In the last two issues of Basis Points, we reported on new credit card rules promulgated by the Federal Reserve Board, the Office of Thrift Supervision and the National Credit Union Administration, which take effect on July 1, 2010, as well as proposed amendments to those rules. Congress has now joined the fray, having enacted the Credit Card Accountability and Disclosure Act of 2009 (the CARD Act), which was signed into law by President Obama on May 22, 2009. While the CARD Act includes certain protections that mirror those under the new Regulation Z rules, the Act also adds protections for cardholders and imposes more requirements on card issuers.
In addition to regulation of credit card accounts, certain provisions apply to other types of open-end credit. For instance, the CARD Act increases the penalties under Section 130 of TILA for a violation of the open-end rules. For any violation involving non-real estate secured open-end credit (not just credit card accounts), creditors are now liable for a minimum of $500 and a maximum of $5,000, or such higher amount as may be appropriate in the case of a pattern or practice of failures.
As to some of the changes that will impact cardholders, the CARD Act includes requirements, which become effective on August 20, 2009, to provide advance notice to cardholders before increasing the rate applicable to the account. In particular, the CARD Act provides that in connection with any credit card account under an open-end consumer credit plan, a creditor must give written notice of an increase in an annual percentage rate no later than 45 days prior to the effective date of the increase. These requirements are similar to those imposed by the new Regulation Z rules. The advance notice requirement does not apply, however, to an increase in an annual percentage rate upon expiration of a specified period of time (such as introductory or promotional rates), provided that the creditor satisfies certain requirements. The advance notice requirements also do not apply to increases in the APR due to changes in the index for variable rate cards, or to increases associated with completion or termination of temporary hardship or workout arrangements.
In addition to notice of rate increases, the CARD Act also requires card issuers to provide a 45-days advance written notice prior to any “significant change” in the terms of the account. It is anyone’s guess as to what Congress means by “significant change,” though it has (thankfully) directed the Federal Reserve Board to issue rules on the matter. In any case, the advance notice must clearly and conspicuously inform the cardholder of the right to cancel the account before the effective date of the rate increase or other significant change. In order to protect customers who do opt to cancel, the CARD Act places limitations on the repayment terms that the creditor can require from the cardholder in the event they elect to cancel. Apparently, Congress thought that if creditors could require immediate repayment of the entire balance that might dissuade consumers from exercising their right to cancel.
The CARD Act also includes prohibitions on increasing the annual percentage rate, fee, or finance charge applicable to any outstanding balance, subject to certain exceptions (including failure to make a payment within 60 days (!) of its due date, increases due to variable rate adjustments, and increases after temporary rate reductions). But even the exceptions don’t come without strings. For instance, if the creditor increases the rate because the consumer failed to make a payment, the creditor must notify the consumer that the increase will terminate not later than 6 months after the date it is imposed if the creditor receives the required minimum payments on time during that period.
As with the provisions governing repayment upon a consumer’s election to cancel an account upon notice of a change in terms, creditors are also prohibited from changing the terms of repayment of any outstanding balance after an increase, except if the change is no less beneficial to the cardholder than one of the following methods: (1) an amortization period of not less than 5 years after the increase; or (2) a required minimum periodic payment that includes a percentage of the outstanding balance that is equal to not more than twice the percentage required prior to the increase.
In one of the more interesting developments, the CARD Act includes provisions that require the card issuer to reduce rates after having increased them, in certain circumstances. The Act provides that if the creditor increases the APR based on credit risk, market condition, or other factors, the creditor must consider changes in those factors in subsequently determining whether to reduce the APR for the affected cardholders. The creditor must, every 6 months or less, review accounts as to which the APR was increased since January 1, 2009, in order to assess whether factors have changed (including whether any risk has declined), and reduce the APR when a reduction is warranted by that review. The CARD Act, however, is clear that this provision does not mandate a reduction by any particular amount. Thankfully, these particular requirements do not take effect until 15 months after the Federal Reserve Board enacts rules to implement them.
The CARD Act prohibits creditors from increasing the APR on any credit card accounts within the first year, except in certain limited circumstances. Further, the CARD Act mandates that any promotional rate must remain in effect for at least 6 months. In a development that mirrors the new Regulation Z rules, the CARD Act also prohibits double-cycle billing (accruing finance charges on balances for days in billing cycles preceding the most recent cycle).
The CARD Act also imposes an opt-in requirement in connection with over-the-limit fees. That’s right – before an over-the-limit fee can be imposed, the consumer has to affirmatively opt-in to allow a creditor to charge it. The Act provides that where a fee will be charged for an extension of credit in excess of the limit, the consumer must expressly elect to permit the creditor to complete transactions that would cause the balance to exceed the credit limit, and permit a fee to be charged. The Board will be enacting rules governing the form, manner, and timing of the notice of any over-the-limit fees, though the notice must include a notice of the right to revoke the election to allow transactions that exceed the credit limit. Of course, creditors are not prohibited from honoring transactions that will exceed the credit limit for consumers that have not made a valid election to allow transactions that will cause an over-the-limit fee to be assessed, so long as the creditor does not assess any fees in connection with those transactions.
The CARD Act also prohibits creditors from charging over-the-limit fees in multiple billing cycles (that is, assuming the consumer has elected to allow such charges). An over-the-limit fee may be imposed only once during a billing cycle if the credit limit on the account is exceeded, and may be imposed only once in each of the two subsequent billing cycles, unless the consumer has obtained an additional extension of credit that causes the outstanding balance to exceed the credit limit during the subsequent cycle.
The CARD Act prohibits charging a separate fee for repayment of the obligation, whether repayment is made by mail, electronic transfer, telephone authorization, or other means, unless the payment involves an expedited service by a service representative of the creditor.
In another development that could have a far-reaching effect on creditors, the CARD Act requires that any penalty rate or fee imposed on a cardholder must be “reasonable and proportional” to the omission or violation for which it is imposed. As luck (perhaps) would have it, the Board is charged with developing regulations to implement this limitation. The CARD Act provision does not become effective until 15 months after the Board enacts such rules.
Payment due date for an account must be the same day each month and creditors cannot impose any charges for failure to make timely payments for any payment received as of 5:00 p.m. on the date on which it is due. If the payment date is a day on which the creditor does not receive or accept payments by mail (including weekends and holidays), the creditor must treat any payment received on the next business day as timely. In addition, if a change in the creditor’s address or procedure for handling payments causes a material delay in crediting payments during the 60 days following such change, the creditor may not impose any late fee or finance charge for a late payment. If the creditor is a financial institution that maintains branches or offices at which payments can be made, payments are considered to be received on the date the cardholder makes the payment at the branch or office.
Effective August 20, 2009, the CARD Act also prohibits a creditor from treating any payment as late unless the creditor has adopted reasonable procedures to ensure that each periodic statement is mailed or delivered to the consumer not later than 21 days before the payment due date. The same timing rules apply with respect to expiration of any grace period for avoiding finance charges – the statement must be mailed or delivered to the consumer at least 21 days before the date such balance must be paid to avoid finance charges.
As with the new Regulation Z rules, the CARD Act also requires that periodic statements include in a conspicuous location the date on which payment is due, or if different, the date on which a late payment fee will be charged, with the amount of the late fee or charge. If a late payment may cause the APR to increase, the statement must also include a notice of this fact, together with the penalty APR in close proximity to the due date disclosure on the periodic statement. The Act imposes civil liability on creditors who fail to satisfy these requirements.
The CARD Act includes other requirements similar to those enacted under the Regulation Z rules with respect to the written payment warning concerning the amount of interest and time it will take to repay a balance if the cardholder makes only minimum payments. The information must be provided in tabular format on each billing statement in the form and manner required by the Board. The Act imposes civil liability for failure to comply with this requirement. Interestingly, however, while Regulation Z exempts certain accounts from the minimum payment disclosure rule, the CARD Act does not.
The CARD Act also prohibits creditors from charging fees against the available credit if the total fees charged during the first year after the account is opened (other than late fees, over-the-limit fees, or fees for payments returned for insufficient funds) exceed 25 percent of the total available credit.
In another of the more interesting developments, creditors are required to establish and maintain an Internet website on which the creditor posts the written agreement between the creditor and consumer for each account, other than individually negotiated changes to terms such as workout arrangements. The creditor must also provide the Board, in electronic form, the agreements that it publishes on its website. The Board will maintain a publicly available website on which it will post all agreements received by creditors so that they are easily accessible to the public.
Congress also passed new laws to regulate advertising. Creditors may only use the term “fixed rate” when the APR or interest rate will not change or vary for any reason over the period specified in the account terms. In addition, if a creditor advertises free credit reports, it must prominently disclose that free credit reports are available under federal law at AnnualCreditReport.com. In television or radio advertising, the creditor must disclose: “This is not the free credit report provided for by Federal law.” The Board has been instructed to enact rules to address these provisions.
The CARD Act requires issuers to consider a consumer’s ability to repay before opening an account or increasing the credit limit under the account, though it does not provide any guidance with respect to the ability to repay standard. Along similar lines, the CARD Act expressly prohibits creditors from issuing a credit card to a consumer under the age of 21 unless the consumer has independent means of repaying the obligation, or the application is cosigned by a person who is at least 21 years old or having the means to repay debts incurred by the consumer. Any person who agrees to be jointly liable for an account must approve, in writing, any increase to the credit limit.
Dan Laudicina is a partner in the Maryland office of Hudson Cook, LLP. Basis Points readers can reach Dan at 410-865-5435 or by email at dlaudicina@hudco.com.