WASHINGTON — When it comes to proposed new rules for plastic cards, the devil will lie in the details, especially when it comes to pricing cardholders according to risk.
Already, rules set to go into effect July 1, 2010 are meant to provide a host of consumer protections. But as is often the case with legislation, intent and actual results can differ.
Specifically, the new proposals clarify the fact "key protections" in the final rules would continue to apply to balances on a consumer credit card account when the account is closed or acquired by a different institution, or when the balances are transferred to another account issued by the same institution. For example, an institution would not be permitted to increase the rate on a credit card balance because the account has been closed.
In addition, as a result of changes made April 21, institutions and retailers may continue to offer deferred interest and similar programs, but these programs are subject to all of the protections in the final rules. If a consumer makes a purchase under this type of program, the agencies said the terms governing interest charges on that purchase cannot be changed through a "hair trigger" or universal default rate increase. In addition, institutions and retailers must comply with enhanced disclosure requirements.
CUs Will Feel The Effects
Jeff Russell, VP-strategic development for The Members Group, noted changes to credit card rules passed in December 2008 affect CUs in a number of significant areas, including:
- First, by modifying how issuers (CUs and banks) may change interest rates on credit cards. Today, he explained, rates may be changed based on consumers' credit scores going up or down. The new rule says rates can be changed only on new balances (unless the person is 30 days late).
- Second, amount of time to pay. The new regulation establishes a minimum of 21 days.
- Third, payment allocation in the case of different balances which have different interest rates. Today, many issuers allocate an incoming payment to pay down the balance with the lowest APR first. The new rule establishes two options: either proportional application or application to the highest APR first. In either case, the allocation policy must be disclosed.
"Universal default was banned by the rules, as was double-cycle billing, but those do not affect credit unions," Russell assessed. "The real implication for credit unions is, today they practice risk-based interest rates on credit cards. Credit score is a predictor of risk. If credit unions are not allowed to reprice existing balances, interest rates as a whole will rise and credit limits will be lower. Rates will be higher to begin with, since credit unions will not be allowed to raise them later."The problem with this rule is it restricts credit and makes credit more expensive for deserving, responsible cardholders," he added.
Multi-Year Process Yields Reforms
Steve Salzer, chief strategic, compliance and legal officer for St. Petersburg, Fla.-based PSCU Financial Services, noted the rules passed by the Federal Reserve Board, OTS and NCUA (see related story) went through a multi-year process from proposal to finalization after comments.
He noted the release of those rules has prompted the entire issuer/processor community to respond by preparing for meeting the new requirements in July 2010.
However, Salzer warned, if Congress passes the two bills currently in the committee stage, it would create problems for CUs that issue credit cards. "Both represent Congress second-guessing the best requirements to impose on the financial services sector that were imposed by the Federal Reserve," he asserted. "What these bills say is these Senators and Representatives feel they have better answers."
Salzer said there is an unusual amount of legislative activity directed at credit cards underway in D.C. The Senate also is considering the Student Credit Card Protection Act of 2009, which he described as a "much narrower bill" designed to give additional protections specifically to college students.
"Some of the bills are actually reworked bills from last year, but this is a lot of legislation in a short amount of time," Salzer reported. "The consumer protection sentiment is not just a 2009 phenomenon. It started last year but was not successful in either house of Congress. There were very contentious votes last year, and not on party lines, so there was not a clear avenue of success-thanks to the strength of the credit card lobby and the fact the bills may have gone too far, too fast."
Salzer said he believes CU credit card issuers do need to address the changes in the December 2008 final rules before the July 2010 implementation date, but he insisted they must take steps to ensure they have another year-plus to make the changes happen.
"The regulations are a done deal, but in PSCU's opinion lobbying efforts by credit unions are needed against the bills that are pending," he declared. "Congress is second-guessing the regulations, and in some cases would speed up implementation. We believe the implementation date is appropriate, as there need to be many changes in credit card practices, processing and disclosures to be ready by July 2010."
