Will The Fed Learn Its Lesson From The Sub-Prime Crisis?

credit_cardsweb.jpgToday, Federal regulators moved ahead with a good plan designed to stop credit card companies from taking advantage of their clients. The Federal Reserve, in conjunction with Office of Thrift Supervision and National Credit Union Administration, have released a specific, seven-point proposal to tackle “unfair” and “deceptive” practices by businesses that issue credit cards.

According to the Center for American Progress, the new rules would prohibit companies from:

— 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 move by the federal agencies comes with little time to spare. Now that borrowing in the mortgage market has stagnated due to the subprime crisis, credit card debt has skyrocketed for Americans. Between April 2006 and December 2007, the rate of national credit card debt increased four times faster than during the previous business cycle.

Similar to mortgages, credit cards can carry subprime-like lending conditions, such as poorly-disclosed, hidden, or higher fees, heavy interest rate burdens, and complex terms. Also similar to mortgages, credit card debt is packaged and sold off to investors as securities — and the $915 billion held in these securities can come tumbling down just as easily as the $900 billion that were held in residential mortgages.

The administration missed the regulatory boat once. One in 194 American households received a foreclosure filing during the first three months of this year, up 23% from the last final three months of 2007. After two decades of deregulation, the subprime crisis has sparked a need to reassess the Federal government’s role in protecting Americans against the predatory and abusive lending practices exercised mortgage lenders that caused the crisis in the first place.

Today’s proposal shows that the federal regulators are doing the right thing. They have undertaken “one of the most aggressive efforts in decades to crack down on the credit card industry.” Hopefully live up to this unique opportunity to learn from their mistakes.