Despite regulations aimed at making credit card agreements more consumer friendly, new cardholders carrying plastic from the No. 2 U.S. bank won’t know the exact cost of making a borrowing mistake until it’s too late.
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Despite regulations aimed at making credit card agreements more consumer friendly, new cardholders who carry plastic from the No. 2 U.S. bank won’t know the exact cost of making a borrowing mistake until it’s too late.
That’s because Bank of America is no longer outlining penalty rates, also known as default rates, in its card offers and agreements. Those are the higher interest rates that borrowers can expect to pay when they make a late payment or otherwise violate the terms of their credit card agreements. That approach goes against regulations established by the Credit CARD Act of 2009 — landmark legislation designed to improve the disclosure and predictability of credit card rates and fees — which specifically requires issuers to list those rates in their credit card agreements.
A July 2010 report from the Pew Health Group’s Safe Credit Cards Project shows that 94 percent of the nation’s largest banks — including Bank of America — and about half of the nation’s largest credit unions feature these rates. (Only Target and USAA clearly don’t offer penalty rates.) However, Bank of America appears to be the only major issuer that doesn’t disclose the size of that rate in its cardholder agreements.
That can mean trouble for cardholders. Experts say the current economic challenges mean that consumers need to be better informed than ever. “When people are seriously distressed, it’s important that they have a sense of what their rights are and what they can expect to pay,” says Nick Bourke, director of the Pew Safe Credit Cards Project, noting that consumers need to have all the information if they’re making a tough decision about whether to not pay that month’s mortgage bill or credit card bill, for example.
In its report, Pew called the nondisclosure “a troubling new penalty rate trend … that is undermining the transparency of the market.” It called on federal banking regulators to enforce existing regulations requiring their disclosure.
No set penalty rate
Bank of America, however, says it has a good reason for not disclosing a specific penalty rate: It hasn’t got one.
“Because we review accounts individually, we don’t have a set penalty rate,” says BofA spokeswoman Riess. She explains that when a consumer pays 60 days late or otherwise slips up, it triggers an account review that is used to determine whether to re-price the account. If BofA does decide to increase the cardholder’s annual percentage rate (APR), “we provide the customer with advance notice of a penalty rate increase and clearly state what the new rate will be — and the customer has the opportunity to opt-out and close the account,” Riess says in an e-mail.
“We also disclose in the ‘clarity commitment’ each customer receives and in our terms and conditions posted online that, if an account becomes 60 days or more past due, we may increase the interest rate,” she says.
But there is no indication regarding the amount of that new, higher rate. Since there is no cap on bank-issued credit card APRs — unlike the 18 percent maximum APR for plastic issued by federally-chartered credit unions — the penalty rate possibilities are, literally, limitless.
Because of this ambiguity, Pew, in its survey, recommmended that regulators ensure “full and reliable disclosure of these rates” and asked the Federal Reserve to “prohibit issuers from charging penalty rates that are higher than initially disclosed rates.” They also recommended that issuers keep their penalty rates at no more than seven percentage points above non-penalty rates.
Penalty rates have increased recently. Data compiled by CreditCards.com shows default APRs can top 30 percent, with the average cardholder paying more costly default rates than before most provisions of the landmark Credit CARD Act took effect in February 2010. Bank of America’s decision to not disclose these terms seems to violate, at a minimum, the spirit of the new law .
“Stopping disclosing the penalty interest rates goes against that trend of transparency and predictability,” says Pew’s Bourke. “It leaves consumers in the dark.”
Although it won’t comment on whether Bank of America is breaking any laws, the Federal Reserve did point to language in the Truth in Lending Act, also known as Regulation Z, requiring disclosure of any default rates. According to the Fed, “the amount of any late payment fee and any penalty APR that could be triggered by a late payment must be disclosed in close proximity to the due date” on the cardholder’s account statement.
The more recently enacted CARD Act also has something to say concerning penalty rates. “If 1 or more late payments under an open end consumer credit plan may result in an increase in the annual percentage rate applicable to the account, the statement required under subsection (b) with respect to the account shall include conspicuous notice of such fact, together with the applicable penalty annual percentage rate.”
In short, if you’ve got a penalty rate, you’ve got to share it. And once that penalty APR is established, the bank can’t charge a higher rate, Bourke explains.
“It’s pretty clear that that principle of full disclosure has been there for a long time and it’s the right thing to do given that the Credit CARD Act is trying to increase transparency,” he says.
Other consumer groups say BofA is more clearly in violation. Six consumer groups — Consumer Action, Consumers Union, the National Consumer Law Center, U.S. Public Interest Research Group, Consumer Federation of America and the Center for Responsible Lending — signed a July 7 group letter to the Federal Reserve that highlighted BofA’s activities.
The letter noted the bank had several card applications on its website that did not disclose a penalty rate. “The solicitation does state, ‘If this account becomes sixty days or more past due, we may amend the terms of the Agreement to increase all interest rates.’ However, this disclosure is made outside of the mandatory table required for credit card solicitations, and does not disclose the amount of the increased rate,” the letter reads. That table, known as the Schumer Box, is intended to clearly outline the various costs associated with borrowing on a specific card.
“Bank of America cannot avoid disclosure of the amount of the penalty rate, or place it outside of the required table, simply by declining to name the rate as a ‘penalty rate,'” the letter says “We request that the Board examine the credit card issuing banks under its supervision to ensure that they are properly disclosing penalty rates.”
Price of the penalty?
Consumer advocates have good reason for concern. Without any idea of how much they could end up paying, cardholders lack a key piece of information.
Pew’s Bourke says that in the past, banks included wording in card agreements acknowledging that they could charge “up to” a certain rate. For example, an agreement might state that the cardholder would pay a default rate of up to 30 percent, with the bank reserving the right to charge as much — or little — as it wanted to within that limit. “It’s unusual from where I sit to see an issuer no longer disclosing a maximum” rate, Bourke says.
For the time being, BofA stands alone among major banks in its decision to not list default rates. “It’s not the norm. We haven’t been seeing other banks follow suit,” Bourke says. “But of course, Bank of America is such a large player that it’s pretty significant when you see them doing that.” With 57.7 million BofA cardholders as of the end of 2009, it certainly is.
UPDATE (07/27/2010): After our story’s initial publication, bank spokeswoman Riess contacted us to point out that BofA has “not raised rates on our consumer credit cards since the CARD Act was passed last year,” she said in an e-mail. “We’re committed to providing customers with clear information about their accounts, and we’ll continue to look at how we can improve the clarity of our disclosure around our practices. I think it’s also important to point out that we are in full compliance with the CARD Act.”
UPDATE (08/04/2010): BofA spokeswoman Riess followed up with us again, saying that the bank is “making changes to our materials to clarify that we do not re-price existing balances on consumer credit card accounts. Customers will start to see those changes in our materials later this fall.” She added the following: “We aren’t re-pricing existing balances on consumer credit card accounts when the customer is 60 days past due and don’t plan to do so in the future. In fact, we haven’t raised rates on consumer credit cards since the CARD Act went into effect. Our objective is to help customers who may be struggling to make their payments, not make it more difficult to do so. We are committed to providing customers with clear information about their accounts and are always listening to feedback on the clarity of our communications.”