Credit card debt warnings rejected

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Federal judge tosses state law requiring alerts

Robert Salladay, Chronicle Sacramento Bureau Tuesday, December 24, 2002

Sacramento -- California lost a major consumer battle Monday when a federal judge threw out a state law requiring credit card companies to warn customers that it could take decades to pay off balances if only minimum payments are made.

The debt warning was considered among the major consumer protections of the past year. But the ruling by U.S. District Judge Frank C. Damrell invalidates the law and casts further doubt on other attempts by California to control banks.

Although Damrell acknowledged California could impose some consumer protections on its own, he found that banks are for the most part controlled by federal law and states cannot impair their operations by piling on new and expensive rules.

Attorney General Bill Lockyer, who defended the state law, was disappointed at the ruling and is considering an appeal.

"We continue to strongly believe that this is an important consumer protection statute that would help families become less debt-ridden," said Lockyer spokesman Tom Dresslar. "The statute falls squarely within the state's authority."

The summary judgment from Damrell is the second major defeat for a banking- related consumer law in California, after the federal courts threw out San Francisco's ban on dual ATM fees for using another bank's machine in October.

The ruling Monday also is another warning sign that efforts by the Legislature to install privacy protections on personal banking information could effectively be challenged in federal court as further state interference.

The credit card warning, which the banks challenged only days before it was to begin this summer, would have required every credit card statement to include at least three generic examples of how long it would take to pay off various balances with a minimum payment.

The law was designed to target people who continually make small payments on their credit card balances, which average about $7,000 for the typical American household.

A $5,000 balance, for example, would take 40 years to pay off at a total cost of $16,305, using a 17 percent interest rate and a 2 percent minimum payment.

Consumer groups believe many credit card users have little idea how long it takes to pay off balances, and they cited the huge amount of credit card debt as the leading cause of personal bankruptcy in America.

The lawsuit was filed against Lockyer by five trade groups, including the American Bankers Association, and five major credit card companies: Citibank, Chase Manhattan, MBNA America Bank, First USA and Household Bank. The Bush administration, through the office of the Comptroller of the Currency, joined the banks in supporting the lawsuit.

The new law also required credit card companies to identify customers who make minimum payments at least six months in a row. Those habitual customers were supposed to get a "Minimum Balance Warning" on their statement showing how long it would take to pay off their specific balance and a referral to a credit counseling service.

Damrell noted that if the California law only included a two-line warning that "making the minimum payment will increase the interest you pay and the time it takes to repay the balance," the law probably would pass muster.

Banks objected specifically to a required chart that lists how long particular balances will take to pay off. In arguments this year, Laurence J. Hutt, an attorney representing the coalition of banks and credit unions, told Damrell: "What is being warned to consumers is: 'Warning, don't use our product.' "

The banks also estimated that it would cost them at least $19 million to prepare for the new law, and then about $2 million a month to maintain the system with the extra postage, printing and computer costs.

-- Anonymous, December 25, 2002


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