Fed pushes aggressive credit-card protections

WASHINGTON — The Federal Reserve Board moved Friday to end "unfair and deceptive" credit-card-industry practices assailing consumers who are already struggling to cope in a bad economy.

If approved, the regulations would be the biggest clampdown on the industry in decades, aiming at protecting people from credit-card companies that arbitrarily raise interest rates or don't give borrowers adequate time to pay their bills.

"The proposed rules are intended to establish a new baseline for fairness in how credit-card plans operate," Federal Reserve Chairman Ben Bernanke said. "Consumers relying on credit cards should be better able to predict how their decisions and actions will affect their costs."

The banking industry promised a fight, saying the regulations would hurt consumers.

"The Federal Reserve's proposal is an unprecedented regulatory intrusion into marketplace pricing and product offerings," said Edward Yingling, president and chief executive of the American Banking Association. "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. In short, everyday consumers will bear the real cost of these proposals."

The Federal Reserve Board said its new rules are part of an effort "to enhance protections for consumers who use credit cards." Its get-tough stance comes after the Fed was sharply criticized for not acting quickly enough in the face of a burgeoning mortgage crisis that has seen foreclosures skyrocket, home sales and prices plummet, and new-home construction falter.

"These steps are a significant improvement," said Sen. Charles Schumer, D-N.Y., a member of the Banking Committee and a leader in legislative efforts to make credit-card companies more forthcoming about the interest rates they charge. "While they can still go further, the Fed deserves credit for acting, particularly for banning some awful practices rather than relying solely on disclosure."

Tighter interest controls

The new rules would prohibit lenders from arbitrarily raising interest rates on any debt unless a promotional rate expires or the borrower was more than a month late in making a payment.

Payments also no longer could be classified as late if borrowers didn't receive their statements at least 21 days in advance of the due date.

The rules also would stop the practice of "double-cycle billing," in which lenders calculate one month of fees based on two months' worth of activity on an account, and would impose restrictions on how lenders compute balances.

Lenders also would be prohibited from allocating payments among balances with different interest rates in a way that benefits only lenders. That means lenders no longer could apply an entire payment only to the balance with the lowest rate, as lenders frequently do with so-called "zero-interest" balance transfers, leaving balances with higher interest rates to grow. Instead, lenders would be required to divide payments in a way that gives consumers the full benefit of any discounted rates.

The Fed said the new regulations could be finalized by Jan. 1.

The credit-card industry has been under attack on Capitol Hill since Democrats took control of Congress last year. The industry once faced greater controls, but when interest rates skyrocketed in the late 1970s, banks complained that the controls were hurting profits and reducing credit, and the regulations were eliminated. The result has been an industry that critics say has taken advantage of low-income and middle-class Americans, who increasingly are turning to credit cards to pay for living expenses.

"Credit-card industry abuses have become more pronounced in this troubled economy as more families turn to their credit cards to help pay bills, buy groceries and make ends meet," said Rep. Carolyn Maloney, D-N.Y., chairwoman of the House Financial Institutions and Consumer Credit subcommittee.

Maloney said she feared that action won't come soon enough.

"By the time the Fed gets around to finalizing its regulatory proposals, countless more cardholders could be facing sky-high interest rates that will bury them in mountains of inescapable debt," she said.

"Perplexing" rules

Yingling called the new rules "particularly perplexing," saying they'll reduce the availability of credit when the Fed is working to increase access to credit. He said the proposal would restrict card companies' ability to charge interest rates that reflect the risks of different consumers, similar to how insurance companies charge different rates depending on drivers' records.

"If card companies cannot fully reflect risk," he said, "then millions of consumers with good credit histories will end up with higher rates. ... Regulatory responses such as these are effectively price controls, which have never worked in the past, and we do not believe they will work here."