I2CREDIT Nº 1
Tougher rules for credit card issuers in works
Washington - Cash-strapped consumers can expect a special delivery this holiday season: sweeping new rules on credit cards.
Federal regulators will unveil final rules within the next several weeks to restrict credit card practices seen as unfair or deceptive. Proposals would prohibit institutions from practices such as increasing rates on an outstanding balance, except under limited circumstances; applying consumers’ payments over the minimum so as to maximize interest charges; and giving consumers an unreasonably short time to make payments.
Por: Ruth Mantell | McClatchy Tribune
Industry raises concerns
Meanwhile, the credit card industry has reiterated concerns that the rules will damage its ability to manage risk, leading issuers to raise rates and cut available credit. Meredith Whitney, a prominent analyst and managing director of Oppenheimer & Co., agrees that the rules would tamp access to credit, and wrote recently in the Financial Times that the rules will lead to the "severe unintended consequence" of pulling credit from consumers to the tune of $2 trillion, or 40 percent of unused credit lines.
"With so many Americans relying on their credit cards as a major source of liquidity, it would be equivalent to a major pay cut," Whitney wrote.
Ken Clayton, managing director of the American Bankers Association's card policy council, expects the Fed to "move aggressively."
"What you're going to see is an unprecedented change in the way consumers deal with their card companies," Clayton said. "In light of the current economic uncertainties, it's important that all of us understand the full impact of these regulations on consumers and the economy before we can understand [whether they are] successful."
One sticking point is the proposal to prohibit issuers from raising interest rates on outstanding balances. The interim proposal allows for exceptions, such as when a minimum payment is not received within 30 days of the due date. The credit card industry has argued that the 30-day period is too long, a position backed by the Office of the Comptroller of the Currency, the primary federal regulator of national banks, which account for almost 80 percent of U.S. credit card lending.
"We believe the proposed restriction is unnecessarily stringent and would severely curtail the ability of creditors to react to adverse changes in a borrower's risk characteristics during the term of the account," the OCC told the Fed in public comments. "The period should be long enough so that payment on the account is clearly late, for example, five days after the payment due date, and before a new credit cycle begins and the next periodic statement is prepared."
Regulators on notice
Chi Chi Wu, staff attorney with the National Consumer Law Center, said the rate hike provision will improve consumer protections. "The ban on rate hikes on existing balances protects balances that are already extended," Wu said. "If somebody is really risky, you should work with them on a payment plan, not put them further in the hole."
It's likely that the bulk of the interim proposals will make it into the final rules, observers say, given that Congress has lit a fire under regulators. In September, the House passed its own version of credit card reform with a 312-112 vote.
"The point was to show the Federal Reserve and the credit card industry that Congress is very serious about implementing meaningful restrictions on unfair and deceptive practices, and if the Fed does significantly weaken their proposal, there's a good chance that Congress will override them," said Travis Plunkett, legislative director with the Consumer Federation of America.
Rep. Barney Frank (D-Mass.), chairman of the House Financial Services Committee, told consumer advocates on Dec. 4 that he expects to see credit card legislation pass. Staff for President-elect Barack Obama declined to comment on the incoming administration's position.
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