The last of the credit card reforms kicked in just two months ago, but get ready soon for reform version 2.0.
The Federal Reserve last week released proposed amendments to the Credit Card Accountability Responsibility and Disclosure Act to clarify language and close a loophole that could allow subprime lenders to charge high, upfront fees.
"The CARD Act, ever since it was introduced, has needed clarity," says Curtis Arnold, founder of CardRatings.com. "There are a lot of gray areas."
The Fed is accepting comments on its proposal for 60 days. These changes will likely be the last — at least for a very long time, consumer advocates say.
Here are some proposed revisions:
A fee is a fee The CARD Act prohibits fees in the first year that an account is opened to exceed 25 percent of the initial card limit. The idea is to protect subprime borrowers from paying hefty fees that eat up their credit limit.
The Fed's proposal clarifies that this 25 percent cap includes application or similar upfront fees that consumers must pay before an account is opened. Consumer advocates say this appears to be targeted at First Premier Bank of South Dakota, which charges a processing fee to apply for a card.
"They were concerned this was a business model that could take off if this loophole is allowed to stand," says Lauren Saunders, managing attorney for the National Consumer Law Center.
First Premier's MasterCard charges a $25 or $45 processing fee — depending on when you click on the bank's website — plus a $75 annual fee for a card with a $300 limit. That means you could pay fees worth up to 40 percent of the credit limit during the first year. First Premier's card, which charges a 59.9 annual percentage rate, was recently named the "Worst Credit Card" by Consumer Reports.
First Premier did not return phone calls for comment.
Individual, not household income To prevent people from getting deep in debt, the CARD Act mandates that issuers assess a customer's ability to pay before opening an account or increasing a credit limit. But it wasn't clear if issuers should look at individual or household income, with the latter potentially being much higher.
The Fed states that issuers must check the individual's independent income and assets.
"It's really something we have actually called for for many years," says Linda Sherry, spokeswoman for Consumer Action. "People can exaggerate household income … and then they would end up having more credit than they can reasonably or comfortably pay."
The Fed acknowledges that this could prevent spouses with no income or assets to get a card on their own, even though they have access to a mate's money.
But Sherry says nonworking spouses still will have access to credit cards by opening a joint account with their mate or by being added as an authorized user on another's card. They can also open a secured card, where the credit limit is tied to an amount set aside in a bank account, she says.
A promise is a promise The law prohibits card issuers from revoking promotional interest rates unless the customer's payment is more than 60 days late. The Fed says that this rule also extends to other types of waivers or rebates of interest and fees.
In this case, the Fed is addressing "deferred interest" promotions offered by many retail cards, says Josh Frank, a senior researcher at the Center for Responsible Lending.
The retailer promises not to charge interest provided you repay the debt in full within a certain period, he says. But miss the deadline by even a day and "you end up paying all that interest retroactively," Frank says. And the interest rate could be a steep 28 percent, he says.