Credit Card Issuers to Be More Accountable for Rate Hikes

In new rules disclosed today, the Federal Reserve is proposing to make credit card issuers more accountable by requiring them to provide as many as four reasons for every interest rate increase.

The Fed may also require rate-hike reviews every six months, but it is soliciting comments from the industry that might set a long-term deadline for discontinuing a customer’s ongoing review process.

Credit card companies will have to do the evaluations for interest rate increases that started on January 1, 2009.

The rate reviews were part of a batch of new reform rules announced today, setting in motion a required public comment period.

The other proposed rules included a new ban on “inactivity” fees and restrictions on other “unreasonable” penalty fees. The rules will take effect August 22, the final phase of the Credit CARD Act that required compliance on Feb. 22.

But it’s the interest rate evaluations that further erode the credit card industry’s ability to raise or sustain interest rate increases. Since Feb. 22, credit card issuers are prohibited from raising interest rates on existing balances, except under very few circumstances.

Now, if an interest rate review merits a reversal of a rate hike, the credit card issuer must restore the initial rate within 30 days of notification.

The Fed gave examples of how a customer must be given the reasons, in “general terms,” for rate hikes. Primary examples include: “a decline in your creditworthiness” or “a decline in your credit score,” if the rate increase is triggered by a decrease of 100 points in a consumer’s credit score, the Fed said.

“Similarly …a notice of a rate increase triggered by a 10 percent increase in the card issuer’s cost of funds may be disclosed as “a change in market conditions,” according to the Fed’s proposed rule.

In some circumstances, the Fed states that card issuers may be required to reevaluate rate increases each six months for an indefinite period.

However, it also said that issuers can provide suggestions on limiting ongoing evaluations “after some specific time period elapses following the initial increase, for example after five years.”