Agencies propose sweeping changes to credit card practices

Federal regulators are poised to make some of the most sweeping changes in rules governing how credit card issuers market, promote and collect on millions of credit card accounts.

New rules released today by the Office of Thrift Supervision (OTS) and scheduled for a vote Friday before the Federal Reserve Board in Washington, D.C., outline seven key protections that target some of the most egregious credit card industry abuses cited by consumer advocates.

Double-cycle billing, allocating payments to lower interest purchases first and changing due dates would be banned under the new rules.

Proposed rules
Here's a breakdown of the proposed rules:

1. Time to make payments: Credit card issuers would have to give credit card account holders "a reasonable amount of time" to make payments on monthly bills. That means payments would be due at least 21 days after they are mailed or delivered.
2. Allocating payments: On accounts with different interest rates for different types of purchases (i.e., cash advances, regular purchases, balance transfers or ATM withdrawals), issuers would have three options for allocating monthly payments: Apply the entire amount to the balance with the highest interest rate, split the payment equally between all of the balances or use a method that gives "consumers the full benefit of the discounted rate or deferred interest plan" when those types of rates apply.
3. Hiking interest rates: Interest rate increases would be allowed only under limited conditions, such as when a promotional rate ends or if the cardholder fails to make a timely monthly payment. This would apparently ax "universal default," the practice of raising interest rates on customers based on their payment records with other nonrelated credit issuers (such as utility companies and other creditors). However, many banks in recent months have voluntarily discontinued this practice.
4. Fees: Credit card issuers would be prohibited from charging over-the-limit fees when consumers exceed their credit limits because holds or blocks were placed on their credit cards.
5. Double-cycle billing: Finance charges on outstanding credit card balances must be computed based on billing in the current cycle rather than going back to prior cycles to calculate interest charges.
6. Fee harvesting: People who get subprime credit cards and are charged exorbitant account-opening fees that eat up their available balances would get relief under the proposed rules. Credit card issuers would not be allowed to charge these fees if "those fees or deposits utilize the majority of the available credit on the account." Also, fees that exceed 25 percent of the available credit limit must be spread over the first year of card use, rather than piled on at the beginning.
7. Credit offers: When advertising or marketing credit cards to consumers, issuers must disclose the factors that will determine which interest rates or credit limits potential customers will receive.

Overdraft protection
Two additional proposed rules would help the millions of consumers who are miffed when hit with overdraft fees and holds on checking accounts and debit cards. Consumers would be able to opt out of overdraft fees. Issuers could charge the fees only if an account holder fails to opt out. Lenders would also be banned from charging overdraft fees on accounts as a result of holds being placed on the account, such as when rental cars or reserving hotel rooms.

The Fed, OTS and National Credit Union Administration are exercising their authority under the Federal Trade Commission Act (FTC Act) to impose regulations on banks, credit unions and savings associations. The act prohibits unfair and deceptive trade practices in business and commerce. The agencies "have joined to each issue an identical proposed rule," according to an OTS press release. The OTS approved the proposal today.

Reaction
Consumer advocates were quick to react to the OTS's release of the specific rules. Ed Mierzwinski, consumer program director of the U.S. Public Interest Research Group, writes in his blog:

“For once the bank regulators appear to understand that credit card companies and banks have been ratcheting up profits by unfairly tightening down the screws on consumers.  We’re encouraged that this press release indicates the intention of bank regulators to protect consumers from the worst of the bank unfair and deceptive practices. While the devil is in the details we haven’t yet seen, what we’ve seen is mostly positive. Of course, there is still a lot of work that Congress will need to do to protect college students and other consumers from other unfair practices.”

Bank executives have testified in numerous Congressional hearings over the past year that tougher regulations could mean higher interest rates and less credit available to consumers, particularly those with low credit ratings.

Slow process
Don't expect quick action on these regulations. There will be a 75-day comment period when consumers, credit counselors and all of the credit card issuers can weigh in with the pros and cons of the proposal. Each agency will then review the comments and make recommendations for the final rules. A Fed official said in April they expect to finalize the FTC Act regulation by year's end. The lending institutions will then have a certain amount of time (it could be a year) to implement changes and, if necessary, revise their billing and marketing practices to meet the guidelines.

Stay tuned. CreditCards.com will have a reporter at the Fed hearing Friday to report the latest developments.

See related: "Fed: Expect credit card regulations this spring," "Fed to release new credit card regulations this week," "Regulation Z: Fed moves to change credit card rules," "House introduces Credit Cardholders' Bill of Rights"