Credit Card Reforms Favor Consumers
May 22, 2009
Today, President Obama is expected to sign legislation that will require credit card and gift card issuers to make significant changes to some of their practices. The enactment of the Credit Card Accountability Responsibility and Disclosure Act of 2009 (“CARD Act”) is the culmination of many efforts to reform credit card practices, including regulations by the Federal Reserve Board, legislation modeled on those rules by Representative Maloney (D-NY) and even more encompassing legislation by Senator Dodd (D-CT). President Obama strongly supported the legislation and also worked to bring pressure on credit card executives to change certain practices.

The bill, S. 414 framed by Senator Dodd, ultimately prevailed with strong bi-partisan support in both Houses of Congress. Consumer groups view the new law as a much-needed crack-down on abusive practices by credit card companies, but the industry argues it will raise costs and limit credit availability for consumers.

The CARD Act supersedes credit card rules finalized by the Federal Reserve Board (the “Board”) in December of 2008 that prohibited such practices as universal default and double-cycle billing. While the law overlaps with the Board’s rules in many instances, it strengthens and expands others, while also adding new restrictions. The law injects specificity into rules the Board would have made more flexible, such as requiring that payments be allocated first to higher balances in cases where different balances exist, and requiring that issuers must send a bill 21 days before the due date. New restrictions include rules curtailing credit availability to consumers under the age of 21. Additionally, most provisions of the law will become effective nine months after enactment (by late February 2010) instead of July 1, 2010, when the Board’s rules were to be fully implemented.

Below is a summary of many of the major provisions of the CARD Act, including reference to the relevant section(s) of the Act.

Credit Cards

Rate Increases and Fees
  • Institutions are prohibited from increasing existing credit card balances. Rates may only be increased: if the rate increase is due to the operation of an index; if a promotional rate ends or is otherwise lost; if the consumer fails to comply with a workout plan, or if minimum payment is made more than 60 days after the due date. These measures effectively prohibit the raising of rates based on “universal default.” (Sec. 101)
     
  • If rates are increased due to late payment, card issuers are required to terminate the increase after six months if the card holder pays on time during that period. (Sec. 101)
     
  • Card companies must give 45 days notice of any rate increase or other significant changes and must notify consumers of a right to close the account. The provisions requiring these changes become effective 90 days after enactment, approximately August 20, 2009. (Sec. 101)
     
  • Closure or cancellation of an account shall not constitute a default nor shall it trigger a requirement to pay the outstanding balance in full. (Sec. 101)
     
  • If a card issuer increases the prospective rate because of credit risk, market conditions, or other factors, the creditor must review the conditions leading to such increased rate at least every six months and assess whether the rate can be decreased. (Sec. 101)
     
  • Institutions are prohibited from increasing the interest rate within the first year of the account, and any promotional rates must last for at least six months. (Sec. 101)
     
  • Over-limit fees can only be charged if the consumer has expressly permitted transactions in excess of the amount of credit authorized. For accounts that do not have fixed limits, card companies may not charge over-limit fees more than once in the billing cycle, and only once in each of the two subsequent billing cycles. (Sec. 102)
     
  • Card companies may not charge a fee to allow a cardholder to pay a credit card debt, no matter what method is used to pay (e.g. phone, electronic transfer, etc.), except for live services for expedited payments. (Sec. 102)
     
  • Any fees charged must be reasonably related to the omission or violation. The Board is directed to promulgate rules to establish standards for assessing reasonableness.

Billing and Payments
 
  • The method of assessing interest—commonly called “double-cycle” or “two-cycle” billing—that retroactively assesses interest on the balance for days in the preceding billing cycle when the balance is not fully paid within the grace period is prohibited. (Sec. 102)
     
  • When a cardholder’s account has APRs that apply to different balances on the card (e.g. balance transfers versus new purchases), the cardholder’s payment must be allocated to the balance with highest interest rate first, and then in a way to minimize finance charges. (Sec. 104)
     
  • Card companies are required to mail billing statements no fewer than 21 days before the payment due date. Consumers have to be granted a “reasonable amount of time to make payment,” and billing statements must include payment due dates and late penalties. The provisions related to timing of the billing become effective 90 days after enactment. (Sec. 106; 202)
     
  • Mailed payments received by 5:00 pm on the due date have to be considered timely. (Sec. 104) Payments made at local branch must be credited same day. (Sec. 202)
     
  • Card issuers cannot charge a late fee if the company had made a material change in its contact information and that change caused a delay in the crediting of a payment made within 60 days of the date of change of contact information. (Sec. 104)
     

Disclosures and Marketing
 
  • When opening an account, the card issuer must consider the consumer’s ability to repay. (Sec. 109)
     
  • Sets definitions for “fixed rate” when used by card issuers in the credit card agreement. “Fixed rate” can only be used to refer to an interest rate or an APR that will not change for any reason and must be clearly specified in the agreement. (Sec. 103)
     
  • Card companies are required to give 45 days notice of any significant change in terms of a card agreement and to notify consumers of a right to close the account. (Sec. 101)
     
  • Card issuers must provide account-specific information showing, among other things, the amount of time to pay off a balance if only minimum payments are made and the total amount of interest that will be paid in the process. (Sec. 201)
     
  • Card issuers must provide account disclosures to consumers upon renewal of a card if the terms have changed. (Sec. 203)
     
  • Card companies are required to post card agreements on the Internet and provide the same to the Board to be posted on its website. (Sec. 204)
     

Young Consumer-Specific Provisions
 
  • Card companies soliciting consumers under 21 years old must obtain either: (1) signature of parent or guardian who assumes joint liability; or (2) information showing applicant has independent means of paying balances. (Sec. 301)
     
  • Approval of the parent or guardian who is jointly liable is required before increasing the credit line. (Sec. 303)
     
  • Agreements between universities and card companies must be publicly disclosed, and card issuers may not offer any “tangible item” to induce students to apply for a credit card. (Sec. 304)
     

Gift Cards
 
  • Gift card rules do not become effective until 15 months after enactment. (Sec. 403)
     
  • Sets definitions for “General-Use Prepaid Cards,” “Gift Certificates,” and “Store Gift Cards.” These definitions exclude cards or other such devices that are, among other things, “a loyalty, award, or promotional gift card.” The Board is tasked with defining such gift cards within nine months of enactment. (Sec. 401)
     
  • For cards or other products meeting the definitions, issuers are prohibited from charging dormancy, inactivity, or service fees unless the required disclosures (as defined in the Act) have been made, and only after 12 months of inactivity. (Sec. 401)
     
  • Gift cards may not expire sooner than five years after their issuance, and then only if the terms of the expiration are clearly stated. (Sec. 401)
     

Miscellaneous
 
  • Clarifies that federally regulated depository institutions will not be subject to conflicting rules issued by the Federal Trade Commission addressing unfair and deceptive practices (Sec. 510)

Studies
 
  • Credit Card Interchange Fees Study: The Comptroller General of the GAO shall conduct a study on interchange fees and their effects on merchants and consumers, and report the findings to Congress in 180 days. (Sec. 501)
     
  • Study on Consumer Credit Plans and Regulations: Within two years, and every two years thereafter the Board shall review the credit card market, looking at practices and agreements, whether consumer protections are adequate against unfair or deceptive acts or practices relating to credit card plans, and examining the impact of the CARD Act on credit availability and its cost, safety and soundness of issuers, the use of risk-based pricing, and card innovation. (Sec. 502)
     
  • Study on Consumer Credit Card Limits: The Board, in consultation with other federal bank regulators, shall study over the previous three-year period the extent to which credit card limits were affected by: (1) the location of a transaction, (2) the item(s) purchased, and (3) the company that was the cardholder’s mortgagor; and (4) whether there was a disparate impact on minorities from such practices. The Board shall also make recommendations to Congress based on its findings. (Sec. 505)
     
  • Study on Small Business Credit Plans: Within nine months, the Board shall review credit card practices affecting small businesses, the adequacy of protections from unfair or deceptive practices, the cost and availability of credit for non-prime borrowers, the use of risk-based pricing for small businesses, and the extent to which small businesses use personal credit cards to fund their business operations, and shall make recommendations for legislative and regulatory changes. (Sec. 506)
     
  • Study on Emergency PIN Technology for ATMS: The Federal Trade Commission, in consultation with the Attorney General and the U.S. Secret Service will conduct a study on the cost-effectiveness of making available at automated teller machines (“ATMs”) technology that enables a consumer that is under duress to electronically alert a local law enforcement agency that an incident is taking place at such ATM. (Sec. 508)
     
  • Study on Financial and Economic Literacy: Within six months, the Director of the Office of Financial Education of the Department of the Treasury shall coordinate with the President’s Advisory Council on Financial Literacy to evaluate and compile a comprehensive summary of all existing Federal financial and economic literacy education programs. The Director must also submit a report to Congress on the findings of the evaluations, along with a strategic plan to improve and expand financial and economic literacy education. (Sec. 510)
     
  • Study on Relationship between Financial Literacy and Language Fluency: The Comptroller General shall conduct a study examining (1) the relationship between fluency in the English language and financial literacy; and (2) the extent, if any, to which individuals whose native language is a language other than English are impeded in their conduct of their financial affairs, and provide recommendations to Congress within one year.

These studies could well lay the foundation for future legislation. The interchange fee issue, for example, has been hotly contested between the credit card and retail industries. The outcome of the study could shape legislation. The study on consumer credit card limits may engender a review of the Home Mortgage Disclosure Act and other laws designed to protect consumers from discriminatory practices. The populist sentiment that produced the CARD Act may well be stronger when these studies come out over the next year, and will coincide with the re-election bids of many members of Congress. Industry and consumer groups are likely to be at odds again, and business that may be impacted should work to educate members of Congress on their issues and potential negative or unintended consequences.

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The above analysis addresses only some of the aspects of the CARD Act of 2009. Other details of the law may be applicable to your business. Readers should not rely on this information for any purpose without seeking legal advice on the specific facts and circumstances at issue from a licensed attorney.