Government Cracks Down on Unfair Credit Card Practices

The federal government today approved new rules that would ban certain financial institutions from engaging in unfair credit card practices.

The steps taken by the Federal Reserve, the Office of Thrift Supervision and the National Credit Union Administration represent the most significant reform of the credit card industry in decades.

The government today banned banks, credit unions and savings associations from a number of practices. Among the practices to be prohibited are: raising interest rates on existing balances unless a payment was received more than 30 days late; charging a late fee if a borrower was given less than 21 days to pay; and applying payments in a way that would result in debts with higher interest rates getting repaid last. In the subprime credit card market, which caters to borrowers with poor or mediocre credit histories, fees that reduce the credit available to them would be restricted. Financial institutions will have to comply with the new regulations by July 1, 2010.

With the approval of new rules banning "unfair and deceptive" practices today, the federal government is handing a victory to consumer groups that have long complained of lax oversight of the $970 billion industry.

Even with all its lobbying power, the credit card industry was not able to beat back the most sweeping overhaul in decades. Financial companies and trade groups argue that regulators are overreacting to problems in ways that will limit the availability of credit to customers.

Today's move is the first of what could be many attempts to further regulate the industry, as several members of Congress plan to codify the Fed's regulations next year and perhaps pass even more stringent rules. It also represents a significant shift in the thinking of the regulatory agencies, which still are run by Republican appointees. Analysts note that regulators have stepped back from an emphasis on educating customers about what they should do, primarily through disclosures, in favor of telling companies and customers what they can and cannot do.

"It just shows how the world has changed," said Brian Gardner, who follows financial regulation issues for the investment bank Keefe, Bruyette & Woods.

"Eighteen months ago the Fed was focused on disclosure and transparency, and now they're coming out with a prescriptive, rules-based guidance. It's a whole different world."

Consumer advocates have argued that the changes are necessary because borrowers are having a hard time keeping up with payments. The latest Fitch Retail Credit Card Index, released this month, shows that 60-day delinquencies have increased by nearly 24 percent since August to 4.8 percent.

"If the rule is adopted largely as it was proposed it could help improve the economic stability of many families," said Travis Plunkett, legislative affairs director of the Consumer Federation of America. "When companies sharply increase interest rates, that could have a devastating effect on the financial stability of credit card holders."

But by limiting banks' ability to manage risk, regulators would be forcing the institutions to withhold credit, raise interest rates or eliminate such programs as zero percent balance transfers to compensate for it, industry officials and analysts said. That could prolong the credit crunch, damp consumer spending and stall an economic recovery, they said.

"Every proposal needs to be looked at in terms of its effect on credit availability," said Ed Yingling, president of the American Bankers Association. "They need to be concerned that on the one hand they're encouraging banks to lend more and on the other hand you have a series of policies that tell banks to lend less."