Proposed rules seek to bar some rate hikes by credit card firms

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By Kathy M. Kristof

Complaints of unfair rate hikes spur new consumer protections.

Credit card companies would be barred from some retroactive interest rate hikes and other "unfair and deceptive" practices that cost consumers billions of dollars each year under a proposal by federal regulators Thursday.

The proposal by the Office of Thrift Supervision was hailed as a "good start" by the Consumer Federation of America. But the federation and other consumer advocates said stronger steps were still needed, including measures to ban overdraft fees that are assessed because a bank has put a payment check on hold.

Federal regulators said they drafted the measures in response to a wide range of public complaints on credit card fees and practices. Susan Wones of Denver, for instance, testified at a recent congressional hearing that the interest rate on her credit card had soared because the issuer decided her credit card balances were too high. She said she had never been late with a payment or gone over her credit limit, but she was forced to pay an interest rate of 24.99%.

In addition to barring some interest rate hikes, the proposed rules would require banks and other credit card issuers to mail or deliver statements at least 21 days before their due dates to allow consumers adequate time to mail a payment without facing a late fee.

To ensure uniform practices across the industry, the Federal Reserve Board and the National Credit Union Administration are expected to release identical proposals today, said William Ruberry of the Office of Thrift Supervision.

The proposals will be subject to a 75-day public comment period, with adoption anticipated by the end of the year.

"It's about time federal regulators offered consumers some relief from unfair bank practices," said Gail Hillebrand, financial services campaign manager at Consumers Union in San Francisco.

Banking industry groups declined to comment, saying they did not have time to review the proposal.

If enacted, the proposed rules also would:

* Prohibit institutions from increasing the interest rate on an outstanding balance, except in some well-communicated instances, such as when the credit card was issued with a temporary promotional rate. The proposal also would allow banks to hike the rate on an existing balance if the consumer was more than 30 days late in making a payment.

* Curb fees required to obtain some cards so that these fees won't eat up the majority of the available credit limit. In addition, if the fee exceeded 25% of the available balance, it would have to be spread out, rather than charged as a lump sum.

* Bar a controversial practice in which credit card companies apply all payments to the balance with the lowest interest rate, in instances where different rates apply to portions of the consumer's debt.

(This often happens when consumers get a low promotional rate for, say, a balance transfer. However, they are charged a higher rate for purchases and potentially a third rate for cash advances.) The proposed rule demands that any amount over the minimum payment be either allocated among all outstanding balances or allocated to the highest-cost debt.

* Ban credit card and checking account issuers from assessing over-limit or overdraft fees solely because of a "hold" placed on available credit. (These holds are sometimes placed by gas stations for amounts that exceed the customer's purchase price and are not lifted until the retailer's debt clears.)

It was not clear Thursday how common these practices were or how much they cost consumers. But Hillebrand of Consumers Union estimated that it was easily in the billions of dollars.

Credit card issuers collect $15 billion annually in penalty fees, and overdraft fees run to $17 billion a year, she said.

Hillebrand and other groups noted that the rules did not address fees charged to pay a credit card bill over the phone or banks' ability to charge over-limit fees when they've approved the charge. Nor does it stop overdraft fees that are caused by a check hold, in which the bank has the money but has not yet credited the consumer's account.

Rep. Carolyn B. Maloney (D-N.Y.) is sponsoring proposed legislation dubbed the Credit Cardholders' Bill of Rights, which is opposed by bankers but widely supported by consumer advocates.

"This is a good first step -- an important first step," said Travis Plunkett, legislative director at the Consumer Federation of America. "But Congress still needs to act. More needs to be done."