Fed proposal: No more credit card rate hike surprises
Notice and free credit report required before risk-based rate changes
Federal regulators are proposing new rules that would require credit card issuers send notices and provide free credit reports to consumers when they are subject to interest rate hikes based on information contained in credit reports.
If approved, the rules -- nearly five years in the making -- may help take the surprise element out of interest rate increases based on information from a credit report that may be inaccurate or arise from circumstances beyond the consumer's control.
The rules come amid a flurry of legislative and regulatory action targeting the credit card industry. Consumers, lawmakers, credit counselors and others have blasted credit card issuers for alleged unfair and deceptive trade practices. On May 2, the Fed issued a broader set of proposed new rules aimed at curbing some of the most-criticized practices and pledged to vote on final version by year's end.
The proposal, issued jointly on May 8 by the Federal Reserve Board and Federal Trade Commission (FTC), won praise from consumer advocates, but banking industry representatives said many of the top credit card issuers have already voluntarily stopped a practice known in the industry as "universal default," in which interest rates are increased based on information contained in credit reports. Under universal default, missing a payment with just one creditor could cause any another creditor to raise rates.
Citi discontinued such re-pricing in the spring of 2007, according to Sam Wang, vice president of public affairs for Citi. JP Morgan Chase stopped its universal default practice in March 2008 and Bank of America, the largest credit card issuer, also no longer uses it.
"I am pleased that they saw fit to give the consumer a separate free credit report as a condition of receiving the risk-based pricing notice," says Linda Sherry, national priorities director of Consumer Action, a San Francisco-based consumer advocacy group. "This is good news."
According to a Fed press release, the rules are part of the Fair and Accurate Credit Transactions Act (FACT Act), which was signed into law in December 2003. That law is best known for requiring that consumers are entitled to a free credit report every 12 months from the three major credit reporting agencies (Equifax, Experian and TransUnion).
Today's proposal is the result of a FACT Act requirement that the Fed and FTC jointly issue rules governing "re-pricing" of risky credit cardholders. Re-pricing is a banking industry term used to describe increasing interest rates for customers, often based on risk-based criteria. Credit card issuers re-price accounts when customers are considered greater credit risks (when there is greater doubt about account holders' ability to repay their debts).
The proposed new rules affect re-pricing caused by circumstances outside of the consumer's payment performance with the issuer. This can be too many inquiries made on a credit report, such as when consumers apply for new jobs, apartments, car insurance or new credit cards. Inaccurate information, such as payment records from one Jane Smith appearing on another Jane Smith's credit report, may also affect a credit score and could potentially trigger re-pricing of a credit card account.
Under the proposal, credit card issuers would be required to notify those customers that they may be subject to risk-based interest rate increases when they receive interest rate offers that are "materially less favorable" than offers given to customers without negative credit reports. The notice must inform consumers they have a right to obtain a free credit report from a credit reporting agency. Receiving a free report would presumably allow consumers time to check their reports for inaccurate or negative information so they can take action to correct the report before it affects their credit card interest rates.
The rules would cover credit cards as well as student, car and adjustable rate mortgage loans and any issuer that uses a credit report to grant, extend or provide credit. The proposal spells out several exceptions to the notice requirement. Creditors that provide credit score information to customers would not have to send risk-based re-pricing noticies and creditors who issued loans based on pre-screened solitications to customers with bad credit also would not have to send notices to these customers.
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