Board of Governors of the Federal Reserve System

May 2, 2008

We are meeting today to discuss proposed regulations for banks under the Federal Trade Commission Act. These rules are intended to protect consumers from unfair or deceptive practices, and would address credit card accounts as well as banks’ overdraft protection plans on checking accounts.

Twenty-five years ago, less than half of all American families had a general purpose credit card. Since then, the number of consumers holding such cards and the amount of outstanding credit card debt has grown significantly. The development of credit scoring and implementation of risk-based pricing have made credit cards available to more people. In addition to serving as a source of needed credit, consumers benefit from the convenience credit cards offer as a payment mechanism.

Although they work well for many consumers, credit card plans have become more complex. The 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. The Federal Reserve has used consumer testing to make great strides in developing improved disclosures under the Truth in Lending Act. However, based on our review of consumers' response to the Board's recent regulatory initiative, it seems clear that improved disclosures alone cannot solve all of the problems consumers face in trying to manage their credit card accounts.

The Board is responding to these concerns with proposed rules that are intended to establish a new baseline for fairness in how credit card plans operate. Consumers relying on credit cards should be better able to predict how their decisions and actions will affect their costs. At present, this is not always the case. For example, creditors now can reserve the right to increase interest rates at any time and for any reason and apply the new rate to purchases the consumer has already made. Likewise, when consumers accept low-rate promotional offers, they do not expect card issuers to allocate their payments to minimize the benefits of the offer and maximize interest charges

The proposed rules dealing with banks' payment of overdrafts address a similar concern about consumers' ability to manage their checking accounts. Checking accounts have become more complex and offer consumers the convenience of being able to access their funds in a variety of ways. These different payment channels and the possibility of transaction fees can make it difficult for consumers to know the precise amount of funds available at any given time. Historically, banks paid occasional overdrafts on an ad hoc basis, but today overdrafts are often paid routinely using automated programs. While some consumers prefer to have most of their transactions honored or approved, overdraft services can be expensive and other consumers may prefer not to exceed their account balance. The proposal seeks to give consumers greater control, by ensuring they have ample opportunity to opt out of overdrafts.

I will now turn it over to Governor Randall Kroszner, who chairs the Board's Committee on Consumer and Community Affairs, to discuss the proposals in greater detail.