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The new credit card guidelines issued last week by the Federal Reserve Board are likely to do more to uphold last year’s round of credit card interest rate increases than force a meaningful review of rate increases, as originally called for in the Credit CARD Act of 2009.
The Credit CARD Act bans retroactive interest rate hikes on credit card debt for consumers who meet their monthly payment obligations. Unfortunately, as is by now old news, credit card issuers used the nine months preceding the implementation of the new law to get around the new rule by raising credit card interest rates on existing credit card debt, even for consumers with excellent credit who had never had a late payment.
Congress sought to preempt indiscriminate interest rate increases in the months leading up to the implementation of the new credit card rules by adding a provision in the new credit card law, section 101(c), which mandates regular, six-month reviews of interest rate increases starting in August this year. The clincher? Reviews were to include rate hikes imposed by credit card issuers dating all the way back to January 1, 2009, before the Credit CARD Act was signed into law. The provision called for card issuers to roll back interest rate hikes “as appropriate” based on cardholders’ current creditworthiness.
While Congress wrote the new credit card law, it fell to the Federal Reserve Board to specify the details of how its provisions are to be carried out. Last Wednesday, the Fed released its new draft guidelines for the last stage of implementation of the Credit CARD Act. And unfortunately, as consumer advocates were quick to point out, instead of forcing a meaningful review of rate hikes, the proposed Fed guidelines hand card issuers an easy out.
Firstly, the Fed’s proposal doesn’t stipulate common criteria for the interest rate reviews, nor does it require banks to use the same criteria for determining whether previous rate hikes should be rolled back or continue to be justified. For example, if a card issuer cited economic conditions, such as high unemployment rates, as the reason for a rate increase, that card issuer would be free to change the criteria for setting rates and keeping them at their current levels. Secondly, the Fed leaves the door open for banks to use criteria such as ‘deteriorating marketing conditions,’ which are so broadly defined to be largely meaningless.
Furthermore, if a bank determines that a cardholders’ interest rate hike should be rolled back, the Fed guidelines say little about by how much rates should be reduced. An interest rate increase from, say 12.99 percent APR to 24.99 percent could simply be rolled back to 22.99 percent, remaining far from the original level at which the consumer incurred the debt.
The Fed move comes despite repeated urgings from some members of Congress and state attorney generals to give real teeth to the new rules regarding interest rate reviews. Senator Chris Dodd, Chairman of the Senate Banking Committee, in the fall wrote a letter to the Fed Chair Ben Bernanke, calling for the Fed to lay down stringent specifics for the rate hike reviews, stating that “the look-back provision will serve as a deterrent only if it will be implemented and enforced effectively.”
More recently the Attorney General of Connecticut, Richard Blumenthal, wrote a letter to the Federal Reserve Board, asking that the Fed adopt rules to implement Section 101(c) in a way that mandates a meaning review of interest rate hikes.
“As you well know, one decreases interest rates to ease access to credit and encourage spending,” Blumenthal wrote in his letter. “Higher interest rates and burdensome fees harm consumer spending and suck cash from hard working families directly into the pockets of large banks.”
The Fed has repeatedly been criticized for failing to effectively implement the consumer protections it is charged with. Current draft legislation in Congress seeks to strip the Fed of its consumer protection powers and instead create an independent consumer watchdog agency to regulate credit cards and other areas of consumer finance.
The latest set of provisions from the Fed is available for one month for public comment. If approved, the guidelines set in the proposal will take effect August 22nd of this year.
