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Debate Rages Over Effective Date of New Credit Card Laws

On Wednesday, Federal Reserve Chairman Ben S. Bernanke said that moving the effective date of new credit card laws up may help consumers but would take a toll on small issuers and lead to other economic troubles.

This week, the House Financial Services Committee will decide whether to move the effective date of the legislation up to December 1, 2009 from the end of February 2010. The law, which was passed in May, is intended to curtail the abusive practices of lenders.

Responding to a question from Representative Spencer Bachus of Alabama, the leading Republican on the Financial Services committee, Bernanke commented, “Moving the act’s effective date to December 1, 2009, could benefit consumers by providing important protections earlier than scheduled (including protections against applying increased rates to existing card balances).”

However, he also conceded that issuers have to make sweeping changes in order to comply with the new legislation, and cautioned that smaller providers may find it challenging to meet a moved-up effective date. The Federal Reserve, the Chairman says, still believes that “card issuers must be afforded sufficient time for implementation to allow for an orderly transition and to avoid unintended consequences, compliance difficulties and potential liabilities.”

The impetus to expedite the implementation of the new lending rules comes in response to some card issuers scrambling to increase minimum payments and retract offerings in preparation for the new regulations. A study conducted by the Pew Charitable Trust discovered that interest rates have increased by 20 percent on average on cards that account for more than 91 percent of the $864 billion in U.S. credit card debt.

The new laws basically prohibit interest rate increases on existing outstanding balances except when a cardholder has not made a minimum payment for at least 60 days. The legislation bars costly double-cycle billing, mandates 45 days’ notice prior to any interest rate increases, and bans interest increases at any point during the first year that a card is activated.

The new law also compels companies to dedicate the cardholder’s monthly payment to the outstanding debt with the largest interest rate.

The financial industry, including most creditors and lenders, vehemently opposes an earlier effective date, arguing that such a decision would cause chaos in the credit card industry. This is not the first time the new rules have encountered opposition. Critics have argued for months that the new laws shift costs from irresponsible cardholders to responsible cardholders.