September 30, 2009
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News: Federal Reserve Spell Out New CC Rules
President Barack Obama signed credit card reform legislation in law last May that is aimed at stopping the unfair and deceptive practices of the credit card industry. Although it was a major accomplishment for all involved and hailed by credit card consumers across the nation, many of the most valuable provisions of the new law will not go into effect until February 2010. Americans and lawmakers alike have protested against the financial institutions that have taken advantage of the nine month delay before the law takes effect. On Tuesday, the Federal Reserve basically demonstrated their support of the law by taking the new legislation's provisions and presenting them with greater clarity. The Federal Reserve's language spells out exactly what is expected of the credit card companies in fulfilling the requirements of the law.
As with the credit card reform bill, the Federal Reserve rule mandates that banks apply monthly payments to the highest interest rate balances first. Additionally, the Fed proposed that the lender not approve any transaction that would place the account over-the-limit without first acquiring the permission of the account holder. The practice of allowing credit transactions to be approved and then charging a hefty fee to the customer has been a major complaint by credit card holders. Many say they would not have completed the transaction if they had known they were at their limit and would be penalized.
The Fed rules also include restrictions on increasing interest rates including accounts held by individuals under the age of 21 and subprime credit card borrowers. The Fed rules prohibit fixed rate increases for the first year after the account is opened. Most major lenders have acted very quickly to make a switch from fixed rate to variable rate to avoid these restrictions. Fees imposed on subprime accounts will be capped at 25% of the card's credit limit for the first year. In line with the new legislation, the Fed rules also prohibit issuing an account to any individual under the age of 21 unless they can demonstrate an ability to repay or have a co-signer.