The Federal Reserve and two other agencies proposed yesterday sweeping new regulations to stop "unfair or deceptive" practices in the credit card industry, giving consumers struggling with debt their most significant new protections in decades.
The proposed rules would require credit card companies to give people at least 21 days to pay bills without incurring late fees and stop banks from arbitrarily raising interest rates on existing balances, among other things.
Federal Reserve Chairman Ben S. Bernanke said the proposed rules "are intended to establish a new baseline for fairness in how credit card plans operate."
The regulations are aimed particularly at the more than half of all credit card holders who don't pay their bills off every month, putting them at greater financial risk during an economic downturn. The Fed calculates that Americans carry $951.7 billion in revolving credit debt.
The Consumer Federation of America and other groups praised the new rules, but said they don't go as far in protecting consumers as several reform bills pending in Congress. Consumer advocates have criticized the Fed in the past for allowing banks to engage in unfair practices, as long as the card issuers disclosed the rules to customers in brochures and other communications, often in fine print.
"The shocking thing about these rules is that they've been proposed at all," said Edmund Mierzwinski, consumer program director for U.S. PIRG, a consumer advocacy group in Washington. "We strongly believe we will still need congressional action because these rules only go so far."
Banking industry officials contend that the new rules will reduce consumer choice and potentially lead to higher rates for everybody. The result could be reduced access to credit at a time when the Fed is trying to increase those options in the marketplace, an industry trade group said.
"We are deeply concerned that these rules will result in less competition, higher consumer prices, fewer consumer choices and reduced consumer access to credit cards," Edward L. Yingling, president and chief executive of the American Bankers Association, said in a statement.
The proposed rules come as members of Congress and federal regulators say they are receiving more complaints from the public about credit card companies, which is contributing to a growing appetite for reform.
Gerald Beauchesne, 71, a Baltimore property inspector who owns his own business, said he carefully studies his credit card bills to make sure he is not charged any added fees. He said he prefers to use cash whenever he can.
"I don't really trust the credit card companies," Beauchesne said. "They always sneak in those little rates."
The proposed regulations would require banks to give consumers a reasonable amount of time to make payments before charging late fees, which can be as much as $40. Bills would have to be sent at least three weeks before the payment due date. Consumer groups have complained that banks routinely shorten the payment window, snaring customers who are slow to drop their checks in the mail.
The Fed also seeks to stop banks from applying a customer's payment to the portion of their debt that carries the lowest interest rate, even though the borrower has balances with higher rates.
It's common for banks to charge customers different interest rates on the same card.
For example, some cards offer a low introductory rate on balance transfers, but charge a higher rate on new transactions. Cash advances also carry a higher interest rate. When a customer pays less than the full balance on their card, many companies will apply the payment to the low-rate balance first and let the higher-rate balances grow.
The proposed regulations would also prevent banks from arbitrarily raising a customer's interest rate on existing balances.
Travis Plunkett, legislative director for the Consumers Federation, noted that many banks will boost the interest rate if they learn a customer's credit score has fallen, or if they missed payments to another, unrelated lender.
Richard Davis, formerly of Severna Park, said he was stunned when his bank tripled the interest rate on his credit card last fall to 24 percent, claiming that it had "negative information" about his credit rating.
Davis, 37, said he had just checked his credit report, finding he had a credit score of 720 - a level considered better than average. And he had never missed a payment on the card in question - something a bank representative acknowledged. But when he pressed the bank to give him a reason for the rate increase, he hit a wall.
"They would never tell me," said Davis, who recently married and now lives in Centreville, Va. "To this day, I don't know."
William Ruberry, a spokesman for the Office of Thrift Supervision, said the agencies acted in part because of growing consumer complaints and heightened interest in Congress to rein in credit card companies. The OTC and the National Credit Union Administration joined the Federal Reserve in proposing the rules, which are expected to be finalized by the end of the year.
"There's a lot of interest in the rules by which credit cards are issued and there are some practices that consumer groups and members of Congress think are unfair, and we're trying to address those," Ruberry said.
Several bills are pending before Congress, including a credit cardholders "Bill of Rights" introduced by Rep. Carolyn B. Maloney, a New York Democrat.
Maloney said yesterday that she plans to press ahead with a reform bill, saying the Fed's proposed regulations will come too little, too late for the millions of consumers who need help now.
"More Americans are turning to their credit cards to help pay bills, buy groceries and make ends meet in this troubled economy," she said in a statement.
In testimony before Maloney's committee, banking industry officials complained such legislation, while well-meaning, could end up making credit more expensive.
"We've said in previous testimony on the Maloney bill that we remain concerned about the unintended consequences," said Betty Riess, a spokeswoman for Bank of America, which has a large consumer base in Maryland.
The bank declined to comment on the Fed's new regulations, saying that it needs time to review the proposals.
Sun reporter Megan Hartley contributed to this article.
Proposed credit card regulations
Credit-card rules proposed by three agencies would prohibit:
Retroactively raising interest rates on pre-existing balances.
Charging unfair late fees. Rules would give borrowers at least 21 days to pay bills.
Allocating payments to low-interest rate balances first, carrying higher-rate balances into the next month.
Charging high fees for exceeding a credit limit because of a temporary hold on the account.
Charging high interest by computing monthly balances using double-cycle billing method.
Adding unfair security deposits and fees for making credit available.
The proposed rules would also require federal credit unions to give consumers a chance to opt out of an overdraft protection program.
[ Source: Associated Press; Office of Thrift Supervision]