By Kristina Peterson
Of DOW JONES NEWSWIRES
WASHINGTON -(Dow Jones)- A U.S. Federal Reserve Board advisory panel on Thursday disagreed on how the Fed should allow card companies to set terms as part of credit-card industry changes signed into law earlier this year.
As the start date for President Barack Obama's credit-card reform laws approaches, consumer advocates and credit-card industry leaders are vying to influence the final rules that the Fed must set before the changes take effect in stages, beginning in late August and continuing into 2010.
Consumer groups on the advisory panel want further cardholder protections, while industry executives argue that only flexible, broad regulations will enable them to remain competitive in light of the new legislative changes.
In late May, Obama signed the Credit Card Accountability Responsibility and Disclosure Act, which prohibits credit-card companies from increasing rates retroactively unless a payment is made late. It also requires terms to be spelled out in simple language and makes it harder to impose late fees. The new law leaves it up to the Fed to decide what constitutes a "reasonable fee."
On Thursday, credit-card company representatives said that because they can no longer adjust rates on existing balances, they need to be able to mitigate their losses from defaulting customers - first by setting competitive rates tied to the individual's credit score and later by imposing fees.
"This is an extraordinarily risky product and a lot of the tools to manage risk are being taken away," said Andres Navarrete, a Capital One (COF) senior vice president. "I think we need to retain some tools so we can continue to lend."
But consumer advocates said that credit-card companies shouldn't beef up revenues with penalties for exceeding a credit limit or paying a balance late. Americans pay around $15 billion in penalty fees annually, according to the White House.
"Penalty fees should never evolve into a profit center. They are for guiding conduct," said Thomas James, senior assistant attorney general in the Illinois Attorney General's consumer fraud bureau.
The advisory council presented more unified recommendations to the Fed concerning the new laws surrounding foreclosure prevention. Under the Secure and Fair Enforcement for Mortgage Licensing Act, which was passed last year, many institutions that make loans must license and register all employees that help citizens take out mortgages.
Several members of the council urged the Fed not to license independent foreclosure consultants who have come under attack for profiting off families already in distress.
"We've seen no value added by this for-profit sector," said Kirsten Keefe, an attorney with Empire Justice Center in New York. "Licensing these for-profit consultants would legitimize a business we don't see any legitimacy in at this time."
-By Kristina Peterson, Dow Jones Newswires; 202-862-6619; kristina.peterson@dowjones.com