Banking regulators target credit card abuses
Rules take first step to rein in unfair interest rate hikes
Representatives of national consumer organizations today
applauded federal banking regulators for proposing initial rules
to curb some abusive credit card lending practices. The groups
also called on Congress to provide additional consumer
protections not proposed by the regulators. The proposal was
offered today by the Federal Reserve Board, the Office of Thrift
Supervision and the National Credit Union Administration. Among
other things, the regulators would stop many unjustified
interest rate hikes on existing balances, prohibit the charging
of interest on debt already paid off and require issuers to
allocate cardholder payments more fairly.
Click here to download the 276-page proposed rule.
“The proposed regulations are a clear effort to correct some of
the most harmful and costly credit card practices such as
retroactive rate hikes,” said Ruth Susswein, deputy director of
national priorities for Consumer Action. “We look forward to
encouraging regulators to dig deeper to protect consumers from
penalty rate increases across the board.”
“We commend federal regulators for taking an important first
step to stop credit card companies from pumping up their profits
by using hidden traps and tricks that drive up the amount of
debt consumers owe,” said Travis B. Plunkett, legislative
director of the Consumer Federation of America. “We urge
Congress to focus on enacting a permanent law that curbs abusive
practices not addressed in this proposal.”
"Card companies have been playing costly games with the economic
well-being of consumers for too long," said Jeannine Kenney,
policy analyst with Consumers Union. "This proposal at least
begins to give cardholders a fair shake."
The proposal would prohibit or restrict a number of abusive
credit card practices:
Costly and unjustified retroactive interest rate increases. The
proposal would prohibit the widespread practice of charging
higher interest rates on balances incurred before a rate
increase went into effect, unless the cardholder is more than 30
days late in paying his or her credit card bill. Although the
proposal would not prohibit card issuers from raising rates
because of a supposed problem with another creditor or a drop in
cardholders’ credit scores (a practice often called “universal
default”), forbidding issuers from applying higher rates to
existing charges should discourage credit card companies from
unjustifiably increasing cardholders’ interest rates in many
cases.
“This proposal will make the rules of play fairer by making it
harder for the credit card companies to raise rates on existing
balances,” said Kathleen Keest, senior policy counsel for the
Center for Responsible Lending.
Hidden payment allocation methods that cause debts to escalate.
Credit card issuers would be required to more fairly apply the
payments that cardholders make to balances with different
interest rates. When consumers transfer balances with low,
short-term “teaser” rates (that have higher rates for new
purchases), issuers would be required to apply payments first to
higher rate debt. For consumers who take out cash advances that
have higher interest rates, credit card companies would have to
apply part, but not all, of a payment above the minimum amount
to the higher rate debt.
"The rules should put a crimp on the bait-and-switch deceptions
that turn low introductory rates into high rate balances,” said
Lauren Saunders, managing attorney of the Washington office of
the National Consumer Law Center. “However, the rules do less to
protect consumers who use the cash advance checks pushed on them
and are then socked with a 20 percent rate on a balance they are
not allowed to pay off, even when they make more than the
minimum payment."
Interest charges on debts that have already been paid. The
proposal would forbid “double cycle billing,” which results in
cardholders paying interest on debts paid off the previous month
during the grace period.
Excessive fees for low-credit cards. The proposal would forbid
credit card companies that target consumers with poor credit
histories from charging fees that amount to more than half of
the credit being offered. If the fees being charged to use the
card amount to more than one-quarter of the credit line,
cardholders would be allowed to pay these fees off over a
one-year period.
“The federal regulators have gotten the message from consumers
that the banks are using unfair practices to make bad money on
top of good money,” said U.S. PIRG consumer program director Ed
Mierzwinski. “These rules will ban some of the unfair tactics
that hurt American families.”
“These rules begin to undo the damage done by decades of
deregulation in the credit card market and will help to rectify
the balance of power between borrower and lender,” said Caleb A.
Gibson, advocacy and legislative coordinator at Demos.
Congress is considering a number of reforms that would address
practices nottargeted by these proposed rules:
Aggressive lending to young consumers. Requiring credit card
companies to consider the ability of consumers under the age of
21 to repay the loans they are offered and allowing them to
affirmatively choose whether to receive credit card
solicitations.
Excessive and growing penalty fees.Requiring that penalty fees
be reasonably related to the costs that credit card issuers
incur because of a late or over-limit transgression.
Outrageous interest rate hikes. Limiting “penalty” interest rate
increases to 7 percent above the previous rate if the consumer
fails, for instance, to make a payment on time, or imposing
penalty rate increases only on future purchases.
Repeat over-limit fees. Allowing over-limit fees to be charged
only once, unless additional charges increase balances above the
account limit.
Fees for paying a bill. Prohibiting card issuers from charging a
fee to allow consumers to pay a bill by telephone, on the
internet or by mail.
Unilateral changes in terms. Prohibiting card issuers from
altering credit card agreements while they are in force without
specific written consent from the cardholder.
Source:
Consumer Action
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