The Federal Reserve Board came under fire Tuesday in a report that evaluated what credit card issuers are required to tell customers about potential hikes in their interest rates.
The report, written by CardHub.com, a web site that lets consumers compare credit card offers, concluded that while card issuers are meeting the Fed's disclosure standards regarding the re-pricing of credit, those standards are inadequate. It blasted the Fed for omitting key consumer protections in its guidelines, such as what can trigger a rate increase for existing balances versus new transactions.
"The Federal Reserve has set an embarrassingly low bar for issuer disclosures," the report concluded.
"Issuers can't be faulted for the way they characterize account terms as long as they at least meet regulatory standards, and the fact that these standards are so low means that disclosures will leave much to be desired until a better example is set," Odysseas Papadimitriou, CardHub's chief executive officer, said in a press release.
The Fed declined to comment on the report, but a spokeswoman pointed to congressional testimony in which a Fed official said that the disclosure rules were the product of testing with more than 1,000 consumers.
As a result of the Dodd-Frank Act, the Fed ceded authority over credit-card disclosure rules to the Consumer Financial Protection Bureau. Then last December, the CFPB released its own prototype disclosure form.
Although that form is not yet in use by industry participants, it got a much more positive review from CardHub.
"It's encouraging to see that the CFPB is trying to improve upon the previous regime's work rather than simply follow in its footsteps, but the fact that it had to take a stab at a sample credit card disclosure at all is truly an indictment of the Fed's effort," Papadimitriou said in a written statement.
The CFPB's prototype, which is part of the agency's "know-before-you-owe" project, is meant to be easy to read while also informing consumers of their legal rights. For example, it notes that issuers are required to give customers 45 days advance notice of a penalty interest rate, a fact that the Fed omitted.
CardHub gave its lowest marks to two particular aspects of the Fed's disclosure rules.
First, it determined that the Fed's rules will create confusion among consumers about the portion of their balances that will be affected by a penalty increase in the annual percentage rate. Second, the report found that the Fed has been telling card issuers that they cannot disclose to consumers when they are legally required to reverse a penalty APR.
The CardHub report also looked at the disclosure forms used by major credit card issuers, and it gave credit to American Express (AXP) and Bank of America (BAC) for exceeding the Fed's standards.
Capital One (COF), JPMorgan Chase (JPM), Citigroup (NYSE: C), Discover (DFS) and Barclays were all found to be on par with the Fed's standards, and no issuers were found to be falling short of the requirements.
Rep. Carolyn Maloney, D-N.Y., one of the co-authors of the 2009 law that overhauled credit-card rules, said the report confirms what was already known about the Federal Reserve.
"The Fed was not built for consumer protection, and the CFPB will strengthen the protections that we enacted with the Card Act," Maloney said in a written statement.
Maloney said that the Card Act addressed the most serious abuses involving penalty fees, but did not specifically outlaw them — on the theory that as long as consumers understand the terms of an offer, they will be able to evaluate it.
"With consumer protection as its sole mission, the CFPB has shown that it can effectively craft model disclosures that will arm consumers with all of the information they need to make informed choices," Maloney said.