New Credit Card Rules
A blog with this name has to say something about the final publication this week by the Federal Reserve of new restrictions on common credit card issuer practices. For anyone who did not notice, the following is an excerpt from the Federal Reserve press release describing the purpose of the changes (the parenthetical comments are mine):
• Protect consumers from unexpected interest charges, including increases in the rate during the first year after account opening and increases in the rate charged on pre-existing credit card balances (also known as “I can’t lose, you can’t win marketing”, or “go ahead and kick it Charlie Brown, I won’t pull the football away this year”)
• Forbid banks from imposing interest charges using the "two-cycle" billing method (retroactive finance charges on balances that have already been paid in full)
• Require that consumers receive a reasonable amount of time to make their credit card payments ("you will incur penalties unless you pay me yesterday")
• Prohibit the use of payment allocation methods that unfairly maximize interest charges (balances with lowest interest rates reduced first)
• Address subprime credit cards by limiting the fees that reduce the amount of available credit (i.e., fees required to be financed on card)
These new restrictions are based on a finding under Section 5 of the Federal Trade Commission Act (which the federal banking regulators are required to enforce in their arena of control) that the practices described are “unfair and deceptive practices”. On the surface of things, these new restrictions might be viewed as a new regulatory emphasis on simple fairness and decency in business practices, and no doubt that thought occurred to the regulators. However, in making this determination the regulators applied the following tests required by the FTC Act: (1) the practice causes or is likely to cause substantial injury to consumers; (2) the injury is not reasonably avoidable by consumers themselves; and (3) the injury is not outweighed by countervailing benefits to consumers or to competition. Lest there be any doubt that this is strictly a cost-benefit analysis, the Federal Reserve notes that “According to the FTC, an unfair act or practice will almost always represent a market failure or imperfection that prevents the forces of supply and demand from maximizing benefits and minimizing costs.”
One obvious question about these new restrictions, is why now? These practices have been widespread in the industry for years, and, in the case of the two-cycle balance computation method, since the 1970’s. My opinion is that consumer complaints to Congress and resulting Congressional pressure on the regulators finally forced (or permitted) the regulators to admit that relying on disclosure and the free market to protect consumers, while generally the preferred course, is not a universal panacea for controlling the less-consumer-friendly impulses of credit card issuers. In essence, the Federal Reserve determined that no matter how clearly these practices were disclosed, consumers still would still be confused and suffer economic harm when the practices were exercised. Again picking on the two-cycle balance computation method, there are multiple variations of the method, and multiple variables, so any explanation in a cardholder agreement is generally not worth the trouble to decipher. I used to review them in my early years as a Regulation Z attorney, so I know of what I speak.
It is also probably no accident that these new restrictions on credit card issuer practices come during a time of financial turmoil and rethinking of old rules, or lack thereof. In the coming year, there will likely be much talk about regulatory reform, and while most of the attention is focused on the financial markets, there is reason to think that the impulse will reach consumer payments regulation as well. The Treasury Department’s Blueprint for Regulatory Reform published in March of 2008 provides some useful hints.
In the New Year I will be talking more about this. In the meantime, Happy Holidays to all!
• Protect consumers from unexpected interest charges, including increases in the rate during the first year after account opening and increases in the rate charged on pre-existing credit card balances (also known as “I can’t lose, you can’t win marketing”, or “go ahead and kick it Charlie Brown, I won’t pull the football away this year”)
• Forbid banks from imposing interest charges using the "two-cycle" billing method (retroactive finance charges on balances that have already been paid in full)
• Require that consumers receive a reasonable amount of time to make their credit card payments ("you will incur penalties unless you pay me yesterday")
• Prohibit the use of payment allocation methods that unfairly maximize interest charges (balances with lowest interest rates reduced first)
• Address subprime credit cards by limiting the fees that reduce the amount of available credit (i.e., fees required to be financed on card)
These new restrictions are based on a finding under Section 5 of the Federal Trade Commission Act (which the federal banking regulators are required to enforce in their arena of control) that the practices described are “unfair and deceptive practices”. On the surface of things, these new restrictions might be viewed as a new regulatory emphasis on simple fairness and decency in business practices, and no doubt that thought occurred to the regulators. However, in making this determination the regulators applied the following tests required by the FTC Act: (1) the practice causes or is likely to cause substantial injury to consumers; (2) the injury is not reasonably avoidable by consumers themselves; and (3) the injury is not outweighed by countervailing benefits to consumers or to competition. Lest there be any doubt that this is strictly a cost-benefit analysis, the Federal Reserve notes that “According to the FTC, an unfair act or practice will almost always represent a market failure or imperfection that prevents the forces of supply and demand from maximizing benefits and minimizing costs.”
One obvious question about these new restrictions, is why now? These practices have been widespread in the industry for years, and, in the case of the two-cycle balance computation method, since the 1970’s. My opinion is that consumer complaints to Congress and resulting Congressional pressure on the regulators finally forced (or permitted) the regulators to admit that relying on disclosure and the free market to protect consumers, while generally the preferred course, is not a universal panacea for controlling the less-consumer-friendly impulses of credit card issuers. In essence, the Federal Reserve determined that no matter how clearly these practices were disclosed, consumers still would still be confused and suffer economic harm when the practices were exercised. Again picking on the two-cycle balance computation method, there are multiple variations of the method, and multiple variables, so any explanation in a cardholder agreement is generally not worth the trouble to decipher. I used to review them in my early years as a Regulation Z attorney, so I know of what I speak.
It is also probably no accident that these new restrictions on credit card issuer practices come during a time of financial turmoil and rethinking of old rules, or lack thereof. In the coming year, there will likely be much talk about regulatory reform, and while most of the attention is focused on the financial markets, there is reason to think that the impulse will reach consumer payments regulation as well. The Treasury Department’s Blueprint for Regulatory Reform published in March of 2008 provides some useful hints.
In the New Year I will be talking more about this. In the meantime, Happy Holidays to all!
Comments