Dan Geldon: Preventing the next meltdown

Pets get applications

Credit card companies have not only ramped up their marketing to staggering levels. Many dead people, tiny babies and household pets have received pre-approved applications. But the first card is followed by mailing after mailing that imposes new rules that allow for hidden and unfair fees and interest rate increases.

These rules have allowed credit card companies to continue increasing interest rates on consumers even as the Fed continues to cut them. Some consumers try to read the paper, but it is hard to figure out all the tricks and traps buried in the legalese.

One of the industry’s most pernicious tricks is called universal default. Most of us know and understand that credit card companies can raise our interest rates when we fail to make a payment. What many of us do not know is that many companies will raise our rates even when we make our payments on time. Under universal default, credit cards can raise their prices based on unrelated activity. If you open a line of credit at the Gap or forget to pay a utility bill, your credit card company can raise your rate.

Under House Bill 1178 — sponsored by Delegates C. William Frick, Brian J. Feldman, C. Sue Hecht and Susan C. Lee — lenders would no longer be able to pull a bait-and-switch on consumers by changing their rates for no good reason.

By enacting the bill, Maryland can take the lead against a largely unchecked industry. This would not only protect consumers in Maryland but has enormous potential to spur Congress to act on a nationwide basis and put pressure on the credit card industry to adopt reforms voluntarily.

Limited enforcement power

States are limited in their ability to take on credit card companies. Under the National Bank Act (NBA), a state cannot regulate the specific interest rates and charges of banks outside its jurisdiction.

However, that law does not prohibit states from regulating the terms of consumer contracts. While some in the Bush administration argue otherwise, a new administration is likely to be more in sync with the letter and spirit of the law on this issue.

Lobbyists for the credit card companies are sure to fight this effort. That’s hardly surprising. In October 2006, just weeks before the now-infamous subprime mortgage meltdown, a lobbyist for the industry testified before Congress that recent lending patterns were ‘‘a positive development, not cause for alarm.” Moreover, he stated that adjustable rate mortgages and other non-traditional mortgage products ‘‘are being effectively underwritten and managed today.”

Today, it is hard to pick up a newspaper without seeing the effects of the collapse of the subprime mortgage market. Over the past year and a half, the country has faced ever-increasing foreclosure rates, sliding housing prices, staggering job losses and shockwaves through the rest of the economy.

Recent reports revealed that the national foreclosure rate jumped 9.1 percent just between December and January, new home sales fell 2.8 percent over the same period, and mortgage underwriter Fannie Mae lost $3.6 billion in the last quarter of 2007.

Without government attention, credit cards could be behind the next meltdown. Professor Warren puts it simply: ‘‘This is a disaster in the making.”

Dan Geldon of Bethesda is a student at Harvard Law School and has interned for the Maryland Senate Judiciary Proceedings Committee and the U.S. Senate Judiciary Committee.