Magazine article American Banker

Card Rules Have Fed, Lawmakers Far Apart: Where Central Bank Would Boost Disclosure, Bills Seek Bans

Magazine article American Banker

Card Rules Have Fed, Lawmakers Far Apart: Where Central Bank Would Boost Disclosure, Bills Seek Bans

Article excerpt

WASHINGTON -- Though the Federal Reserve Board last week proposed a broad shakeup of disclosures for credit cards, a wide gulf remains between the central bank's plan and more sweeping changes sought by several lawmakers.

Under the Fed plan, credit card issuers could continue to use many existing practices that have come under fire on Capitol Hill, including so-called universal default and double-cycle billing, but they would be forced to explain them better. Lawmakers, however, are seeking to ban most of these practices outright.

The result is a proposal that industry representatives are already signaling they believe is onerous while lawmakers dismiss it as not tough enough.

"Is what the Fed proposed ... enough to satisfy congressional critics of the credit card industry? The answer to that is clearly no," said Jaret Seiberg, an analyst at the Stanford Washington Research Group. "Ultimately, the goal for some of the legislation really is to change how banks price their product."

The Fed's proposal, issued Wednesday, would require issuers to beef up disclosures on several fronts, including substantial editing of monthly statements and giving customers at least 45 days notice before hiking interest rates or making other changes.

The proposed changes in Regulation Z, which enforces the Truth in Lending Act, also include model applications and solicitations that would explain which penalties result in which fees, including over-the-limit charges and details about transaction costs such as balance transfers. The central bank wants issuers to include enhanced disclaimers about the risk of making minimum payments and a modified format for presenting the fee-inclusive, or "effective," annual percentage rate.

But all seven bills pending in Congress would go much further, often calling for more specific disclosures in addition to abolishing certain fees and penalty rates.

For example, Sen. Daniel Akaka, D-Hawaii, introduced a bill in April that would require lenders to give customers the specific time and cost to pay off their balances if they only make minimum payment. Rep. David Price, D-N.C., introduced a similar bill in the House on March 13.

In contrast, the Fed proposal, directed by the 2005 bankruptcy reform law, only requires a universal disclaimer regarding the effects of making minimum payments.

Legislation from Rep. Carolyn Maloney, the chairman of the House Financial Services Committee's financial institutions subcommittee, meanwhile, would ban fees for certain card payment methods, including electronic funds transfers. A broad bill introduced in March by Reps. Mark Udall, D-Colo., and Emanuel Cleaver, D-Mo., would prohibit penalties for on-time payments and over-the-limit fees for approved purchases, among other changes.

A House bill introduced by Rep. Keith Ellison, D-Minn., and a Senate bill introduced by Sen. Jon Tester, D-Mont., would ban "universal default" - a practice in which lenders raise interest rates if a borrower's rating with another creditor deteriorates.

But the toughest crackdown would come in the bill offered by Sen. Carl Levin, D-Mich., the chairman of the Senate Permanent Subcommittee on Investigations. In addition to many of the same provisions floated by colleagues, his legislation, co-sponsored with Missouri Democrat Claire McCaskill, would cap penalty interest rate hikes at seven percentage points.

Several industry representatives - though not thrilled by the Fed proposal - nevertheless see it as far preferable to the legislative possibilities.

"The Fed's approach at least leaves flexibility," said Robert Rowe, a regulatory counsel for the Independent Community Bankers of America. …

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