New credit card laws favor consumers

by Jennifer Liberto

Consumers scored a few unexpected victories in a set of Federal Reserve rules issued earlier this week.

The Fed issued 1,155 pages of rules Tuesday telling banks how to comply with new laws regulating credit cards that go into effect on Feb. 22. In a handful of cases, in which the law was unclear, federal regulators used their discretion to go a step further to protect consumers. One little-known practice that the Fed banned: Card issuers won’t be allowed to set minimum interest rates. “I was pretty pleased with that,” said Nick Bourke, co-author of the Pew Charitable Trusts credit card study. “These floors simply didn’t meet the requirements of the law.” The Fed will also prevent banks from automatically enrolling consumers in over-the-limit programs that charge regular fees. The Fed will also make it more difficult for banks to exert control over interest rates based on changing indicators, such as the prime rate. Banking industry experts agreed that the Fed tended to side with consumers in creating the new rules implementing credit card laws. “This demonstrates the Fed is trying to anticipate moves and err on the side of consumers,” said Nessa Feddis, vice president and senior counsel for the American Bankers Association.

Congress passed new laws last spring cracking down on banks’ ability to hike interest rates. Starting Feb. 22, a consumer’s rate won’t be hiked just because a cell phone bill was paid late. In fact, a bank won’t be able to raise rates, even if a consumer is late paying a credit card bill, until 60 days have passed. In addition, monthly statements will clearly indicate how long it would take for a consumer to pay off his balance making only minimum payments. But the new laws give wiggle room for rate hikes when it comes to so-called variable-rate cards, which offer interest rates based on a financial indicator, such as the prime rate, which rises and falls with the health of the U.S. economy. Since the prime rate is at 3.25%, a historic low, experts predict credit card rates based on the prime will increase once the Federal Reserve starts raising rates, perhaps as early as this year. With the new credit card laws about to kick in, banks have been hiking interest rates and switching customers into prime rate-based cards.

Floors: Consumer groups had complained that banks were fiddling with credit card rates that were supposed to be beyond the banks’ control by instituting minimum rates or “floors.” The Fed agreed with the groups, so the floors will go away Feb. 22. A recent Pew Charitable Trusts study found that more than a third of the largest card issuers had instituted minimum interest rates. In December 2008, only 10% of banks had such a floor. The industry considers these minimum interest rates a way of accounting for the inherent risk in credit card lending. But consumer groups said that minimum interest rates conflict with the law’s intention to allow these rates to rise and fall based on fluctuations in the prime rate.

Pick a rate: The Fed also agreed with consumer groups that banks shouldn’t have the upper hand when it comes to picking which prime rate should apply to an interest rate. Some banks had adopted a practice in which they got to choose the prime rate to be applied, picking a day with the highest rate during a long period, such as 90 days. That picking practice gives banks more opportunity to ensure that a higher interest rate is applied. “Instead of picking an index on a specific day, they’d take the index and say, we want the maximum interest rate for the last three months,” said Joshua Frank, a senior analyst for the Center for Responsible Lending, a nonprofit advocacy group. The new Fed rules prohibit card issuers from such picking, at least for existing balances on cards. If banks want to try such a move with future credit card purchases, the banks would first have to give consumers 45 days advance notice, which officials say makes the practice less likely. Feddis said losing the ability to pick the prime rate isn’t a big deal for most banks, and only garnered them about an extra 50 cents on a $2,000 balance.

Opt-in: Consumers also will not be automatically enrolled in credit card programs that offer the option to charge beyond credit limits. Similar to overdraft protection for checking accounts, such programs often charge regular monthly fees that consumers may not notice. Starting on Feb. 22, card issuers will be required to ask consumers if they want such over-the-limit protection on their credit cards. Consumer groups called the new opt-in rule an unexpected coup. The move could ding banks, said Feddis of the American Bankers Association. They won’t be able to charge an over-the-limit fee, even if they accidentally process and clear a charge for a cardholder who is beyond his credit limits, the Fed rule stated.

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