Federal regulators are taking a stab at reining in "unfair and deceptive" bank tactics. Three federal agencies, including the Federal Reserve, have issued proposed rules that would ban consumer-unfriendly credit card issuer practices like double-cycle billing and unfair interest rate hikes. Some unpopular bank overdraft fee policies would also be banned.
The Office of Thrift Supervision announced its proposals Thursday. The Federal Reserve Board and the National Credit Union Administration made their similar announcements on Friday.
Together, the agencies regulate most banks, meaning new rules would have wide impact. The proposal, however, faces what figures to be a testy public comment period, during which banks are expected to challenge any new rules and ask the agencies to scale them back.
According to the Office of Thrift Supervision, the proposed rules would address seven different credit card abuses: unfair time periods for making payments; unfair payment allocations; unfair interest rate increases on outstanding balances; unfair fees from credit holds; unfair methods of computing balances; unfair security deposits; and deceptive offers of credit.
The rules would also require banks to allow consumers to opt out of courtesy overdraft protection, the source of many overdraft fees, and it would prevent banks from charging overdraft fees when money is "held" by banks during debit card authorizations.
"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."
Rep Carolyn Maloney (D-N.Y.), who has proposed legislation with similar bans, welcomed the proposal but urged Congress to move forward with a new law anyway.
"Just as we didn't wait for the regulators to deal with subprime mortgage reform, we shouldn't wait for them to deal with the pressing issues on credit cards," she said. "By the time they get around to finalizing these rules, they will be watered down and come too little too late to help struggling consumers."
The regulators have taken aim at some practices that are particularly irksome to consumers. One new rule would require banks to make sure cardholders have a "reasonable" amount of time to make their monthly payments, forcing banks to ensure that statements are mailed or delivered at least 21 days before the payment due date.
When banks advertise new credit cards with low rates, the rules say, banks will have to spell out what requirements consumers must meet to receive the advertised rate.
When consumers have multiple rates on different balances on the same card -- often the case when cardholders have used balance transfers to open new cards -- banks would be forced to apply partial payments in the way that is most beneficial to consumers. Currently, most banks use payments to reduce the balance with a lower interest, which allows banks to collect more revenue from the higher interest balances.
Double-cycle billing, which allows card issuers to charge interest on purchases dating back two months in some situations, would be banned.
The new rules would also clarify two rules governing bank overdraft policies. Banks would be banned from charging overdraft fees unless consumers are expressly given the chance to opt out of automatic payment of overdrafts. According to the proposal, consumers must be given "reasonable opportunity" to exercise that option.
Last year, consumers were assessed more than $17 billion in overdraft fees, according to the Center for Responsible Lending.
Also, a little-known cause of overdrafts -- debit card "holds" -- would be eliminated. Many consumers don't realize that when they use their debit cards to make certain purchases which require pre-authorization, such as gasoline, the retailer often widely overshoots the value of the transaction to ensure the consumers' bank account has enough money to cover the purchase. Gas stations routinely block off $50 to $100 at the beginning of a gas purchase, for example. Even if the consumer ultimately only buys $10 in gas, the pre-authorization of $100 results in a $100 "hold" being placed on the account for several days. Travelers driving off in rental cars can discover holds of up to $500, placed to ensure the consumers' card can cover potential damage to the car.
While the holds are generally invisible to consumers, they do result in overdraft fees. The new federal regulations would prohibit overdraft fees resulting solely from debit card holds.
Consumers Union cautioned that while the proposal offers hope for new credit card rules, consumers must be "vigilant" and make sure the rules eventually become law.
"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."