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BANKS & CREDIT
CARD COMPANIES SUE TO BLOCK
NEW CALIFORNIA CONSUMER PROTECTION LAW
Consumers Union
Says Suit Is Designed to Keep Credit Card Users
in the Dark About the Costs of Long Term Debt
Sacramento, CA - Last year, the financial services industry worked with consumer groups to draft a new California law designed to help credit card users better understand the costs associated with long-term debt. This year, these same banks and credit card companies have gone to court to stop the law from going into effect.
"This lawsuit is designed to keep consumers in the dark about how expensive it is to carry a lot of credit card debt each month," said Shelley Curran, Policy Analyst with Consumers union's West Coast Regional Office. "It is outrageous that these financial institutions have gone to court to scuttle this consumer protection law because they essentially drafted the framework for the entire bill." The law in question, AB 865, was sponsored by Consumers Union and introduced by Assembly Speaker Bob Hertzberg.
Earlier this month, a group of banks and credit card companies filed suit to block the law from taking effect on July 1, so that they can get around a new requirement to disclose the costs that consumers will incur if they make the minimum payment on their credit cards each month. The new disclosure requirement was a compromise proposal signed into law after the financial industry lobbied Governor Gray Davis in 2000 to veto a stronger version of the bill. Among the banks suing to stop the new law is Citigroup, which drafted the outline of the compromise. No financial institutions opposed the compromise proposal when it was considered and adopted by the California legislature last year.
The new law requires credit card companies to disclose on customer bills the total costs and length of time it will take to retire credit card debt of $1,000, $2,500, and $5,000 if a consumer makes just the minimum payment. Consumers who make the minimum payment for six months will receive this information based on their exact outstanding balance. Credit card companies are also required to maintain a toll-free telephone number to call a "live" customer service representative so that individualized minimum payment information can be obtained.
All of these provisions were contained in an amended proposal drafted by Citigroup lobbyists after they succeeded in winning a veto of AB 1963, a tougher disclosure law passed by the California legislature in 2000. In his veto message about AB 1963,
Governor Gray Davis urged the legislature to develop a new bill that would embody certain basic principles, all of which were contained in the Citigroup proposal. And that's exactly what the legislature enacted the following year.
Now, however, the banks have sued to keep the law from going into effect. The lawsuit claims that the new state law is preempted by the National Bank Act and that national banks cannot be required to abide by state laws that impede their business. It also alleges that the California law violates the commerce clause by significantly impeding interstate commerce.
"The only thing this law impedes is the ability of banks to rip off consumers with high interest rate payments," said Curran. "This is actually a very modest disclosure requirement developed after countless meetings with industry lobbyists to accommodate their concerns. But the banks are clearly worried that if consumers are armed with better information about the costs of long-term debt, they'll make smarter decisions when it comes to using their credit cards."
Personal credit card debt and bankruptcies have reached all-time highs in recent years. Personal bankruptcy filings increased 15.2 percent to 1.46 million during the one year period from March 31, 2001 to March 31, 2002. According to the Federal Reserve Board, consumer debt excluding mortgage loans reached $1.7 trillion in March of 2002. And the average household carried nearly $8,400 in credit card debt last year.
"Many credit card holders are lulled into a false sense of security by making the minimum payment on their accounts," said Curran. "But by doing so, they end up paying far more in interest than the costs of their actual purchases. California's new law will help consumers realize the true cost of long term credit card borrowing and allow them to make more informed financial decisions for their families."
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Consumers Union, publisher of Consumer Reports, is an independent, nonprofit testing and information organization, serving only the consumer. We are a comprehensive source of unbiased advice about products and services, personal finance, health, nutrition, and other consumer concerns. Since 1936, our mission has been to test products, inform the public, and protect consumers.
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