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Proposed credit card rule changes draw massive response

56,000 comments set record response for a Fed proposal

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Proposed credit card industry regulation has made history with the Federal Reserve Board, generating more public comments than any other issue reviewed by the nation's top banking regulator. More than 56,000 submissions from banks, credit unions, credit card users and advocates are being processed, according to a Fed spokeswoman.

At issue are proposals to strengthen consumer protections, limit interest rate hikes and ban other credit card industry practices regulators have labeled "unfair or deceptive." 

According to a Fed spokeswoman, the previous recordholder -- 45,000 submissions -- was generated in December 2000 by a proposal to allow financial holding companies to act as real estate brokers. The publicly posted credit card comments total more than 42,000 submissions, including more than 27,000 form letters that are not posted on the Fed's website. A spokeswoman said there is a delay in posting the remaining comments to the site but most should be published by next week. 

What they're saying
Proposed credit card regulation changes draw massive consumer reaction
Here's a sampling of the comments filed so far.

"Hello! I have been ripped off by the credit card Co. ... (more)" Thomas Csora, Akron, Ohio

"While we support the principles articulated in the ... proposals, we believe that certain modifications are necessary to avoid unintended consequences and enhance the objectives of the rules...(more)" Minh-Duc T. Le, assistant general counsel, Capital One

"I am an example of this practice as I have recently filed for bankruptcy and also foreclosed on my house of 28 years ... (more)" Diane Huneke, North Brunswick, N.J.

"It is past time for increased regulation of the credit card industry ... (more)" Chris Reichardt, Berkeley, Calif. 

"No justifiable rationale exists for such thievery, save for greed ... (more)" Jim Chambless, Lewisville, Texas

"Certain aspects of the proposal would tend to exacerbate existing industry problems rather than contribute to their curtailment...(more)"  Keith W. Reynolds, senior vice president, SunTrust Banks Inc.

"The government should include a review of credit card processing practices for small businesses. We own a small business and feel it is necessary to accept credit cards for the convenience of our customers ... (more)" John Gass, Burlington, Iowa

"The alleged disclosures by credit card companies are clearly calculated, drafted and printed to prevent the average consumer from reading and understanding them, and to take unfair advantage of them and rip them off ... .(more)" Peter Chamberlain, Commerce, Texas

TO VIEW COMMENTS

To read comments filed regarding the proposed "unfair or deceptive" trade practices rules, go to  the Federal Reserve website. 

"It wasn't that long ago that the usury laws would have made credit card company owners criminals and felons. Enough is enough ...  (more)" David Anderson, Pompano Beach, Fla.

"Banks are preying on the poor and disadvantaged. It is un-American and un-Christian ... (more)" Scott Simmerman, Taylor, S.C.

"When a credit card company states a 'fixed' rate, why does it escalate? It has happened on most of my cards and I have never paid a bill late ... (more)" Sherry Gravitt, Chattanooga, Tenn.

"They are making millions on unsuspecting borrowers who fail to read, or do not fully understand, the tiny print ... (more)" Anne Cook-Frantz, Wayland, Mass.

"They never told me I had to have it paid by a certain time ... (more)" Vivian Cooper, Valparaiso, Ind.

"In what other industry can one party arbitrarily change the terms of a contract without the written consent of all involved parties? ... (more)" Brian Burton, Abilene, Texas

Flood of response
Why would so many have so much to say about credit card reform measures?

Consumer advocates say the large public response is a reflection of just how frustrated and angry many Americans are about treatment from credit card issuers. Bank industry representatives, however, say the comments were spurred by media attention and by consumer groups who solicited public input.

Consumers Union, the nonprofit publishers of Consumer Reports magazine, led a campaign. One group urged people to write in and set a goal of getting 10,000 comments. The Ohio state Treasurer Richard Cordray personally campaigned for commentors and submitted more than 4,600 comments. Another factor that may have contributed to the large number of comments: the ease with which people can send e-mails or file comments via the Internet.  

"Credit card companies have been allowed to run wild for too long and millions of consumers have felt the brunt of it," says Chi Chi Wu, an attorney with the National Consumer Law Center, a Boston-based nonprofit consumer rights group. "Card issuers are notorious for hair-trigger tricks to impose a late fee or penalty rate."

Wu called the proposed rule changes, "the first real effort by the federal government to rein in some of these bad practices." She said the volume of comments is a reflection of how strongly consumers feel about the need for industry reforms. Credit card issuers, however, point out that many of the comments appear to be form letters, filed in response to campaigns launched by public advocacy groups to boost the number of submissions. 

Banks' comments
Bank of America, the largest U.S. credit card issuer, filed a lengthy response challenging use of the FTC Act to legislate credit card practices.

"Rather than regulating unfair or deceptive practices, the agencies are legislating what they believe to be ideal practices," according to BoA's statement. "More importantly, we believe the practices that the agencies are mandating are in fact far from ideal from the perspective of consumers, banks, and the financial system as a whole ... (more)."

The bank suggests that proposed rules might be more appropriately handled with disclosure provisions of Regulation Z of the Truth in Lending Act.

BoA also contends implementing all of the changes needed to comply with the proposed rules would take two years and cost the company $75 million to $100 million.

JPMorgan Chase, the second largest issuer, released its statement Aug. 4, citing the importance of risk-based pricing in providing affordable financing options for consumers.

"Making elements of that approach difficult or impossible to implement, or artificially raising issuers' costs, will have a direct and negative affect on both the cost and availability of credit to consumers," the statement said. 

Chase's statement predicts the changes would:

  • Cost the industry $10.6 billion a year in lost interest.
  • Cause consumers' average card interest rates to jump more than 1 percentage point
  • Tighten underwriting standards, cutting the availability of credit to riskier consumers.

The American Legislative Exchange Council, a nonpartisan group of state legislators, urged the Fed to reconsider fee limits on subprime credit cards -- those known in the industry as fee harvesting credit cards.

"Unfortunately, the Federal Reserve's proposed rule limiting fees to get a credit card for subprime consumers will effectively remove access to credit cards for these individuals and make the task of rebuilding credit even more difficult," writes Michael Hough, the group's commerce and economic development task force director.  

The American Bankers Association, the major bank trade group, issued a statement May 2, shortly after the Fed announced the proposed rules, criticizing them as an intrusion on competition that would lead to higher interest rates for all consumers.

Representatives of the card and banking industry followed up by detailing their opposition in a series of private meetings with Federal Reserve governors and staffers. One such meeting, on May 8, included representatives of the ABA and three of the five largest credit card issuers in the United States -- Capital One, Bank of America and Citi.

The Fed later released notes of the meeting. According to the notes, the banking officials again defended their practices of anytime rate increases and universal default as beneficial to consumers because they hold down costs overall. The representatives said the proposal "would prevent card issuers from adjusting the rate on the existing balance to reflect increased risk of consumer default. Because initial underwriting cannot identify the 5 percent of consumers who will eventually default on their accounts, issuers must continue to re-evaluate the risk over time by, for example, looking at credit scores.

Because initial underwriting cannot identify the 5 percent of consumers who will eventually default on their accounts, issuers must continue to re-evaluate the risk over time ...

-- Card issuers, according to Federal Reserve minutes

"Increasing the interest rate for these consumers does not lead to higher defaults; instead, some consumers charge less and pay off faster," the notes summarized industry officials as saying. "When the interest rate is increased due to increased risk, additional revenue is earned from the majority who do not default, which is used to offset losses on the smaller number of accounts that go into default and will be charged off."

The Fed later met with American Express and US Bank to hear those issuers' objections. Consumer groups were given a similar chance to express themselves privately.

As for the public comments, the vast majority filed so far come from individuals who overwhelmingly support the credit card practices proposals. Brad Caldwell was one of the few people who filed comments challenging the need for reform measures. He wrote: "I am dead set against this bill ever becoming law! It will reward people who don't manage their credit properly and penalize those who do. It's tantamount to another bailout and is bound to raise interest rates for everybody."

Federal regulators have the power under the Federal Trade Commission Act to ban unfair or deceptive trade practices of banks, thrifts and credit unions. If given final approval by the Fed's Board of Governors, the proposed rules would curb the practices cited most often by credit card users, advocates and members of congress who have complained about abusive tactics.

The proposal calls for:

  • Banning interest rate increases except for a limited number of circumstances, such as when a promotional rate ends or if customers are late making payments.
  • giving credit cardholders a reasonable amount of time (at least 21 days) to make monthly payments.
  • Prohibiting over-the-limit fees caused when holds or blocks are placed on credit card accounts.
  • Eliminating upfront fees on so-called fee harvesting credit cards when they eat up the majority of the available balance on the cards.
  • Requiring credit card issuers to allocate monthly payment amounts either 1) to items with the highest interest rates, 2) by dividing the payment equally among high- and low-interest rate items, or 3) through a method that allows consumers to benefit from a discounted interest rate plan. Currently, many issuers allocate the entire monthly payment to items with the lowest interest rate until they are completely paid off -- a method that allows high-interest rate balances to continue to accrue.
  • Eliminating double-cycle or two-cycle billing practices where interest charges are stretched over more than one month.
  • Requiring that credit card ads offering low "teaser rates" disclose the factors that will determine a customer's final interest rate. 

The proposed rule changes were issued jointly by the Fed, the Office of Thrift Supervision, which regulates thrifts, and the National Credit Union Administration, which oversees credit unions, but the majority of comments have been filed with the Fed.

Fed Chairman Ben Bernanke noted the large number of submissions when he spoke to a congressional hearing July 15 regarding monetary policy. Bernanke cited the unfair practices rules as an example of the board's "actions in the areas of consumer protection."  

"Credit cards provide a convenient source of credit for many consumers, but the terms of credit card loans have become more complex, which has reduced transparency," Bernanke told members of the U.S. Senate Committee on Banking, Housing and Urban Affairs. "Our consumer testing has persuaded us that disclosures alone cannot solve this problem. Thus, the board's proposed rules would require card issuers to alter their practices in ways that will allow consumers to better understand how their own decisions and actions will affect their costs."

Americans for Fairness in Lending, a nonprofit group that educates consumers about predatory lending practices, has also urged people to file comments. "The responses from outraged consumers posted on the Federal Reserve Board website are eye opening and heart breaking," the group's campaign manager, Sarah Byrnes, says in a press release. "Americans are telling the Federal Reserve Board in no uncertain terms that they have had enough of these tricks and traps."

Other measures
Two other proposed reform measures also under consideration by the regulators would require greater disclosure of terms and conditions of credit card agreements (Regulation Z) and limit overdraft fees on checking accounts (Regulation DD). The comment period for those ended July 18. However, neither has generated the kind of response that the unfair practices rule has gotten.

After the comment period ends, staff members from the three agencies will review the submissions and recommend final rules. A Fed spokeswoman has said the Board of Governors will vote on the final rules by year's end. Credit card issuers may then have several months or longer to implement any new rules before they become mandatory.

On July 31, a congressional bill -- the Credit Cardholders' Bill of Rights -- that would ban some of the same practices as the Fed proposal passed a key hurdle and was approved by the House Financial Services Committee. However, members of the committee admit the bill may have little chance of passing when it goes to the full House and even less chance of passing in the U.S. Senate. 

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

See related: Credit Cardholders' Bill of Rights survives key voteFed backs rules to curb deceptive credit card practices, Fed moves to close timing loophole in credit card paymentsTiming is everything for some credit card paymentsRegulation Z: Fed moves to change credit card rules

 

Updated: August 6, 2008


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