Debt smart credit card rules adopted by federal regulators
I can't believe it! It appears that we consumers
have received a major holiday gift this season.Government regulators adopted sweeping
new rules for the credit card industry. Finally, rules that protect consumers!
This is certainly a time for celebration, because
it's the first time in decades that consumers have received protection from some
of the most terrible practices of these banks. I am excited, however, these
rules don't go into effect until July 2010. My only fear is that the banks will
figure out a way to get around these changes by that time. They are smart, after
all, they got our tax money from the bailout and managed to spend it without
anyone knowing where it went. And our reward for this bailout? Increased fees,
reduced credit limits, and increased rates. I will celebrate our victory with
these rules for now, but we all need to keep our eye on the credit card banks to stop them from
wiggling out of the deal. After all, we did get these rules through.
These rules that would better protect credit card
users by prohibiting certain unfair acts or practices and improving the
disclosures consumers receive in connection with credit card accounts and other
revolving credit plans.
The final rules prohibiting certain credit card
practices were adopted under the Federal Trade Commission Act, and are being
issued concurrently with substantially similar final rules by the Office of
Thrift Supervision and the National Credit Union Administration. Among other
things, the rules will: (1) 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; (2) Forbid
banks from imposing interest charges using the "two-cycle" billing method; (3)
Require that consumers receive a reasonable amount of time to make their credit
card payments. (4) Prohibit the use of payment allocation methods that unfairly
maximize interest charges. (5) Address subprime credit cards by limiting the
fees that reduce the amount of available credit.
In finalizing the rules on unfair credit card
practices, the Board carefully considered information obtained through consumer
testing and more than 60,000 comment letters received during the comment period.
"The revised rules represent the most
comprehensive and sweeping reforms ever adopted by the Board for credit card
accounts," said Federal Reserve Chairman Ben S. Bernanke. "These protections
will allow consumers to access credit on terms that are fair and more easily
The Board is also adopting final rules to revise
the disclosures consumers receive in connection with credit card accounts and
other revolving credit plans to ensure that information is provided in a timely
manner and in a form that is readily understandable. These rules amend
Regulation Z (Truth in Lending) and conclude a comprehensive review of the
open-end credit rules. The final rules under Regulation Z require changes to the
format, timing, and content requirements for credit card applications and
solicitations and for the disclosures that consumers receive throughout the life
of an open-end account. Many of the changes reflect the result of consumer
testing conducted on behalf of the Board during its review.
"Our intent is to increase transparency and
fairness in how credit card and deposit accounts operate, thereby enhancing
competition and empowering consumers to better manage their accounts and avoid
unnecessary costs," said Federal Reserve Governor Randall S. Kroszner. "The
rules represent a significant step forward in consumer protection. By ensuring
fairness and making credit terms easier to understand, these safeguards should
allow more consumers to benefit from using credit."
Both of the final rules addressing credit card
accounts take effect on July 1, 2010. Below are the details from new rules:
Highlights of Final Rules Regarding Credit
Regulation AA (Unfair Acts or Practices)
Final Rule The final rule amends Regulation AA to
prohibit unfair or deceptive acts or practices by banks in connection with
credit card accounts. The effective date for the Regulation AA amendments is
July 1, 2010.
Time to Make Payments
The final rule prohibits banks from treating a payment
as late for any purpose unless the bank provides a reasonable amount of time for
the consumer to make that payment. The rule provides a safe harbor for banks
that send periodic statements at least 21 days prior to the payment due date.
Allocation of Payments
When different annual percentage rates (APRs) apply to
different balances on a credit card account (for example, purchases, balance
transfers, cash advances), the final rule requires banks to allocate payments
exceeding the minimum payment to the balance with the highest rate first or pro
rata among all of the balances.
Increasing Interest Rates
The final rule requires banks to disclose at account
opening all interest rates that will apply to the account and prohibits
increases in those rates, except in certain circumstances. First, if a rate
disclosed at account opening expires after a specified period of time, banks may
apply an increased rate that was also disclosed at account opening. Second,
banks may increase a rate due to the operation of an index (in other words, the
rate is a variable rate). Third, after the first year, banks may increase a rate
for new transactions only after complying with the 45-day advance notice
requirement in Regulation Z. Fourth, banks may increase a rate if the minimum
payment is received more than 30 days after the due date.
The final rule prohibits banks from calculating
interest using a method referred to as "two-cycle billing." Under this method,
when a consumer pays the entire account balance one month, but does not do so
the following month, the bank calculates interest for the second month using the
account balance for days in the previous billing cycle as well as the current
Financing of Security Deposits and Fees
The final rule addresses concerns regarding subprime
credit cards with high fees and low credit limits. Banks would be prohibited
from financing security deposits and fees for credit availability (such as
account-opening fees or membership fees) if charges assessed during the first 12
months would exceed 50 percent of the initial credit limit. The rule also limits
the security deposits and fees charged at account opening to 25 percent of the
initial credit limit and requires any additional amounts (up to 50 percent) to
be spread evenly over at least the next five billing cycles.
Regulation Z (Truth in Lending) Final Rule
The final rule amends Regulation Z to improve the
effectiveness of the disclosures consumers receive in connection with credit
card accounts and other revolving (non home-secured) credit plans. The effective
date for the Regulation Z amendments is July 1, 2010.
Applications and solicitations
The final rule contains format and content changes to
make the credit and charge card application and solicitation disclosures more
meaningful and easier for consumers to use. These disclosures are provided in
the form of a table that summarizes the key account terms. The changes include:
a) Format Revisions
New format requirements for the summary table include rules regarding type
size, the use of boldface type for certain key terms, and the placement of
b) Content Revisions
Creditors must disclose the duration that penalty rates may be in effect,
simplify disclosures about variable rates and revise disclosures regarding when
a grace period is offered on purchases or when no grace period is offered.
Periodic statement disclosures
The final rule contains revisions to make disclosures
on periodic statements more understandable, primarily by making changes to the
format requirements, such as by grouping fees and interest charges together. The
a) Interest Charges and Fees
Interest charges and fees must be grouped separately, with a monthly total for
each. Interest charges must be itemized according to the type of transaction
(such as interest charged on purchases, and interest charged on cash advances).
Separate year-to-date totals for fees and interest charges are also required.
b) Effective APR
The requirement to disclose an "effective annual percentage rate" is eliminated
due to the lack of consumer understanding of this term. New requirements to
disclose interest and fee totals for the month and year-to-date should more
effectively inform consumers of the total cost of credit.
c) Minimum Payment Disclosure
The effect of making only the minimum required payment on the time to repay
balances must be disclosed, as required by the Bankruptcy Abuse Prevention and
Consumer Protection Act of 2005.
Changes in consumer's interest rate and
other account terms
The final rule expands the circumstances under which
consumers receive written notice of changes in the account terms (such as, an
increase in the interest rate), and increases the amount of time these notices
must be sent before the change becomes effective. The changes include:
a) Increase in Advance Notice for Changes in
The final rule increases the amount of advance notice before a changed term
can be imposed from 15 to 45 days to better allow consumers to obtain
alternative financing or change their account usage.
b) Requiring Prior Notice for Penalty Rate
Creditors must provide 45 days prior notice before the creditor increases a
rate due to the consumer's delinquency or default or as a penalty.
c) Summary Table
When a change-in-terms or penalty-rate notice accompanies a periodic
statement, the final rule requires creditors to provide a tabular disclosure on
the front side of the periodic statement showing the key terms being changed.
The final rule includes the following additional protections for consumers:
a) "Fixed" Rates
Advertisements may refer to a rate as "fixed" only if a time period is
specified for which the rate is fixed and the rate will not increase for any
reason during that time, or if a time period is not specified, if the rate will
not increase for any reason while the plan is open.
b) Cut-off Times and Due Dates for Mailed
Creditors must set reasonable cut-off hours for mailed payments to be
considered timely on the due date. The final rule deems 5 p.m. to be a
reasonable time. When mailed payments are not accepted on the due date, such as
on weekends or holidays, creditors must consider a payment received on the next
business day as timely.
In a related move, the Board is adopting final
amendments to Regulation DD (Truth in Savings) to address depository
institutions' disclosure practices related to overdraft services. The effective
date for the final rules adopted under Regulation DD is January 1, 2010.
Highlights of Rules Regarding Overdraft Services
Regulation DD (Truth in
Savings) Final Rule
The final rule amends Regulation DD to address depository
institutions' disclosure practices related to overdrafts. The effective date for
the Regulation DD amendments is January 1, 2010.
Disclosure of Aggregate Overdraft Fees
The final rule extends to all institutions the requirement to disclose on
periodic statements the aggregate dollar amounts charged for overdraft fees and
for returned item fees (for the statement period and the year-to-date).
Currently, only institutions that promote or advertise the payment of overdrafts
must disclose aggregate amounts.
Disclosure of Balance Information
The final rule
requires institutions that provide account balance information through an
automated system to provide a balance that does not include additional funds
that may be made available to cover overdrafts.
The Board is separately proposing rules to
protect consumers that use overdraft services offered by their bank. The rule
solicits public comment on proposed amendments to Regulation E (Electronic Fund
Transfers) intended to provide consumers a choice regarding their institution's
payment of overdrafts for automated teller machine withdrawals and one-time
debit card transactions. The Board is proposing two alternative approaches to
providing consumer choice, including a proposed requirement that would require
institutions to obtain consumers' affirmative consent (or opt-in) before any
overdraft fees or charges may be imposed on consumers' accounts. The comment
period for the Regulation E proposal ends 60 days after publication in the
Regulation E (Electronic Fund Transfers) Proposed Rule
proposal amends Regulation E to provide consumers certain protections relating
to the assessment of overdraft fees. The proposal replaces previously proposed
amendments under Regulations AA and DD addressing overdraft services.
Consumer Choice Regarding Overdraft Services
proposal solicits comment on two approaches to providing consumers a choice
regarding the payment of ATM and one-time debit card overdrafts by their
Under one approach, an institution
would be prohibited from imposing an overdraft fee unless the consumer is given
an initial notice and a reasonable opportunity to opt out of the institution's
overdraft service, and the consumer does not opt out.
The second approach would prohibit an
institution from imposing an overdraft fee for paying such overdrafts unless the
consumer affirmatively consents (or opts in) to the institution's overdraft
The proposal would prohibit
institutions from imposing an overdraft fee when the account is overdrawn
because of a hold placed on funds in the consumer's account that exceeds the
actual transaction amount. The proposed rule is limited to debit card
transactions in which the actual transaction amount generally can be determined
within a short period of time after the transaction is authorized (for example,
transactions at gas stations and restaurants).
You can find more details about the new credit
card rules at
The Federal Reserve website.
Good article. I was glad to
see it and think you have a good grasp on what banks are
getting away with. It gave good explanation of the rules
and was helpful to credit card users to show us what
injustices were being practiced and what to watch for
and hopefully expect to end only I wish it were now as
people are losing jobs and times are rough now. Thank
you for all you do.I like that you come on Fish and give
advice on finances. I listen to you on Fish (KFSH) when
you're on there. Glad you are looking out for our
interests. Again thank you."
Wonderful!! Very educational
and taught me the meaning of many of the unfamiliar
terms used. I will now be able to follow a news report
with understanding and may be able to understand the
notices sent with my bank statements. Happy and Healthy
Holiday Season to you Scott. I look forward to your
excellent continuing advice in the New Year 2009. HAVE A
PROSPEROUS NEW YEAR. THANK YOU SCOTT!"
It explained what's
happening in terms I understood. Thanks so much! By the
way, I remember there used to be limits on how high
credit card interest could be. What happened to that??