Fed moves to close 'timing' loophole in credit card payments

Tired of getting hit with late fees for credit card payments that arrive hours after a 1 p.m. or noon payment deadline? Credit card issuers would no longer be able to set early morning or other seemingly arbitrary deadlines for payments under proposed Truth in Lending Act (TILA) amendments under consideration by the Federal Reserve.

According to the proposed rules, published this week in the Federal Register, cut-off times set before 5 p.m. on the payment due dates are "unreasonable." In addition, "Creditors that set due dates on a weekend or holiday but do not accept mailed payments on those days would not be able to consider a payment received on the next business day as late for any reason."

TILA requires that creditors issuing open-end loans such as those on revolving credit card accounts clearly disclose the terms and conditions associated with the loans. The section of TILA that sets forth those disclosure rules is Regulation Z -- or Reg Z. Four years ago, the Fed announced plans to update Reg Z's open-end credit card disclosures and proposed rules were issued in June 2007. Earlier this month, when sweeping new rules banning unfair and deceptive trade practices were introduced, new Reg Z provisions were part of plan. However, the specifics of those disclosures were not released until this week.

More disclosure rules
The proposed new Reg Z rules also include:

Grace periods. Credit card issuers would have to eliminate the use of the term "grace period" on credit card applications and solicitations. Instead the phrase "how to avoid interest" or similar wording would have to be used.

Foreign transaction fees. Any fees charged for purchasing goods or services in a foreign currency or for using the credit card outside of the United States would have to be disclosed in a table on credit card applications and solicitations. Previously, the proposed rule would have required this disclosure when the account is initially opened.

Penalty interest rates. Interest rates that apply when credit privileges are terminated would have to be disclosed on the application.

Subprime credit cards. Oral disclosures -- such as in a telephone pitch for a credit card -- would have to include information about how much available credit would be left on a credit card if upfront account opening fees are charged and those fees are more than 25 percent of the credit limit. This impacts people with bad credit who apply for subprime credit cards. Consumers often find out -- after the fact -- that a $500 credit limit has been reduced to only $100 after security deposits and other fees are charged before the card is used for the first time. In addition, the proposal would allow subprime cardholders an opt-out option "if the consumer has not used the account or paid a fee..."

Checks. Those convenience checks that many consumers receive in the mail would have to disclose "any date by which consumers must use the check to receive the disclosed rates."

Other disclosure rules include minimum interest charges, changes in interest rates, advertising and investigating unauthorized transactions.

Fed officials have said all of the proposed rules announced this month -- Reg Z's 2007 and 2008 provisions, the unfair trade practices rules and the checking account overdraft rules -- will be finalized by year's end.

Deadlines for comments
If you want to comment on any of the proposed rules, the deadlines have now been set.

Reg Z (disclosure rules): July 18, 2008

Reg DD (overdraft rules): July 18, 2008

Reg AA (unfair and deceptive trade practices rules): Aug. 4, 2008

Links to comment on or read others' comments on all three proposals are available on the Fed's Web site.

See related: "Timing is everything for some credit card payments," "Fed backs rules to curb deceptive credit card practices," "Regulation Z: Fed moves to change credit card rules"