Federal Reserve Board Clarifies Some Credit Card Rules
Attempting to clarify some of the rules regarding credit cards, the Federal Reserve Board has proposed follow-up rules amending Regulation Z (Truth in Lending).
The CARD Act rules went into effect in three different stages: August 20, 2009; February 22, 2010; and August 22, 2010. After several months of action, the Federal Reserve Board believes that clarification is now needed to remove uncertainty and ambiguity from the final rules.
Here are several of the clarifications:
Penalty Rate Disclosure
The Board acknowledges that it may be unclear how issuers should disclose length of a penalty rate, and that the complex disclosures are confusing for consumers.
The Board proposed that issuers use the following language to
describe the penalty rate:
“The increased rate will apply until the consumer makes twelve timely consecutive required minimum periodic payments; or, the issuer should
disclose that the penalty rate will apply until the consumer makes twelve consecutive timely minimum payments or that the penalty rate may apply indefinitely.”
Interest Charges During Promotional Programs
Promotional programs that waive interest charges for a specific period of time are subject to the same protections as reduced rate programs. This clarification says that a card issuer offering to waive interest charges for six months can not revoke the waiver and charge interest during the intro period unless the cardholder becomes more than 60 days delinquent.
Application fees are also covered by rules that apply to fees charged during the first year after the account is opened. The total amount of fees is capped at 25 percent of the initial credit limit and a card issuer that charges a $75 application fee with a $400 limit could not charge more than $25 in additional fees during the first year after the account is opened.
Another clarification to the credit card law would require issuers to consider the applicant’s independent income rather than household income when opening an account or increasing the limit on an existing account.
The Fed has developed model language to describe the grace period. This language was developed through extensive consumer testing. There are two descriptions that can be used.
“Your due date is [at least] ___ days after the close of each billing cycle. We will not charge you any interest on purchases if you pay your entire balance by the due date each month.”
“Your due date is [at least] __ days after the close of each billing cycle. We will not charge you any interest on purchases if you pay your entire balance by the due date each month. We will begin charging interest on cash advances and balance transfers on the transaction date.”
Card issuers must consider a person’s independent income, not household income, when determining a consumer’s ability to make payments before opening a new credit card or increasing the credit limit. An issuer that asks for income and not household income does not need to check whether the stated income is actually household income.
Fees Added to Closed Accounts
The CARD Act generally prohibits a card issuer from applying a new or increased fee or charge to a closed account. The Fed would amend this to state that the rule does not permit a card issuer to increase a rate, fee, or charge while an account is closed or while the card issuer does not permit the consumer to use the account for new transactions.