Credit Card Disclosures

The long-awaited proposal from the Federal Reserve Board (FRB) to revamp Truth-Lending-Disclosures on credit cards (Regulation Z, open-end credit not secured by home equity) has not satisfied key members of Congress who have been pushing for tougher restrictions on credit card terms and issuer practices. In late May the FRB issued an Advanced Notice of Proposed Rulemaking that reflected three years of study and marked the first major overhaul of the truth-in-lending rules applied to credit cards in two decades. The FRB proposal is open for public comments for 4 months. The proposal would implement a number of new standards for disclosing information more clearly to consumers, but does not limit or ban many of the card industry practices that lawmakers have sharply criticized this year.

The FRB proposed changes to the format and content of the summary table of credit card pricing known as the Schumer Box that appears in credit card applications and solicitations. It also proposed changes in the appearance of credit card monthly statements as well as new content, including a requirement that interest and fees be broken out and a required statement regarding length of time needed to pay off the debt if only the minimum payment is made. Under the proposal, notices of changes in account pricing would need to be made 45 days in advance of the actual change in terms, including rate increases that stem from penalties for late payment or over-limit activity. However, at least 7 bills have already been proposed in Congress that would go further to restrict credit card practices. Several of the more prominent were featured in this column last month.

For its part, the card industry has voiced cautious support of the FRB proposal, undoubtedly with the hope that it will lessen the pressure for tougher legislative action. Robert Rowe, a regulatory counsel for the Independent Community Bankers of America, told the American Banker that "the FRB approach at least leaves flexibility. It is more: ‘We're going to make sure you know what you're doing", whereas the other bills in Congress take the approach "you cannot do this." Ken Clayton, managing director for card policy at the American Bankers Association said "Frankly, disclosures go a long way in addressing some of the problems that are out there. You arm consumers with the information, and you give them the time so they can make choices that work for them, and they pretty much can avoid a lot of what people are complaining about. If you get too specific in how you're trying to address these problems, you end up limiting consumer choice and hurting them, and in the long run, is that what you really want to do?"

The Congressional response has been tepid. In a House Financial Services subcommittee hearing in early June that featured federal financial regulators as panelists, Rep. Carolyn Maloney noted that only the Fed has rule-writing authority to ban deceptive practices under the Truth-in-Lending Act, and asked regulators from other agencies if they should also be granted such authority. Comptroller of the Currency John Dugan, FDIC Chairman Sheila Bair and Office of Thrift Supervision Director John Reich all responded affirmatively. Maloney called the Fed proposal "a step forward and long overdue" but said "I'm concerned that even the best disclosures will not be enough to resolve some of the serious issues consumers are facing." Sheila Bair indicated that regulators and lawmakers may need to go further to address practices such as universal default (raising a card's interest rate based on credit report data), double-cycle billing (which imposes finance charges on balances paid by the due date) and applying payments first to balances with lower interest rates. She said "I am not convinced that fuller disclosure will completely address... problematic practices that are increasingly complex and difficult to explain."

Criticism of the industry from lawmakers was not confined to the Democratic side of the aisle. Rep. Spencer Bacchus (R-AL), the ranking Republican member of the Financial Services Committee said he failed to understand why credit card companies engaged in certain practices, such as applying payments to balances with the lowest interest rate first. He said to the regulators on the panel "Part of your duty is to listen to consumers. When they come to you with the complaint that their payments are going to the balance with the lowest interest rates — which is always unfavorable to them — is there any public interest argument that you can give them why that should be so?"