The parliaments of El Salvador and Guatemala are debating bills aimed at halting abusive loans and high credit card costs. But the initiatives have run up against strong opposition from the financial sector.

Legislators in El Salvador are considering a law against usury that would put a ceiling on the interest rates charged on direct loans and on credit cards. And in Guatemala, lawmakers are studying a credit card law that would not set a maximum rate but would attempt to halt abusive charges on plastic money.

The governing leftwing Farabundo Martí National Liberation Front (FMLN) and the Great Alliance for National Unity (GANA), which together have a parliamentary majority in El Salvador, are promoting the bill to regulate the “active” interest rates charged by banks to borrowers.

The initiative is a response to constant complaints by the public and by consumer defence organisations about the high costs of borrowing and the excessive profit margin compared to the “passive” interest rates paid by banks on account-holders’ deposits.

The bill has been under debate in the Salvadoran legislature for the last three months. But after five articles were approved, discussion has got bogged down on the nub of the issue: the imposition of maximum limits on interest charged by banks.

“No country can be competitive if people have to pay excessively high interest on loans or credit cards,” FMLN lawmaker Antonio Echeverría, one of the sponsors of the bill, told IPS.

El Salvador’s Office of the Financial Superintendent (SSF) reports that interest rates for consumer loans over a year or more vary from 28.9 percent at the Bank of Central America and 198 percent at Banco Azteca.

Banking and financial activity is regulated by the SSF and a 1999 law which allows banks to set their own rates of interest.

The SSF report also says that as of Sept. 30, interest payable on deposits ranged from 0.10 percent at Scotiabank for 30-day deposits to 1.75 percent at Banco G&T Continental of El Salvador, for deposits of one year.

GANA legislator Francisco Zablah told IPS that the disparity between active and passive interest rates shows that the financial sector “is taking advantage of consumers.

“We will not allow such a huge gap between what is charged for a loan and what is paid for deposits,” he said.

Members of Congress in El Salvador have still not reached agreement about how to limit interest rates. But the most popular idea is to come up with a mathematical formula for a reference average rate, which would be the ceiling rate for bank interest charges. The legislators expect this rate would not be above 48 percent.

But the financial sector is staunchly opposed to setting limits on interest rates, especially for credit cards, the most profitable line in Salvadoran banking.

The return on the credit card market is an average of 17.6 percent, far higher than for the rest of the operations, says the report “Estudio de las Condiciones de Competencia en el Sector de Tarjetas de Crédito y Débito en El Salvador” (Study on competition conditions in the credit and debit card sector in El Salvador), published by the Competition Superintendency in 2011.

The Salvadoran Banking Association (ABANSA) ran an advertising campaign claiming that if limits were set on credit card interest rates, the market would be restricted to 300,000 cardholders compared to 800,000 at present, in this country of 6.1 million people.

Their ads stated that banks would not be able to provide small loans to credit card holders, because they are high-risk and not viable at interest rates below the current ones.

But Zablah said “ABANSA is just protecting the banks’ interests.”

The Association of Microfinance Organisations unexpectedly came out in support of the banks, saying that if the bill were approved, 1.27 billion dollars in loans for micro and small businesses would be at risk, affecting both the microcredit sector and the country’s productivity.

A study by the Competition Superintendency reported that the credit card sector combines a high rate of return with a high degree of market concentration, which gives financial companies plenty of opportunity to exploit their market share, to the detriment of consumers.

The sector is regulated by the Credit Card System Law, in force since 2009, which does not set interest rate limits.

In Guatemala, meanwhile, Congress has been debating a credit card bill since 2011 that aims to regulate interest rates, commissions, extended financing and the evaluation of applicants’ ability to pay, and to establish credit card cloning as a crime.

The draft law does not set a limit on interest rates, but it does stipulate they should be negotiated with cardholders and not increased except through an established procedure.

It also indicates that interest on loans cannot be capitalised or calculated including commissions and other charges, payment for which must be according to services provided to each cardholder and negotiated in their contracts.

The congressional Economy Commission pointed out that the sector has 748,000 cardholders and controls 20 percent of the consumer credit portfolio, and should therefore not continue to be regulated by the 1970 Commerce Code.

Arturo Quezada of the Insurance and Securities Consumers Defence Association, a civil society organisation, told IPS the absence of credit card regulations “lets the issuing companies charge what they like for interest and repayments,” and allows them to commit other abuses as well.

Quezada said he was in favour of interest rate regulation “because there are abusive charges on credit cards of up to 50 or 60 percent a year.” But he said he was not in favour of establishing a maximum rate.

“The issue of most concern is that interest payments on credit card debt are not explained, nor are the percentages, let alone what has been paid,” he said.

Carlos González of the Association for Social Research and Studies (ASIES), a private local think tank, told IPS that passing a law on plastic money would be a positive step because of the importance of credit cards to much of Guatemala’s population of 15 million people.

However, he too was against fixing a limit on interest rates and suggested, instead, allowing free competition to do its job, pointing out that “the country has monopolies in beer and in cement, whereas the banking system is an oligopoly.”

“This distorts market prices, but there is no oversight,” he said.

* With reporting by Danilo Valladares in Guatemala City.

In the wake of the epidemic of home foreclosures, banking scandals and resulting massive financial regulation overhaul two years ago known as the Dodd-Frank legislation, the U.S. government created a new federal agency to protect consumers from being taken advantage of by banks and other institutions.

Robert Moses, 92, faces foreclosure on his home. He recently participated in an Occupy movement rally in San Francisco demanding justice for mortgage and debt holders. Credit: Judith Scherr/IPS

Known as the Consumer Financial Protection Bureau (CFPB), it’s operated for a year now, with mixed results, according to civil society groups that follow the issue.

“Obviously, the agency’s been stifled somewhat by Congress,” Jamie Court, president of the non-profit California-based group Consumer Watchdog, told IPS. “Given the scrutiny they face, and the budget limitations, they’ve done a good job of starting to break new ground on mortgage regulations and financial services regulations, disclosure for consumers.”

Republicans, particularly in the U.S. House of Representatives, have been vehemently opposed to the CFPB.

“It’s a very tough job in this political and budgetary climate. They’ve done a good job of letting the public know their doors are open. The question is, how responsive they are to petitions from the public, and how much can they do as quickly as possible?” Court said.

“They have a good staff that understands consumer protection. The real fate of the agency will be determined by the (November U.S. presidential) election. The election is really a mandate for this agency to go forward or not,” he said.

Republican nominee Mitt Romney opposes the CFPB, while President Barack Obama, the Democratic nominee, supports it.

The CFPB is “pretty much what Obama got for the consumer out of financial reform, which was too little. It’s the first time we have a federal agency that’s there to protect consumer, not the bank, not the investor,” Court said.

Over the past weekend, the agency announced its second enforcement action in conjunction with the Federal Deposit Insurance Corporation (FDIC), ordering Discover Bank to refund approximately 200 million dollars to more than 3.5 million consumers and pay a 14-million-dollar civil penalty.

At issue were “deceptive telemarketing and sales tactics used by Discover to mislead consumers into paying for various credit card ‘add-on products’ – payment protection, credit score tracking, identity theft protection, and wallet protection,” according to an agency press release.

According to the CFPB, Discover Bank, one of the largest credit card issuers in the U.S., misled customers about whether there was a cost for the products, enrolled customers without their consent, and failed to tell customers about some of the eligibility requirements associated with payment protection benefits.

In a similar case of “deceptive marketing tactics”, on Jul. 18, the agency announced its first enforcement action, requiring Capital One Bank to refund approximately 140 million dollars to two million customers and pay an additional 25-million-dollar civil penalty.

On Aug. 10, the agency proposed two new rules that will protect families who take out mortgages for their homes. These proposed rules are currently subject to a public comment period before final action will be taken.

The agency has also been collecting hundreds of comments from U.S. consumers regarding various complaints each week, and is encouraging consumers to submit complaints to the agency, including on its website.

“They’re being judicious in what they’re setting out to do. They’re not being a lightening rod for controversy – they’re doing sensible things on a sensible timeline. We’re very pleased by their agenda,” Linda Sherry, director of national priorities for Consumer Action, a San Francisco-based national consumer education and advocacy group, told IPS.

One of the benefits of the CFPB is that it gives U.S. consumers a single place to seek help with complaints regarding banking products and other financial products, Sherry said.

Previously, there were “too many cooks in the kitchen”, she said.

“This brings everything under the same roof. It’s easier for consumers to know who to go to for help. Beforehand, there were seven different agencies engaged in regulating the banking system,” she said.

Those agencies included the Board of Governors of the Federal Reserve, U.S. Department of Housing and Urban Development, FDIC, Federal Trade Commission (FTC), National Credit Union Administration, Office of the Comptroller of the Currency (OCC), and Office of Thrift Supervision.

The FTC, for example, would look for trends in the credit industry and credit reporting industry, sometimes bringing legal actions in conjunction with the U.S. Department of Justice. However, they would not respond to individual complaints.

“As far as banking complaints, any banks that were national banks were (previously only) regulated by the OCC. They had robust consumer complaint unit. However, what would come back to us many times, they (a consumer) would submit a complaint, it would be sent for review and it would come back,” Sherry said.

“The OCC would write a letter saying, ‘The bank doesn’t see there’s a problem. We can’t do anything,’” she said.

“Financial services are key to a person’s well-being, livelihood, and prosperity. We want to keep people from being ripped off. That’s why we’re very pleased to have a new national consumer watchdog on the beat,” she said.

Court believes that the CFPB should be acting more aggressively.

“It also has to start banning certain types of products because they’re dangerous. There are some obscene interest rates on credit cards being charged, also payday lending, a lot of toxic financial products. They’re going to be asked to deal with these by petition,” Court said.

“The real test of the agency will be what it does when presented with toxic products,” Court said.

Court applauded the recent enforcement actions against Citibank and Discover Bank. “It’s a great example. An agency can step in and get 200 million dollars back to consumers’ pockets. Before that you had to file a class action lawsuit,” he said.

Meanwhile, Elizabeth Warren, a Harvard Law School professor who came up with the idea for the agency, and who worked with interest groups and the U.S. Congress to bring the agency into fruition, also praised the Discover Bank action.

“I’m proud the Consumer Financial Protection Bureau is standing up for working families by holding major credit card companies accountable for deceptive practices,” Warren, who is currently the Democratic nominee for a U.S. Senate seat in Massachusetts, said in a statement sent to IPS.

“The new consumer agency is a strong advocate for hardworking men and women here in Massachusetts and across the country. The CFPB has been hard at work reducing the fine print in credit card agreements and assisting with consumer complaints… These actions will help protect families from financial tricks and traps and create a level playing field,” Warren said.