Fed issues CARD Act clarification proposal

Tuesday, October 19, 2010

The Federal Reserve Board on Tuesday proposed a rule amending Regulation Z (Truth in Lending) to clarify aspects of the Board's rules protecting consumers who use credit cards. The proposal is intended to enhance consumer protections and resolve areas of uncertainty so that card issuers fully understand their compliance obligations.

In particular, the proposal would clarify that:

• Promotional programs that waive interest charges for a specified period of time are subject to the same protections as promotional programs that apply a reduced rate for a specified period. For example, a card issuer that offers to waive interest charges for six months would be prohibited from revoking the waiver and charging interest during the six-month period unless the account becomes more than 60 days delinquent. Card companies attempted to find a loophole in the law for zero interest promotional offers.
• Application and similar fees that a consumer is required to pay before a credit card account is opened are covered by the same limitations as fees charged during the first year after the account is opened. Because the total amount of these fees cannot exceed 25 percent of the account's initial credit limit, a card issuer that, for example, charges a $75 fee to apply for a credit card with a $400 credit limit generally would not be permitted to charge more than $25 in additional fees during the first year after account opening. A sub-prime credit card issuer, First Premiere, had stated publicly that its application fees were not covered by the 25 percent rule, when it was the intent of Congress to cover sub-prime credit cards, or "fee harvester" cards such as those issued by First Premiere.
• When evaluating a consumer's ability to make the required payments before opening a new credit card account or increasing the credit limit on an existing account, card issuers must consider information regarding the consumer's independent income, rather than his or her household income. This is a clarification that Consumer Action has called for since the Act was passed.

The proposal would clarify portions of the Federal Reserve's final rules implementing the Credit Card Accountability Responsibility and Disclosure Act of 2009 (Credit CARD Act) enacted in May 2009. The last of these rules went into effect on Aug, 22, 2010.

Comments on the proposal must be submitted within 60 days after publication in the Federal Register, which should create a deadline in mid-to-late December. Consumer Action will post a link as soon as the Fed begins accepting comments.