Network News

X My Profile
View More Activity





Posted at 7:00 AM ET, 02/22/2011

New studies show changes to credit cards after landmark law

By Ylan Mui

One year after sweeping reforms of the credit card industry took effect, two new government surveys released Tuesday found that card issuers have largely stopped hiking interest rates on customers' existing balances, reduced penalty fees and all but eliminated overlimit charges.

But the studies also outlined new tactics used to skirt the law that prompted calls for a new approach to regulating the industry.

The Credit Card Accountability, Responsibility and Disclosure Act -- helpfully shortened to the CARD Act -- that took effect Feb. 22, 2010, ushered in a dramatic transformation in the way credit card issuers acquired new customers and charged existing ones. It was designed to prevent the most vulnerable (or, perhaps risky) clients from paying exorbitant interest rates and fees, but card issuers warned it could also lead to higher charges for some good customers.

The Consumer Financial Protection Bureau, which will be responsible for administering the law starting this summer, surveyed nine of the largest card issuers, which represent 90 percent of the market. It found that the number of accounts that saw interest rate increases on existing balances -- a practice prohibited under the law unless a customer is late on two consecutive payments -- dropped from 15 percent of accounts to 2 percent. However, issuers are still allowed to raise rates for any new purchases, and one bank periodically reviews accounts to do just that, according to the report. Five others raise rates on delinquent customers, and another bank is testing the practice.

The CARD Act also set new restrictions on late fees, capping them at $25 for the first violation and $35 for the second. However, the fee cannot exceed the minimum payment due. That has helped slash the amount consumers pay in late fees in half, dropping from $901 million in January 2010 to $427 million in November 2010, according to a survey by the Office of the Comptroller of the Currency that was also released Tuesday. But there's a catch: The CFPB found that some banks were raising the minimum payment due, allowing them to charge higher fees.

Another provision of the law forbid issuers from charging over-limit fees to customers unless they expressly opted in to the service. That has virtually eliminated the practice, with the penalty charged to just 1 percent of accounts each year compared to 12 percent, according to the CFPB. Six of the largest card issuers never charge over-limit fees, even if they the process the transaction.

In a prepared statement, CFPB special adviser Elizabeth Warren acknowledged the changes the industry has made and applauded card issuers that have gone beyond the letter of the law.

"Much of the industry has gone farther than the law requires in curbing re-pricing and over-limit fees," she said. "Leaders in the industry deserve credit for moving in the right direction."

However, Warren warned that new regulations may be needed as issuers find ways to circumvent the law. That process, which some advocacy groups have referred to as "whack-a-mole," is costly for both sides, Warren said. Finding a way to regulate the market without extensive rule-making will be part of the CFPB's challenge, she said.

Still, many consumers are unaware of the law or the changes it has wrought, according to the CFPB study. Less than half of consumers say they are very or somewhat familiar with the law, while 30 percent said they are not familiar with it at all.

Meanwhile, at least one consumer advocacy group is pushing for even greater changes. Consumers Union, a nonprofit that publishes Consumer Reports, called on the CFPB to lower penalty fees to $10 for the first violation and $15 for the second. The OCC found that the average late fee is now $23, down from $35 before the CARD Act. The group also urged the CFPB to curb increases in penalty interest rates. Under the law, once a customer has twice been late paying a bill, there is no limit to how high card issuers can raise the rate.

But the group acknowledged that the law has been a win for consumers.

"The CARD Act has made a big difference by putting an end to some of the bait and switch tactics that unfairly trap credit card consumers in high interest debt," said Pamela Banks, senior policy counsel for Consumers Union. "Thanks to the new law, consumers stand a much better chance of avoiding the credit card gotchas."

By Ylan Mui  | February 22, 2011; 7:00 AM ET
Categories:  Consumer Financial Protection Bureau, Federal Reserve, Regulation  
Save & Share:  Send E-mail   Facebook   Twitter   Digg   Yahoo Buzz   Del.icio.us   StumbleUpon   Technorati   Google Buzz   Previous: New consumer protection bureau headquarters to be across from White House
Next: Economic agenda: Wednesday, Feb. 23, 2011

Comments

whack a mole vs exotic scamming rates by credit card companies
= somebody is trying to protect us from the "fine print"

Posted by: Anonymous | February 22, 2011 9:57 AM | Report abuse

can I get a message to "Peggy" through this blog

Posted by: Anonymous | February 22, 2011 9:59 AM | Report abuse

This is crazy. “Issuers” intentionally searching for ways to “circumvent” the law? I remember when banks were afraid of thieves. Now they are the thieves. Here is a suggestion. Attach the interest paid on a credit card to the interest paid by a bank on a savings account. In short, if the bank is willing to pay 3 percent on a savings account, they can charge 3 percent for their credit card…etc…etc…etc…

Posted by: Anonymous | February 22, 2011 9:59 AM | Report abuse

This is one of the really good things that happened under the current administration. Before, you didn't have to be a credit risk to get hit with outrageous fees. Your previous credit history, no matter how stellar, might as well have not existed. Credit card companies made up new rules almost daily and consumers were helpless.

It's very troubling that something that can make a big difference for a majority of Americans, because everyone has an emergency situation from time to time, got so little attention beyond the initial announcement.

Posted by: cb11 | February 22, 2011 10:28 AM | Report abuse

Credit Card reform must slow down unless the pendulum is swung too far the otherway where delinquent users get away from taking advantage of lower penalties. Easy credit was partly to blame for the financial meltdown, making the value of money and real estate a fantasy land of real worth. Good credit card customers shouldn't have to begin taking on the debt and cost of bad users.

Posted by: Anonymous | February 22, 2011 10:50 AM | Report abuse

My main gripe with this law is that every statement is now at least two pages, because of the text they added at the top showing how long it would take to pay off my balance if I made the minimum payment and how much extra it would cost, etc.

Posted by: rjm1 | February 22, 2011 11:22 AM | Report abuse

Perhaps a more interesting question concerns what end up happening with debit cards. Many of the leaders in the banking industry have whined about the consequences of limits on the fees they can charge for debit card transactions. They claim they will not be able to offer any banking services to lower income Americans unless they are allowed to subsidize those services through monopoly pricing on debit card transactions. In fact, an effective financial agent should be able to handle debit card transactions at very low cost. Neither should there be any large expense in maintaining accounts used only for the purpose of settling debit card transactions. Perhaps at least one financial institution will appear that is at least effective enough at doing its business to make money providing basic financial services to all Americans.

Posted by: Anonymous | February 22, 2011 12:08 PM | Report abuse

So when will Congress do something about the 19% and higher interest rates?

These rates were raised in the year that Congress gave the banks to get ready for the passage of the law. They didn't do a thing about the banks raising the rates to ridiculous levels during that period.

How do they get away with such obscene rates when you have never missed a payment, never been late and always pay more than the minimum payment?

Posted by: Anonymous | February 22, 2011 1:17 PM | Report abuse

http://www.bankrate.com/brm/news/cc/20020320a.asp

For hundreds of years, societies all over the world have protected borrowers by limiting interest rates charged by lenders.

But in today's credit card market, American borrowers are on their own.

Less than half of all U.S. states bother to cap credit card interest rates, and few credit card issuers are based in these states anyway.

Most major credit card issuers are based in states without usury laws and without interest rate caps on credit cards. Banks and credit card issuers based in these states can charge any interest rate they wish -- as long as the rate is listed in the cardholder agreement and the borrower agrees.

And thanks to a 1978 U.S. Supreme Court decision, these the-sky's-the-limit rate policies dominate the credit card business.

In Marquette vs. First Omaha Service Corp., the Supreme Court ruled that a national bank could charge the highest interest rate allowed in their home state to customers living anywhere in the United States, including states with restrictive interest caps.

"It's whatever is agreed to in the contract," says Michael Donovan, a consumer attorney and partner at Donovan Searles in Philadelphia.

"They can export rates to other states and override state law limits."

When it comes to credit card interest rates, the law in a lender's home state rules. It doesn't matter what kind of rate cap exists in a customer's state.

A funny thing happened after the Marquette ruling. Major credit card companies began relocating to states with liberal or no usury laws. New York-based powerhouse Citibank moved its credit card business to South Dakota in 1981.

"Citibank went to South Dakota, not because South Dakota was a banking center but because it had that particular law," Donovan says.

In 1982, the four largest banks in Maryland relocated their credit card operations to Delaware because of that state's lender-friendly credit card laws. Other states with lender-friendly credit laws include Georgia, Illinois, Nebraska, Nevada, Rhode Island and Utah.
To hang on to the credit card business, many other states loosened state usury limits.

In the early '80s, most states capped credit card interest rates between 12 percent and 18 percent. Today's caps are in the 18-percent to 24-percent range.

Hawaii and the District of Columbia cap credit card interest rates at 24 percent, which isn't much of a cap at all. Missouri caps card rates at 22 percent. And Colorado, Indiana, Kentucky, Oklahoma, Tennessee and Wyoming allow credit card interest rates up to 21 percent.
"The unmistakable dynamic is in the direction of deregulation," says Mathew Street, associate general counsel at the American Bankers Association. ""The unmistakable dynamic is in the direction of deregulation," says Mathew Street, associate general counsel at the American Bankers Association. "The states have moved in the direction of raising the caps or removing the caps.

Posted by: MichelleKinPA | February 22, 2011 2:20 PM | Report abuse

Take a free market, and let it run for awhile. Note that it is somewhat ruthless, and some participants don't have "fair" or "good" outcomes. Regulate the market some seeking fairness for all. Guess what? The sellers in the market are going to do everything they can to legally replace the profits they lost through regulation. Keep regulating until the regulations stack up and you need six lawyers to tell you what remains that you can do legally. Then decide, to heck with it, we'll just get out of this business and put our capital to work somewhere else --- like overseas.

That's where we are headed with this relentless search for social nirvana.

Posted by: Curmudgeon10 | February 22, 2011 2:56 PM | Report abuse

Ms. Warren wants to make banks and credit card issuers into a charity for deadbeat losers. Free money for all! That's her goal.

Posted by: jibe | February 22, 2011 4:41 PM | Report abuse

Ms. Warren wants to make banks and credit card issuers into a charity for deadbeat losers. Free money for all! That's her goal.

Posted by: jibe
__________________________________________
Tea-baggers are so one-note it's pathetic. No matter what the story is about a Democrat or the Obama Administration it's always "they took our job"! or "they want our money"! These guys are such dupes! The ones you nutters really have to worry about are the ones chartering the tea-bagger buses to Madison and you don't even get it.

Posted by: Anonymous | February 22, 2011 8:55 PM | Report abuse

Ms. Warren wants to make banks and credit card issuers into a charity for deadbeat losers. Free money for all! That's her goal.

Posted by: jibe
__________________________________________
Tea-baggers are so one-note it's pathetic. No matter what the story is about a Democrat or the Obama Administration it's always "they took our job"! or "they want our money"! These guys are such dupes! The ones you nutters really have to worry about are the ones chartering the tea-bagger buses to Madison and you don't even get it.

Posted by: Anonymous | February 22, 2011 9:00 PM | Report abuse

I would like to see a restoration of anti-usury restrictions. On one credit card, I am being charged an annualized percentage interest rate of 7.24%. While the lenders' cost of capital is close to zero (and has been that way for at least a couple of years), I feel that spread is reasonable allowing for standard operating costs and risk of defaults. Two other cards, on which I will not put new debt, charge 21.24% and 23.99% respectively, with the same rough levels of risk and operating expense.

There ought to be some restriction on these absurdly exploitative high interest rates, which help to create insurmountable debt levels; that is they almost lock in an inevitable default, and, even if that is avoided, a lot of unnecessary misery on the part of consumers. In other words, they help to create the problems they purport to fear.

Usury used to be thought of as negatively as what lenders would call abdication of personal responsibility on the part of borrowers.

Posted by: brombonz | February 22, 2011 9:46 PM | Report abuse

I would like to see a restoration of anti-usury restrictions. On one credit card, I am being charged an annualized percentage interest rate of 7.24%. While the lenders' cost of capital is close to zero (and has been that way for at least a couple of years), I feel that spread is reasonable allowing for standard operating costs and risk of defaults. Two other cards, on which I will not put new debt, charge 21.24% and 23.99% respectively, with the same rough levels of risk and operating expense.

There ought to be some restriction on these absurdly exploitative high interest rates, which help to create insurmountable debt levels; that is they almost lock in an inevitable default, and, even if that is avoided, a lot of unnecessary misery on the part of consumers. In other words, they help to create the problems they purport to fear.

Usury used to be thought of as negatively as what lenders would call abdication of personal responsibility on the part of borrowers.

Posted by: brombonz | February 22, 2011 9:46 PM | Report abuse

The amazing thing is if the Republicans were in charge NONE of this would have happened. All the goodies on the table are there for the monied and the powerful and NO one else. If banks stick it to you then it's YOUR own fault.

Posted by: Anonymous | February 23, 2011 11:41 AM | Report abuse

Our supported Bank of American has started to charge its credit card holders with no late payments an annual card fee of $59 per year. They will close the account if you do not accept the new fee.

Posted by: Anonymous | February 23, 2011 12:14 PM | Report abuse

Post a Comment

We encourage users to analyze, comment on and even challenge washingtonpost.com's articles, blogs, reviews and multimedia features.

User reviews and comments that include profanity or personal attacks or other inappropriate comments or material will be removed from the site. Additionally, entries that are unsigned or contain "signatures" by someone other than the actual author will be removed. Finally, we will take steps to block users who violate any of our posting standards, terms of use or privacy policies or any other policies governing this site. Please review the full rules governing commentaries and discussions.




characters remaining

 
 
RSS Feed
Subscribe to The Post

© 2011 The Washington Post Company