Lenders and retailers offering credit cards and other forms of open-ended credit would have to give consumers more straightforward information about interest rates and fees and 45 days’ notice before raising rates under a new proposal.
In its first major rewrite of Truth in Lending rules in 26 years, the Federal Reserve last week laid out proposed changes for credit card advertising, billing and consumer updates. The Fed mantra: simpler, clearer.
“If information is put out, and it’s not consumer-friendly, it has absolutely no value,” Fed Governor Frederic Mishkin said at a meeting in the central bank’s ornate boardroom.
The proposals, based on extensive use of consumer focus groups, respond to the increasing complexity of credit products. The Fed also plans a new look at mortgage and home equity financing. Further, the action comes as Democrats, now the majority in Congress, are pushing regulators to take a more activist role.
Among elements of the proposed rules, which now go out for a 120-day comment period and could be modified before being issued in final form:
• Financial institutions and retailers offering credit cards and other products could advertise that they offer fixed interest rates only if they clearly state how long the rate is set, and the rate is not allowed to rise during that period. If a firm does not specify a time period, the rate cannot increase while the card or loan is in effect. Ads for goods or services that include minimum payments would also have to state how long it would take to pay off a balance if a consumer made just minimum payments.
• Creditors would have to provide 45 days’ notice before changing credit terms or increasing an interest rate due to consumer delinquency or default. Currently, consumers get 15 days’ notice.
• Creditors would have to present more information in larger-type, easy-to-read boxes. Consumer focus groups revealed many card holders too fine-print inserts without reading them, even though they contain important notices. Rates and interest charges would be broken down for specific transactions such as balance transfers, cash advances and penalties.
• Expanded disclosure for subprime borrowers, people with less-than-stellar credit who generally pay higher rates and fees. Consumers taking out subprime credit cards, for example, may not realize account setup and other fees will be billed on their initial statement, whittling down their allowable line of credit.
