Holiday delivery: New credit card rules from regulators

MarketWatch (MCT) - 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 to maximize interest charges; and requiring a reasonable amount of time for consumers to make payments.

Consumers have spoken loudly in favor of curbing aggressive pricing. They've posted tens of thousands of comments on the Federal Reserve's Web site, complaining about predatory lenders.

"Please stop credit card companies from committing unfair billing practices. ... Honest people need an honest chance," wrote Laura White in a comment on the Fed's site.

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.

While there's no crystal ball to peek at the rules before they are finalized, Ken Clayton, managing director of the American Bankers Association's card policy council, expects that the Fed will "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 point of contention regards the provision that would prohibit issuers from increasing the interest rate on outstanding balances. The regulators' interim proposal allows for exceptions to this rule, 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 delinquency 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."

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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 of Representatives 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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Given the state of the economy, consumers might appreciate swift movement from companies on adapting the new rules. The implementation date for rules will be announced when they are finalized.

CFA's Plunkett said six months should be ample time for institutions to get their programs in order.

"The issuers have been arguing for a huge implementation period," Plunkett said. "They don't want the Fed to implement these rules until the existing recession is over, which wouldn't help people when they need it most."

Clayton said issuers need enough time to re-evaluate millions of accounts that had been previously priced based on the ability to reprice them as necessary.

"If the Fed takes away the ability to reprice, then they need to give adequate time for us to work through the process so that we don't have too much risk exposure," Clayton said.

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