Federal Reserve Proposes New Rules For Credit Card Issuers

Posted by Jay Fleischman, Esq.
May 6, 2008

This past Friday, May 2, 2008, the Federal Reserve Board proposed rules designed to limit unfair practices regarding credit cards and overdraft services. Among other provisions, the rules would protect consumers from unexpected increases in the rate charged on pre-existing credit card balances.

The rules also would prohibit so-called “two-cycle” billing, would require that consumers receive a reasonable amount of time to make their credit card payments, and would prohibit the use of payment allocation methods that unfairly maximize interest charges. They also include protections for consumers that use overdraft services offered by their bank.

The proposed changes to the Board’s Regulation AA (Unfair or Deceptive Acts or Practices) would be complemented by separate proposals that the Board is issuing under the Truth in Lending Act (Regulation Z) and the Truth in Savings Act (Regulation DD).

It’s all part of the Federal Reserve Board’s attempt to increase protections for consumers who use credit cards. According to the press release issued in connection with the proposal, five key provisions are included:

  • Banks would be prohibited from increasing the rate on a pre-existing credit card balance (except under limited circumstances) and must allow the consumer to pay off that balance over a reasonable period of time.
  • Banks would be prohibited from applying payments in excess of the minimum in a manner that maximizes interest charges.
  • Banks would be required to give consumers the full benefit of discounted promotional rates on credit cards by applying payments in excess of the minimum to any higher-rate balances first, and by providing a grace period for purchases where the consumer is otherwise eligible.
  • Banks would be prohibited from imposing interest charges using the “two-cycle” method, which computes interest on balances on days in billing cycles preceding the most recent billing cycle.
  • Banks would be required to provide consumers a reasonable amount of time to make payments.

    • The proposal also addresses acts or practices in connection with a bank’s payment of overdrafts on a deposit account, whether the overdraft is created by check, a withdrawal at an automated teller machine, a debit card purchase, or other transactions. The proposal requires institutions to provide consumers with notice and an opportunity to opt out of the payment of overdrafts, before any overdraft fees or charges may be imposed on consumers’ accounts.

    You can see the Federal Register notices here.

    Consumer Protection

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