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January 13, 2010

Think tank lambasts recent US reforms

The war of words between US consumer activists and card issuers continues unabated, with a leading consumer think tank alleging that the ballyhooed reforms ushered in by Congress are not making a dent in industry practices.

By Verdict Staff

Despite a wave of pro-consumer card reforms being introduced in the US, many consumer advocates say that they have not gone far enough. One body, the Center for Responsible Lending, says that controversial business practices meant to have been stamped out are still in existence, as Charles Davis reports.


The war of words between US consumer activists and card issuers continues unabated, with a leading consumer think tank alleging that the ballyhooed reforms ushered in by Congress are not making a dent in industry practices.

A new report from the Center for Responsible Lending (CRL), Dodging Reform: As Some Credit Card Abuses Are Outlawed, New Ones Proliferate, asserts that US issuers are simply changing their tactics in order to bypass both Federal Reserve Board rules and new federal laws set to take full effect in late February 2010.

The report states that many of the nation’s 80 million families with one or more credit cards continue to be hit with what the CRL deems arbitrary, unfair interest rate hikes and fees. The study, which examined the practices of issuers that hold over 400 million credit card accounts, found at least eight specific industry practices that flourish despite federal efforts to rein issuers in.

“The Credit CARD Act that Congress passed earlier this year was a big improvement for American families,” said CRL researcher, Josh Frank, the report’s author. “But our research shows that the industry keeps finding clever ways to get around meaningful reform, and we need a regulator focused on making financial products fair.”

Issuers exploiting legal loopholes

The CRL said that industry practices make it all but impossible for the average person to determine the real cost of credit card debt, arguing that the eagerness of credit card issuers to exploit loopholes in the new federal rules underscores why lawmakers need to pass legislation to create the Consumer Financial Protection Agency, as proposed by the White House and now under consideration by Congress.

The eight practices highlighted in the report include the manipulation of interest rates, the padding of miscellaneous fees and a deceptive policy on late payment fees. Use of these abusive tactics is widespread and growing, the report finds.

The report spotlights a little-known tactic, which the CRL calls “pick-a-rate”. In this example, a card company tells cardholders their interest rate will be pegged to the prime rate, which until now has usually meant the prime rate on the last day of the last billing cycle. But the CRL’s analysis of the fine print finds that a growing number of issuers have added language that allows them to pick the highest prime rate in a 90-day period – no longer a single day.

This small change can significantly raise a cardholder’s cost, often without his or her knowledge. This particular practice alone produces $720 million a year in industry revenue and, the CRL predicts, could grow to $2.5 billion annually in a few years as the practice spreads.

The study also found widespread imposition of new fees. All of the top eight credit card issuers have increasingly imposed large late fees across the board for borrowers, even for smaller balances.

‘Deceptive marketing’ allegations

The CRL argues that marketing around late fees is deceptive. Credit card issuers claim to impose late fees on a sliding scale that charges a larger flat fee for larger total balances.

“In fact, issuers have steadily lowered the amount it takes to be considered in the highest balance category and, consequently, subject to the largest fees,” the report said. “This penalty structure has undergone a fundamental shift since 2003, when a balance of $1,000 triggered a $35 late fee. Since then credit card issuers have lowered the cut-off for the balance that triggers the highest late fee, so that today a balance of $250 is assessed the same penalty fee as a $1,000 balance.”

The result is that 9 of every 10 cardholders will incur the largest fee if they pay late. In addition, the average late fee today is $39, while the typical past-due amount is approximately $50.

Other practices that have become increasingly common include imposing minimum finance charges; inactivity fees; fees on international transactions; fees (in addition to interest charges) on balance transfers and on cash advance fees; and variable rates that have artificially high floors.

Banks accused of gaming the rules

“Issuers have increased costs to consumers through other mechanisms that borrowers are unlikely to notice,” the report said.

“While these practices vary in nature and impact, they all share some traits. They were not regulated by the Credit CARD Act of May 2009, nor by rules announced in December 2008 by the Federal Reserve. Issuers have expanded the circumstances in which they apply or the amounts charged recently. All the practices are either hidden or at least obscure enough that they are easily missed by consumers. Most, if not all, are economically inefficient in that they create fees that have little correlation with issuer costs or the value of the benefits received.”

In its conclusion, the report said that there are other areas where credit card banks may manipulate the rules in an attempt to evade the provisions of the new reforms.

“For example, credit limits can be reduced and accounts can be closed without notice,” the report said. “Minimum payments can be sharply increased, and if the cardholder is unable to stay current with the new higher payment and falls 60 days behind, the existing balance can be raised to a penalty rate. Minimum payments also may be used as a bargaining tool to get cardholders to accept a higher interest rate on their balance.”

The report concludes with a call for Congress to approve the Consumer Financial Protection Agency, a new regulatory agency dedicated to overseeing the extension of credit and subject of a withering lobbying battle between consumer groups and the financial services industry.

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