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To continue on the theme of the greed of Banks, and especially their handling of consumer credit, here is the latest news of what the government is planning to do. It may not be to control the banks as much as it may be an attempt to get the so called “consumers” to start spending again.
By DAMIAN PALETTA
WASHINGTON
– U.S. federal regulators are poised to adopt tough restrictions to
make it harder for credit-card companies to raise interest rates on
millions of existing customers, reversing decades of light regulation
of the industry.
The new standards, expected to be issued Thursday, would represent
the biggest changes to the industry in a generation and will apply to
more than 16,000 companies, including major credit-card issuers Citigroup Inc., Bank of America Corp., J.P. Morgan Chase & Co. and Capital One Financial Corp.
The new standards come as U.S. consumers are caught in a deepening
economic recession in which access to credit, from student and business
loans to home-equity lines, has been constrained. For many, credit
cards are considered the easiest type of short-term loan to obtain from
a bank.
The standards are expected to alter the types of products offered.
Banks might be less willing to offer cards with low introductory rates
that could be harder to change. Banks might also try to raise rates for
many new customers to compensate for any lost income.
“We think it’s really going to mark the beginning of the new
marketplace for credit cards,” said Edward Yingling, chief executive of
the American Bankers Association, the industry’s biggest trade group.
“It will in some fundamental ways change the product.”
The most controversial new policy is expected to prohibit banks from
raising interest rates on existing card balances as long as a customer
doesn’t fall more than 30 days behind on payments. Industry officials
have estimated the new rules could cost banks $12 billion in annual
revenue.
The Federal Reserve, Office of Thrift Supervision and National
Credit Union Administration, which drafted the rules, are also expected
to require that banks give customers a “reasonable” amount of time to
make payments and prevent banks from raising a customer’s interest rate
if the person has fallen behind paying other bills, among other things.
Bankers and consumer advocates will closely watch how narrowly
regulators define the “reasonable” standard, which could spark debate
over how onerous the rules are supposed to be.
The new rules, which refer to credit cards, not charge cards, won’t
require congressional approval and are expected to take effect by
mid-2010.
Credit cards are a major source of income for banks and of credit
for consumers. The Fed said U.S. banks had $976.1 billion of revolving
debt outstanding at the end of October, a number that comprises mostly
credit-card debt. These products are often controversial, and
regulators hear thousands of complaints each year, typically related to
late fees and interest-rate increases. The Fed said 4.9% of all credit
cards were delinquent at the end of the third quarter, the highest
level since the end of 2002.
The central bank had never used its powers in this area to ban
certain credit-card practices before, and was under enormous pressure
from Democrats in Congress after years of running a hands-off approach
to consumer regulation. Last December, it banned certain mortgage
practices that many believe contributed to the financial crisis.
Shortly after warnings from Capitol Hill, Fed officials began
drawing up new rules. The central bank recently hired consumer advocate
Allen Fishbein to serve as an adviser in its division of consumer and
community affairs. Mr. Fishbein spent years working at the Consumer
Federation of America arguing for tough consumer protection rules.
Credit-card companies in recent months have raised interest rates on
certain cards to offset losses in other areas. Citigroup, which has 54
million active accounts, began notifying some customers recently that
their interest rates were going up by an average of three percentage
points. American Express also announced plans to raise rates on some
customers by two to three percentage points on an annual basis.
Depending on whether the increases apply to existing balances, such action could be limited or banned by the new rules.
The Fed received more than 60,000 comment letters on the proposal, a
record number for any regulatory proposal. Most were from consumers
complaining about their credit cards.
The most significant change between the pending rules and a proposal
in May was the government’s decision not to enact specific rules
related to fees that customers are charged when they overdraw their
bank account. Regulators want more time to study this issue, people
familiar with the matter said.
—Jane J. Kim contributed to this article.
Write to Damian Paletta at damian.paletta@wsj.com
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