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Credit card reform challenged

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Reform efforts that are the focus of President Obama's meeting with credit card executives Thursday could choke off credit to the borrowers they are intended to help, industry experts say.

"When you start restricting the price banks can charge to customers, they are going to start cutting back their lending," said Erik Benrud, finance professor at Drexel University in Philadelphia.

"If the banks know they can't raise rates on existing balances, that too will restrict their desire to make loans to certain groups," he said.

A proposed ban on "retroactive repricing" contained in a bill sponsored by Sen. Christopher J. Dodd, Connecticut Democrat, is the biggest threat to the industry, said Mark Furletti, an attorney at Ballard Spahr, a Philadelphia law firm that represents banks.

The provision would prevent card issuers from responding to changes in credit risk, Mr. Furletti said, adding that it appears the president is moving toward the Dodd bill rather than a less-stringent House version sponsored by Rep. Carolyn B. Maloney, New York Democrat.

"You're going to end up with cross-subsidization. That means borrowers who become risky, instead of paying higher interest rates, that cost is shifted to lower-risk consumers," Mr. Furletti said.

Consumer advocates disagreed.

"You mean, if they can't rip us off they are going to give us less credit?" said Gail Hillebrand, financial services campaign manager at Consumers Union. "We've been hearing that argument for a long time.

"I don't think they're going to give us less credit, but if they can't rip us off, that's a good thing," she said.

Tamara Draut, vice president of policy and programs at Demos, a New York think tank, said credit card issuers are already raising rates on customers who carry a balance.

"It's not limited to people who recently lost their jobs. We are seeing rate increases across the board that on their face appear to have no rationale other than trying to make up for losses in other areas of the banking industry," Ms. Draut said.

Mr. Obama reportedly will meet Thursday with executives from Bank of America, Citi, Chase, American Express, Wells Fargo, Capital One, Visa and MasterCard.

Mr. Dodd's bill, the Credit Card Accountability, Responsibility and Disclosure Act, would ban credit card interest rate increases at any time for any reason, limit fees and penalties, require payments to be applied first to balances with the highest interest rates and prohibit the use of a consumer's history with other lenders to raise interest rates, among other provisions.

Mrs. Maloney's bill, the Credit Cardholders' Bill of Rights, passed the House Committee on Financial Services on Wednesday by a vote of 48-19.

Both bills go beyond credit card rules published in January by the Federal Reserve and would speed the implementation of restrictions to July in the case of Mr. Dodd's bill and to three months after the passage of her bill in the case of Mrs. Maloney's bill.

The Fed's regulations wouldn't go into effect until July 2010.

Mr. Furletti, a former researcher at the Federal Reserve, said that with the financial system shaky and delinquencies rising, it is a "bad time" for the legislation.

"A lot of these things are well intended, but nobody thinks about the unintended consequences," he said. "They want them to lend more, but they are going to do something like this that will lead them to lend less."

Mr. Benrud said the cap on rates on existing balances could have one positive effect.

"Banks will be explicit about the prices they charge. If the price is more transparent to borrowers, they can make a better decision," he said.

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