At long last, most of the credit-card reform provisions contained in last year’s NSBA-supported Credit Card Accountability Responsibility and Disclosure (CARD) Act of 2009 (H.R. 627/S. 414) took effect this week.

While welcoming of the commencement of this landmark legislation, NSBA remains extremely concerned about the law’s failure to protect some of the credit cards used by America’s small-business owners. In the meantime, NSBA welcomes the enactment of a law that prohibits or severely circumscribes several of the most egregiously unfair and deceptive practices of the credit-card industry.

Interest Rates
Issuers no longer are allowed to raise cards’ interest rate at any time for any reason. Issuers are precluded from retroactively raising interest rates on existing balances—unless the cardholder is more than 60 days late. This effectively abolishes the industry’s ability to engage in “universal default,” whereby a late payment on any credit card, loan, or financial obligation (utility bill, etc) could lead to the retroactive increase of all existing card balances.

Issuers also must restore the original interest rate to any card for which a previously late-paying customer makes six months of on-time payments.

Issuers are not prohibited from increasing the interest rate on future transactions, but their ability to do so has been restricted. Issuers cannot increase the interest rate on a card within the first year of it being opened—unless an introductory-rate period expires. Cardholders must be noticed 45 days in advance of any other rate changes.

A cardholder notified of an impending rate increase also must be given the opportunity to opt out of the rate hike by canceling the card and fulfilling the obligation at the old interest rate.

Issuers also must apply payments above the minimum to the balance with the highest interest rate, as many cards apply different interest rates to different uses. Previously, issuers usually applied any payments above the minimum to the balance with the lowest rate.

Due Dates and Double-Cycle Billing
Issuers now are required to send out statement a full 21 days before the due date. The law also requires due dates to remain consistent.

The law also eradicates the practice of “double-cycle” billing or the imposition of any interest charges on any part of a balance paid by the due date, by prohibiting the imposition of finance charges and fees before the expiration of the 21-day grace period.

Disclosure
The law requires issuers to provide cardholders with information on how much needs to be paid each month to pay off a balance within three years and disclose how long it will take to pay off an account if only the minimum payment is made each month. Going forward, all monthly statements also are required to include a summary of the interest and fees paid that year, so cardholders can see clearly how much they are spending on their card.

Improved disclosure was the major focus of the final rules released Jan. 12 by the U.S. Federal Reserve Board (the Fed). The Office of Thrift Supervision at the U.S. Department of the Treasury, the National Credit Union Administration (NCUA), and the Fed first adopted the “Unfair and Deceptive Acts or Practices” (UDAP) rule in December 2008.

The Fed will impose additional disclosure requirement in July. Specifically, it will require issuers to provide cardholders, at the time the card is issued, with single-page summaries of the cards’ terms and key account information, composed in clear, “everyday language.”

Fees
The law requires cardholders’ explicit consent to permit transactions that exceed their credit limit and the subsequent imposition of over-the-limit fees. Absent this consent, issuers either than refuse the transaction or allow it without imposing a fee. The law also prohibits over-the-limit fees being triggered by other fees or interest charges and restricts issuers to a single over-the-limit fee per billing cycle.

The law also stipulates that any penalty fees be reasonable and proportional to the late or over-the-limit violation, but what constitutes “reasonable” and “proportional” still is being decided. The Fed is expected to issue new rules that define these terms by August.

Failure to Explicitly Protect Small-Business Owners
Although the credit cards of many—if not most—small-business owners are based on the individual owner’s personal credit history, it is conceivable that issuers could legally consider them exempt from the new protections codified by the CARD Act. This is due to the law amending the Truth in Lending Act (TILA), which for the most part applies only to “consumer” and not business credit cards.

TILA defines a “consumer” as a “natural person who seeks or acquires goods, services, or money for personal, family, household use other than for the purchase of real property.”

While a small-business owner who opens a personal credit-card account and uses it occasionally for business should be covered under TILA, it is far from clear that this law will protect a small-business owner who uses his/her card exclusively or even primarily for business purposes. In fact, spokespeople for several issuers have gone on record as saying the protections do not apply to any business cards.

This is highly troubling, given that 86 percent of the respondents to NSBA’s 2009 Small Business Credit-Card Survey reported using their consumer or business credit cards primarily or exclusively for business purposes.

While issuers are eager to exploit this loophole, they are proving less willing to differentiate between consumer and business cards when it comes to credit bureaus. A spokesperson for Capital One recently confirmed that that the company was reporting credit information for business cards to credit bureaus. JP Morgan Chase and American Express also admit that they report delinquent accounts to consumer credit bureaus and not just the so-called commercial credit bureaus. Of course, the effects of this reporting show up on business owners’ personal credit reports.

New (and Unwelcome) Practices Expected
With most of the provisions of the CARD Act finally in effect, issuers are expected to seek ways around the restrictions.

For example, Citi has been reported to be offering credit cards with an annual percentage rate (APR) of 29 percent—with the promise to refund 10 percent of the APR the next month if the cardholder pays on time. This effectively would allow Citi to impose a 10 percent retroactive rate hike if the cardholder is a single day late in making a payment.

Other issuers purportedly have begun imposing “inactivity fees” on cardholders who have not been using their cards.

NSBA would like to hear from small-business owners who have experienced new and unwelcome credit-card industry practices and will continue to push Congress to explicitly protect the cards used by small-business owners.

It is inconceivable that Congress would knowingly allow issuers to perpetuate—with impunity—practices recognized as “unfair” and “deceptive” against America’s small-businesses.