CU: Fed should roll back credit card rate hikes

April 14, 2010

Consumers Union Urges Fed to Require Banks to Roll Back
Recent Unfair Credit Card Interest Rate Hikes

Millions of Consumers Have Been Hurt By Interest Rate Spikes

WASHINGTON, D.C. – After Congress passed legislation last year reining in some of the worst credit card lending practices, many banks responded by hiking interest rates before the new rules went into effect, including on customers with perfect bill paying records. Now Consumers Union, the nonprofit publisher of Consumer Reports, is calling on the Federal Reserve Board to require banks to roll back those unfair interest rate hikes and to put stronger limits on the size of penalty fees and interest charges.

The Fed has already proposed new regulations that would limit penalty fees and require banks to reconsider interest rate hikes imposed during the year leading up to the enactment of key CARD Act protections on February 22, 2010. But the proposed regulations don’t go far enough according to Consumer Union and should be strengthened to ensure consumers are more likely to see their old interest rates reinstated and don’t face unfair penalty fees and charges in the future.

“Last year’s shameful frenzy of credit card interest rate spikes has saddled millions of Americans with high cost debt, including many consumers who always paid their bills on time,” said Lauren Bowne, staff attorney for Consumers Union. “The Fed should undo that damage by requiring banks to lower interest rates for customers who were treated unfairly before the new credit card protections went into effect.”

The Fed’s proposed regulations would require banks to review interest rate hikes made on customers between January 2009 and February 22, 2010 and to reduce those rates "as appropriate." But under the proposal, banks are allowed to keep secret their review process with no oversight by the Fed.

Banks could keep the higher interest rate if the reason for the old rate hike still exists, or if the bank decides to come up with a new reason for the higher rate. Banks would not be required to start this "look back" process until six months after the regulations go into effect - in other words, starting in late February 2011.

Consumers Union urged the Fed today to strengthen the rate review proposal by:

• Requiring banks to reinstate the old interest rate if the reason for the rate hike would not have been allowed under the new protections afforded by the CARD Act.
• Requiring banks to disclose the methodology they use to review rates and to report to the Fed twice each year the number of rate increases reviewed and the number of rate reductions that result.
• Requiring banks to begin reviewing rate increases on August 22, 2010, when the rate review provision goes into effect.

Thousands of consumers have contacted Consumers Union over the past year to complain that their credit card interest rates were raised unfairly. Many consumers reported that their banks acknowledged that interest rates were raised because of the economy or a change in market conditions and not because of anything wrong done by the consumer. Other consumers reported that their interest rates doubled or tripled after they were a day or two late making their payment or for other minor mistakes. Before the new credit card protections started on February 22, banks were allowed to raise interest rates on existing balances at any time for any reason.

Starting on February 22, banks were prohibited from raising interest rates on a credit card customer’s existing balance unless the customer has a variable rate card, a promotional rate has expired, or if the customer is more than 60 days late making the minimum payment.

The Fed also has proposed regulations required by Congress under the CARD Act that are meant to ensure penalty fees and charges are “reasonable and proportional” to the customer’s violation of the credit card contract. However, the Fed’s proposed rule only applies to penalty fees such as those imposed for going over the limit or being late with a payment and not penalty interest rates.

Under the Fed’s proposal, penalty fees would be allowed only if a bank can show the fee is a reasonable proportion of the total cost to the bank caused by the customer’s violation of the credit card agreement or if the bank proves that the fee amount is necessary to deter the same kind of violations in the future. The rule also proposes a complicated "safe harbor" provision which allows a bank to pick a permissible fee amount without doing the cost or deterrence analysis.

Consumers Union urged the Fed to broaden its proposed regulation so it extends to the size of penalty interest rate hikes in addition to fees and to limit those rate increases to no more than seven percentage points above the non-penalty interest rate. Consumers Union called on the Fed to simplify and strengthen the “safe harbor” provision for penalty fees by setting it at five percent of the violation or no more than $10.

Michael McCauley: 415-431-6747, ext 126 or David Butler – 202-462-6262