Credit card issuers beware: Feds will be watching
FDIC, FTC other regulators will use fairness and deception tests
With new credit card rules coming in 2010, credit card issuers may be tempted to adopt new billing practices or offer services not specifically banned by the new regulations, but that are still potentially unfair or deceptive.
Don't do it, federal regulators warn.
Regulators and bank examiners will be monitoring credit card practices to determine what's unfair or deceptive based on criteria outlined in the Federal Trade Commisison Act, the federal law that bans unfair and deceptive trade practices in all areas of commerce.
Monitoring for future abuses
"We will continue to follow those principles for looking at those situations that don't fall within what we are saying today," says Mira Marshall, chief of the compliance policy section of the Federal Deposit Insurance Corp. (FDIC), the federal agency best known for insuring deposits against bank failures. Marshall adds: "There are still going to be lots of situations where we will go through the process of analyzing whether they are unfair and deceptive."
The new credit card rules -- announced in December 2008 and scheduled to take effect July 1, 2010 -- apply to consumer credit cards, but not corporate or small business cards. Among other things, the new rules will limit interest rate increases, give consumers more time to pay their monthly credit card bills, ban double-cycle billing and require issuers to put any amount above the minimum payment due each month toward balances with higher interest rates first. (See What the new credit card rules may mean for you.)
Understanding which agency is responsible for monitoring which credit card issuer is complicated because banking regulation is like a patchwork quilt of jurisdictions. The rules were approved by the Federal Reserve, which regulates banks that are members of the Federal Reserve System, the Office of Thrift Supervision (OTS), which regulates thrifts and savings and loan associations, and the National Credit Union Administration, which regulates national credit unions.
The FTC Act gives rule-making power to these three agencies only, however, enforcement of the rules falls on a broader list of agencies. The Office of the Comptroller of Currency (OCC) regulates national banks, which are the major credit card issuers, including Bank of America, Citi and Chase. State-chartered banks are regulated by their home states and supervised by the FDIC, and state-chartered credit unions are regulated by their home states and the FTC.
A small percent of consumer credit cards -- those that are not issued through banks but rather by retailers -- are not subject to the new rules because they are not affiliated with lending institutions regulated by any federal agency. Those include the Army & Air Force Exchange and Sterling Jewelers.
Credit cards issued by state-chartered credit unions also are not covered under the new federal rules. However, regulators say issuers of those cards would still fall under the provisions of the FTC Act that ban unfair and deceptive trade practices. The bottom line: The FTC can take action against any potential violator with a maximum civil penalty of $10,000 per incident. The FTC and FDIC invoked the FTC Act in June 2008 when the agencies jointly filed suit against Atlanta-based credit card marketer CompuCredit Corp. and several banks for alleged deceptive practices in "fee harvesting" credit cards. Compucredit agreed to settle the case and pay $114 million to consumers.
What's unfair and deceptive?
What criteria will the FTC use to determine if a credit card practice is unfair or deceptive?
The FDIC and Fed jointly issued guidelines to help bank examiners determine when a billing practice, card feature or offering has crossed the line. The guidelines, originally published in 2006, state a practice is unfair if it meets all of the provisions of a three-part test, namely, if:
- It causes or is likely to cause substantial injury to consumers.
- Consumers are reasonably unable to avoid the injury.
- It is not outweighed by any benefits to consumers or competition.
A credit card practice may be deemed deceptive if the representation, omission of information or practice meet all of the following. If:
It misleads or is likely to mislead consumers.
Consumers' interpretation of it is reasonable under the circumstances.
It is material.
The guidelines note that, "Although a specific act or practice may be both unfair and deceptive, an act or practice is prohibited by the FTC Act if it is either unfair or deceptive." In addition, "Meeting the standards for deception or unfairness depends on the specific facts and circumstances of each case," according to the guidelines.
Similarly, regulators will be looking for issuers that attempt to get around the new regulations by, for example, characterizing a fee as something else to avoid new rules regarding upfront account opening fees. Upfront fees (security deposits, membership fees, account-opening fees) that total more than 50 percent of the credit limit on subprime credit cards cannot be financed. Fees totaling up to 25 percent of the credit limit on the cards must be spread over the next five billing cycles.
"We would not look positively at simply renaming a fee in order to get around the fee regulations," April Breslaw, from the OTS' Office of Consumer Education, said during a Feb. 24 briefing to credit unions and other lending institutions about the new credit card rules.
Marshall from the FDIC says card issuers may be scrutinized more closely by bank examiners if they are "advertising something in a way that is deceptive or undertaking some activity in a way that is unfair."
To comment on this article, write to: Editors@CreditCards.com.
See related: What the new credit card rules may mean for you, Proposed credit card rules prompt massive response, Regulators approve sweeping new credit card rules, New Fed rules don't cover business, corporate credit cards, FTC: Subprime credit card marketer must repay $114 million, Feds seek $200 million for 'fee harvesting' credit cards
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