Federal regulators issued credit card rules today that take a significant and welcome step to curb some of the industry's most unfair and abusive practices. Unfortunately, implementation of the rules won't take effect for 18 months and, in several key respects, don't go far enough to protect consumers.

"Protecting consumers from the costly credit card practices that drain their wallets should always be a priority," said Center for Responsible Lending president Michael Calhoun. "But with a faltering economy showing no sign of improvement, consumers need to be able to hold on to hard-earned money now-not a year-and-a-half from now."

The new credit card rules issued by the Federal Reserve Board, the Office of Thrift Supervision and the National Credit Union Administration won't take effect until July 1, 2010. And, while better than the status quo, the rules will still allow credit card issuers to capriciously impose higher interest rates and hidden fees. Regulators and lawmakers must do more to rein in these practices in the coming new year.

In a separate action, the Federal Reserve today also asked for comment on two alternative proposals aimed at giving consumers better protection against abuses in unauthorized overdraft fees.

The better of the two alternatives would require banks to obtain permission from customers before charging them overdraft fees on ATM and certain debit card transactions. While broader protections would still be needed, this alternative would begin to give consumers a true choice about when and how they are charged for short-term credit. The other alternative would do little to change current practices.

Key provisions of the new credit card rules include:

  • Protects against retroactive rate hikes. Banks can no longer retroactively raise interest rates based on conduct or circumstances unrelated to the account. Only when a payment is 30 days late can they retroactively impose a penalty rate--which typically has been as high as double the previous rate--on existing balances. Lenders must give card holders 45 days advance notice of the change.
  • Limits bait-and-switch rate hikes during the first year of an account: Banks must tell a new credit card holder whether and when an interest rate will change during the first year.
  • Bars lenders from applying monthly payments to the cheapest credit card balance first while letting more expensive balances continue to accrue interest. The rule forbids the unfair standard industry practice of applying payments to your lowest rate balances first, while keeping the interest rate clock ticking on your high rate balances.
  • Protects against shrinking payment periods: Banks must give customers a reasonable time to make payments before a late charge can kick in. Twenty-one days after mailing will meet this requirement.

What the new rule doesn't do is curb over-the-limit fees on charges the lender has approved. CRL also believes that all retroactive rate hikes should be eliminated. These charges make it harder for struggling families to avoid default in this difficult economy.

The final credit card rules come on the heels of CRL research that shows that common credit card practices--such as penalizing customers through undisclosed interest rate hikes and applying customer payments to highest-interest balances first--are poorly understood by most card holders and cost consumers billions of dollars a year.

Proposed overdraft rules fall short

The Federal Reserve Fed simultaneously released a new proposal on overdrafts -- abusive short-term loans that strip nearly $17.5 billion from consumers annually.

The proposed rule may, at best, require consumers' affirmative consent before being charged overdraft fees on ATM and certain debit transactions, which would be a step in the right direction. But the Fed also suggested that it may instead effectively maintain the status quo--and continue to allow unauthorized overdraft fees on all types of transactions.

"Banks should not be able to make expensive overdraft loans without their customers' explicit permission," said Eric Halperin, director of CRL's Washington, D.C. office.

The FDIC confirmed in a recent report that unauthorized overdrafts are stripping funds from the bank accounts of low-income customers unfairly and at great cost to those who can least afford it.

It is critical that the final rule be strengthened to require banks to obtain explicit permission from their customers before enrolling them in these expensive programs, particularly for ATM and debit transactions that can be cancelled at the terminal at no cost to the consumer.

Institutions should also be prohibited from other abusive practices, such as clearing transactions from largest dollar amounts to smallest to increase the number of overdraft fees the bank can charge.

For more information: Kathleen Day at (202) 349-1871 or kathleen.day@responsiblelending.org; Chris Kukla at (919) 313-8520 or chris.kukla@responsiblelending.org; or Ginna Green at (510) 379-5513 or ginna.green@responsiblelending.org.

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