About That New, "Friendly" Consumer Contract

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Former Citibank lawyer MacDonald opposed harsh penalties for late payments Chris Casaburi

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Responding to such practices, Democrats on Capitol Hill are pushing the Credit Card Accountability, Responsibility & Disclosure Act, which would ban card issuers from making unilateral changes to their contracts. The bill expands on regulatory amendments the Federal Reserve adopted on Dec. 18. "Fifty lines of text explaining how interest rates will be calculated before concluding 'We reserve the right to change the terms at any time for any reason' is not disclosure," said Christopher Dodd (D-Conn.), chairman of the Senate Banking Committee, in a Mar. 11 speech. "That's obfuscation."

Innovative lenders and other companies are trying to tap into that spirit and attract new customers by eliminating tricky fees and payment terms. But as in the past, when such reforms were quickly eclipsed by new manipulations of change-in-terms provisions, the latest marketing campaigns should be scrutinized closely.

Since late 2007, Western Alliance Bancorp has pitched its PartnersFirst card as a fairer kind of credit. Currently the card is marketed to consumers by such diverse institutions as Utah State University and the Chicago Bar Assn. "Our cards are not going to be tricked up with all sorts of gimmicks," says PartnersFirst CEO Hal Erskine. A deal PartnersFirst is finalizing with the Service Employees International Union would give SEIU's 2 million members credit without annual fees and would delay penalty interest rates until a consumer misses two consecutive payments or three in six months.

But the SEIU card contracts will still include a change-in-terms provision. The union must approve any adjustment of fees. If overall interest rates rise, Erskine says, PartnersFirst needs to be able to charge more to cover its own borrowing costs. "And if the consumer has a better-than-market rate and does not live up to the deal," he adds, "we need to be able to change it."

With Douglas MacMillan and Theo Francis

Grow is a correspondent in BusinessWeek's Atlanta bureau. Berner is a senior writer in BusinessWeek's Chicago bureau.

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