Breaking Down the Credit Card Act’s Clarifications

Photo courtesy of Andres Rueda via Flickr

A few weeks back, the Federal Reserve issued a series of clarifications regarding the Credit CARD Act of 2009. While the last of the regulations were implemented about a year ago, issuers have tried to sidestep the intent of the regulation.

“There are some issues that simply were not provided for in the legislation, or that the legislation resolved in a way that is now raising concerns,” spokesman Dean DeBuck said. “Where we find violations of new or existing requirements we will insist on immediate correction and will take formal enforcement action where appropriate to the circumstances.”

The Fed’s new guidelines should offer clarity, but some have also provoked new controversy.

Individual Income Vs. Household Income

The Back story: In the free-flowing credit days, lenders would give high credit ceilings to people who simply couldn’t afford to pay back what they borrowed. The legislation required issuers to consider an applicant’s ability to repay debt when considering new or increased credit limits. This provision was meant to prevent the unemployed or underemployed from getting into too much debt; student credit cards, in particular, came under fire.

The Response: Banks asked for “household income” on credit card applications, a vague term that could include a spouse’s or parent’s income, and one that the Fed does not believe accurately reflects the applicant’s ability to pay.

The Clarification: Banks must now consider “individual income.” This more restrictive definition requires banks to consider how much the applicant makes.

On the one hand, this is a sensible way to keep a two-bowls-of-Ramen-away-from-broke college student working at Applebee’s over break from getting a $3,000 credit limit. On the other, some argue the provision unfairly hurts stay-at-home parents, who may manage the household’s income but do not technically draw a salary. The Federal Reserve notes that credit card companies can issue joint accounts, but victims of domestic abuse may be prevented from gaining financial independence.

Waived (and Then Un-Waived) Interest Rates

The Back Story: The CARD Act aimed to curb the use of “teaser” rates: Low interest rates that skyrocketed after an introductory period. To that end, the law prohibited raising interest rates on new transactions in the first year.

The Response: Citigroup, for one, issued cards with an interest rate of as much as 29.9% APR, and then offered to refund up to 70 percent of the finance charges, effectively giving cardholders an 8.9% rate. The bank could later charge the 29.9% rate with impunity, because they were reverting to an original interest rate rather than raising it. At the time, Citi said that “the rebate offer is clear, transparent, and we believe fully within the spirit of the CARD Act.”

The Clarification: The Federal Reserve ruled that the same rules for interest rate hikes applied to waivers: Unless a cardholder is 60 days delinquent, a waiver cannot be revoked in the first year and the cardholder must be given 45 days’ notice.

Credit Card Fee Limits

The Back Story: Some cards offered extremely low interest rates, but charged excessive credit card fees. For example, First Premier Bank offered the Centennial Gold MasterCard, with a 9.9% APR. The interest rate was substantially less attractive, though, when fees were taken into account: The card netted $250 in fees and a $300 limit. The CARD Act limited yearly fees to a maximum of 25 percent of the initial credit limit.

The Response: Some cards tacked on fees before the card was issued, thus classifying the fees as one-time, front-loaded expenses rather than annual fees. First Premier bank charged some cardholders a $95 “processing fee,” maintaining that the 25 percent cap “only applies to fees charged after the account is opened.”

The Clarification: The Fed announced that “application and similar fees that a consumer is required to pay before a credit card account is opened are covered by the same limitations as fees charged during the first year after the account is opened.” So, for example, an issuer that charges a $75 processing fee on a card with a $400 limit can only charge $25 more in fees during the first year.