Credit Card Holders Bill of Rights

In the midst of all the bailout activity, the House passed the Credit Cardholders' Bill of Rights Act of 2008 with virtually unanimous support from Democrats and 84 Republican votes. Although passage of the bill in the Senate was always iffy, and is now extremely unlikely, the new Congress is likely to revisit these issues.

The "Bill of Rights" title might lead one to think that the bill incorporated a short list of broad principles. In fact, it addresses a number of specific issues in a particularized and technical way. What follows is a summary of the main provisions:

1. Card issuers would be prohibited from increasing the interest rate on existing balances, unless (a) the rate is tied to a publicly available index that is not under the issuer's control; (b) the increase is the result of (i) the expiration or loss of a promotion rate for a reason that was disclosed in an account agreement; or (ii) the cardholder's failure to make the minimum payment more than 30 days past the due date.

2. Issuers would be required to permit cardholders with existing balances at the time of a rate increase to amortize the existing balance over at least a 5-year period and the percentage of the existing balance that was included in the required minimum payment cannot be more than doubled.

3. Rate increases would require 45 days notice, must be complete and conspicuous, and explain the extent to which they apply to an existing balance.

4. Double cycle billing would be prohibited.

5. Where a cardholder fully pays a balance and only interest accrues during the billing period, the bill would prohibit (a) any fee in connection with the interest-only balance and (b) the issuer from treating a failure to make timely payment as a default. The cardholder would remain responsible for paying the interest.

6. Issuers would be prohibited from furnishing information to a consumer reporting agency until the card is used or activated, except that the issuer may furnish information about any application for a credit card account.

7. Issuers would be required to treat any payment received, or transferred by wire over a web-based or telephone system, by 5PM on the due date as timely. A receipt showing that the payment was mailed not less than 7 days before the due date would also constitute presumptive payment by the due date, unless the issue shows fraud or dishonesty on the part of the cardholder with respect to the mailing date.

8. Where an account has multiple interest rates, the bill would require that the issuer allocate payment among the outstanding balances in the same proportion as each such balance bears to the total outstanding balance. Issuers would be permitted to allocate a higher percentage to higher interest rate balances, but they would be prohibited from engaging in the now common practice of allocating the entire payment to the lowest rate balance.

9. If an account includes a grace period, cardholders taking advantage of promotional offers could not be denied the benefit of the grace period.

10. Issuers would be required to offer cardholders the option to elect not to permit the bank to authorize an over-the-limit charge and thereby avoid fees for going over the limit. Issuers would be permitted to authorize charges going over the limit by a small amount, but they could not charge a fee.

11. Over-the-limit fees could be charged only once during a billing cycle.

12. Additional information would be collected on rates and fees.

13. Issuers would be prohibited from financing up front fees in excess of 25% of the credit authorized on the account.

14. Credit cards could not be issued to anyone under 18 unless emancipated under state law. A signed application indicating that the applicant is 18 would protect the issuer.

The provisions in the bill resemble those proposed by the FED last May, which have generated a record 56,000 comments. Some opponents of the bill, including the White House, contend that regulators are better equipped to deal with these sorts of issues. Proponents contended that controls on the credit card industry require the force of legislation.
The industry, not surprisingly, came out strongly against the bill. A statement from the American Bankers Association argued that the provisions in the bill would limit the banks ability to manage risk and therefore raise prices and restrict the availability of credit to consumers and businesses.

The bill would not address the issue of merchant credit card acceptance fees that are currently being challenged in a nationwide class action. In August, the House Judiciary Committee reported a bill dealing with merchant fees, and the new Congress is likely to take up that issue.