By Scott Talbott, The Financial Services Roundtable

The 111th Congress is well under way and has enacted a credit card bill to place new restrictions on card issuers. It is also considering overhauling the consumer protection laws and creating a new agency that would have jurisdiction over a large section of the financial services industry and its products.

President Signs Bill into Law

The House of Representatives passed Rep. Carolyn Maloney’s (D-NY) bill,
H.R. 627, The Credit Cardholders’ Bill of Rights Act of 2009, by a vote of 357 to 70. The bill codifies the Federal Reserve’s Unfair and Deceptive Practices (UDAP) rules on credit card practices. The Senate passed the same bill by a vote of 90 to 5, and the president signed it into law on May 22, 2009.

The card industry argued against the law on the grounds that it would reduce the availability of credit and increase the cost of credit for those who still qualify. Supporters argued the law would help protect consumers from the “tricks and traps” of credit card contracts.

The new law contains the following restrictions on credit cards:

• Increases the amount of time consumers have to make a payment on an outstanding bill
• Dictates how excess payments are used to pay off balances with differing APRs
• Prohibits credit institutions from applying increased APRs to the outstanding balance on a credit card account
• Prevents fees on credit holds
• Prevents double-cycle billing
• Limits the amount of security deposits and fees
• >Requires that when credit institutions make a firm offer of credit, they must disclose the criteria that will determine whether consumers receive the lowest APR or the highest credit limit
• Requires interest rate increases to apply only to future credit card debt
• Requires payments to be applied first to the credit card balance with the highest rate of interest, and to minimize finance charges
• Prohibits the charging of interest on credit card transaction fees, such as late fees and over-the­-limit fees
• Requires issuers to lower penalty rates that have been imposed on a cardholder after six months if the cardholder commits no further violations
• Applies new restrictions on fees and expiration dates on gift cards or prepaid cards
• Places new restrictions on applications from people under the age of 21
  

The bulk of the law becomes effective in February 2010. The requirement for advanced notice before interest rates are increased went into effect in August 2009. The U.S. Federal Reserve Bank passed regulations with many of these same restrictions; however, they would not be effective until June 2010. The new law trumps the regulations.

Major Regulatory Reform

As part of the Obama administra­tion’s response to the economic crisis, the Treasury Department and Chairman of the Financial Services Committee Barney Frank (D-MA) unveiled proposals to create a free-standing Consumer Financial Protection Agency (CFPA). The card markets would be under its jurisdiction. The new CFPA will strip current federal banking regulators of their existing consumer protection powers and amass them under its umbrella. This new regulator would have authority over more than 16 different existing lending and disclosure laws, many of which cover the card markets, such as Truth in Lending, Fair Credit Reporting Act, Equal Credit Opportunity, and the Fair Debt Collection Practices Act.

Consumer groups are supportive of the CFPA as a means to have one regulator focused solely on consumers. The financial services industry is opposed to the CFPA, arguing that separating the regulation of the bank from the product is an ineffective way to protect both the consumers and the industry. The financial services industry is arguing to strengthen the existing consumer protection departments in federal banking regulators or the proposed unified bank regulator.

The proposed CFPA would have both rule-making and enforcement authority over “covered persons,” or “those who engage directly or indirectly in a financial activity, in connection with the provision of consumer financial product or service.” This is very broad author­ity and many of the terms, and even the scope, of the CFPA’s jurisdiction would be left to the agency to decide. This broad category will include almost all financial services firms, except those regulated by the SEC or the U.S. Commodity Futures Trading Commission. The breadth of the proposal has many concerned, but consumer groups argue that it doesn’t go far enough.

Under the Treasury’s proposal, the new CFPA would have authority over credit cards, debit cards and stored-value cards. It will be empowered to set specific terms for products, as well as advertising for them. The CFPA will be tasked with defining a category of consumer products as “plain vanilla” for all consumers and establishing reasonableness standards. Any product that deviates from this definition could require additional oversight, capital requirements and consumers to sign a waiver that they do not want the plain vanilla product. The industry argues that the plain vanilla oversight will stifle product innovation and consumer choice as banks lean toward only offering the more basic products. Consumer groups believe that offering plain vanilla products will simplify financial choices to make them less confusing.

The CFPA would not pre-empt state law, and it encourages states to enact tougher consumer protection standards and allow their attorney generals more enforcement power over national banks. Consumer groups argue that more police offi­cers are needed on the beat to pro­tect consumers as well. The industry has argued that the provision will cre­ate a patchwork of protection regimes by state, which will increase the cost of products and lead to confusion of consumers. When the lack of pre­emption in CFPA is combined with the recent Supreme Court decision in Cuomo v. Clearing House Association, L.L.C. (2009), there is a clear trend to increase the state regulation over national financial institutions.

During the month of July, Chairman Frank scheduled a number of hearings to mark-up a bill to create the CFPA before the 111th Congress adjourned for the August recess. The chairman of the Senate Banking Committee, Chris Dodd (D-CT) scheduled hearings during the month of July and is expected to act in September or October.

About the Author

Scott Talbott is a senior vice president for government affairs for The Financial Services Roundtable, a trade association representing 100 of the largest financial services firms in the country. He is based out of Washington, D.C.

TSYS Featured in Webinar, Debate on Credit CARD Act

TSYS was recently represented in the debate and Webinar, “CARDS and Consequences: What the CARD Act Means for Banks and Consumers.” During the debate, three leading credit card experts debated and discussed the recently passed Credit CARD Act of 2009. Tom Brown, a lawyer who has represented Visa, and Professor Ron Mann from Columbia University and author of Charge It were joined by Victoria Strayer, Regulatory and Compliance Chief from TSYS, who shared what she is hearing from TSYS clients.

The debate was sponsored by FinReg21.com, a non–partisan online media entity developed for, and by, those involved in or affected by financial services regulation. The following is an excerpt from portions of the discussion and some additional comments from TSYS’ Victoria Strayer.

The first provisions of the CARD Act went into effect on August 20, 2009. What’s kicking in and what has that meant for your card issuers?
There are three main components that were made effective in August:

First, creditors must provide a written notice to consumers with a minimum of 45 days before increasing an annual percentage rate or making any other significant change to the terms of a credit card account, excluding Home Equity Lines of Credit (HELOC).

Second, creditors must inform consumers, in that same notice, of their right to cancel the account before the increase or change goes into effect. Now, if a consumer does so, the creditor is generally prohibited from applying the increase or change to that account, excluding HELOC. At this point, issuers are analyzing their pricing models to understand where they have behavior-based automatic increase APRs and how they now must insert, technically and operationally, the 45-day advance notice. They are establishing their ‘right to cancel’ policies and training customer care staff while evaluating the revenue implications with which they are faced.

Third, creditors must mail or deliver periodic statements (for credit cards and other open-ended consumer credit accounts) at least 21 days before the payment is due or before the loss of any grace period for which finance charges would not be assessed if the payment was received. Issuers are reviewing their payment due date calculation options, late fee triggers, grace period timing, change in terms triggers, collateral, statement messages, right to cancel messaging and impacts to other fees, such as closed or canceled account fees.

The rest of the provisions go into effect next February. Have most issuers started gearing up for that?
Absolutely. They have been active on this initiative since the Reg Z and UDAP rule revisions were published last December. Actually, some players have been active since the comment period was opened in 2007.

Many issuers are working with their vendors to ensure their internal timeline is in alignment with those of their processor and other support parties. Re-pricing options, over-limit fee opt-ins, notification strategies and disclosure formats all must be tested and reviewed to allow for final decisions to be made and in place by February 22, 2010.

Is the CARD Act going to change the issuing business and how?
Initially, issuer profits are the headline, and the thought is that profits will shrink from the channels in place today. Since a successful business will not accept the new lower benchmark, profits may come from new avenues that have not yet been defined by the issuing community. We may not see the fruit of those labors until further down the timeline, given that the current focus is on compliance. We may see a change in the type of products offered. Certainly more stringent risk models are already in effect, also a symptom of the economic conditions.

Consumer reaction will also be one of the more interesting points to watch. Will consumers notice the changes? Will they respond differently? Will these new consumer protections truly have an impact on behavior as it relates to spending and payment trends? While this change is about advocacy for consumers, time will tell if the changes will be positively embraced. Most likely, studies will be conducted to learn more about resulting consumer behavior and financial trends.

Will this affect small businesses?
This legislation does not cover small businesses except to order a study on the small business sector, which is due to Congress in February 2010. Some issuers manage their small business portfolios as a hybrid between business and consumer benefits, and believe rules similar to those for consumer products should be passed for small business. The National Small Business Association (NSBA) has been an active advocate. In the meantime, issuers may choose to implement business practices for small business that are in alignment with the consumer rules. This is partially to ensure consistency for those account holders, and partially as a campaign to tell the industry that they do not adhere to practices that are considered unfair or deceptive in any of their portfolios.

About Enterprise Business Compliance

Enterprise Business Compliance is a single entity at TSYS responsible for maintaining optimal focus and priority for achievement of the required compliance for the company. It is committed to cultivating relationships with card brands, industry groups and other governing entities that will position us to influence and champion on behalf of our clients and their customers by participating in strategy forums, roundtables and other events.