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3 credit card rule loopholes the Federal Reserve wants to close

November 23, 2010

By Barbara Marquand | Money Rates Columnist

The Credit Card Act of 2009 ushered in a slew of new rules for the credit card industry to protect consumers against unfair lending practices, with the latest batch going into effect in August 2010.

Yet a few tricky loopholes remain, and federal regulators want to close them. The Federal Reserve Board proposed a new rule Oct. 19 to enhance the consumer protections and clarify a few areas of uncertainty.

Three loopholes the new rule would close:

1. Revoking credit card interest rate waivers

The new rule would prohibit credit card issuers from revoking promotional programs waiving for 0 interest credit cards, unless the account holder was more than 60 days late on payments. That's in line with the broad rule that went into effect in February prohibiting issuers from raising rates on new purchases during the first year of an account or on existing balances, period, unless the accounts were more than 60 days delinquent.

However, there's been some confusion about whether that applied to promotional offers waiving interest charges for certain periods. Lately some credit card companies have been yanking the deals when customers were late by only a few days.

2. A fee by any other name

The credit card law limits annual fees to no more than 25 percent of the first year's credit limit. But some issuers have gotten around that restriction by inventing other fees, such as application and processing fees. The proposed rule says application and similar fees that consumers have to pay before a low interest credit card account is opened are covered by the same 25 percent limitation. So if an issuer charges you a $75 application fee to open a credit card account with a $400 limit, it could charge no more than a $25 annual fee, the Federal Reserve proposal says.

This would mainly impact credit cards marketed to people with poor credit, who in some cases end up paying half or more of the credit limit just to open an account.

3. Credit limits and independent income.

Under the credit card law, issuers must consider information about a consumer's ability to pay off the debt before approving an account or credit limit increase. However, it's been unclear what category of income issuers must consider.

The new rule would require issuers to evaluate an applicant's independent income, versus household income. The change would make it harder for non-working spouses to get credit cards in their own names. However, they still would be able to be authorized users on their spouses' accounts or open joint accounts with their working spouses.

The Fed announced the proposed clarifications Oct. 19 and will take comments for 60 days before giving the new rule final approval.

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