In an 800-page document released Sept. 29, 2009, the Fed lays out detailed rules requiring credit card issuers to confirm borrowers’ ability to pay
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In more than 800 pages, proposed rules issued Sept. 29 by the Federal Reserve Board outline what credit card issuers can consider when deciding to grant new credit cards to customers or increase credit limits on existing accounts.
Currently, credit card applicants typically fill out applications declaring their annual income but providing no proof. Of the major credit card issuers, only American Express currently asks for income tax returns for its applicants. After Feb. 22, 2010, applicants may be asked to pony up the following kinds of proof of ability to repay credit card debts:
- Salary, wages, bonus pay, tips and commissions from full- or part-time, seasonal, military or irregular jobs and self-employment.
- Interest, dividends, retirement benefits, public assistance, alimony checks, child support and other kinds of maintenance payments.
- Savings accounts or investments.
- Credit reports and credit scores.
The proposed rules provide guidelines to direct the issuers of credit cards in implementing the second phase of the Credit CARD Act of 2009, a federal law signed by President Obama in May. The law mandates the most sweeping changes in credit card industry history and seeks to safeguard consumers against what the Federal Reserve calls “unfair or deceptive” trade practices.
“This proposal is another step forward in the Federal Reserve’s efforts to ensure that consumers who rely on credit cards are treated fairly,” Fed Gov. Elizabeth A. Duke said in a press release. “The rule bans several harmful practices and requires greater transparency in the disclosure of the terms and conditions of credit card accounts.”
New ‘proof of income’ rules
The new income guidelines unveiled Sept. 29 were developed to satisfy a provision in the credit card law stating that applicants must show they have the means to make minimum monthly payments on credit card debts. The clause was incorporated into the law to address America’s growing credit card debt burden and prevent instances of people with relatively low incomes receiving multiple credit cards with high credit limits. The guidelines direct banks develop reasonable policies and procedures to determine ability to pay.
“The Board believes an evaluation of a consumer’s current ability to pay must include a review of the consumer’s income or assets as well as the consumer’s current obligations,” according to the Fed. “A card issuer has not complied with this provision if, for example, a card issuer does not review any information about a consumer’s income, assets, or current obligations, or issues a credit card to a consumer who does not have any income or assets.”
Young adults and college students
The Fed also clarified several unanswered questions about restrictions on college credit card marketing. Freebies and other giveaways cannot be used to entice students to fill out credit card applications if conducted within 1,000 feet of the campus border. Those free gifts are allowed if the person seeking a credit card does not have to fill out an application.
If people under 21 want credit cards in their own names, they must show proof of means to pay or get co-signers — anyone older than 21 who agrees to be jointly liable on the account or guarantee repayment. The letter of the credit card law specifies that parents, guardians or spouses can co-sign, but in the proposed regulations, the Fed expanded the list of those who can co-sign — to anyone 21 or older.
The new law requires that consumers must consent to (or opt-in to) over-limit fees, charged when purchases exceed the account’s available credit limit. Rejecting over-limit coverage means consumers’ purchases will be denied at the cash register or point of sale if they do not have sufficient available credit to cover transactions. If consumers agree to over-limit fees, the law restricts credit card issuers to charging only one over-limit fee per month and no more than three months of fees for any one transaction.
The Fed guidelines give details of card issuer over-limit fee practices that will be banned as unfair and deceptive. Among them:
- Consumers cannot be pushed over their credit limits based on fees and charges tacked on by the issuer.
- Consumers cannot be charged over-limit fees if they go over their limits because card issuers failed to adjust their credit balances in a timely manner.
- Credit card issuers cannot threaten to withhold credit to customers who don’t agree to pay over-limit fees.
HOW TO COMMENT
ON PROPOSED RULES
|The Fed accepted public comments on the proposed rules until Nov. 20, 2009. You can comment using one of the following methods:|
Time line for implementation
The newly released rules add more detail to an already complex law, which comes into force in several phases. The first provisions of the new law — advance notice requirements and allowing consumers more time to pay their monthly credit card bills — took effect Aug. 20. The major provisions — those involving interest rate hikes on existing credit card balances and young adult applicants — start Feb. 22, 2010. A few aspects — such as a clause that requires credit card issuers to roll back interest rates to previous levels if consumers have been good and paid their bills on time — do not start until August 2010. (See Interactive time line: How the bill became law, when its provisions take effect.)
Interest rate rules changing in February
Starting in February, the credit card law will limit when annual percentage rates (APRs) can be increased on existing credit card balances. After that date, issuers can hike interest rates on outstanding balances only when:
- An introductory or teaser rate (such as 0 percent for six months) expires. The law requires that teaser rates must be offered for at least six months.
- Consumers are more than 60 days late paying their monthly credit card bills.
- The APR on the account is based on a variable interest rate tied to an index.
- Consumers complete or fail to comply with special programs to repay debt (called workout plans).
- Military personnel return from active duty and credit card APR protections for service members end.
In addition, APRs must be fixed during the first year of new credit card accounts. After that, interest rate hikes that are not among the exceptions can apply only to future purchases made with the credit card as long as issuers give consumers at least 45 days’ warning of the rate hikes.
The Fed’s release of the interim rules comes less than a week after members of Congress took steps to fast-track the effective dates of the remaining portions of the law. U.S. Rep. Carolyn Maloney of New York and Rep. Barney Frank, chairman of the House Financial Services Committee, introduced a bill make the law effective on Dec. 1, 2009 — nearly three months ahead of the original Feb. 22, 2010, startup date. Maloney and Frank cited continued interest rate hikes, fee increases and other account changes launched by credit card issuers in the months before new consumer protections begin.
Said Maloney in introducing the legislation: “The breadth and depth of the rate hikes happening now point to the need for faster consumer protections. Americans need relief now.”
A Senate version of the bill has not been introduced.
See related: Credit card reform and you, A comprehensive guide to the Credit CARD Act of 2009, Fed issues final rules for first phase of Credit CARD Act, Will new credit card law help or hurt consumers, How to cope until the new credit card rules take effect, What the new credit card rules mean for you, Interactive time line: How the bill became law, when its provisions take effect, Annual fees return in credit card mail offers