The Federal Reserve has proposed new rules that would require credit card issuers to communicate rates and fees through credit card disclosures more clearly.
Under new rules proposed by the Federal Reserve on May 23, 2007, credit card issuers would be required to present interest rates and fees to consumers in more straightforward language. The new regulations, unveiled following a two-and-a-half year study, could take effect by the end of 2007.
The rules proposed by the central bank would be the most significant change to U.S. truth-in-lending regulations in 26 years. At the same time, some key members of Congress are stepping up efforts to prevent aggressive marketing and pricing practices by retail lenders.
Among the suggested changes would be requiring credit card solicitations to prominently display information related to penalties and payment-allocation methods, having periodic statements contain a warning about the dangers of only making the minimum monthly payment, and forcing lenders to give 45 days’ notice before raising an interest rate due to delinquency or default.
Additionally, the proposal requires credit card disclosures to use larger type in some cases, as well as compelling issuers to show on monthly statements how much a customer had paid in fees and interest so far for that calendar year. Card companies would also need to explain that low interest rates on balance transfers apply solely to that balance, as opposed to new purchases.
Federal Reserve Chairman Ben Bernanke explained that the proposed revisions aim to ensure that consumers are provided with necessary information about credit cards “in a clear and conspicuous format and at a time when it would be most useful to them.” The Fed chief added that improved clarity in credit disclosures enables consumers to make more informed choices while also increasing competition among credit card issuers.
While both industry and consumers groups applauded the Fed’s announcement, each group will attempt to alter the final rules during the 120-day comment period. Following the review period, the central bank can apply the new rules.