The Credit Card Accountability, Responsibility, and Disclosure Act (the "CARD Act"), which was signed by President Obama on May 22, 2009, is an attempt to strengthen consumer protection in the credit card market by amending the Truth in Lending Act ("TILA") and the Fair Credit Reporting Act ("FCRA"). The CARD Act imposes new restrictions on interest rate and fee changes, increases penalties for TILA and FCRA violations, and limits the ability of persons under the age of 21 to obtain a credit card. The provisions also enhance disclosure requirements and seek to increase accountability from card issuers and regulators. Most of the provisions will take effect in February 2010, but some commence in August 2009. The CARD Act is likely to have a significant impact on how card issuers do business.
A primary focus of the CARD Act is to stabilize interest rates by limiting when a creditor may increase the APR. Once the account is opened, a creditor may not increase the APR, fee, or the finance charge on any outstanding balance for the first year except when: (1) a previously disclosed promotional rate expires (promotional rates must now be in effect at least six months); (2) the variable interest rate increases as measured by an external index; (3) a hardship agreement is completed; or (4) when payments are delinquent more than 60 days. A cardholder must be given notice 45-days prior to any significant change in the terms of their account with an option for the cardholder to cancel the account within the 45 days. In addition to limiting rate increases, creditors must evaluate market conditions once every six months to assess whether a rate reduction is appropriate. The Federal Reserve is to issue the standards and methodologies for this assessment by February 22, 2010, which will go into effect August 22, 2010.
The new restrictions on penalties and fees, such as overdraft or late-payment charges, limit the charges to an amount proportional to the contractual violation or harm suffered. Within fifteen months of the effective date of the Act, The Federal Reserve Board will issue regulations defining what constitutes a reasonable or proportional fee. "Double-cycle billing" is prohibited, which means that a creditor may not impose a finance charge based on prior billing cycles when calculating the charges of the current billing cycle. Cardholders must be given the opportunity to choose a fixed credit limit that may not be exceeded, rather than a "soft" limit that may be exceeded and will result in overdraft charges. Creditors also may not impose a fee for choosing one method of payment over another, i.e., in person, by mail, via telephone, or online. Subprime or so-called "fee harvester" cards are also restricted because the CARD Act prohibits any fees, other than late or overdraft fees, that are greater than 25 percent of the authorized credit limit for the first year the account is open.
The CARD Act attempts to promote personal responsibility by mandating enhanced consumer disclosure, including:
- Creditors must maintain a public website that will host all written credit card agreements they offer to consumers except those for individually negotiated contracts;
- Creditors must include a conspicuous disclosure in their periodic statements regarding payment methods;
- The disclosure must address (1) a minimum payment warning (that paying only the minimum amount required will increase the amount of interest paid and the time it takes to repay the balance), (2) the monthly payment required to repay the debt in 36 months, and (3) the terms of any late payment fees (i.e. when the fee will be imposed, the amount of the fee or increase in the interest rate, etc.).
- The billing statement must also provide a toll-free phone number for credit counseling services; and
- Creditors must take reasonable measures to ensure that these statements are mailed or delivered to customers at least 21 days before payment is due.
The ability of creditors to market their cards to persons under 21 or in college has been narrowed. To start, before a creditor may even issue a credit card to an individual under 21, the individual must prove his or her ability to repay the debt or cosign the application with a parent or other individual with such means. The CARD Act also precludes creditors from offering promotional items in exchange for credit card applications on or near a university campus or sponsored event.
The CARD Act also expands liability for TILA and FCRA violations. Civil liability under TILA for violations of open end consumer credit plans is increased to twice the amount of any finance charge with a minimum of $500 and a maximum of $5,000. The $5,000 limit may even be exceeded where there is a pattern or established practice of violations. Attorney's fees are also recoverable.
TILA and FCRA have long been favorites of the plaintiffs' class action bar. Given the CARD Act's generous recoveries, as well as the all important ability to recover attorney's fees for violations, it is likely that the Act will spawn a significant number of new lawsuits.