The Federal Reserve laid out plans on November 9, 2010 to close loopholes within the CARD Act that have allowed certain credit card companies to circumvent consumer protections and continue the shady, predatory practices that helped lead to roughly a quarter of American consumers having credit scores below 600 following the Great Recession.
Despite being perhaps the most sweeping credit card regulatory legislation in years, somewhat vague language has allowed a small number of banks to strive only to meet the letter and not the intent of the law. However, the Fed’s regulations stand to clarify such gray areas.
“This type of action is in stark contrast to Fed practices spanning the last decade which allowed unsafe lending to permeate unchecked,” said Odysseas Papadimitriou, CEO of WalletHub.com and a former Capital One executive. “It is so refreshing to finally see the ‘new Fed’ take a very proactive role in addressing dangerous trends as soon as they pop up.”
Currently, the CARD Act prohibits fees that total more 25% of a credit card’s limit from being applied in the first year a card account is open. Certain banks have skirted this restriction by assessing processing fees that must be paid before a credit card is ever opened. They claim that that these fees are not included in the 25% calculation because they are charged before the account’s first year begins. Thus, when combined with the yearly fees applied once a card is opened, they often exceed 25% of a card’s limit and are thereby at odds with the law’s intent.
The Fed’s proposed CARD Act addendum addresses these fees by expressly stating that no distinction exists between fees charged before an account is opened and those assessed during the first year of use. Both are included within the 25% total.
Additionally, the CARD Act restricts credit card companies from raising interest rates on existing balances unless a customer is 60 days delinquent and from changing the terms of a contract without 45 days notice. Counter to these rules, many credit card companies now offer periods during which customers receive interest fee waivers that can be revoked at issuer discretion. These promotions effectively amount to unregulated interest rate change capabilities. Issuers rationalize this practice by claiming that the interest rate associated with the card is its normal amount and any waiver is merely a consumer bonus, thus revocation of a waiver is not an interest rate increase but a return to the standard rate.
However, the new Fed rules will include interest waiver offers within the scope of current interest policies and prohibit their revocation unless a user is 60 days delinquent on payment.
Proposed CARD Act additions will also require credit card issuers to evaluate individual rather than household income in determining a customer’s ability to pay. This adjustment will further protect consumers from taking on credit burdens that exceed their means, one of the primary causes of the Great Recession.
While such changes do promise to address some of the loopholes within the legislation and thereby increase its overall benefit, they are not expected to take effect until at least October 2011.