End of last week, the Federal Reserve released a proposed set of regulations on credit cards and overdraft. See
These regulations, when implemented will:
- Prohibit credit card companies from raising rates on existing credit card balances, unless a payment is at least 30 days overdue.
Card issuers will required to provide a 'safe harbor' - 21-day "grace period" before payments fall due
- Customer payments to be allocated in a manner that clears the higher-interest balances first and not follow practices that knock off the lowest rate balances on priority.
- Prohibit rate increases unless on variable rate, expiry of promotions, or account falls overdue.
- Stop the practice of 'two cycle billing' where banks charged interest retroactively on balances.
- Security deposit and fees on subprime credit cards restricted to 50 percent of initial credit limit that use up the limit.
- Disallow charging overlimit fees on accounts with 'authorization holds' causing an account to go overlimit. Overlimit fees applicable only if the actual transaction amount causes the excess - not merely authorizations.
- Make credit card companies disclose what credit factors influence their decisions when offers are made that include differing tiers for interest rates and credit lines
- Make customer payments received by 5PM on the due date considered to be "on time", and/or, if card companies set due dates when mail is not delivered or business is not conducted, payments would be considered on time if received the next standard business
Given that most of the above issues have already been raised by consumer groups and banks have realized that innovative 'fees and charges' is not sustainable, you can expect these regulations to go through without much of a fuss. For consumers, this is a
vindication of their commonly held belief that card issuers are full of tricks and always manage to extract the maximum out of consumers; particularly off revolvers and late payers. Of course, many of us may debate on whether it is advisable for regulators
to poke their heads into card issuers' business. However, in the current mood, regulators can't be seen as standing back while banks make the maximum out of credit lines.
We may now expect other Central Banks and regulators around the world to follow suit! Looks like some shine off the 'supra -ROE' image of card business is inevitable.