Regulators finalize sweeping credit card rule reforms
Consumer groups pleased, but not with the 18-month phase-in
Federal regulators have approved final rules clamping down on "unfair or deceptive" credit card industry practices by limiting interest rate hikes on past purchases, requiring clearer disclosure of terms and eliminating many of the "gotcha" practices that cost consumers millions in fees and interest.
The rules, approved on December 18, are the culmination of more than four years of federal hearings, reviews and consumer studies into the oft-criticized practices of the nearly $1 trillion credit card industry. The provisions are the most sweeping changes to credit card industry practices in more than three decades -- a period of exponential growth in credit card use, easy credit offers and growing American dependence on credit to pay basic living expenses.
The new rules require credit card issuers to, among other things:
- Limit interest rate hikes on existing credit card balances.
- Keep a fixed interest rate on new purchases for the first year of a card and increase rates afterward after giving 45 days' notice. The old rules allowed rate changes at any time for any reason, with just 15 days' notice.
- Discontinue universal default.
- Give cardholders at least 21 days to pay monthly bills.
- Allocate payments in excess of the minimum amount due each month to items with the highest interest rate balances.
- Limit over-the-limit and subprime credit card fees.
- More clearly disclose terms such as due dates and times, year-to-date totals on interest and fees and the implication of making only the minimum payments on credit card bills each month (See: Interactive look at what new monthly credit card statements would disclose).
The Federal Reserve Board of Governors voted 5-0 on December 18 to approve the new rules, the third of three agencies to act. Fed Chairman Ben Bernanke said fundamental changes were needed in credit card practices, which have become too complex for consumers.
"Transparency makes markets work better," Bernanke said during the Fed's meeting. "These changes represent the most comprehensive reforms ever adopted by the board. It will provide clear and timely information about account balances."
The rules were released jointly by the Fed, the Office of Thrift Supervision (OTS), which regulates savings associations and thrifts, and the National Credit Union Administration (NCUA), which oversees credit union operations. The OTS and NCUA approved the measures earlier on December 18.
"The new regulations will fundamentally alter the relationship that cardholders have with their banks and the way that banks communicate with cardholders," Edward Yingling, president of the American Bankers Association, said in a press release issued this morning.
18 months to implement
The new credit card rules won't immediately help families currently struggling with credit card debt. Regulators gave banks and credit card issuers until July 1, 2010, to implement changes in their billing, marketing and advertising systems. Enactment of the rules likely won't come in time to help ease the current credit card crisis, consumer advocates say.
According to the Fed, the 2010 date was selected to give issuers time to "extensively redesign systems and modify procedures to comply with the changes required under both regulations."
"This is a grave misstep in an otherwise stellar consumer-protection rulemaking," said Linda Sherry, director of national priorities for Consumer Action, a San Francisco-based consumer advocacy group, in a statement. Regulators have "given banks another year and a half to continue indiscriminate interest rate increases on consumers with historically high credit card balances."
Adds Chi Chi Wu, an attorney with the National Consumer Law Center in Boston: "It's got to be quicker to help consumers. That's a long implementation period."
Gail Cunnningham, spokeswoman for the National Foundation for Credit Counseling, said she understands that change can't come overnight. "We all wish it could be immediate," Cunningham said. "But big ships don't turn on a dime. They have to restructure their business model."
Among the predicted consequences of the new rules:
- No more 0 percent balance transfer offers.
- A return to routine annual fees on credit card accounts.
- Significant reduction in subprime credit cards, forcing those with bad credit to seek higher cost credit options such as payday loans.
- Higher interest rates for all credit card users.
In its comments on the proposed changes filed with the Fed on Aug. 4, Chase Card Services estimated that major issuers would have to increase interest rates by more than 1 percent to offset the additional lending risks. A study submitted to the Fed indicated accounts for as many as 45 million cardholders could closed as a result of the risk-based pricing rule restrictions.
A year of financial upheaval
Bernanke had promised to finalize the credit card rules by year's end. The release comes in a year of financial upheaval, bank failures, bankruptcies and stock market swings not seen since the Great Depression.
The new rules also come at a time when consumer advocates and members of Congress have accused regulators of not doing enough to prevent the financial sector from imploding in the subprime mortgage meltdown. Too little regulation, they say, helped fuel risky investments in mortgage-backed securities.
A CreditCards.com poll conducted in June 2008 found that nearly three out of four Americans felt the government should regulate the credit card industry more closely. The proposed credit card rules generated a record number of comments filed with the Fed, many from angry consumers pleading for relief from mountains of credit card debt.
Even critics of the proposed rules acknowledged that the Fed -- challenged by Congress to rein in abusive credit card practices or face legislative efforts to do so -- would likely act in some way given the public response, pressure from Congress and current political climate (President-elect Barack Obama's campaign had a pro-consumer agenda that supported a five-star rating system for credit cards). Critics of the new rules, however, said they preferred to have regulatory reforms rather than legislative actions because the Fed was more knowledgeable about banking operations than members of Congress.
Opponents of the new rules -- mainly banks and credit card issuers -- argued that many of the measures would hinder their ability to react quickly when users become more risky borrowers, known in the business as re-pricing. The effect of the regulations, they say, would be to restrict the amount of credit available to all credit card users. Thanks to the credit crunch and recession, that is already happening.
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Banks already cutting credit
Banks and credit card issuers are already tightening lending standards, cutting credit limits, raising interest rates and reducing mail solicitations in response to the sagging economy. Credit card industry analysts are forecasting rising delinquencies well into 2009 -- tied largely to growing U.S. unemployment. According to the FDIC, credit limits were cut by $123 billion during the third quarter of 2008. One analyst has predicted credit card limits will be slashed by as much as $2 trillion in the coming years as issuers take steps to minimize risk of credit card defaults. The Fed's latest G.19 report of consumer credit indicated a slight drop in revolving debt between October and September 2008.
Investor distrust in asset-backed securities (ABS) similar to those embroiled in the subprime mortgage meltdown have spilled over into credit card backed securities. Issuers rely on pools of investments backed by credit card payments to generate cash to make additional credit card loans. When the ABS market ground to a near standstill in October 2008, the Treasury Department intervened to boost investor confidence by offering to guarantee certain top-tiered ABS for credit cards and student and auto loans.
Lawmakers, including New York Congresswoman Carolyn Maloney, urged the Treasury not to bail out credit ABS markets without first acting to fix credit card industry practices. Maloney was the sponsor of the Credit Cardholders' Bill of Rights, a U.S. House bill that passed by a 312-112 vote in September. The bill was not considered in the Senate. In a statement released on December 18, Maloney says she will re-introduce the bill in January: "This is a good first step, but consumers can't wait." Sen. Chris Dodd, chairman of the Senate Banking Committee, also pledged to re-introduce a credit card bill he sponsored.
Maloney's bill contains many but not all of the same provisions as the federal rules issued on December 18. (See: What the new credit card rules don't cover.) Critics have argued that release of the federal rules make Congressional legislation unnecessary. Maloney, however, has argued that Fed rules can be changed relatively easily compared to federal laws.
The rules will affect the overwhelming majority of Americans. According to Federal Reserve statistics, three out of four households in the United States have at least one credit card, and most Americans have several: The Card Industry Directory estimates that Americans carry more than 694 million cards branded with the logos of the four main transaction processing firms -- Visa, MasterCard, Discover or American Express.
With contributions from Washington, D.C., by freelance writer Charles Dervarics
To comment on this article, write to: Editors@CreditCards.com.
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