After the CARD Act
The 2009 Credit CARD Act set out to curtail abusive industry practices. What was accomplished and will more reform be on the way?
The Credit Card Accountability, Responsibility, and Disclosure (CARD) Act of 2009 was lauded by advocates as a Cardholders’ Bill of Rights. Card issuers, on the other hand, likened it to a horrible compliance migraine. Most all would agree conforming to the regulation has required a Herculean effort by financial institutions, compliance teams, and card processors.
Credit unions in general have noted that despite the vast range of provisions affected by the act—statements, disclosures, fees, and account changes—the law ultimately benefits members by making card terms more consistent and easier for them to understand and compare products.
Industry practices: then and now
The law largely went into effect in February 2010. It targeted what regulators called “unfair or deceptive” practices, such as “hair-trigger” penalty interest rate increases on existing balances for minor account violations, unfair payment allocation, and imposition of over-credit-limit fees without consent, according to a Pew Charitable Trusts Safe Credit Cards Project report.
In general, the regulation:
- Restricts changes in interest rates;
- Requires minimum payment warnings on credit card statements;
- Limits marketing practices to college students;
- Requires co-signers for consumers who are under age 21 in order to open an account if they don’t otherwise have the ability to make payments;
- Requires issuers to consider a person’s ability to repay when opening a credit card account or increasing credit limits;
- Requires that payments above the minimum amount be applied to balances with the highest interest rate, in addition to a number of other requirements;
- Requires issuers to send periodic statements at least 21 days before the payment is due and provide a 45-day notice when the rate and certain terms of a credit card account are changed; and
- Prohibits assessing a fee for paying an over-credit-limit transaction unless the consumer is given notice and a reasonable opportunity to opt-in, and chooses to do so.
Before the legislation took effect, research showed that 100% of credit cards from the largest banks included the practices the law aimed to abolish. And today, “the elimination of these practices marks a major improvement,” says Nick Bourke, director of the Safe Credit Cards Project and co-author of the Pew report, which evaluated the top 12 bank issuers and the top 12 credit union issuers. Some highlights include:
- Over-credit-limit fees. About 11% of bank cards in the Pew study had an over-credit-limit fee in a January 2011 study, with an average fee of about $35. That’s down from more than 80% of cards in July 2009 (before the law’s effective date) and 25% in March 2010 (just after the effective date). Credit unions had virtually eliminated these fees by 2011. CUNA’s 2010-2011 Credit Union Fees Survey Report indicates of those credit unions offering credit cards, about one-third offered over-credit-limit fees in 2010, down from about 85% in 2008. Fees credit unions charge ranged from $20 to $25, depending on card type.
- Penalty fees. The size of bank penalty fees for late payments dropped slightly in the past year, from $39 to $35. Credit union late fees in the Pew survey rose to a median of $25 (up from $20 in July 2009). The Federal Reserve capped some penalty fees, however, and generally requires issuers to justify any penalty fees of more than $25. CUNA’s survey shows penalty fees range from $20 to $25 depending on card type. An Office of the Comptroller of the Currency (OCC) study shows that the CARD Act has substantially curbed late fees. The total amount of late fees paid by consumers dropped by more than half, from $901 million in January 2010 (before the effective date of the new late-fee rules) to $427 million in November 2010. The number of accounts that assessed at least one late fee declined by almost 30%, and the average size of the late fee declined from $35 to $23.
- Penalty interest rates. These practices remain widespread, Pew reports. At least 94% of bank cards and 46% of credit union cards included penalty rate terms. Where disclosed, the median penalty rate rose by one percentage point from July 2009, to 29.99%. Some disclosures stopped including the size of penalty interest rates, even as issuers reserved the right to impose them. Other issuers failed to state what cardholder actions would trigger penalty rate increases or how cardholders could return to nonpenalty rates. Credit union penalty rates rose slightly, to 17.99% in 2011 from 17.90% in 2010. “When issuers withhold key penalty pricing information, cardholders become vulnerable and uninformed. It’s a worrisome trend that runs counter to the Credit CARD Act’s goals of transparency and simplicity,” the Pew report maintains.
- Surcharge fees for cash advances rose sharply. Bank cash advance and balance transfer fees rose by one-third between July 2009 and March 2010, from 3% to 4% in the Pew survey. Credit union cash advance fees rose to 2.50% and then dropped to 2% in 2011, largely consistent with CUNA’s fee survey. Compared with bank cards, credit union cards generally remained less likely to include surcharge fees and more likely to cap the fees voluntarily to a stated maximum, the Pew research points out.
- Annual fees. Of all reviewed cards in the 2010 Pew study, 14% included an annual fee (compared with 15% in July 2009). Yet the median size of annual fees grew between July 2009 and March 2010—the time period before the law’s effective date—rising from $50 to $59 for banks and from $15 to $25 for credit unions. In 2011, Pew found 21% of banks now charged these fees, up from 14% the previous year. Just 8% of credit unions in CUNA’s fee study charge an annual fee, ranging from median fees of $12 to $25, depending on card type.
New fees and practices emerging
The Credit CARD Act was expected to wipe out about $390 million a year in fee revenue, according to the card industry newsletter Nilson Report. Issuers are adopting new practices and strategies to recoup lost revenue. They’re:
- Switching fixed-rate cards to variable rates linked to an index such as the prime rate. Doing so allows financial institutions to change customers’ rates without advance notice.
- Ramping up marketing of “professional” cards. These are like corporate cards but carry the same terms as consumer cards. Professional cards also aren’t covered under the CARD Act, notes The Wall Street Journal.
- Ignoring limitations on campus marketing. A University of Houston Law Center study found 76% of those surveyed under age 21 said they had received a credit card offer since 2010 when the CARD Act went into effect. And 73% of freshmen said they saw credit card issuers marketing to students off-campus. Additionally, 47% reported seeing card companies offering tangible gifts on and around campus, which is a violation of the CARD Act.
In July, the new Consumer Financial Protection Bureau (CFPB) will officially oversee the Credit CARD Act and other consumer regulations. Earlier this year, the agency held a state-of-the-industry conference on the regulation’s effects so far on the industry and on cardholders’ behavior.
While front-end credit card pricing has increased for some consumers, the overall cost of credit has not, CFPB points out. Additionally:
- The actual average interest rate that consumers paid in the third quarter of 2010 was 12.3%, below the level in the comparable period in 2007.
- Industry income as a percentage of balances increased in 2010 over pre-CARD Act levels. Industry profitability improved as well, reflecting in part reduced loss rates as the economy improved. This has enabled card issuers to release some of the reserves they had created for expected bad debt.
- More consumers are offered cards now than in 2009, and consumers with lower credit scores continue to receive credit.
Before the Credit CARD Act, monthly statements provided consumers with limited information about their balances and obligations, and about the interest, finance charges, and other fees they were incurring. But consumer awareness of the CARD Act regulation is modest, according to CFPB’s survey: Only 46% of cardholders report being very or somewhat familiar with the CARD Act, and 30% percent say they aren’t at all familiar with the law.
Awareness of most of the changes made in monthly billing statements is higher than awareness of the CARD Act itself. For example:
- 80% of cardholders have noticed that their payments are now due on the same day of each month.
- 77% have noticed that the monthly statements contain a warning about the cost of making a late payment.
- 70% have noticed that monthly statements now contain information about the consequences of making only minimum payments.
- 48% of cardholders recall their bill now tells them how much they need to pay each month in order to pay off the balance within three years.
- 31% who recall seeing the new information on their statement report that it has caused them either to increase the payments they make or to reduce their use of credit.
- 60% of those who’ve noticed at least one of the changes in their monthly billing statements say their monthly statements are easier to read and understand than they were a year ago. Additionally, 60% say the terms of their credit card are clearer than they used to be.
But many cardholders remain confused: 35% of those who carry a balance from month to month say they don’t know how much interest they paid on their primary credit card last year. And a J.D. Power and Associates Credit Card Satisfaction Study reports only 32% of consumers say they understand their credit card terms completely.
The Credit CARD Act addressed credit card safety and transparency, including restricting interest-rate increases on outstanding balances, introducing consumer-friendly payment allocation rules, and regulating costly penalties, the Pew report says.
But higher transaction surcharges and the use of undisclosed penalty rates are undermining the general trend toward increased transparency, according to Pew. With modest policy changes, credit card issuers and regulators can add to the significant improvements the industry’s seen, the group believes. And industry observers expect that once the CFPB receives its full authority, it may begin another review of these immense credit card regulations.