January 14, 2010
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News: Feds Say "No" to Floors
The Federal Reserve released its 1,155 page document that outlines guidelines for banks and credit card companies on implementing the Credit CARD Act of 2009. Among the rules is a controversial issue pertaining to “floors” on interest rates. Consumer advocates salute the Fed's rule that prohibits lenders from setting floors on variable interest rates. The rule is a victory for advocates who have demanded that credit card companies adjust rates down as well as up in response to a changing prime rate. The rule is welcomed news for cardholders that have recently been notified that their account was switched from a fixed rate to a variable interest rate. The going prime rate has been at some of the lowest in history.
New legislation limits lenders' abilities to raise credit card interest rates on current account balances with the exception of cards with variable rates and hence the reason lenders modified existing accounts. The Fed's rule nullifies this exception if the lender imposes a floor on rates. Joshua Frank, a researcher from the Center for Responsible Lending and author explained that the rule will create "an environment that is safer and more fair" for credit card holders. It will also limit the lenders ability to manipulate interest rates to their advantage which could save Americans over a billion dollars.
In view of the fact that most credit card companies made the switch from fixed rate to variable rate in order to get around the new legislation, most will be forced back to the drawing table. It will be some time before the rule will make an impact since the Federal Reserve has kept prime at an all time low to help boost the economy. The Fed has stated that they will keep rates low for an extended period of time. However, consumers will begin to feel the pain of higher interest rates when prime begins to rise.