Monday, February 22, 2010

CARD Act of 2009

Nine months after its enactment, the Credit Card Accountability Responsibility and Disclosure Act of 2009 or the Credit CARD Act of 2009 (Public Law No. 111-24) becomes effective today. The CARD Act, introduced by Rep. Carolyn Maloney (D-NY), was signed into law by President Obama on May 22, 2009. Consumer advocates praised the new legislation for putting restraints on a loosely regulated industry. Among its most prominent features, the law bars retroactive rate increases, requires more notice of impending increases and limits how quickly banks can impose late fees. In addition, it includes changes aimed at protecting young consumers from excessive credit card debt.

The Federal Reserve Board approved its final rule last month. Among other things, the rule:

  • Protects consumers from unexpected increases in credit card interest rates by generally prohibiting increases in a rate during the first year after an account is opened and increases in a rate that applies to an existing credit card balance
  • Prohibits creditors from issuing a credit card to a consumer who is younger than the age of 21 unless the consumer has the ability to make the required payments or obtains the signature of a parent or other cosigner with the ability to do so
  • Requires creditors to obtain a consumer's consent before charging fees for transactions that exceed the credit limit
  • Limits the high fees associated with subprime credit cards
  • Bans creditors from using the "two-cycle" billing method to impose interest charges
  • Prohibits creditors from allocating payments in ways that maximize interest charges.

The new rule amends Regulation Z to address CARD Act amendments to the Truth in Lending Act, For more information, visit the Federal Reserve’s page What You Need to Know: New Credit Card Rules.

Unfortunately, the CARD Act's delayed effective date has resulted in the legislation falling short of its consumer protection goals in significant ways. If the bill had become effective on the day after it was signed, it would have achieved what it set out to accomplish. Many of the new law's important provisions do not become effective until August 2010 allowing credit card companies ample time to escape most of the provisions with real teeth.

Another major flaw of the legislation is it does not set a cap on credit card interest rates. While the new legislation puts curbs on when and how the industry can increase interest rates, it does nothing to limit card issuers’ ability to charge interest rates in excess of 30%. An amendment to put a ceiling on credit card interest rates at 15% was rejected by the Senate by an overwhelming majority. In advance of the law's effective date, some credit card companies have tested 39.9% 59.9% and even 79.9%APR cards in recent months in the sub-prime market or people at the very bottom credit rung. See Cost of Bad-credit Credit Cards Rising Due to Reform Law posted at Personal Finance News. Interestingly, reports that one of the card companies offering the 79.9% APR has called the response to its offer "phenomenal" saying that 2% of people receiving the offers have applied for the cards compared to the normal response rates of 1% to 1.2%.

Starting in August of 2010, card issuers will no longer be able to increase the interest on existing credit card balances, unless the cardholder falls 60 days behind on payments on any bill, not just their credit card bill. Credit card companies will be able to raise interest rates on future purchases at their discretion, as long as they provide 45 days notice. Further, credit card companies will not be able to increase interest rates at any time in the first year after issuing a credit card.

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