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Loopholes in the CARD Act are Under Fire From the Federal Reserve

Feb. 21, 2011
Credit Cards
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The Federal Reserve Board has published some potential amendments to 2009’s three-phase CARD Act, passed by Congress to shield Americans from predatory credit card schemes. As ever, some people have made routes around new regulations, exploiting blind spots in the act’s text. In light of these developments, the Reserve Board is proposing some new measures to add specificity to the existing content of the Act with the goal of closing loopholes. What kind of results can be expected from this change?

A Total Ban on Surprise Alterations of Interest

Under the new changes, your credit card company won’t be able to twist language to avoid disclosing when the amount of interest you’re being charged changes. As things stand today, companies are required to notify forty-five days before any changes in how much interest they assess on your balance. If we’re discussing a low apr credit card, the current Act requires that introductory rates must be maintained for the amount of time advertised at the outset, unless the cardholder is delinquent on their bills for over two months. But, this hasn’t prevented certain creditors from toying with language in order to get people to accept revocable refunds that have the final impact of raising overall rates.

The Wall Street Journal reports that Citibank provided one example of this approach, assessing interest on some customers at a rate of almost thirty percent and then turning around with an offer for a “rebate on up to seventy percent of the finance charges if they paid on time.” However, Citibank included stipulations that it could unilaterally end this relief without warning.

The Feds’ tightening of regulations should prevent such behavior in the future. According to the Board, such rebate programs will be subject to requirements for following through on advertised timing, just like offers for low introductory interest rates.

An End to “Fee Harvesters”

The new measures also stipulate that card issuers cannot profit from attaching outrageous fees to opening your account. At the moment, companies can only assess fees up to one-fourth of the worth of the cardholders’ line of credit. Nonetheless, some companies have made attempts to get around these restrictions by attaching fees to the process of signing up for a card, even earning the nickname “fee harvester credit cards.” According to these institutions, such charges are not covered under the CARD Act, which only makes reference to fees assessed on established accounts.

The WSJ also brings us an instance of such manipulation at the hands of First Premier Bank. First Premier assessed a $75 yearly fee and an additional $95 fee for processing on a card that’s attached to a three hundred dollar line of credit. The Fed’s additional stipulations would make this impossible to do within the law since all fees would be covered by the 25% ceiling.

Preventing Toxic Debt

The Reserve is also adding language to prevent people from taking out loans they can’t realistically pay back. Under the new rules, individual income, not household, will be the metric by which a loan applicant’s ability to pay down their debt will be assessed. So, if someone is trying to take out a loan, open a line of credit, or increase an existing one they need to either prove they can manage the debt or find someone else to vouch for them.

At the end of the day though, while these new measures will address past excesses, they’ll also inevitably be seen as new challenges to be surmounted by creditors out for quick profit. So, even though these new regulations have yet to fully go into effect, people are already wondering how the Fed will respond to the next wave of strategies to take advantages of consumers, and whether the Reserve will always be playing catch-up.