On Friday, May 22, 2009, President Barack Obama signed into law the Credit Card Accountability Responsibility and Disclosure Act of 2009 (Act). Many of the key provisions do not become effective until February 2010, but several provisions require card issuers to change their practices by August 20, 2009. The Act fundamentally changes certain aspects of the law regarding credit cards and gift cards. This newsletter provides a general overview of the Act's key provisions that will affect issuers of credit cards and gift cards.
Title I: Consumer Protection
Credit card issuers who wish to increase an annual percentage rate (APR) that is not applicable to an outstanding balance must provide 45 days' written notice of the new terms to card holders before the new APR can go into effect. Each notice must contain a conspicuous statement notifying the consumer of the right to cancel the account before the effective date of the APR increase. These provisions become effective 90 days after the date of enactment of the Act.
The Act prohibits card issuers (with a few exceptions) from increasing the APR, fees, or finance charges either within the first year of opening the account or to outstanding balances unless minimum payment has not been made by the consumer within 60 days after the due date. Card issuers must disclose the reason for the increase and, if the consumer makes minimum payments, the increase will terminate no later than six months after it was imposed.
In other sweeping changes, Title I also:
- Requires creditors to consider a consumer's ability to repay before opening an account.
- Prohibits double-cycle billing and penalties for on-time payments.
- Restricts creditors from imposing an over-the-limit fee, unless the consumer has agreed to let the creditor extend the amount of credit authorized.
- Requires payment due dates to be the same day each month and credit card statements to be mailed or delivered 21 days before the due date. This provision becomes effective 90 days after the date of enactment of the Act.
- Bans creditors from imposing fees on repayment, except when payment is made to a service representative.
Title II: Enhanced Consumer Disclosures
The Act requires creditors to provide additional information on monthly billing statements, including:
- The posting of the following: "Minimum Payment Warning: Making only the minimum payment will increase the amount of interest you pay and the time it takes to repay your balance."
- The number of months and the total cost card holders will have to pay if they elect to make only minimum monthly payments
- The monthly payment amount necessary for card holders to pay off the outstanding debt in 36 months
- A toll-free number for credit counseling and debt management
- Whether the card holder's APR will increase as a result of late payments
- The amount of any penalty APR imposed
The first four items above must be displayed conspicuously and prominently in a table on the billing statement.
Additionally, Title II of the Act requires the following:
- Financial institutions with branch locations that issue bank or credit cards must credit the accounts of cardholders who make payments in-person on the day payments are made.
- Card issuers must post their consumer credit card agreements on an Internet site and forward those agreements to the Federal Reserve Board.
- Card issuers who advertise free credit reports must disclose that free credit reports are available at a Web site such as AnnualCreditReport.com. Television and radio advertisements must include the following statement: "This is not the free credit report provided for by Federal law."
Title III: Protection of Young Consumers
This section addresses cardholders under the age of 21 and college and university students. The Act provides that no credit cards will be issued to consumers under 21 unless there is a signed application that (a) has the signature of a co-signer such as a parent, legal guardian, spouse, or any other individual over 21, or (b) includes a submission by the consumer of financial information indicating an independent means of repaying the debt borrowed.
Title III also:
- Requires colleges to publicly disclose any contracts or agreements with card issuers for the purposes of marketing credit cards
- Prohibits card issuers from offering students tangible items at college campuses or college-sponsored events to induce them to apply for credit cards
- Requires card issuers to submit an annual report to the Federal Reserve Board containing the terms and conditions of their agreements and any affinity card agreements with colleges, alumni organizations, or foundations associated with the card issuer
Title IV: Gift Cards
The Act provides new restrictions on gift certificates, store gift cards, and general-use prepaid cards. Issuers of these items may charge a monthly dormancy fee or a service charge only if there has been no activity on the card for a 12-month period and the issuers have disclosed that a fee may be assessed, the amount of the fee, and how often it may be assessed.
The Act also prohibits the sale of these items with expiration dates, unless (1) the expiration date is no earlier than five years after the gift certificate was issued or the date on which funds were last loaded onto a store gift card or a general-use prepaid card; and (2) the terms of expiration are stated clearly and conspicuously.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.