Despite the CARD Act being one of the most sweeping pieces of regulatory credit card legislation in years, some credit card companies did not get its message and have refused to operate with more transparency. They believed that simply meeting the letter of the law and ignoring its intent would be sufficient. However, in a move contradictory to over a decade of loose regulation that allowed, for example, unsafe mortgage lending practices to permeate unchecked and ultimately compound into a national recession, the Fed recently announced directives that will effectively close certain CARD Act loopholes and force comprehensive issuer compliance.
In its current form, the CARD Act restricts credit card companies from changing the interest rates of existing balances unless a consumer becomes 60 days delinquent. Some issuers have circumvented this condition by providing a certain interest rate which they then offer to waive for a period of time. These companies, however, retain the right to revoke these waivers at their own discretion and essentially change a card’s interest rate. Such a practice is legal, these companies maintain, because they are not offering a lowered introductory interest rate, they are simply temporarily waiving a card’s normal rate. However, the Fed’s loophole response—expected to take effect October 2011, at the earliest—classifies interest rate waivers in the same manner as introductory rate offers. Interest rate changes can only take place when an advertised promotion with set terms runs out and newly instituted rates do not apply to existing balances.
Furthermore, the CARD Act prevents credit card companies from assessing more than 25% of a credit cards limit in fees during the first year an account is opened. Certain banks take this provision extremely literally and claim that total fees can legally exceed 25% of a card’s limit as long as some of them are charged before an account is opened. The Fed addresses this practice in their new rules by explicitly holding that all fees count toward limit maximums, no matter when they are assessed.
Finally, some lenders currently use household income as an indicator of ability to pay. However, household income might provide a misleadingly high sense of payment capability and lead to people owing more than they can afford to pay back. Therefore, the Fed has mandated that personal income must be used for these purposes, effectively further protecting consumers from the unrealistically high loans and lines of credit that enabled so many of them to live beyond their means and brought about the Great Recession.
Such proactive action undertaken by the Fed signals improved consumer rights in the short-term while also representing a harbinger of future economic growth and well being in the United States. If the Fed continues to address problems quickly after they arrive, trends with serious consequences will be prevented and serious economic swoons will be prevented. Therefore, while the Fed’s CARD Act supplements are positive for consumers, what they indicate about the Fed is even more important.