Feds aiming at credit crisis

    WASHINGTON  _ The Federal Reserve and other regulators
initiated steps Friday to end ``unfair and deceptive'' credit card
industry practices assailing consumers who are already struggling

to cope in a bad economy.
    The proposed rules would be the biggest clampdown on the
industry in decades, aiming at protecting people from credit card
companies that arbitrarily raise interest rates or don't give
borrowers adequate time to pay their bills.
    The proposals would also restrict such lender practices as
allocating all payments to balances with lower interest rates when
a borrower has balances with different rates. The Fed board voted
Friday to approve the recommendations.
    Federal Reserve Chairman Ben Bernanke said the proposed rules
``are intended to establish a new baseline for fairness in how
credit card plans operate.'' Consumers using credit cards ``should
be better able to predict how their decisions and actions will
affect their costs,'' he said.
    Lawmakers who have demanded tougher controls on the credit card
industry were generally positive about the proposed rules, as were
consumer groups. But some questioned whether the changes would be
strong enough and soon enough to help the millions of households
struggling with credit card debt.
    The Fed drew considerable criticism for its slow response to
abuses that contributed to the subprime mortgage crisis.
    ``These steps are a significant improvement,'' said Sen. Charles
Schumer, D-N.Y., a member of the Banking Committee and a leader in
legislative efforts to make credit card companies more forthcoming
about the interest rates they charge. ``While they can still go
further, the Fed deserves credit for acting, particularly for
banning some awful practices rather than relying solely on
disclosure.''
    Last year the Fed proposed rules that would make credit card
bills and solicitations easier to understand, but Friday's
proposals go well beyond those in tightening interactions between
the industry and consumers.
    ``At first blush, this does seem to be good news for credit card
holders,'' said Sen. Robert Menendez, D-N.J., author of pending
legislation addressing some of the same credit card abuse issues.
``However, it remains to be seen if these proposals will go far
enough.''
    ``The problems are mounting and the last thing consumers need is
to have credit card companies ripping them off with late fees and
charges through no fault of the consumer at all,'' said Senate
Banking Committee Chairman Christopher Dodd, D-Conn., who is also
pushing reform legislation.
    The banking industry opposes the changes, and says they could
lead to higher interest rates. The rules could be finalized by the
end of the year.
    The proposed new rules would prohibit:
    _Placing unfair time constraints on payments. A payment could
not be deemed late unless the borrower is given a reasonable period
of time, such as 21 days, to pay;
    _Unfairly allocating payments among balances with different
interest rates, with lenders crediting payments to balances with
lower rates so they can continue to charge interest for balances at
higher rates;
    _Retroactively raising interest rates on pre-existing balances;
    _Placing too-high fees for exceeding the credit limit solely
because of a hold placed on the account;
    _Unfairly computing balances in a computing tactic known as
double-cycle billing;
    _Unfairly adding security deposits and fees for issuing credit
or making credit available;
    _Making deceptive offers of credit.
    The agencies said the proposed rules also would require federal
credit unions to give consumers a chance to opt out of an overdraft
protection program. And they would prohibit those institutions from
charging a fee for an overdraft caused by a hold placed on
consumer's funds when a person uses a debit card.
    Ken Clayton, senior vice president of card policy for the
American Bankers Association, described the proposed changes as
``aggressive regulatory intervention in the marketplace that will
result in higher prices and less consumer credit.''
    ``If card companies cannot fully reflect risk, then millions of
consumers with good credit histories will end up with higher
rates,'' the ABA's president and CEO, Edward L. Yingling, said in a
statement.
    ``It's unfortunate that the industry continues to buck the
immense groundswell of support that is building for credit card
reform,'' said Rep. Carolyn Maloney, D-N.Y., who has introduced
consumer protection legislation in the House. She said the Fed
endorsement of provisions in her bill ``puts to rest the credit
card companies' assertion that reform will somehow harm consumers
or the economy.''
    The Consumer Federation of America estimates that credit card
debt held by consumers is about $850 billion, some four times what
it was in 1990. The group says the average debt for those 58
percent of card-holding households that do not pay their balance in
full every month is about $17,000.
    Travis Plunkett, legislative director for the federation, said
the rules were a ``good-faith effort by the Federal Reserve to curb
some of the most significant abuses that have been hurting credit
care users for over a decade.'' He singled out the practice of
lenders increasing interest rates on a borrower because of a
supposed problem with another creditor or a drop in the borrower's
credit score.
    But the CFA and other consumer groups also complained that the
``opt-out'' proposals for overdraft plans were insufficient and
there should be an affirmative ``opt-in'' right for such plans.
Banks routinely allow consumers to overdraw their accounts and then
charge overdraft fees, the groups said.
    The Fed is acting in conjunction with the National Credit Union
Administration and the Office of Thrift Supervision.