Calling many credit card company tactics "unfair," "unreasonable," and "deceptive," federal regulators on Thursday unveiled sweeping new rules aimed at protecting consumers. They then invited card issuers to continue those unfair tactics for the next 18 months.
A 300-page report by the Office of Thrift Supervision described bank misbehavior in great detail, at times using stinging language. It then laid out updated federal regulations that will bar many such practices.
The new rules, for example, limit card issuers' ability to raise interest rates in the first year after they issue a card. They also severely curtail banks' ability to retroactively raise interest rates on consumers' existing balances, including penalties levied when the a payment arrives a few days late.
And card issuers won't be able to toy with "grace periods," as they have in the past. Instead, banks must give consumers at least 21 days to pay their bills, and they are prohibited from double-cycle billing, which retroactively applies interest charges to purchases made after a consumer fails to pay their bill on time.
The Office of Thrift Supervision report uses the term "deceptive" more than 100 times in describing the banks' practices and "unfair" more than 200 times.
But the three agencies cooperating on the rules -- the Office of Thrift Supervision, the Federal Reserve, and the National Credit Union Administration -- also gave the banks a generous grace period. The new rules will not take effect until July 1, 2010.
Linda Sherry, director of national priorities for advocacy group Consumer Action, hailed the rules as "great" for consumers, but sharply criticized the delay in their implementation.
"The fact that they are waiting 18 months in this economy is a disaster," she said. "That will give the credit card companies time to reprice their consumers and do all kinds of tricks. (Regulators) should have made it much shorter."
No ruling on overdrafts, over-the-limit fees
The regulators also decided not to make rules inhibiting banks' ability to hit card users with over-the-limit fees -- an issue of recent concern as many issuers lower consumers' credit limits. And the agencies removed provisions in their initial proposal in May, which would have restricted banks' ability to levy overdraft fees, another thorn in the side of consumers. Both issues can be reconsidered at a later time.
Despite such omissions, many of the most unpopular credit card tactics will be outlawed by the new rules. For example:
• Banks will have to send bills at least 21 days before payments are due, and midday payment- due cutoff times will no longer be allowed. When due dates fall on weekends, consumers also will be granted extra days to pay.
• When multiple interest rates apply to different types of balances on the same card, banks will be prohibited from applying payments in a way that maximizes interest charges. This is a common problem for those who utilize balance transfers. Transferred balances usually incur interest at very low teaser rates, but new charges are hit with a much higher rate. Traditionally, banks apply interest to the transfer balance, maximizing their return and effectively making a consumer swap out low-priced credit for high-priced credit. The thrift supervisors said banks make an extra $930 million each year by applying payments this way. When the new rules go into effect, payments must be applied evenly across all types of balances, or in a way that's more advantageous to consumers.
• Many banks now go back to the previous billing cycle when computing interest rates, a practice called double-cycle billing. For example, a consumer who fails to pay a bill due Jan. 5 will see interest charges levied on items purchased during December, even if that was a grace period. Once the new rules are in place, interest charges on average daily balances must be computed using only a single month's transactions.
• There are also many provisions for making credit card statements and terms easier to understand.
But the main gain for consumers is a prohibition on many kinds of retroactive interest charges that are routinely charged by credit card companies. Currently, consumers who have their interest rates hiked have their entire outstanding balance subjected to the new rate. For instance, a consumer who borrowed $2,000 for auto repairs 12 months ago, and is paying that back at 9 percent, could see the interest rate on that balance rise to 29 percent "at any time for any reason," according to most card issuers' terms of service. Regulators said banks make $11 billion each year through such retroactive interest charges.
Under the new rules, interest rate increases will only apply to purchases made after the rate hike takes effect for most consumers.
"So people who just kind of miss a payment by a few days will no longer get caught in this," Sherry said.
Consumers who are 30 days late, however, are not exempt from retroactive charges, making the penalty for letting accounts become delinquent quite severe.
The provision might lead to confusion, however. Already, many consumers have three different interest rates on a single credit card – one for purchases, one for cash advances and one for balance transfers. This provision would add a fourth rate, by creating a rate for "new" purchases and a rate for "old" balances.
While consumers cheered regulators through the process -- a record 65,000 comments were filed, most of them positive -- banks resisted the changes, saying the limitations would increase interest rates on good consumers and reduce the availability of credit. Edward L. Yingling, CEO of the American Bankers Association, warned that Congress should expect unintended consequences as the new rules take effect.
"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," he said. "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."
'Monetary harm constitutes injury'
In its report, the Office of Thrift Supervision rejected many of the arguments put forth by the credit card issuers to try and fend off the new rules, including the suggestion that cardholders can avoid all interest and fees by simply paying their bills on time. Credit cards are designed as borrowing instruments, the agency reasoned, and consumers shouldn't be expected to avoid mistreatment only "by paying their balances in full each month."
It also rebutted one bank argument that provides some insight into credit card issuer strategies: that the agency does not have jurisdiction because no harm could be proven against consumers "merely because other, less costly allocation methods exist."
The Office of Thrift Supervision replied that "it is well established ... that monetary harm constitutes an injury."
Rep. Carolyn Maloney, D-N.Y., who has led the charge in Congress to enact similar protections through federal legislation, applauded the new rules. But she said there was still a need for her law, called the "Credit Card Users Bill of Rights." The legislation bill passed the House of Representatives earlier this year, but a companion bill stalled in the Senate.
"As one who's been working for years to bring consumers the protections they need, I'm delighted to see the regulators take substantive action," she said. "Finally, these practices have been declared what they are: 'unfair' and 'deceptive. But while these new rules are a strong first step, I'll be working with (Congress) to fill any gaps in protections for cardholders. These new rules aren't scheduled to take effect until 2010; Congress should act sooner to protect American consumers."