Finance Globe

U.S. financial and economic topics from several finance writers.
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New Credit Card Rules Protect Consumers

The Office of Thrift Supervision (OTS), a division of the U.S. Treasury Department, approved a final rule today to prevent savings associations from engaging in credit card practices that are unfair to consumers.

The Federal Reserve Board (FRB) and the National Credit Union Administration (NCUA) are expected to approve the same rule later today, so that consumers can expect the same kinds of protections regardless of what type of financial institution issued their credit cards.

The OTS began the inter-agency effort to protect consumers in August 2007 by seeking comments on common, unfair credit card practices related to the marketing, originating, and servicing of credit cards and other related products. Many of the comments asked for a uniform approach across the federally regulated financial services industry.

The FRB and the NCUA joined the OTS in the federal rule making process and issued a Notice of Proposed Rulemaking in May 2008. 66,000 comments were received and led to today's final rule. The rule bans practices often cited as unfair to consumers, such as raising the interest rate on an existing credit card balance when the consumer is paying the credit card bill on time.

"I am extremely proud that OTS leadership has culminated in this important rule to ensure fair treatment for the millions of Americans who use credit cards," said OTS Director John Reich. "The rule will enhance public confidence in financial institutions and establish a level playing field for institutions that want to do business fairly without suffering competitive disadvantages."

The OTS version of the rule will apply to savings associations, the FRB version to banks, and the NCUA version to credit unions. A summary of the OTS version:

Interest rate changes
The annual percentage rate (APR) must be disclosed to the consumer when the account is opened, and the institution cannot raise the APR on existing balances unless it is expressly permitted, such as for a limited-time introductory rate. The institution may increase variable rates if the index the rate is tied to increases. The APR may be changed once the account has been opened for a year, but the consumer must be given 45 days notice of the rate increase. Rates may also be increased on existing balances if the consumer is more than 30 days late in making a payment.

Reasonable time to pay
Payments cannot be considered late unless consumers are given a reasonable amount of time to pay. The OTS considers 21 days to be reasonable. This will help prevent card users from being unfairly charged late fees after being given very little time to make their payment. Also, payments received the day after the payment is due will be considered on-time if the due date falls on a day that the U.S. Postal Service does not deliver mail.

Fair payment allocation
In the case of balances with different APRs, if the consumer sends a payment above the minimum payment, the amount in excess of the minimum payment must be applied either to the highest interest balance, or proportionately to all balances. This new rule will prevent the unfair, widespread practice of applying payments to the lowest APR balance first and milking the most interest possible from card users.

Prohibits double-cycle billing
Double-cycle billing, the practice of computing balances based on the last two billing cycles, will no longer be allowed. This practice doesn't really affect cardholders who typically carry a balance of approximately the same amount from month to month, but it especially penalizes card holders who only carry a balance sometimes, and typically pay their balance in full.

Fees on sub-prime cards
Fees exceeding 25% of the credit limit must be spread out over at least a six month period, rather than charged as one lump sum in the first billing cycle. This unfair tactic has frustrated many sub-prime card holders. Upon opening their account, they often find that high fees wipe out much of their limited credit limit, often only several hundred dollars, and make it especially easy to exceed their credit limit or otherwise make the credit card practically useless until the fees are paid off. This new rule will make it much more fair for those who are trying to improve their credit and must use a sub-prime card.

President and CEO of the American Bankers Association said in a statement about the new rules, "The strong new regulations announced today by the Federal Reserve, the Office of Thrift Supervision and the National Credit Union Administration are unprecedented in their scope and signal the beginning of a new market structure for credit cards.

"While the new rules are designed to increase protection for consumers, the Fed itself has recognized that they may result in increased costs for most card users and reduced credit availability, particularly for consumers with lower credit scores or limited credit history. With the uncertainty facing our financial system, it's absolutely vital for policymakers to understand the full impact of these regulations on consumers and the economy before judging their success or further restricting the marketplace."

The new rules will not take effect until July 1, 2010, but the OTS asks institutions under its supervision to conform to the new rules as soon as they can, especially to the provisions related to high-fee cards.

The Office of Thrift Supervision - U.S. Department of the Treasury
American Bankers Association
National Credit Union Administration
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