Credit Card Regulation to Tighten?

Yesterday, the Federal Reserve unveiled fresh proposals that it hopes will provide new protections for credit card users. These are intended to prohibit many unreasonable fees, and they will also require banks to “reconsider” recent hikes in credit card rates. In a statement, Federal Reserve Governor, Elizabeth A. Duke said:

This proposal addresses two key costs of using a credit card–fees and interest rates. The rule would prevent credit card issuers from charging large penalty fees for small missteps by consumers and would require issuers to reevaluate rate increases imposed since the beginning of last year.

Credit Card Terms

The Fed’s ideas (they’re a long way from being implemented) for regulating fees fall into three broad categories:

1. Every penalty fee would be capped to the dollar amount of the transgression that triggered it. So, for example, the fee for the late receipt of a $20 minimum payment could not exceed $20.
2. All inactivity fees to be banned.
3. One violation of credit card terms = one fee. So no more multiple fees for a single transgression.

Credit Card Rates

When it comes to credit card rates, the Fed has two proposals:

1. Credit card companies must advise customers why a rate has increased.
2. “Require issuers that have increased rates since January 1, 2009 to evaluate whether the reasons for the increase have changed and, if appropriate, to reduce the rate.”

Nobody Loves the Fed

The Fed’s suggestions seem to have been met by near-universal derision, which can in itself be a considerable recommendation for any regulatory announcement. In covering the story, the New York Times and the Washington Post reported negative reactions from both bankers and consumer groups.

Kenneth J. Clayton, for instance, a senior vice president of the American Bankers Association, told the Times: “The issues addressed by this proposal are complicated and, despite good intentions, may mean higher prices for credit card customers, and some may see their accounts closed.”

Meanwhile, Nick Bourke, manager of the Safe Credit Cards Project at the Pew Charitable Trusts, complained to the Post: “They didn’t fully seize the opportunity.”

Credit Card Regulation Remains Challenging

So far, trying to make credit card use more fair has been like trying to produce a ballet for cats. As soon as the main players learn what’s required of them, they set about finding ways to do their own thing. Certainly, credit card companies have been exceptionally creative in getting around each new wave of regulation.

And some believe that–owing to its close connections to the banking industry–the Fed is the wrong body to regulate card issuers. So when it was recently suggested that the proposed new Consumer Financial Protection Agency should be housed within the Fed, many were unhappy.

For example, House Financial Services Committee Chairman, Barney Frank (D-MA), said in an email sent to this reporter yesterday: “My main objection to housing this critical function in the Federal Reserve has been the central bank’s historical failure to implement consumer protection as a central part of its mission and role.”

Credit Cards Vital

One thing’s for sure. Living without credit cards in modern America is difficult. And a fair way to make them affordable needs to be found.

Published 03/04/10 (Modified 04/23/12)