Proposed Fed/OTS/NCUA Credit Card Regulations

[Updated  5.4.08.  Updated language, largely comparing Regs to pending legislation, is in brackets.]

This afternoon, the Federal Reserve, Office of Thrift Supervision, and National Credit Union Administration unveiled a set of new, proposed unfair and deceptive practices (UDAP) rules under section 5(a) of the Federal Trade Commission Act.  A copy is available here.  Other materials are here.  It's not light reading--269 pages. 

Some of the proposed rules are quite favorable for consumer interests.  Others do not go far enough, however, and perhaps most importantly, there are several major issues that the proposed rules simply do not address. From an initial perusal, the gist of the rules (and what's missing) seems to be as follows (below the break):

(1) Card issuers must provide consumers a reasonable amount of time to make a payment before it is considered late.  If the bill is mailed (or delivered) at least 21 days before the due date, it is considered reasonable.  The proposed rules would also require a payment received before 5pm EDT to be treated as timely and to have payments received the day after a day on which the USPS does not deliver mail treated as if received the day before.  This is an important step   I think the provision could have been drafted better, however.  First, the safe harbor should be presumptive, not conclusive.  Second, it raises the question of what constitutes proof of mailing?  Can an issuer prove that it mailed the bill 21 days before absent a USPS certification?  And third, what about the Providian problem of deliberately miscoding return envelopes?  Nothing in this rule prevents that.  Likewise, it does not create any procedure whereby a consumer can prove on-time delivery absent USPS certification, etc.

(2) Payment allocation.  Issuers are required to allocate payments to balances accruing interest at different rates in one of three methods (highest rates first, pro rata, equal amounts to all balances) or a method more favorable to the consumer.  This is a very good provision.  I would have preferred to have the equal amounts option be eliminated, but it is an improvement on the current situation. 

(3) Retroactive application of increased APRs to existing balances.  Issuers are forbidden from applying higher APRs to existing balances with three exceptions:  when the existing balance is at a variable rate APR and the public variable rate index increases; when a teaser rate expires (reset allowed to non-teaser base rate unless late); when a payment is made 30 days late.  This is also a very good provision--it applies to retroactive APR increases triggered by both "on-us" and "off-us" transactions, making it a stricter regulation than the proposed Credit Cardholders' Bill of Rights, which covers "off-us" retroactive increases only. 
 
(4) Prohibition on overlimit fees caused by credit holds.  Good and self-explanatory.  Limits on overlimit fees could go much farther, though, starting with limiting the number of overlimit fees in a cycle (5 fees on 5 overlimit transactions of $10 each versus 1 overlimit fee on 1 transaction of $50).  [Other possible limits on overlimit would be barring fees when the limit was exceeded because of a penalty or fee, permitting consumers to opt-out of the ability to go overlimit; requiring consumers to opt-in to the ability to go overlimit, or simply banning overlimit fees altogether.  Various bills proposed in Congress take different tacks on this.]

(5) Prohibition on imposition of finance charges based on balances in preceding billing cycles.  This puts an end to the nefarious practice of double-cycle or two-cycle billing.  Unfortunately, it does not reach far enough (at least as I read it) to prohibit a related practice--the imposition of finance charges on balances paid off on time after the closing of the previous billing cycle.  To illustrate, say I am billed $100 at the end of billing cycle 1 (assume 30-day billing cycles).  I write then make an $80, payment, received on time, 10 days after the close of billing cycle 1.  Then, in billing cycle 2, I charge $50 on day 15.  A finance charge is then applied to the average balance of (1) $100 [$80 + $20] for 10 days, (2) $20 for 5 days, and (3) $70 [$20 plus $50]  for 15 days.  The finance charge is being calculated solely for days in the current billing cycle, so the proposed rule doesn't touch fix the problem of being charged a finance charge that for the $80 I paid off on time.  Alas, I don't know of a name for this problem--which makes it hard to talk about in short-hand, so let's call it expanded finance charge calculation (I'll take suggestions for better names in the comments).  [The Levin bill would ban this.]

(6) Fee harvester cards are limited to charging initial account opening fees of no more than 50% of the line of credit and any fees over 25% of the line of credit must be spread out over the course of a year.  Also, there is an increased opt-out (not of a lot of value, if you ask me, given the sophistication of fee harvester card users).  How the Fed came up with 50% is anyone's guess.  It strikes me as ridiculous to have to pay a $150 fee for an effective $150 credit limit ($300 nominal limit, half taken up by the fee).  I would think a more reasonable number should be in the 10%-20% range. 

(7) When making firm offers of credit, issuers must specify the criteria for determining APRs and credit limits.  This can be satisfied with meaningless boilerplate language:  “If you are approved for credit, your annual percentage rate and/or credit limit will depend on your credit history, income, and debts.”  Gee, that's a helpful disclosure.  I suspect anyone who doesn't know that also doesn't read disclosures.  It's not a harmful provision, but let's not pretend that this is a useful disclosure provision.

   Notably, the rules do not address several other serious problems with credit card billing practices. 

First, they do not make any attempt to address universal cross default.  [Maloney, Udall, Lowey, Elison, and Levin bills all do so in one way or another]

Second, they do not prohibit or limit unilateral term changes other than barring retroactive applications of increased APRs to existing balances. 

Third, the do not limit the number of overlimit fees that may be applied in a single billing cycle or give consumers the option of opting out of overlimit transactions. 

Fourth, they still permit the accrual of residual interest. 

Fifth, they do not limit the application of finances charges to fees incurred in that billing cycle.  [Levin bill does so]

Sixth, they allow the application of finance charges from the transaction date, rather than from the posting date (when the issuer actually extends financing). 

Seventh, the proposed rules do not limit pay to pay fees. [a/k/a pay-to-pay.  Levin and Ackerman bills address this.]

Eighth, although they lop off two-cycle billing, they don't eliminate the imposition of finances charges on balances paid off on time when part of a balance is not within the same cycle. 

Ninth, they fail to institute definitions for terms like "Prime Rate" and "Fixed Rate".  [Levin and Maloney bills do so.]

[Tenth, they do not address lending without investigation of reasonable ability to repay in full in reasonable time period.  The Menendez bill does.

Eleventh, they do not prohibit fees/cancellation for on-time payment or payment in full, or fees for non-use of a card.  The Udall bill does.

Twelfth the regs do not address penalty interest rates.  The Levin and Menendez bills would cap at 7% above base.

Thirteenth, the regs do not address the solicitation/issuance of cards to college students.  Kohl, Slaughter, and Menendez bills do. 

Fourteenth, the regs do not address requiring disclosures about time and cost to payoff by making minimum payments, a requirement that several pending bills would impose.

Fifteenth, the regs do not address the reasonableness of currency conversion fees, an issue about which there was significant litigation.  The Levin bill would limit these fees. 

There's a lot that the Fed/OTS, NCUA left unaddressed in these regs.  It might be that they did not think they had the authority to address all of these issues under UDAP or Reg Z powers or they might not have thought changes were necessary or there might not have been sufficient intra-and inter-agency agreement on further regs to get to the public proposal stage.  Whatever the reason for their limited scope, the proposed regs are a positive first step in creating fairness and transparency in the credit card industry, an important step towards efficient consumer payments and credit markets.  If the regs remain in their current form, there will certainly be a lot left on the table for Congress to consider, and all the more so, if the card industry manages to whittle back the proposed regs.  Still to the extent that they addressed various issues, the proposed regs are generally an encouraging sign from banking regulators.] 

Comments

[Maxine Jesse]

Thank you for the article on credit card regulations - I am canceling my card with FIA Card services because of Residual Finance charges. I could have read the card member agreement 10 times over and not realized that they could continue to bill me for one of two more cycles when I thought I had paid my card in full. On my cancellation letter to FIA I also carbon copied my congressman and senator. I hope they will keep up the work of making the credit card companies stop ripping us off.