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Credit CARD Act of 2007

posted by Bob Lawless

The Credit Card Accountability Responsibility and Disclosure Act of 2007 or Credit CARD Act (H.R. 1461) is currently before the Financial Services Committee of the U.S. House of Representatives. The pressure to do something about abusive consumer credit practices is building, and I expect some regulatory change to come out of Washington during this congressional session. Also, as Credit Slips co-blogger Katie Porter observed, pressure also is building from the Supreme Court's decision in Watters v. Wichita Bank (2007) that federal regulations from the Office of the Comptroller of the Currency (OCC) preempt some state consumer protection laws. Given the OCC's rather miserable track record in consumer protection, members of Congress may step in rather than leave it to the OCC.

If you read this blog, it won't surprise you to learn that I would support many of these efforts. But, even if you disagree with me about whether some increased credit card regulation should happen, I think it is more difficult to disagree that some increased regulation will happen. The Credit CARD Act of 2007 is an example of the type of regulation we might see, and I find all of its provisions propose very worthwhile changes that should be adopted. What are those changes?

First, the bill would require advance notice of interest-rate increases. Many consumers do not realize that the credit card companies have reserved the right to change the terms of the credit card contract, including the right to unilaterally increase the fees the credit card company charges. If a credit card company wanted to increase the interest rate on an existing customer's outstanding balance, the company would have to give at least fifteen days advance notice of the change. The customer would then have the right to cancel the card and pay off the existing balance under the old interest rate. Of course, after cancellation, the customer would not have the right to make further charges on the card.

Second, the bill would put an end to so-called universal default clauses. Under these clauses, the credit card company reserves the right to raise the interest charged because of a change in the customer's credit score. A universal default clause can mean that a late payment to a utility company or a landlord can result in increased credit card fees even if the customer has not made any late payments to the credit card company. The bill would require the credit card company to base its charges and interest rates based on the credit card company's experience with the customer rather than the customer's experience with other lenders.

Third, the bill would prohibit the issuance of a credit card to persons under the age of 18 without a parent's signature, submission of financial information proving the minor has independent means to pay, or completion of a credit counseling course. (So much for Hasbro's plan to market the Visa card with its Game of Life.)

Those are just some of the changes that I see as particularly noteworthy. The Credit CARD Act of 2007 would make other laudable changes that space and time do not permit for a fuller explanation. These other changes include banning credit card companies from charging "over the limit" fees when they have authorized a consumer to exceed the credit limit on the card; requiring disclosure in the credit card statement of how much the monthly payment would need to be to pay off the credit card debt in 36 months; and banning credit card companies from charging fees to customers who pay more than the minimum monthly balance or pay the credit card balance in full.


Greetings from Vegas, Bob.

Here's a legal strategic consideration favoring federal rather than piecemeal state legislation: state efforts to secure the same outcomes could run afoul of federal constitutional prohibitions that run against the states only.

For example, Nevada has pending a bill SB302 that would eliminate universal default clauses prospectively but that would also restrict rate increases under existing credit card agreements. Arguably, this latter provision violates the Contracts Clause's prohibition against a state's impairment of contractual obligations (U.S. Const. art. I, sec. 10), which restriction applies only to the several states and not the national government. In other words, there could be no Contracts Clause objection to the Credit CARD Act of 2007.

Tuan, thanks for your comment. I think your point takes us through the looking glass. The credit card companies' adhesion contracts give them the right to change the terms of the agreement at any time, but the states cannot regulate the changes because the credit card companies have the contractual right to make the change?

It is not clear to me that "contract" is the right way to think about the credit card company's relationship with their customers. A fuller explanation would require more space (and time) than I have. The gist of the point is why not think about the credit card company's relationship with its customers as an ongoing series of contracts? Every time the terms are changed by the company, why could we not view that as a new contract, make the state's regulation prospective instead of retroactive and constitutionally suspect.

Mr. Lawless,
I recently listened to the first quarter conference call of TCF Financial, the 13th largest debit-card issuer in the US. At the very end a question came up from an analyst at Philadelphia Financial. Here is the transcription of the exchange: Keep in mind that TCF makes $411 million a year in banking fees. Half their earnings come from deposits.
Question: "Hey guys, I had a question on disclosure on deposit service fees. With some of the legislation being proposed now in Congress, are you guys now disclosing on your (ATM) machines when someone is overdrafting on their account, for deposit service fees?"

Answer (TCF´s chief information officer, Earl Stratton): "No, we are currently not disclosing on the screens. Customers do their transactions and manage their accounts the way they normally have."

Follow-up question: "Are there any plans to change that?"

Answer: "We will change it when the law changes."

I guess it can`t be much clearer than that. I have a question for you, Mr. Lawless. The legislation being discussed in the House and introduced today in the Senate (Senator Levin´s bill) seem to focus mainly on credit cards. Will the effect of these bills spill over to deal with similar debit card problems?

Thanks for your attention.

From probably you most faithful reader in Guatemala, Matt Creelman

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