On May 20 2009 the House of Representatives passed HR 627, the Credit Card Accountability Responsibility and Disclosure Act of 2009, by a vote of 361 to 64. The Senate passed the bill on the previous day by a vote of 90 to five. President Obama, who had called for the legislation by Memorial Day (May 25), is expected to sign the bill in the near future.
This update describes several key provisions of the act. In general, the credit card provisions of the act are amendments to the Truth in Lending Act, the stored value provisions are amendments to the Electronic Fund Transfer Act and the pre-screening provisions are amendments to the Fair Credit Reporting Act. Any implementing regulations of the amendments to the Truth in Lending Act and the Electronic Fund Transfer Act must be adopted by the Federal Reserve Board of Governors. A number of provisions in the act will require significant interpretation by the board, and the board is expected to engage in significant rulemaking as a result of the act. In so doing, the board may build from several provisions in its yet-to-be-effective unfair and deceptive practices regulations and amendments to Regulation Z, although the act has a significantly broader scope than the board's prior rulemakings.
In general, the requirements of the act become effective nine months after it is signed by the president. Several provisions, including the notice requirements pertaining to increased annual percentage rates and significant changes to account terms, are effective 90 days after enactment. Some other provisions are effective 15 months after the date of enactment. Regardless, the requirements become effective whether or not the board issues implementing regulations. Early indications from board staff suggest that the board will propose implementing regulations as soon as possible.
One of the most significant provisions of the act is a provision that may be used to limit certain credit card charges substantively. Under the act, any penalty fee or charge imposed in connection with a violation of the cardholder agreement, including any late payment fee, over-limit fee or any other penalty fee or charge, must be "reasonable and proportional" to the cardholder's omission or violation.
This provision is effective 15 months after the date of enactment.
Rate increases and significant changes to account
A card issuer must provide written notice of any annual percentage rate increase at least 45 days prior to the effective date of the increase. However, the 45-day notice is not required if the increase is due to:
- the expiration of an introductory rate;
- a change in an index; or
- the completion or failure of a workout or temporary hardship arrangement.
An issuer must also provide written notice of any significant change in the terms, including an increase in any fee or finance charge, at least 45 days prior to the effective date of the change.
Any required notice of an increased annual percentage rate or significant change in terms must include a statement of the right of the cardholder to cancel the account, pursuant to rules established by the board, before the effective date of the increase or change.
Although issuers have flexibility to increase annual percentage rates for new transactions (but only in limited cases for accounts that have been open for less than a year), an issuer may not increase the annual percentage rate on an outstanding account balance unless the increase is due to:
- an expiration of a specified period of time (with certain conditions);
- a variable rate;
- the completion or failure of a workout or temporary hardship arrangement if the issuer has provided the consumer a disclosure of the terms of the arrangement; or
- a 60-day delinquency on the account, provided that the cardholder can cure to the previous annual percentage rate after six months of timely payments.
The act prohibits an issuer from changing the terms governing the repayment of any outstanding balance, although the creditor may provide a method of repayment that is no less beneficial than either a five-year amortization period or a required minimum payment that includes a percentage of the outstanding balance that is no more than twice the percentage required prior to the increased annual percentage rate. The act defines an 'outstanding balance' to be the account as of the end of the 14th day after the date on which the issuer provides the notice of the annual percentage rate increase.
The act also provides that a promotional annual percentage rate must have a term of at least six months.
Interest rate reductions
Another significant provision in the act relates to issuers' apparent obligations to reduce annual percentage rates in some circumstances. If an issuer increases the annual percentage rate on an account based on factors including the cardholder's credit risk or market conditions, the creditor must consider changes in such factors in subsequently determining whether to reduce the annual percentage rate for the account. An issuer must:
- have methodologies to assess such factors;
- review accounts that have had an increased annual percentage rate since January 1 2009 at least every six months to assess whether such factors have changed; and
- reduce the annual percentage rate previously increased when a reduction "is indicated by the review".
The application of this provision to accounts that have had an increased annual percentage rate since January 1 2009 may present special compliance burdens for issuers. However, this provision is one that is not effective until 15 months from the date of enactment. It is also subject to enforcement solely by administrative means.
Consideration of ability to repay
An issuer may not issue a credit card or increase any credit limit unless the card issuer considers the ability of the consumer to make the required payments under the terms of such account. This provision raises questions as to what an issuer must consider and whether current underwriting processes would comply.
Ban on double-cycle billing and charging interest on certain on-time payments
The act bans the use of double-cycle billing. Although the double-cycle billing ban is similar to the unfair and deceptive practices regulations, the act also includes a new prohibition on assessing interest on any portion of a balance that was subject to a grace period if it was repaid in a timely manner. It is not entirely clear how the board will implement this latter provision, but it will likely require changes to balance calculation methods for all card issuers, not just those that used the two-cycle average daily balance method. The board will also need to consider in its rulemaking process how this provision will effect deferred interest offers.
The act requires an issuer to allocate a cardholder's payment in excess of the minimum payment to the balance with the highest annual percentage rate and then to each successive balance bearing the next highest annual percentage rate. This is more restrictive than the unfair and deceptive practices regulations, as it precludes a pro rata allocation among balances. Furthermore, an issuer must allocate the entire payment in excess of the minimum payment to a deferred interest balance during the last two billing cycles immediately preceding the expiration of the deferred-interest programme.
Time to make payments
An issuer must mail a periodic statement not less than 21 days before the due date. This is similar to the unfair and deceptive practices rule, although the act makes the 21-day period a requirement rather than a safe harbour. Furthermore, the act requires that if an issuer offers a grace period, the issuer must mail the periodic statement not less than 21 days before its expiration (replacing the existing 14-day rule). The 21-day rule become effective 90 days after the date of enactment.
The act also requires that the payment due date for a credit card account must be the same day each month. If the date falls on a day on which the creditor does not receive or accept payments by mail (including weekends and holidays), the creditor may not treat a payment received on the next business day as late for any purpose.
The act takes a slightly different approach to credit cards with higher fees from that of the unfair and deceptive practices rule. Under the act, required fees (other than any late fee, over-limit fee or fee for a payment returned for insufficient funds) during the first year of the account in an aggregate amount in excess of 25% of the initial credit limit may not be paid from credit made available on the account.
The act imposes significant requirements in connection with over-limit fees. For example, an issuer may not impose a fee for an extension of credit over an account's credit limit unless the consumer has expressly opted in to the authorization of such transactions. A cardholder must receive a notice regarding the ability to revoke the opt-in each time the cardholder incurs an over-limit fee. Furthermore, an issuer may impose an over-limit fee only once during a billing cycle. If an account is over limit and the issuer previously has imposed an over-limit fee, an issuer may impose an over-limit fee only once in each of the subsequent two billing cycles, unless the consumer has obtained an additional extension of credit in excess of the limit during any such subsequent cycle or reduces the outstanding balance below the credit limit as of the end of the billing cycle.
Fees for method of payment
An issuer may not impose a separate fee to allow the cardholder to make a payment unless it involves an expedited service by a service representative of the issuer.
Minimum payment notices
The act revises the minimum payment disclosure requirements that were recently adopted by the board. Each periodic statement must include a general minimum payment warning and specific repayment information, including:
- the number of months it would take to pay the balance making only the minimum payments;
- the total cost, including interest and principal, of paying the balance in full making only the minimum payments;
- the monthly payment amount to pay off the balance in 36 months (including the total cost to the consumer); and
- a toll-free telephone number at which the consumer may receive information about credit counselling and debt management.
Credit card issuance to young adults
An issuer may not issue a credit card to a consumer aged under 21 unless the written application includes a co-signor aged 21 or older, or the submission by the consumer of financial information indicating an independent means of repaying any credit obtained. In addition, an issuer may not increase a credit limit on an account issued to someone under 21 with a co-signor unless the co-signor approves and assumes joint liability for the increase.
Pre-screening for young adults
In connection with any pre-screening (including credit cards), the consumer report provided to the pre-screener may not contain a date of birth that shows that the consumer is below 21 years of age. If the consumer report provided to the pre-screener includes a date of birth that shows the consumer is not yet 21, it may be provided only if the consumer has consented. This provision applies to all pre-screening, not just for credit cards.
Provisions applicable to college students
A college must publicly disclose any agreement with a card issuer for the purpose of marketing a credit card. An issuer may not offer to a college student any tangible item to induce the student to apply for, or participate in, a credit card plan offered by the issuer if the offer is made:
- on a college campus;
- near the campus, as determined by the board; or
- at an event sponsored by or related to a college.
Each issuer must also submit an annual report to the board containing the terms and conditions of all business, marketing and promotional agreements and college affinity card agreements with a college or alumni group pertaining to college credit card accounts.
The act includes several provisions relating to stored value cards. For example, an issuer may charge a dormancy fee, inactivity fee or service fee on a non-reloadable gift card that is marketed to the general public only if there has been no activity on the card in the previous 12 months and certain disclosures relating to such fees have been provided on the card.
Furthermore, a stored value card may not have an expiration date earlier than five years from the date when funds were last loaded on the card. In addition, the board must determine the extent to which the Electronic Fund Transfer Act and Regulation E should apply to general-use pre-paid cards, gift certificates and store gift cards.
The act also addressed anti-money laundering issues by requiring the Treasury Department to issue regulations "implementing the Bank Secrecy Act regarding the sale, issuance, redemption, or international transport of stored value, including stored value cards".
For further information on this topic please contact James A Huizinga, Michael F McEneney, John K Van De Weert or Karl F Kaufmann at Sidley Austin LLP by telephone (+1 202 736 8000) or by fax (+1 202 736 8711) or by email ([email protected] or [email protected] or [email protected] or [email protected]).
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