Credit card reform leaves out small entrepreneurs

The new law reining in the penalties that banks can levy on their riskiest borrowers doesn't apply to small businesses.

Though U.S. consumers can look forward to some relief under the credit card reform bill signed into law last week by President Obama, small-business owners may not be so lucky.

Congress is reining in the penalties that banks can levy on their riskiest borrowers. Card issuers stand to lose billions in revenue. They may seek to make it up from other plastic-wielding customers by raising interest rates, scaling back rewards and imposing annual fees. Small-business cardholders could be prime targets.

"It's no secret that [banks] are hurting and looking for any source" of revenue, said Molly Brogan, spokeswoman for the National Small Business Assn., based in Washington.

The new law, which shields consumers from predatory fees and sudden rate hikes, doesn't include customers holding credit cards backed by their companies. An amendment that would have extended the protections to cardholders whose businesses have fewer than 50 employees was killed before the final bill was voted on.

Amendment author Sen. Mary L. Landrieu (D-La.), chairwoman of the Senate Committee on Small Business and Entrepreneurship, hasn't given up on winning the changes for small firms.

"We will look into other legislative vehicles," said Scott Schneider, committee spokesman.

Many small firms rely on credit cards to pay for everything from paper clips to equipment. Even more are doing so as the recession has limited access to other credit. Some are already feeling the sting of higher rates.

Television writer and producer Bill Taub, president of Jabberwock Corp. of Los Angeles, didn't notice for four months that the interest rate on his Advanta small-business credit card had jumped to 19.99% from 7.99%. A call to customer service got it dropped to 10.99%, but he said his request for a refund was refused.

"That was outrageous," said Taub, whose TV credits include episodes of "Hollywood Babylon" and "Relic Hunter." He hadn't yet heard that Pennsylvania-based Advanta Corp., which has been hit with rising losses in its portfolio, won't allow any of its small-business customers to put new charges on their cards after June 10. Taub is one of as many as 1 million cardholders who will have to turn elsewhere for credit.

Anna Perelman, co-owner and chief operating officer of Vestalife, a Studio City maker of Apple iPod speakers, said her firm also was being hit with interest rate hikes and credit-limit cuts, seemingly out of the blue.

"It's really tough for small business," said Perelman, whose husband, Wayne Ludlum, is a founder and president of the six-person firm. "There's nowhere to go other than credit cards."

Small businesses have been courted heavily by card issuers in recent years, and the number of small-business cards has grown dramatically, said David Robertson, publisher of the Nilson Report, an industry newsletter based in Carpinteria, Calif. Small-business credit cards now account for 11% of all Visa and MasterCard charges, up from 3% in 1998, he said.

The actual share of business-related purchases is far higher, because many small-business owners still use their personal cards for business expenses. It is unclear whether those cardholders are included in the new protections. The law amends the Truth in Lending Act, which focuses on "consumer use," defined as that which is primarily for personal, family or household expenses.

Those who hold small-business credit cards from Discover Financial Services in Riverwood, Ill., will not be covered under the new law, company spokesman Jon Drummond said.

That's because the company bases its decision to issue a small-business card on a combination of personal and business credit, he said. That's a step more companies have taken as credit rating bureaus such as Experian have responded to demand to create products that combine both credit profiles as a more accurate picture of a borrower's ability to repay.

"The legislation deals only with personal credit cards, so the provisions would not affect small-business owners who use a business credit card," Drummond said.

That's as it should be, according to the American Bankers Assn.

"Business accounts are not nor should they be" covered, said Peter E. Garuccio, a spokesman for the trade group. "They should be like any other open-end business loan that adjusts to market conditions. The amounts are higher, the risks greater, and presumably someone who is in business is more sophisticated than the average consumer."

Reform advocates also failed to raise the credit limit at which the Truth in Lending Act exempts credit card accounts from its protections. The exemption kicks in for cards with a credit limit of $25,000 or more, a level the advocates consider outdated. The Landrieu amendment would have raised the exemption trigger to $50,000.

The new law does require the Federal Reserve to conduct a review of credit card use by small-business owners with fewer than 50 employees. The report, which is supposed to include recommendations for initiatives covering small-business cardholders, is due to Congress within 12 months.

It's hard to say whether the law will result in a major pullback in credit for consumers or small-business owners as some financial services groups warned. Competition among banks to keep good credit card customers could eventually moderate those effects.

But in the near term, credit looks to remain tight, and credit card companies are likely to continue to hike rates and cut limits where they can in a bid to reduce their own exposure to risk and save money.

That won't make it easy for companies like Vestalife, which is planning to roll out three new products this year.

"I think we are going to experience a lot of small businesses in this place for a while," Perelman said. "You have some good ideas, but how do you take them to the next level?"

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