Fed Drafting New Credit Card Rules

Regulations Would Ban 'Unfair or Deceptive' Practices, Panel Is Told

The Federal Reserve later this spring will propose new rules to prohibit "unfair or deceptive credit card practices," such as arbitrary interest-rate increases and double-cycle billing, a top agency official told a congressional panel yesterday.

The rules would go further in regulating the credit card industry than one the agency announced last summer, which would require card issuers to more clearly disclose terms and conditions to their customers.

Sandra F. Braunstein, director of the Fed's division of consumer and community affairs, acknowledged to the House Financial Services subcommittee on financial institutions and consumer credit that "careful measures that would restrict credit card terms or practices may in some instances be more effective than disclosure to prevent particular consumer injuries."

Braunstein said the agency expects the regulations to be final by the end of the year. If approved, they could result in broad changes for the credit card industry, which has come under scrutiny in the past year over practices such as retroactively increasing interest rates, charging excessive fees and imposing finance charges on billing cycles preceding the most recent one, known as double-cycle billing. Several lawmakers have introduced bills to curtail such practices.

It was one of those bills -- the Credit Cardholders' Bill of Rights of Rep. Carolyn B. Maloney (D-N.Y.) -- that brought more than a dozen representatives from government agencies, credit card companies and consumer advocacy groups to the same table yesterday. Three cardholders who said they had incurred inexplicable fees and interest rate increases testified before the subcommittee. The bill would, among other things, force card companies to give advance notice of interest rate increases and allow borrowers to reject them, crack down on excessive fees, and require Congress to practice better oversight of the industry.

"I believe it is a much-needed correction to a market that has gotten wildly out of balance," said Maloney, whose bill has 100 co-sponsors. "A credit card agreement is a contract between a card company and a cardholder, but what good is a contract when only one party has any power to make decisions?"

Representatives from Citi Cards, American Express and Discover Financial Services acknowledged that the industry needs reform. Citi Cards, for example, last year stopped raising customers' interest rates, or repricing, over delinquent behavior with other creditors, a practice known as universal default. It also stopped what has been called "any time, any reason" repricing.

However, the executives said Maloney's bill is too restrictive and would result in higher costs for all borrowers because companies would not be able to properly assess an individual's risk.

"Without that ability to differentiate risk, less creditworthy consumers would have fewer means of accessing regulated credit, relatively risk-free consumers would face a higher cost of credit, and banks would have to rethink their lending models," said John P. Carey, chief administrative officer of Citi Cards.

But the discussion often focused more on regulatory reform than legislative reform. The Federal Reserve is not the only agency trying to change the rules. The Treasury Department's Office of Thrift Supervision, which regulates all federal and some state thrift institutions, is also crafting stricter credit card controls, which it will unveil in the "very near future," said John E. Bowman, deputy director and chief counsel of that agency.

While praising some of the provisions in Maloney's bill, Bowman said his agency "favors an alternative to new legislation prohibiting specific credit card practices. We support a more agile regulatory approach that allows OTS to respond to whatever unfair or deceptive practices it finds exist in the industry or are on the horizon." Some lawmakers echoed his concern.

Rep. Judy Biggert (R-Ill.) said regulation and consumer education should precede any congressional interference. "Regulators have expertise," she said.

Braunstein said the Fed's new rules would incorporate some of Maloney's proposals. The issues the agency has looked at, she said, include increasing rates on existing balances, payment allocations, double-cycle billing, the timeliness of statements, and whether or not people are given adequate time to pay. To ensure that consumers with cards from banks, savings associations or federal credit unions would get the same protection, she said the Fed will consult with the OTS and the National Credit Union Administration to come up with a "uniform" set of rules.