Fed Adopts New Credit Card Rules for Implementation in 2010

The U.S. federal government through the Federal Reserve, the National Credit Union Administration and Office of Thrift Supervision, adopted new rules today that increase protections for consumers by adopting new regulations for the credit card industry.  The goal is to ban unfair and deceptive practices such as surprise fees and interest rate increases.  The shift is part of its recognition in May that improving disclosure to, and education of, consumers has been insufficient and that some rules are needed as to what credit card companies can and cannot do.

The new rules take effect July 01, 2010.  The timing is problematic for consumers, as it won’t help them through the downturn in the economy which many believe will begin to recover in late 2009 or early 2010, and it provides plenty of time for credit card issuers to modify their interest rates, credit lines, fees, and policies so as to minimize the effect of the Federal Reserve’s credit card regulations.  There still is the possibility that Congress will step up with one of its various credit reform proposals, but this change may take much of the steam out of the legislation’s momentum.  The one positive effect of the 2010 start date is that it won’t jam up banks during the worst of the credit crisis.

Federal Reserve Chairman Ben S. Bernanke called the rules “the most comprehensive and sweeping reforms ever adopted by the Board for credit card accounts.”  There is a wealth of information available from the Federal Reserve’s press release, though the final rules have not been published yet.

My best read from various sources is that the rules:

• Require the due date for credit card payments to be set a reasonable time after billing (basically, the bill must be sent 21 days prior to payment due date).

• Protects against unexpected interest rate changes by precluding rate increases during the first year and makes it tougher to increase the interest rate on preexisting balances by limiting rate increases to consumers making a payment more than 30 days late.  Interest rate increases that are fully disclosed at the outset of the transaction or via a variable rate (the interest rate is tied to an index) are permitted.

• Prohibits “two-cycle” or double cycle billing, which uses the balance from a month where the bill was paid in full to calculate interest for a later month when the consumer carries a balance in the subsequent period.

• Eliminates universal default, so that late payments on one credit card will not affect interest rates on another credit card.

• Issuers must make credit applications, terms and conditions and monthly statements more readable by adding plain language to make disclosures more meaningful.

• Prohibits banks from applying your entire payment to the balance with the lowest interest rate if you have debt on the card at different interest rates and make more than the minimum payment.

I am eager to get a more thorough look at the last rule as its summary wording says:

When different annual percentage rates (APRs) apply to different balances on a credit card account (for example, purchases, balance transfers, cash advances), the final rule requires banks to allocate payments exceeding the minimum payment to the balance with the highest rate first or pro rata among all of the balances.

That suggests that if a debtor pays the minimum payment, then the bank could continue to allocate the the payment to the balance with the lowest rate.  It also leaves the question open as to whether the banks need only apply the portion exceeding the minimum payment or the entire payment according to the rule.

Morrison & Foerster estimates that the changes could cost the banking industry between 10 and 12 billion dollars a year.  In their statements during the public comment period, creditors warned that they would have to drop credit lines and increase interest rates because of the changes.

The adoption of the upcoming change in credit card rules follows the Federal Reserve’s cut in interest rates to historic lows for the United States, with a target rate of between 0 and 25 basis points (that’s practically no interest!), and the drop in mortgage rates to below five percent.

And, in other news, Discover Financial applied to the Federal Reserve to become a bank holding company so that it can access funds from the Troubled Asset Relief Program.  It follows the likes of Citigroup, whose two-time government bailout from the TARP wasn’t sufficient to prevent Moody’s from cutting its senior debt rating today.  If you’d like to read my thoughts on credit cards companies applying for TARP relief (there have been a few already), you should read these two posts from November.

I’m sure there will be more later …

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