Merry Christmas, you wonderful old Building & Loan.

In the movie It’s a Wonderful Life, when George Bailey and Uncle Billy loan you money, all they expect in return is the principle, plus a reasonable rate of interest.

In Bedford Falls, they don’t take American Express — and they don’t take Visa, either. Unless you make the mistake of going to see Mr. Potter, there are no late fees, balance-transfer fees, monthly service fees, over-limit fees or same-day payment fees. And George isn’t about to jack your annual interest rate up to 36 percent, compounded daily.

But you don’t have to be Clarence Oddbody (Angel, Second Class) to know that if you fall behind on your credit card bills these days, it’s not such a wonderful life.

That point was driven home recently when U.S. Sen. Sheldon Whitehouse held a field hearing of the Senate Judiciary Committee at Rhode Island College. The topic was “Credit Cards and Bankruptcy: Opportunities for Reform.”

Whitehouse heard from a panel of four experts, including Robert M. Lawless, a University of Illinois College of Law professor. In answer to a question from Whitehouse, Lawless drew a comparison to It’s a Wonderful Life, noting the Bailey Building & Loan was content to make “a little money off the interest.”

“That time has gone,” Lawless said. “That’s not the way the consumer lender is working now.”

Instead, credit card companies are making the most money when they get consumers in the “sweat box” of credit card debt, Lawless said, borrowing a phrase from a law review article by Columbia Law School Prof. Ronald J. Mann.

In that sweat box, “People are not in good enough shape that they are paying on time but they are not in bad enough shape that they can file bankruptcy,” Lawless explained. “They are piling up the huge interest rates, piling up the big penalty fees, and the longer the credit card companies can keep people in that sweat box, the more money the credit card companies are going to make.”

John Chung, a Roger Williams University School of Law professor, told Whitehouse that his own credit card carries an annual interest rate of 36 percent, compounded daily. At that rate, a $1,000 debt doubles in less than two years and keeps doubling every two years, he said.

“Once a debtor falls into the trap of exponential debt growth, can such a person ever climb his or her way out?” Chung asked. “I highly doubt it. Perhaps we are witnessing the 21st-century equivalent of the company store where the debtor is just another day older and deeper in debt because he has sold his soul to his credit card issuer.”

U.S. Bankruptcy Judge A. Thomas Small, of North Carolina, spoke on behalf of the National Bankruptcy Conference, saying, “High cost credit permits lending to borrowers whose ability to repay is tenuous. While such lending may provide benefits to some borrowers and to the economy, its effect on many borrowers and, as we are currently seeing, on the economy generally and therefore on all Americans, can be devastating, resulting in bankruptcy for some borrowers who would have maintained financial health but for the additional, aggressively marketed credit.”

Newport lawyer John Rao, who testified on behalf of the National Consumer Law Center and the National Association of Consumer Bankruptcy Attorneys, said, “Credit card companies push consumers into borrowing because they derive profits mainly from consumers that use their cards to borrow [‘revolvers’], not from convenience users who pay off their cards.”

He quoted Julie Williams, the top lawyer for the Comptroller of the Currency, who in 2005 said: “Today the focus for lenders is not so much on consumer loans being repaid, but on the loan as a perpetual earning asset.”

Call it a perpetual earning asset. Call it the company store. Call it the sweat box.

I call it outrageous. I call it a huge financial drain on families — often families that can least afford it. I call it something that needs to be reined in, especially now that so many people are losing their jobs and their houses and becoming more desperate — and ever more likely to take the kind of ill-advised leap into the easy-credit abyss that can end in bankruptcy and ruin.

At one point in the movie, George Bailey yells at Uncle Billy about a missing $8,000 deposit and a visit by the bank examiner: “Do you realize what this means? It means bankruptcy and scandal and prison.”

Granted, George’s money problems did not involve MasterCard. But they did involve Mr. Potter, and I think Old Man Potter would be proud of how the credit card companies have seized on the opportunity to put the squeeze on consumers.

“We have come to this situation largely because of historical accident,” Lawless told Whitehouse. “Laws passed for one purpose in an earlier time were used for different purposes in a later era.”

In 1864, “amidst the chaos of the Civil War,” Congress passed the National Bank Act of 1864 to create a banking system that would stabilize the nation’s finances, he said. “A banking system that the federal government controlled was controversial, and there was concern that states might use their legislative powers to defeat the national banking system before it got established,” he said.

So Congress enacted provisions to protect the new national banks, including one that prevented states from applying lower interest rate caps to nationally chartered banks than they applied to locally chartered banks, Lawless said. Over the years, states enacted “effective usury laws” limiting the interest rates that lenders could charge consumers, Lawless said.

But all of that changed in 1978 when, in the case of Marquette National Bank v. First of Omaha Service Corp., the U.S. Supreme Court “turned what Congress intended to be a protective shield into a sword, ruling that the National Bank Act allowed national banks to export the most lenient usury laws to any other state of the union,” Lawless said.

That meant, for example, that a Nebraska bank could charge Minnesota consumers 18 percent interest although Minnesota capped interest rates at 12 percent.

“After the court’s decision, consumer lenders rushed to locate national banks in states that traditionally had no usury law or that had recently repealed their usury statutes at the behest of the consumer lending industry,” Lawless said. “By relocating to states with no usury statute, lenders could charge whatever rate they could extract from consumers across the country.”

Whitehouse said that explains why credit card companies ended up in states such as South Dakota and Delaware.

“After Marquette National Bank, consumer lending took off,” Lawless said. “With lenders now able to charge exorbitant rates of interest, even marginal borrowers could find lenders willing to extend massive amounts of consumer credit.”

In 1996, the Supreme Court extended the Marquette National Bank decision to credit card fees, allowing lenders to extract huge penalty fees, Lawless said. Late fees for credit cards more than doubled between 1996 and 2006, when they averaged $35, and now “fee income has become a major profit center for the credit card industry,” he said.

Congress made matters worse when it changed the bankruptcy laws in 2005, panelists said. The changes were touted as a way to separate the “can pay” debtors from the “can’t pay” debtors, but Lawless said, “The real effect of the 2005 bankruptcy law was to increase the cost and hassle of filing for bankruptcy, extending the amount of time that consumers would suffer before seeking bankruptcy relief.”

In other words, they spend more time in the sweat box.

When I heard all of that, I was ready to go get a drink at Martini’s — and I’m not talking about the mulled wine or the flaming rum punch that Clarence favored.

But then I realized I didn’t have my Visa card. So I decided to tune in for the part about the proposed solutions.

“There are several things Congress can do,” Whitehouse said. Congress can pass a bill, sponsored by Sen. Christopher Dodd, D-Conn., that would outlaw practices such as “universal default,” in which credit card companies assess penalties when a customer defaults on a different account, he said.

Congress can pass another bill, sponsored by Sen. Richard Durbin, D-Ill., that would set a national interest rate cap of 36 percent, including fees, he said.

Also, Whitehouse said he plans to reintroduce a bill aimed at encouraging more reasonable interest rates. Under his legislation, if someone enters bankruptcy proceedings, claims stemming from agreements with excessive interest rates and fees would receive lowest priority — after all other secured and unsecured claims.

In September, the House passed a “credit cardholders’ bill of rights,” which would have limited surprise interest rate increases and fees for credit card users. The legislation received strong support from consumer groups but vehement opposition from the banking industry. The White House also came out against the legislation, saying, “For the credit market to operate efficiently, creditors must have the flexibility to react to changes in customer risk and market conditions.” The bill ended up languishing in the Senate.

But on Thursday, federal regulators adopted sweeping new rules that will allow credit card companies to raise interest rates only on new credit cards and future purchases or advances, rather than on current balances. The rules, which take effect in July 2010, also will extend the time customers have to pay bills before incurring late fees.

The rules were first proposed in May in response to criticism from Congress that the Federal Reserve was neglecting its authority to prevent abusive lending and strengthen consumer protections, according to Bloomberg News. The rule changes could cost the banking industry more than $10 billion a year in interest payments, according to a study cited by the Associated Press.

So it’s clear the topic is timely and the stakes are high. And as I listened to the experts at the Senate Judiciary Committee hearing, it became clear to me that lawmakers and regulators are going to have to be creative and bold — because the most creative and bold idea I heard was attributed to a credit card company.

Rao recalled a case in which a credit card company required people to get their payments in by a certain day each month — but then set the deadline for 10 a.m. that day, so payments were considered late even if they arrived at 11 a.m. on the right day.

“Those are the kind of practices that cause consumers to get behind,” he said. “All it takes is that one late payment and now they are being jacked up to a much higher interest rate.”

As I savored the evil genius of the 10 a.m. cutoff, the words of George Bailey came to mind: “You sit around here and you spin your little webs and you think the whole world revolves around you and your money. Well, it doesn’t, Mr. Potter. In the whole vast configuration of things, I’d say you were nothing but a scurvy little spider.”

And that goes for you, too, credit card companies.

efitzpat@projo.com