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Consumer Credit Regulation: 8.5.1.3 Secured Cards

Another product targeted at consumers with poor or nonexistent credit histories is the secured credit card. A secured credit card requires the consumer to maintain a deposit with the lender, which serves as collateral for the line of credit.337 The Truth in Lending Act generally prohibits a credit card lender from exercising a right of set-off against a consumer’s deposit account, but allows a consensual security interest if certain requirements are met.338

Consumer Credit Regulation: 8.5.1.4 Common Abuses

Prior to the establishment of the CFPB and the Credit CARD Act, the limited number of consumer protection actions taken by the federal banking regulators against credit card lenders largely focused on fee-harvester cards, primarily for bait-and-switch tactics.351 In addition, fee-harvester cards relied heavily on penalty fees, especially over-the-limit fees given that the available credit lines are so limited on these cards.352 Fee-harvester card issuers also engaged in plain old deception, such

Consumer Credit Regulation: 8.5.2.1 Prohibition of Fees and Security Deposits That Exceed 25% of the Credit Limit

The Credit CARD Act limits the percentage of an account’s credit limit that can be consumed by fees and security deposits charged to the account. The Act provides that the total amount of fees that a consumer is required to pay with respect to the account during the first year must not exceed 25% of the account’s credit limit.367 For purposes of this restriction, a security deposit charged to a credit card account is considered a fee.368

Consumer Credit Regulation: 8.5.2.2.2 Excluded fees

The Credit CARD Act excludes certain fees from the 25% limit. These include late payment fees, over-the-limit fees, and fees for a returned payment.388 The Act itself only excludes fees for a payment returned for insufficient funds, but Regulation Z expands that exclusion to a fee for a payment returned for any reason.389

Consumer Credit Regulation: 8.5.2.2.3 Security deposits charged to the account

One type of abusive fee-harvester card involves a “secured” card in which the security deposit is charged to the card’s credit line, consuming most of the available credit for the account. To address this abuse, the Official Interpretations of Regulation Z provides that a security deposit that is charged to a credit card account is a fee for purposes of the 25% limit.394 Thus, these faux security deposits are now limited to 25% of the credit line.

Consumer Credit Regulation: 8.5.2.3 Intersection with Other Fee Prohibitions

The Credit CARD Act provides that its 25% limitations should not be interpreted to permit the imposition of fees otherwise prohibited by law.397 The official interpretations cite as example certain advance fees that FTC Telemarketing Rule398 prohibits a telemarketer from charging for helping a consumer obtain credit in certain circumstances.399 This provision should also apply to certain advance fees prohibited by some state laws, such as for credi

Consumer Credit Regulation: 8.5.3 Prior Regulatory Guidance on Subprime Credit Cards

Prior to the Credit CARD Act, the OCC had issued an advisory letter (now rescinded) identifying a number of practices that were potentially unfair or deceptive under the Federal Trade Commission Act, such as promoting credit cards with credit limits “up to” a specified dollar amount when the “up to” amount is essentially illusory, and offering promotional rates without disclosing significant limitations on those rates.401

Consumer Credit Regulation: 8.6.3 Prompt Crediting of Consumer Payments

TILA requires credit card lenders to promptly credit consumer payments, if the creditor has received the payment in a readily identifiable form in the amount, manner, location, and time indicated by the creditor.423 Payment must be credited as of (although not necessarily on) the day of receipt unless a delay in posting does not result in a finance charge or other charge.424

Consumer Credit Regulation: 8.6.4.1 No Cut-Off Time Before 5:00 p.m.

In response to the practice of lenders setting early hour cut-off times, such as 9:00 or 10:00 a.m., the Credit CARD Act established a requirement that payment cut-off times must be specifically set for 5:00 p.m.435 Regulation Z specifies that the relevant time zone is the one for the location specified by the creditor for the receipt of payments.436 Regulation Z also permits the creditor to set a payment cut-off time later than 5:00 p.m.437

Consumer Credit Regulation: 8.6.4.2 Same Due Date Each Month

The Credit CARD Act requires that the payment due date must be the same day of each month for credit card accounts.438 That means that the due date must be the same numerical date each month, e.g., the 25th of every month.439 A due date that is the same relative date but not the same numerical date each month, such as the third Tuesday of the month, generally would not comply, except the due date can be the last day of each month, even though it would not be the same numerical date.

Consumer Credit Regulation: 8.6.4.3 Weekend and Holiday Due Dates

If the payment due date falls on a day on which the creditor does not receive or accept payments by mail, it may not treat as late any payment received by mail on the next “business day.”441 The “next business day” is the next day on which the creditor accepts or receives payments by mail.442 This provision addresses the practice of lenders, when due dates fell on a weekend or holiday, of treating payments as late if they not received on the prior business day.

Consumer Credit Regulation: 8.6.5.1 Change in Address

If a credit card lender makes a material change in the address for receiving payments or procedures for handling payments, and the change causes a material delay in the crediting of a payment during a sixty-day period after the change, the lender is prohibited from assessing late fees or finance charges for late payment.449

Consumer Credit Regulation: 8.6.5.2 In-Person Payments

If a credit card lender is a financial institution that maintains branches or offices, and the consumer makes a payment in person at a branch or office at which credit card payments are accepted in person, the date on which the consumer makes a payment at the branch or office must be considered to be the date on which the payment is made.452

Consumer Credit Regulation: 8.6.6 Limit on Fees Related to Method of Payment

The Credit CARD Act limits fees that some lenders previously charged for services such as accepting a payment by telephone or at an internet website. Lenders may not impose a separate fee to allow the cardholder to make a payment on a credit card account, regardless of whether the payment is made by mail, electronic transfer, telephone authorization, or other means, unless the payment involves an expedited service by a customer service representative of the lender.460

Consumer Credit Regulation: 8.6.7 Payment Allocation Order

Many credit card companies heavily advertise low APRs in their solicitations that are only applicable to one category of transactions. Previously, one tactic used by these lenders to increase profitability was to allocate payments first to the balances with lower APRs, thus leaving the higher balance APRs to accrue finance charges.

Consumer Credit Regulation: 8.6.8.1 Background

In the early to mid-2000s, many credit card lenders decreased the minimum monthly payments from 4% to 2% or 3% of the consumer’s balance.473 With lowered monthly minimum payments, consumers who pay only the minimum will take much longer to pay off the credit card debt and will pay substantially more in finance charges.

Consumer Credit Regulation: 8.11.1 Debt Collection Abuses

Credit card lenders, like many creditors, have been known to engage in plain old debt collection abuse—harassment, deception, and unfair practices.668 One of the CFPB’s first enforcement actions was against a credit card lender for abuses that included deceptive debt collection practices.669

Consumer Credit Regulation: 8.11.3 Credit Card Reward Programs

Credit card lenders now often compete on the basis of reward programs instead of the price of credit on an account. According to the CFPB, “survey findings that show rewards as the predominant factor in choosing a card.” 700 Credit cards that have a rewards program account for about 90% of spending on credit cards overall.701

Consumer Credit Regulation: 8.11.4 Add-On Products

Another area rife with abuse is the sale of add-on products, such as debt cancellation and debt suspension products (collectively, “debt protection” products) and credit monitoring. Debt cancellation/suspension products are discussed at length in § 6.2, supra.

Consumer Credit Regulation: 8.7.2.3.1 Introduction

Before the Credit CARD Act, college students were a favorite target of credit card lenders.516 One study found that 70% of undergraduates had one credit card, and 90% of these students carried a balance.517 In 2008, the average college senior had credit card debt of $4,100.518 In response, a number of states passed laws regulating credit card marketing on college campuses.519