Politics are Working Against Some Very Good Credit Card Legislation

Regulators are finally doing something about the abusive practices of the credit card companies. The Federal Reserve Board has a proposed set of rules that should level the playing field and make things a little easier for the highly indebted consumer. These new regulations could go into effect by the end of the year.

Here are some of the proposed rules (a sampling):

- Prohibit credit card companies from raising interest rates on money already borrowed with the exception of variable rate cards, the ending of promotional periods, and the minimum payment being made more than 30 days late.
- Prohibit credit card companies from charging a late fee if the bill is mailed to the consumer less than 21 says before the due date (a trick used by the industry).
- Prohibit two-cycle billing (another trick credit card companies use that creates additional interest charged to the consumer).
- Prohibit credit card or overdraft fees where the fee itself creates the overdraft.

If you ask me, that is a good start for regulating the credit card industry. Unfortunately, due to the high probability of these new regulations going into force, there are reports that credit card companies have started to aggressively raise rates on credit balances for no good reason at all.

Of course, they can get away with this because of the universal default clause, which states that the credit card company can basically raise rates for any reason. Unfortunately, consumers sign off on this in most cases when they sign the dotted line of a credit application.

The clause was originally intended to protect the credit card company against the risk of a default. If the credit card company suspects that the consumer is getting in trouble due to late pays on other cards and the accumulation of too much debt, then they can raise the rate. Essentially, this would do away once and for all with the universal default clause.

This set of regulations is also good in that it gives the consumer a full 30 days in the event that a bill does not arrive on time. Unfortunately, life does happen and sometimes mistakes are made. A consumer should not be punished for an occasional mistake.

Ironically, the Office of the Comptroller of the Currency, who regulates and supervises all national banks, is urging the Federal Reserve Board to not be so harsh with these rules. In other words, they want the Federal Reserve Board to soften up regulations so that banks and credit card companies can continue abusive lending practices. They maintain “that restricting these unfair practices would hamper the ability of banks to offer credit to consumers.”

One of the regulations that they want changed as to do with the late payment period. Credit card companies have been making a fortune because of raising rates to penalty rates when a credit card payment is one day late. They want the 30-day window to be limited to 5 days.

So, here we go again with a prime example of why things don’t get done in Washington. This is politics as usual. You would think that the Office of the Comptroller of the Currency would encourage these new regulations since it is their job to regulate the banking system. Of course, if the Office of the Comptroller of the Currency would have been regulating the banking system in the first place, these abusive practices wouldn’t be taking place.

Another one of the agency’s objectives is to ensure fair and equal access to financial services for all Americans. It really does appear that yet another Washington agency is taking care of big business rather than looking out for the best interest of the American consumer.
Copyright © 2008 Prudent Money and Bob Brooks. All rights reserved.