Wallet Watch

Our country’s federal banking regulators are deliberative, slow-moving agencies. Except on very rare occasions, they’re not known for using their authority to implement broad, sweeping action. And they’re even less known for broad sweeping change that could be beneficial for consumers. That’s why the Federal Reserve made huge waves last week when it proposed new rules governing credit card agreements, which has the effect of making credit cards more fair for every day Americans.

Here’s the legal mumbo jumbo: under the Federal Trade Commission Act, the Federal Trade Commission normally has the power to prohibit companies from implementing “unfair and deceptive acts and practices.” But in the case of financial institutions, this power is instead delegated to a given financial institution’s federal regulator. Since these powers were delegated to them, federal regulators have only used them only  on a couple of occasions. That’s what makes this move so monumental.

The Fed’s new rule would prohibit or restrict some of the worst credit card abuses, including:

– Raising interest rates on debt that has already been charged

– Assessing late fees when consumers are not given a billing statement within a reasonable amount of time to make a payment

– Applying a payment to the balance with the lowest rate if different interest rates apply to different balances on the same card

– Charging fees to open an account and receive credit

This is great news for consumers, as these rules go a long way to making credit card terms and conditions more understandable. Yet I would still argue that more work needs to be done, which a number of bills currently in Congress would do. Other groups have been talking about the benefits of this move for consumers — as well as what the Fed left out. Consumer groups have been writing about the positive effects on consumers, as well as additonal steps, as has Professor Adam Levitin on his blog (careful — this link is a little busted so you have to scroll down to see his post on the new rules).

But what I find most blog-worthy is the timing of this new rule. The hot financial news out there is about how the Federal Reserve was asleep at the switch when it came to regulating subprime mortgages, and how that lack of regulation led to huge problems not just for the borrower whose home was lost, but also for people who invested in subprime mortgage-backed securities. Is it possible that the Fed foresees a parallel crisis saw trouble brewing in the credit card market and didn’t want a repeat of the subprime mortgage crisis?

To over-simplify the subprime mortgage story, lenders shoehorned every day borrowers into very complex mortgages. These borrowers couldn’t understand and couldn’t afford these mortgages, and ended up not being able to make payments. Hundreds of thousands of borrowers have now defaulted, and more defaults are still to come. These defaults subsequently have ruined the quality of the subprime mortgage-backed securities that these loans were packaged into.

Just like subprime mortgages, credit cards are difficult to understand, and new numbers tell us that Americans are getting in debt up to their eyeballs. And just like subprime mortgages, credit card debt is packaged into securities and bought and sold on Wall Street. Whether or not averting a financial crisis was its intention or not, kudos to the Federal Reserve for tightening credit card rules not just for the benefit of our consumers but for our economy as well.  

Check out this summary video from whatthefico :