The Fed Proposes Aggressive Restrictions on Abusive Credit Card Practices

In a move that is stunningly pro-consumer, the Federal Reserve Board has proposed tough new policies to curtail the types of abusive credit card practices that have been the subject of recent Congressional hearings.

These practices, which include arbitrary increases in credit card interest rates for existing balances, applying payments only to balances with the lowest interest rate rather than the highest rates and double-cycle billing (charging interest on debt that has already been paid), would be changed under the new, stricter policies. In addition, banks may also be required to give customers advance notices as well as the ability to opt out of overdraft programs.

The rules could go into effect by the end of this year.

The banks are already in an uproar over the proposed rules, which could affect more than 10,000 financial institutions. Industry representatives have begun threatening exhorbitant annual fees, elimination of balance transfers and increased interest rates. According to lobbyists, the restrictions would eliminate credit or make it more expensive to get credit.

The biggest source of angst for banks is the issue of universal default, which allows banks to increase a customer's interest rate for any reason, including defaults on other credit cards or loans, slight drops in credit scores or an increase in banks' cost of funds.

Eliminating universal default, known in bank lingo as "risk-based repricing," is a key component of a number of bills on Capitol Hill. The Fed's proposal would allow banks to raise rates when a consumer defaults on that account, and to consider "outside factors" to raise rates for new transactions. However, banks would not be allowed to use such factors to raise rates on existing balances.

According to On Wall Street, Citigroup and JPMorgan Chase & Co. announced they would no longer do universal default; however, Bank of America still uses risk-based repricing, and Capital One reprices its customers when their cost of funds rate increases.

Consumer advocates are applauding the Fed's aggressive stance. A vote is expected today.