It sounds like a victory for credit card users — a rule that would require banks to review any interest rate hikes every six months, and lower rates when appropriate.
Yet loopholes in the Federal Reserve's latest proposal could let banks avoid rolling back rates in most cases.
To start, the proposal issued Wednesday wouldn't require banks to use the same factors for raising a rate when reviewing whether to lower it.
That means a bank could cite a new set of criteria when evaluating rate hikes every six months. And the measures banks use could be very broadly defined. For example, banks often cite deteriorating market conditions when hiking interest rates. Yet market conditions could be based on unemployment rates, consumer confidence, or any number of yardsticks.
"The Fed left a lot of leeway for issuers to determine on their own what to do," said Nick Bourke, manager of the Safe Credit Cards Project at The Pew Charitable Trusts.
Even if banks determine that a lower rate is warranted, the Fed's proposal doesn't call for a reduction of a specific amount. So banks wouldn't need to return the interest rate to its original level.
Instead, banks could opt for a minimal reduction, said Bill Hardekopf, CEO of LowCards.com.
The latest proposal by the Fed is part of the broader credit card reforms that went into effect last month. After a public comment period of one month, if approved, the rules outlined in the proposal would take effect Aug. 22.
To address the tougher terms banks rushed to cram in before they faced restrictions, the proposal would also apply retroactively to Jan. 1, 2009. That means banks would need to review the spate of rate hikes they implemented in the past year.
But all the gray areas in the proposal could mean there are no meaningful reviews of those hikes — many of which may not have been fair, Bourke notes.
The Fed could of course still tighten its rule that applies to interest rates charged for new purchases. For existing balances, the law already prevents banks from raising rates unless consumers are at 60 days past due. If payments are made on time for six consecutive months, the original rate must be restored.
Meanwhile, another rule outlined in the proposal is much tougher. Namely, penalty fees would be capped to no more than the dollar amount of the violation. So is you went $5 over your credit limit, you couldn't be charged a flat $39 penalty.
The American Bankers Association said in a release that it's still reviewing the possible impact of the Fed's proposal, but noted that the restrictions could result in higher prices for credit card customers.
That's a reality consumers are already dealing with. Banks have already introduced new fees and tougher terms in the past year. And despite the breadth of the new regulations, there's still no cap on interest rates.
"That was one of the great myths about the law," notes John Ulzheimer, president of consumer education Credit.com.
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