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Sweeping New Rules to be Costly for Credit Card Industry

Federal regulators on Thursday adopted sweeping new rules for credit cards which could cost the banking industry more than $10 billion a year in interest payments, and which the head of the American Bankers Association described as "strong new regulations ... (that are) unprecedented in their scope and signal the beginning of a new market structure for credit cards."

The rules, which take effect in July 2010, will allow credit card companies to raise interest rates only on new credit cards and future purchases or advances, rather than on current balances and will eliminate increases in interest rates on existing account balances among other changes.

"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 policymakers to understand the full impact of these regulations on consumers and the economy before judging their success or further restricting the marketplace."

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

In addition, consumers will have to be given 45 days notice before any changes are made to the terms of an account, including imposition of higher penalty rates for missing payments or paying bills late. 

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.

The new rules prohibit:

--Placing 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.

--Charging fees for exceeding the credit limit solely because of a hold placed on the account.

--Computing balances using a double-cycle billing method.

--Adding security deposits and fees for issuing credit or making it available.

--Making deceptive offers of credit.

Under the new rules, credit card lenders will be required to apply any payment above the minimum to the part of the balance with the highest interest rate.

Full story here...

For more information, contact Keith Hazelton keith@oba.com (405) 424-5252, ext. 106

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