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Fed backs rules to curb deceptive credit card practices

Final vote on consumer protections could come by year's end

By  and David Munns

See later stories:  Feds finalize sweeping credit card rule changes, What the credit card regulation changes mean to youA guide to the Credit CARD Act of 2009

WASHINGTON -- Federal banking regulators took unusual steps Friday to protect credit cardholders from unfair and deceptive trade practices, proposing rules to eliminate "surprise" interest rate hikes, limit fees and give consumers reasonable time to pay their monthly credit card bills.

The Federal Reserve and other banking regulators propose new regulations May 2
Fed proposes new credit card protections

What's new: Federal bank regulators have proposed new rules to protect consumers from unfair and deceptive trade practices in the credit card industry. 

What it may mean to ...

... Consumers:
Greater protection and safeguards when dealing with credit card issuers and peace of mind in knowing under what circumstances interest rates may increase. However, banks have said that increased regulation will result in fewer consumers having access to credit, especially those with poor credit ratings. This may not bode well for families living off of credit cards.

... Credit card issuers: Limited ability to assess fees and raise interest rates. Bank executives have testified that additional regulation may result in higher interest rates for all customers and no credit for some.

... Credit card securities trustsSecuritized credit card receivables are the fuel that funds rewards programs and helps keep interest rates low. The trusts' ability to charge fees or increase interest rates helps offset rising defaults and rising costs of issuing new securities.    

... The economy: Any clampdown on access to credit may have a ripple effect on the overall economy, slowing growth and increasing the likelihood of a recession.

To submit comments on the proposed rules go to the Federal Reserve's website.

The Federal Reserve Board of Governors voted 4-0 to approve the proposed rules. If given final approval later this year, the regulations may provide important safeguards to consumers who have complained about skyrocketing credit card interest rates, fluctuatinfg due dates, over-the-limit fees and how monthly payments are applied to outstanding credit card balances.  

"Consumers relying on credit cards should be better able to predict how credit card operations affect their accounts," Fed Chairman Ben Bernanke said. "It's a very good and comprehensive proposal."

In discussing the new rules, Bernanke noted how credit card lending has evolved over the years and become more complex. 

"Twenty-five years ago, less than 25 percent of consumers had credit cards," Bernanke said. "Now, it's grown substantially. Credit cards are available to more people. Although they work well for more consumers, the credit card plans need to work better for more consumers."

Reaction to the proposal was swift, and passionate. The proposed new rules -- which carry fines and penalties levied under the Federal Trade Commission Act (FTC Act) -- could slow the nearly $951 billion credit card lending industry and result in higher credit card interest rates for everyone, banking and credit analysts and observers told CreditCards.com.

'Regulatory intrusion'
"The Federal Reserve's proposal is an unprecedented regulatory intrusion into marketplace pricing and product offerings," said Edward L. Yingling, president and CEO of the American Bankers Association in a prepared statement. "We are deeply concerned that these rules will result in less competition, higher consumer prices, fewer consumer choices and reduced consumer access to credit cards.  In short, everyday consumers will bear the real cost of these proposals."

Betty Riess, a spokeswoman for Bank of America, the largest credit card issuer, said in a telephone interview just prior to the meeting: "We remain concerned about the unintended consequences of well-meaning regulation that ends up hindering the ability of financial institutions to make credit available to customers and increases the cost of that credit."

'Thrilled to death'
Consumer advocates, however, praised the regulations, which come at a time when Congress too is clamoring for legislative remedies to protect consumers. Several bills have been introduced in both the U.S. House and Senate aimed at curbing some of the most-criticized credit card industry practices.

"We are thrilled to death," said David Jones, president of the Association of Independent Consumer Credit Counseling Agencies, a nationwide trade group of credit counseling agencies. "This is almost like a debtor's bill of rights. These are excellent, excellent rules."

Linda Sherry, national priorities director for Consumer Action, a San Francisco-based nonprofit advocacy coalition, said the proposals "look very promising," but don't provide blanket consumer protection.

According to Sherry: "Just giving consumers more time to receive the bill -- 21 days -- does not stop the companies from late fee tricks. They can still credit a payment late, since there is no proof of when the consumer mailed the payment."

Proposed rules
Regulators propose the following consumer protections:

1. Payment due dates: Credit card issuers would have to give credit card account holders "a reasonable amount of time" to make payments on monthly bills. That means payments would be due at least 21 days after they are mailed or delivered. Consumers have complained about due dates that change without notice or are moved up, giving them less time to pay their bills and increasing the likelihood of late fees.
2. Payment allocation: On accounts with different interest rates for different types of purchases (i.e., cash advances, regular purchases, balance transfers or ATM withdrawals), issuers would have three options for allocating monthly payments: Apply the entire amount to the balance with the highest interest rate, split the payment equally between all of the balances or use a method that gives "consumers the full benefit of the discounted rate or deferred interest plan" when those types of rates apply, according to the proposed rules. Current industry practice is to apply all monthly payments to the lowest-interest balances first -- thus extending the time it takes to pay off higher-interest rate balances. 
3. Hiking interest rates: Interest rate increases would be allowed only under limited conditions, such as when a promotional rate ends or if the cardholder fails to make a timely monthly payment. This would apparently end "universal default," the practice of raising interest rates on customers based on their payment records with other nonrelated credit issuers (such as utility companies and other creditors). However, some large banks in recent months have voluntarily discontinued this practice.
4. Over-the-limit fees: Credit card issuers would be prohibited from charging over-the-limit fees when consumers exceed their credit limits because holds or blocks were placed on their credit cards. This is a sore point with people who reserve rental cars or hotel rooms. These merchants may place holds on credit card accounts for the total amount of purchase plus a deposit. While a hold is in effect, the amount of available credit on the account is reduced. It may take several days or a week or more to release these holds and consumers close to their credit limits have been hit with over-the-limit fees when they tried to make additional charges.
5. Double-cycle billing: Finance charges on outstanding credit card balances would be computed based on billing in the current cycle rather than going back to prior cycles to calculate interest charges. So-called two-cyle or double-cycle billing hurts consumers who pay off their balances in full in one month but not in the next. They are hit with finance charges from the previous cycle even though they have paid the bill in full.
6. Fee harvesting: People who get subprime credit cards and are charged account-opening fees that eat up their available balances would get some relief under the proposed rules. The practice is called fee harvesting in the industry. Credit card issuers would be banned from charging these fees if "those fees or deposits utilize the majority of the available credit on the account." Also, fees that exceed 25 percent of the available credit limit must be spread over the first year of card use, rather than piled on at the beginning.
7. Credit offers: When advertising or marketing credit cards to consumers, issuers would have to disclose the factors that will determine which interest rates or credit limits potential customers will receive. This would help to eliminate the surprise some consumers experience when they are teased with low interest rates in ads but end up with much higher interest rates when they actually apply for the credit cards. 

What's next? Steps to reform

•  May 2: The Fed votes to approve proposed rules.

•  Public comments are sought on the proposed regulations (75 days after publication in the Federal Register).

•  Fed staff reviews comments and recommends final rules.

•  Fed board of governors votes on final rules by the end of 2008.

•  Effective date when the rules begin but are not mandatory may be January 2009.

•  Credit card banks may then have several months or longer to implement new rules before they become mandatory.

Joint agency review
The Fed is jointly issuing the same rules with the Office of Thrift Supervision, which regulates savings associations, and the National Credit Union Administration, which oversees credit unions. All three agencies will have a 75-day comment period allowing the public to give feedback on the pros and cons of the rules.

Sherry, from Consumer Action, noted that the rules do not cover retroactive application of interest rate hikes -- another practice often cited by credit card industry critics as unfair to consumers. When interest rates are increased, the new, higher rate is applied retroactively back to previous purchases rather than on purchases made after the increase.

She said credit offers under the proposed rules "still allow the companies to offer wishy-washy rate tiers and probably use meaningless jargon to tell consumers what they need to do to get that rate." She added, "They should have called for a specific credit score, or some such specific indicator of what it takes to get that rate."

For subprime credit card accounts, "I am not pleased with the allowance for the fee harvester cards to go ahead and charge fees in excess of 25 percent as long as they allow people the right to pay them off over the first year. Upfront fees of more than 10 percent are unconscionable in our view," Sherry said.

Overlapping rules and laws
Release of the proposed rules puts federal regulators in a race with Congress to see who can enact the most comprehensive consumer protections first. In a statement released just before Friday's Fed vote, New York Congresswoman Carolyn Maloney said consumers can't afford to wait for action. Maloney introduced the Credit Cardholders' Bill of Rights Act in February. The proposed legislation includes several of the provisions covered in the Fed's proposed rules. Sens. Christopher Dodd and Carl Levin co-sponsored a new bill this week called the Credit Card Accountability, Responsibility and Disclosure (or CARD) Act. It brought to more than two dozen the number of credit card industry bills circulating in Washington. 

"It seems to us that practically every committee in the House and the Senate and regulator that has an interest in banking or credit cards has a dog in this fight," according to Robert Hammer, CEO of R.K. Hammer, a credit card consulting firm. "Moreover, it seems like many of the well-intended versions carry similar overlapping provisions."

Hammer said at some point all of the parties will have to collaborate on a final version. He adds: "That change is coming is a certainty; the only remaining questions are the depth and breadth and timing of the changes."

As for timing, neither federal regulators nor Congress are likely to act swiftly. Bills must be passed by both houses of Congress and then signed by the president. In a politically charged election year, that isn't likely to happen before January 2009, if then. The Fed is also considering stricter rules on credit card disclosures under the Truth in Lending Act's Regulation Z provisions. Reg Z, as it is called, would require clearer, more readable disclosure of interest rates, fees and terms on monthly statements, require that "fixed rate" cards actually have fixed rates, as well as demand 45 days' notice instead of 15 days when credit card terms change.

Said Fed chairman Bernanke: "Approving disclosures alone cannot address all concerns about account holders."

Sandra Braunstein, director of the Fed's Division of Consumer and Community affairs, said the Reg Z proposals will be merged with the FTC Act rules in the coming months. "The idea on this is that the rules proposed under Reg Z and a number of these rules will require fairly major changes to systems," she told Fed board members. "It would behoove the industry if we did it all at one time. We will roll all of this into one final package."

Several of the banks that submitted comments last year regarding Reg Z indicated they would need at least 12 to 18 months to revamp their billing and marketing systems to comply with the regulations.

Maloney said in her statement: "By the time the Fed gets around to finalizing its new credit card reform proposals, they will likely be watered down and come too little too late for millions of struggling consumers who need help now. More and more Americans are turning to their credit cards to help pay bills, buy groceries and make ends meet in this troubled economy. Congress can and should take swift action ..."

To submit comments on the proposed rules go to the Federal Reserve's website.

To comment on this article, write to: Editors@CreditCards.com.

See related: "Agencies propose sweeping changes to credit card practices," "Fed to release new credit card regulations this week," "Fed: Expect credit card regulations this spring," "Regulation Z: Fed moves to change credit card rules," "House introduces Credit Cardholders' Bill of Rights," "Timing is everything for some credit card payments

Published: May 2, 2008



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