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Credit Card Reform

August 18, 2008
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Credit Card Industry Is Ready for Reform at Last

After receiving nearly 56,000 consumers' comments on the stricter regulation of credit practices, the Fed and Congress are finally ready to introduce them by the end of the year. As the comment period comes to an end, Members of Congress, consumer advocates and banking officials admit it has been the largest response for any Fed's proposal so far.

While the Fed is on half the way to getting the reform to work, Credit Cardholders' Bill of Rights proposed by Rep. Carolyn Maloney was approved by the House Financial Services Committee on July, 31. But it will probably not pass the Senate this year due to the lack of time for the revision. The comprehensive bill includes some very important for credit consumers points which would stop creditors' abuses and improve disclosure laws.

Maloney's bill pushed its way out through the committee despite the aggressive interference from the banking industry. This fact, as noted by members of Congress, should alert the Federal Reserve that if they do not take action to curb unfair credit practices this year, then Congress will.

There are quite a number of other bills with similar proposals waiting for revision at the House and Senate, and it makes harder for the Fed to beat a retreat and weaken the proposed legislation.

Once put into practice, the Fed's credit reform would limit the practice of increasing APRs on existing balances by specifying the occasions when lenders can actually do it. This point is of great significance for cardholders as arbitrary interest rate increases count for numerous late payments and defaults on credit cards. Consumers' protection against arbitrary rate increases is also on the Credit Cardholders' Bill of Rights, which means the issue will be settled without fail.

The Fed's proposal also gives guarantees concerning late payment fees which are often unfairly applied. Now, if a person is given a too small period of time to pay, late payment fees are prohibited to charge. Late payment fees and other penalty charges are partly the reason for consumers' bad debts and bankruptcies.

Surprisingly enough, while most major credit issuers, Citibank as an example, are refusing from the practice of universal default, the Federal Reserve does not propose to ban it, at least in all cases. The same concerns some arbitrary high credit card fees.

The new legislation seeks to protect owners of deposit accounts as well. Banks will be required to let consumers opt out of the overdraft service before they accumulate hefty fees.

All this signifies big charges for the banking industry but it doesn't mean everything will go off without a hitch. As the Federal Reserve is reviewing and analyzing the comments to decide which point of the proposal needs an alteration, bankers assure the new rules will have inevitable impact on applications and their pricing, meaning extra costs on low-risk people to subsidize high-risk borrowers.

Banking industry will not get off with the requirement of improved disclosure forms only. In view of rising debt and unemployment, lawmakers acknowledge the pressure for tougher approach.

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