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The Honolulu Advertiser
Posted on: Sunday, July 13, 2008

Credit card reform rules debated

By Andrea Coombes
MarketWatch

Hawaii news photo - The Honolulu Advertiser

Consumer advocates disagree with banks' claims that new regulations would not reflect the risks of different consumers for the card issuers and raise rates for some with good credit histories.

BRENDAN SMIALOWSKI | Bloomberg News Service

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MAKE A COMMENT

To comment on the proposed rules, go to www.federalreserve.gov, click on "Consumer Information" at the top of the page, click on "Proposed Rules for Credit Cards and Overdraft Services," scroll to bottom of the page, and under "Regulation AA," click on "Submit Comment." Comments are public.

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SAN FRANCISCO If you've ever complained about an unexpected interest-rate hike on your credit card, now's your chance to have your gripe heard. But you don't have much time.

The Federal Reserve is accepting comments through Aug. 4 on credit card reform rules it proposed in May. (The deadline for comments regarding related proposals, mainly to do with credit card disclosures, is sooner: July 18.)

Already, more than 9,300 people have commented on the sweeping set of proposed changes that, among other things, would prohibit credit card companies in some instances from hitting you with a higher interest rate on debt you've already incurred.

Or, if you've ever accepted a "balance transfer" offer with a low interest rate, only to find that your payments go first to that cheaper debt, rather than to the higher-rate purchases you've made, that situation would change, too. Under the Fed's proposal, credit card issuers would need to apply at least a portion of your monthly payment to higher-rate debt, in most cases.

The proposed rules also would prohibit "two-cycle billing," in which banks compute interest on debt on days preceding the most recent billing cycle, a practice that can result in borrowers paying interest on debt paid off during the previous month's grace period.

The Fed's proposed rules are "much better than we expected," said Lauren Saunders, managing attorney of the National Consumer Law Center's Washington office. "There are some real improvements in them."

CARD ISSUERS UNHAPPY

Plenty of consumers agree, judging by the comments posted to the Federal Reserve site. The Fed doesn't keep a running for-or-against tally, however.

It's not unusual for consumer-related proposals to generate about 1,000 comments, said Federal Reserve spokeswoman Susan Stawick. A recent high was more than 45,000 comments related to a December 2000 proposal to allow financial holding companies to act as real-estate brokers, she said.

Credit card issuers say the proposed rules are bad news for consumers.

"We are deeply concerned that these rules will result in less competition, higher consumer prices, fewer consumer choices and reduced consumer access to credit cards," said Edward Yingling, president and chief executive of the American Bankers Association, a Washington-based trade group, in a statement released soon after the Fed's proposal.

"For example, the proposal would greatly restrict the ability of card companies to charge interest rates that reflect the risks of different consumers," the statement said. "If card companies cannot fully reflect risk, then millions of consumers with good credit histories will end up with higher rates."

While consumer advocates disagree with banks' claims, they aren't entirely pleased with the proposed regulations they would like to see them go further. For instance, the proposal to make credit card issuers apply consumers' payments to higher-rate debt only applies to money consumers send in above the minimum payment. And the Fed rules don't really address fees.

That's where Congress may step in. A veritable feast of pro-consumer bills has been introduced over the past year or so.

RAISING INTEREST RATES

In February, Rep. Carolyn Maloney, D-N.Y., introduced H.R. 5244, a bill that, among other things, would end "universal default" when a credit card issuer raises a consumer's interest rate based on late payments to other, unrelated creditors. The bill would also prohibit "any time, any reason" changes in credit card terms, with certain exceptions.

Sen. Chris Dodd, D-Conn., recently outlined a bill he intends to introduce with similar provisions to Maloney's, such as requiring banks mail statements 21 days before the bill is due rather than the current 14, according to Dodd's statement.

In May 2007, Sen. Carl Levin, D-Mich., introduced S. 1395, which proposes a cap on "penalty" interest-rate hikes to no more than seven percentage points above the previous interest rate. The bill would also prohibit charging interest on fees, among other provisions.

Sen. Robert Menendez, D-N.J., introduced S. 2753 in March. Like Dodd's proposal, the bill limits the ways in which banks offer credit to people under age 21. Also, it would prevent late-payment fees on any payment postmarked by the payment date, among other changes.

The Federal Reserve said it expects to issue a final ruling by the end of this year. It could weaken the proposed rules. Saunders said the Fed asked credit card companies whether the rules would be expensive or burdensome. That "indicates a possibility of (the Fed) weakening the rules," she said.