Federal regulators set tighter credit card standards

Published: Thursday, January 9, 2003 at 6:01 a.m.
Last Modified: Thursday, January 9, 2003 at 12:30 a.m.
WASHINGTON - Citigroup Inc., MBNA Corp. and other U.S. credit-card issuers should raise minimum payment requirements, lower late fees and stop pursuing delinquent card debts after five years, according to new federal guidelines aimed at reducing banks' bad loans.
Shares of Capital One Financial Corp., which has targeted borrowers with histories of unpaid bills, jumped when regulators released the recommendations, which were expected to be stricter, analysts said. The American Bankers Association called a July draft of the new rules "overly harsh."
The final report "was not as onerous as people had feared," said Matthew Park, an analyst at Thomas Weisel Partners LLC, who has "buy" recommendations on Capital One, MBNA, and American Express Co. "Investors were assuming that the regulators would be a lot more restrictive."
The Federal Deposit Insurance Corp., Office of the Comptroller of the Currency and other government agencies decided to set industry standards after bad debts ballooned at Providian Financial Corp. during the recession that started in March 2001. The FDIC, which guarantees deposits of as much as $100,000, was forced to pay off NextCard Inc. clients after the online card issuer was shut down in February.
Higher monthly payments and lower fees will help customers pay back their credit card debts by reducing principal faster, regulators said.
"We observed some inappropriate practices that had crept into how credit-card lenders were managing their accounts," said Barbara Grunkemeyer, acting deputy comptroller for credit risk at the OCC.
"There was a little pushing of the envelope and we're pushing back."
Competition The guidelines, which apply to any bank that issues credit cards, also cover managing credit lines, reserving against bad loans and handling overdue balances. Draft recommendations had proposed a four-year maximum for collections.
Competition among card issuers created "liberal repayment programs that increase credit risk and mask portfolio quality," the regulators said in a six-page report.
Capital One shares rose $3.21 to $35.41 in composite trading on the New York Stock Exchange; Providian rose 23 cents to $7.15 after climbing as high as $7.40; MBNA fell 28 cents to $20.30; American Express fell 28 cents to $37.30; Citigroup, the biggest credit-card issuer, fell 50 cents to $33.55.
In August, Capital One said the guidelines as presented in the preliminary report may reduce revenue from fees charged when a customer exceeds a credit limit and force higher fees or interest rates in other areas.

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