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The Honolulu Advertiser
Posted on: Sunday, March 6, 2005

Bill targets interest-rate cap

By Deborah Adamson
Advertiser Staff Writer

Higher credit-card fees might be in store for Hawai'i consumers who use cards issued by local banks.

A bill winding its way through the Legislature would eliminate the annual percentage rate cap on outstanding credit-card balances and allow local financial institutions to charge whatever rate the market will support. Current state law caps the APR at 18 percent.

Senate Bill 1135 — which was passed by the Senate Commerce, Consumer Protection and Housing Committee as well as the Judiciary and Hawaiian Affairs Committee — has come under fire from consumer groups.

"I find the idea onerous," said Scott Foster, communications director of Advocates for Consumer Rights in Honolulu. "This will do nothing but take more money out of the poorer consumers who are not able to pay their credit-card bills off every month."

But local bankers say that 90 percent of Hawai'i consumers already use out-of-state credit cards — several of which are are issued by banks in states where there no caps on APR. That means they can charge Hawai'i consumers an annual percentage rate higher than 18 percent — a situation they say puts local financial institutions at a disadvantage.

"The credit-card lenders that control 90 percent of the Hawai'i market are not subject to Hawai'i's usury law," said Neal Okabayashi, an executive of First Hawaiian Bank who testified before a Senate committee on behalf of the Hawaii Bankers Association.

The Hawaii Financial Services Association and the Hawaii Credit Union League also back the bill, mainly for the same reasons.

Sen. Ron Menor, D-17th (Mililani, Waipi'o) and chairman of the Commerce, Consumer Protection and Housing Committee, said the "intent here is to pass a measure that would help level the playing field. ... By leveling the playing field, it would help local and state-chartered institutions achieve greater financial stability, which would be beneficial to the residents of Hawai'i."

But he added that the bill "still needs to be carefully scrutinized for the potential impact on consumers — whether or not the measure may result in Hawai'i's consumers being charged higher finance charges. We were assured such would not most likely be the case because the credit-card market is very competitive."

Consumer Action in San Francisco, a consumer-rights group that focuses on the credit-card industry, was critical of the bill.

"Eighteen percent is a very healthy interest rate," said Executive Director Ken McEldowney. "While bankers in Hawai'i can claim this puts them at an unfair disadvantage, the only disadvantage comes from (being left out of) the gouging done by national banks."

First Hawaiian Bank is the largest local issuer of credit cards. As of Dec. 31, the bank had $245.7 million in outstanding balances on its credit cards, according to the Federal Deposit Insurance Corp. American Savings Bank is second, with $28 million. Hawaii National Bank comes in third with $1.3 million. Bank of Hawaii has sold its credit-card operations.

The bill would get rid of the APR cap but keep a simple interest-rate ceiling at 18 percent.

APR is not the same as a credit card's simple interest rate. The APR reflects the interest rate plus certain charges associated with extending credit — such as finance charges if you carry a balance — and it is expressed as a yearly rate.

Thus, a card can advertise a simple rate of 12 percent but after fees are added, the APR for purchases could be 21 percent. The APR calculation is required by federal law so consumers have a fairer basis to compare different cards.

For example, a card with a 10 percent interest rate sounds more enticing to consumers than one with a 12 percent rate. But if the 10 percent card has higher fees, it could end up costing a consumer more than the card with the 12 percent rate.

Of course, consumers who pay off their balances every month are not charged interest. Other cardholders give higher priority to perks — such as airline mileage, cash rewards and no annual fees — than interest rates.

Okabayashi, a vice president in the legal department at First Hawaiian Bank, said the bill's impact is "not significant" since most fees already are excluded from the calculation of the APR. But one that's included is the cash-advance fee.

"Because a cash-advance fee is a finance charge, the major Mainland banks can charge it — and they all do — but local banks cannot, even when lending on the Mainland," he testified.

That's because a cash advance fee could easily push a local credit card's APR above 18 percent. Okabayashi said if a consumer takes out a $100 cash advance on the last day of the month and doesn't have any other charges, a 25-cent fee translates into a 91 percent APR — illegal under state law.

First Hawaiian currently does not charge a cash-advance fee and doesn't have plans to do so.

There's another fee that worries local issuers.

Starting in April, Visa and MasterCard will start charging member banks a 1 percent administrative fee on currency transactions — what you incur when you use your credit card abroad. Previously, Visa and MasterCard charged consumers this fee.

Financial institutions such as First Hawaiian Bank want to pass on this cost to the consumer — but in doing so it might go over the 18 percent APR cap unless state law clearly specifies that the fee would not be part of the APR.

A lifting of the cap doesn't necessarily have to be detrimental, the bank said. In a competitive market consumers can shop around for the best deals. They don't have to take a local credit card if it has a higher APR.

"As everyone who opens his or her mailbox knows, there are a lot of Mainland credit cards available," Okabayashi testified.

Wayne Tanna, an accounting professor at Chaminade University, agrees to a certain extent.

"The impact is going to be negligible on average. The more savvy consumers are going to shop around," he said. However, "this is going to disproportionately impact the poor. They're going to get their credit card where they bank. ... The poor pay banking fees and now they'll pay more fees on top of that."

Reach Deborah Adamson at dadamson@honoluluadvertiser.com or 525-8088.