Federal banking regulators issued tighter standards for credit card lenders yesterday, saying that some issuers have been engaging in practices that could harm borrowers and their banks.
Under the guidelines, lenders will be expected, for example, to set the minimum monthly payment at a level that will pay off the loan in a "reasonable period of time." They will also be expected to be prudent in allowing cardholders to exceed their credit limits, although the guidelines stop short of forbidding borrowers from going over those limits.
Some banks have issued cards to consumers who are already overextended, set minimum payment requirements so low that they do not cover interest and fees, resulting in balances that rise even when regular payments are made, and reached workout agreements with troubled borrowers that stretch out for years, which allows the lender to avoid recognizing what has clearly become a bad loan.
"We saw slippage in banking practice," and the new standards are meant to "kind of pull it back into more the middle of the road," said Barbara Grunkemeyer, acting deputy comptroller of the currency for credit risk.
Grunkemeyer and regulators at other agencies involved -- the Federal Deposit Insurance Corp., the Federal Reserve and the Office of Thrift Supervision -- said their goal was to improve banking safety and soundness and not specifically to protect consumers. But Grunkemeyer added: "It's always nice when there's a secondary benefit . . . affecting consumers in a positive way."
The standards are in the form of guidance to bank examiners who will be looking at these issues and how banks are dealing with them as the auditors go through each institution's books and records.
Michael J. Zamorski, director of the FDIC's division of supervision, which oversees the agency's examiners, said the regulators were spurred to action by examiners' findings at a few lenders over the past 18 to 24 months. Many of the questionable practices emerged among "subprime" lenders -- those that specialize in lending to people with weak credit histories.
The guidelines come as the credit card industry has been struggling to grow. Most consumers who want a credit card have at least one, and a growing number of cardholders have been paying off their balances every month, depriving lenders of interest income, a key revenue source.
"Competitive pressures and the desire to preserve outstanding balances have led to a general easing of minimum payment requirements in recent years," the guidelines say. Those easings sometimes "increase credit risk and mask portfolio quality."
These problems grow worse when minimum payments repeatedly do not cover all finance charges and fees each month and the outstanding balance continues to climb, a process called "negative amortization," the guidelines say.
Very small required minimum payments have long been criticized by consumer groups as stretching out loans and adding to interest payments.
When a draft of the guidelines circulated in July, they were criticized by card issuers as overly harsh, and some bankers argued that the rules should apply only to subprime lenders. As issued, the guidance applies to all institutions under the regulators' authority. Wall Street reacted positively yesterday, bidding up shares of such credit card specialists as Capital One Financial Corp.
Many lenders declined to comment yesterday, but one who asked to not be identified called the guidelines "reasonable."
"I think the regulatory rules are far more manageable and quite innocuous relative to what the proposal looked like," said Caren Mayer, specialty finance analyst for Banc of America Securities LLC.
Mayer said the regulators softened two standards that most concerned Wall Street. One would have barred or severely restricted subprime lenders from allowing customers to go over their credit limits. Now, the rules say subprime over-the-limit credit should be restricted or subject to controls.
The other rule would have disallowed negative amortization, requiring banks to boost the minimum payments that subprime cardholders would have to pay each month -- when many such borrowers are finding themselves financially strapped, Mayer said. The standards issued yesterday would permit negative amortization over a reasonable period of time.
Staff writer Caroline E. Mayer contributed to this report.