Legislative Update

April – June 2009

Credit Card Accountability Responsibility and Disclosure Act

On May 22, President Obama signed into law the Credit Card Accountability Responsibility and Disclosure (Credit CARD) Act of 2009 (Public Law No. 111-24). The law amends the Truth in Lending Act (TILA) to prohibit a number of misleading or predatory practices by credit card issuers. Provisions of the law protect consumers by limiting fees and interest charges and requiring enhanced disclosures. It also contains provisions that affect prepaid gift cards. Most of the provisions of the law will become effective nine months after it was signed, except as otherwise specifically provided in the legislation.

The bill was originally introduced in the House on January 22, 2009, by Rep. Carolyn Maloney (D-N.Y.). A previous version of the bill was introduced in the House in 2008 (H.R. 5244) but was not passed. For more information on this version of the bill, see Banking Legislation and Policy, Volume 27, Number 1.

Consumer Protection

Amendments to the TILA will now require a card issuer to notify a customer at least 45 days before the effective date of an increase in the customer's annual percentage rate (APR). Customers will have the option of canceling the account prior to the rate increase. The APR on an account may not be increased for at least one year following its opening, and any promotional rate must last at least six months.

Retroactive increases on existing balances are strictly prohibited, unless the increase is solely due to the expiration of a promotional rate or the completion of a workout or temporary hardship arrangement; if the APR is variable and indexed to some other rate; or if the customer has not made the minimum payment within 60 days.

Under this law, universal default — the practice of increasing the APR on a customer's account due to delinquency or default on another account — is prohibited. In general, the issuer must reassess any factors that led to an APR increase every six months and determine whether the factors have changed and the APR should be decreased.

Any penalty fees charged need to be "reasonable and proportional" to the penalty. The Board of Governors of the Federal Reserve is required to issue a final rule within nine months to establish what constitutes reasonable fees.

"Double-cycle" billing — the practice of charging interest based on the account's average balance over the last two billing cycles — is also now prohibited.¹ Practitioners of this method had been able to charge interest on amounts paid off during the previous cycle's grace period if any balance had carried over to the current period, thereby increasing total interest charges in the long run. Double-cycle billing is especially costly to consumers who carry a large balance or who wish to pay off their balance over a period of time.

If the issuer offers over-the-limit protection for an account but charges a fee when a transaction causes the account balance to exceed the authorized credit limit, the customer must now expressly opt in to such coverage. In addition, an over-the-limit fee may be charged only once during a billing cycle and only once in each of the next two billing cycles, unless the consumer obtains additional credit or pays down the balance to below the limit and subsequently exceeds it again.

If different APRs apply to different portions of the balance on an account, the issuer will now be required to credit payments over the minimum first to the portion of the account with the highest APR. The only exception is if there is any balance on which interest was deferred for at least the previous two billing cycles and that deferral period is expiring, that balance must be credited first.

Subprime, or "fee harvester," cards are also now subject to certain rules. A card is defined as subprime if its terms require the consumer to pay any fees (other than late fees, over-the-limit fees, or fees for payment returned for insufficient funds) in the first year in excess of 25 percent of the total authorized credit. Under this law, the credit available from the account may not be used to pay these fees. This provision is intended to help avoid the overuse of credit by subprime borrowers, who will no longer be able to open a credit card account by charging the opening fees to that credit card.

Additional provisions specify how issuers must handle payments and what is considered an on-time payment.

Enhanced Disclosure Requirements

Under the bill's enhanced disclosure requirements, card issuers must now give consumers printed warnings on periodic statements about the interest that will be charged if only the minimum is paid. The issuers will have to indicate the number of months it would take to repay the balance if only the minimum is paid each month and the total cost of such a payment stream, as well as the monthly amount the consumer would have to pay to eliminate the balance within 36 months. The Federal Reserve is charged with creating a standardized template that all issuers will have to use to convey this information.

In addition, card issuers must make clear and conspicuous disclosures on periodic statements of due dates for payment and any penalty fees or interest that will be charged for late payments. Under this legislation, any payments made at a local branch on the due date must be counted as on time.

Protecting Young Consumers

Issuers are now prohibited from pre-approving consumers who are under 21 for credit cards; the consumer must now submit a written application. A card may then be issued to the applicant only if the account is co-signed by someone who is 21 and has the means to repay the loan, such as a parent, guardian, or spouse. Once the account has been opened, the credit limit on the account may be increased only if the co-signer also approves it.

The legislation also enacts new rules for issuers who wish to partner with universities to offer cards to students. Institutions of higher education and card issuers must publicly disclose any marketing agreements. Issuers are prohibited from offering any "tangible item" to induce students to apply for a card if the offer is made on or near a college campus or at any event sponsored by the college. In addition, Congress recommends that colleges limit the number of locations where issuers may market credit cards and offer debt education and counseling sessions for students.

Gift Cards

New rules will also exist for general-use prepaid cards, gift certificates, and store gift cards. An inactivity fee may be charged only if the card clearly and conspicuously states its frequency and amount or if the card has not been used in 12 months; the inactivity fee may be charged only once a month. Cards may not expire for at least five years from issuance. These rules do not apply to prepaid telephone cards or to cards that are reloadable and not marketed as gift cards.

Judicial Rulings

Circuit Court Rulings

Balance Transfer Between Credit Cards Voidable Under Bankruptcy Law

On March 27, the U.S. Court of Appeals for the Sixth Circuit upheld a bankruptcy court's ruling to void a balance transfer from one credit card to another by a consumer who filed for bankruptcy shortly thereafter (Yoppolo v. MBNA American Bank NA (In re Dilworth), 6th Cir., No. 08-3389, 3/27/09). The customer used a Citi-issued credit card to pay off a $10,500 balance on an MBNA-issued credit card less than one month before she filed for bankruptcy protection. Such preferential treatment of creditors by a debtor is not allowed once the customer has filed for bankruptcy, and the trustee sought to void the transfer under section 547(b) of the bankruptcy code. The bankruptcy court agreed with the trustee, because the customer had exhibited significant control over distribution of the funds when she decided to pay MBNA instead of other creditors.

¹ For an example of double-cycle billing, see page 28 of the Government Accountability Office's report on credit card practices from September 2006.