A new law curbs some of the most egregious practices in the credit card industry, but law professor Robert Lawless says consumers should be on the lookout as companies seek new ways to make money. Lawless, a leading consumer credit and bankruptcy expert, discusses the changes and what might lie ahead in an interview with News Bureau Business & Law Editor Jan Dennis.
What are the main features of the new credit card law?
As many people know by now, a new law went into effect on Feb. 22. The Credit Card Accountability Responsibility and Disclosure Act, also known as the Credit CARD Act, imposes restrictions on some of the terms credit card lenders can offer to their customers. President Obama signed the law in May of 2009, but under its own terms, the effective date was delayed nine months so the Federal Reserve could adopt new regulations to enforce it.
The Credit CARD Act will stop many, but not all, of the most abusive practices of the credit card industry. For example, retroactive rate increases will go away. If a credit card company raises the interest rate on a card, the higher rate will apply only to new purchases. There are exceptions if your credit card carries a variable rate, that is a rate that floats up and down based on an index, or if you pay your bill more than 60 days late. Also, the law requires 45-day advance notice of any changes to the interest rate (again except for variable rates), as well as for most changes to the terms of the credit card. There also are limits on the ability of credit card companies to impose certain fees. For example, I agree with the observation of most experts that over-the-limit fees will become a thing of the past because of this new law.
Those are a few highlights of the new changes. The Credit CARD Act is 34 pages long and is very complex. It is riddled with exceptions, such as those I have mentioned for variable-rate cards.
There is a lot of talk about loopholes in the new law, allowing things like new fees for inactivity or other policies to make up for lost revenues. Is this true?
A: Yes and no. It is true that the Credit CARD Act still leaves credit card companies room to maneuver. Whatever the law does not ban is allowed, which is the general rule for U.S. laws. Credit card companies undoubtedly will find new ways to make money. Fees for not using a card - or inactivity fees - are one thing we are likely to see. "Loopholes" is an unfair word, however, because it would have been impossible to write a law that covered every possible contingency in advance. The creativity of the credit card companies is the only limit to what we will see. The Federal Reserve will use its authority under the new statute where it can. Although the law is still very new, the Federal Reserve already has proposed new regulations to cap late and penalty fees on credit card accounts.
Do the changes go far enough? Is there something else Congress might want to consider?
The Credit CARD Act is the result of many political compromises. It is a useful law, but it is only a start. What is really needed is an independent federal agency that can react to the new practices that will appear as the credit card industry evolves. Right now, the proposal is that this agency would be housed in the Federal Reserve, but my opinion is that is not good enough. What is really needed is a regulator that can resist what is known as "agency capture," where the agency serves the industry it regulates instead of the public. The best chance for that is an independent agency outside any of the existing regulators.
Personally, I would like to see Congress return interest-rate regulation to the states. Like everything I've discussed, it's not a panacea, but such a move would help a lot. Thirty years ago, the states lost the ability to regulate interest rates because of a Supreme Court decision. Returning this power to the states would encourage experimentation to help us find interest rate regulation that makes sense in today's lending environment, and it also would allow states to adopt regulation most appropriate for their own citizens instead of relying on a national policy set in Washington, D.C.