Credit Card Industry Faces Reforms

Congress, Federal Reserve Propose Tighter Rules to Protect Consumers

Stricter regulation of the credit card industry will probably be approved by the end of the year, consumer advocates, members of Congress and banking officials said as the comment period on the Federal Reserve's proposed actions drew to a close last week.

Nearly 56,000 comments poured into the agency via e-mail and regular mail, a record response for any Fed proposal, said agency spokeswoman Susan Stawick.

Both the Fed and Congress are working to tighten rules on the credit card industry. The large response to the Fed's proposal comes on the heels of congressional action on the issue. The House Financial Services Committee moved Rep. Carolyn B. Maloney's Credit Cardholders' Bill of Rights out of committee on July 31. The measure would prohibit unexpected increases in the rates charged on pre-existing credit card balances, among other things. Observers said the New York Democrat's bill probably wouldn't pass the Senate this year because time is running out.

Nonetheless, the fact that the bill made it out of committee despite significant pushback from the banking industry and top Republican lawmakers sends a signal to the Fed that if it doesn't take action, Congress eventually will, if not this year then next, consumer advocates and members of Congress said. Several similar bills have been floating around the House and Senate for months, adding to the momentum for change.

"It's going to hem in the Fed. It's going to be harder for the Fed to weaken what they've proposed," said Travis Plunkett, legislative director of the Consumer Federation of America. "It sends a message that 'You did the right thing. Don't weaken it and move it along.' "

The Fed's proposed rules would, among other things, specify when credit card issuers can increase interest rates on existing balances, keep them from calculating finance charges based on the average of balances over two cycles even if part of the debt has been repaid, and prohibit late fees on customers who were not given a reasonable amount of time to pay. The proposal also seeks to regulate overdraft protection on deposit accounts, requiring banks to let customers opt out of the service before assessing fees.

But the proposal does not, in all cases, ban the so-called universal default -- that is, raising a person's interest rate if he or she is late on an unrelated debt. It also does not address many arbitrarily high credit card fees.

The banking industry is preparing for new regulations but does not intend to stay silent while the Fed reviews the comments and determines which if any changes should be made to the proposal.

"The Fed is going to act and is going to establish a new baseline for consumer protection that everyone will follow," said Ken Clayton, the American Bankers Association's senior vice president of card policy. "We hope they will consider the impact this will have on pricing in the marketplace and the big question of whether or not low-risk consumers are going to have to subsidize people who pose a higher risk."

Until now, the Fed has regulated the card industry primarily by requiring better disclosure forms. But as consumers buckle under the weight of rising debt and unemployment, lawmakers and even Fed Chairman Ben S. Bernanke have acknowledged that a much tougher approach is needed to guard against what they call "unfair or deceptive practices."

That said, consumer groups and key members of Congress said the Fed's current proposal still falls short.

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 rules.