Feds tell credit card companies to shape up

Too much easy credit.

Offering another credit card to a consumer who is already struggling with card payments.

A minuscule minimum payment that makes a card bill go up instead of down.

Creditors urged to keep it clean
These credit card practices have irked consumer advocates for years, and now federal regulators are advising card issuers to knock them off.

On July 22, the Federal Reserve Board, the Office of the Comptroller of the Currency, the Federal Deposit Insurance Corporation and the Office of Thrift Supervision released a draft offering "guidance" to banks on credit card lending.

"Recent examinations of institutions in credit card lending have disclosed a wide variety of account-management, risk-management and loss-allowance practices, a number of which were deemed inappropriate," the draft reads. "This interagency guidance communicates the Agencies' expectations for prudent practices in these areas."

In short, after looking over the shoulders of card issuers, federal regulators want lenders to tighten up lending practices ASAP.

"This is a signal to the industry to clean up their act," says Frank Torres, legislative counsel at Consumers Union.

A guidance, however, is a recommendation, not a requirement.

Issuers and others wishing to comment have until Sept. 23 to respond through the Web site of the Federal Financial Institutions Examination Council.

"It's putting the banks on notice," says Linda Sherry, editorial director at Consumer Action, a San Francisco-based consumer advocacy organization. "Some of these practices are skirting the line between a loophole and a really bad practice, perhaps even an illegal one."

Over-the-top practices
A key concern for regulators is credit line management. Some issuers are giving customers new or increased credit lines without running thorough credit evaluations first. Other banks approve additional cards to customers who are already struggling to pay current card bills.

"It's just not a good practice for the bank," says Dean DeBuck, a spokesman for the OCC. "The bank is taking on more risk and not doing the homework it needs to take on added risk."

Regulators advise issuers to conduct a thorough credit review and consider the repayment capacity of the borrower before approving or increasing a credit line.

Another area of concern for regulators stems from lax over-the-limit practices and puny repayment requirements.

The scenario, which is particularly prevalent among subprime card issuers, goes something like this.

A card issuer lets a customer charge well over their credit limit and then slaps down a $29 penalty fee. Thanks to a high interest rate and low minimum payment, a customer's minimum payment may not be enough to bring their card balance under limit. So they'll be slapped with another over-the-limit fee the following month.

The result? Their card balance goes up even though they've made the required payment on the account.

"That doesn't seem fair," DeBuck says.

"If you're making minimum payments your debt should be reduced and not getting greater."

To remedy this, regulators recommend that issuers charge a minimum payment that would cover the entire over-limit amount or at the very least cover the interest and penalty fees assessed on an over-the-limit account. They also suggest lenders severely restrict or flat-out ban over-the-limit charges for subprime credit card accounts in the future.

As welcome as these suggestions may be from regulators, it's tough to gauge the impact they will have for consumers. Guidance, unlike a regulation, still gives issuers quite a bit of wiggle room.

"Guidance is just that. It's something that the industry can take or leave. It's got very little teeth associated with it," Torres says.

"Guidance isn't enforceable. A rule would be."