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Fed Proposes New Credit Card Rules

Would bring new regulations into line with tougher new law

September 29, 2009

"This proposal is another step forward in the Federal Reserve's efforts to ensure that consumers who rely on credit cards are treated fairly," said Federal Reserve Governor Elizabeth A. Duke. "The rule bans several harmful practices and requires greater transparency in the disclosure of the terms and conditions of credit card accounts."

Among other things, the proposed rule would:

• Protect consumers from unexpected increases in credit card interest rates by generally prohibiting increases in a rate during the first year after an account is opened and increases in a rate that applies to an existing credit card balance.

• Prohibit creditors from issuing a credit card to a consumer who is under the age of 21 unless the consumer has the ability to make the required payments or obtains the signature of a parent or other cosigner with the ability to do so.

• Require creditors to obtain a consumer's consent before charging fees for transactions that exceed the credit limit.

• Limit the high fees associated with subprime credit cards.

• Ban creditors from using the "two-cycle" billing method to impose interest charges.

• Prohibit creditors from allocating payments in ways that maximize interest charges.

In December 2008, the Fed adopted final regulations prohibiting unfair credit card practices and improving the disclosures consumers receive in connection with credit card accounts. However, Congress and the Obama Administration said tougher rules were needed. This Fed proposal amends aspects of those 2008 regulations to incorporate provisions of the Credit Card Accountability Responsibility and Disclosure Act of 2009 (Credit CARD Act), which was enacted in May 2009.

The proposed rule represents the second stage of the Fed's implementation of the Credit Card Act. On July 15, 2009, the Board issued an interim final rule implementing the provisions of the Credit Card Act that went into effect on August 20, 2009.

The proposed rule would implement the provisions that go into effect on February 22, 2010. The remaining provisions of the Credit CARD Act go into effect on August 22, 2010 and will be implemented by the Federal Reserve at a later date.

Some consumer advocates have complained that both the Fed and Congress waited too long to implement the new rules. Over the last few months many credit card companies have raised rates on existing balances and closed thousands of accounts before the new law and regulations could take effect.

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