Credit CARD Act Goes Far Beyond the Fed's Credit Card Regs

According to an editorial in last Thursday’s Washington Post,  the credit card bill that the President signed into law the following day “isn’t really needed” because it is “awfully similar” to the regulations on credit cards that were issued by the Federal Reserve last December.

Wrong!

In fact, the new law is remarkably broader and stronger than the regulations adopted by the Fed.  The changes happened in three stages. First, the House Financial Services Committee approved a bill stronger than those regulations; second, the full House, responding to a high-profile intervention by the President, approved a bill stronger that the one that emerged from its committee; and third, the Senate approved a bill that was stronger still.  Consumer advocates are used to seeing their favored legislation weakened at each successive stage of the process, before finally perishing at some point along the route, so the dramatically different trajectory this time is particularly noteworthy – at least for those of us who don’t write editorials for the Post.

Among the important ways that the final law is stronger than the Fed’s regulations are the following (if no difference is noted, the Fed regs didn’t address the issue at all): 

Interest rates:  Rates on existing balances can only be increased if consumer is 60 days late in making a required minimum payment (Fed: 30 days); penalty rates must be reversed after six months of on-time payments; promotional rates must last at least six months; and any rate increase must be reviewed at least every six months.  

Payment allocation:  Any amount above minimum payment must be entirely applied to highest-rate balance (Fed: proportional allocation among all balances).  

Fees:  No over-limit fees for approved charges unless consumer asks for this feature on the account; no fees to make a payment by phone or online (except for expedited payments arranged through a service representative); and all penalty fees must be “reasonable and proportional” to costs imposed on credit card issuer (law mandates the Fed to issue new regulations to specify details).   

Young consumers:  No credit card can be issued to a consumer under 21 unless either an adult co-signer or a determination that consumer has independent ability to repay the credit provided; no increase in credit limit for a consumer under 21 who has a co-signer without written agreement by the co-signer; no prescreened credit card offers to a consumer under 21 unless he or she has consented to receiving such offers; no tangible gifts to college students in exchange for completing a credit card application; and colleges must disclose all marketing contracts with card issuers.  

Ability to pay:  Card issuers must consider consumer’s ability to make the required payment under the new terms before raising credit limits or issuing a new card.   

Effective dates: Most provisions go into effect February 22, 2010 (Fed: July 1, 2010); requirements that bills be sent 21 days before due date and that there be a 45 day notice for rate increase or change in terms go into effect August 22, 2009 (Fed: July 1, 2010).   

Other: Restrictions on fee-harvester cards where first year fees and charges total more than 25% of the credit limit (Fed: 50% of credit limit); gift cards, including those branded by Visa and MasterCard, cannot expire in less than five years; and the notoriously deceptive ads by “freecreditreport.com” are subject to disclosure and FTC rule-making.  

If this seems like a long list – well, that’s the point.

Another way to see the extent to which the final law is stronger than the Fed’s regulations is to examine its provisions in light of a report that Consumers Union issued last December.  “Unfinished Business: Consumers Need More Protection from Unfair Credit Card Practices” identified seven important ways that the Fed’s “important first step in curbing some of the most outrageous tricks and traps used by credit card issuers”  fell short of what was needed.  By my analysis, the final law is responsive to five of these seven shortfalls of the Fed’s regulations – fully responsive in three cases and at least half-way responsive on two other matters.

To be sure, there is still “unfinished business.”  The Credit CARD Act imposes no restrictions on the level of interest rates or on the size of the rate increases that are allowed; it is silent on the industry practice of reducing credit limits at any time for any reason; and it does nothing to ban the forced arbitration clauses that are buried in almost every credit card agreement.   Nevertheless, it is important to recognize how much consumer advocates and our allies accomplished in the last five months.