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The Fed's Weak Gruel for the Credit Card Companies

posted by Bob Lawless

On Wednesday (May 23), the U.S. Federal Reserve announced proposed regulations that would impose new restrictions on the credit industry. The Fed issued the regulations pursuant to its powers under the Truth-in-Lending Act, and the regulations would try to stop some of the most egregious marketing practices in which credit card companies currently engage. As the Washington Post reported, the credit card industry expressed its pleasure with the new regulations. Ed Yingling, president of the American Bankers Association, was quoted as saying "We strongly agree that improved disclosures empower consumers to make better choices in our competitive marketplace."

What!? The consumer credit industry wants this regulation? Well, of course they do. There are several bills pending in Congress to impose more substantive restrictions on the credit card industry. Most notable among these measures are the Stop Unfair Credit Card Practices Act (S. 1935) and the Credit CARD Act of 2007 (H.R. 1461), both of which we have previously discussed on Credit Slips. The Fed's proposed regulations offer several important improvements in the law, but they simply do not go far enough. The Fed lacks the regulatory authority to take the necessary steps to protect consumers. These are steps that only Congress can take. The Fed's regulations are principally about disclosure, and the consumer credit industry is hoping that the Fed's regulations will head off more serious reform in Congress.  The consumer credit industry has learned that disclosure does not stop consumers from making poor borrowing choices. Because of the complexity, it is simply not a marketplace with informed purchasers making rational decisions that weight risks and benefits.

Comments to the Fed's proposed regulations are due June 29, 2007. (By the way, anyone can submit comments.) The Fed's proposal is too lengthy to discuss in detail, but a few notable changes are worth mentioning.

The best thing the Fed's regulations would do for consumers would be to increase from 15 to 45 days the advance-notice period for changes in the terms of a credit card account. The Fed also would require 45 days advance notice before a credit card company could impose a higher rate interest due to a "consumer's delinquency or default." Previously, credit card companies could increase the interest rate without notice to the consumer. Also, the credit card companies will have to call these higher interest rate "penalty rates" because the Fed's research suggested consumers would understand such a term better than "default rates."

These changes will help, but they do not prevent the credit card companies from retroactively applying changes to outstanding balances on a credit card. The credit card companies still will be able to lend money to consumers under one set of terms and then change the deal once the consumer has borrowed the money. The credit card companies will just have to provide more notice that they are doing so. Also, the Fed regulation reaches interest rate hikes only due to a "delinquency or default," meaning the credit card companies could invent other reasons for raising interest rates that do not require notice. The bills pending before Congress would prevent credit card companies from retroactively changing the terms of credit on consumers.

Many of the other changes the Fed will require go to make credit card advertising and billing easier to understand. These changes are based on Fed studies and conversations with consumer focus groups. For example, the Fed now will prohibit advertisements that state a certain annual percentage rate (APR) is "fixed" unless the advertisement states a time the rate will be fixed and that the rate cannot change for any reason during that time. Another example is the Fed will now require a summary table of key terms at the time an account is open, a sample of which appears here.

As I wrote above, the comment period ends on June 29. Everyone should feel welcome to comment, and a link to the web page where you can submit comments appears with the Fed's announcement of the proposed regulations.

Comments

Credit card co's should be banned for at least 8 years or better yet, life from sending CC offers to those who have filed bankruptcy.
Let those who want to get back in the credit card game find these cos, instead of these predators bombarding the newly bankrupt with these dreadful offers.
Some people are desperate. Some mentally impaired, and some just plain don't understand what they are getting into.
It doesn't help when they get messages that this will "help" them rebuild their credit.
Stop this insanity. Just as some should never touch alcohol, some should never touch credit cards.
Stop these predators, and you may see a drop in bankruptcies!!

What they really need to do away with is the universal default clause. This is what gets most people swamped.

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  • As a public service, the University of Illinois College of Law operates Bankr-L, an e-mail list on which bankruptcy professionals can exchange information. Bankr-L is administered by one of the Credit Slips bloggers, Professor Robert M. Lawless of the University of Illinois. Although Bankr-L is a free service, membership is limited only to persons with a professional connection to the bankruptcy field (e.g., lawyer, accountant, academic, judge). To request a subscription on Bankr-L, click here to visit the page for the list and then click on the link for "Subscribe." After completing the information there, please also send an e-mail to Professor Lawless (rlawless@illinois.edu) with a short description of your professional connection to bankruptcy. A link to a URL with a professional bio or other identifying information would be great.

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