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UDAAP Violation in BofA Credit Cardholder Agreements?

posted by Adam Levitin

Heads up Kathy Kraninger:  you might want to look at whether Bank of America is engaged in an unfair or abusive act or practice in its credit cardholder agreements.  Here's the deal.  

The Credit CARD Act of 2009 prohibits so-called "double cycle billing" on credit cards:

Prohibition on double-cycle billing and penalties for on-time payments.  ...[A] creditor may not impose any finance charge on a credit card account under an open end consumer credit plan as a result of the loss of any time period provided by the creditor within which the obligor may repay any portion of the credit extended without incurring a finance charge, with respect to—

(A) any balances for days in billing cycles that precede the most recent billing cycle; or

(B) any balances or portions thereof in the current billing cycle that were repaid within such time period.

The prohibition in clause (A) is on calculating the average daily balance to which the APR is applied based on balances other than in the current billing cycle.  That was the practice of double cycle billing:  the average daily balance was the average of not just the current billing cycle but of the current and previous billing cycles.  So even if you had no charges this billing cycle and had paid off the balance, you'd still have a positive average daily balance because of the previous month and thus pay interest.  

The prohibition in clause (B) is supposed to get at "trailing interest"—no interest should accrue on balances to the extent they are paid off on time.  If you charged $100, but repaid $90 on time, you should only be paying interest on $10, not on $100.  But notice how it's drafted. It only applies if there is a loss of a grace period; there is no grace period required.   If there is no grace period, you can be charged interest on the $100, even if you repaid $90 on time.  

So consider, then, this term from Bank of America's current credit card holder agreements:

We will not charge you any interest on Purchases if you always pay your entire New Balance Total by the Payment Due Date. Specifically, you will not pay interest for an entire billing cycle on Purchases if you Paid in Full the two previous New Balance Totals on your account by their respective Payment Due Dates; otherwise, each Purchase begins to accrue interest on its transaction date or the first day of the billing cycle, whichever date is later.

Did you get that?  You only have a grace period allowing for interest-free repayment if you have paid in full the two previous billing cycles.  Otherwise, you're going to be charged interest even if you pay the current cycle's balance in full.

Is that permitted under the Credit CARD Act?  I'm not sure.  On the one hand, it seems as if there is a grace period, but that it is lost if you fail to pay the two previous cycles on time.  On the other hand, maybe you only have a grace period if you pay the two previous cycles on time.  The framing issue is a bit like what one calls two-tiered pricing.  Is it a surcharge or a discount?  Depends on the baseline.  But according to the the CFPB's Official Interpretation of Reg Z under TILA, it's fine.  This is the result of the CFPB's early wholesale adoption of the Fed's CARD Act rulemaking that generally weakened the CARD Act's protections. 

Even if Bank of America is in technical compliance with the CARD Act and Reg Z implementation, this cardholder agreement still seems problematic to me.  It's saying that if you paid in late or revolved a balance in January, then paid the balance in full and on time in February that you will be charged interest on every purchase in March even if you pay the March bill in full and on time.  

How many Bank of America consumers do you think have any awareness of this term?  Yes, it's all there in the cardholder agreement, but it's not so easy to parse. And notice the effect it has on pricing.  This double cycle grace period doesn't change the APR or the average daily balance.  But it changes when interest is applied.   It means that interest will be applied for 25 days when it would not otherwise have been.  So if I had a $400 average daily balance and a 16% APR, that turns into $17.53 in extra interest.  Probably not enough for a consumer to spend a lot of time fighting over it, but there are some 26 million BofA credit cards outstanding.  Even if only a fraction of them end up paying more because of this provision, it's easily real money.  There might be technical compliance with the CARD Act, but this cardholder agreement is clearly violating the spirit of it.  This is a return to the very "tricks and traps" that resulted in the CARD Act in 2009.  And the Consumer Financial Protection Act of 2010 has a solution for that:  UDAAP.  

This looks like an unfair and abusive provision to me.  It's unfair because it causes "substantial injury to consumers" in aggregate.  It is not reasonably avoidable by consumers because they would have to parse through cardholder agreements looking for such a term and hope that it isn't a common term in other cardholder agreements.  I don't know any reasonable consumer who would do this.  At best, consumers are shopping for rewards or top level APR, not the way in which balances are computed.  Reasonable consumers don't read cardholder agreements in detail.  And I don't see how the injury here is possibly outweighed by any benefit to consumers or competition.  That looks like "unfair" to me.  It seems to me to be a provision that abusive because it "takes unreasonable advantage of a lack of understanding on the part of the consumer of the material risks, costs, or conditions of the product or service." No consumer, reasonable or not (and "abusive" doesn't require a reasonable consumer), is likely to be aware of, much less understand the importance of this provision, yet it is a material risk, cost or condition.  

This seems like really low-hanging fruit for the CFPB to address, whether through supervision or enforcement...  





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