A Credit-Card Crackdown

A Credit-Card Crackdown
Federal Regulators Seek Strict Policies For Financial Firms
By DAMIAN PALETTAApril 29, 2008; Page A3
WASHINGTON -- The Federal Reserve and two other regulators plan to propose strict policies on credit-card issuers after criticism that card companies charge too many hidden fees and unfairly raise interest rates on borrowers.
Banking officials are bracing for the proposal and raising concerns about the plan's breadth. It would mark one of the government's most aggressive efforts to curb credit-card practices in decades and could affect more than 10,000 financial institutions.
• What's New: The Federal Reserve wants to restrict some common moves by credit-card issuers, such as raising interest rates on troubled borrowers.
• Proponents Say: The steps will curb abusive practices.
• Opponents Say: The new rules could unravel innovations that allowed card issuers to price risk accurately.
The agencies, which include the Office of Thrift Supervision and the National Credit Union Administration, would propose labeling several credit-card and banking practices as "unfair or deceptive," according to people familiar with the plan. The Fed has scheduled a public meeting on Friday to issue the plan. The proposal is expected to include curbs on the fees depositors are charged when they overdraw their bank account.
The proposal comes as the Fed is under fire for its record of consumer protection. In December, the Fed proposed new limits on mortgage fees and other mortgage-lending practices. It was criticized for reacting too late to abuses that contributed to the housing boom and bust. Democrats in Congress have been pushing regulators to rein in credit-card companies as well.
House Financial Services Committee Chairman Barney Frank (D., Mass.) last year noted the Fed's power to rein in abusive lending and told the central bank it needed to "use it or lose it."
The Fed has "the authority to deal with deceptive practices, and it's pretty clear now that credit-card issuers are using a number of abusive practices that are not only unfair, but are financially destabilizing," said Travis Plunkett, legislative director at the Consumer Federation of America, a Washington consumer group.
The Fed's move to tighten rules would mark the latest rollback in Washington of the laissez-faire philosophy that governed regulation in recent years.
One part of the proposal would restrict the ability of lenders to raise interest rates on existing credit-card balances. For example, if a borrower was given a 10% interest rate when he or she had a credit score of 750, regulators would propose making it harder for banks to unilaterally raise the rate if the customer's credit score fell to 650. The banking industry would likely push back against such a proposal.
Another part of the plan would create restrictions on how lenders apply payments borrowers make on their credit cards, people familiar with the matter said. If a borrower has a $500 balance at an introductory rate of 0% and another $500 balance at 10%, the lender would be prohibited from allocating payments only to the 0% balance first.
Ed Yingling, chief executive of the American Bankers Association, said his organization has "some concern about just how far this regulation might go." On the question of changing consumers' interest rates, which will likely spark a big fight, he said the rules could unravel innovations made over the past decade that allow companies "to price for individual risks."
Facing congressional pressure for tighter credit-card regulation, Fed Chairman Ben Bernanke announced several months ago that he planned to propose banning certain practices. Since then, the Fed has hosted multiple closed-door meetings with consumer groups and bankers, but the regulators have been careful not to reveal what they might do.
Delinquency rates on credit cards rose on a seasonally adjusted basis to 4.38% in the fourth quarter of 2007 from 4.18% in the third quarter, according to the bankers' association. The Consumer Federation of America has estimated that the average household has $7,430 in credit-card debt. The Government Accountability Office estimated that the top six credit-card issuers charged on average about $1.2 billion each in penalty fees for cardholders in 2005.
House and Senate Democrats are pushing forward with legislation that would create additional curbs on credit-card practices, such as requiring lenders to give borrowers more notice before raising interest rates. Such legislation would be difficult to pass this year, however, as lawmakers are consumed with the mortgage-market turmoil.
The proposal by the Fed and the other two agencies wouldn't require congressional approval. The agencies will solicit comments, and the proposal could be in place this year.