May 2, 2008
But More Safeguards Needed To Rein In Abusive Practices
WASHINGTON, D.C. — Federal regulators have issued a set of proposed rules that, if adopted, would prohibit banks, savings associations, and credit unions from engaging in certain unfair and deceptive practices. The proposed rule offers important new protections for credit card consumers, but more safeguards are needed, according to Consumers Union, nonprofit publisher of Consumer Reports.
“It’s about time federal regulators offered consumers some relief from unfair bank practices,” said Consumers Union Financial Services Campaign manager Gail Hillebrand. “This proposed rule finally acknowledges that some practices just aren’t fair. All the disclosure in the world can’t make it fair to send the bill too close to the due date; to raise the interest rate on money already borrowed: or to charge a fee for a problem caused by the bank’s practice to allow a credit hold or a debit hold.”
The proposed rules by the Federal Reserve Board, Office of Thrift Supervision, and the National Credit Union Administration respond to a sustained outcry from consumers and strong interest in Congress in credit card reform and in reform of bank account practices such as overdraft loans. Consumers Union praised the approach of the proposed rule to ban, not just require more disclosure about, some of the worst credit card practices. The proposed refroms include:
• No late fee if the bill was mailed to the consumer less than 21 days before the due date.
• Payments would have to be allocated among balances with different interest rates to give consumers the full benefit of a discounted promotional rate.
• No interest rate increases could apply to money already borrowed except under three circumstances: 1.) the money was borrowed on a variable rate card; 2.) the promotional rate is lost or expired (then the rate can go to a regular rate, but not a higher penalty rate; or 3.) the minimum payment is made more than 30 days late. However, if the bank wishes to raise the rates on a category of transactions for all customers (such as cash advances), consumers who owe money in that category at a lower rate must be given either five years to pay off the balance or a new minimum payment that includes a percentage of the balance of no more than twice the percentage of the balance in the old minimum payment.
• No charging interest on amounts already repaid, through two cycle billing.
• Restrict the finance fees on credit cards where the fees or deposits use up the majority of the available credit on the account.
• No credit card or overdraft program fees where a credit hold or a debit hold (in an amount greater than the actual charge or debit) was the cause of the credit card over limit or the bank account overdraft.
The proposed rules also would make it an unfair practice to provide an overdraft loan on a bank account unless the consumer is given an opt-out opportunity. While it is helpful that the agencies are finally recognizing the problems posed by high cost overdraft loans for bank account holders, Consumers Union believes that this form of unsought credit is unfair unless the consumer affirmatively opts-in to such a program.
“The credit card rules are real progress for consumers, but the details will be very important, and there is much more to be done by both the agencies and Congress,” said Hillebrand. “It’s time to end all of the abusive credit card practices that trap Americans in debt.”
Similarly, it is very important that the rules finally begin to address “fee harvester” credit cards, where much of the credit line is used up by the initial fees. However, Consumers Union and other consumer groups had asked the agencies to restrict cards that use up 10% of the credit line in fees. The proposed rule apparently addresses only cards that use a majority of the credit line in the initial fees. Consumers Union noted that these unfair practices remain to be addressed:
• Restricting fees to pay a credit card by phone.
• Banning over limit fees if the credit card issuer approved the charge.
• Stopping overdraft and bounced check fees on bank accounts which are caused by check holds. The proposed rule apparently addresses credit holds and debit holds but not check holds. Consumers whose banks choose to impose long check hold times may still get stuck with overdraft and bounced check (NSF) fees due to this practice.
• Stopping bounced check fees caused by debit holds. The rule apparently stops the overdraft fee when a debit hold causes an overdraft but it may not address the bounce (NSF) fee caused in the same way.
Once the proposed rules are published in the Federal Register, there will be a 75 day public comment period. Final rules usually follow the comment period. More information on how to file comments with the Federal Reserve Board and other agencies can be found on Consumers Union’s tip page for consumers.
Gail Hillebrand – 415-431-6747
Jeannine Kenney – 202-238-9249