Interest in new rules boils over

By Ruth Mantell, MarketWatch

In public comments on proposed credit-card rules, consumers complained about "loan sharks," "crooks," "leeches" and "usury." Many said rates seemed to be raised arbitrarily and punitively, adding that they should have a fair amount of time to pay bills

As the economic slowdown squeezes families across the nation, wheels are turning in Washington to curb perceived credit-card abuses that can keep borrowers mired in debt. The public comment period recently closed for credit-card rules proposed by U.S. agencies, and with tens of thousands of responses from consumers the issue's importance is clear.

Less clear, however, is which strategies regulators should take to curb abuses while maintaining consumers' access to credit.

Consumers who didn't have opinions about precise actions that should be taken were still sure that something needs to be done.

Barbara Conley, of Akron, Ohio, commented: "Help protect the unsuspecting credit-card user. Too many people have gotten themselves deeply in debt from credit-card company practices. Please help the uninformed from getting themselves in trouble and unable to recover from their debts."

Lindsey Baccus, from Clarksville, Tenn., said: "Now is the time to reign in these 'white collar, criminal like' practices of the credit-card companies! Banks and card companies blatantly display a ... predatory personality when it comes to their ability to think of new ways to financially rape the public. In fact, they should be required to repay or pay penalties for their 'dark side' practices. Sincere thanks for making them toe the line!"

Individuals also acknowledged consumer responsibility:

"I agree that 30 days late is late -- one day is not late! I support the 21 day period that you are proposing for issuers to mail deliver the bill to me. It gives me a chance to avoid expensive late fees and maybe even a penalty interest rate," wrote Mary Kleiss, Port Charlotte, Fla.

Tightening controls

Regulators are looking to complete final credit-card rules this year. Proposals from the Federal Reserve, Office of Thrift Supervision, and National Credit Union Administration would take steps such as:

• Prohibiting a rate increase on an outstanding balance, except under limited circumstances, such as when a minimum payment has not been received within 30 days after the due date
• Prohibiting institutions from applying payments over the minimum in ways that maximize interest charges
• Requiring a reasonable amount of time for consumers to make payments
• Prohibiting interest charges using the "two-cycle" method that computes interest on balances on days in billing cycles before the most recent billing cycle
• For deposit accounts, requiring institutions to provide consumers with notice and the opportunity to opt out of automatic overdraft payments, before any overdraft fees or charges may be imposed

Problems in the housing market, as well as general economic weakness, have been contributing to delinquency rates for credit cards, according to the American Bankers Association. Delinquencies in the first quarter for credit cards provided by banks rose more than one-tenth of a percentage point to 4.51%, compared with the five-year average delinquency rate of 4.4%, ABA reported last month.

Advocacy group Consumers Union told the agencies that the proposals are a "strong beginning," and supported steps such as restricting rate increases on existing balances for consumers who haven't been more than 30 days late.

"Penalty interest rates are unfair when applied retroactively," according to Consumers Union. "The restriction on penalty rates as applied to existing balances is the heart of the proposed rule. This protection will do more than any other to return some balance and fairness to the credit-card marketplace."

The group added that agencies should go further than the current proposals, with moves such as:

• Ending all retroactive interest-rate increases, including for consumers who have had a 30-day late payment
• Limiting how high credit-card issuers can set "penalty" interest rates, and how long issuers can keep consumers at these rates
• Prohibiting fees to pay a credit card by phone or Internet

Card issuers balk

Credit-card firms say restricting their ability to raise interest rates on existing balances would prevent them from adjusting the rate to reflect the higher risk of a consumer defaulting. According to public notes of a May meeting with Fed officials and representatives from the ABA, Capital One, Bank of America and Citibank, the industry believes allowing issuers to raise rates only on new transactions is insufficient because the "greatest risk is on funds already extended."

Further, industry groups said the proposal would lead issuers to raise rates and reduce the availability of credit for all consumers, rather than only for those who present the greatest default risk.

"Rather than prohibiting rate increases on existing balances, the final rule should permit such increases if consumers also have the ability to opt out of the increase by closing the account," according to the public notes. "If a rate increase accurately reflects the available market rates for that consumer, it is rational for a consumer to accept the increase and not opt out because, if they close that account, the consumer may not be able to get a lower rate with another card issuer."

There are also proposals on credit cards in Congress, including a Credit Cardholders' Bill of Rights from Rep. Carolyn Maloney, D-N.Y., that has been approved in committee. That legislation aims to protect consumers against arbitrary interest-rate increases.

Echoing concerns about the agencies' proposals, industry participants have said Maloney's bill could be overly restrictive and force rate increases across the board by limiting the ability of lenders to adjust interest for customers who become riskier.

While proposals from agencies are helpful, some consumer advocates say it's more important for Congress to enact legislation, which would be tougher to alter once the nation's attention turns away from credit-card issues.

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