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Research and Statistics

Feds: Close rate-hike loopholes in credit card rules


Feds propose rule amendments to close loopholes that would have allowed interest rate hikes by credit card issuers; the public can comment on them until June 4.

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Federal credit card regulators are taking steps to close potential loopholes that, if left unaddressed, could allow card issuers to get around limits on when interest rates can be increased on existing credit card balances.

In proposed rules published May 4 in the Federal Register, regulators are seeking public comment on “clarifications” to the sweeping credit card rules finalized in December 2008. Those rules limited interest rate hikes on existing consumer credit card balances to four circumstances: when a cardholder is more than 30 days late paying a bill, when an introductory APR or teaser rate ends, if a card has a variable interest rate or after the first annivesary of a new account. Issuers must give 45 days’ advance notice of changes to accounts. (See: What the new credit card rules mean for you.)

Extending consumer protections
The proposed clarifications make it clear that APRs also cannot be increased:

  • On balances of closed accounts. As currently written, the rules apply to open accounts.
  • When an account is acquired by another credit card issuer (such as when one bank buys or acquires another or purchases their credit card portfolio).
  • When the balance on the account is transferred to another account with the same issuer.

“For example, an institution would not be permitted to increase the rate on a credit card balance because the account has been closed,” according to a Federal Reserve release on the changes. The notice was jointly issued by the Fed, the Office of Thrift Supervision, which regulates savings and loan associations, and the National Credit Union Administration, which regulates credit unions.

Regulators also note: “The acquisition of an account does not involve any choice on the part of consumers, and the Agencies believe that consumers whose accounts are acquired should receive the same level of protection after acquisition as they did beforehand.”

Deferred interest changes
Other clarifications involve deferred interest programs offered by many retailers and card issuers. They are advertised with “no interest payments until” some future date.

According to the Fed, “Institutions and retailers may continue to offer deferred interest and similar programs, but these programs are subject to all of the protections in the final rules. For example, if a consumer makes a purchase under this type of program, the terms governing interest charges on that purchase cannot be changed through a “hair trigger” or “universal default” rate increase. In addition, institutions and retailers must comply with enhanced disclosure requirements.”

Active duty military personnel
Regulators also clarified how active duty military personnel and their spouses are affected by interest rate protections when they are deployed. The rules limit when interest rates on existing credit card balances can increase. However, regulators had not previously considered the Servicemembers Civil Relief Act. That law requires credit card issuers to charge military personnel and their spouses no more than 6 percent in interest while they are deployed on active duty. Without the clarification from the Federal Reserve, credit card issuers would have been banned from restoring interest rates to previous levels — or increasing them — once soldiers returned from service. The Fed’s proposed change basically adds another exception for when credit card interest rates can increase.

The public has until June 4, 2009, to comment on the proposed changes. According to the Fed, the revisions do not affect the implementation time line for the federal rules. Issuers still must comply with the new federal rules by July 1, 2010.

“Since publication of the two rules, the Agencies have become aware that clarification is needed to resolve confusion regarding how institutions will comply with particular aspects of those rules,” according to the notice.

Fed: Please limit remarks
The last time the Fed open its website for comments on credit card rules, it received a record 66,000 comments from consumers, bankers, credit unions, thrifts, consumer groups and elected officials. The Fed noted in its announcement that the new comment period is not opening the floodgates for general comments about the need for credit card reform and asked those submitting comments to focus only on the proposed clarifications.

Public comments on Fed’s revisions
Go to the Fed’s website to read the public comments filed on revisions to unfair practices rules and disclosure provisions of Regulation Z.

“The Agencies emphasize that the purpose of these rulemakings is to clarify and facilitate compliance with the final rule, not to reconsider the need for — or the extent of — the protections that the rule affords consumers. Thus, commenters are encouraged to limit their submissions accordingly,” according to the notice.

The latest Fed rule changes raise the question of whether members of Congress — who are working with President Barack Obama — will incorporate any of the clarifications into legislation currently under consideration on Capitol Hill. The Credit Cardholders’ Bill of Rights passed by an overwhelming 357-70 vote in the U.S. House of Representatives on April 30. The Credit Card Accountability, Responsibility and Disclosure (or Credit CARD) Act (S. 414) may be up for debate by the full U.S. Senate late this week or early next week.

The legislation in both the House and Senate largely mirror the federal rules, but also include additional provisions for protecting minors and veterans and adding requirements for studying the impact of the legislation of availability of credit. Lawmakers said they wanted codify the federal rules into law so they would be more difficult to revise.

See related: House OKs Credit Cardholders’ Bill of Rights, House committee OKs Cardholders’ Bill of rights, Credit Cardholders’ Bill of Rights passes 1st legislative hurdle, Federal banking regulators finalize sweeping rule changes for credit cards, House again weighs Cardholders’ Bill of rights, What the new credit card rules mean for you, New credit card rules don’t cover business, corporate credit cards

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