage as “exploitative.”  Based on the results of a 2009 survey conducted by Consumer Action, she specifically noted that card issuers had “arbitrarily increased rates, spiked fees and hiked minimum payments” with “no rational reason.”

Mr. Clayton, on behalf of the American Bankers Association, noted that card lenders were working vigorously to implement the protections of the Credit CARD Act and that some provisions, such as the interest rate increase restrictions, were already implemented, but stated that full implementation by the December 1 deadline contemplated by H.R. 3639 is a “practical impossibility,” is “not adequate for the task at hand and ... consumers, small businesses and the American economy would suffer as a result.” Moreover, a December 1 implementation would require an investment of several hundred million dollars and thousands of man-power hours.  He also cited that technological solutions to the implementation do not yet exist, and small issuers would be hit the hardest. In particular, Mr. Clayton expressed concern that a December 1 implementation deadline would also negatively impact the holiday season and gift card sales, and that increased costs on issuers would inevitably result in higher fees.  In response to questions from Rep. Mel Watt (D-NC), Mr. Clayton asserted that it was “impossible” to comply with the proposed implementation date and would mean a “rewrite” of the way card issuers do business. 

Mr. McCracken stated that the most significant problem with the Credit CARD Act was the "absence of explicit protection for small businesses," since the Credit CARD Act is limited to consumer credit cards.  He noted that small businesses, which typically create the bulk of jobs in a recovery and are often financed with credit cards, have seen credit card lines cut by $1.2 trillion in the last two years, with 10% of cards issued having been cancelled. 

Mr. Demangone noted that credit unions were being burdened by lending law changes drafted only with large financial institutions and issuers in mind.  He warned that credit unions will not be able to bring their systems into compliance by December 1, and emphasized that Congress must be "mindful" of the compliance costs for credit unions and that there should be sufficient time between Congress passing a law and implementation of that law.

Rep. Emanuel Cleaver (D-MO) noted a “coincidence” between the increase in interchange fees at the same time that the implementation deadline approached, noting that overdraft fees were $24 billion, up 35% over the previous year.   In response, Mr. Clayton argued that interchange fees were not rising, and distinguished them from overdraft fees, and that in his view, the correlation between the increase in interchange fees and overdraft fees was in fact "coincidental."  The Committee members continued to press the witnesses on whether there was any correlation between interchange fees and increases in overdraft fees.  Mr. Demangone denied any connection and further warned against increasing the layers of regulatory oversight imposed on card issuers.