|The primary responsibility of the Board members is the formulation of monetary
policy. The seven Board members constitute a majority of the 12-member
Federal Open Market Committee (FOMC),
the group that makes the key decisions affecting the cost and availability of
money and credit in the economy.
The Federal Reserve Board on Friday, 5/2/08,
proposed rules to prohibit unfair practices regarding credit cards and overdraft
services that would, among other provisions, protect consumers from unexpected
increases in the rate charged on pre-existing credit card balances.
The rules, proposed for public comment under the
Federal Trade Commission Act (FTC Act), also would forbid banks from imposing
interest charges using the "two-cycle" billing method, would require that
consumers receive a reasonable amount of time to make their credit card
payments, and would prohibit the use of payment allocation methods that unfairly
maximize interest charges. They also include protections for consumers that use
overdraft services offered by their bank.
"The proposed rules are intended to establish a
new baseline for fairness in how credit card plans operate," said Federal
Reserve Chairman Ben S. Bernanke. "Consumers relying on credit cards should be
better able to predict how their decisions and actions will affect their costs."
The proposed changes to the Board’s Regulation AA
(Unfair or Deceptive Acts or Practices) would be complemented by separate
proposals that the Board is issuing under the Truth in Lending Act (Regulation
Z) and the Truth in Savings Act (Regulation DD).
The provisions addressing credit card practices
are part of the Board’s ongoing effort to enhance protections for consumers who
use credit cards, and follow the Board's 2007 proposal to improve the credit
card disclosures under the Truth in Lending Act. The FTC Act proposal includes
five key protections for consumers that use credit cards:
- Banks would be prohibited from increasing
the rate on a pre-existing credit card balance (except under limited
circumstances) and must allow the consumer to pay off that balance over a
reasonable period of time.
- Banks would be prohibited from applying
payments in excess of the minimum in a manner that maximizes interest
- Banks would be required to give consumers
the full benefit of discounted promotional rates on credit cards by applying
payments in excess of the minimum to any higher-rate balances first, and by
providing a grace period for purchases where the consumer is otherwise
- Banks would be prohibited from imposing
interest charges using the "two-cycle" method, which computes interest on
balances on days in billing cycles preceding the most recent billing cycle.
- Banks would be required to provide consumers
a reasonable amount of time to make payments.
The proposal would also address subprime credit
cards by limiting the fees that reduce the available credit. In addition, banks
that make firm offers of credit advertising multiple rates or credit limits
would be required to disclose in the solicitation the factors that determine
whether a consumer will qualify for the lowest rate and highest credit limit.
"Unfair practices can impose significant costs on
credit card users," said Federal Reserve Board Governor Randall S. Kroszner.
"The new proposed rules would provide the benefit of substantial protection
against practices that can harm consumers."
The Board's proposal under the FTC Act also
addresses acts or practices in connection with a bank’s payment of overdrafts on
a deposit account, whether the overdraft is created by check, a withdrawal at an
automated teller machine, a debit card purchase, or other transactions. The
proposal requires institutions to provide consumers with notice and an
opportunity to opt out of the payment of overdrafts, before any overdraft fees
or charges may be imposed on consumers' accounts.
To ensure that consumers enjoy the same
protections regardless of the institution from which they obtain a credit card
or receive overdraft protection, the Board's FTC Act proposal is issued
concurrently with substantively similar proposals by the Office of Thrift
Supervision and the National Credit Union Administration that would apply,
respectively, to savings associations and federally-chartered credit unions.
Highlights of Proposed Rules
Regarding Credit Cards and Overdraft Services
Regulation AA (Unfair Acts or Practices)
The proposal would amend Regulation AA to prohibit unfair or deceptive acts or
practices by banks in connection with credit card accounts and overdraft
services for deposit accounts.
- Time to Make Payments. The
proposal would prohibit banks from treating a payment as late unless the
consumer has been provided a reasonable amount of time to make that
payment. There would be 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 and cash advances), banks
would have to allocate payments exceeding the minimum payment using one
of three methods or a method equally beneficial to consumers. They could
not allocate the entire amount to the balance with the lowest rate. A
bank could, for example, split the amount equally between two balances.
In addition, to enable consumers to receive the full benefit of
discounted promotional rates (for example, on balance transfers), during
the promotional period payments in excess of the minimum would have to
be allocated first to balances on which the rate is not discounted.
- Applying Rate Increases to Existing
Balances. The proposal would prohibit banks from increasing the
interest rate on outstanding balances unless the increase is due to: (i)
the operation of an index (in other words, the rate is a variable rate);
(ii) the expiration or loss of a promotional rate (provided the rate is
not increased to a penalty rate); or (iii) the minimum payment not being
received within 30 days of the due date.
- Two-Cycle Billing. The
proposal would prohibit banks from imposing finance charges based on
balances on days in billing cycles preceding the most recent billing
cycle, a practice that is sometimes referred to as two-cycle billing.
- Financing of Security Deposits and
Fees. The proposal would address concerns regarding subprime
credit cards by prohibiting banks from financing security deposits and
fees for credit availability (such as account-opening fees or membership
fees) if charges assessed during the first twelve months would exceed 50
percent of the initial credit limit. The proposal would also require
financed security deposits and fees exceeding 25 percent of the initial
credit limit to be spread over the first year.
- Credit Card Holds. The
proposal would prohibit banks from imposing a fee when the credit limit
is exceeded solely because a hold was placed on available credit. This
can occur where the final dollar amount of a transaction was not known
in advance (for example, when a consumer checks into a hotel, a hold is
placed for the expected cost of the stay).
- Firm Offers of Credit. The
proposal would require banks making firm offers of credit advertising
multiple APRs or credit limits to disclose the factors that determine
whether a consumer will qualify for the lowest APR and highest credit
limit advertised (for example, the consumer’s credit history, income,
and debts). A safe harbor disclosure is provided.
- Right to Opt Out. The proposal
would prohibit banks from imposing a fee for paying an overdraft unless
the bank has provided the consumer with an opportunity to opt out of the
payment of overdrafts and the consumer has not done so. The opt-out
right would apply to all transaction types. Banks also would be required
to provide consumers a partial opt-out for overdrafts resulting from ATM
and point-of-sale transactions.
- Debit Holds. The proposal
would prohibit banks from imposing a fee when the account is overdrawn
solely because a hold was placed on funds in the consumer’s deposit
account.This can occur where the final dollar amount of the transaction
was not known in advance (for example, when a consumer purchases fuel at
the pump, a hold is placed for the estimated amount of fuel that will be
Regulation Z (Truth in Lending)
The proposal would also amend Regulation Z to complement the proposed
amendments to Regulation AA, including the following:
- Due Dates for Mailed Payments. The
proposal would provide that mailed credit card payments received by 5 p.m.
on the due date must be considered timely. In addition, if a creditor does
not receive or accept mailed payments on the due date (for example, when the
due date falls on a Sunday or holiday), a payment received by mail on the
next business day would be considered timely.
Regulation DD (Truth in Savings)
The proposal would also amend Regulation DD to complement the proposed
amendments to Regulation AA, including the following:
- Disclosure of Aggregate Overdraft Fees.
The proposal would extend to all banks and savings associations the
requirement to disclose on periodic statements the aggregate dollar amounts
charged for overdraft fees and for returned item fees (for the month 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 proposal would require banks and savings associations that provide
account balance information through an automated system to disclose the
amount of the consumer’s funds available for immediate use or withdrawal,
without including additional funds the institution may provide to cover
Post Your Comments
All three Federal Register notices are
attached. In light of the significance of the issues raised, the comment period
for the FTC Act proposal ends seventy-five days after publication of the
proposal in the Federal Register, while the comment periods for the
Regulation Z and DD proposals end sixty days after publication. Publication of
each of the proposals is expected shortly.
Statement by Chairman Ben S. Bernanke
Statement by Governor Randall S. Kroszner
Federal Register Notice -- Regulation AA (Federal Trade Commission Act) (788 KB
Federal Register Notice -- Regulation DD (237 KB PDF)
Federal Register Notice -- Regulation Z (541 KB PDF)
Board meeting materials
Proposals for Comment
Regulation AA (Federal Trade Commission Act) --
Unfair or Deceptive Acts or Practices
Regulation DD -- Truth in Savings
Regulation Z -- Truth in Lending