November 24, 2015

Fed backs rules to curb deceptive credit card practices

Final vote on consumer protections could come by year's end

By Connie Prater  and David Munns

Published: May 2, 2008

WASHINGTON -- Federal banking regulators took unusual steps Friday to protect credit cardholders from unfair and deceptive trade practices, proposing rules to eliminate "surprise" interest rate hikes, limit fees and give consumers reasonable time to pay their monthly credit card bills.

The Federal Reserve Board of Governors voted 4-0 to approve the proposed rules. If given final approval later this year, the regulations may provide important safeguards to consumers who have complained about skyrocketing credit card interest rates, fluctuating due dates, over-the-limit fees and how monthly payments are applied to outstanding credit card balances.  

"Consumers relying on credit cards should be better able to predict how credit card operations affect their accounts," Fed Chairman Ben Bernanke said. "It's a very good and comprehensive proposal."

In discussing the new rules, Bernanke noted how credit card lending has evolved over the years and become more complex. 

"Twenty-five years ago, less than 25 percent of consumers had credit cards," Bernanke said. "Now, it's grown substantially. Credit cards are available to more people. Although they work well for more consumers, the credit card plans need to work better for more consumers."

Reaction to the proposal was swift, and passionate. The proposed new rules -- which carry fines and penalties levied under the Federal Trade Commission Act (FTC Act) -- could slow the nearly $951 billion credit card lending industry and result in higher credit card interest rates for everyone, banking and credit analysts and observers told CreditCards.com.

Proposed rules
Regulators propose the following consumer protections:

1. Payment due dates: Credit card issuers would have to give credit card account holders "a reasonable amount of time" to make payments on monthly bills. That means payments would be due at least 21 days after they are mailed or delivered. Consumers have complained about due dates that change without notice or are moved up, giving them less time to pay their bills and increasing the likelihood of late fees.

2. Payment allocation: On accounts with different interest rates for different types of purchases (i.e., cash advances, regular purchases, balance transfers or ATM withdrawals), issuers would have three options for allocating monthly payments: Apply the entire amount to the balance with the highest interest rate, split the payment equally between all of the balances or use a method that gives "consumers the full benefit of the discounted rate or deferred interest plan" when those types of rates apply, according to the proposed rules. Current industry practice is to apply all monthly payments to the lowest-interest balances first -- thus extending the time it takes to pay off higher-interest rate balances.

3. Hiking interest rates: Interest rate increases would be allowed only under limited conditions, such as when a promotional rate ends or if the cardholder fails to make a timely monthly payment. This would apparently end "universal default," the practice of raising interest rates on customers based on their payment records with other nonrelated credit issuers (such as utility companies and other creditors). However, some large banks in recent months have voluntarily discontinued this practice.

4. Over-the-limit fees: Credit card issuers would be prohibited from charging over-the-limit fees when consumers exceed their credit limits because holds or blocks were placed on their credit cards. This is a sore point with people who reserve rental cars or hotel rooms. These merchants may place holds on credit card accounts for the total amount of purchase plus a deposit. While a hold is in effect, the amount of available credit on the account is reduced. It may take several days or a week or more to release these holds and consumers close to their credit limits have been hit with over-the-limit fees when they tried to make additional charges.

5. Double-cycle billing: Finance charges on outstanding credit card balances would be computed based on billing in the current cycle rather than going back to prior cycles to calculate interest charges. So-called two-cyle or double-cycle billing hurts consumers who pay off their balances in full in one month but not in the next. They are hit with finance charges from the previous cycle even though they have paid the bill in full.

6. Fee harvesting: People who get subprime credit cards and are charged account-opening fees that eat up their available balances would get some relief under the proposed rules. The practice is called fee harvesting in the industry. Credit card issuers would be banned from charging these fees if "those fees or deposits utilize the majority of the available credit on the account." Also, fees that exceed 25 percent of the available credit limit must be spread over the first year of card use, rather than piled on at the beginning.

7. Credit offers: When advertising or marketing credit cards to consumers, issuers would have to disclose the factors that will determine which interest rates or credit limits potential customers will receive. This would help to eliminate the surprise some consumers experience when they are teased with low interest rates in ads but end up with much higher interest rates when they actually apply for the credit cards. 

Click on Link:
http://www.creditcards.com/credit-card-news/unfair-credit-card-trade-practices-1282.php