Proposal Would Address Credit Card, Overdraft Practices

Reprinted from the CCH Federal Banking Law Reporter.

The Federal Reserve Board, Office of Thrift Supervision and National Credit Union Administration have announced that they will be proposing rules to prohibit unfair practices regarding credit cards and overdraft services that would, among other provisions, protect consumers from unexpected increases in the rate charged on pre-existing credit card balances. The rules, proposed for public comment under the Federal Trade Commission Act (FTC Act), also would forbid banks from imposing interest charges using the "two-cycle" billing method, require that consumers receive a reasonable amount of time to make their credit card payments and prohibit the use of payment allocation methods that unfairly maximize interest charges. Protections for consumers that use overdraft services offered by their banks also are included.

"The proposed rules are intended to establish a new baseline for fairness in how credit card plans operate," said Federal Reserve Chairman Ben S. Bernanke. "Consumers relying on credit cards should be better able to predict how their decisions and actions will affect their costs."

The proposed changes to Reg. AA --Unfair or Deceptive Acts or Practices (12 CFR 227) and the parallel OTS and NCUA rules would be complemented by separate proposals that the Fed intends to issue under Reg. Z --Truth in Lending (12 CFR 226) and Reg. DD --Truth in Savings (12 CFR 230).

Credit Card Proposals

The joint proposal includes five key protections for consumers that use credit cards, under which banks would be:

• prohibited from increasing the rate on a pre-existing credit card balance (except under limited circumstances) and required to allow the consumer to pay off that balance over a reasonable period of time;
• prohibited from applying payments in excess of the minimum in a manner that maximizes interest charges;
• required to give consumers the full benefit of discounted promotional rates on credit cards by applying payments in excess of the minimum to any higher-rate balances first and by providing a grace period for purchases where the consumer is otherwise eligible;
• prohibited from imposing interest charges using the "two-cycle" method, which computes interest on balances on days in billing cycles preceding the most recent billing cycle; and
• required to provide consumers a reasonable amount of time to make payments.
  

The proposal also would address subprime credit cards by limiting the fees that reduce the available credit. In addition, banks that make firm offers of credit advertising multiple rates or credit limits would be required to disclose in the solicitation the factors that determine whether a consumer will qualify for the lowest rate and highest credit limit.

"Unfair practices can impose significant costs on credit card users," said Federal Reserve Board Governor Randall S. Kroszner. "The new proposed rules would provide the benefit of substantial protection against practices that can harm consumers."

Overdraft Protection

The FTC Act proposal also addresses acts or practices in connection with a bank's payment of overdrafts on a deposit account, whether the overdraft was created by check, withdrawal at an automated teller machine, debit card purchase or other transaction. The proposal would require institutions to provide consumers with notice and an opportunity to opt out of the payment of overdrafts before any overdraft fees or charges may be imposed on consumers' accounts.

Industry Opposition

The American Bankers Association (ABA) called the Fed proposal "an unprecedented regulatory intrusion into marketplace pricing and product offerings." The ABA said it is "deeply concerned" that the rules will result in less competition, higher consumer prices, fewer consumer choices and reduced consumer access to credit cards.

ABA President and CEO Edward L. Yingling said the proposal "is particularly perplexing as the result will be a reduction in credit availability at the very time the Fed is working to increase access to credit in the marketplace. 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."

Congressional Proposals

Meanwhile, Senate Banking Committee Chairman Christopher J. Dodd, D-Conn., has introduced legislation intended to improve credit card billing, marketing and disclosure practices. Known as the Credit Card Accountability, Responsibility and Disclosure Act (the CARD Act), the bill is intended to strengthen credit card regulation and supervision, prevent arbitrary increases in interest rates and terms and require fairness in the application of credit card payments. In addition, the bill would protect the rights of financially responsible credit card holders, prohibit exorbitant and unnecessary rates and fees and offer enhanced disclosure of terms and conditions.

"Americans do not deserve to be pushed down the economic ladder by credit card companies. It's wrong, it's unfair, and it must end. The CARD Act will protect Americans by bringing an end to wrongful credit card practices and helping to provide consumers with a fair chance to secure economic security in their futures," Dodd said.

House Financial Services Committee Chairman Barney Frank, D-Mass., said he looks forward to reviewing the details of Dodd's proposal. Rep. Carolyn Maloney, D-N.Y., who has introduced legislation in the House, said she looks forward to working with Dodd in order to deliver "swift and meaningful" credit card reform.