WASHINGTON - Cash-strapped consumers can expect a special delivery this holiday season: sweeping new rules on credit cards.
Federal regulators will announce final rules within the next several weeks to restrict credit card practices seen as unfair or deceptive. Proposals would prohibit institutions from practices such as increasing rates on an outstanding balance, except under limited circumstances; applying consumers' payments over the minimum to maximize interest charges; and requiring a reasonable amount of time for consumers to make payments.
Consumers have spoken loudly for curbing aggressive pricing. They have posted tens of thousands of comments on the Federal Reserve's Web site, complaining about predatory lenders.
"Please stop credit card companies from committing unfair billing practices. . . . Honest people need an honest chance," wrote Laura White in a comment on the Fed's site.
Meanwhile, the credit card industry has reiterated concerns that the rules will damage its ability to manage risk, leading issuers to raise rates and cut available credit. Meredith Whitney, a prominent analyst and managing director of Oppenheimer & Co. Inc., agrees that the rules would tamp access to credit. She wrote recently in the Financial Times that the rules will lead to the "severe unintended consequence" of pulling credit from consumers to the tune of $2 trillion, or 40 percent of unused credit lines.
"With so many Americans relying on their credit cards as a major source of liquidity, it would be equivalent to a major pay cut," Whitney wrote.
While there is no crystal ball to peek at the rules before they are made final, Ken Clayton, managing director of the American Bankers Association's card policy council, expects that the Fed will "move aggressively."
"What you're going to see is an unprecedented change in the way consumers deal with their card companies," Clayton said. But he cautioned that the effect of the proposals be known first.
One point of contention regards the provision that would prohibit issuers from increasing the interest rate on outstanding balances. The regulators' interim proposal allows for exceptions to this rule, such as when a minimum payment is not received within 30 days of the due date. The credit card industry has argued that the 30-day delinquency is too long, a position backed by the Office of the Comptroller of the Currency, the primary federal regulator of national banks, which account for almost 80 percent of U.S. credit card lending.
"The period should be long enough so that payment on the account is clearly late, for example, five days after the payment due date, and before a new credit cycle begins and the next periodic statement is prepared," the OCC told the Fed in public comments.
Chi Chi Wu, staff attorney with the National Consumer Law Center, said the provision on rate increases would improve consumer protections.
"If somebody is really risky, you should work with them on a payment plan, not put them further in the hole," Wu said.
It is likely that the bulk of the interim proposals will make it into the final rules, observers say, given that Congress has lit a fire under regulators. In September, the House of Representatives passed its own version of credit card regulations with a 312-112 vote.
"The point was to show the Federal Reserve and the credit card industry that Congress is very serious about implementing meaningful restrictions on unfair and deceptive practices, and if the Fed does significantly weaken their proposal, there's a good chance that Congress will override them," said Travis Plunkett, legislative director with the Consumer Federation of America.