Fed Seeks Ban on Some Practices of Credit Card Firms
Saturday, May 3, 2008
Federal Reserve Chairman Ben S. Bernanke said yesterday that the agency's effort to regulate the credit card industry by requiring better disclosure forms has fallen short and that certain practices have to be banned to protect consumers.
"Based on our review of consumers' response to the Board's recent regulatory initiative, it seems clear that improved disclosures alone cannot solve all of the problems consumers face in trying to manage their credit card accounts," he said.
Bernanke's comments came during a meeting in which the Federal Reserve board unveiled its proposal to prohibit practices by credit card issuers that it deems "unfair" and "deceptive." The Fed joined the Treasury's Office of Thrift Supervision, which regulates all federal and some state thrift institutions, and the National Credit Union Administration, which oversees credit unions, in drafting the proposed rules, which could be finalized by the end of the year.
If they are instituted, they would constitute the most significant crackdown on the credit card industry in decades. The rules would, among other things, specify when card issuers can increase interest rates on existing balances, ban finance charges on balances that have been repaid, and prohibit late fees on customers who were not given a reasonable amount of time to pay.
Consumers have long complained about such practices. The Fed responded last year with a proposal, still under consideration, to require card companies to improve disclosure forms.
Several lawmakers have sharply criticized the agency for not aggressively exercising its right to regulate the credit card industry, whose actions have been blamed for forcing consumers who are struggling with mortgages they cannot afford even deeper into debt.
Yesterday, some of the lawmakers, who have proposed their own pro-consumer bills, praised the proposal but said that legislation is still needed to restore the balance between card issuers and consumers.
"I am happy on two grounds: first, that the Fed has finally used the authority we gave them under the Federal Trade Commission Act; and second, that they have produced a substantive proposal that appears to have a lot in common with legislation we are considering in the Financial Services Committee," said Rep. Barney Frank (D-Mass.), head of the financial services panel. "We . . . believe some legislation will still be appropriate."
"These steps are a significant improvement," said Sen. Charles E. Schumer (D-N.Y.). "While they can still go further, the Fed deserves credit for acting, particularly for banning some awful practices rather than relying solely on disclosure."
The banking industry vowed to fight the proposal during the 75-day comment period. The three agencies involved must review the comments before finalizing the rules.
Edward L. Yingling, president and chief executive of the American Bankers Association, said the rules would restrict the ability of card companies to charge interest rates that reflect the risks of different customers, thus forcing them to raise rates on everyone, even those with good credit.
"Regulatory responses such as these are effectively price controls, which have never worked in the past, and we do not believe they will work here," Yingling said.
Joe Belew, president of the Consumer Bankers Association, which represents regional banks, said "it is important to ensure that whatever rules are adopted do not inadvertently do more harm than good."
Members of the Fed board acknowledged that there might be costs, along with benefits, to consumers. "If the rules are adopted, consumers may see some costs decline as new business models emerge, while other costs might increase," said Fed governor Randall S. Kroszner. But, Bernanke said, the proposal is "intended to establish a new baseline for fairness in how credit card plans operate."
Guidelines would specify how payments are to be allocated, banning card issuers from applying a payment to a portion of a balance with a lower interest rate, then to one with a higher rate, thereby maximizing the consumers' finance charges. They would crack down on subprime credit cards, in which consumers with bad credit are charged higher rates and fees. And they would give consumers the right to opt out of overdraft protection on their deposit accounts.