New Credit Card Reform Proposals Announced

May 6, 2008

Adding to the growing number of credit-card reform bills introduced in the last year, Sen. Chris Dodd (D-Conn.), chairman of the U.S. Senate Committee on Banking, House, and Urban Affairs, last week unveiled his own credit-card reform legislation.

The Credit C.A.R.D Act Dodd’s bill, the Credit Card Accountability, Responsibility, and Disclosure (Credit C.A.R.D.) Act will include most of the credit-card reforms called for by NSBA. In addition to a number of enhanced disclosure requirements, the bill would:

• Prohibit the practice of universal default,
• Prohibit the practice of double-cycle billing,
• Prohibit the retroactive application of interest rate hikes—interest rate increases only should be applied to future card usage,
• Require card issuers to apply a customer’s payments to the card balance with the highest interest rate first,
• Prohibit extra interest charges on card debt that the cardholder already paid in full,
• Prohibit interest charges on transaction fees,
• Prohibit late fees if an issuer’s action caused a delay in crediting a payment, and
• Establish 5 pm as the industry-wide deadline for a payment to be received to be considered on time.

The Credit C.A.R.D. Act prohibits credit-card issuers from unilaterally altering the terms of a cardholder’s contract for the length of the agreement, forcing issuers to adhere to one of the most basic tents of the free market capitalism. It also allows customers who close their accounts to pay under the terms of the agreement in place at the time the account is closed and requires issuers to notify cardholders of interest rate increases 45 days in advance.

By requiring the signature of a parent, guardian, or other person willing to take responsibility of any incurred debt, the bill imposes significant restrictions on credit-card issuers’ ability to confer cards to those less than 21 years of age. The Credit C.A.R.D. Act does not contain any of the harmful “proof of income” provisions contained in the Credit Card Reform Act of 2008 (S. 2753), introduced by Sen. Robert Menendez (D-N.J.)

Noting that credit-card issuers made $17 billion in fees last year, Dodd vowed to move his measure this year, although he acknowledged that he first need to secure the support of Sens. Thomas Carper (D-Del.) and Tim Johnson (D-S.D.), both of whom represent states with a significant credit-card industry presence.

Senate Committee on Banking, House, and Urban Affairs Ranking Member Richard Shelby (R-Ala.) said he would prefer the committee review the rules recently released by the Federal Reserve and two other federal banking regulators before taking any action of it own.

Proposed “Unfair or Deceptive Acts or Practices” Rule After individually approving it earlier in the week, a trio of federal banking regulators—the Federal Reserve Board, the Office of Thrift Supervision at the U.S. Department of the Treasury, and the National Credit Union Administration—unveiled May 2 a new proposed rule aimed at curtailing the most egregious practices of the credit-card industry. It would apply to banks, thrifts, and credit unions.

The proposed “Unfair or Deceptive Acts or Practices (UDAP)” rule represents one of the most aggressive efforts in decades to address the practices of the industry.

The UDAP rule would strengthen the improved disclosure rules proposed last year by the Federal Reserve by requiring issuers to disclose in any solicitation that advertises multiple interest rates the factors that determine whether a consumer will qualify for the lowest and highest advertised interest rates. The proposed rule also would:

• Prohibit double-cycle billing;
• Prohibit issuers from treating a card payment as late, unless customers were provided with a “reasonable” amount of time to make a payment;
• Prohibit institutions from allocating any payments made in excess of the minimum in a manner less than beneficial than one of three it identifies: (1) Apply the balance payment to the balance with the highest annual percentage rate,(2)Split the amount equally among the various balances; or (3) An approach that gives consumers the full benefit of any discounted rate or deferred interest plan;
• Prohibit issuers from increasing a cardholder’s interest rate on an outstanding balance unless certain exceptions apply, including the expiration of a promotional rate or cardholder’s payment is delinquent (i.e. more than thirty days past due);
• Prohibit issuers from assessing an overdraft fee unless the bank had previously provided the consumer with both the right to opt out of overdraft payments and a reasonable opportunity to exercise that right.

  Mixed Response to the Proposed Rule The UDAP rule was met with mostly praise by consumer groups and interested lawmakers. Rep. Carolyn Maloney, chair of the U.S. House Committee on Financial Services Subcommittee on Financial Institutions and sponsor of the NSBA-supported Credit Cardholders’ Bill of Rights (H.R. 5244), called the proposed rule a “strong affirmation of the need to move promptly forward and pass” her legislation. She also warned that by the time regulators “get around to finalizing these rules, they will be watered down and come too little too late to help struggling consumers.” A collection of consumer groups commended the regulators for finally taking an important first step to address unfair credit-card practices but urged Congress to continue its efforts to tackle the problem and enact permanent laws aimed at abusive practices not covered in the proposal.

  Predictably, the banking industry was less receptive to the proposed rule. Calling it “an unprecedented regulatory intrusion into marketplace pricing and product offerings,” banking lobbyists argued the rule would restrict their ability to price for risk. They contended that the rule would result in “less competition, higher prices, fewer consumer choices, and reduced consumer access to credit cards.”

  NSBA Welcomes UDAP Rule, Stresses Need for Additional Legislative Solutions

  While NSBA will file comments in support of the proposed UDAP rule, it also will continue to urge Congress to enact additional legislative measures with the stronger safeguards necessary to protect America’s small businesses as the engine of the U.S. economy. Although the proposed rule would address some of the unfair and unacceptable practices of the credit-card industry, it would leave untouched a significant number of the practices that restrict small-business growth and harm America’s economy.

  Most notably, the proposed rule fails to prohibit credit-card issuers from unilaterally altering the terms of a cardholder’s contract or engaging in the practice of universal default. While NSBA advocates for a prohibition of all retroactive interest rates hikes, believing that such hikes effectively increase the purchase price of products and services for which consumers are already committed, which undermines business plans, the proposal does significantly limit the instances in which issuers could increase the interest rate on cardholders’ outstanding balances.

  The proposed rule also fails to prohibit interest charges on transaction fees. Two-thirds of the respondents to a recent NSBA quick poll reported noticing an increase in the fees associated with their credit cards in the last three months. The same quick poll revealed that 56 percent of respondents had experienced an increase in their credit card interest rates in the last three months or had received notice that their issuer planned to increase them in the near future.

  During a question-and-answer period that followed the regulators’ unveiling of the proposed rule, the Federal Reserve Governor who headed the effort stressed that the rule was a work in progress and that comments received from all sides of the issue would help shape the final rule’s content and scope. The proposed rule is available here: http://www.ots.treas.gov/docs/7/778014.html.

• The public will have 75 days to comment on the proposed rule, which is expected to appear in the Federal Register this week and could be finalized by the end of the year.