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Understanding the Credit Card Act of 2009 and its Impact on the Credit Card Industry

By Lisa Bonelli, Director, CBSI, Harrison, New York

Regulation

On May 22, 2009 Congress passed the Credit Card Accountability Responsibility and Disclosure Act of 2009 (amends the Truth in Lending and Fair Credit Reporting Acts). The new requirements were phased in over a 15-month period. The first batch of new credit card protections took effect August 20, 2009, and the majority of provisions started on Feb. 22, 2010, while the final batch began August 22, 2010. This Act regulates practices around credit cards as well as gift cards in the following manner.

  • Bans Unfair Rate Increases
  • Prevents Unfair Fee Traps
  • Provides Plain Sight /Plain Language Disclosures
  • Creates Accountability
  • Provides Protections for Students and Young People

Provisions 1

Prevents Unfair Increases in Interest Rates and Changes in Terms

  • Prohibits arbitrary interest rate increases and universal default on existing balances;
  • Requires a credit card issuer who increases a cardholder’s interest rate to periodically review and decrease the rate if indicated by the review;
  • Prohibits credit card issuers from increasing rates on a cardholder in the first year after a credit card account is opened;
  • Requires promotional rates to last at least 6 months.

Prohibits Exorbitant and Unnecessary Fees

  • Prohibits issuers from charging a fee to pay a credit card debt, whether by mail, telephone, or electronic transfer, except for live services to make expedited payments;
  • Prohibits issuers from charging over‐limit fees unless the cardholder elects to allow the issuer to complete over‐limit transactions, and also limits over‐limit fees on electing cardholders;
  • Requires penalty fees to be reasonable and proportional to the omission or violation;
  • Enhances protections against excessive fees on low‐credit, high‐fee credit cards.

Requires Fairness in Application and Timing of Card Payments

  • Requires payments in excess of the minimum to be applied first to the credit card balance with the highest rate of interest;
  • Prohibits issuers from setting early morning deadlines for credit card payments;
  • Requires credit card statements to be mailed 21 days before the bill is due rather than the current 14.

Protects the Rights of Financially Responsible Credit Card Users

  • Prohibits interest charges on debt paid on time (double‐cycle billing ban);
  • Prohibits late fees if the card issuer delayed crediting the payment;
  • Requires that payment at local branches be credited same‐day;
  • Requires credit card companies to consider a consumer’s ability to pay when issuing credit cards or increasing credit limits.

Provides Enhanced Disclosures of Card Terms and Conditions

  • Requires cardholders to be given 45 days notice of interest rate, fee and finance charge increases;
  • Requires issuers to provide disclosures to consumers upon card renewal when the card terms have changed;
  • Requires issuers to provide individual consumer account information and to disclose the period of time and total interest it will take to pay off the card balance if only minimum monthly payments are made;
  • Requires full disclosure in billing statements of payment due dates and applicable late payment penalties.

Strengthens Oversight of Credit Card Industry Practices

  • Requires each credit card issuer to post its credit card agreements on the Internet, and provide those agreements to the Federal Reserve Board to post on its website;
  • Requires the Federal Reserve Board to review the consumer credit card market, including the terms of credit card agreements and the practices of credit card issuers and the cost and availability of credit to consumers;
  • Requires Federal Trade Commission rulemaking to prevent deceptive marketing of free credit reports.

Ensures Adequate Safeguards for Young People

  • Requires issuers extending credit to young consumers under the age of 21 to obtain an application that contains: the signature of a parent, guardian, or other individual 21 years or older who will take responsibility for the debt; or proof that the applicant has an independent means of repaying any credit extended;
  • Limits prescreened offers of credit to young consumers;
  • Prohibits 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;
  • Increases protections for students against aggressive credit card marketing, and increases transparency of affinity arrangements between credit card companies and universities.

Enhanced Penalties

  • Increases existing penalties for companies that violate the Truth in Lending Act for credit card customers.

Gift Card Protections

  • Protects recipients of gift cards by requiring all gift cards to have at least a five‐year life span, and eliminates the practice of declining values and hidden fees for those cards not used within a reasonable period of time.

Encourages Transparency in Credit Card Pricing

  • Requires the GAO to study the impact of interchange fees on consumers and merchants, specifically their disclosure, pricing, fee and cost structure.

Protects Small Businesses

  • Requires the Federal Reserve to study the use of credit cards by small businesses and make recommendations for administrative and legislative proposals;
  • Establishes Small Business Information Security Task Force to address the information technology security needs of small businesses and help prevent the loss of credit card data.

Promotes Financial Literacy

  • Requires comprehensive summary of existing financial literacy programs and development of strategic plan to improve financial literacy education.

Concerns with Law

  • Many issuers raised their interest rates and fees before the new laws went in. Consumer advocacy groups claim the credit card companies who said regulatory changes would lead to higher rates have fulfilled their own prophecy, using their claims as cover to raise rates and find new ways to exploit their customers.
  • The act does not place a cap on interest rates nor does it apply to business or corporate credit cards. The credit card industry said the act would result in higher interest and annual fees, and lowered credit limits for customers with bad credit.

Impacts to credit card market

  • Card issuers boosted interest rates, switched from fixed-rate to variable-rate cards, cut credit limits to eat up their available credit and closed unprofitable accounts.2
  • According to a survey by Javelin Strategy & Research, 56% of consumers used credit cards in 2009, down from 87% in August 2008. This number could fall as low as 45% in 2010.3
  • 4Direct marketing efforts were up 83% in the first quarter of 2010 versus last year at the same time.
    • Rewards cards offers with annual fees increased from 11% to 22%
    • Annual fee, no rewards offers increased from 9% to 12 %
    • No annual fee no rewards offers decreased from 22% to 9%
    • Rewards cards with no annual fee increased from 48% to 57%
  • Issuers are moving away from a mass acquisition approach yielding short term results and high turnover to structuring card products based on targeting specific customers for long term relationships.
  • Some issuers added annual fees to card products to account for lost revenue.
  • The market is more like to see issues altering annual fees for reward programs and testing merchant funded programs.
  • Some lenders are trying to expand credit cards role as part of a broader customer relationship and not a standalone profit center (increased customer loyalty).

Potential Opportunities for financial institutions

  • CBSI could work with banks to provide insurance benefits/rewards for increased spend on card (i.e. make 4 retail purchases on card over xxx and receive purchase protection). The increased usage would drive customer loyalty and spend.
  • CBSI could provide enhancement bundles to issuers to offer with their increased annual fees. This could be in an effort to reduce card attrition.

Contact Lisa Bonelli at CBSI for more information at 914-381-5353.

Resources

1 U.S. Senate Committee on Banking, Housing, and Urban Affairs
2Credit cards.com
3USA Today, 9/10/2010
4Payment source – June/July 2010