Research and Statistics

Regulation Z: Feds move to change credit card rules


The Federal Reserve Board is considering sweeping changes to credit card disclosure rules to address growing consumer complaints.

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Depending on who you ask, today’s credit card industry — a multibillion dollar easy access lending machine — operates like a deceptive, predatory mafia or is a convenient service for those in need of quick cash.

Consumers and advocacy groups complain that banks that issue credit cards unfairly change their rules, hiking annual percentage rates with little notice or changing payment due dates so that consumers are constantly hit with late fees. Banks, on the other hand, contend that people who borrow money should be prepared to repay their debts and banks should be compensated for their risks and losses when lending money. (See what everyone has to say about the credit card reform measures.)

Who’s right? That’s up the Federal Reserve Board, the regulatory agency charged with overseeing the Truth in Lending Act. That federal law spells out what lenders (banks, credit card issuers and credit unions) must disclose to borrowers about the payment terms, interest rates and due dates for loans. The section of the law that deals with credit cards (called open-ended loans) is Regulation Z.

After nearly two decades, the Fed’s Board of Governors is proposing changes to help consumers better understand and know the terms of credit card use.

Among the most important changes: Fixed rates will really be fixed for a specified period. Now fixed-rate cards can be changed with just 15 days’ notice. The rules would also lengthen that minimum notice period to 45 days. There are also provisions to make terms more readable (with larger type displayed in tables) and clear (informing consumers of the amount of fees paid so far during the year and calculating how many years it would take to pay off the balance if they paid only the minimum amount due each month).

Understanding the fine print
If you’ve ever tried to read — and understand — a credit card terms and conditions disclosure statement and couldn’t figure out what  it meant, blame weaknesses in Regulation Z. Don’t feel like a dunce. Many lawyers say they can’t even follow some of the wording in the credit card fine print. A  Government Accountability Office study released in February 2006 asked 12 people to read credit card disclosure statements and found almost all were confused by the wordy sentences and passages. The report found the typical agreements and terms and conditions materials were too difficult for average readers to understand. Most were written at a 12th-grade reading level; experts recommend simple language on a sixth- to eigth-grade level.

The Fed conducted its own focus groups with credit card owners and observed that many didn’t  read the small type printed outside of the tables. This led regulators to propose placing key information  — late-payment fees, over-the-credit-limit fees, balance transfer fees and cash advance fees — within tables.

“The goal of the proposed revisions is to make sure that consumers get key information about credit card terms in a clear and conspicuous format and at a time when it would be most useful to them,” Fed Chairman Ben Bernanke said when the proposals were unveiled in May 2007.  “Greater clarity in credit disclosures allows consumers to make more-informed credit decisions and enhances competition among credit card issuers.”

Time for change?
Don’t expect reform to come too quickly — and that fine print on your monthly statement to suddenly read like a Dr. Seuss book. The Fed likely won’t vote on the final changes until well into 2008. After that, credit card issuers will be given time to implement the new rules. Bank of America and Visa both suggest at least two years lead time.

Quick take: Regulation Z amendments
What Regulation Z does: It lays out disclosure and notice requirements for credit card issuers.
Why it’s important: The Federal Reserve Beard, which oversees the regulations, has proposed significant changes intended to make it easier for consumers to understand and compare credit card terms.
What happens next: The public comment period ended Oct. 12, 2007; the board will now work with a private firm, Macro International, to amend and test its proposed disclosures. A spokeswoman says the staff will make recommendations to the Fed’s Board of Governors in 2008. After that, the board will vote on changes. No effective date is set; the board said it will give creditors “sufficient time to implement any revisions.”

Complaints about credit card industry practices are mounting so quickly that Congress may intervene to strengthen consumer protection laws and ban some of the credit card industry’s most egregious practices. As of December 2007, nearly a dozen bills pending in the U.S. House and Senate sought to regulate credit cards and identity theft.

Some credit card issuers are starting to police themselves and voluntarily backing away from some of the practices cited most often by consumer advocates. On Dec. 4, 2007, Capital One announced voluntary adoption 45-day notice periods prior to interest rate changes. Citigroup says it began revising its standard credit card agreement in 2007 to read on an eighth-grade level. In March 2007, the company announced an end of “anytime, any reason” changes in terms for all Citi-branded credit cards. In what appeared to be acknowledgement of consumer confusion about credit card terms, Chase Card Services also announced it would implement new “clearer pricing practices.”

JP Morgan Chase announced in November 2007 it would do away with “universal default” based on credit scores by March 1, 2008. Bank of America, in its comment to the Fed regarding Regulation Z, states it does not engage in the practice.

Universal default is commonly used by credit card issuers to increase cardholders’ annual percentage rates (APR) when customers’ credit scores drop. Creditors view a drop in the credit score as a sign that lending money to these customers has become more risky and argue that increasing the APR is warranted. For example, Chase can increase its rates to customers who miss a payment on a Visa credit card or mortgage — even if they paid their Chase bills on time each month.

Consumers complain that the practice is unfair, especially if they have paid one creditor on time each month but are penalized for late payments to a different unrelated credit issuer. Advocates also object to the perceived “surprise” nature of these default rates, arguing consumers are not given adequate warning that their interest payments have suddenly become a lot higher and it will take much longer to pay off their debts.

Not tough enough?
Several consumer groups complain the Fed’s Regulation Z amendments don’t go far enough to ban the worst of the unfair or deceptive practices seen in the credit card industry. These include universal default, charging fees when consumers go over their credit limits when lenders can simply reject the transactions at the time of purchase, and retroactively increasing APRs on entire account balances rather than only on future purchases. Critics say the Fed has the authority to curb many of these practices — but hasn’t — opting instead to pass the buck to Congress to police the credit card industry.

Just how many of the Fed’s proposed Regulation Z changes will eventually be enacted is not known. Consumer advocates advise credit card users to read the fine print each month and educate themselves as best they can about their credit card terms and conditions.

See related: Regulators issue sweeping new credit card rules, Proposed credit card rule changes draw massive response, Poll: Nearly 3 in 4 feel need for more credit card regulation, Obama will usher in credit card reform, observers say

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