Regulators Approve New Credit Card Rules

Federal regulators today approved a rule prohibiting banks and other issuers from engaging in unfair credit card practices.

The Office of Thrift Supervision (OTS), approved the rule early in the morning, and the Federal Reserve Board (FRB) and the National Credit Union Administration (NCUA) were expected to add their approval by the end of the day, providing consumers with uniform restrictions on credit card interest rate increases, late payment fees and other practices of card issuers that were deemed unfair.

“Credit card issuers are already facing a considerable challenge in the current economy: less people are signing up for credit cards and less interchange is being funneled back to issuers as consumers use their credit cards less,” said Aite Group analyst Adil Moussa. “This will diminish issuers’ receivables over the next few years.”

Moussa said that he sees chargeoffs and bad debt increasing, but more due to the current economic environment than from the impact of the new rules.

Moussa added that he expects issuers to now have an increasing focus on retention strategies, particularly rewards programs.

The OTS said it began the interagency effort to reform credit card practices in August 2007 by issuing an Advance Notice of Proposed Rulemaking to seek comments on a broad array of practices related to the marketing, originating and servicing of credit cards and other products.  Many comments responding to the notice urged a uniform approach across the federally regulated financial services industry.

The FRB and NCUA joined the OTS for the next step in the federal rulemaking process and in May 2008, the agencies issued a Notice of Proposed Rulemaking that generated 66,000 comments and led to today’s final rule (“Regulators Propose Credit Card Rule Changes,” May 2).

The OTS version of the rule will apply to savings associations, the FRB rule will apply to banks and the NCUA rule will apply to federal credit unions.

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The rule bans practices often cited as unfair to consumers, such as raising the interest rate on an existing credit card balance when the consumer is paying the credit card bill on time.

The rule requires that consumers receive a reasonable amount of time to make their credit card payments, prohibits payment allocation methods that unfairly maximize interest charges and, in the subprime credit card market, limits fees that reduce the credit available to consumers.

“I am extremely proud that OTS leadership has culminated in this important rule to ensure fair treatment for the millions of Americans who use credit cards,” said OTS director John Reich in a prepared statement. “The rule will enhance public confidence in financial institutions and establish a level playing field for institutions that want to do business fairly without suffering competitive disadvantages.”

“While the new rules are designed to increase protections for consumers, the Fed itself has recognized that they may result in increased costs for most card users and reduced credit availability, particularly for consumers with lower credit scores or limited credit history,” the American Bankers Association added in a prepared statement. “With the uncertainty facing our financial system, it’s absolutely vital for policymakers to understand the full impact of these regulations on consumers and the economy before judging their success or further restricting the marketplace.”

The ABA endorsed the rule changes over a legislative proposal that passed overwhelmingly in the House but never was approved in the Senate.

“The Credit Card Holders Bill of Rights,” passed the House by a 312 to 112 vote, despite the objection of bankers and other opponents who say the legislation will lead to higher fees and charges for credit cards (“Credit Card Bill Passage Sparks Debate on Impact,” Sept. 25).

The legislation would have eliminated retroactive interest rate hikes, late fees that push cardholders over their credit limits, and double-cycle billing, among other reforms, according to Rep. Carolyn Maloney (D-N.Y.), who sponsored the bill along with Rep. Barney Frank (D-Mass.).

Although the new regulatory rule takes effect July 1, 2010, the regulators are expected to encourage institutions under their supervision to make their best efforts to conform as soon as is practical.