WASHINGTON — Bankers have spent months awaiting a proposal that would change the credit card business by eliminating activities such as double-cycle billing and instituting new rules on how payments could be applied.
On Thursday they got what they were waiting for and more.
The Office of Thrift Supervision released the outline of a proposal that would define unfair and deceptive practices under the Federal Trade Commission Act. It would implement an array of requirements governing card practices, including restricting interest rate increases on balances and dictating payment allocation guidelines.
But it also would reach beyond the card industry to crack down on overdraft practices.
The OTS, the Federal Reserve Board, and the National Credit Union Administration are expected to release the full proposal today, and observers are calling it sweeping.
Certain provisions would "change open-end credit as we know it," said L. Richard Fischer, a partner with Morrison & Foerster LLP. "In essence, what the regulators are saying is that existing law in states like Delaware and South Dakota is unfair business practice."
According to the OTS summary, institutions could not charge a fee for paying an overdraft unless the customer has had the chance to opt out of overdraft programs. The provision would apply to all transactions, regardless of whether they are conducted by check, debit card, or other methods.
An institution would be required to notify consumers of their right to opt out of overdraft payments in two ways. First, it would have to send a notice giving consumers the option to opt out. If a consumer who did not opt out later incurred an overdraft fee, the bank would have to send another notice providing the opportunity to opt out during the billing cycle in which the fee was assessed.
Regulators are also seeking to prohibit banks from collecting overdraft fees if the overdraft was caused by a hold placed by the bank on the customer's funds. Fees could still be charged if the purchase would have sent the consumer into overdraft anyway.
Montrice Yakimov, the managing director of compliance and consumer protection at the OTS, said regulators are proposing rules on overdraft protection because consumers need to have more control over products from financial institutions.
"In the case with an institution that automatically enrolls the consumer in an overdraft program without the benefit of allowing the consumer to choose whether or not they want to be included, we found that troubling," she said, "in part because there are significant fees that can be associated with these programs, and consumers may with that knowledge want to make a different choice."
Ms. Yakimov also said consumers increasingly are giving up their checkbooks in favor of debit cards and may be sent into overdraft by small purchases.
"If you have someone that goes to a coffeehouse and buys that $3 cup of coffee, and that $3 cup of coffee overdraws their account, if they were given an opportunity to opt out of payment of that overdraft, they may decide, 'I don't want the coffee that much to pay a $30 fee in connection with the $3.50 overdraft,' " she said.
Still, much of the proposal focuses on card practices. One of the most controversial provisions is a proposed ban on raising the annual percentage rate on outstanding balances unless certain conditions, such as the end of a promotional period or a delinquency of more than 30 days, apply.
Ms. Yakimov did not detail whether other exemptions could apply to the ban, but she said regulators tried to acknowledge that card companies may take a wide range of information into account when deciding whether to raise a rate.
"The provision on interest rates is a recognition of the importance of risk-based pricing and allows for an APR to increase in a number of circumstances," she said.
House Financial Services Committee Chairman Barney Frank, D-Mass., Rep. Carolyn Maloney, D-N.Y., and Senate Banking Committee Chairman Chris Dodd, D-Conn., are pushing bills that would ban several industry practices. Ms. Yakimov said the proposal includes much of what lawmakers are trying to accomplish on Capitol Hill.
"The provisions that we are proposing are essentially consistent with a lot of the issues that have been raised through proposed legislation," she said.
But Rep. Frank said Thursday that legislation is still necessary.
"What's done by regulation can be undone by regulation," he said.
Sen. Dodd has proposed legislation calling on banks to apply payments first to balances with the highest interest rate. Regulators are allowing more flexibility; they would let banks apply the entire payment to the highest interest rate or split it equally among balances carrying different rates.
The proposal also would rein in how banks calculate late payments. Institutions would have to give consumers a "reasonable amount of time" to make payments. Though that term is not defined, the summary suggests payments mailed or delivered at least 21 days before the due date should not be considered late.
Regulators also would ban double-cycle billing and prohibit account-opening fees or deposits that fill up a majority of the available credit on the account. Fees or deposits that are more than 25% of the credit limit would have to be spread out over one year.
Industry representatives sharply criticized the plan, saying policymakers are trying to fix a nonexistent problem.
"This seems to be a race to the bottom with who can come out with the most damaging proposal," said Scott Talbott, a lobbyist with the Financial Services Roundtable. "We're not really sure what the problem is everyone is trying to solve. The vast majority of consumers manage their credit responsibly."
The plan is expected to be published soon in the Federal Register, with comments due in 75 days.
