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Credit cards face crackdown

Regulators ban 'unfair' practices

Bloomberg News / December 19, 2008
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WASHINGTON - The Federal Reserve and other bank regulators are cracking down on "unfair or deceptive" credit card practices, including fees, and interest rate increases blamed for pushing Americans deeper into debt.

The central bank adopted rules yesterday that limit rate increases on existing balances and require lenders to give consumers a reasonable time to pay. The National Credit Union Administration and the Office of Thrift Supervision adopted the same rules, which an industry group said will raise borrowing costs. The new lending policy takes effect in July 2010.

"In recent years, credit card terms and features have become more complex," Fed chairman Ben S. Bernanke said before the vote at the Fed's Washington headquarters yesterday. "Consumers must understand the pricing of credit card services if they are to make well-informed, responsible decisions."

The action, in response to criticism in Congress that regulators failed to rein in abusive credit card and mortgage lending practices, is unlikely to satisfy lawmakers. House Financial Services Committee chairman Barney Frank and Senate Banking Committee chairman Christopher Dodd, said their panels will consider legislation next year to end credit card abuses.

Frank, a Massachusetts Democrat, has said legislation is necessary "even if they do everything we like" because "what's done by regulation can be undone by regulation."

The House this year approved credit card legislation introduced by Representative Carolyn Maloney, a New York Democrat. A Senate version written by Dodd, a Connecticut Democrat, stalled.

Companies including American Express Co., Discover Financial Services, and Citigroup Inc. will be restricted in their ability to raise rates for borrowers deemed increasingly risky, forcing them to shift those costs to more creditworthy borrowers, said Nessa Feddis, vice president and senior counsel at the American Bankers Association, an industry group.

The rules ban lenders from increasing annual percentage rates "unless expressly permitted." They may raise a rate on existing balances when payments are over 30 days late and must provide 45-days' notice to raise the rate on new transactions. The rules ban firms from applying payments strictly to the balance with the lowest rate first on accounts that carry different interest rates. The rules also ban double-cycle billing, when a lender imposes finance charges based on balances from previous periods.

Fed chief Ben S. Bernanke said consumers need to understand credit card services pricing to make responsible decisions.

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