Credit Card Overhaul Passes Senate

Yesterday, this page discussed plans by Advanta to close down its credit cards to new purchases and securitize its debts. One can only wonder if one of the things that drove this small business lender to this rather drastic decision was the legislation that passed the Senate today by a vote of 90-5.

This new legislation, called the Credit Card Accountability Responsibility and Disclosure Act of 2009 (Credit CARD Act of 2009) offers a number of changes to the way credit card companies do business. These changes include new mandates as well as amendments to various federal regulations such as:

Title I: Consumer Protection

• Amends the Truth in Lending Act to require advance notice of any increase in the annual percentage rate of interest (APR) pertaining to a credit card account under an open end consumer credit plan.
• Requires such advance notice to include a statement of the obligor's right to cancel the account before the effective date of the increase.
• Imposes a freeze on interest rate terms and fees on canceled cards.
• Sets limits on fees and interest charges, including a prohibition against penalties for on-time payments.
• Authorizes consumers to elect to prohibit a creditor from completing any over-the-limit credit card transaction that will result in a fee, or constitute a default.
• Allows for over-the-limit fees only when an extension of credit causes the account credit limit to be exceeded. Prohibits such a fee when the credit limit is exceeded only due to fees or interest charges.
• Allows imposition of an over-the-limit fee only once during a billing cycle. Prohibits its imposition in a subsequent billing cycle with respect to such excess credit, unless the consumer has exceeded their credit limit during that subsequent cycle.
• Prohibits a separate fee to allow the consumer to pay their bill regardless of method--mail, electronic transfer, telephone authorization, or other means.
• Requires reasonable fees for cardholder agreement violations and currency exchanges.
• Prohibits a creditor from furnishing information to a consumer reporting agency concerning a newly opened credit card account until the credit card has been used or activated by the consumer, thus granting the consumer a right to reject a credit card before notice of the new account is given to a consumer reporting agency.
• Sets forth requirements for the terms of any credit card account, particularly fixed rate and prime rate, under any open end consumer credit plan.
• Revises requirements for prompt and fair crediting of card payments.
• Increases from 14 to 21 days the length of the billing period for imposition of the finance charge in credit statements.
• Prohibits universal default except in certain circumstances.
• Prohibits unilateral changes to cardholder agreements until after the date on which the credit card will expire if not renewed.
• Increases the civil penalty against any creditor who fails to comply with specified requirements in the case of an individual action relating to an open end credit plan that is not secured by real property or a dwelling.
• Specifies such penalty as twice the amount of any finance charge in connection with a transaction, with a minimum of $500 and a maximum of $5,000, or an appropriate higher amount in the case of an established pattern or practice of such failures.
• Requires specified federal regulatory agencies to evaluate the policies and procedures used by credit card issuers for compliance with this Act.
• Specifies additional transaction or event information to be included in APR information the Board of Governors of the Federal Reserve System (Federal Reserve Board) must collect, publish, and disseminate to the public.

Title II: Enhanced Consumer Disclosures

• Revises payoff and repayment timing disclosure requirements, as well as those for civil liability determinations for creditor compliance violations.
• Requires the creditor to provide a toll-free telephone number at which the consumer may receive information about accessing credit counseling and debt management services from agencies certified by the Secretary of the Treasury.
• Instructs the Secretary, through the Office of Financial Education (OFE), to issue guidelines for the establishment and maintenance of such a toll-free telephone number.
• Revises requirements relating to late payment deadlines and penalties.
• Requires a periodic statement of account to disclose: (1) the date by which a payment must be postmarked, if paid by mail, in order to avoid the imposition of a late payment fee; and (2) any possible resulting increase in interest rates for late payments.
• Repeals the special rule for disclosure of APR and annual fee before a credit card account renewal.

Title III: Protection of Young Consumers

• Prohibits issuance of a credit card on behalf of a consumer under age 21, unless the consumer has submitted a written application meeting specified requirements.
• Directs the Secretary of the Treasury, acting through the OFE, to make and publish a list of all courses and programs that have been certified for financial literacy or financial education purposes appropriate for young consumers.
• Prohibits issuance to students of certain affinity cards, pursuant to any agreement between the creditor and an institution of higher education, unless certain requirements have been met.
• Amends the Fair Credit Reporting Act to allow consumers between ages 18 and 21 to elect to be included in any list provided by a consumer reporting agency in connection with a credit or insurance transaction that is not initiated by the consumer.
• Amends the Truth in Lending Act to require approval by such individual to increase credit lines for credit card accounts for which a parent, legal guardian, spouse, or any other individual is jointly liable until the consumer attains the age of 21.

Title IV: Federal Agency Coordination

• Amends the Federal Trade Commission Act to require all federal banking agencies and the Federal Trade Commission (FTC) to coordinate rulemaking and regulations.
• Requires the Comptroller General to a report to Congress on the status of regulations of the federal banking agencies and the National Credit Union Administration (NCUA) regarding unfair and deceptive acts or practices by depository institutions and federal credit unions.

Title V: Gift Cards

• Declares that, with respect to a gift certificate, store gift card, or general-use prepaid card, it is unlawful, except in specified circumstances, to: (1) impose a dormancy fee, inactivity fee, or a service fee; or (2) sell or issue such a certificate or card subject to an expiration date. Prescribes disclosure requirements for such cards.
• Empowers the FTC to enforce these prohibitions.

Title VI: Miscellaneous Provisions

• Directs the Comptroller General to study and report to certain congressional committees on the extent to which interchange fees must be disclosed to consumers and merchants and how such fees are overseen by the federal banking agencies.
• Directs the Comptroller General to establish the Credit Card Safety Rating System Commission to: (1) to determine if a rating system to allow cardholders to quickly assess the level of safety of credit card agreements would be beneficial to consumers; and (2) assess the impact on credit card transparency and consumer safety of various rating system policy options.
• Authorizes appropriations.
• Amends the the Federal Deposit Insurance Act (FDIA) and the Federal Credit Union Act (FCUA) to increase the borrowing authority: (1) of the Federal Deposit Insurance Corporation (FDIC) from $30 billion to $100 billion; and (2) of the NCUA from $100 million to $6 billion.
• Authorizes temporary further increases for the FDIC of up to $500 billion, and for the NCUA of up to $18 billion, through calendar 2010 if the FDIC Board of Directors or the NCUA Board, as the case may be, together with the Federal Reserve Board and the Secretary, determine that additional increases are necessary.
• Amends the FCUA to direct the NCUA Board to establish a National Credit Union Share Insurance Fund Restoration Plan whenever the Board determines that the equity ratio of the National Credit Union Share Insurance Fund will fall below a specified minimum amount.

One can imagine how unhappy the credit card industry is with this legislation. No more jacking-up their interest rates, no more surprise fees. True, the law does nothing to keep consumers from over-extending themselves and it doesn’t necessarily keep credit card companies from coming up with new and creative ways outside the scope of the law to extract money from their customers, but consumer groups are hailing it as a significant blow against abusive credit card practices.

There is no doubt that credit card issuers have gotten pretty shady over the last few years, especially so when the economy began to freefall into the current recession, but one returns to the Advanta decision and has to wonder whether there was a connection.

It is clear from a March 30th letter to Senators Chris Dodd and Richard Shelby from American Banking Association Executive Vice President, Congressional Relations & Public Policy, Floyd Stoner that the organization is against the bill. He writes, in part, that the bill, “if enacted as currently drafted, would exacerbate the problems facing the U.S. economy by imposing serious restraints on card lenders’ ability to serve consumers and small businesses.” Stoner then lays out his argument as follows:

Among other things, S. 414 seeks to put into statute the sweeping card reforms adopted by the Federal Reserve Board (Fed) and other financial services regulators in December 2008. These regulations, which entirely revamp disclosures and address a wide range of concerns expressed by policymakers over card practices, involve a complete reworking of credit card internal operations, risk management, and funding mechanisms, among other things. As such, they represent an enormous drain on the resources and lending abilities of both large and small card lenders. S. 414 seeks to codify these regulations, but does not do so precisely, and would force regulators to go back and revise card rules that were carefully crafted and based on detailed regulatory analysis, extensive consumer testing, and over 66,000 public comments. Lenders of all sizes have already taken extensive efforts to comply with these sweeping reforms, and if confronted by new requirements, will have even more difficulty serving their customers at a time their customers most need it.

S. 414 also goes far beyond the Fed’s broad, new regulatory mandates by adding provisions that would micromanage how lenders, for example, price and market their products and how they may be paid. These detailed prohibitions have not been subject to close scrutiny to determine what impact they may have on the availability and price of credit for tens of millions of Americans with imperfect or limited credit records, or who otherwise receive substantial benefit from credit card loans. Nor has the overall impact on the broader economy been fully explored. For example, there has been no analysis of the impact on immigrant populations with limited credit histories, those who have had credit problems in the past, the college student population, small businesses that use personal credit cards to help fund their operations, or even efforts by the Administration and Congress to jumpstart our economy.

Moreover, there has not been careful consideration over potential unintended consequences of various other provisions of this legislation. It should be fully explored, for example, whether the provision on limiting reporting to credit bureaus on the opening of card accounts actually facilitates identity theft, as well as what impact a short implementation period under the bill would have on credit card operations or available credit. Such issues may compound the broader concerns already expressed.

Essentially, it all boils down to this: If this legislation is enacted, it would create hardship for lenders and so there will likely be problems for consumers looking for credit, which does describe what happened at Advanta rather well. Credit card companies will, in other words, do what they feel they need to do to protect themselves from the economic difficulties of their customers. If you rely on credit cards, for your business or for yourself, one thing you can bet on is that the rules will change. How they will change is, at this point, anyone’s guess, but remember that credit card companies are not in business to support your success and ask yourself this: Do these things usually change for the better?

That said, before things begin to happen, you should position yourself and your business so that any changes in the credit card industry have little, if any impact, and that means making arrangements for some other form of funding. Check out Finding Your Funding or our Q&A Section for more information on funding your business.

The Bottom Line

While wrestling matches between industry and government rarely satisfy everyone, and usually leave the tax payer holding the proverbial bag, this action and the credit card industry’s reaction may not amount to the worst thing in the world. If it goes far enough, which is not very likely since these companies would have to reinvent themselves, not to mention the whole credit-driven global economy, it will mean a shift away from consumer credit cards and back to a more cash-based economy. Personal debt, which has been encouraged here in the US since the 1980s, may finally begin to dry up as debt regains the stigma it once had and Americans relearn the lessons of thrift. It is a lesson that most of us have forgotten, and that—more than anything else—is what has brought us to the current recession. If we don’t want our children and grandchildren to go through this again, it is time to relearn those lost lessons and assume a far more conservative stance toward our economy.