Janice A. Oser, Esq.

In December, we got a present for the holidays from our federal bank regulators. Certain common practices by banks concerning credit cards were officially declared unfair.

These practices are prohibited in revised consumer protection regulations described by Ben S. Bernanke, Chairman of the Federal Reserve Board, as “the most comprehensive and sweeping reforms ever adopted by the Board with respect to credit card accounts.”

The revised regulations do not become effective until July 1, 2010. Some of us may think that sooner would have been better, say, right away. But the fact that the federal agencies adopted “comprehensive and sweeping reforms” without new legislation by Congress is pretty remarkable.

It wasn’t done lightly. The story begins in June 2007, when the Federal Reserve Board, which has responsibility for issuing regulations implementing the Truth in Lending Act, issued a proposal to amend certain provisions of those regulations. When the Board, or any federal agency, issues a proposal to amend its regulations, it asks for comments. Among the comments received were many urging the Board to propose more regulations to prohibit what were characterized as unfair practices by banks with respect to credit cards.

The issues raised by the comments that were received were addressed in revisions proposed in May 2008 to regulations implementing the Federal Trade Commission Act. This Act prohibits unfair and deceptive practices. The revisions were proposed collectively by three federal regulatory agencies, the Federal Reserve Board, which regulates state-chartered banks, the Office of Thrift Supervision, which regulates savings banks, and the National Credit Union Administration. The rules would apply to all but a small percentage of entities that issue credit cards in this country.

Subsequently, these federal agencies conducted meetings and discussions with consumer group representatives, industry representatives, other federal and state banking agencies, and the Federal Trade Commission. In April 2008 the Federal Reserve Board hosted a forum on credit cards. Finally, before issuing the new rules the agencies heard testimony in a number of Congressional hearings on consumer protection issues with respect to credit cards.

The Federal Reserve Board received more than 60,000 comments on the May 2008 proposal, more than it had for any other regulatory proposal in its history. The other two agencies received over six thousand comments between them. The overwhelming majority of the comments came from individual consumers, and a majority of them supported the proposed rules.

As a result, the “change” that is so much in the air these days is indeed coming, with respect to consumer credit cards. Here are the high points of the changes to come as of July 1, 2010:

Probably the most gratifying changes as far as addressing the unfairness issue goes are those that protect the consumer from unexpected increases in interest rates. Under the new rules, a bank cannot increase the interest rate on a pre-existing balance, except under certain circumstances. These are circumstances under which the increases should not be unexpected. After the first year, the bank may increase a rate for new transactions but not until after 45-days’ advance notice.

In addition, banks must provide “a reasonable amount of time” for the consumer to make a payment before the payment may be treated as late. A bank cannot be assured that an amount of time for this purpose is “reasonable” unless it is at least 21 days before the due date.

Also, when different interest rates (annual percentage rates) apply to different balances on a credit card account (such as purchases, balance transfers and cash advances), any amount paid by the consumer in excess of the minimum payment due may not simply be applied to the balance with the lowest rate. This would maximize the interest charges the consumer would have to pay. Rather, the amount must be applied to the balance with the highest rate first, or prorated among all the balances.

Banks are also prohibited from using a method of calculating interest known as “two-cycle billing.” Under this method, when a consumer pays the entire account balance one month but does not do so the following month, the bank calculates interest for the second month using the account balance for days in the previous billing cycle as well as the current cycle. (Would you believe.)

Finally, certain issues are addressed with respect to subprime credit cards with high fees and low credit limits (pay a lot for a little credit). Banks are prohibited from adding the amount of security deposits and fees such as account-opening fees to the amount owed by the cardholder if charges during the first year would exceed 50 percent of the original credit limit. There are some other restrictions as well.

You may not consider all this much of a holiday present if you always pay the total balance on a credit card in time (no forgetting, ever, and no mistakes). Still, the changes should, when they become effective, help many consumers and make life a little less unfair.