WASHINGTON — Though the Federal Reserve Board last week proposed a broad shakeup of disclosures for credit cards, a wide gulf remains between the central bank's plan and more sweeping changes sought by several lawmakers.
Under the Fed plan, credit card issuers could continue to use many existing practices that have come under fire on Capitol Hill, including so-called universal default and double-cycle billing, but they would be forced to explain them better. Lawmakers, however, are seeking to ban most of these practices outright.
The result is a proposal that industry representatives are already signaling they believe is onerous while lawmakers dismiss it as not tough enough.
"Is what the Fed proposed … enough to satisfy congressional critics of the credit card industry? The answer to that is clearly no," said Jaret Seiberg, an analyst at the Stanford Washington Research Group. "Ultimately, the goal for some of the legislation really is to change how banks price their product."
The Fed's proposal, issued Wednesday, would require issuers to beef up disclosures on several fronts, including substantial editing of monthly statements and giving customers at least 45 days notice before hiking interest rates or making other changes.
The proposed changes in Regulation Z, which enforces the Truth in Lending Act, also include model applications and solicitations that would explain which penalties result in which fees, including over-the-limit charges and details about transaction costs such as balance transfers. The central bank wants issuers to include enhanced disclaimers about the risk of making minimum payments and a modified format for presenting the fee-inclusive, or "effective," annual percentage rate.
But all seven bills pending in Congress would go much further, often calling for more specific disclosures in addition to abolishing certain fees and penalty rates.
For example, Sen. Daniel Akaka, D-Hawaii, introduced a bill in April that would require lenders to give customers the specific time and cost to pay off their balances if they only make minimum payment. Rep. David Price, D-N.C., introduced a similar bill in the House on March 13.
In contrast, the Fed proposal, directed by the 2005 bankruptcy reform law, only requires a universal disclaimer regarding the effects of making minimum payments.
Legislation from Rep. Carolyn Maloney, the chairman of the House Financial Services Committee's financial institutions subcommittee, meanwhile, would ban fees for certain card payment methods, including electronic funds transfers. A broad bill introduced in March by Reps. Mark Udall, D-Colo., and Emanuel Cleaver, D-Mo., would prohibit penalties for on-time payments and over-the-limit fees for approved purchases, among other changes.
A House bill introduced by Rep. Keith Ellison, D-Minn., and a Senate bill introduced by Sen. Jon Tester, D-Mont., would ban "universal default" — a practice in which lenders raise interest rates if a borrower's rating with another creditor deteriorates.
But the toughest crackdown would come in the bill offered by Sen. Carl Levin, D-Mich., the chairman of the Senate Permanent Subcommittee on Investigations. In addition to many of the same provisions floated by colleagues, his legislation, co-sponsored with Missouri Democrat Claire McCaskill, would cap penalty interest rate hikes at seven percentage points.
Several industry representatives — though not thrilled by the Fed proposal — nevertheless see it as far preferable to the legislative possibilities.
"The Fed's approach at least leaves flexibility," said Robert Rowe, a regulatory counsel for the Independent Community Bankers of America. "Their approach is more: 'We're going to make sure you know what you're doing.' The Levin-McCaskill bill is more telling the lenders: 'You cannot do this.' "
One by one, Hill Democrats active on the issue came out with statements Wednesday saying that the Fed proposal, though a good step, was not enough.
"Better disclosure is critical to helping consumers," Sen. Levin said in a press release, "but it is no substitute for outlawing abusive credit card practices that unfairly mire American families in debt."
Whether the Fed could go further to crack down on credit card practices if it wanted to is debatable. Its authority under the Truth in Lending Act to regulate credit cards is largely limited to disclosures, though a 1994 amendment to the law gave it added power to crack down on mortgage lending practices.
"It's questionable whether they can impose significant, substantive provisions beyond what they've done," said Gil Schwartz, a former lawyer at the Fed and now a partner at Schwartz & Ballen LLP in Washington.
Observers noted that the Fed, as well as the federal banking agencies, could restrain credit card pricing under the Federal Trade Commission Act, which gives the regulators authority to define and curtail "unfair and deceptive practices."
"They have expansive authority," Chi Chi Wu, a lawyer at the National Consumer Law Center, said of the Fed. The central bank not only has rule making leeway under the FTC Act, Ms. Wu said, but also could have done more under the Truth in Lending Act, including forcing lenders not to penalize cardholders for missing payment deadlines that are unrealistic.
"The Truth in Lending Act requires prompt posting of payments. So the Fed, as the implementing agency, could easily say, 'Prompt posting means postmarked by a certain date,' … but they didn't," Ms. Wu said.
The Fed's proposal "doesn't address the substantive issues of credit card abuses that are going on. This is not going to deal with the problem of credit card abuses in our society."
Industry representatives disagreed. Bankers have expressed concern over the cost of adopting many of the Fed's proposed changes, but they say enhanced disclosures will help address any issue.
"Frankly, disclosures go a long way in addressing some of the problems that are out there," said Ken Clayton, the managing director of card policy for the American Bankers Association. "You arm consumers with the information, and you give them the time so they can make choices that work for them, and they pretty much can avoid a lot of what people are complaining about.
"If you get too specific in how you're trying to address these problems, you end up limiting consumer choice and hurting them, and in the long run, is that what you really want to do?"
It also remains unclear whether Congress could even pass one of the seven pending bills. Mr. Seiberg and other industry observers said lawmaker consensus is insufficient to enact a credit card bill.
Ultimately, he said, some Democrats view penalties and fees as not the real problem and want to address issuers' ability to price based on risk, which leaves low-income customers with the highest credit costs.
"I'm not sure if there is a clear view yet upon what Congress can do on credit card lending," he said. "There have certainly been practices, such as double-cycle billing, that have been identified … but that doesn't get to the heart of many lawmakers' concerns."
