As the United States comes out of the Great Recession, we must critically examine the causes of this economic swoon and make adjustments in order to prevent such an event from ever occurring again. While it appears that many consumers have failed to do this--as indicated by the rise in credit card debt during the third quarter of 2010--the Federal Reserve has indeed altered its approach. In a move running counter to a decade of laissez faire regulatory policy, the Fed recently announced changes that stand to close loopholes in the CARD Act before they lead to major issues. These proactive regulations stand to benefit American consumers in the short term by further strengthening what is already the most consumer friendly credit card legislation passed in years. Even more importantly, they may also represent a portent of future U.S. economic safety and well-being.
The Fed changes--which will take effect as soon as October 2011--stand to supplement the CARD Act in three ways. First, they will outlaw unscrupulous credit card companies from treating interest rate waivers any differently than they do introductory or promotional interest rates. No matter what terminology credit card companies use to describe them, all interest rate offers must comply with the CARD Act stipulations concerning when an interest rate can be changed and if an increased interest rate can apply to an existing balance. In addition, the Fed addressed the issuer practice of charging more than the legally allowed 25% of a card's limit in fees during the first year an account is open by amending current rules to include any fees charged before an account has been active for 12 months--even "processing" fees assessed before an account is officially "open." Finally, the Fed ruled that lenders can no longer use household income as an indicator of how much debt a consumer can reasonably manage. Individual income must now be used in its stead. This aspect of the Fed's loophole restrictions is particularly poignant considering the fact that unchecked dangerous lending practices were a main precursor to the Great Recession.
In fact, the Federal Reserve's transformation can be seen clearly by comparing its inactivity before the recession to its activity after it. Before, the Fed allowed consumers to acquire more debt than they could handle, lenders to perform unsound underwriting practices and credit card companies to act without transparency. It did not step in to curb these trends despite having the power to do so and, as a result, problems compounded and placed extraordinary stress on the economy, forcing its fall. It now appears that the Fed has learned from its mistakes and is handling problems in their infancy. This policy shift is quite encouraging and if it persists, America's financial future will surely be much brighter.
Whether or not the "New Fed" will continue in its regulatory ways, we do not yet know. What is certain, however, is the effect the Fed's announced changes will have on the shady credit card companies that have circumvented the spirit of the law by semantically adhering to its letter. These changes will surely benefit consumers by eliminating the wiggle room issuers have to evade the intent of the law. Still, abiding only by the letter of the law and not the spirit is often lucrative for issuers, and with money at stake there's incentive to find new ways to carry on such practices. Therefore, both the Fed and consumers alike must keep a critical eye trained on banks to ensure that they are not continuing predatory operations.