The Federal Reserve Board on Friday proposed rules to prohibit unfair
practices regarding credit cards and overdraft services that would, among other
provisions, protect consumers from unexpected increases in the rate charged on
pre-existing credit card balances.
The rules, proposed for public comment under the Federal Trade Commission Act
(FTC Act), also would forbid banks from imposing interest charges using the
"two-cycle" billing method, would require that consumers receive a reasonable
amount of time to make their credit card payments, and would prohibit the use of
payment allocation methods that unfairly maximize interest charges. They also
include protections for consumers that use overdraft services offered by their
bank.
"The proposed rules are intended to establish a new baseline for fairness in
how credit card plans operate," said Federal Reserve Chairman Ben S. Bernanke.
"Consumers relying on credit cards should be better able to predict how their
decisions and actions will affect their costs."
The proposed changes to the Board’s Regulation AA (Unfair or Deceptive Acts
or Practices) would be complemented by separate proposals that the Board is
issuing under the Truth in Lending Act (Regulation Z) and the Truth in Savings
Act (Regulation DD).
The provisions addressing credit card practices are part of the Board’s
ongoing effort to enhance protections for consumers who use credit cards, and
follow the Board's 2007 proposal to improve the credit card disclosures under
the Truth in Lending Act. The FTC Act proposal includes five key protections for
consumers that use credit cards:
- Banks would be prohibited from increasing the rate on a pre-existing credit
card balance (except under limited circumstances) and must allow the consumer to
pay off that balance over a reasonable period of time.
- Banks would be prohibited from applying payments in excess of the minimum in
a manner that maximizes interest charges.
- Banks would be required to give consumers the full benefit of discounted
promotional rates on credit cards by applying payments in excess of the minimum
to any higher-rate balances first, and by providing a grace period for purchases
where the consumer is otherwise eligible.
- Banks would be prohibited from imposing interest charges using the
"two-cycle" method, which computes interest on balances on days in billing
cycles preceding the most recent billing cycle.
- Banks would be required to provide consumers a reasonable amount of time to
make payments.
The proposal would also address subprime credit cards by limiting the fees
that reduce the available credit. In addition, banks that make firm offers of
credit advertising multiple rates or credit limits would be required to disclose
in the solicitation the factors that determine whether a consumer will qualify
for the lowest rate and highest credit limit.
"Unfair practices can impose significant costs on credit card users," said
Federal Reserve Board Governor Randall S. Kroszner. "The new proposed rules
would provide the benefit of substantial protection against practices that can
harm consumers."
The Board's proposal under the FTC Act also addresses acts or practices in
connection with a bank’s payment of overdrafts on a deposit account, whether the
overdraft is created by check, a withdrawal at an automated teller machine, a
debit card purchase, or other transactions. The proposal requires institutions
to provide consumers with notice and an opportunity to opt out of the payment of
overdrafts, before any overdraft fees or charges may be imposed on consumers'
accounts.
To ensure that consumers enjoy the same protections regardless of the
institution from which they obtain a credit card or receive overdraft
protection, the Board's FTC Act proposal is issued concurrently with
substantively similar proposals by the Office of Thrift Supervision and the
National Credit Union Administration that would apply, respectively, to savings
associations and federally-chartered credit unions.
All three Federal Register notices are attached. In light of the
significance of the issues raised, the comment period for the FTC Act proposal
ends seventy-five days after publication of the proposal in the Federal
Register, while the comment periods for the Regulation Z and DD proposals
end sixty days after publication. Publication of each of the proposals is
expected shortly.
