Pew Report Finds Credit Cards More Transparent, Yet Problems Remain

/PRNewswire/ -- Most of the practices deemed "unfair" or "deceptive" by the Federal Reserve have disappeared from new credit card offers since federal passage of the Credit CARD Act last year, according to a new report by the Pew Health Group's Safe Credit Cards Project. Yet new trends have emerged that could cost cardholders significantly.

The report finds that issuers have eliminated practices such as "hair trigger" penalty rate increases (disproportionate charges for minor account violations), unfair payment allocation, and raising interest rates on existing balances. However, Pew's research also highlights a sharp rise in cash advance fees, continued widespread use of other penalty interest rates and an emerging trend of credit card companies failing to disclose penalty interest rates in their online terms and conditions.

"While it's been less than a year since passage of the Credit CARD Act, the new law appears to be working for millions of Americans who have credit cards," said Shelley A. Hearne, managing director of the Pew Health Group. "The elimination of most of the 'unfair' or 'deceptive' practices of the credit industry since we last surveyed the marketplace marks a major milestone in the move to make credit cards safer, transparent and more fair for consumers. Most of the news is good, but we are seeing the rise of new harmful behavior."

The study, Two Steps Forward: After the Credit CARD Act, Cards Are Safer and More Transparent--But Challenges Remain, is the latest in a series of reports from the Pew Safe Credit Cards Project that has examined all consumer credit cards offered online by the nation's 12 largest banks and 12 largest credit unions. Together these institutions control more than 90 percent of the nation's outstanding credit card debt. For this latest report, which measures how the industry has changed since the passage of the Credit CARD Act, Pew gathered data in March 2010 on nearly 450 cards. Full details, including previous research, can be found at www.pewtrusts.org/creditcards.

Key findings show:

-- Many of the most troublesome practices of the credit card industry
have been eliminated. A credit card issuer can no longer unilaterally
decide to raise interest rates on existing balances. Likewise,
practices including "hair trigger" penalty rate increases, unfair
payment allocation, and overlimit fees without prior consent are a
thing of the past. Earlier Pew research found that before the
implementation of the law, 100 percent of the credit cards surveyed
included at least one of these practices.
-- Beyond the requirements of the new law, there are new practices that
benefit consumers. Less than 25 percent of all cards examined had an
overlimit fee, which is down from more than 80 percent of cards in
July 2009. Additionally, mandatory arbitration clauses, which can
limit a consumer's right to settle disputes in court, are now found in
10 percent of cards compared to 68 percent in July 2009.
-- Predictions that legislation would spawn the growth of new fees have
yet to materialize. There was minimal change in the number of cards
that include an annual fee (down 1 percentage point from July 2009 to
March 2010). During that period, the median size of these fees
increased from $50 to $59 for banks and from $15 to $25 for credit
unions.
-- Some disclosures stopped including the size of penalty interest rates
even as issuers reserved the right to impose them. At least 94 percent
of bank cards and 46 percent of credit union cards came with interest
rates that could go up as a penalty for late payments or other
violations. But nearly half these warnings failed to inform the
consumer of the actual penalty interest rate or how high it could
climb.


"Although we applaud changes by the card industry to create a fairer and more transparent marketplace, our research shows that some challenges remain," said Nick Bourke, director of Pew's Safe Credit Cards Project and report co-author. "For the first time, we have seen credit card disclosures warning consumers that interest rates could go up as a penalty for certain actions, but not stating how high those rates could go. Federal regulators should pay attention to this problematic new trend. When issuers withhold vital pricing information, it leaves cardholders in the dark and puts their financial security at risk, which is why federal regulations have long required issuers to disclose their rates and fees up front."

Two Steps Forward includes a number of policy recommendations to address new challenges, including:

-- Federal bank regulators should enforce existing regulations that
require companies to disclose full and reliable credit card penalty
rate information.
-- The Federal Reserve should prohibit issuers from charging penalty
interest rates that are higher than initially disclosed when the
consumer opened the card account.


The report also shows that surcharge fees for cash advances rose sharply between July 2009 and March 2010. Bank cash advance and balance transfer fees increased on average by one-third during this period, from 3 percent of each transaction to 4 percent. Credit union cash advance fees went up by one quarter, from 2 percent to 2.5 percent.

Other pricing data is also included in the report, showing recent increases in a variety of credit card interest rates and fees.

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Consumers Union Urges Fed to Require Banks to Roll Back Recent Unfair Credit Card Interest Rate Hikes

/PRNewswire/ -- After Congress passed legislation last year reining in some of the worst credit card lending practices, many banks responded by hiking interest rates before the new rules went into effect, including on customers with perfect bill paying records. Now Consumers Union, the nonprofit publisher of Consumer Reports, is calling on the Federal Reserve Board to require banks to roll back those unfair interest rate hikes and to put stronger limits on the size of penalty fees and interest charges.

The Fed has already proposed new regulations that would limit penalty fees and require banks to reconsider interest rate hikes imposed during the year leading up to the enactment of key CARD Act protections on February 22, 2010. But the proposed regulations don't go far enough according to Consumers Union and should be strengthened to ensure consumers are more likely to see their old interest rates reinstated and don't face unfair penalty fees and charges in the future.

"Last year's shameful frenzy of credit card interest rate spikes has saddled millions of Americans with high cost debt, including many consumers who always paid their bills on time," said Lauren Bowne, staff attorney for Consumers Union. "The Fed should undo that damage by requiring banks to lower interest rates for customers who were treated unfairly before the new credit card protections went into effect."

The Fed's proposed regulations would require banks to review interest rate hikes made on customers between January 2009 and February 22, 2010 and to reduce those rates "as appropriate." But under the proposal, banks are allowed to keep secret their review process with no oversight by the Fed.

Banks could keep the higher interest rate if the reason for the old rate hike still exists, or if the bank decides to come up with a new reason for the higher rate. Banks would not be required to start this "look back" process until six months after the regulations go into effect - in other words, starting in late February 2011.

Consumers Union urged the Fed today to strengthen the rate review proposal by:

-- Requiring banks to reinstate the old interest rate if the reason for
the rate hike would not have been allowed under the new protections
afforded by the CARD Act.
-- Requiring banks to disclose the methodology they use to review rates
and to report to the Fed twice each year the number of rate increases
reviewed and the number of rate reductions that result.
-- Requiring banks to begin reviewing rate increases on August 22, 2010,
when the rate review provision goes into effect.


Thousands of consumers have contacted Consumers Union over the past year to complain that their credit card interest rates were raised unfairly. Many consumers reported that their banks acknowledged that interest rates were raised because of the economy or a change in market conditions and not because of anything wrong done by the consumer. Other consumers reported that their interest rates doubled or tripled after they were a day or two late making their payment or for other minor mistakes. Before the new credit card protections started on February 22, banks were allowed to raise interest rates on existing balances at any time for any reason.

Starting on February 22, banks were prohibited from raising interest rates on a credit card customer's existing balance unless the customer has a variable rate card, a promotional rate has expired, or if the customer is more than 60 days late making the minimum payment.

The Fed also has proposed regulations required by Congress under the CARD Act that are meant to ensure penalty fees and charges are "reasonable and proportional" to the customer's violation of the credit card contract. However, the Fed's proposed rule only applies to penalty fees such as those imposed for going over the limit or being late with a payment and not penalty interest rates.

Under the Fed's proposal, penalty fees would be allowed only if a bank can show the fee is a reasonable proportion of the total cost to the bank caused by the customer's violation of the credit card agreement or if the bank proves that the fee amount is necessary to deter the same kind of violations in the future. The rule also proposes a complicated "safe harbor" provision which allows a bank to pick a permissible fee amount without doing the cost or deterrence analysis.

Consumers Union urged the Fed to broaden its proposed regulation so it extends to the size of penalty interest rate hikes in addition to fees and to limit those rate increases to no more than seven percentage points above the non-penalty interest rate. Consumers Union called on the Fed to simplify and strengthen the "safe harbor" provision for penalty fees by setting it at five percent of the violation or no more than $10.

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Wachovia Corporation Lowers Prime Rate

/PRNewswire-FirstCall/ -- Effective today, Wachovia Corporation (NYSE:WB) lowered its prime interest rate to 3.25 percent from 4 percent at Wachovia Bank, National Association, and all of its other banking subsidiaries.

The prime rate is a benchmark used to set interest rates on various forms of corporate and consumer credit. It is one of several interest rate bases used by Wachovia, which lends at interest rates above and below the prime rate. The prime rate last changed on Oct. 29, 2008.

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Bankrate: Mortgage Rates Remain Volatile

PRNewswire-FirstCall/ -- Mortgage rates fell this week, with the average 30-year fixed mortgage rate dropping to 6.2 percent. According to Bankrate.com's weekly national survey, the average 30-year fixed mortgage has an average of 0.4 discount and origination points.

The average 15-year fixed rate mortgage popular for refinancing retreated to 5.95 percent, while the average jumbo 30-year fixed rate was down slightly to 7.61 percent. Adjustable mortgage rates were sharply lower, with the average 1-year ARM down to 5.89 percent and the average 5/1 ARM pulling back to 6.21 percent.

Mortgage rates continue to be volatile, yo-yoing up and down from one day to the next. Heightened economic worries pushed mortgage rates lower versus last week, but the continued twists and turns of the credit crunch are certain to produce more volatility in mortgage rates. Although mortgage rates are pegged to long-term Treasury yields, the spread above risk-free Treasury yields is ever-changing as credit worries prevail. The movement of fixed mortgage rates is not directly influenced by the Federal Reserve's cut to short-term interest rates.

This year has been a wild ride for mortgage rates, with a low in January of 5.57 percent and a high of 6.77 percent in July. At today's rate of 6.20 percent, a $200,000 loan carries a monthly payment of $1,224.94.

SURVEY RESULTS

30-year fixed: 6.20% -- down from 6.41% last week (avg. points: 0.4)
15-year fixed: 5.95% -- down from 6.14% last week (avg. points: 0.44)
5/1 ARM: 6.21% -- down from 6.49% last week (avg. points: 0.36)



Bankrate's national weekly mortgage survey is conducted each Wednesday from data provided by the top 10 banks and thrifts in the top 10 markets.

For a full analysis of this week's move in mortgage rates, go to http://www.bankrate.com/mortgagerates

The survey is complemented by Bankrate's weekly forward-looking Rate Trend Index, in which a panel of mortgage experts predicts which way the rates are headed over the next 30 to 45 days. More than half of respondents, 53 percent, expect rates to retreat further in the coming weeks. However, 41 percent predict a rebound in mortgage rates, while just 6 percent forecast that mortgage rates will remain more or less unchanged in the next 30 to 45 days.

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Wachovia Corporation Lowers Prime Rate

PRNewswire-FirstCall/ -- Effective today, Wachovia Corporation (NYSE:WB) lowered its prime interest rate to 4.50 percent from 5 percent at Wachovia Bank, National Association, and all of its other banking subsidiaries.

The prime rate is a benchmark used to set interest rates on various forms of corporate and consumer credit. It is one of several interest rate bases used by Wachovia, which lends at interest rates above and below the prime rate. The prime rate last changed on Apr. 30, 2008.

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