U.S. PIRG Consumer Blog: OTS publishes summary of unfair credit card rule proposal

The Office of Thrift Supervision has posted a summary of anticipated rules preventing unfair and deceptive credit card and overdraft checking practices. OTS writes rules for thrifts; the Fed for banks. The National Credit Union Administration will join the Fed and OTS and tomorrow (or soon) all three agencies are expected to post the detailed rule for comment.

While the devil may be in the details (and undisclosed but hinted at "exceptions") we haven't seen yet, for credit cards, the proposal includes several significant and positive reform elements of proposed Congressional credit card legislation; for overdraft checking plans, consumers are protected not so much.

Here's more on the highlights of the proposed prohibitions, again, this is based on a press release, not the specific rule, so we reserve the right to change our mostly positive preliminary views tomorrow:

The rule would ban retroactive interest rate hikes on existing outstanding balances unless a consumer was 30 days late on the card. This prohibits banks from collecting interest on "hair-trigger" late payments. It also prevents banks from retroactively raising rates on good customers for activity unrelated to the specific card, such as paying your phone bill late, or merely obtaining another card (that you may pay on time, but the mere presence of the card lowers your credit score). This tawdry practice of raising rates to 35% APR or more based on off-card factors is known as universal default. In either a delinquency on the customer's own card, or a universal default situation, the bank could only impose punitive penalty rates on future purchases.

The proposed rule would require that monthly payments above the minimum payment be allocated in a way that is "beneficial" to the cardholder. Today, if a customer has a partial balance at zero percent, a partial at 125 APR (purchases) and a partial balance (cash advances) at 23% APR, all payments are allocated only to the lowest rate balance. Under the rule, payments would need to be allocated proportionally, or to the highest balance first.

The double-cycle interest method, where interest is charged on amounts already paid off, would be banned.

On checking account overdraft "protection" plans, we have long sought a requirement that consumers must opt-in to this anti-consumer product. The proposed rule would require only an opt-out. Not good enough. But presumably, the regulators will require a clear disclosure of the opt-out right. We haven't had that.

However, in a surprise, the proposal would ban both credit card over-the-limit-fees (OTL) and checking account overdraft fees if a consumer's debit (but not check) overdraft or OTL credit card transaction was due solely to holds or blocks against funds (as imposed by gas stations, hotels, rent a car companies and others). These are especially problematic because some gas stations may impose a block of $100 on a purchase of $20 worth of gas, and not release the block for several days.

The regulator/cheerleader known as the Office of the Comptroller of the Currency does not have its own rulemaking authority. That's a good thing. When the Fed's version of these rules becomes final, then OCC would presumably have to enforce them against its own national banks. While the OTS website says OCC was consulted, to my knowledge nothing in these rules has ever been been supported in OCC testimony or enforcement actions, except for certain actions it has taken against predatory "fee-harvester" cards, which would also be restricted under this proposal.

If the rules are generally as strong as they appear from the press release (and have I said that the devil is always in the details?), we fully expect that the bank associations will be encouraging banks to oppose these rules in any way possible. We'll then of course ask you to support them and strengthen them. Here is our most recent testimony, from an April 17 hearing before the House Financial Institutions and Consumer Credit Subcommittee, on these issues. here is our Truthaboutcredit.org website.