Board of Governors of the Federal Reserve System

December 18, 2008

We are meeting today to consider final rules concerning credit cards and overdraft services.  The revised rules represent the most comprehensive and sweeping reforms ever adopted by the Board for credit card accounts.  These protections will allow consumers to access credit on terms that are fair and more easily understood.

The final rules are based on several proposals that the Board published for comment.  One set of rules would prohibit unfair or deceptive credit card practices using the Board's rulemaking authority under the Federal Trade Commission Act (FTC Act), while the second set of rules would improve consumer disclosures for credit cards and other revolving credit plans under the Truth in Lending Act.  A third set of rules addresses disclosure practices for overdrafts on deposit accounts under the Truth in Savings Act.  

In addition, we will be discussing proposed rules that would be published for comment under the Electronic Fund Transfer Act.  Under these proposed rules, consumers would have the option to instruct their depository institution whether to allow overdrafts for ATM withdrawals or when debit cards are used at point-of-sale terminals.

In considering these reforms, we recognize that credit cards provide important benefits for many consumers, both as a source of credit and as a convenient payment mechanism.  Nevertheless, in recent years credit card terms and features have become more complex.  This greater complexity has reduced transparency in credit card pricing and increased the risk that consumers will not understand key terms that affect the cost of using the account.  Consumers must understand the pricing of credit card services if they are to make well-informed, responsible decisions about the use of credit and the management of their accounts.

In developing these rules, the Board made extensive use of consumer testing to improve the content, format, and timing of credit card disclosures to make them more useful for consumers.  However, the testing process also informed us about the limitations of disclosures for today's complex financial products.  The finding that disclosures are not always sufficient was supported by the many comments we received from consumers who detailed the challenges they face in managing their accounts, particularly when the terms change and costs increase for reasons they do not always understand.

Because improved disclosures alone cannot solve all the problems consumers face in trying to manage their credit card accounts, the Board was persuaded that fundamental changes are needed to establish a new baseline for fairness in the way credit card plans operate.  Accordingly, we followed up our disclosure proposal by issuing a second proposal last May under the FTC Act, to prohibit certain unfair practices.

Although these rules take some new approaches, at their foundation are familiar principles and goals.  Above all, the rules seek to promote responsible use of credit cards through greater transparency in credit card pricing, including the abolition of pricing practices that are deceptive or unfair.  Greater transparency will enhance competition in the marketplace and improve consumers' ability to find products that meet their needs.  From the lenders' perspective, reduced reliance on penalty rate increases should spur efforts to improve upfront underwriting.

The rules dealing with overdrafts under the Truth in Savings Act are intended to ensure that consumers have clear and timely information about their account balances, so that they can properly manage their accounts and avoid unexpected overdraft charges.  For example, under these rules, if an institution provides additional funds to cover overdrafts, it must disclose an account balance that clearly distinguishes those amounts from the consumer's own funds.

I want to commend the staff for its tireless efforts on these rulemakings.  I will now turn the floor over to Governor Randall Kroszner, who chairs the Board's Committee on Consumer and Community Affairs and has provided outstanding leadership throughout this process.