Compliance Blog

Posted by Anthony Demangone

Please allow us to pause our section-by-section march through the Credit CARD Act to highlight a few related  issues that we want to highlight.  As we write about the law and talk to other credit union compliance professionals, new things come to light.

In a strange way, there's a January 1, 2009 effective date buried in the Credit CARD Bill, and Senator Dodd (D-Conn.) is making sure NCUA and other regulators don't overlook it.  Senator Dodd issued a letter to financial regulators to remind them of a provision that limits the ability of credit card issuers to increase rates.  Read his letter here. Here's a snippet:

I urge you to do everything in your power to protect cardholders from these abusive practices. In particular, as the Federal Reserve drafts regulations and the agencies enforce them going forward, I invite your diligent attention to Section 101(c) of the Credit CARD Act which will require credit card companies to review every six months any account where the interest rate has been raised since January 1, 2009, and reduce the rate if the review indicates that the cardholder has become less risky or the circumstances that warranted the increase are no longer present.

January 1, 2009?  Yes, that would be correct.  Section 101 of the Credit CARD Act includes the following language:

‘‘SEC. 148. INTEREST RATE REDUCTION ON OPEN END CONSUMER CREDIT PLANS.

IN GENERAL

.—If a creditor increases the annual percentage rate applicable to a credit card account under an open end consumer credit plan, based on factors including the credit risk of the obligor, market conditions, or other factors, the creditor shall consider changes in such factors in subsequently determining whether to reduce the annual percentage rate for such obligor.

‘‘(b) REQUIREMENTS

.—With respect to any credit card account under an open end consumer credit plan, the creditor shall—

‘‘(1) maintain reasonable methodologies for assessing the factors described in subsection (a);
‘‘(2) not less frequently than once every 6 months, review accounts as to which the annual percentage rate has been increased since January 1, 2009, to assess whether such factors have changed (including whether any risk has declined);
‘‘(3) reduce the annual percentage rate previously increased when a reduction is indicated by the review; and
‘‘(4) in the event of an increase in the annual percentage rate, provide in the written notice required under section 127(i) a statement of the reasons for the increase.

‘‘(c) RULE OF CONSTRUCTION.—This section shall not be construed to require a reduction in any specific amount.

‘‘(d) RULEMAKING.—The Board shall issue final rules not later than 9 months after the date of enactment of this section to implement the requirements of and evaluate compliance with this section, and subsections (a), (b), and (c) shall become effective 15 months after that date of enactment.’’.

There you have it.  So, if you increased one of your credit card interest rates as noted above any time after January 1, 2009, you'll have to revisit the decision at least every 6 months to see if the factors have changed.  But here's the rub:  Take a look at subsection (d).  The Fed has to issue regs on this, which will become effective 15 months after the law took effect.  Assuming that the regs hit this timeline, the final regs won't be in place for a long, long time.  So it is hard to determine exactly how you have to comply with this section.

I wish there were an easy answer to this pickle, but as I write this, I'm not sure I have one.  But here's a thought.  If you raised rates on any credit card this year due to credit risk of the member, market conditions, etc., I'd maintain records that back up why you raised the rates.  Because you'll need to revisit the rationale for the increase later to see if you need to lower the rates if the rationale no longer holds up.  Of course, we won't know exactly what type of records you'll need until those final regulations come out.

It is going to be a long year.