Board of Governors of the Federal Reserve System

December 18, 2008

Today the Board is considering final action on three regulatory proposals that represent a significant step forward in consumer protection, particularly for consumers who use credit cards.  By ensuring fairness and making credit terms easier to understand, these safeguards should allow more consumers to benefit from using credit.

Last year, we published for comment an innovative proposal to improve consumer disclosures for credit cards and other revolving credit plans under the Truth in Lending Act.  Effective disclosure empowers consumers by permitting them to make better-informed shopping decisions and better decisions about using their credit card accounts. Changes of this type can make markets more competitive and, therefore, more efficient.          

Importantly, these new disclosures were not crafted in a vacuum.  By testing the content and format with actual consumers, we were able to develop disclosures that are more useful for consumers trying to understand the costs and risks associated with today's complex financial products.  It is a challenge to create disclosures that are accurate and complete, but at the same time, not so detailed or technical that they create information overload.  Testing alternative formats with real, live credit card users has been a great aid in seeking to balance these dual objectives.  Consumers should find the new disclosures more useful throughout the life-cycle of their accounts, whether they are choosing a new card, evaluating the costs reflected on monthly statements, or considering the impact of future changes in the account terms.      

In response to the disclosure proposal, we received many comment letters from individual consumers who urged the Board to broaden the scope of its rulemaking efforts.  They shared personal experiences in trying to manage their accounts and identified practices they characterized as "traps" designed to increase costs.  At the top of the list of concerns, for example, was the practice of increasing interest rates retroactively to cover past extensions of credit, often for reasons that were not apparent to consumers.  Consumers also expressed concerns about card issuers' allocation of payments in a manner that maximized interest charges, and about not receiving periodic statements early enough to pay by the due date and avoid penalties.

Given the complexity of credit card products and cardholder agreements, it has become increasingly difficult for reasonably attentive consumers to avoid the pitfalls that can significantly increase their debt burden.  The lessons learned from our extensive consumer testing and our experience as a regulator suggested that more disclosure is not likely to address these issues.  Accordingly, last May the Board issued a second regulatory proposal, using our authority under the Federal Trade Commission Act to adopt substantive rules to ban practices that can injure consumers.  We developed this proposal jointly with the Office of Thrift Supervision and the National Credit Union Administration and identified a number of specific practices that we believed unfair and should be prohibited. 

The public response to this proposal was unprecedented, generating more than 60,000 comment letters, the largest number ever received by the Board for any regulatory proposal.  Each one of those comment letters was reviewed by the Board's staff.  We also conducted an extensive outreach effort, speaking with industry representatives, consumer advocates, and others to ensure we received input reflecting their differing viewpoints before making final decisions.  The rules being considered today certainly benefited from that process.

As in most rulemakings, it is important that we try to strike the appropriate balance between competing points of view to achieve our objectives while minimizing the risk of unintended consequences.  Unfair practices can impose significant costs on consumers.  Likewise, the new rules will have a cost, too.  In addition to extensive changes in disclosures, financial institutions will be required to make changes to their business models and alter certain practices.  Although consumers might see some costs decline as new business models emerge, consumer might see other costs increase.  Creditors may need to strengthen upfront underwriting efforts in the process.  Over the long term, however, we expect the costs of making the required changes will be outweighed by the benefit of creating significantly clearer credit card pricing.  In sum, our intent is to increase transparency and fairness in how credit card and deposit accounts operate, thereby enhancing competition and empowering consumers to better manage their accounts and avoid unnecessary costs.  

Before concluding, I would like to say a few more words about the final rules for deposit accounts. The final rules we are considering under the Truth in Savings Act would enhance the disclosures on consumer’s checking account statements, so consumers can see the aggregate cost associated with overdrawing their accounts.  In addition, the rules would ensure that when consumers obtain their account balance from an automated system, the amount disclosed does not include additional funds that may be provided to cover overdrafts.  This will lessen the opportunity for inadvertent overdrafts. 

As staff will explain shortly, some aspects of the proposed rules for deposit accounts would not be finalized at this time, but would be the subject of a new proposal under Regulation E, which implements the Electronic Fund Transfer Act.  These provisions were intended to give consumers greater control in determining whether their account is subject to an overdraft service.  The operational issues are complex, and this is an area where we believed there was benefit in obtaining further comment on alternative approaches.     

Before turning to Sandy Braunstein, who is the Director of our Division of Consumer and Community Affairs, I want to express my deep appreciation to her and so many members of her staff for their tireless efforts on these rules, in particular, Leonard Chanin, Jim Michaels, Ky Tran-Trong, Ben Olson, and Amy Burke.