Fed cracks down on credit card industry

WASHINGTON – The Federal Reserve and two other banking regulators today will unveil one of the most aggressive efforts to crack down on the credit card industry in decades, prohibiting practices such as arbitrarily raising interest rates on outstanding balances.

The proposed regulations, which could be finalized by the end of the year, would label as “unfair or deceptive” practices that consumers have complained about for years. That includes charging interest on debt that has already been repaid and assessing late fees when a consumer was not given a reasonable amount of time to make a payment. When different interest rates apply to different balances on one card, the regulations would prohibit companies from applying a payment first to the balance with the lowest rate.

“It’s stronger than what has been issued in the past,” said William Ruberry, a spokesman for the Office of Thrift Supervision (OTS), which has joined the Fed and the National Credit Union Administration (NCUA) in backing the proposals. “What they proposed is a significant set of rules governing credit card practices and overdraft protection.”

In the past, the agencies have regulated the industry by forcing card issuers to better disclose terms and conditions to their customers. Last summer, the Fed proposed requiring card companies to improve their disclosures, a plan that is still under consideration. But this new proposal, a summary of which was released by the OTS and NCUA Thursday, would send a clearer pro-consumer message, credit card watchdogs and government officials said.

It would also show that the Fed, which was criticized for reacting too late to the subprime mortgage crisis, is loath to let card issuers force consumers deeper into debt through inexplicable fees and interest rate hikes. Several members of Congress have blasted the Fed for not effectively using its power to regulate card issuers. A number of influential leaders, including Senator Chris Dodd, D-Conn., chairman of the Senate Committee on Banking, Housing, and Urban Affairs, have proposed their own bills to ban unfair practices.

“Disclosure has been the tool of choice for regulators. Now they are saying that unfair practices are out of control and they need to ban those practices,” said Ed Mierzwinski, consumer program director for U.S. PIRG, a consumer advocacy group. “This is surprising coming from banking regulators.”

Both the OTS, which regulates all federal and some state thrift institutions, and the NCUA, which oversees credit unions, announced Thursday that they had approved the proposal, the full details of which will not be released until today. The Fed is expected to vote on it at its meeting Friday. Once all three have approved the proposed rules, they will be published in the Federal Register. The public will then have 75 days to comment.

The proposal also seeks to regulate overdraft protection, banning companies from assessing a fee unless the customer chooses not to opt out of that service.

The banking industry was quick to denounce the rules and vowed to fight them.

“This is a very aggressive regulatory intervention in the marketplace that will lead to higher prices and less credit options for everyday consumers,” said Ken Clayton, senior vice president of card policy at the Washington-based American Bankers Association. “It basically says that we can’t price for risk and we can’t in a cost-effective way provide these low cost options like balance transfer opportunities at zero percent interest because of the way they’re mandating how these loans get paid back. We won’t be able to make the loan.”

But other consumer advocates and lawmakers said the proposals don’t go far enough.

“Just as we didn’t wait for the regulators to deal with subprime mortgage reform, we shouldn’t wait for them to deal with the pressing issues on credit cards,” said Rep. Carolyn Maloney, D-N.Y., who has proposed her own Credit Card Holders’ Bill of Rights. “By the time they get around to finalizing these rules, they will be watered down and come too little too late to help struggling consumers.”

Travis Plunkett, legislative director for the Consumer Federation of America, said that it would be hard to properly assess the proposal until all the details are released.

“The details matter,” he said. “What we don’t know is whether there will be exceptions or limits on what they say they’re going to do.”

He said it omitted many provisions that members of Congress have included in their bills such as restricting credit card marketing to college students. “It’s strong but limited,” he said.