Advocate happy credit-card companies called on the White House carpet

Kathleen Keest cheered quietly last week as an issue she has toiled on for decades - unfair practices by the credit-card industry - finally made it to center stage in the grand theater of U.S. politics.

President Obama had invited card-company executives to the White House to discuss legislation he supports that would crack down on practices such as tricky fine print and sudden, retroactive changes in interest rates.

"The days of any-time, any-reason rate hikes and late-fee traps have to end," Obama said after meeting with the executives, whose companies include banks such as Citigroup and JPMorgan Chase that have received billions of dollars in federal bailout funds.

It was a singular moment to Keest and other advocates who have struggled for years to make the case against such practices to a bipartisan coalition of bank-friendly Republicans and Democrats.

"I think Obama understands - and may be the first person in a long time in the White House to understand - that debt at any price is not good for households and may well not be good for the economy," Keest said Friday.

The nation's credit-card debt, which totals nearly $1 trillion, is a tricky subject for policymakers who have been trying since last year to shore up the nation's shakiest banks.

On one hand, the banks argue that the recession and joblessness are boosting default rates and chargeoffs, and that they need to respond to market conditions and use credit-card revenue to bolster their balance sheets.

On the other hand, consumer advocates and their allies in Congress argue that recent moves by some card companies to raise interest rates or minimum payments for customers in good standing have put millions of consumers at additional risk of default.

In fact, shortly after Thursday's meeting at the White House, two leading Democrats, Sens. Chris Dodd of Connecticut and Charles E. Schumer of New York, publicly urged the Federal Reserve to take emergency action to protect credit-card customers from what they called "outrageous rate increases."

In a letter to Federal Reserve Chairman Ben Bernanke, the senators accused the companies of raising rates now to deflect the impact of new federal regulations scheduled to take effect July 1, 2010. The new rules will curtail some of the card companies' most-criticized practices - including one Obama singled out, that of "any-time, any-reason rate hikes" not triggered by cardholders' delinquencies.

Under the new rules, companies will no longer be able to apply such increases to existing balances. Dodd and Schumer want the Federal Reserve to invoke its emergency powers and impose that limit immediately.

"Consumers describe situations to our offices in which the interest rates on their accounts have doubled or tripled overnight, without any misconduct on their part," Dodd and Schumer wrote. "This kind of practice clearly violates the spirit and intention of the rules, even if the delayed implementation date has the effect of making such behavior legal."

Federal Reserve officials had no immediate response. However, when they announced the new rules in December, they said the industry needed the long lead time to adjust.

The legislation that Obama endorsed last week, which would write the new Federal Reserve rules into law and put additional restrictions on credit-card companies, also offers substantial lead time. But to Keest and other advocates, the changes are already overdue.

Keest has a long perspective on the subject. As a lawyer at Boston's National Consumer Law Center, and then as an Iowa assistant attorney general, she watched as paying with plastic moved from the financial margins to a central role in people's everyday lives.

As senior policy counsel at the Center for Responsible Lending, which she joined in 2004, she watched as credit-card debt soared toward its current stratospheric heights. But she was more concerned about another piece of data - evidence that credit-card debt was fueling the problem that the North Carolina Advocacy group focuses on: predatory mortgage lending.

In 2005 alone, Keest says, Federal Reserve data showed that Americans used nearly $144 billion in cash from mortgage refinancings to repay other debt - mostly credit-card debt, she says. That was nearly as much as the $169 billion they took from refinancings that year to pay for actual home improvements.

"More than $140 billion in credit-card debt just vanished into mortgage debt," she says.

Paying off credit-card purchases with home equity might have seemed sensible as housing prices climbed to record heights and as credit-card companies offered attractive "teaser" rates to lure customers. But its foolishness became clearer as the housing bubble burst and as cardholders got caught by late fees, over-limit fees and penalty rates.

Now the problem is coming home to roost, as many of those borrowers are in trouble or on its brink. Keest says raising their rates or minimum payments will only make the problem worse.

"Even Congress can't change that basic law of plant morphology - that you can't get blood out a turnip," Keest says. "These people have lost their jobs, and if they can't pay that credit-card debt at 14 percent, then they can't pay it at 29 percent, either. They're just more likely to throw up their hands in despair."