NEW CREDIT CARD RULES: What They Mean For You. April 30, 2010 Joan T. Garton, Assistant Vice President Federal Reserve Bank of Richmond

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1 NEW CREDIT CARD RULES: What They Mean For You April 30, 2010 Joan T. Garton, Assistant Vice President Federal Reserve Bank of Richmond

2 Agenda Credit card trends Background on legislation New protections and disclosures Disclosure examples The analysis and conclusions set forth in this presentation represent the work of the author and do not indicate concurrence of the Federal Reserve Board, the Federal Reserve Banks, or their staff. Confidential Information 2

3 Credit Card Transaction Volume Current Dollars (Billions) Constant Dollars 2009 (Billions) Confidential Information 3

4 18 Credit Card Interest Rate Interest as a Percent Jan-99 Apr-99 Jul-99 Oct-99 Jan-00 Apr-00 Jul-00 Oct-00 Jan-01 Apr-01 Jul-01 Oct-01 Jan-02 Apr-02 Jul-02 Oct-02 Jan-03 Apr-03 Jul-03 Oct-03 Jan-04 Apr-04 Jul-04 Oct-04 Jan-05 Apr-05 Jul-05 Oct-05 Jan-06 Apr-06 Jul-06 Oct-06 Jan-07 Apr-07 Jul-07 Oct-07 Jan-08 Apr-08 Jul-08 Oct-08 Jan-09 Apr-09 Jul-09 Oct-09 source: Federal Reserve Board Prime Rate Interest Rate Confidential Information 4

5 Confidential Information 5

6 Top 10 Credit Card Issuers as of 6/30/09 1. Chase: $165.9 billion 6. Discover: $48.9 billion 2. Bank of America: $150.8 billion 7. Wells Fargo: $30.89 billion 3. Citi: $102.5 billion 8. HSBC $ billion 4. American Express: $78.2 billion 9. US Bank: $20.2 billion 5. Capital One: $55.5 billion 10.USAA Savings: $13 billion Source: CreditCards.com, The Nilson Report, and The Richmond Times Dispatch Confidential Information 6

7 College seniors graduated d with an average of $4,100 in credit card debt. This is up from a reported average of $2,900 four years ago. Eighty-four percent of undergraduates had at least one credit card, up from 76 percent in On average, students have 4.6 credit cards. (Source: How undergraduate students use credit cards: Sallie Mae's national study of usage rates and trends, 2009, Confidential Information 7

8 Credit Cards Credit Card Accountability& Disclosure Act (CARD Act) Confidential Information 8

9 Credit Card Accountability & Disclosure Act (CARD Act) Effective in three phases August 20, 2009; February 22, 2010; and August 22, 2010 Board of Governors released the final amendments to Regulation Z (Truth in Lending Act) for first two phases Confidential Information 9

10 Applicability CARD Act applies to more than just credit cards Student card marketing Gift cards CARD Act applies to more than just creditors Institutions of higher education Gift card providers Confidential Information 10

11 New Protections Interest Rates Existing Balances can not apply increased rates to existing balances except: Expiration of promotional rate (must last 6 months and disclose go-to to rate) Variable rate tied to index Delinquency of more than 60 days (advance notice required and right to cure ) Workout or temporary hardship arrangement Leave military service (SCRA) Confidential Information 11

12 New Protections Interest Rates New Transactions can apply increased rates to new transactions except: During first year account if open After first year, must provide 45 day advance notice No two cycle billing and limits for universal default Can not apply increased rate to transaction that occurred within 14 days after provision of notice Confidential Information 12

13 Interest Rates 14 Day Example 3/15 - $ % non-variable 3/16 card issuer sends notice that rate will increase to 15% non-variable on May 1st 3/29 consumer makes purchase for $100 (14 th day) 3/30 consumer makes purchase for $150 On May 1 st the $150 purchase begins accruing at 15% but the $1, balance continues at 12% The $1, is the protected balance Confidential Information 13

14 New Protections Fee Disclosures No late fees unless adequate time to make payment Prohibits treating a payment as late unless periodic statement delivered at least 21 days before payment due date Card payments received by 5 pm on due date are on time During first year, total t fees can not exceed 25% of initial iti credit limit (excluding penalty fees) Must obtain consumer ss consent (opt-in) for extensions of credit that exceed credit limit before charging any overthe-limit fees (new and existing card accounts) Creditor can not charge more than one over-the-limit fee per cycle or charge fee on the same transaction for more than 3 consecutive cycles Confidential Information 14

15 Payment Allocation Payments made by consumer above the minimum required payment must be applied to the balance with the highest rate of interest first Unless you have a deferred d interest t charge ( no interest until March 2012 ) then two months before interest starts, payments applied dto deferred dinterest tbalance Payment due date must be same day each month (e.g. 15 th or last day of month). If due date is weekend or holiday, payment is due next business day Confidential Information 15

16 Evaluation of Ability to Pay Creditors can not open new account or raise credit limit on existing account unless it considers consumer s ability to make the required minimum payments Must review income or assets and current obligations Must consider debt-to-income t or debt-to-asset t t ratio or residual income (no specific ratio or amount required) Can not issue card to consumer without income or assets Consumers under age of 21 without ability to pay must have co-signor with ability to pay Confidential Information 16

17 Marketing to Students Creditors can not offer tangible items to induce applications for open-end credit products Limited to offers to students of institutions of higher education Limited to offers made on campus, near campus, or at sponsored events Institutions of higher education must publically disclose agreements with creditors regarding marketing of credit cards to students Confidential Information 17

18 Other Provisions Online Posting of Agreements Card issuers must post their credit card agreements on their websites or make agreements available to consumers upon request Card issuers must also submit agreements for currentlyavailable products to the Board, on a quarterly basis, for posting to the Board s website Timely Settlement of Estates Card issuer must ensure that an administrator of an estate can determine the amount of and pay the outstanding balance of a deceased accountholder in a timely manner If administrator requests account balance, card issuer must provide balance in timely manner, cease imposing fees, and waive or rebate interest accrued after request if balance paid in full within 30 days Confidential Information 18

19 CARD Act Effective 8/22/10 Re-evaluation evaluation of rate increases Reasonableness of penalty fees and charges Gift cards Limits on dormancy, inactivity, and service fees 5-year minimum expiration date 19 Confidential Information

20 Solicitations Disclosures at 4 Key Points Account opening Monthly periodic statement Change in terms Confidential Information 20

21 New Solicitation Disclosure Confidential Information 21

22 Account Opening Disclosure Confidential Information 22

23 Periodic Statement Disclose total fees and interest for the cycle and year-to-date Disclose how long it will take to pay off balance only making minimum payment (along with total cost) Disclose how much consumer needs to pay in order to pay off balance in 3 years (along with total cost) Confidential Information 23

24 Periodic Statement Page 1 Confidential Information 24

25 Periodic Statement Page 2 Confidential Information 25

26 Change in Terms Notice Confidential Information 26

27 What do we need to teach consumers? Compare credit card offers Interest rates (introductory, variable) Fees Penalties Know your payment due date and pay your bill on time Don t go over your credit limit Make more than the minimum payment Avoid unnecessary fees Pay attention to changes in terms Watch for fraud and theft Confidential Information 27

28 Confidential Information 28

29 Consumer Complaints Federal Reserve Consumer Help Toll Free: Office of the Comptroller of Currency (OCC) Toll Free: Federal Deposit Insurance Corporation (FDIC) Toll Free: Confidential Information 29

30 Questions?? 30 Confidential Information