Fed Could Remake Credit Card Regulations

New Rules Would Ban Retroactive Rate Hikes

By Nancy Trejos? Washington Post Staff Writer

The Federal Reserve on Thursday will vote on sweeping reform of the credit card industry that would ban practices such as retroactively increasing interest rates at will and charging late fees when consumers are not given a reasonable amount of time to make payments.

The Fed, which has been considering the proposed changes since May, declined this week to release details of the final draft regulations. But banking officials and consumer advocates said that they do not expect substantial changes before the vote, especially since members of Congress have pressured the Fed not to water down the rules.

However, industry officials and consumer advocates said, the Fed will likely postpone a decision on a proposal to prohibit banks from charging fees for overdraft protection unless they have given customers the chance to opt out. Both the banking industry and consumer advocates considered the overdraft proposal flawed.

If the new credit card regulations are approved largely as proposed, they would represent the most significant overhaul of the industry in decades, banking officials and consumer advocates said. The Fed has not yet indicated a timeline for implementation.

“It covers a lot of issues and is really unprecedented in its scope,” said Edward L. Yingling, chief executive of the American Bankers Association. “You add them all up, it’s going to mark the beginning of a new market.”

The changes are particularly needed now, consumer advocates said, because many borrowers are drowning in debt and having trouble making their payments in the midst of a deep recession.

The Fed first attempted to reform the industry by forcing card issuers to make disclosures of terms and conditions more user-friendly. That proposal is also to be voted on Thursday.

But consumer advocates argued, and Fed officials agreed, that better disclosure was not enough. In May, the agency followed with its “unfair and deceptive practices” proposal.

Among the many provisions is a ban on raising interest rates on existing balances unless the customer was 30 days or more late in paying the minimum. Other circumstances in which a rate change would be allowed would be if the card had a variable rate or a promotional rate that was set to expire. Banks would also not be able to treat a payment as late if the customer had not been given a fair amount of time to make that payment.

The proposal would also dictate how credit card companies should apply customers’ payments that exceed the minimum required each month. When different annual percentage rates apply to different balances on the same card, banks would be prohibited from applying the entire amount to the balance with the lowest rate. Many card issuers do that so that debts with the highest interest rates linger the longest, thereby costing the consumer more.

Industry officials have lobbied against the provisions, particularly the one restricting their ability to raise interest rates. They have warned that the changes would force them to withhold credit or raise interest rates because they won’t be able to manage their risk.

“If the industry cannot change the pricing for people whose credit deteriorates then they have to treat most credit-worthy customers the same as someone whose credit has deteriorated,” Yingling said. “What that means for most people is they’ll pay a higher interest rate.”

Consumer advocates pointed out that card issuers will still be able to raise the rate on an existing balance if the customer is 30 days late on a payment. Furthermore, they said, the proposal does nothing to restrict banks’ ability to raise rates on a customer’s future balance or to exercise other punitive measures. An increase in credit card delinquencies has already led many banks to cut limits and raise rates.

“They can cut my credit line, they can freeze my credit line, they can tell me going forward that my interest rate is doubled or tripled,” said Travis Plunkett, legislative director for the Consumer Federation of America.

Another concern among consumer advocates is the timeframe for implementing the changes. Card issuers have said they will need a substantial amount of time, up to a year, to change their practices. Yingling said that changing their disclosures and their computer systems takes time.

Linda Sherry, director of national priorities for Consumer Action, urged the Fed to give the banks no more than 180 days.

“That would be a big mistake if they give the card companies a couple of years to do this,” she said. “In the interim period the consumers would be sitting ducks for all these bad practices.”

Consumer advocates said they hope for more reforms. Although the proposal is sweeping, the advocates said it fails to ban all questionable practices, such as aggressively marketing credit cards to college students.

Several members of Congress, including Sen. Christopher J. Dodd (D-Conn.), proposed bills this year that would have gone further than the Fed’s proposal. They have said they plan to do so again next year.

“I think we’d be kidding ourselves if we thought this is the final word on credit cards,” said Ira Rheingold, the executive director and general counsel of the National Association of Consumer Advocates. “This is a good first step. But there’s a way to go before we properly regulate credit in our society.”

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