Professor Warren wrote earlier this week about the New York bill that would ban cross-default clauses -- provisions that allow card issuers to raise interest rates dramatically whenever a cardholder is late in making a payment to ANY creditor -- even if the credit card bill has always been paid on time. As reader Okie Lawyer noted, the national reach of this promising legislation, unfortunately, may be limited. Still, its national importance shouldn't be underestimated.

The possibly limited impact of the bill is the inevitable result of it being first-of-its-kind legislation that, as state law, necessarily can't fully address the national problem of cross-default clauses. First, as New York state law, the legislation probably wouldn't apply to national banks.  In addition, even state-chartered banks might be exempt from the legislation if they're based outside of New York, because the FDIC allows them to export the interest rate laws of their home states. While many of the biggest banks are headquartered in New York, their credit card units are often based in other states, like Delaware.

Even so, the bill is an important step forward, and it shouldn't be discounted. New York is the first state to consider legislation of this sort, and if the bill is signed, it could provide an example that other states might follow. In the absence of strong national legislation banning the practice, similar legislation by a few key states could have a real impact on the use of these clauses as part of the industry-standard practice.

The law also would help bring the issue of cross-default clauses into the public eye. As people become more informed about the practice, the pressure of public opinion might be powerful enough to force the credit card companies to reconsider the wisdom of their approach. Similarly, the legislation could be helpful in court cases that challenge cross-default clauses as unfair and deceptive practices, lending support and credibility to the people fighting against these clauses.

The bill goes to Governor Pataki for signing on August 8; we should all be watching carefully to see what happens.