Fed Cracks Down On "Unfair" Credit Cards

The Federal Reserve and other regulators initiated steps Friday to end "unfair and deceptive" credit card industry practices assailing consumers who are already struggling to cope in a bad economy.

The proposed rules would be the biggest clampdown on the industry in decades, aiming at protecting people from credit card companies that arbitrarily raise interest rates or don't give borrowers adequate time to pay their bills.

The proposals would also restrict such lender practices as allocating all payments to balances with lower interest rates when a borrower has balances with different rates. The Fed board voted Friday to approve the recommendations.

Federal Reserve Chairman Ben Bernanke said the proposed rules "are intended to establish a new baseline for fairness in how credit card plans operate." Consumers using credit cards "should be better able to predict how their decisions and actions will affect their costs," he said.

"For markets to work, people have to understand what it is they're buying and paying for and if they do they can make better choices and the market will work better," Bernanke said.

The new rules would ban unfair or deceptive tactics, like mailing out bills less than 3 weeks before the due date so there's not enough time to pay, or jacking up the interest rate even for people who pay on time - and then applying that interest to the pre-existing balance.

That's exactly what happened to Dennis English. A trucker in Augusta, Georgia whose rate on his $10,000 balance suddenly jumped.

"It started out at 9.9 percent interest rate and last month when I went to pay my bill I happened to notice that it went up to 32.99 percent," English told CBS News Correspondent Nancy Cordes.

"I explained to them that I have never been late on a payment, I have never missed a payment, I never have been overdrawn on the account," English told CBS News. "And they said, unfortunately, they was nothing they could do about it."

Lawmakers who have demanded tougher controls on the credit card industry were generally positive about the proposed rules, as were consumer groups. But some questioned whether the changes would be strong enough and soon enough to help the millions of households struggling with credit card debt.

The Fed drew considerable criticism for its slow response to abuses that contributed to the subprime mortgage crisis.

"These steps are a significant improvement," said Sen. Charles Schumer, D-N.Y., a member of the Banking Committee and a leader in legislative efforts to make credit card companies more forthcoming about the interest rates they charge. "While they can still go further, the Fed deserves credit for acting, particularly for banning some awful practices rather than relying solely on disclosure."

Last year the Fed proposed rules that would make credit card bills and solicitations easier to understand, but Friday's proposals go well beyond those in tightening interactions between the industry and consumers.

"At first blush, this does seem to be good news for credit card holders," said Sen. Robert Menendez, D-N.J., author of pending legislation addressing some of the same credit card abuse issues. "However, it remains to be seen if these proposals will go far enough."

"The problems are mounting and the last thing consumers need is to have credit card companies ripping them off with late fees and charges through no fault of the consumer at all," said Senate Banking Committee Chairman Christopher Dodd, D-Conn., who is also pushing reform legislation.

The banking industry opposes the changes, and says they could lead to higher interest rates. The rules could be finalized by the end of the year.

The proposed new rules would prohibit:

• Placing unfair time constraints on payments. A payment could not be deemed late unless the borrower is given a reasonable period of time, such as 21 days, to pay;
  
• Unfairly allocating payments among balances with different interest rates, with lenders crediting payments to balances with lower rates so they can continue to charge interest for balances at higher rates;
  
• Retroactively raising interest rates on pre-existing balances;
  
• Placing too-high fees for exceeding the credit limit solely because of a hold placed on the account;
  
• Unfairly computing balances in a computing tactic known as double-cycle billing;
  
• Unfairly adding security deposits and fees for issuing credit or making credit available;
  
• Making deceptive offers of credit.

So are the new rules going to help? Travis Plunkett, Legislative Director of the Consumer Federation of America, says yes.

"It's going to help because some of these practices - we call them traps and tricks, hidden traps and tricks - drive up the amount of money that people owe their credit card companies, often very suddenly," Plubkett told CBS Early Show anchor Susan Koeppen. "You haven't budgeted for these payments, and then you wake up one day, you open your credit card bill, and your interest rate has tripled."

One of the biggest unfair practices that Plunkett accuses credit card companies of using is universal default. "What that means is that you're paying your bill on time, you are paying at least the minimum payment, you are meeting your obligations, and your credit card company decides that you are a higher credit risk and sharply increases your interest rate because of the supposed problem with another creditor," Plunkett said. "Many people don't think it's fair. It's simply not fair. It's not even fair from a business point of view, because in many cases the credit risk, as they say, for these people has not increased at all."

Credit card companies also target younger borrowers who don't understand how credit cards work. "A lot of parents are concerned, for example, about the kind of credit that's being offered their children at college," Plunkett told Koeppen. "Young people don't quite understand how debt works in many cases. Credit card companies are pushing a lot of debt at people often as young as 18, and we would like to reign in some of these reckless lending practices to young people and other vulnerable populations."

Among the banking practices that are not dealt with by the proposed new regulations are one-off fees, such as for the person whose payment arrives a day late. "Yes, they should pay a little extra," Plunkett said, "But they're hit with a $40-45 late fee. That strikes a lot of folks as out of proportion to the mistake they've made."

Ken Clayton, senior vice president of card policy for the American Bankers Association, described the proposed changes as "aggressive regulatory intervention in the marketplace that will result in higher prices and less consumer credit."

"If card companies cannot fully reflect risk, then millions of consumers with good credit histories will end up with higher rates," the ABA's president and CEO, Edward L. Yingling, said in a statement.

Plunkett doesn't believe the banking industry's claims that the new rules will prevent them from taking on poor credit risks. "We don't see anything in this proposal that would stop the credit card companies from looking at the financial risk of somebody they're loaning money to, [that] wouldn't stop them from being careful," Plunkett said. "It wouldn't stop them from offering an initial interest rate that's a little higher for somebody that's a little riskier. There are many ways credit card companies are going to be able to account for the financial risk of the people they're loaning money to.

"It's unfortunate that the industry continues to buck the immense groundswell of support that is building for credit card reform," said Rep. Carolyn Maloney, D-N.Y., who has introduced consumer protection legislation in the House. She said the Fed endorsement of provisions in her bill "puts to rest the credit card companies' assertion that reform will somehow harm consumers or the economy."

The Consumer Federation of America estimates that credit card debt held by consumers is about $850 billion, some four times what it was in 1990. The group says the average debt for those 58 percent of card-holding households that do not pay their balance in full every month is about $17,000.

But the CFA and other consumer groups also complained that the "opt-out" proposals for overdraft plans were insufficient and there should be an affirmative "opt-in" right for such plans. Banks routinely allow consumers to overdraw their accounts and then charge overdraft fees, the groups said.

The Fed is acting in conjunction with the National Credit Union Administration and the Office of Thrift Supervision.