So much has been debated and criticized about the credit card reform laws set for full effect Feb. 22 that the sizzle the legislation initially sparked has fizzled.
Nonetheless, the interest rate relief and other provisions in the landmark Credit CARD Act of 2009, signed into law by President Obama in May, goes further than any other expansion of consumer credit regulation.
The biggest point of contention in the reform is what it does or doesn’t do to help credit card customers deal with sudden, unfair and inconsistent hikes in interest rates that have become pervasive in recent years – and more so in recent months.
Credit card issuers have taken advantage of a nine-month grace period before the law’s full enforcement to even intensify rate or policy practices that the reform targets. This has happened much to the disgust of some lawmakers who now want the Federal Reserve to put more teeth into the reform laws through the Fed’s power to establish specific rules behind each provision.
“The Credit CARD Act …was a big improvement for American families. But our research shows that industry keeps finding clever ways to get around meaningful reform, and we need a regulator focused on making financial products fair,” said Josh Frank, a research and author for the Center for Responsible Lending, the nonprofit consumer group that focuses on household finance issues.
Here’s what the reform’s interest rate provisions say:
- Creditors generally cannot raise interest rates, or any fees, during the first year after an account is opened. But there are exceptions, including when the hike is due to a variable-indexed interest rate, or if the required minimum payment is not received within 60 days after the due date. Promotional rates now have to stay in effect for a minimum of six months.
- After the first year of an account’s opening or at any time, credit card issuers are restricted as to the reason and timing of proposed increases in interest rates on existing balances. They can raise rates if the increase is based on a variable-indexed interest rate, or if the creditor disclosed to the consumer in a “clear and conspicuous manner” that a new annual percentage rate will apply after a specified expiration date.
- At any time, if an interest rate is increased due to the 60-day delinquency rule, the consumer must be given 45 days advance notice and option to cancel. The consumer also must be provided the reason for the interest rate increase and informed that the interest rate increase will terminate within six months, if the creditor receives the minimum payments on time during that period.
Led by Chase – the nation’s top card issuer – credit card providers are converting more of their best-rated customers to variable interest rates, an interest-rate category that is exempt from most provisions of the reform laws.
Moreover, variable rates, most often based on the prime rate, will mostly move upward in coming months, especially as the economy moves deeper into a sustainable recovery.
In his letter to the Federal Reserve in November, Sen. Carl Levin, D-Michigan, a co-author of the reform laws, was remarkably detailed in the practices that the Fed should review, including so-called “hybrid fixed-variable” interest rates.
Card issuers have been implementing this “mechanism” that allows rates to go up as indices rise, but prevents rates from coming down below a “fixed minimum of the issuer’s choosing,” according to Levin.
