Federal Reserve Proposes Rules to Implement Card Law

Federal Reserve Proposes Rules to Implement Card Law

Sept. 29 (Bloomberg) -- The U.S. Federal Reserve proposed rules today that will end banks’ ability to apply credit-card payments to balances with the lowest interest rates first, implementing legislation Congress passed in May.

The Fed also proposed that creditors obtain consumers’ consent before charging fees for transactions that exceed credit limits. Restrictions on lending to people under the age of 21 and subprime credit-card fees were also included, the Fed said in a statement.

“The rule bans several harmful practices and requires greater transparency in the disclosure of the terms and conditions of credit-card accounts,” Federal Reserve Governor Elizabeth Duke said in the statement.

President Barack Obama signed the credit-card legislation in May, describing its provisions as “common-sense reforms” that would “protect consumers.”

The Fed’s proposal generally prohibits rate increases on fixed-rate accounts in the first year after an account is opened, as well as increases on existing credit-card balances. For consumers under the age of 21, cards can’t be issued unless the borrower can show an ability to repay the debt or an older person agrees to back the account.

Fees on so-called subprime credit-cards, those issued to consumers with lower credit scores, will be capped at 25 percent of the account’s credit limit during the first year after the account is opened, according to a description of the rules in the Federal Register.

Three Stages

The law is being implemented in three stages. Today’s rules will take effect Feb. 22. The first parts of the law, giving consumers the right to reject rate increases within 45 days and pay off balances at the current rate, took effect Aug. 20. Companies also began mailing bills 21 days before the due date, up from 14 previously. Remaining provisions are scheduled to go into effect Aug. 22, 2010.

House Financial Services Committee Chairman Barney Frank, a Massachusetts Democrat, and Representative Carolyn Maloney, a New York Democrat, proposed Sept. 24 to move up the implementation date of the card law to Dec. 1, saying lenders have been using the implementation period to add fees and raise interest rates.

Average write-offs for U.S. card issuers, including JPMorgan Chase & Co., Bank of America Corp. and Citigroup Inc., soared to a record 11.49 percent last month, according to a Sept. 23 report by Moody’s Investors Service. PNC Financial Services Group Inc. said yesterday defaults eased in August.

American Bankers Association Vice President and Senior Counsel Nessa Feddis said today’s announcement is mostly the technical language needed to implement the May law and reconcile it with previously announced Fed rules.

“Our hope and expectation is that the law will be implemented in a manageable way,” Feddis said in an interview.

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