Largely in response to increasing consumer demands and complaints about credit card company behavior and practices, in May 2009 Congress enacted the Credit Card Reform Act (CCRA), 15 U.S.C. § 1601. The CCRA reigns in some of the most abusive practices of the credit card industry, forbidding some practices entirely and imposing constraints on others. The CCRA is applicable to open-end credit accounts (accounts not secured by a home). Effective dates for the various provisions were set in three stages, but all provisions are now in effect. A great deal of emphasis in the new act is on required disclosures that must be made before credit card companies may impose certain changes in the terms of credit card accounts. The CCRA amends the Truth in Lending Act. The Truth in Lending Act requires five major types of disclosures: credit card applications and solicitations, account-opening disclosures, periodic statements, notices of changes in terms, and advertisements. The CCRA affects all types of required disclosures. Rule-making authority for the Truth in Lending Act, and, therefore, also the CCRA, belongs to the Board of Governors of the Federal Reserve Board. The Board has issued rules amending Regulation Z (Loan Originator Compensation and Steering) as required by the CCRA.
Advance Notice of Changes in Terms Required
At least 45 days advance written notice must be given by a creditor of any increase in interest rate or any other significant change to an account in an open-end consumer credit plan. The notice must include an explanation of the consumer’s right to cancel the contract before the effective date of the proposed changes. A consumer’s decision to cancel the contract rather than accept the announced changes shall not be considered a default and will not result in an immediate acceleration of the balance on the credit card account. The consumer shall have a minimum of five years to repay the balance on the same terms as existing prior to the announced change in terms.
In general, retroactive changes to the balance of a credit card account are prohibited. Notable exceptions to the rule are:
- The end of a pre-disclosed rate for a set limit of time, if the newly imposed rate does not exceed the disclosed rate (the new rate may not be imposed on transactions occurring prior to the pre-set term);
- The completion of a payment arrangement or failure to complete an agreed-upon payment arrangement; and
- The imposition of an increased interest rate when the minimum payment due on the account is 60 days or more past due, as long as (1) the creditor notifies the consumer of the reason for the increase and (2) the increased rate will terminate if the consumer makes timely payments for six months.
The CCRA strictly limits a creditor’s ability to increase interest rates. If credit risks, market conditions, or other factors make a creditor decide to increase a consumer’s interest rate and it is properly disclosed, the creditor is required to consider the same factors in the future in evaluation whether a reduction in the interest rate may be justified.
Major Changes to Credit Card Accounts
Interest rates may not be raised within the first year any credit card account is opened.
- Promotional rates may not expire in less than six months.
- Double-cycle billing is prohibited.
- No fees may be charged for a particular method of payment.
- All penalty fees must be reasonable and proportional to the violation.
- Payments in excess of the minimum payment due shall be applied first to the balance bearing the highest rate of interest.
- Payment dates for credit card accounts shall be the same date each month, and consumers shall be given a minimum of 21 days advance notice of payment due date.
- Creditors must post their credit card agreements on the Internet.
Opt-In Required for Over-the-Limit Fees
Creditors who wish to impose an over-the-limit fee must first disclose the proposed fee to its consumers and may only impose the fee if each consumer expressly opts in. Not opting in means no fees will be imposed but also means no charges over the consumer’s credit limit will be allowed. Even if the consumer elects the option of over-limit transactions and the resulting fee, a creditor may not impose the fee more than once per billing cycle, and the fee may not be imposed if only fees or interest pushed the balance over the limit.
In an effort to curb some of the abuses practiced by some credit card companies, the CCRA regulates the fees allowed to be charged for sub-prime or “fee-harvester” cards. A number of companies previously offered credit cards with low limits and charged fees for the issuance of the cards, fees which were charged to the new account and all but charged up the available credit on the new card.
Credit card companies are also required to give conspicuous disclosure on a credit card statement of the length of time it will take to pay off an account should only minimum payments be made. The disclosure must also show what the monthly payments would be to pay off the current balance within 36 months. Because this requirement is already in effect, your current credit card statements should already be making this disclosure.
Most consumers are aware of their right to receive one free credit report from each credit reporting agency per year. Some companies have advertised the availability of such reports but only in connection with purchasing an additional service such as credit reporting monitoring or identity theft protection. The CCRA prohibits the deceptive marketing of free credit reports and requires all advertisements to disclose that under federal law free credit reports are available at www.annualcreditreport.com.
The CCRA also reigns in the freewheeling marketing of credit cards to college students. Now credit cards may not be issued to persons under the age of 21 without a co-signer, and the creditor must take into consideration the consumer’s ability to repay the credit. Increased credit lines must be approved by an adult co-signer or parent. Colleges and universities must disclose agreements with credit card companies and are no longer permitted to offer incentives to college students for the signing up of credit cards on campus.
Gift cards are also covered by the new act. No dormancy, inactivity, or service fee may be imposed on a gift certificate, store gift card, or general use prepaid card any earlier than one year from the effective date of the card. All such fees must be prominently disclosed. It is unlawful to sell gift cards with an expiration date less than five years.
Under the CCRA, the Federal Reserve Board is directed to make several studies and reports to Congress.
The CCRA imposes both substantive law changes and changes in disclosure requirements. Violations of most disclosure requirements and many of the substantive provisions have a private cause of action remedy under the Fair Credit Billing Act. Both actual and statutory damages as well as attorney fees and court costs may be recovered by the successful plaintiff.
By enacting the CCRA, Congress intended to establish fair and transparent practices for open-end credit plans. Only time will tell whether the statute will be effective in limiting the practices previously permitted.