The Credit Card Accountability Responsibility and Disclosure Act of 2009
On May 22, 2009, President Obama signed into law the Credit Card Accountability Responsibility and Disclosure Act of 2009 (CARD Act). The Act imposes restrictions on many credit card issuer practices that have been the subject of criticism over the years. While most consumer advocates have acknowledged that the Act is a step in the right direction, many also agree that the law could have gone further and incorporated stronger and more meaningful protections for consumers. Below is a brief summary of the most significant substantive provisions of the new law, followed by a discussion of some of the ways in which the legislation could have done more for credit card users.
I. Key Provisions of the Act
- Section 101 – Protection of Credit Cardholders
- Requires 45 days advance written notice of an increase in interest rate, fee, or finance charge, or any other “significant change” in the terms of the cardholder agreement, as well as a statement of the consumer’s right to cancel the account before such change takes effect
- If the consumer chooses to cancel to avoid the change in terms, such cancellation cannot be treated as an event of default or result in a penalty or fee
- Prohibits increases in interest rates, fees, or finance charges on outstanding balances except for the previously disclosed expiration of a promotional rate; increases tied to an independent index (e.g., “prime plus” interest rates); increases after completion of a “workout” or hardship arrangement; increases resulting from failure to make minimum payment for 60 days after due date (such an increase must terminate in 6 months assuming on-time payments)
- Prohibits changing the terms of repayment for outstanding balances, except to implement an amortization period not less than 5 years or a minimum payment including a percentage of the balance no more than twice what it was before
- Requires issuers, after a rate increase, to consider a subsequent decrease based on credit risk, market conditions and other factors, at least every 6 months and to employ a “reasonable” methodology in making such decisions
- Prohibits increases in interest rate, fee, or finance charge for the first year after an account is opened (subject to the same exceptions as those for increases in rates applicable to outstanding balances)
- Requires promotional rates to be effective for at least 6 months
- Section 102 – Limits on Fees and Interest Charges
- Prohibits penalties for on-time payments and “double-cycle” billing
- Requires cardholders to opt-in before issuers may allow the processing of transactions that would increase the balance over the card’s credit limit, and limits the number of over-the-limit fees that can be imposed based on a single authorized transaction
- Prohibits fees imposed for particular payment methods (e.g., phone, electronic) unless the issuer is providing an “expedited service”
- Requires that all penalty fees be “reasonable,” in light of the cost to the issuer, the conduct of the cardholder, deterrence of future violations of the agreement and other factors
- Section 103 – Use of Terms Clarified
- Prohibits the use of the term “Fixed Rate” unless the rate will not change for any reason over the specified time period
- Section 104 – Application of Card Payments
- Establishes 5 p.m. as the uniform time of day before which a payment must be received to be considered as received on that day
- Requires that payments be applied first to the balances with the highest interest rates
- Section 105 – Standards Applicable to Initial Issuance of Subprime or “Fee Harvester” Cards
- Prohibits issuers from assessing fees against the credit line on cards where fees other than late, over-the-limit, or returned payment would amount to more than 25% of the total credit limit in the first year
- Section 106 – Rules Regarding Periodic Statements
- Requires due date be the same day each month
- If due date falls on a weekend or holiday, payments received next business day must be treated as on time
- Requires statement be delivered no less than 21 days before due date
- Requires grace period be at least 21 days
· Section 107 – Enhanced Penalties
- Increases penalties for violations of TILA to twice the amount of the finance charge at issue, with a minimum of $500 and a maximum of $5000
- Section 109 – Consideration of Ability to Repay
- Requires issuers to consider the ability of the consumer to make required payments before issuing a card or increasing a credit line
- Section 201 – Payoff Timing Disclosures
- Requires a warning on each bill that making only the minimum payment will increase the amount of interest and the time required to pay off the full balance as well as a table that sets forth: the number of months it would take to repay entire balance and the total cost in interest and principal if the cardholder pays only the minimum; the monthly payment that would be required and the total cost to pay off the full balance in 3 years; and a toll-free number for information about credit counseling services
- Section 202 – Requirements Relating to Late Payment Deadlines and Penalties
- Requires bills to disclose the date when a late payment fee will be imposed and the amount of the fee
- Requires bills to disclose any increase in interest rate that will result from late payments
- If the issuer is a bank with local branches, requires payments made at branches to be treated as having been received on the date the payment is made
· Section 204 – Internet Posting of Credit Card Agreements
- Requires card agreements to be posted on the internet
· Title III – Protection of Young Consumers
- Requires card applications from consumers under 21 to have a cosigner or to be accompanied by proof of ability to repay
- Requires parent’s approval for credit line increases on cards for which parent is jointly liable
- Requires disclosure of any agreements between colleges/universities and issuers and restricts promotional giveaways by issuers on or near campuses
· Title IV – Gift Cards
- Prohibits dormancy fees or service charges on gift cards for the first year after purchase, and limits fees to one per month
- Requires clear disclosure of any dormancy fees on the card and at the point of purchase
- Prohibits expiration of gift cards prior to 5 years from purchase and imposes disclosure requirements
II. Criticisms of the Act/Missed Opportunities
The most obvious protection that could have been, but was not, included in the CARD Act is a cap on interest rates. A proposal to cap rates at 15 percent failed to get the required number of votes when introduced by Sen. Bernard Sanders of Vermont. Since the Supreme Court’s decision in Marquette Nat’l Bank v. First of Omaha Service Corp., 439 U.S. 299 (1978), banks have effectively escaped any limitations on the interest rates charged on loans, including credit card loans, by incorporating in states that have no usury laws. The Marquette court held that national banks need only comply with the laws of the states in which they are located, even when making loans to customers located in other states. Though Federal Credit Unions operate under an interest rate cap similar to that proposed by Sanders for bank loans, he was unable to generate enough support for the proposal.
The CARD Act, though actually incorporating more stringent requirements than the final rules promulgated by the Federal Reserve last December in some respects (e.g., the Fed rules would have allowed application of payments among balances subject to different interest rates on a pro rata basis and would have allowed a rate increase if a minimum payment was 30 days late, as opposed to 60), the Act does not include among its disclosure requirements a statement of monthly and year-to-date interest and fee totals. Though the disclosure requirements that were included in the Act (effect of making only the minimum payment and required payments to pay off balance in 3 years) arguably present a more sobering depiction of the perils of borrowing more than one can afford, any additional disclosures could only increase the likelihood that cardholders would act to avoid further pitfalls.
Earlier legislative proposals contained some more consumer-protective terms. For instance, Rep. Carolyn Maloney (D-NY) floated a proposal in 2008 that required statements to be mailed 25 days before the payment due date, required issuers to allow consumers to set their own credit limits, and gave cardholders three billing cycles to reject changes in terms. Some of these provisions survived and were present in the version of the Credit Cardholder’s Bill of Rights that passed the House last year but failed to make it into the final bill.
Much criticism of the Act has centered on the fact that, with a few exceptions, the Act is not scheduled to take effect until February or August of 2010. The 45-day notice provision, including the right to cancel, and the requirement that statements be delivered at least 21 days before the payment due date are to take effect August 20, 2009, and the Fed has issued an interim final rule to implement those provisions. However, the restrictions on increasing rates, and on application of payments among balances, will not go into effect until February 2010. Consumer advocate predictions that giving card issuers such a generous lead time before enforcement of the regulations would encourage the banks to jack up interest rates and fees in anticipation of the crackdown seem to have been justified. Banks have been raising interest rates, raising minimum payments, and moving toward offering more variable rate cards to take advantage of projected increases in interest rate indexes.
Card issuers and their industry associations have also threatened to cut perks and reward programs, eliminating cash back and miles/points cards, as well as reinstating or increasing annual fees. This, not surprisingly, has resulted in some backlash from the public, in the form of complaints that responsible card users – those who do not overextend themselves and make payments on time – will suffer to protect those who were not responsible with their credit.
In sum, the Act is certainly significant in that it addresses some of the more egregiously anti-consumer provisions in card agreements that have been imposed by issuers. Whether, and if so, how quickly, the banks will come up with creative ways to milk consumers for more in interest and fees without running afoul of the letter of the new law remains to be seen. Consumers and consumer advocates should remain vigilant, and prepare to push for further curbs on the industry to ensure that the relationship between issuers and consumers is as fair as possible.
 A 1996 case, Smiley v. Citibank (South Dakota), N.A., 517 U.S. 735 (1996), established that late payment fees were also considered “interest” for purposes of the relevant statutes and regulations.
 See 12 U.S.C. § 1757(5)(A)(vi).