While recent class action lawsuits have forced credit card companies to more openly disclose fees and allowed people who have been charged foreign transaction fees to recover those payments, many credit card fees have remained dubious or difficult to decipher. Finally, after 2 1/2 years of studying, the Federal Reserve Board has proposed sweeping changes to the way credit card companies disclose and charge fees. The report does discuss foreign transaction fees, and does propose some changes about the way they are disclosed. However, I’m still weighing whether the new guidelines go far enough. Keep reading for changes travelers should expect.

Generally speaking, perhaps the most significant change is that the proposed rules would require companies to apply new payments to the debt carrying the highest interest rate. Currently, many credit card companies apply payments to the balance with the lowest interest rate first. This delays the time it takes for customers to pay off the high interest rate balance, thus increasing the total cost paid for carrying a credit card balance. Customers caught in this trap are often not aware that their total outstanding balance even has two different interest rates being applied.

Other policy changes to disclosures and fees would include:

• Credit card companies must give 45 days notice to changes in policy. (Right now they’re required to give 15 days notice.)
• Companies must report the exact amount (year to date) that customers have paid in interest.
• Increase the font size of disclosures.

The official Federal Reserve Board Press Release states:

“The goal of the proposed revisions is to make sure that consumers get key information about credit card terms in a clear and conspicuous format and at a time when it would be most useful to them,” said Federal Reserve Board Chairman Ben S. Bernanke. “Greater clarity in credit disclosures allows consumers to make more-informed credit decisions and enhances competition among credit card issuers.”

The proposed amendments principally focus on the rules for open-end credit accounts that are not home-secured, chiefly general-purpose and retail credit card plans. The proposal would require changes to the format, timing, and content requirements for credit card applications and solicitations and for the disclosures that consumers receive throughout the life of an open-end account, including account-opening and periodic statements. These changes largely reflect the result of consumer testing conducted on behalf of the Board as part of its comprehensive review of the open-end credit rules.

[...]

Disclosures accompanying credit card applications and solicitations would highlight fees and the reasons penalty rates might be applied, such as for paying late. Creditors would be required to summarize key terms at account opening and when terms are changed. Periodic statements would break out costs for interest and fees. Two alternatives are proposed regarding the “effective” or “historical” annual percentage rate disclosed on periodic statements. The proposal would also expand the circumstances under which consumers receive written notice of changes in the terms applicable to their accounts, including requiring an advance notice before a penalty is required, and increase the amount of time these notices must be sent before the change becomes effective.

The proposal follows the Board’s comprehensive review of the open-end credit rules (other than home-secured) and takes into consideration comments from the public on two previously issued advance notices of proposed rulemaking.

The Federal Register notice is attached. The comment period ends 120 days after publication of the proposal in the Federal Register, which is expected shortly. [See press release and full list of proposed policy changes and documents...]

Changes for Travelers

After scouring the .pdf documents provided by the Feds for policy changes especially pertinent to travelers, the FRB does propose some important changes to the way foreign transaction fees are disclosed which should make understanding them easier. Specifically, in Section Two (down loadable at the link above) the report finds:

Recently, a question has arisen about the proper disclosure of another kind of transaction fee imposed on credit cards. The question is whether fees that credit cardholders are assessed for making purchases in a foreign currency or outside the United States – for example, when the card holder travels abroad – are finance charges. The question has arisen in litigation between consumers and major card issuers.8 Some card issuers have argued by analogy to comment 4(a)-4 that a foreign transaction fee is not a finance charge if the fee does not exceed the issuer’s fee for using a debit card for the same purchase. Some card issuers disclose the foreign transaction fee as a finance charge and include it in the effective APR, but others do not.

Thus, having considered alternative approaches, the Board is proposing to adopt a simple interpretive rule that any transaction fee on a credit card plan is a finance charge, regardless of whether the issuer in its capacity as a depository institution imposes the same or lesser charge on withdrawals of funds from an asset account such as a checking or savings account. This proposal would be implemented by removing staff comment 4(a)-4 and replacing it with a new comment of the same number reflecting this rule. The comment would give as examples of such finance charges a fee imposed by the issuer for foreign transactions and a fee imposed by the issuer for taking a cash advance at an ATM.9 Such guidance would be consistent with TILA Section 106, 15 U.S.C. 1605, which gives the Board discretion to determine whether a given credit transaction has a comparable cash transaction within the meaning of the statute. This guidance would also facilitate compliance and promote consumer understanding. See TILA Section 105(a), 15 U.S.C. 1604(a). The Board seeks comment on whether this new approach would facilitate compliance and improve consumer understanding without causing unintended consequences.

Concluding the foreign transaction fee discussion, the report goes on to say:

5a(b)(4) Transaction Charges
Section 226.5a(b)(4), which implements TILA Section 127(c)(1)(A)(ii)(III), requires that card issuers disclose any transaction charge imposed on purchases. The current commentary to this provision clarifies that only transaction fees on purchases imposed by the issuer must be disclosed. (See comment 5a(b)(4)-1.) For clarity, the board would amend § 226.5a(b)(4) to incorporate this commentary provision. In addition, the Board proposes to amend § 226.5a(b)(4) to specify that fees charged for transactions in a foreign currency or that take place in a foreign country may not be disclosed in the table. In an effort to streamline the contents of the table, the Board proposes to highlight only those fees that may be important for a significant number of consumers. In consumer testing for the Board, participants did not tend to mention foreign transaction fees as important fees they use to shop. There are few consumers who may pay these fees with any frequency. Thus, the Board proposes to except foreign transaction fees from disclosure of transaction fees. [Font boldfaced by me] The Board proposes to include foreign transaction fees in the account-opening summary table that is required under § 226.6(b)(4), so that interested consumers can learn of the fees before using the card.

According to the report, foreign transaction fees must be disclosed at the time of application, but that there will still won’t be a standardized way of reporting these fees on statements. I also found no mention in the report about guidelines for how foreign transaction fees should be assessed. And although foreign transaction fees will not be itemized in the table described above, they will be included in the “Transaction Charges” section of the statement. [See page 234 of Section 3].

Overall, I would like to see the report specify that credit card companies clearly disclose the way they calculate foreign transaction fees. For example, a recently failed class action lawsuit brought against American Express highlights the fact that although American Express discloses a 2% conversion fee, they often charge more than 2% because they pass on a higher exchange rate to the customer than the rate they purchased the currency at. This ends up making the total fee charged more in the area of 3% than the disclosed 2%.

The board is seeking comments for 120 days before making the rules final. Though the FRB is definitely going in the right direction with the proposed regulations, I’m still considering whether I should submit comments to them about foreign currency transactions. If you have any thoughts about this, definitely email me, post a comment, or share your thoughts some other way as I’m still undecided about if these rules go far enough.