Attorney General Richard Blumenthal today wrote U.S. Federal Reserve Chairman Ben S. Bernanke calling the Fed’s draft credit card rules “woefully inadequate” and seeking changes to compel rollback of recent massive interest rate increases on creditworthy consumers.

          Blumenthal reiterated his call that card issuers reverse all arbitrary rate increases since January 1, 2009 for creditworthy consumers.

          “The proposed rules recently issued by the board to implement provisions of the Credit Card Accountability Responsibility and Disclosure Act of 2009 (CARD Act) are woefully inadequate to protect consumers from the worst abuses of the credit card industry,” Blumenthal said in the letter. “Once again, the Federal Reserve Board has chosen to protect the interests of Wall Street bankers at the expense of Main Street consumers -- putting concerns for bank ‘safety and soundness’ ahead of consumer protection. The board’s apparent favoritism of banks mocks the clear Congressional intent evidenced in the CARD Act to protect consumers from the abuses of credit card issuers and underscores the need for a strong, independent Consumer Financial Protection Agency that puts consumers first.

“The board’s aversion to consumer protection is most clearly evidenced by its failure to fight interest rate increases that credit card issuers unfairly and arbitrarily imposed on consumers -- even some of their best customers who fully honored their credit card agreements -- before the CARD Act’s effective date.  Indeed, the proposed regulations do not actually require interest rate reductions regardless of how unjustified the increase. The board’s failure to require interest rate reductions in these circumstances violates the CARD Act’s fundamental purpose of protecting consumers from bank practices that take advantage of and gouge consumers.”

Congress passed the CARD Act in May 2009, but key provisions did not go into effect until February 22, 2010. Card issuers used the interim to jack up rates to as high as 30 percent on consumers, many of whom never missed a payment. Blumenthal has written the Fed three times since December noting that the CARD Act compels issuers to roll back arbitrary increases during the interim and urging the Fed to write rules compelling decreases.

Blumenthal said today that the Fed’s draft rules fail to compel rollbacks by letting issuers set their own standards for interest rate reviews required by the law.   

“The board’s complete lack of regulatory guidance leaves banks free to perform perfunctory reviews, manipulate amorphous factors to justify rate increases, switch to different factors during the review from those used to increase rates, and otherwise deny appropriate rate reductions -- even where such reviews show a clear decline in consumer credit risk,” Blumenthal said in his letter. “Under the board’s proposed rules, banks are literally free to look at any factors they choose and to write their own ‘policies and procedures’ for doing the required reviews without any guidance from the board to ensure that the methodologies used are reasonable.

          “I continue to urge the board to adopt rules that require banks to roll back interest rate increases on existing balances imposed between January 1, 2009 and February 22, 2010 where the mandated review indicates that the cardholder engaged in no adverse conduct and poses no increased credit risk. Such reductions would be fully consistent with Congress’ intent in the CARD Act to prohibit arbitrary and retroactive rate increases.”

          Blumenthal also blasted the Fed for creating a gaping loophole by exempting penalty interest rate charges from the law’s requirement that all penalty fees and charges be “reasonable and proportional.”

“I call on the board to reconsider its flawed determination that the CARD Act’s important limitations on penalty fees and charges should not apply to penalty interest charges,” Blumenthal said in the letter. “Specifically, the new (law) . . . broadly provides that ‘[t]he amount of any penalty fee or charge . . . including any late payment fee, over-the-limit fee, or any other penalty fee or charge, shall be reasonable and proportional’ to the violation of the cardholder agreement to which the fee or charge is connected.  Despite this broad and clear language, the board’s proposed comment 52(b)-1 purports to exclude penalty interest charges that banks routinely impose on cardholders for such violations from the ‘reasonable and proportional’ standard.

          “The board’s determination is inconsistent with clear Congressional intent and abandons consumers with a dubious statutory interpretation creating a giant loophole banks will surely exploit. The board’s final rules should rectify this error and state that the reasonable and proportional standard applies to all penalty fees or charges, including penalty interest charges.”

          Blumenthal called on the Fed to establish “safe harbors” -- maximum amounts -- for penalty fees.

          “In setting these ‘safe harbor’ limits, the board should look to the far lower amounts that community banks and credit unions currently impose -- compared to those of large banks -- as strong indicators of the maximum amounts necessary to deter cardholder misconduct and recover bank costs incurred as a result of such misconduct,” Blumenthal said. “If such lower fees and charges do not threaten the safety and soundness of smaller institutions, they will not harm the far wealthier and diversified large banks.”

          Blumenthal praised rules that prohibit:

·         Penalty fees for violations of credit card contract terms that exceed the actual cost to the issuer;

·         Penalty fees for inactivity or termination of an account;

·        Multiple penalty fees for a single event or transaction.

View entire letter Ben S. Bernanke - (PDF - 586KB)