By John Poirier and Karey Wutkowski
WASHINGTON (Reuters) - Rules aimed at preventing credit card holders from being hit by unfair and deceptive practices such as surprise fees and interest-rate hikes were approved on Thursday by a U.S. banking regulator.
The new regulations are expected to bring some relief to millions of card users by restricting issuers' ability to raise rates and by giving holders reasonable time to pay their balances. They also are expected to lower revenues for issuers.
The Federal Reserve Board and the National Credit Union Administration are expected to approve the regulations later on Thursday. The new rules go into effect July 1, 2010.
Office of Thrift Supervision Director John Reich, whose agency approved the regulations, said in a statement they will "ensure fair treatment" for millions of American cards users.
"The rule will enhance public confidence in financial institutions," Reich said.
In 2007, Americans used an estimated 694.4 million credit cards with Visa, MasterCard, American Express and Discover logos, according to the Card Industry Directory.
Citigroup, Bank of America and JPMorgan Chase enjoyed almost 70 percent of the credit card market at the end of 2007, according to the directory.
The American Bankers Association, which represents the biggest card issuers, called the rules unprecedented.
"The new regulations will fundamentally alter the relationship that cardholders have with their banks and the way that banks communicate with cardholders," ABA President Edward Yingling said in a statement.
Scott Talbott, chief of government affairs for the Financial Services Roundtable, said the rules will likely result in less credit as banks won't be as able to charge higher interest rates to riskier borrowers.
"You need to be able to reprice for that risk, otherwise banks will grant less credit," Talbott said. "You will have those who manage credit properly subsidizing those who don't."
18-MONTH DELAY, MORE NEEDS TO BE DONE
The rules aim to address several issues consumer groups and U.S. lawmakers have complained about for years. Among them, the rules prohibit raising the annual percentage rate (APR) on existing balances except under certain circumstances, such as a payment being more than 30 days late.
Consumer groups said the new protections will restore "some basic fairness" to consumers. "But we're not going to get these protections for another year and a half," said Gail Hillebrand with Consumers Union in San Francisco.
U.S. lawmakers said the rule is a "good first step" but may not go far enough. "There remain other areas that Congress may need to pursue legislatively to protect consumers," Sen. Charles Schumer, a New York Democrat, said.
Rep. Carolyn Maloney, who has introduced credit card legislation, said Congress should act sooner to protect consumers and will work with Sen. Mark Udall, a Colorado Democrat, on a new bill next year.
"With the regulators finally acting, and the new administration's support, Washington should do more for Main Street," Maloney, a New York Democrat, said.
Consumers will be given 45 days notice before a rate is increased, and holders will be allowed a reasonable amount of time -- 21 days -- to pay, according to the rules.
The rules also ban a practice known as universal default, in which the terms of the card are changed based on how the holder performs on other bills such as utilities or gym memberships.
Issuers will also be prohibited from another highly criticized practice called double-cycle billing, which imposes interest charges based on the previous billing cycle.
Further, the rules require issuers to allocate payments in excess of the minimum payment to balances with a higher APR or to all balances equally.
A study by the law firm Morrison Foerster found that if the industry tried to recoup its lost yield from the new rules solely by reducing credit lines equally on existing accounts, the reduction would be at least $2,029 per account.
Regulators received more than 66,000 comments, more than for any other regulatory proposal in its history.
Ladenburg Thalmann's banking analyst, Richard Bove, said in a research note he expects lower industry profits, higher rates for holders, and less availability of credit at a time when policymakers are trying to get consumers to spend money.
"Timing for these changes could not be worse," Bove said.
(Additional reporting by Juan Lagorio in New York; Editing by Steve Orlofsky, John Wallace and Gunna Dickson)
