Friday, May 22, 2009

Obama Signs Credit Card Holders Bill of Rights

After years of legislative wrangling, President Obama has signed a credit cardholders' bill of rights that was passed overwhelmingly by both houses. Last September, the House passed a similar bill that died in the Senate. Last December, the Federal Reserve issued a series of regulations that would have imposed many of the requirements in the new legislation, but not until January or July 2010, depending on the provision. The heightened recent legislative activity had been attributed to a desire to trigger the Federal Reserve regulations more quickly. The final bill, however, calls for implementation 12 months from enactment, meaning that the rules will go into effect only about 1 month sooner than the FED's regulations. The legislation, however, goes beyond the regs in some areas. This post provides a summary of the key points in the legislation. I'll summarize the comments and reaction, and speculate about the effects, in a future post.
Summary of Key Provisions:
Notice: Requires card issuers to provide at least 45 days notice prior to any rate increases or other significant changes, and the notice must include a statement that the cardholder may cancel the card.
Increasing Interest Rates on Outstanding Balances: Limits the ability to increase the interest rate on existing balances to specific situations, including a failure to make the minimum payment for 60 days.
Double Cycling Billing: Prohibits reaching back and assessing interest on balances from the prior billing cycle if the cardholder fails to pay the balance in full. Average daily balance accounting, in which interest is assessed to the entire balance, rather than just the portion left unpaid, is not prohibited.
Allocation of Payment: requires that any payment beyond the minimum be allocated first to debt accruing the highest rate of interest. This provision is substantially tougher than the FED regulation, which would have allowed the banks to allocate payments proportionally among balances of varying interest rates.
Timely Payment: Requires statements to be issue 21 days before the due date, and prohibits assessing late fees when the due date is a day on which mail is not delivered (or not accepted) and the payment is received by mail the next business day.
Over-the-Limit Fees: Requires that the cardholder opt-in to a system in which charges over the limit are permitted with a late fee and limits these fees to once per billing cycle. This provision is also more consumer friendly than the FED regulations, which had left open the possibility of an opt-out scheme.
Minors & College Students: Prohibits the issuance of credit cards to unemancipated minors, unless a parent is designated as the primary account holder, and places strict limits tied to annual income on the credit limit for cards issued to college students.
Means-of-Payment Fees: Prohibits fees for using non-standard payment methods, except for expedited payments by phone on the due date or the proceeding day.
Warning: Requires solicitations to provide a warning of the adverse effects of excessive credit inquiries.


Robert Justin Lipkin said...

I'm interested in any legal or constitutional explanations why usury limits were not included in this bill. Surely the retraint of contract argument in light of the current Great Recession is not persusaive.


Jim Chen said...

Hi Bobby,

I think it's as simple as the realization that usury limits would tighten the consumer credit market all the more. The bill as it stands will make it very hard for the most marginal borrowers to get credit cards. The lifting of usury limits several decades ago practically invented the modern credit card market. Which, then again, is reason enough in some minds to bring them back!