Federal regulators adopted rules Thursday that will change the face of the credit card industry and may clash with other government efforts to promote liquidity.
In recent months, regulators have been vigorously trying to encourage banks to offer more loans as a means of stimulating the economy. But industry representatives and other observers said the new credit card rules were likely to have a tightening effect on credit.
"The effects of this are going to be pretty severe," said Oliver Ireland, a partner in the Morrison & Foerster law firm. "People are going to see either some combination of rising prices or a reduction in the availability of credit by either cutting lines or simply not making credit available."
The rules, largely unchanged from a proposal released in May, would ban certain card practices, limit when credit card companies can raise interest rates, dictate payment allocation methods to benefit consumers, and curtail late fees.
Bankers have argued that the changes go too far particularly in limiting card companies' ability to raise interest rates and price for risk. Doing so will produce higher rates across the board for customers and fewer cards, they said.
At a Federal Reserve Board meeting Thursday, Fed Vice Chairman Don Kohn acknowledged that the rules could limit credit availability but said they would be a positive in the long run.
"I do think there will be some reduction in available credit to some people," he said. "But I think in the end the credit card industry will find ways to make credit available to creditworthy people at reasonable costs and that the benefits of these proposals taken together will outweigh the costs."
The rules will also cost banks a normally reliable source of income. "The rate-change provision, combined with the payment-allocation provision, could affect up to $12 billion in revenue a year industrywide," Mr. Ireland said.
Consumer groups counter that industry fears are overblown and said
that reducing credit lines for some people is a good thing.
"Credit card companies have been reducing lines for their own reasons already, but we think that's basically post-hoc underwriting," said Gail Hillebrand, a senior attorney for Consumers Union. "You aren't doing consumers any favors by giving them more credit than they could handle."
Though the rules do not take effect until July 1, 2010, industry representatives said they could start having an impact much sooner.
"We've already seen some banks try to anticipate the rule and make adjustments earlier than required," said Nessa Feddis, a senior federal counsel at the American Bankers Association. "Basically, the rules will require credit card issuers to dismantle their whole existing credit card model and rebuild it."
Other observers agreed.
"It's my hunch that some changes aren't going to wait until a year and a half from now," said Robert Hammer, the chairman and chief executive of R.K. Hammer, a California bank card advisory firm. "Issuers have most likely been putting some contingency plans in place in the event that this passed."
Congress may also act in the interim. Rep. Carolyn Maloney, the chairwoman of the House Financial Services Committee's financial institutions subcommittee, praised the rules Thursday but said she planned to push legislation next year to rein in card practices. "Congress should act sooner to protect American consumers by giving credit card protections the permanence and force of law," she said.
Senate Banking Committee Chairman Chris Dodd, D-Conn., is also looking for more legislation next year. "I plan to reintroduce the Credit Card Accountability, Responsibility, and Disclosure Act when the Congress reconvenes," he said in a statement. "This comprehensive legislation bans a number of practices that the Fed rules do not."
The Federal Reserve Board, Office of Thrift Supervision, and National Credit Union Administration completed one rule under the Federal Trade Commission Act that defines unfair and deceptive practices.
In a related move, the Fed completed a separate rule under Regulation Z dictating required credit card disclosures, and it proposed another plan under Regulation E that would require card companies to give customers a chance to opt out of any overdraft program.
Most observers focused on the unfair and deceptive practices rule, which would significantly curtail when a card company could raise interest rates. The rule bars a company from raising rates on a consumer for reasons unrelated to that card account.
Issuers can raise rates if a cardholder is delinquent on the card account but must wait until the customer is at least 30 days delinquent and give 45 days notice.
"In practice, that's meaningless," Mr. Ireland said. "If they're 30 days late, they're so far gone it doesn't mean anything."
Even other regulators have objected. The Office of the Comptroller of the Currency urged the Fed in a comment letter this summer to let companies raise rates after a consumer has been delinquent for five days. Though the final rule did not include such a change, the OCC on Thursday backed the rule. "It's good that the rule includes an appropriate transition period that will allow credit card companies to
comply," an OCC spokesman said.
Double-cycle billing, in which a card company charges interest not only for the balance of one billing statement, but also for part of a previous one, has been banned.
The rule requires that issuers mail statements at least 21 days before a payment is due and restricts cutoff times and due dates for payments on days mail is not delivered. The rules also dictate how companies must allocate payments. Issuers must allocate any amounts above the minimum payment either entirely to the balance with the higher interest rate or to all balances equally.
Regulators also sought to crack down on hidden fees in subprime credit cards. The rule said no more than 25% of the credit limit can be charged in start-up fees on the first statement of a new account and, if the fees exceed 25% of the total limit, their cost must be spread across at least six months.
As card companies work to comply with the new rules, the industry is likely to focus on the overdraft proposal, which was originally part of the unfair and deceptive practices rule.
The Fed separated the provision into its own proposal, which would require banks to give customers the chance to opt out of overdraft programs before charging them one-time fees on ATM withdrawals or debit card transactions. The proposal would not apply to overdrafts caused by checks, ACH transactions, or preauthorized transfers.
The Fed said an alternative approach could be to require that customers opt in to an overdraft program. Fed officials said more consumer testing on both options will occur. The plan is open for comment for 60 days.
