Financial Update (Second Quarter 2008)

Fed Proposes New Protections for Credit Card Users

fine print graphic The Federal Reserve Board in early May proposed rules to prohibit unfair practices concerning credit card and overdraft services that would, among other provisions, protect consumers from unexpected interest rate increases on pre-existing card balances.

The rules, proposed for public comment under the Federal Trade Commission Act, also would prohibit card issuers from imposing interest charges using the "two-cycle" billing method, which computes interest on balances on days preceding the most recent billing cycle, including debt that has already been repaid. Other proposed measures would require that consumers receive a reasonable time to make payments and would prohibit the use of payment allocation methods that unfairly maximize interest charges.

Overdraft services would also be affected
The proposals also include protections for consumers who use overdraft services offered by their bank. Specifically, they require institutions to notify consumers and let them decline to have the bank pay their overdraft before any overdraft fees or charges may be imposed on consumers' accounts.

Proposed changes install a "baseline for fairness"
"The proposed rules are intended to establish a new baseline for fairness in how credit card plans operate," said Federal Reserve Chairman Ben Bernanke. "Consumers relying on credit cards should be better able to predict how their decisions and actions will affect their costs."
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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).

To ensure consumers enjoy the same protections regardless of the institution from which they obtain a credit card or receive overdraft protection, the Board's proposal has been 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.

The provisions addressing credit card practices are part of the Board's ongoing effort to enhance protections for card users, and they follow the Board's 2007 proposal to improve credit card disclosures under the Truth in Lending Act.

May 20, 2008