Monday, 1 March 2010

Changes to credit card practices and federal cost of borrowing disclosure

McCarthy T├ętrault
James H. Archer and Mathieu Dubord

Final versions of the Credit Business Practices Regulations (CBP Regs) and the Cost of Borrowing Regulations (COB Regs) that apply to federally regulated financial institutions were published in September 2009. Drafts of both sets of regulations had previously been submitted for public comment in May 2009, and after submissions by industry groups remained largely intact. Some of the changes came into force on January 1, 2010. Other changes that require substantial system changes will be delayed until September 1, 2010.

The CBP Regs address certain practices regarding credit cards and debt collection. The new debt collection practices are intended to provide uniformity for federally regulated financial institutions in place of the patchwork of provincial regulations. The more important and visible changes made by the CBP Regs relate to some fundamental elements of the credit card agreement, such as the following:
  • The practice (referred to as M2) that required a cardholder to pay a prior statement balance in full in order to avoid interest charges on purchases charged in a current billing period will no longer be permitted. Beginning on September 1, 2010, cardholders may not be charged interest on purchases made during a billing period provided that they pay the balance in full on their credit card statement by the payment due date. The period from the date of the credit card statement to the payment due date (the grace period) may not be less than 21 days.
  • Also, beginning on September 1, 2010, payments on a credit card in excess of the minimum payment must be allocated either (i) to the portion of the balance carrying the highest interest rate, and then to other portions in descending order of the rate of interest payable on those portions; or (ii) pro rata based on the relative proportion of each part of the balance bearing a different rate. It remains to be seen what effect this will have on promotional and introductory offers that carry lower rates.
  • Beginning January 1, 2010, credit card issuers are no longer permitted to increase a cardholder’s credit limit without first obtaining the cardholder’s express consent, which may be given orally if confirmed in writing (paper or electronically) before the next statement date. Use of a card does not constitute express consent. This change does not appear to restrict the authorization of any transaction over a credit limit, as the CBP Regs sanction overlimit fees, except where an overlimit occurs as a result of a hold that is placed on a credit card.
Changes to the COB Regs substantially increase the level of disclosure required with respect to all types of consumer credit — not just credit cards. The most visible change is the requirement that there be a "summary box" in addition to the disclosure statement in order to provide a snapshot of the most important aspects of the credit arrangement. It is to be provided at the beginning of the credit agreement (if the disclosure statement is part of the credit agreement) or at the beginning of the disclosure statement (if the disclosure statement is separate from the credit agreement). Even credit card applications must have a summary box, although it may be used in substitution for the required disclosure. Both the form and content of the summary boxes have been prescribed. It is also now abundantly clear in the COB Regs that a disclosure statement must be presented in a single location and in a consolidated manner if it is contained in the credit agreement.

In addition, the changes to the COB Regs clarify the rules for providing disclosure to co-borrowers and require that:
  • Monthly credit card statements include an estimate of the time that would be required to repay the outstanding balance at the annual interest rate if only the minimum payment were made on the due date each month. This change comes into effect on September 1, 2010.
  • If the interest rate payable by a cardholder could increase in the next billing period, the circumstances that would give rise to that increase and the new rate of interest that would apply in the next billing period as a result of the increase be disclosed. Accordingly, advance notice of the expiry of an introductory rate must be given.
Unfortunately, a number of the provisions in the changes to the COB Regs are subject to various interpretations, and therefore the goal of uniformity of disclosure may not be achieved.

Sunday, 28 February 2010

FTC tightens credit report rules

Disclosure and transparency are also at the heart of the new rules for credit card statements mandated by the CARD Act that took effect last week. If you haven't seen the new version yet, you will soon.

The changes are welcome. As spelled out by the Obama administration, the idea is to have "plain language in plain sight," and the efforts I have seen from Citibank and Valley National Bank do that, providing "clear statements of the activity on consumers' accounts," as required.

On both, the "summary of account activity" and "payment information" are clear and concise, telling consumers what they owe, when payments are due and, in Valley's case, how long it would take — and how much it would cost in interest — to pay off the balance if the cardholder makes only minimum payments.

Both also include a "late payment warning" alerting customers that they will be hit with a fee of $39 (for Citi) or $29 (for Valley), as well as a possible increase in their interest rate if they don't pay on time. Keeping track of the due date will be easier than in the past because the CARD Act requires accounts to have the same due date each month.

Similar disclosures are required before a consumer opens an account.

The previous standard for credit card disclosure was the "Schumer box," which required key terms to be listed in a table and included in credit card offers, applications and monthly statements.

"The new standard is like the Schumer box on steroids, with much more details about terms and what they mean," said Connie Prater on

The Schumer box — named for then-congressman, now-Sen. Charles Schumer, D-N.Y., who was responsible for the law — contains a summary of the costs of a credit card, including fees, interest rate and grace period, presented in type big enough to read.

What has made it so helpful is that all card issuers are required to use the same format, which makes comparison shopping possible.

Now we have a similar commonality in credit card bills, and that's a big plus for consumers.

Monday, 27 July 2009

Store Owner Fights Credit Card Fees

BOSTON -- A Massachusetts store owner has started a nationwide petition against what's called interchange fees.

NewsCenter 5's David Brown reported that they are unregulated credit cards fees charged to store owners for every credit and debit card transaction. It's a hidden fee that is eventually passed on to the consumer.

For 35 years, Dennis Lane has owned a 7-Eleven on Adams Street in Quincy. Lane said credit card companies are taking a big portion from each credit card purchase and that has spurred him into action.

Roughly 2 percent of the cost of each purchase is eaten up by the fee.

An in-store petition is asking for customers' help. It asks Congress to regulate the interchange fee -- a fee that Lane said has skyrocketed in recent years.

"We believe that the escalation of fees has been extreme and unreasonable, and we believe as responsible retailers should have an opportunity to negotiate those fees," Lane said.

According to the Electronics Payments Coalition, the payments to credit card companies have jumped 137 percent since 2001. In 2004, 7-Elevens paid $40 million to credit card companies for transactions. In 2008, the fee was $160 million.

Lane said by regulating the fee, the consumer would be paying less.

"We could reduce those fees and lower the overall cost of goods -- the cost of doing business -- as a responsible retailer we would pass the savings on to the consumer," Lane said.

Customers are eagerly signing up, happy to get rid of extra fees.

"There are so many of them that are not explained. It just seems senseless. It's like when you are paying points to the bank and just wondering where is that going?" customer John Parsons said.

At 7-Eleven stores across the country, more than 1 million people have signed the petition. They hope to have 2 million by Aug. 10. The petitions will be delivered to Congress.

Monday, 20 July 2009

Tories plan new consumer champion in banking shake-up

Banks will be legally forced to tell customers details of all charges levied on overdrafts, mortgages and credit cards under a wide-ranging shake-up planned by the Conservatives.

A new Consumer Protection Agency will be established and, in an echo of plans being pursued by Barack Obama's administration, customers will be able to use a third party website to tell them if the products being offered are suitable.

George Osborne, the shadow chancellor, will also today outline how he will re-order the relationship between the Bank of England and the Treasury as part of a wide-ranging overhaul of economic policy in the wake of the economic and financial meltdown.

The moves to protect consumers are part of a detailed white paper that Mr Osborne and David Cameron will champion as the most detailed work of an opposition Treasury team in advance of winning power.

At a City launch today they will contrast it with the way Gordon Brown plotted in secret and only revealed he was planning to make the Bank of England independent the day after Labour won power in 1997.

Mr Osborne will say that the new Consumer Protection Agency will be a tough champion of the consumer and will take powers for consumer credit from the Office of Fair Trading and other existing powers for regulation from the Financial Services Authority, which will be abolished. The body will be able to "name and shame" firms that break the rules.

Banks, credit card companies and mortgage lenders will be forced to be more transparent about their charges. A Tory government would require greater disclosure in a "summary box" so genuine comparisons can be made and people do not fall victim to mis-selling.

This policy will be likened to President Obama's attempts to force greater transparency on financial institutions.

Mr Osborne yesterday reiterated his plans to abolish the current tripartite system and give power back to the Bank.

However, conscious not to return to a position where too mush emphasis is placed on the Governor, a powerful new Financial Policy Committee will be established within the Bank. It will working alongside the existing Monetary Policy Committee.

It will contain independent members as well as the governor and deputy governor of the Bank. Its aim will be to ensure closer co-operation between monetary and financial policy.

But Mr Osborne will stop short of requiring retail banks to jettison the "risky" parts of their business and which many blamed for exposing the banks to parts of the market they did not understand and which contributed to their downfall.

The Conservatives would prefer that investments banks are the only ones involved at the riskier end of the market. But Mr Osborne believes that only a worldwide decision to separate the two parts can solve that problem, although he will try and make it more punitive for high street banks to continue with so-called "casino" activities.

Alistair Darling, the Chancellor, has ruled out stripping retails banks of their ability to operate in other fields.

Banks also face a higher levy to pay for a new breed of regulators to monitor the City.

There will also be a new tax on "risky bonus structures" that only reward short term gains.

And in a new departure a senior Treasury minister will be sent to Brussels by Mr Osborne to monitor ill-conceived European Union regulation and ensure it does not hinder Britain's recovery from the financial crisis.



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