On CARD Act’s 5th anniversary, Consumers Union calls for new reforms by CFPB

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Thursday, May 22, 2014

On CARD Act’s 5th anniversary, Consumers Union calls for new reforms by CFPB

WASHINGTON – On the fifth anniversary of the Credit CARD Act, a historic federal law to prevent unfair and abusive practices by credit card companies, Consumers Union (CU) is asking the Consumer Financial Protection Bureau (CFPB) to build upon the success of the law with new reforms to protect cardholders.

In a letter to CFPB director Richard Cordray, CU said the CARD Act has helped consumers in many important ways, such as prohibiting retroactive interest-rate hikes on balances and requiring better disclosure of rates, fees, and payments on your monthly statement.  More action and reforms are still needed today, the organization said:

  • The CFPB has taken enforcement actions against credit card companies for evading or violating the CARD Act, and CU urged the bureau to continue to be vigilant in rooting out deceptive practices by bad actors.
  • The CFPB should act to lower credit-card penalty fees, place caps on penalty interest rates, and make it easier for consumers to earn their way out of penalty rates.
  • Deferred-interest credit cards can be dangerous debt traps.  Consumers Union believes the CFPB should ban these types of cards, or in the absence of a ban, improve underwriting standards so deferred-interest card issuers are required to assess the consumers’ ability to pay off these cards.
  • Consumer protections should be extended to prepaid cards, which may look like credit or debit cards, but typically do not have the same level of protection under the law.  Consumers Union is advocating for payment-card-protection parity so that every way to pay is safe.

See below for the full text of the letter from Consumers Union to the CFPB:

May 22, 2014

Director Richard Cordray
Office of the Executive Secretary
Consumer Financial Protection Bureau
1700 G Street, NW
Washington, DC  20552

RE: The CARD Act’s 5th Anniversary

Dear Director Cordray:

Today marks the fifth anniversary of the Credit Card Accountability Responsibility and Disclosure Act of 2009 (CARD Act), a vital federal law that established much-needed consumer protections for credit cards.  At Consumers Union, the policy and advocacy arm of Consumer Reports®, we urge the Consumer Financial Protection Bureau (CFPB) to build upon the success of this law with new reforms to help credit card users.  While the CARD Act ended many egregious credit card industry practices, we encourage the CFPB to eliminate remaining bad practices and products through continued enforcement and new regulatory action. We also urge the Bureau to make every way to pay safe by extending consumer protections to prepaid cards.

Background

Prior to the CARD Act, credit card companies aggressively pursued customers, regardless of those customers’ ability to repay, and lent to many who had no hope of ever paying off credit card debts completely. While some consumers failed to use credit cards responsibly, many were victims of injurious industry practices, such as retroactive interest rate hikes and abusive fees, which drove balances ever higher. Today, thanks to the CARD Act’s improved underwriting and better disclosure requirements, as well as its ban on many of the worst industry practices, consumers are better able to manage credit card debt. This has all happened, as the Bureau’s own studies and others have shown, without increasing the cost or availability of credit.

While the CARD Act has aided consumers in many ways, more protections are needed in these key areas:

  • We need continued enforcement actions against bad actors.
  • We need lower penalty fees, a cap on penalty interest rates, and an easier path for consumers to follow to escape penalty rate hikes.
  • We believe there should be a ban on deferred interest credit card programs, or in the absence of that, underwriting requirements should be changed to ensure that consumers are able to pay off these cards before the deferral period ends
  • Every way to pay should be made safe by extending consumer protections to prepaid cards.

Continued Bureau action is needed to hold bad actors accountable.

The Bureau’s enforcement actions against credit card companies show that evasions and violations of the CARD Act persist. Moreover, the Bureau’s October 2013 report showed that the marketing and sale of add-on products, such as credit monitoring, is suspect. These “add-ons” sometimes turn out to be of little or no benefit to consumers. We support the Bureau’s enforcement efforts and urge continued vigilance to root our deceptive acts and practices.

The Bureau should act to lower penalty fees, cap penalty interest rates, and provide an easier path for consumers to follow to escape penalty rate hikes.

The CARD Act’s limits on retroactive interest rate hikes and restrictions on how long penalty interest rates can last for late payments are necessary and effective methods of protecting consumers. Additional measures would carry forth this work. Consumers Union specifically recommends the following:

  • The safe harbor for a penalty fee should be lowered from the $25 permitted by existing regulations to $10, and the penalty fee for a repeat incident should drop to $15 from its current $35.
  • Penalty rates should be limited to an increase that is “reasonable and proportional” to the incident. The current regulation places no cap on penalty interest rate increases.
  • Card issuers should be required to allow all consumers who make six on-time payments after a penalty fee is imposed to “earn the way back to a good rate.” Currently, consumers get this opportunity only if the first six consecutive payments after a penalty interest rate begins are all made on time.

The Bureau should ban deferred interest credit card programs, or in the absence of that, underwriting standards should require that consumers are able to pay off these cards before the deferral period ends.

As the Bureau’s own investigation shows, consumers often don’t get the full story when it comes to deferred interest credit cards. While the final rules implementing the CARD Act addressed some aspects of deferred interest plans, many consumers find these programs to be dangerous debt traps. Improved disclosures are not enough to prevent confusion and miscalculation, missteps that can leave consumers trapped by debt.

Consumers Union believes that the CARD Act implicitly bans deferred interest plans. In particular, the prohibition on double-cycle billing effectively prohibits the retroactive assessment of interest for the entire deferred interest amount for the entire period. We are calling on the Bureau to make this ban explicit.

If the Bureau does not interpret the CARD Act to ban deferred interest offers, the Bureau should change to ability to pay rules to require issuers considering applications for deferred interest programs to assess a consumer’s ability to pay off the entire balance during the deferred interest period.

Consumer protections should be extended to prepaid cards.

Plastic payment cards often look alike. A credit card, a debit card and a prepaid card may all carry the same logo such as Visa or MasterCard. Yet consumers are often surprised to find that  protections for each of these payment types vary. Consumers Union wants to end the confusion. We think its time for payment card protection parity so that every way to pay is safe. In 2012, we submitted comments, in response to the Bureau’s advance notice of proposed rulemaking on prepaid cards, in which we urged the Bureau to ensure that all consumers who use prepaid card products and services receive strong consumer protections. Specifically, we urge the Bureau to require prepaid card issuers:

  • to eliminate harmful fees;
  • to improve fee disclosure;
  • to extend to prepaid cardholders the same mandatory protections consumers are guaranteed when using debit cards linked to bank accounts; and
  • to provide chargeback rights, which credit card users enjoy, to debit and prepaid card holders.

Conclusion

Nearly three-quarters of Americans have credit cards. As a result of the CARD Act, consumers are less likely to be tripped up by credit-card industry traps. However, gaps remain. Consumers can still be harmed by unfair and deceptive acts and practices related to credit cards, hit with outrageous penalty fees, and have to wait too long to get out of the penalty-rate dog house. Moreover, prepaid card users are currently unprotected by federal law against loss of important household funds.

To remedy these gaps, we urge the Bureau to enact the above reforms. Consumers Union would welcome the opportunity to meet with Bureau staff to discuss our recommendations.

Thank you for your time and consideration.

Sincerely,

Pam Banks
Senior Policy Counsel
Consumers Union

Christina Tetreault
Staff Attorney
Consumers Union

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Media contact: David Butler, dbutler@consumer.org202-462-6262