Senator urges Fed to toughen credit card rules

By John Poirier

WASHINGTON (Reuters) - The Federal Reserve needs to push harder to protect consumers from credit card abuses, such as hidden fees and interest rates that jump unexpectedly, a senior senator urged on Monday.

With the Fed and other regulators studying how far they should go to rein in card companies, Sen. Carl Levin said, "The current regulatory regime is totally insufficient to prevent these ongoing credit card abuses."

The Michigan Democrat, chairman of the Senate Permanent Subcommittee on Investigations, made his remarks on the last day for the public to submit comments to the Fed.

"Stronger consumer protections and clearer prohibitions against unfair and deceptive credit card lending practices are long overdue," Levin said in a letter to the central bank.

Big issuers of Visa Inc and MasterCard Inc cards include Bank of America Corp, JPMorgan Chase & Co, Citigroup Inc, Capital One Financial Corp and Discover Financial Services. Cards are used for about $2 trillion in transactions annually in America.

The Fed said in early May that some card practices need overhauling to protect consumers. It proposed giving consumers more time to pay their bills.

Levin urged the Fed to go further by forcing card companies to credit payments made on weekends or mailed a week before the due date so consumers would not be charged late fees.

To address complaints that payments are applied on balances with lower interest rates first, the Fed is considering forcing issuers to first apply payments to balances with higher rates or apply equal amounts to balances with different rates.

But Levin said the Fed should require the first option and force issuers to determine what type of payment allocation best suits the customer with the least amount of charges.

The American Bankers Association took issue with how "the (Fed) proposals suddenly labels 'unfair' practices that are well grounded in and expressly provided by existing law."

One of the biggest complaints by consumers is when a company charges interest on the entire balance even if some or most of the balance has been paid off by the due date.

Levin called the practice, which is called "double-cycle billing," indefensible.

Another practice being challenged by lawmakers is the use of universal default, in which card issuers unilaterally raise the interest rate on a credit card due to events unrelated to the account, such as late payments on utilities.

The Fed should ban universal default, Levin said.

Levin also urged the Fed to tell companies to stop charging a separate fee when a holders pay their bills by phone and to limit currency exchange fees.