(Updates with background, additional comments)

WASHINGTON -(Dow Jones)- A U.S. House panel put the credit card industry on the defensive Thursday, approving legislation that would curb exorbitant fees and other practices that have come under fire from consumer groups.

The House Financial Services Committee voted 39-27 in favor of legislation that would prohibit or restrict practices such as interest rate increases on the existing balance of a cardholder who has been making on-time payments on their account.

Rep. Carolyn Maloney, D-N.Y., the sponsor of the legislation, cited "due-date gimmicks, penalty fees," and multiple over-the-limit charges for a single overdraft violation.

"Without legislation, lucrative abusive practices will continue," Maloney said during the panel's debate on the legislation.

The panel did amend the bill to bring it more in line with sweeping proposals made earlier this year by federal banking regulators to address industry practices. Additionally, lawmakers included a "sense of the Congress" that the legislation should not prevent the Federal Reserve, Office of Thrift Supervision, and National Credit Union Association from finalizing their new credit card regulations by the end of the year.

The vote comes as American consumers carry increasingly higher levels of debt on revolving credit lines. According to a July 8 report from the Federal Reserve, outstanding consumer credit in revolving credit lines stood at $961.8 billion in May, compared to $940.6 billion at the end of 2007 and $770.5 billion at the end of 2003.

Panel members sparred through the day Thursday on the legislation, with Democrats criticizing firms for designing financial products intended to take advantage of consumers.

"This has nothing to do with the free market, it has to do with greed," Rep. Gary Ackerman, D-N.Y., said. "Greed, greed, greed."

Rep. Jeb Hensarling, R-Texas, warned, however, that lawmakers could run the risk of impeding a competitive marketplace for credit.

"What the bill will do is ultimately take options away from consumers," Hensarling said, suggesting that banning certain fees would just result in new charges on other services.

"If you poke into the balloon on one side it's going to poke out on the other side," he said.

Some Democrats, however, noted that standing aside and "just letting the free market work" is exactly the type of attitude that resulted in the current mortgage and housing crisis.

"With all the work that we've been doing with the subprime meltdown and the foreclosures, the argument "let the market work" just does not work in the way that those that advance this economic model intended it to work," said Rep. Maxine Waters, D-Calif.

Both the legislation and the proposal from federal regulators and the legislation would require companies to give consumers extra time to make their payments and would prohibit firms from steering a borrower's payment in a way that would benefit the company over its customer.

Card companies would also be barred from the practice of "double-cycle billing," where firms reach back into past billing cycles when calculating the interest charged on the current billing statement.

The comment period on the Fed proposal is set to expire August 4, with estimates of comments received topping 30,000 letters, according to lawmakers.

-By Michael R. Crittenden, Dow Jones Newswires; 202-862-9273; michael.crittenden@dowjones.com

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  (END) Dow Jones Newswires
  07-31-08 2050ET
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