the Credit Card Accountability Responsibility and Disclosure Act of 2009 (S.A. 1058)
On May 11, 2009, the Senate will begin consideration of H.R.627, the Credit Cardholders’ Bill of Rights Act of 2009, legislation that was approved by the House in April 2009 by a strong vote of 357-70. Assoon as floor consideration begins, Senators Dodd and Shelby will offer a substitute amendment based on bipartisan negotiations over the text of S. 414, the Credit Card Accountability Responsibility and Disclosure Act of 2009 (the “CARD Act“).
The CARD Actwould implement needed reforms and help protect consumers from the abusive, confusing, and deceptive practices employed by credit card companies. Specifically, the amendment would:
· Establish strong consumer protections by preventing unfair increases in interest rates and changes in terms, prohibiting exorbitant and unnecessary fees, requiring fairness in application and timing of card payments, and protecting the rights of financially-responsible credit card users;
· Enhance consumer disclosures by requiring disclosures related to payoff timing, late payment deadlines and penalties, card renewal terms, and requiring each credit issuer to post their credit card agreements;
· Protect young consumers targeted by aggressive and irresponsible credit card marketing offers;
· Strengthen oversight of credit card industry practices; and
· Protect recipients of gift cards.
This bulletin discusses the Dodd-Shelby substitute amendment (S.A. 1058) to H.R.627.
The increased use of credit cards has contributed to an expansion in household debt. Revolving consumer credit has more than quadrupled over the past two decades, from $238.6 billion in December 1990 to a peak of $977 billion in September 2008 [Federal Reserve Statistical Release G.19] Today, nearly 75 percent of American households have a general purpose credit card. [Federal Reserve Bulletin, 2/2009] Consumer groups have noted that the expansion of the credit card industry has been fueled by the marketing of credit cards to populations that had not had widespread access to mainstream credit, including low -income households, consumers with seriously blemished credit histories, college students, older Americans, and minorities. [BHUA Testimony, 2/12/2009]
As credit card usage has increased, the variety of fees and practices in the industry has also increased, and the amounts that cardholders can be charged have been growing. These include increases in penalties, fees, and loan rates that may not be a part of the original agreement when the card was issued or that were based on terms that were very difficult to understand. Credit card issuers have explained that these re-pricing practices represent risk-based pricing that allows them to offer cards with lower cost to less risky cardholders while providing cards to riskier consumers who might otherwise be unable to obtain such credit. [GAO, 9/2006]
These practices, however, are contributing to the significant credit card debt under which American consumers increasingly find themselves buried. Indeed, growth in credit card debt in 2007 was the highest it had been since 2000. [Federal Reserve, 4/7/09] The average household that carries a credit card balance owes close to $10,000 in revolving debt on their credit cards [Cardtrak.com] Based on current industry statistics and consumer surveys the average American household with at least one major credit card owes $9,659. However, given that 13 percent of Americans carry credit card balances above $25,000, the median is about $6,600 for the typical card using household.
Credit card delinquencies are hitting record highs as more borrowers fall behind on bills amid rising unemployment and falling home values. [USA Today, 2/5/09] Thirty-day credit card delinquencies are now at their highest point in six years, since the last economic recession ended. [Federal Reserve Board, 2/24/09]
New Rules for Credit Card Accounts. In 2006, the Government Accountability Office found that credit card disclosures were insufficient to protect consumers from many abusive practices “because they were too complicated for many consumers to understand.” [GAO, 9/2006]
Subsequently, the Federal Reserve Board, Office of Thrift Supervision, and the National Credit Union Administration finalized rules to prohibit unfair or deceptive practices regarding credit cards and overdraft services on December 18, 2008 (These rules are scheduled to take effect on July 1, 2010) The entities exercised their authority under the Federal Trade Commission Act (Regulation AA) to prescribe credit card protections for consumers. Specifically, credit card issuers will be:
· Prohibited from increasing the rate on a pre-existing credit card balance (with exceptions);
· Prohibited from allocating payments in excess of the minimum in a manner that maximizes interest charges;
· Prohibited from imposing interest charges using the ”double-cycle” method, which computes interest on balances on days in billing cycles preceding the most recent billing cycle;
· Required to provide consumers a reasonable amount of time to make payments, with statement mailing or delivery 21 days prior to the due date considered a ”safe harbor”; and
· Prohibited from financing security deposits and fees for credit availability (such as account-opening fees or membership fees) if charges assessed during the first 12 months would exceed 50 percent of the initial credit limit.
These entities also exercised their authority under the Truth in Lending Act (Regulation Z) to prescribe regulations on consumer disclosures in credit card solicitations, applications, and statements. The new rules require:
· Application and solicitation disclosures to include the actions that would trigger a ”penalty APR” along with the resulting penalty rate and the possibility of that rate to expire;
· Account opening disclosures to include interest fees, minimum charges, transaction fees, annual fees, and penalty fees;
· Periodic statement disclosures to group together interest charges and fees, itemized by transaction type, with year-to-date totals. Payment due dates and the consequences of a late payment would be required on the front of each statement;
· Advance notice for interest rate increases or other changes in terms to increase to a minimum of 45 days. Currently, the rules permit either immediate increases, or a minimum of 15 days advance notice, depending on actions triggering the change; and
· Cut-offs for accepting payments to be established at a ”reasonable time,” no earlier than 5 p.m., with Sunday/holiday due dates postponed to the next business day for payments made by mail.
Protection of credit cardholders. The CARD Act addresses:
- Annual percentage rate changes. The CARD Act would require that cardholders be given 45 days notice of interest rate and fee and finance charge increase, advance notice of any significant change in terms of the credit card account, and require clear notice of right to cancel credit card when the APR is raised or significant terms are changed;
- Universal default and other increases. The CARD Act would prohibit universal default on existing balances; prohibit rate, fee, or finance charge increases on existing balances other than for the expiration of an introductory rate; a change in variable rate, an increase due to the failure of the cardholder to comply with the terms of a workout agreement, or a 60-day late payment by the cardholder where the cardholder can “cure” with six months of on-time payments. The CARD Act would prohibit issuers from accelerating payments after a rate increase beyond prescribed limits;
- Reduction in APR. The CARD Act would require a credit card issuer that increases a cardholder’s interest rate to periodically review and decrease the rate if indicated by the review; and
- Initial rates for new cards. The CARD Act would prohibit credit card issuers from increasing rates on a cardholder in the first year after a credit card account is opened and require promotional rates to last at least six months.
Exorbitant and unnecessary fees. The CARD Act addresses:
· Double-cycle billing. The CARD Act would prohibit double-cycle billing and prohibit credit card issuers from imposing interest charges on any portion of a balance in the current billing cycle that is paid by the due date’
· Overlimit fees. The CARD Act would prohibit the charging of overlimit fees on a credit card account unless the consumer has expressly elected to permit the issuer to complete overlimit transactions on the account;
· Other fees. The CARD Act would prohibit credit card issuers from charging a fee to pay a credit card debt, whether by mail, telephone, electronic transfer, or otherwise, except for expedited service by a live service representative; and
· Penalty fees. The CARD Act would require penalty fees to be reasonable and proportional to the omission or violation.
Application and timing of card payments. The CARD Act would:
· Require payments in excess of the minimum to be applied first to the credit card balance with the highest rate of interest;
· Prohibit credit card companies from setting early morning deadlines for credit card payments; and
· Require credit card statements to be mailed 21 days before the bill is due (the current requirement is 14 days).
Standards applicable to initial issuance of subprime or “fee harvester” cards. If an issuer charges certain fees over 25 percent of the credit limit in the first year, the CARD Act would prohibit payment of those fees from the credit made available under the card.
Enhanced penalties. The CARD Act would increase existing penalties for companies that violate the Truth in Lending Act for credit card customers.
Payoff timing disclosures. The CARD Act would require credit card issuers to:
· Provide individual consumer account information to disclose the period of time and total interest it will take the cardholder to pay off the card balance if only minimum monthly payments;
· Disclose the total amount of interest the cardholder will pay to pay off the card balance if only minimum monthly payments are made; and
· Provide a toll-free number at which the consumer may receive information about accessing credit counseling and debt management services.
Requirements relating to late payment deadlines and penalties. The CARD Act would require full disclosure in billing statements of required payment due dates and applicable late payment penalties. Under the CARD Act, payments made at local branches must be credited same day.
Renewal disclosures. The CARD Act would require card issuers to provide account disclosures to consumers upon card renewal when the terms of the card have changed.
Internet posting of credit card agreements. The CARD Act would require each credit card issuer to:
· Establish and maintain an Internet site on which the issuer shall post the written credit card agreements; and
· Provide its credit card agreements to the Federal Reserve Board in electronic format. The Federal Reserve Board would be required to establish and maintain on its publicly available website a central repository of the consumer credit card agreements.
Credit card issuers engage in extensive marketing on college campuses with offers of easy credit to students and encourage them to obtain and use credit cards without verifying the student’s ability to repay the resultant debt. In contrast, if any other adult applies for a credit card, an issuer generally verifies the consumer’s ability to pay by checking their credit history and obtaining information about the applicant’s income. A consumer with a less positive credit history or lack of income either gets a lower limit, higher interest rate card, or is required to have a co-signer. An even less creditworthy consumer would be denied, or required to obtain a secured credit card.
The CARD Act would protect students and other young consumers by:
· Requiring that credit card issuers extending credit to consumers under the age of 21 to obtain an application that contains: 1) the signature of a parent, guardian, other qualified individual age 21 or older who will take responsibility for the debt; or 2) proof indicating an independent means of re-paying any credit extended;
· Limiting pre-screened offers of credit to young consumers; and
· Prohibiting increases in the credit limit on accounts where a parent, legal guardian, spouse or other individual is jointly liable unless the individual who is jointly liable approves the increase in writing.
The CARD Act would protect recipients of gift cards by requiring all gift cards to have at least a five-year life span, and prohibiting certain fees and charges except as otherwise provided..
Study and report on interchange fees. The CARD Act would require the GAO to study the impact of interchange fees and their effects on merchants and consumers.
Board review of consumer credit plans and regulations. The CARD Act would require the Federal Reserve Board to review the consumer credit card market every two years to examine issues including:
· The terms of credit card agreements;
· The practices of credit card issuers;
· Cost and availability of credit; and
· Credit card innovation.
On April 30, 2009, the House passed the Credit Cardholders’ Bill of RightsAct of 2009 (H.R.627) on a 357 to 70 vote. For a summary of that legislation, click here. H.R. 627 was received in the Senate and placed on the Senate Legislative Calendar under General Orders (Calendar No. 55). A motion to proceed to consideration and a cloture motion on the motion to proceed to the measure were subsequently made and withdrawn in the Senate.
The Senate is expected to consider H.R.627 duringthe week ofMay 11, 2009.
Chairman of the Senate Committee on Banking, Housing and Urban Affairs Dodd and RankingMemberShelby will offer the CARD Act as a substitute amendment (S.A. 1058). The CARD Act is based on the counterpart bill that was reported out of Committee, S. 414. Senator Dodd introduced S. 414 on February 11, 2009 with 15 original sponsors. On March 31, 2009, the Committee on Banking, Housing, and Urban Affairs held a mark-up of the legislation and on April 29, reported S. 414 with an amendment in the nature of a substitute.
DPC will distribute information on additional amendments as it becomes available to staff listservs.
On May 11, 2009, the White House released a Statement of Administration Policy supporting Senate passage of the Dodd-Shelby substitute amendment to H.R.627. The SAP states:
“The Administration strongly supports Senate passage of the amendment in the nature of a substitute to H.R.627 that it understands will be offered on the Senate floor by the Chair and Ranking Member of the Senate Banking, Housing, and Urban Affairs Committee. The Board of Governors of the Federal Reserve System, the Office of Thrift Supervision, and the National Credit Union Administration have issued new rules that prohibit unfair credit card practices. The Administration supports Congress’s efforts to codify these changes and provide additional strong and reliable protections for consumers that ban unfair and abusive practices.
“The Nation’s credit card system must have more accountability, including more effective oversight and more effective enforcement of credit card issuers who violate the law. Consumers need to be informed about the consequences of their financial decisions and critical details informing consumer payment decisions need to be written in plain language and be in plain sight on credit card statements. Credit card companies must be required to make their contract terms freely accessible online in a fashion that allows consumers to easily compare products and choose the card that best meets their needs. Moreover, every credit card issuer ought to provide consumers with at least one card option that has simple terms and a fully transparent pricing structure presented in language that is easy to understand.
“The Administration applauds the efforts of leaders in the Senate in moving this legislation forward, including the Chair and Ranking Member of the Banking, Housing, and Urban Affairs Committee. The Administration looks forward to working further with Congress on this important issue as H.R.627 moves through the legislative process.”
Committee on Banking, Housing, and Urban Affairs, Hearing Materials related to “Modernizing Consumer Protection in the Financial Regulatory System: Strengthening Credit Card Protections” (February 12, 2009), available here.
Committee on Banking, Housing, and Urban Affairs, Hearing Materials related to “Examining the Billing, Marketing, and Disclosure Practices of the Credit Card Industry, and Their Impact on Consumers” (January 25, 2007), available here.
Congressional Research Service, The Credit Card Market: Recent Trends and Regulatory Proposals (RL34393).
Congressional Research Service, Credit Card Minimum Payments (RS22352).
Board of Governors of the Federal Reserve System, Highlights of Final Rules Regarding Credit Card Accounts (December 18, 2008), available here.
Government Accountability Office, Credit Cards: Increased Complexity in Rates and Fees Heightens Need for More Effective Disclosures to Consumers (September 2006), available here.
Senate Credit Card Votes since 2001 are available via the DPC website here
(available inside the Senate firewall for authorized users only)