This past Friday, the Federal Reserve approved a rule meant to close some of the more meaningful loopholes left open by the CARD Act of 2009. As always seems to be the case, credit card issuers were quick to invent ways to circumvent the new law, and avoid having to give up any of their lucrative interest and fee revenues.
Proof of income
Upon its passage, the CARD Act required that card issues actually consider an applicant’s ability to pay off their credit card, before being approved for a line of credit. It doesn’t really sound like a novel concept, but it was meant to prevent companies from issuing excessive credit lines willy-nilly, to people who would inevitably end up hanging themselves on debt, interest charges, and penalty fees.
However, it was never specified how the issuers should verify income or “ability to pay,” so they simply asked for applicants’ “household income” without ever really defining what that meant or how it was supposed to be proven. Without such clarification, the rule was moot. The Fed is trying to close this loophole by amending to Regulation Z, and requiring that card issuers properly evaluate an individual’s income or ability to pay, rather than using a household value. And by doing so, they hope to minimize the amount of credit extended to people who can’t afford it.
Promo interest rates must stand
Offering a promotional 0% APR on balance transfers and purchases is a common marketing tool of credit card issuers, hoping to steal your business away from their competitors. And in the past, if you slipped up during the promotional period and missed a payment, they would immediately revoke the privilege and raise your interest rate to a penalty APR up to 29.99%.
The CARD Act was meant to prevent this by requiring that card issuers keep their promises for the duration of the promotion, and only allowing them to waive the promo or raise the interest rates once an account becomes 60 days delinquent. But some issuers got clever and circumvented the rule by offering consumers an upfront interest rate of 20% or more, and “waived interest charges” if they paid their bills on time. By doing so, they could eliminate the waivers the minute someone missed a payment, rather than waiting 60 days. The Fed’s new rule is meant to prevent this by placing waivers under the same constraints as promo interest rates.
All fees are the same
As for penalty fees, the CARD Act limited the dollar amount of fees that can be charged in a given year to 25% of the card’s total credit limit. Previously, many secured cards and other credit cards geared towards those with poor or limited credit would charge hundreds of dollars in monthly or annual maintenance fees for cards with credit limits of only $300 – 500.
To squeeze out from under this rule, some banks started imposing application fees or processing fees that would be charged before the account was opened, in addition to any annual fees that would be charged afterwards. Since there technically wasn’t an account yet, this obeyed the letter (though perhaps not the spirit) of the law. The Fed is hoping to prevent these types of behaviours by including all fees charged to a given consumer, before or after an account is opened, under the same umbrella.
More loopholes to come?
If there’s one thing we’ve seen banks excel at in the past couple of years, it is identifying and exploiting such loopholes. So it will be interesting to see how they handle newer and more complicated methods going forward.
For example, there are still plenty of problems with the rules for student credit cards, including loopholes that allow young adults to use their student loan proceeds as income or assets, when verifying their ability to pay their credit card debt.
So while the Fed closes a few windows, I’m certain a few more doors will open.
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