Credit Card Issuers May Be Handcuffed on Fees

By JULIE SATOW, Staff Reporter of the Sun
May 2, 2008

Pressure is mounting on credit card issuers, with the Federal Reserve scheduled to hold a public meeting today to approve new rules that would curb the industry's abilities to impose fees on cardholders.

The proposed regulations, which among other things would prohibit banks from increasing the annual percentage rate on a customer's outstanding balance and forbid them from charging a late fee, come as a number of bills that also aim to rein in card issuers are wending their way through Congress.

The regulations are a combined effort of the Federal Reserve, the Office of Thrift Supervision, and the National Credit Union Administration; the latter two approved the rules yesterday. Unlike the proposals on Capitol Hill, no congressional approval is required for the federal regulations, and the agencies expect to finalize the moves by the end of the year.

"This is a move toward involuntary glasnost for the card industry," an associate professor of law at Georgetown University Law Center, Adam Levitin, said.

The push to increase credit card transparency is "fallout from the mortgage foreclosures, and the criticism of the Fed that it didn't do enough to prevent it," a senior fellow at the Milken Institute, James Barth, said. "The Fed doesn't want to be accused of letting people go into too much debt, perhaps unknowingly, which is exactly what happened with subprime mortgages."

The proposed restrictions come as banks are reeling from the mortgage crisis, and are looking to raise credit card fees as a way to boost revenue. Several banks have already increased the amount they charge for ATM withdrawals, and yesterday, Discover lifted its penalty rate for cardholders to 31%. In March, Bank of America tripled rates for some customers, while Washington Mutual has pushed its interest rates higher, in some cases by as much as 100%.

The American Bankers Association, which represents the banks that issue credit cards, is arguing that the consumer, not the banks, will feel the brunt of these new rules.

"We are very concerned that this will increase prices for consumers, and provide them less access for credit," the card policy counsel for the ABA, Kenneth Clayton, said.

For example, by prohibiting card issuers from raising annual rates for risky consumers, all consumers will be forced to pay higher rates, Mr. Clayton said. Bank of America, for instance, said earlier this year that just 7% of its customers see annual rates increase between the start of the year and the end. "That means that 93% of their customers see their rates lowered or stay the same. Don't get me wrong, that is a lot of people, but they bear the cost of higher rates, while everyone else benefits from lower rates," Mr. Clayton said.

The proposals from the Fed, the Office of Thrift Supervision, and the National Credit Union Administration include:

* Prohibiting credit card issuers from charging consumers a late fee unless they have been given "a reasonable amount of time to make a payment." Institutions that allow at least 21 days to make a payment after statements are mailed or delivered will be offered "a safe harbor."

* Prohibiting card issuers that offer different rates for different balances from allocating a payment to the account with the lowest rate first. If a customer makes a payment, the card issuer will either have to apply the payment to the balance with the highest annual percentage rate first, or split the payment equally among the different accounts.

* Prohibiting card issuers from raising the rate on an outstanding balance, except if a promotional rate has expired or if the cardholder defaults on a payment by more than 30 days.

* Stopping card issuers from using double-cycle billing, in which they apply a finance charge on an outstanding balance that is based on balances from previous billing cycles.

* Prohibiting card issuers from charging a fee or security deposit for the issuance of credit if the fees take up the majority of the consumer's available credit on the account.

* In soliciting new customers, card issuers would have to disclose whether a consumer could qualify for the lowest annual rate and the highest credit limit the card offers.

On Capitol Hill, Rep. Carolyn Maloney, a Democrat of New York, has proposed a Credit Cardholder's Bill of Rights, which would allow cardholders to pay off old balances at the annual rate they were charged at the time, even if their rate has risen subsequently. Consumers would also have three billing cycles after any rate increase to cancel their cards.

On Wednesday, Senator Dodd introduced the Credit Card Accountability, Responsibility, and Disclosure Act, which would prohibit issuers from charging customers if they paid a bill by phone, and would require consumers under age 21 get the approval of a guardian or parent.

The chairman of the House Judiciary Committee, Rep. John Conyers, has taken a different tack with his bill, the Credit Card Fair Fee Act, which focuses on the so-called interchange fee. This is the fee that merchants' banks pay to the cardholders' banks, and is used mostly to fund credit card rewards programs. While merchants don't pay the fee directly, their costs go up in relation to it.

"This is ultimately a hidden tax on consumers," a vice president for government relations at the National Retail Federation, Craig Sherman, said.

Card issuers, meanwhile, argue that this legislation is a price cap, and are attempting to persuade several Republicans who have signed on to it, including Rep. Chris Cannon, to remove their names. A spokesman for Mr. Cannon said he was still supportive of the measures.