A summary of the salient provisions of the new legislation and its effects on credit card issuers, consumers and the industry.
On Friday, May 22, 2009, President Obama signed into law the Credit Card Accountability, Responsibility and Disclosure Act of 20091 (the “Credit CARD Act”), effective February 22, 2010, which amends the Truth in Lending Act (TILA) by establishing new and revised practices and disclosures relating to the extension of consumer credit, and amends the Electronic Fund Transfer Act (EFTA) by establishing new requirements applicable to issuers of gift certificates and prepaid/gift cards. The new legislation had been extensively debated in Congress over the past several months, and involved the combination of credit card reform legislation separately2 introduced in both houses of Congress, implementation of a significant bipartisan agreement and a specific request3 by President Obama for Congress to take final action to pass a credit card reform bill that “protects American consumers” by the Memorial Day holiday.
The call to reform credit card industry practices had been initially prompted by various members of Congress and consumer advocates seeking to expand the rules issued by federal banking regulators4 this past December banning certain credit card practices they determined to be inherently unfair and deceptive—rules scheduled to take effect July 2010. Members of Congress and consumer advocates alike lauded the regulators’ adoption of these rules, but many called for quicker and broader reform measures backed by force of statute. The Credit CARD Act is the culmination of this call to action.
The new restrictions and requirements imposed on credit card and gift card issuers by the Credit CARD Act are substantial and comprehensive. Set forth in Part II below is a summary of certain key provisions of the Credit CARD Act. Part III discusses the relationship between the Credit CARD Act and the most recent credit card rules promulgated by the federal banking regulators this past December and, in Part IV, we set forth our view of the technological and financial impacts the Credit CARD Act will likely have on credit card issuers, consumers and the industry.
II. Key Provisions of the Credit CARD Act
A. Title I – Consumer Protection
Title I of the Credit CARD Act sets forth new consumer protection requirements applicable to creditors (generally referred to in this advisory as credit card issuers) in connection with obligors (generally referred to in this advisory as cardholders or consumers) and credit card accounts.
1. Notice Required for Changes to Cardholder Agreement – New TILA Section 127(i)
The Credit CARD Act requires credit card issuers to provide at least 45 days’ advance written notice to cardholders of any “significant” changes to the terms of a cardholder agreement, including any increase in the applicable annual percentage rate (APR), unless the anticipated APR change was previously disclosed to the cardholder as an account feature (e.g., where the APR increases at the end of a promotional period, is tied to an index such as LIBOR or relates to the termination of a temporary hardship program between the issuer and the cardholder). Determination of what constitutes a “significant change” (other than an interest rate increase, which is always subject to the notice requirement) was delegated to the Federal Reserve Board through its rulemaking process. Each such change notice must inform the cardholder of the right to cancel the account before the effective date of the change and thereby avoid its effects. In addition, credit card issuers are prohibited from treating a cardholder’s closure or cancellation of a card account as a default under the cardholder agreement, or from assessing any penalty or requiring repayment of any outstanding balance in a manner that is less beneficial to the cardholder than the methods required by new amendments to TILA Section 171 (see Part II.A.2 below) upon the cardholder’s cancellation of the account.
Although the Credit CARD Act and amendments made by it will be effective on February 22, 2010, the notice provisions described above will be effective on August 20, 2009.
2. Limitations on Increasing Interest Rates/Fees on Outstanding Balances and Prohibition on Universal Default – New TILA Section 171 (current Section 171 is redesignated as Section 173)
The Credit CARD Act prohibits APR, fee and finance charge increases on outstanding balances except under the following circumstances:
- expiration of a promotional rate, the terms and duration of which (and the rate applicable upon the expiration of which) were disclosed to the cardholder at the onset of the promotional period;
- adjustments in a publicly available third-party index to which a variable APR is tied (e.g., changes in LIBOR), as previously disclosed to the cardholder;
- expiration of, or termination in the event of the cardholder’s failure to comply with, a hardship/workout plan entered into between the cardholder and the credit card issuer, provided that the APR, fee or finance charge applicable after such event may not exceed the APR, fee or finance charge that applied prior to entry into the hardship/workout plan; or
- the cardholder is more than 60 days delinquent in making a required minimum payment on the account.
If an APR, fee or finance charge is increased due to a cardholder payment delinquency, the credit card issuer must return the increased interest rate, fee or finance charge to the pre-default value if the cardholder brings the account current and remains current for the six-month period after the increase was imposed.
Additionally, in general, a credit card issuer may not require a cardholder that has provided notice under Section 127(i) to terminate a card account due to an increased APR, fee or finance charge to repay any outstanding balance by a method or on a timetable that is less beneficial to the cardholder than either of the following:
- a five-year amortization period, beginning on the effective date of the APR, fee or charge increase; or
- a required minimum payment that includes a percentage of the outstanding balance that is not more than twice the percentage required before the effective date of the APR, fee or charge increase.
3. Required Reductions in Future Balance Rate Increases; Additional Limitations on Rate Changes and Promotional Rates – New TILA Sections 148 and 172
A credit card issuer that increases the APR applicable to a cardholder’s future balances based on factors (including cardholder risk, market factors or other conditions) must notify the cardholder of the factors contributing to the rate increase decision. The credit card issuer must re-evaluate these factors at least once every six months and, if factors leading to the rate increase decision have decreased since the rate increase was implemented, the issuer must reduce the cardholder’s rate based upon the change in such factors.
Credit card issuers may not increase the APR, fees or finance charges on a credit card account during the first year after the account is opened except upon the occurrence of one of the four conditions (as identified in Part II.A.2 above) under which the issuer may increase the APR, fees or finance charges on an outstanding balance. Additionally, any promotional rate offered in connection with a credit card account may not be increased for at least six months after the promotional rate takes effect, subject to reasonable exceptions that may be established by the Federal Reserve Board.
4. Limitations on Fees and Interest Charges – Amendments to TILA Section 127
With limited exceptions, credit card issuers are prohibited from imposing a finance charge on a credit card account as a result of the loss of any time period provided by the credit card issuer within which the cardholder may repay without incurring a finance charge:
- any balance for days in a prior billing cycle (i.e., double-cycle billing); or
- any balance for the current billing cycle that is repaid during the grace period.
Credit card issuers may not charge over-the-limit fees for honoring charges in excess of the credit line unless the consumer has been notified of the fee in advance and has expressly elected to receive overdraft protection services that will result in imposition of the fee. Additional limitations apply to the frequency on which over-the-limit fees may be assessed and additional requirements relate to periodic statement disclosure of over-the-limit fees.
In addition, credit card issuers may not charge a cardholder a fee to repay borrowings or finance charges by mail, electronic transfer, telephone authorization or other means unless the fee relates to an expedited payment service provided by a credit card issuer service provider.
5. Restrictions on Penalty Fees – New TILA Section 149
Any late payment, over-the-limit or other penalty fee or charge assessed in connection with a cardholder’s violation of the cardholder agreement must be “reasonable and proportional” to the violation. The Credit CARD Act does not purport to define or provide guidance on what constitutes a reasonable or proportional fee or charge; rather, the federal banking regulators are charged with issuing rules that establish standards for making these determinations, including rules establishing safe harbor penalty fees or charges for certain violations as the regulators deem appropriate. In issuing the rules, federal banking regulators must consider (i) the costs incurred by the credit card issuer in connection with the violation, (ii) deterrence of such violations, (iii) the cardholder’s conduct and (iv) other factors deemed necessary or appropriate.
6. Balance Allocation of Card Payments – Amendments to TILA Section 164
Credit card issuers must apply payment amounts in excess of the minimum payment first to the card balance bearing the highest interest rate and then to additional balances in successive order of declining interest rate. However, where a balance is subject to a deferred interest arrangement, the entire amount of a payment in excess of the minimum payment must be applied to the deferred interest balance during the last two billing cycles immediately prior to expiration of the interest deferral period.
7. Restrictions on Fees for Subprime or “Fee Harvester” Cards – Amendments to TILA Section 127
If a cardholder is required to pay fees in connection with a credit card account during the first year after the account is opened (other than late fees, over-the-limit fees or payment insufficient funds fees), and such fees exceed, in the aggregate, 25 percent of the total credit available under the credit card account, none of the fees may be charged to the credit card account.
8. Periodic Statement Requirements – Amendments to TILA Section 127
A cardholder’s payment due date must be the same day each month. In addition, if the payment due date is a day on which the issuer does not receive or accept payments (e.g., a weekend or holiday), a payment received on the next business day must be treated as timely.
9. Timing of Payments – Amendments to TILA Section 163
A credit card issuer may not treat a cardholder payment as late unless the issuer has adopted “reasonable procedures” to ensure that the periodic statement is mailed or delivered to the cardholder at least 21 days before the payment due date. If a credit card issuer provides a grace period within which a cardholder may repay any portion of a balance without incurring an additional finance charge, such a grace period must extend for at least 21 days after the periodic statement reflecting such balance is mailed or delivered to the cardholder.
10. Consideration of Ability to Repay – New TILA Section 150
Credit card issuers are prohibited from opening card accounts or increasing credit limits for consumers without considering the ability of the consumer to make the required minimum payments under the account.
B. Title II – Enhanced Consumer Disclosure
Title II of the Credit CARD Act sets forth new and revised credit card issuer disclosure requirements related to consumer credit card accounts.
1. Payoff Timing Disclosures – Substitute TILA Section 127(b)(11)
Card account periodic statements must include the following balance payoff disclosures:
- a warning, in substantially the form set forth in the Credit CARD Act, that making only the minimum payment will increase the amount of interest paid and the amount of time required to repay the balance
- a balance repayment table that includes
- the number of months required to pay off the balance if the cardholder pays only the minimum monthly payment and incurs no additional charges to the card account;
- the total cost, including principal and interest, of paying the balance in full if the cardholder pays only the minimum monthly payment and incurs no additional charges to the card account;
- the monthly payment required to pay off the entire balance in 36 months (assuming no further advances) and the total cost to the cardholder (including principal and interest) of paying the balance off over 36 months; and
- a toll-free telephone number at which the cardholder may obtain information about credit counseling and debit management services.
2. Late Payment Deadline and Penalty Disclosures – Amendments to TILA Section 127(b)(12)
If a late fee or charge may apply in the event of a cardholder’s failure to make a payment on or prior to the due date for such payment, the periodic statement with respect to such account must include, in a conspicuous location, the date on which the payment is due or, if different, the date on which a late payment fee will be charged and the amount of the fee. Further, if one or more late payments may result in an increase in the APR applicable to the card account, the periodic statement with respect to that account must state that fact in a conspicuous location and in close proximity to the payment due date, and must disclose the penalty interest rate in the event of one or more late payments.
3. Internet Posting of Credit Card Agreements – New TILA Section 122(d)
Each credit card issuer must establish and maintain an Internet site where the issuer posts the cardholder agreement between the issuer and the cardholder. In addition, each credit card issuer must provide the Federal Reserve Board with an electronic copy of each cardholder agreement posted to the credit card issuer’s Internet site, which the Federal Reserve Board will publish in a publicly available Internet repository of cardholder agreements.
C. Title III – Protection of Young Consumers
Title III of the Credit CARD Act sets forth additional protections for credit card holders and prospective credit card holders under the age of 21.
1. Extensions of Credit to Consumers Under Age 21 – New TILA Section 127(c)(8) and 127(p)
Credit card issuers may not issue a credit card to a consumer under the age of 21 unless the consumer has submitted a written application that
- is signed by a cosigner over the age of 21 having means to repay debts incurred by the consumer under the card account and indicating joint liability for debts incurred by the consumer until the consumer has attained the age of 21; or
- includes consumer financial information indicating that the consumer has the independent means of repaying extensions of credit in connection with the card account.
Any cosigner on an account where the primary cardholder is under the age of 21 must consent in writing to a credit line increase and further assume joint liability for such an increase.
2. Extensions of Credit to College Students – New TILA Section 140(f)
Institutions of higher education must publicly disclose any credit card marketing contracts between the institution and any credit card issuer, and credit card issuers are prohibited from offering any tangible item to induce a student at an institution of higher education to apply for a credit card if the offer is made on or near the institution’s campus or at an institution-sponsored or related event.
D. Title IV – Gift Cards
Title IV of the Credit CARD Act amends the EFTA by adding new restrictions on the fees that may be charged in connection with certain prepaid/gift cards and gift certificates, and on expiration dates that may be established for certain prepaid/gift cards and gift certificates. Title IV and the amendments made by Title IV will be effective in August 2010 (15 months after the date of enactment of the Credit CARD Act).
1. Relevant Definitions – New EFTA Section 915(a)
- “Dormancy fee” and “inactivity charge or fee” mean a fee, charge or penalty for non-use or inactivity of a gift certificate, store gift card or general-use prepaid card.
- “General-use prepaid card” means a card, payment code or device that is (i) redeemable at multiple, unaffiliated merchants or service providers or ATMs; (ii) issued in a requested amount (whether or not the amount can be increased or the card reloaded); (iii) purchased or loaded on a prepaid basis; and (iv) honored by merchants for goods and services or at ATMs.
- “Gift certificate” means an electronic promise that is (i) redeemable at a single merchant or an affiliated group of merchants that share the same name, mark or logo; (ii) issued in a specified amount that cannot be increased or reloaded, (iii) purchased on a prepaid basis; and (iv) honored by the single merchant or affiliated group of merchants for goods or services.
- “Store gift card” means an electronic promise, plastic card or payment code or device that has the same characteristics as a gift certificate but that may or may not be increased in amount or reloaded.
- Excluded from the definitions of “general-use prepaid card,” “gift certificate” and “store gift card” is any electronic promise, plastic card or payment code or device that is (i) reloadable and not marketed as a gift card or gift certificate; or (ii) a loyalty, award or promotional gift card, as defined by the Federal Reserve Board; or (iii) not marketed to the general public; or (iv) redeemable only for admission to events or venues at a particular location or group of affiliated locations.
- “Service fee” means a periodic fee, charge or penalty for holding or using a general-use prepaid card, a gift certificate or a store gift card, other than a one-time initial issuance fee.
2. Prohibitions on Fees – New EFTA Section 915(b)
The Credit CARD Act prohibits any person from imposing a dormancy fee, an inactivity charge or fee or a service fee on a general-use prepaid card, gift certificate or store gift card except
- if there has been at least 12 months of inactivity on the card or certificate;
- the card or certificate clearly and conspicuously states the existence, amount, assessment frequency and triggering events (if any) regarding the fee or charge;
- the issuer or seller of the card or certificate informed the purchaser of the applicable fees and charges prior to purchase of the card or certificate; and
- no more than one fee is charged in any given month.
These restrictions on dormancy fees, inactivity charges or fees and service fees do not apply to any award, loyalty or promotional cards distributed without money or other value paid by the customer for the card or certificate.
3. Restrictions on Expiration Dates – New EFTA Section 915(c)
No person may issue or sell a general-use prepaid card, gift certificate or store gift card that is subject to an expiration date except when
- the expiration date is at least five years after the issuance date, in the case of a gift certificate, or the date on which funds were last loaded, in the case of a store gift card or general-use prepaid card; and
- the expiration terms are clearly and conspicuously stated.
4. Federal Reserve Board Rulemaking and Preemption – New EFTA Section 915(d) and Amendments to EFTA Section 920
The Credit CARD Act vests the Federal Reserve Board with discretion to determine the extent to which other EFTA provisions (e.g., initial disclosure, periodic statement and error resolution requirements) should apply to general-use prepaid cards, gift certificates and store gift cards.
The Credit CARD Act also expressly provides that the new EFTA fee and expiration date provisions related to general-use prepaid gift cards, gift certificates and store gift cards do not alter or preempt any more restrictive state laws (i.e., state laws that provide greater consumer protections).
E. Title V – Miscellaneous Provisions
Title V of the Credit CARD Act sets forth a number of miscellaneous provisions, many of which require various government agencies to conduct investigations or studies, and some of which capture amendments to the Credit CARD Act unrelated to its core purpose. A few of the more noteworthy miscellaneous provisions are summarized below.
- Study and Report on Interchange Fees – Within 180 days after the date of enactment of the Credit CARD Act, the Comptroller General of the United States must conduct a study of and provide a report to Congress on the use of credit by consumers, interchange fees and the effects of interchange fees on consumers and merchants.
- Review of Consumer Credit Plans and Regulations – Within two years after the effective date of the Credit CARD Act, and every two years thereafter, the Federal Reserve Board must conduct a review of and report to Congress on consumer credit card marketing, cardholder agreement terms, disclosure practices and other factors, to determine if additional or revised rulemaking is appropriate to adequately protect consumers and to determine if the Credit CARD Act has affected the availability of credit, issuer safety and soundness, use of risk-based pricing or product innovation.
- Bank Secrecy Act Rulemaking Relating to Stored Value – Within 270 days after enactment of the Credit CARD Act, the Secretary of the Treasury, in consultation with the Secretary of Homeland Security, must issue regulations implementing the Bank Secrecy Act with respect to the sale, issuance, redemption or international transport of stored value, including stored value cards.
- Protecting Americans From Violent Crime – The Secretary of the Interior is prohibited from promulgating or enforcing any regulation that prohibits individuals from possessing firearms in any national park or national wildlife refuge, if such possession is in compliance with state law and the individual is not otherwise prohibited by law from possessing a firearm.
III. Effect of the Credit CARD Act on Recent Unfair and Deceptive Acts and Practices Rulemaking by Federal Banking Regulators
The Credit CARD Act swallowed the purpose and effect of the December 2008 joint rulemaking by the Federal Reserve Board, the Office of Thrift Supervision (OTS) and the National Credit Union Administration (NCUA) (collectively, the Banking Regulators) proscribing certain credit card lending practices as per se unfair and deceptive under their Federal Trade Commission Act (“FTC Act”) rulemaking authority. In their December 2008 rules, the Banking Regulators established the new requirements and prohibitions in connection with credit card accounts summarized below.
- Credit card issuers may not treat a credit card account payment as late for any purpose unless the cardholder has been provided a “reasonable” amount of time to make the payment (with a safe harbor that applies where the issuer has adopted reasonable procedures designed to ensure that periodic statements are mailed or delivered to cardholders at least 21 days before the payment due date).
- Credit card issuers must allocate card account payments in excess of the minimum payment either (a) entirely to the card account balance carrying the highest annual percentage rate, or (b) pro rata among the card account balances.
- Credit card issuers must disclose the applicable interest rate at the account opening and may not increase the interest rate except (a) upon the expiration of a promotional period that was disclosed at the account opening; (b) after the first year following the account opening, provided the issuer provides the cardholder with at least 45 days’ notice of the rate increase and the rate increase applies only to new transactions and not to existing balances; (c) where the rate is a variable rate linked to a publicly available index and the increase is tied to a change in the index; and (d) where the cardholder is more than 30 days delinquent in making a required minimum payment.
- Credit card issuers may not impose a finance charge based on balances for days in prior billing cycles as a result of the loss of a grace period (i.e., no double-cycle billing).
- Credit card issuers may not finance, using the available card account balance, any security deposit or fees for credit availability or card issuance if, during the first year after opening the account, the deposit or fees exceed 50 percent of the credit line, and credit card issuers must spread any security deposit or fees for credit availability or card issuance in excess of 25 percent of the credit line over at least the first six months, rather than assessing the deposit and/or fees entirely in the first billing cycle.
The provision of the Credit CARD Act described in Part II.A.9 of this advisory essentially codified the substance of the Banking Regulators’ rule summarized in point 1 above, by requiring that credit card issuers adopt reasonable procedures to ensure that their cardholders receive periodic statements at least 21 days before the payment due date if the issuer wishes to treat any payment received after the due date as late.
The provision of the Credit CARD Act described in Part II.A.6 of this advisory codified a more stringent payment allocation requirement than the alternative approach adopted by the Banking Regulators and summarized in point 2 above. Where the Banking Regulators would have permitted the credit card issuer to allocate payments in excess of the minimum payment pro rata among card account balances, the Credit CARD Act requires that the entire amount of the excess payment be allocated to the balance bearing the highest interest rate.
The provisions of the Credit CARD Act described in Parts II.A.1-3 of this advisory effectively supersede the Banking Regulators’ rule summarized in point 3 above, with more stringent restrictions on the rights of credit card issuers to increase interest rates on outstanding and future account balances. Most notable are the additional requirements under the Credit CARD Act that the cardholder be more than 60 days delinquent in a payment before the issuer may increase the interest rate applicable to outstanding balances, the requirement that any default interest rate applied to an outstanding balance be reduced to the pre-default rate if the cardholder cures the default and remains current for the six-months thereafter, and the requirement that issuers identify the factors supporting a rate increase applicable to future balances and subsequently reduce the rate if the reasons that supported the increase subside.
The Credit CARD Act’s codification of a prohibition on double-cycle billing, as described in Part II.A.4 of this advisory, moots the rulemaking summarized in point 4 above, and the Credit CARD Act’s prohibition against a credit card issuer charging to the card account certain fees or charges greater than 25 percent of the available credit amount is more restrictive than the Banking Regulators’ rulemaking summarized in point 5 above.
In light of the Credit CARD Act’s codification of equally or more stringent restrictions on credit card issuer practices than were generally included in the Banking Regulators’ FTC Act rulemaking, we expect the Federal Reserve Board to revoke its December 2008 FTC Act rules and to issue new rules, as directed in the Credit CARD Act, under its TILA rulemaking authority. It is not clear how the OTS and the NCUA will respond to the Credit CARD Act, given that these agencies do not have general rulemaking authority under TILA.
Issuers of credit cards and prepaid/gift cards alike are continuing to analyze the ramifications of the Credit CARD Act, both in terms of its technological and financial impacts. Most credit card issuers had begun to upgrade systems and adjust credit card lending practices in response to the Banking Regulators’ December 2008 rulemaking, but the Credit CARD Act has both expanded and accelerated those issuer compliance burdens. From a systems perspective, credit card issuers will certainly incur significant costs in the near term to modify existing billing and information systems to comply with the new requirements. In addition to these costs, the new restrictions on credit card issuers’ ability to re-price outstanding balances on credit card accounts based on changing cardholder risk characteristics and to assess fees for certain types of cardholder behavior will likely result in reduced revenue to the credit card issuers. The magnitude of that reduction remains to be seen. Nevertheless, in an effort to compensate for lost revenue due to new requirements of the Credit CARD Act, credit card issuers likely will engage in greater up-front risk profiling of card account applicants, reduce credit availability to riskier cardholders and re-price existing portfolios prior to the Credit CARD Act’s February 22, 2010, effective date.
Likewise, issuers of prepaid/gift cards will also see reduced fee revenue as a result of the Credit CARD Act’s restrictions. In particular, federally chartered financial institutions that issue prepaid/gift cards, which have historically enjoyed significant revenue from dormancy and service fees and have operated unencumbered by state consumer protection laws restricting fees and expiration dates thanks to the preemption that attaches to their federal charter, will be required to significantly revise their prepaid/gift card programs to comply with the fee and expiration date restrictions of the Credit CARD Act. State-chartered financial institutions, which issue prepaid/gift cards that have historically been subject to state consumer protection laws restricting fees and expiration dates, will also need to adjust their programs to comply with the Credit CARD Act, but these issuers are accustomed to dealing with fee and expiration date restrictions and so the changes may be less burdensome.
In a sense, the Credit CARD Act has partly leveled the playing field between state-chartered financial institutions and their federally chartered counterparts in their roles as prepaid/gift card issuers. While the full effects of the Credit CARD Act remain to be seen, expect issuers of credit cards and prepaid/gift cards to assess new fees in connection with card accounts of all types. Services that once were offered at no direct cost to the consumer will likely become fee-for-service offerings in the near future as issuers seek out sources of revenue to replace those lost under the Credit CARD Act. Perhaps the greatest beneficiaries of the Credit CARD Act, besides consumers who have historically paid high fees and penalty interest rates for their use of credit card accounts, will be payments industry participants heavily weighted toward the debit card market, as the effects of the Credit CARD Act are likely to amplify the shift in consumer preference towards the use of debit cards.