Credit Card Providers Beware: Recent Rule Changes and the Credit C.A.R.D. Act of 2009
In a response to public outcry in the midst of a recession, on April 21, 2009 the Board of Governors of the Federal Reserve System (“Board”), together with the Office of Thrift Supervision and the National Credit Union Administration, recently issued new rule clarifications under Regulation AA of the Federal Trade Commission Act in an effort to prevent unfair trade practices related to consumer credit cards. That same day, the Board also released clarifications under Regulation Z of the Truth in Lending Act in order to further regulate disclosures and solicitations related to consumer credit cards. The clarified rules take effect on July 1, 2010.
Taking this step toward tighter consumer credit card regulation and turning it into a giant leap, lawmakers passed the Credit Card Accountability Responsibility and Disclosure Act of 2009 (“CARD Act”), amending the Truth in Lending Act so as to ban certain credit card provider practices and augment required disclosures. President Obama signed the CARD Act into law on May 22, 2009. With the exception of two provisions that take effect on August 20, 2009, the CARD Act takes effect in February of 2010. With such short implementation timeframes for both the clarified rules and the CARD Act, consumer credit card providers must move quickly to revise policies and procedures to achieve timely compliance.
Agency Rules
As stated by Board Chairman Ben S. Bernanke at the adoption of the rules in December of last year, these “protections will allow consumers to access credit on terms that are fair and more easily understood.” These “protections” alter Regulations AA, Z, and DD as follows:
Regulation AA:
- Existing Balance Rate Increases: The proposed rules prohibit increasing the rate on existing balances unless the rate is tied to an index, a promotional rate expires, or the minimum due is not received within 30 days following the due date.
- Payment Times: Under the proposed rules, credit card payments may not be considered “late” unless the provider gives reasonable time to make payments (including a safe harbor provision for providers that send statements at least 21 days before the payment due date).
- Payment Allocation: Payments above the minimum due, made when multiple rates apply to multiple balances, would require allocation by one of three methods. Applying the entire payment to the lowest rate will no longer be permitted. Further, all payments above the minimum due must be allocated first to non-discounted-rate balances.
- Two-Cycle Billing: The proposed rules prohibit calculating finance charges in relation to days in billing cycles preceding the current billing cycle.
- Firm Offers of Credit: Financial institutions advertising offers of credit with multiple rates would be required to disclose the factors assessed to determine if the consumer qualifies for the lowest rate.
- Credit Card Holds: The proposed rules prohibit imposing fees when the credit limit is exceeded because of a hold on available credit.
- Subprime Credit Cards: The proposed rules prohibit financing security deposits and credit availability fees, if such charges over the first year would exceed 50 percent of the initial credit limit. Also, financed security deposits and credit availability fees exceeding 25 percent of the initial credit limit must be spread across the first year.
- Opt Out Rights: The new rules prohibit assessing overdraft fees, unless the consumer was given a chance to opt out of overdraft payment services and declined. Also, the financial institution must offer a partial opt out for ATM and point-of-sale.
- Debit Holds: No fees may be imposed when the account is overdrawn because of a hold on available funds.
Regulation Z:
- Payment Timeliness: Mailed credit card payments received by 5:00 p.m. be considered timely. Further, in cases when the due date falls on a weekend or holiday, payments received by mail the next business day must be considered timely.
Regulation DD – Account Disclosures:
- Overdraft Disclosures: Disclose month-to-date and year-to-date totals for overdraft and returned-item fees on periodic statements; and
- Availability Disclosures: Disclose available funds irrespective of funds to cover overdrafts, when using an automated information system.
Agency Clarifications
The rule clarifications are intended to facilitate compliance with the December, 2008 rules on or prior to their July 1, 2010 effective date. These clarifications sure up the alterations of Regulations AA and Z as follows:
Application Following Account Closing or Sale: The new protections of Regulations AA and Z would continue in effect for existing balances after the credit card account is closed or acquired by another institution. This would prevent any interest rate increase on existing balances, even post-account closure or transfer.
Deferred Interest Programs: Credit card providers may still offer deferred interest programs, but they are subject to all rule changes. For example, credit card providers cannot change the terms of such programs by way of a “hair trigger” or “universal default.”
The CARD Act
Lawmakers, although pleased with the banking agencies’ new regulations and their clarifications, were concerned that an effective date of July 1, 2010 was simply too long for consumers to wait. As a result, the CARD Act reaches further and becomes effective faster than the clarified regulations. “With this new law,” said President Obama at the signing ceremony, “consumers will have the strong and reliable protections they deserve. We will continue to press for reform that is built on transparency, accountability, and mutual responsibility—values fundamental to the new foundation we seek to build for our economy.” The CARD Act provides greater consumer protection and enhances disclosures, specifically by requiring the following:
Interest Rate and Fee Protections:
- Change in Terms Notices: 45 day’s written notice of a rate increase or of another “significant” change in terms; “clear and conspicuous” notice of the right to cancel because of a significant change in terms or a rate increase. These provisions go into effect on August 20, 2009.
- Banned Rate Increases: Rate increases on existing balances due to “any time, any reason” are banned and restrictions on retroactive rate increases are heightened.
- First Year Protection: Consumer credit card account terms must remain stable for one year from opening; promotional rates must last at least 6 months.
- Payment Time: Providers must give a reasonable time to pay (at least 21 calendar days from the statement mailing); changing due dates and midday deadlines are banned.
- Interest Calculations: Payments above the minimum due must be applied first to balances with the highest interest rate; double-cycle billing is banned.
- Over-Limit Fees: Consumer credit card holders must opt-in to the service of processing over-limit transactions—helping cardholders entirely avoid over-limit fees.
- Gift/Stored Value Cards: Inactivity fees are restricted unless the card has been inactive for 12 months, minimum.
Disclosure Requirements:
- Application Disclosures and Statements: Disclosures and periodic statements must use “clear and conspicuous” language in a “clear and prominent” location, which must include the following information:
- Warnings that paying the minimum payment will increase the time it takes to repay.
- Number of months it would take to repay if making only the minimum payment.
- Monthly payment amount needed to pay off the balance in 36 months.
- A toll-free number providing information about credit counseling.
- University Marketing: Both credit card providers and universities must disclose any marketing agreement that governs the marketing and distribution of credit cards to students.
- Posting of Contracts: Credit card account agreements must be published on the internet to allow regulators and consumer groups better opportunities to monitor changes in terms.
In addition to these new requirements the CARD Act also reaches out to hold the regulators themselves accountable. For example, the CARD Act requires that regulators report annually to Congress on their enforcement efforts and that regulators request public input regularly to determine what new regulations might be necessary.
Accountability:
- Posting of Contracts: Credit card account agreements must be published on the internet to allow regulators
- Availability Disclosure: Disclose available funds irrespective of funds to cover overdrafts, when using an automated information system.
The changes imposed by both the clarified rules and the CARD Act are broad and deep. They will require a substantial overhaul of the policies and procedures by which credit card providers manage and operate their businesses. Credit card providers must move quickly to develop and implement a plan for compliance.
