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


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.”

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Issuers exploiting legal

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

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’

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

“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

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.