Fed Shuts Down Credit Card Practices Congress Forgot To Ban

Original Link: http://www.huffingtonpost.com/2010/01/13/fed-shuts-down-credit-car_n_422301.html

By Arthur Delaney

The Federal Reserve announced Tuesday some new rules for the credit card industry, which will take effect Feb. 22 per the reform passed by Congress last year. The central bank is apparently looking to beef up its consumer protection credentials by prohibiting two practices that Congress missed.

While the new law will forbid arbitrary interest rate hikes on existing balances and over-limit fee traps, some worried the industry would simply pioneer more obscure tactics to soak consumers. The Center for Responsible Lending documented eight legal-but-sneaky practices in a report last December.

The Fed has just said no to two of those: "pick a rate" interest rates and variable rate floors. (Congress wrote the law, but it's the Fed's job to draw up the specific regulations that the credit card industry will follow when the law takes effect.)

"Consumer groups and a member of Congress raised concerns about two industry practices that, in their view, exercise control over the variable rate in a manner that is inconsistent with [the new law]," reads the Fed's announcement.

Pick-a-rate interest rates work like this: issuers inflate interest rates on variable rate cards by setting the rate to the highest prime rate in a three-month period instead of to the prime rate on the last business day during a billing period -- long the standard practice for most cards.

"Variable rate floors" allow interest rates to go up but never down.

"For example," explains the Fed, "assume that a card issuer offers a variable rate of 17%, which is calculated by adding a margin of 12 percentage points to an index with a current value of 5%. However, the terms of the account provide that the variable rate will not decrease below 17%. As a result, the variable rate can only increase, and the consumer will not benefit if the value of the index falls below 5%."

HuffPost surveyed the eight largest credit card issuers about the practices documented in CRL's report. None copped to using the pick-a-rate method of setting interest rates, but Bank of America allowed that the calculation for the "majority" of its variable rate accounts is based on the prime rate from the last business day of the previous month. Discover, Capitol One, Wells Fargo, and Chase said they didn't use the "pick a rate" method. None said they used variable rate floors, but Wells Fargo ignored the question. HSBC declined to respond to the survey.

Industry lobbying group American Bankers Association lauded the new rules.

"These rules -- the most comprehensive ever seen -- herald a new era for America's credit card customers," said ABA's Kenneth Clayton. "Many practices that frustrated customers have been eliminated, and credit card users will now benefit from greater control and clearer terms for their accounts."