The U.S. Federal Reserve on Tuesday proposed tough new credit card rules to protect consumers from potentially costly practices by lenders and moved to implement legislation enacted in May. This action is considered by many to be a step in the right direction, and a step recommended in Thomas Frey’s paper titled the “Hornet Nest Theory“.
“This proposal is another step forward in the Federal Reserve’s efforts to ensure that consumers who rely on credit cards are treated fairly,” said Fed Board Governor Elizabeth Duke said in a statement.
The proposals, issued for public comment, represent part of the Fed’s implementation of the Credit Card Act, which was signed into law by President Barack Obama in May.
The Fed adopted final rules prohibiting unfair credit card practices in December 2008. The proposals released on Tuesday amend those regulations to incorporate provisions in the new credit card law.
“The rule bans several harmful practices and requires greater transparency in the disclosure of the terms and conditions of credit card accounts,” Duke said.
They would protect consumers from unexpected increases in credit card interest rates by generally prohibiting a rate rise in the first year after an account is opened, and increases in a rate that applies to an existing car balance.
They would also prohibit creditors issuing a card to anyone under the age of 21 unless the borrower has either the ability to make the required payment, or has the signature of a parent or other co-signer who has the means to do so.
In addition, the proposed rules would mean a consumer’s consent would be needed before creditors could charge fees for transactions that exceed the credit limit, and curb fees linked to subprime cards for consumers with risky credit.
They would also ban “two-cycle” billing methods, where a creditor raises an interest rate and charges the higher rate for a customers’ previous borrowing.