Aggressive Fed Rules Challenge Credit Cards
Friday, May 2, 2008
The Federal Reserve and two other banking regulators are set to unveil today one of the most aggressive efforts in decades to crack down on the credit card industry, prohibiting practices such as arbitrarily raising interest rates on outstanding balances.
The proposed regulations, which could be finalized by year's end, would label as "unfair or deceptive" practices that consumers have long complained about. That includes charging interest on debt that has been repaid and assessing late fees when consumers are not given a reasonable amount of time to make a payment. When different interest rates apply to different balances on one card, companies would be prohibited from applying a payment first to the balance with the lowest rate.
"It's stronger than what has been issued in the past," said William Ruberry, a spokesman for the Office of Thrift Supervision, which has joined the Fed and the National Credit Union Administration in backing the proposals. "What they proposed is a significant set of rules governing credit card practices and overdraft protection."
In the past, the agencies have regulated the industry by forcing card issuers to better disclose terms and conditions to customers. Last summer, the Fed proposed requiring card companies to improve their disclosures, a plan still being considered. But this new proposal, a summary of which was released by the OTS and the NCUA yesterday, would send a clearer pro-consumer message, credit card watchdogs and government officials said.
It would also show that the Fed, which was criticized for reacting too late to the subprime mortgage crisis, is loath to let card issuers force consumers deeper into debt through inexplicable fees and interest rate increases. Several members of Congress have blasted the Fed for not effectively using its power to regulate card issuers. A number of influential leaders, including Sen. Christopher J. Dodd (D-Conn.), chairman of the Committee on Banking, Housing, and Urban Affairs, have proposed their own bills to ban unfair practices.
"Disclosure has been the tool of choice for regulators. Now they are saying that unfair practices are out of control and they need to ban those practices," said Edmund Mierzwinski, consumer program director for U.S. PIRG, a consumer advocacy group. "This is surprising coming from banking regulators."
Both the OTS, which regulates all federal and some state thrift institutions, and the NCUA, which oversees credit unions, announced yesterday that they had approved the proposal, the full details of which were not be released until today. The Fed is expected to vote on it at its meeting today. Once all three agencies have approved the proposed rules, they will be published in the Federal Register. The public will then have 75 days to comment.
The proposal also seeks to regulate overdraft protection, banning companies from assessing a fee unless the customer chooses not to opt out of that service.
Sandra F. Braunstein, director of the Fed's division of consumer and community affairs, last month told a congressional panel investigating credit card practices that she expected both the latest proposal and the one governing disclosures to be finalized by the end of the year.
The banking industry was quick to denounce the rules and vowed to fight them.
"This is a very aggressive regulatory intervention in the marketplace that will lead to higher prices and less credit options for everyday consumers," said Ken Clayton, senior vice president of card policy at the Washington-based American Bankers Association. "It basically says that we can't price for risk and we can't in a cost-effective way provide these low-cost options like balance transfer opportunities at zero percent interest because of the way they're mandating how these loans get paid back. We won't be able to make the loan."
But other consumer advocates and lawmakers said the proposals don't go far enough.
"Just as we didn't wait for the regulators to deal with subprime mortgage reform, we shouldn't wait for them to deal with the pressing issues on credit cards," said Rep. Carolyn B. Maloney (D-N.Y.), who has proposed her own Credit Cardholders' Bill of Rights. "By the time they get around to finalizing these rules, they will be watered down and come too little too late to help struggling consumers."
Travis Plunkett, legislative director for the Consumer Federation of America, said it would be hard to properly assess the proposal until all the details were released.
"The details matter," he said. "What we don't know is whether there will be exceptions or limits on what they say they're going to do. "
He pointed out, for example, that the summary said interest rates could not increase on outstanding balances "unless certain exceptions apply," such as a case in which the promotional rate expires or if the cardholder is delinquent on that card. And, he said, it omitted many provisions that members of Congress have included in their bills, such as restricting credit card marketing to college students. "It's strong but limited," he said.