Fed Proposes New Credit Card Protections

by Peter G. Miller
May 5th, 2008

The Federal Reserve has now proposed new standards for credit cards, steps that should have been taken years ago.

As you check out the astonishingly-abusive practices which the Fed wants to end take a look at your credit cards. If there is any debt that ought to be paid off in full, it’s credit card debt. Credit cards cost big money, the interest on credit cards is not generally deductible, and credit card debts reduce credit standing.

The actual reform proposal runs 162 pages, however a look at the major points — as outlined by the Federal Reserve – can be very educating….

Regulation AA (Unfair Acts or Practices)

The proposal would amend Regulation AA to prohibit unfair or deceptive acts or practices by banks in connection with credit card accounts and overdraft services for deposit accounts.

Credit Cards

___Time to Make Payments. The proposal would prohibit banks from treating a payment as late unless the consumer has been provided a reasonable amount of time to make that payment. There would be a safe harbor for banks that send periodic statements at least 21 days prior to the payment due date.

___Allocation of Payments. When different annual percentage rates (APRs) apply to different balances on a credit card account (for example, purchases and cash advances), banks would have to allocate payments exceeding the minimum payment using one of three methods or a method equally beneficial to consumers. They could not allocate the entire amount to the balance with the lowest rate. A bank could, for example, split the amount equally between two balances. In addition, to enable consumers to receive the full benefit of discounted promotional rates (for example, on balance transfers), during the promotional period payments in excess of the minimum would have to be allocated first to balances on which the rate is not discounted.

___Applying Rate Increases to Existing Balances. The proposal would prohibit banks from increasing the interest rate on outstanding balances unless the increase is due to: (i) the operation of an index (in other words, the rate is a variable rate); (ii) the expiration or loss of a promotional rate (provided the rate is not increased to a penalty rate); or (iii) the minimum payment not being received within 30 days of the due date.

___Two-Cycle Billing. The proposal would prohibit banks from imposing finance charges based on balances on days in billing cycles preceding the most recent billing cycle, a practice that is sometimes referred to as two-cycle billing.

___Financing of Security Deposits and Fees. The proposal would address concerns regarding subprime credit cards by prohibiting banks from financing security deposits and fees for credit availability (such as account-opening fees or membership fees) if charges assessed during the first twelve months would exceed 50 percent of the initial credit limit. The proposal would also require financed security deposits and fees exceeding 25 percent of the initial credit limit to be spread over the first year.

___Credit Card Holds. The proposal would prohibit banks from imposing a fee when the credit limit is exceeded solely because a hold was placed on available credit. This can occur where the final dollar amount of a transaction was not known in advance (for example, when a consumer checks into a hotel, a hold is placed for the expected cost of the stay).

___Firm Offers of Credit. The proposal would require banks making firm offers of credit advertising multiple APRs or credit limits to disclose the factors that determine whether a consumer will qualify for the lowest APR and highest credit limit advertised (for example, the consumer’s credit history, income, and debts). A safe harbor disclosure is provided.

Overdraft Services

___Right to Opt Out. The proposal would prohibit banks from imposing a fee for paying an overdraft unless the bank has provided the consumer with an opportunity to opt out of the payment of overdrafts and the consumer has not done so. The opt-out right would apply to all transaction types. Banks also would be required to provide consumers a partial opt-out for overdrafts resulting from ATM and point-of-sale transactions.

___Debit Holds. The proposal would prohibit banks from imposing a fee when the account is overdrawn solely because a hold was placed on funds in the consumer’s deposit account.This can occur where the final dollar amount of the transaction was not known in advance (for example, when a consumer purchases fuel at the pump, a hold is placed for the estimated amount of fuel that will be purchased).

Regulation Z (Truth in Lending)

The proposal would also amend Regulation Z to complement the proposed amendments to Regulation AA, including the following:

___Due Dates for Mailed Payments. The proposal would provide that mailed credit card payments received by 5 p.m. on the due date must be considered timely. In addition, if a creditor does not receive or accept mailed payments on the due date (for example, when the due date falls on a Sunday or holiday), a payment received by mail on the next business day would be considered timely.

Regulation DD (Truth in Savings)

The proposal would also amend Regulation DD to complement the proposed amendments to Regulation AA, including the following:

___Disclosure of Aggregate Overdraft Fees. The proposal would extend to all banks and savings associations the requirement to disclose on periodic statements the aggregate dollar amounts charged for overdraft fees and for returned item fees (for the month and the year-to-date). Currently, only institutions that promote or advertise the payment of overdrafts must disclose aggregate amounts.

___Disclosure of Balance Information. The proposal would require banks and savings associations that provide account balance information through an automated system to disclose the amount of the consumer’s funds available for immediate use or withdrawal, without including additional funds the institution may provide to cover overdrafts.

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