CONGRESSWOMAN ELISE STEFANIK
The House is scheduled to begin consideration of H.R. 627, the Credit Cardholders' Bill of Rights Act, on Wednesday, April 29, 2009, under a structured rule, making in order certain amendments. Consideration of the amendments to the legislation and final votes on the bill are scheduled on Thursday, April 30, 2009. All amendments made in order under the rule will be summarized and distributed when they are made available. H.R. 627 was introduced on January 22, 2009, by Rep. Carolyn Maloney (D-NY) and referred to the Committee of Financial Services. On April 22, 2009, the bill was marked-up and reported, as amended, by a vote of 48-19.
H.R. 627 would place a number of new federal restrictions on certain credit card company practices and restrict credit card issuers from assessing certain fees on card holders. The bill prohibits a creditor from adjusting any annual percentage rate on preexisting balances, except in certain circumstances. The bill also restricts a creditor's ability to charge delinquency fees and impose charges on overdue interest. A summary of the bill's specific provisions follows below.
Existing Balances: Prohibits a creditor from increasing any annual percentage rate (APR) on the existing balance of a credit card. The bill provides certain exceptions that would allow a creditor to raise the APR on an existing balance if:
Advance Notice of Rate Increases: Prohibits a creditor from increasing a card holder's APR without providing written warning 45 days prior to the increase, except under the exceptions for the existing balance changes defined above. No APR increase could occur within a year of the cdedit card account being opened.
Double-Cycle Billing: Prohibits a creditor from imposing a finance charge on a credit card account based on balances from any billing cycle that precedes the most recent billing cycle (double-cycle billing). The bill provides that the restriction on double-cycle billing would not prohibit adjusting finance charges following the return of a payment for insufficient funds or following the resolution of a billing error dispute.
Balances Attributable to Interest Only: Prohibits fees on balances that are only attributable to interest accrued during a proceeding billing period. In addition, the bill would stipulate that failure to make payment on an interest-only balance would not constitute a default on the account. Thus, a credit card holder could refuse to pay an interest-only balance without being charged any additional fees or defaulting on their account.
Access to Payoff Balance Information: Requires each periodic credit card statement to contain the toll-free number and website address where the card holder may request the payoff balance on the account.
Right to Reject Card: Prohibits a credit card company from issuing information to a credit rating agency until the credit card has been activated by the consumer.
Use of Terms: Stipulates a number of requirements for credit card companies when using common credit card terms as follows:
Payment Allocations: Stipulates that if two or more different APRs apply to the same balance, the amount of any payment in excess of the minimum must be applied using one of the two following methods:
Grace Periods: Prohibits a credit card company from denying an interest-free grace period offer to card holders because they have a promotional or deferred interest rate balance.
Periodic Statements: Requires a credit card company to send periodic statements at least 21 days before payment is due.
Due Dates: Provides that if a due date occurs on a date when mail is not delivered or the credit card company does not accept mail, the creditor may not treat a payment made on the following business day as a late payment.
Over-the-Limit Transactions: Allows a credit card holder to prohibit a credit card company from providing card transactions that push the balance of the account over the credit limit if fees may be assessed for such transactions. The bill requires each creditor to create and maintain a toll-free telephone number and website to allow card holders to notify the company of their decision to block over-the-limit transactions. A credit card company would be required to send an annual notification explaining the option to card holders. The bill would prohibit the creditor from issuing any fee for an over-the-limit transaction if the card holder had elected to block such transactions.
In addition, the legislation prohibits a credit card company from imposing more than one over-the-limit fee per billing cycle. After one month, a credit card company could only impose such a fee once in each of the subsequent two billing cycles.
Credit Card Information Collection: Requires the Federal Reserve Board (Fed) to increase the amount and type of credit card transaction information they collect. Among other things, the bill would require the Fed to collect information regarding the type of transactions that occur, the types of fees assessed, interest rate application, the number of credit holders that incur finance charges, cash advances, and outstanding balances. The Fed would be required to report to Congress on the estimated income for credit card companies from interest rates, fees, and other sources of income.
Subprime Cards: Stipulates that a credit card company may not charge any fee (other than a late fee, over-the-limit fee, or returned payment fee) on a consumer that pays a fee in excess of 25 percent in the first year a credit card is open.
Credit to Underage Consumers: Prohibits a credit card company from issuing a credit card to anyone under the age of 18, unless they have been emancipated.
Electronic Fund Transfers: Prohibits a credit card company from applying a fee based on the manner in which a payment to the account is made.
Report to Congress: Requires the Fed, in coordination with a number of other agencies, to issue a report to Congress regarding the extent to which creditors have raised interest rates or reduced credit availability based on geographic location, a consumer's credit transactions, and a consumer's mortgage.
Effective Date: Stipulates that the provisions under this legislation would be effective after the earlier of 12 months of enactment or June 30, 2010.
In 2008, the Federal Reserve Board (Fed) issued 1,200 pages of new rules and restrictions on credit card practices. The Fed rules contain many of the same requirements as the underlying legislation, including prohibitions on increasing rates on preexisting balances, charging late fees if the consumer has not been given reasonable time to pay, and utilizing the "two-cycle" method for interest computations. The new guidelines are scheduled to be implemented on July 1, 2010. The application of the regulations was scheduled more than a year after the rules were introduced to give the credit card industry proper time to prepare for the new restrictions and any new expenses without passing on an undue cost to consumers or limiting access to credit. CBO has estimated that the mandates on private credit card companies contained in H.R. 627 would exceed $139 million per year.
During the Financial Services Committee hearings and mark-up of H.R. 627, a number of witnesses and Members pointed out that the duplicative application of these provisions may result in undue limitations on credit access for consumers. It is generally agreed that these new rules and restrictions on credit card companies will impose costs that would be, at least partially, passed on consumers. According to a statement by former FED Governor, Randall Kroszner, when the rules were originally issued, "Unfair practices can impose significant costs on consumers. Likewise, the new rules will have a cost, too... Although consumers might see some costs decline as new business models emerge, consumers might see other costs increase."
By requiring companies to stop imposing certain fees, especially on higher risk cardholders, the bill reduces credit card companies' ability to price based on risk. If companies are limited in their ability to impose higher rates on riskier consumers, the company has no incentive to provide access to credit for people without above-average credit ratings. Some Members have expressed concerns that this bill would have the unintended consequence of further restricting access to credit during a global credit crunch that is both a symptom, and a cause of the worldwide financial downtown.
Approximately 145 million Americans, or half the population, own credit cards. Credit cards provide a quick and easy option for individual consumers to make purchases, pay bills, or get access to cash. Perhaps more importantly, credit cards provide vital access to short term credit to small businesses, which use credit as start-up capital, or to purchase inventory, cover payroll, and make improvements. Given the nature of small business, access to short term credit is imperative to small business owners. According to Financial Services Committee Report 111-88, "The Small Business Administration (SBA) has testified that small businesses rely on credit cards as a tool for their day-to-day operations and often shut down or lay off employees when banks will not provide the necessary credit." Some Members may have concerns that the underlying legislation may restrict access to credit for small businesses, which, according to the SBA, have provided 60 to 80 percent of all new jobs in the U.S. over the last decade.
According to CBO, H.R. 637 would not have a significant impact on spending or revenues. However, CBO estimates that the bill would impose large private sector mandates on credit card companies that would exceed $139 million per year, which exceeds the Unfunded Mandate Reform Act (UMRA) threshold.