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Consumer Credit Regulation: 8.1.1 Scope of Chapter

This chapter focuses on lender abuses involving credit card pricing and other practices. It discusses the history of credit card abuses, the types of bad practices, and the evolution of credit card regulation. This regulatory evolution culminated in the Credit Card Accountability, Responsibility and Disclosures Act of 2009 (Credit CARD Act), which is part of the Truth in Lending Act (TILA).

Consumer Credit Regulation: 8.1.2.2 Types of Credit Cards

The most common type of credit card is a “general-purpose” credit card. These are credit cards that can engage in transactions over a network, such as Visa, Mastercard, American Express, and Discover, and are accepted by a wide variety of stores and businesses.

Consumer Credit Regulation: 8.1.2.3 A Short History of Credit Card Lending

The widespread use of credit cards dates back less than eighty years. Charge cards were introduced in about 1914 by department stores, hotels, oil companies, and Western Union.20 These cards could only be used to purchase the lender’s goods and services, and the balance had to be paid in full each month. In the 1950s, Diners’ Club and American Express began issuing general-purpose cards that could be used at a variety of vendors.

Consumer Credit Regulation: 8.2.4.1 The “Democratization of Credit”

The credit card industry defended its practices by arguing that deregulation benefited many consumers, with fewer annual fees, lower interest rates, and rich reward programs.79 In addition, the industry touted the “democratization of credit,” with credit cards available to the vast majority of Americans. It predicted that re-regulating rates and fees would raise costs and limit credit for the majority of consumers in order to help financially distressed borrowers.80

Consumer Credit Regulation: 8.2.4.2 Still Vulnerable: Business Credit Cards

The credit card industry responded to the passage of the Credit CARD Act with new tactics, as well.89 One tactic was to promote credit cards that were ostensibly “professional” or business cards.90 Business credit cards are not subject to the Credit CARD Act or TILA.91 American households receive 10 million offers every month for business credit cards,92 and there is some question as to whether all of these c

Consumer Credit Regulation: 8.3.1.1 Introduction

One of the biggest problems with credit pricing that occurred prior to the Credit CARD Act was that lenders are not required to abide by a fundamental contract principle—that a “deal is a deal.” Credit card lenders were permitted to raise the interest rate for any reason, or no reason at all, by simply mailing a notice to consumers.

Consumer Credit Regulation: 8.3.1.2.1 Penalty rates

A penalty rate is an increase in a credit card account’s APR triggered by the occurrence of a specific event, such as the consumer’s making a late payment or exceeding the credit limit. Penalty rates are a relatively recent phenomenon, first appearing in the 1990s.101 A Government Accountability Office study found that the average penalty rate for the six major credit card lenders was about 27% APR, and that twenty-seven out of the most popular twenty-eight credit cards carried them.102

Consumer Credit Regulation: 8.3.1.2.2 Universal default

Universal default is an especially criticized form of credit card repricing. With universal default, credit card lenders impose penalty rates on consumers, not for late payments or any behavior with respect to the consumer’s account with that particular lender, but for late payments to any of the consumer’s other creditors. In some cases, lenders will impose penalties simply if the credit score drops below a certain number, whether or not the drop was due to a late payment or another factor.105

Consumer Credit Regulation: 8.3.1.2.3 Any time, any reason repricing

Penalty rates and universal default are not the only forms of credit card repricing. Lenders use change-in-terms notices113 to raise a card holder’s rates for any reason, or for no reason at all.114 Lenders have raised rates because card holders used too much of their credit line (despite the fact the card holders did not exceed their credit limits) or simply to make up for losses in the lender’s other business lines.115

Consumer Credit Regulation: 8.3.2.1 Overview

The Credit CARD Act contains significant limits for lenders seeking to raise the annual percentage rate (APR) applicable to the existing or “outstanding balance” on an account. This protection also applies to certain fees and charges.

It prohibits a lender from increasing the APR or certain fees and charges on an outstanding balance,116 except pursuant to four exceptions:117

Consumer Credit Regulation: 8.3.2.2.3 Sixty days’ delinquency exception

A lender may increase an APR, fee, or charge if it does not receive the consumer’s required minimum payment within sixty days after the due date for that payment.141 This increase may apply to the outstanding balance. As of 2018, about 9% of general purpose cardholders and about 4.5% of private label cardholders had at least one sixty-day or more delinquency in the preceding year.142

Consumer Credit Regulation: 8.3.2.2.4 Rate increases permitted on future transactions—advanced notice exception

Lenders are prohibited from increasing the APR, fees, or charges for any transactions during the first year of an account, even for new transactions.146 After the first year of an account, a lender may apply an increased APR, fee, or charge to transactions that occur fourteen days after giving notice of the increase.147 Regulation Z refers to this ability as “the advanced notice exception.”148

Consumer Credit Regulation: 8.3.3 Mandatory Re-Evaluation of Rate Increases

If the interest rate on a credit card account has been increased based on risk, market conditions, or other factors, the Credit CARD Act requires the lender to re-evaluate that account every six months to determine whether the rate should be reduced.165 Lenders must have reasonable written policies and procedures to conduct these re-evaluations.166

Consumer Credit Regulation: 8.3.4 Double Cycle Billing

Double cycle billing is a method of calculating interest on credit cards that assesses the interest based on the account balance for the past two billing cycles.176 This method results in significantly higher interest being charged to the cardholder. In addition, it eliminates the benefit of the grace period if a cardholder moves from non-revolving to revolving status.

Consumer Credit Regulation: 8.4.1.1 Skyrocketing Fees

The Supreme Court’s decision in Smiley v. Citibank (South Dakota), N.A.,184 which nullified state law limits on fees for credit cards,185 resulted in the rapid growth of and reliance on fee income by credit card lenders. It also contributed significantly to the snowballing credit card debt of American consumers.