November 26, 2009
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Senator Levin Addresses Feds, Pt.3
What's in a rate?In light of the fact that the new credit card reform legislation requires additional clarification to deal with the new abusive practices of lenders, Senator Levin made the following recommendations:
Anti-Evasion Rule - strengthen the rule by adding a broad anti-evasion prohibition that would prohibit credit card companies from undermining the CARD Act consumer protections. Doing so would enable regulators to deal with the ongoing, rapid changes, and new abusive practices of lenders. Adding such a provision would provide the Board with adequate authority to address additional abusive practice of the credit card industry including grace period restrictions, minimum payment requirements, account closing guidelines, disclosure practice, rebates, or any additional device or practice that would "evade, circumvent, or undermine" the effectiveness of the legislation.
Hybrid Fixed-Variable Interest Rates - The most prevalent change that has been implemented by credit card companies which allows lenders to adjust interest rates without notice as the index increases. The Hybrid Fixed-Variable Interest rate prevents interest rates from falling below a minimum as determined by the lender. It is the view of Senator Levin and the Subcommittee that this type of interest rate does not qualify under the exemption of the law. Therefore, such variable interest rates do not meet the guidelines of the CARD Act.
Pick-A-Rate - Lenders indicate that credit card variable interest rates will be the highest index rate that occurs during a set period of time and allows the lender to prolong the amount of time the higher rate will apply. This practice enables lenders to pick the highest interest rate during the set time. The Center for Responsible Lending calculated that this practice could increase card interest rates by an average of 0.3 percentage points above traditional pricing methods. This is a subtle form of raising interest rates without the consumer's knowledge making comparison shopping very difficult. The proposed rule must ban this practice.
Interest Rate Rebates - some credit card issuers have raised interest rates to high levels and offering rebates for increased spending levels and on-time payments. These lenders have not adequately defined the terms making it "potentially unfair and abusive."