Feds tighten credit card regulations

Washington —- Federal regulators adopted sweeping new rules for the credit card industry Thursday that, among other changes, will shield consumers from increases in interest rates on existing balances.

The rules, which take effect in July 2010, will let credit card companies raise rates only on new cards and future purchases or advances.

It is the most sweeping clampdown on the credit card industry in decades, aimed at protecting consumers from arbitrary hikes in interest rates or inadequate time provided to pay the bills.

John Reich, director of the Office of Thrift Supervision, a Treasury Department division, said the rules “will enhance public confidence in financial institutions and establish a level playing field for institutions that want to do business fairly.”

Most of the rules were proposed in May and drew more than 65,000 public comments —- the highest number ever received. They also restrict such lender practices as allocating all payments to balances with lower interest rates when a borrower has balances with different rates.

The changes could make it harder for millions of people with bad credit to get a subprime card with higher interest rates, some experts say.

Under the new rules, consumers will have to be given 45 days notice of any changes to the terms of an account, such as a higher penalty for missing payments or paying late. Under current rules, companies in most cases give 15 days notice.

The changes could cost the banking industry more than $10 billion a year in interest payments, according to a study by the law firm Morrison & Foerster.

Roughly 16,000 companies in the U.S. issue credit cards. The biggest lenders include Discover Financial Services LLC, Bank of America Corp., Citigroup Inc., JPMorgan Chase & Co., Capital One Financial Corp., American Express Co. and HSBC Holdings.

The head of the American Bankers Association said the “strong new regulations … ( “signal the beginning of a new market structure for credit cards.

“While the new rules are designed to increase protections for consumers, the Fed itself has recognized that they may result in increased costs for most card users and reduced credit availability, particularly for consumers with lower credit scores or limited credit history,” ABA President and Chief Executive Edward Yingling said in a statement.

“With the uncertainty facing our financial system, it’s absolutely vital for policy-makers to understand the full impact of these regulations on consumers and the economy before judging their success or further restricting the marketplace,” Yingling said.

LIMITS SET

The new rules prohibit:

> Placing unfair time constraints on payments. A payment could not be deemed late unless the borrower is given a reasonable period of time, such as 21 days, to pay.

> Placing too-high fees for exceeding the credit limit solely because of a hold placed on the account.

> Unfairly computing balances in a computing tactic known as double-cycle billing.

> Unfairly adding security deposits and fees for issuing credit or making it available.

> Making deceptive offers of credit.