By: Akanksha A. Panicker
Between the horror stories of credit card debt and the tanking of credit card scores, the idea of using a card itself is daunting. It’s well established that a credit card is a valuable tool for spending, but irresponsible usage can lead to repercussions that span what feels like eons.
Before swearing to forsake credit cards altogether, one needs to understand practices that credit card companies use. It’s no secret that the catalytic mortgage and foreclosure crisis led to the rise of financial products designed to capture lower-income users was targeted at minority borrowers. As a result, predatory lending practices have led to a number of lawsuits against loan companies and banks. Even today, consumer protection acts are designed in order to minimize the damage that can be afflicted by predatory credit card companies.
[1.0] IMPACT OF UNFAIR CREDIT PRACTICES
Predatory lending refers to unethical practices conducted by lending organizations during a loan origination process that are unfair, deceptive, or fraudulent. Essentially, borrowers are held liable even if the loans are unfair or abusive.
The reason consumers need protection from credit card companies is their tendency to target vulnerable consumers using tactics like teaser rates, mass mailings of preapproved cards, fee harvesting cards, and credit card redlining. They make use of exceedingly complex agreements and often push low-income consumers to receive cards with immensely high fees and interest rates.
So what does this mean?
Low-income consumers are forced into unfair agreements, but the benefits of said credit card use cannot directly reflect onto them. Some common perks for credit card usage can be travel miles, which cannot be reaped by them. What this also means is that the entire profit system of credit card companies shifts; they now collect interest payments and rely on late fees instead of annual and interchange fees. Thus, the disparity between income groups widens significantly, as the wealthier consumers and corporations are able to escape the debt spiral but the poorer individuals can never really get rid of their credit debt with a good enough credit score. With bad credit comes predatory lenders, who try to take advantage of individuals who cannot borrow from a legitimate vendor, requiring them to maybe use practices that strip away home equity or by offering loans with terms that cannot be met.
[2.0] LATE FEES
Credit card companies charge late payment fees when payment of the full minimum amount is not made by the due date. Usually, there does exist a grace period that lasts at least 21 days after the billing cycle ends in order to pay it in order to prevent unfair fee traps. It’s common practice to have a fixed fee regardless of how much is owed, but late fees can accrue costs in the form of added interest charges and can contribute to an ongoing cycle of debt. It is necessary to check the information in the fine print of the credit card agreement presented upon the opening of a new account.
The credit CARD Act of 2009 caps late fees. This means the Consumer Financial Protection Bureau can adjust caps on late fees each year, relying on the consumer price index to do so. Late payment fees stay the same if the consumer price index doesn’t change enough to move the fees up or down by a full dollar. However, if it increases or decreases more than that, the CFPB will reset fees in accordance.
[3.0] THE CREDIT CARD ACT
The deregulation of credit cards ended in 2009 with the enactment of the Credit Card Accountability, Responsibility, and Disclosures (CARD) Act. Prior to this, creditors would increase cardholder interest rates with every single late payment or even if the consumer credit score had changed [regardless of the timeliness of the payment itself.] To make things worse, a host of punitive fees and charges were imposed that made things worse for consumers who had hit financial difficulties.
The insensitivity of lenders, especially the big banks, had morphed into abuses, especially considering big banks ignored state limits on interest rates, fees, and other lending practices. The Credit Card Accountability, Responsibility, and Disclosure Act of 2009 is a federal law designed to protect credit card users from abusive lending practices by card issuers. Commonly known as the CARD Act, its primary goals are the reduction of unexpected fees and improvements in the disclosure of costs and penalties.
The CARD Act essentially amends the Truth in Lending Act and aims to protect consumers from unfair lending practices by credit card issuers. It changed the language in credit card agreements to something not mired in legalese and terms that consumers are not easily familiar with. The act made the language, terms, and disclosure of penalties and fees more transparent regardless of whether it is in the initial card agreements or whether they were in monthly statements. The Consumer Financial Protection Bureau, or CFPB, is responsible for developing, implementing, and enforcing the rules necessary for compliance by card issuers.
The CARD Act 2009 seeks to curtail deceptive and abusive practices by credit card issuers and ensures stability and lucidity in the terms of the credit card issuers. Furthermore, it allows for an easier comparison of credit cards.
The act limits charges on universal default, which means that higher interest rates on future balances after a late payment, and mandates greater advance warning of interest rate hikes. Furthermore, the issuers are necessitated to inform cardholders as to how long an existing balance will take to be paid off following the monthly card minimum.
The act also prohibits aggressive marketing measures targeted at younger consumers, as well as prohibiting a credit card company from allowing an account to go over the limit. What this means is that consumers are given a chance to opt-in for over-limit charges on a credit card, and if they deny the same, they will have their cards declined when a proposed charge would put the balance into the over-limit territory. This means that the statements have to be mailed three weeks before the due date, and the due dates need to be consistent. Section 502(a) of the CARD Act also necessitates a review of the consumer credit card market to be carried out every two years.
[4.0] FACTORS FOR CONSUMERS AND LENDERS TO TAKE INTO ACCOUNT FOR LATE FEES
Late fees are just one of several fees companies charge consumers in order to make money. Consumers are also subject to annual fees, balance transfer fees, foreign transaction fees, and return payment fees. Unfortunately, the cardholder will have to specifically select the credit card in order to ensure this, as long as they follow the terms of these cards.
Late fees do not need to be a damning sentence. If the borrower cannot pay off the full balance, a minimum monthly payment can avoid charges. This is an easier option, but it leaves the consumer in a bind if their checking account does not have enough money to cover a credit card payment. The payment will be considered late herein but will also attract a returned payment fee from the issuer and a nonsufficient funds (NSF) fee from the bank.
The good news is that even if a late payment was a simple oversight, the interest rate might not necessarily shoot up automatically. Lenders review and alter interest rates based on payment history in a process called penalty repricing, wherein the interest rate will increase to the penalty Annual Percentage Rate (APR) if they consider the consumer to be a high credit risk. Consumers with higher credit scores and better credit histories will usually have access to credit cards that have lower interest rates. Those with lower credit scores will likely only be approved for cards with higher interest rates. By law, card issuers aren’t allowed to raise the rate to the penalty rate until 60 days past due payment. Additionally, a consumer does not necessarily always have to pay for annual fees to have the card. A large percentage of credit cards do not have an annual fee, and even if they do, they often waive it for the first year of being a cardholder.
It’s important to get a copy of the individual’s credit report or credit score because lenders use this information to set the terms of the card. It is the right of the consumer to request changes in the credit report if there are errors and corrects the same by sending the company a billing error notice disputing the charge. While normally the company has 30 days to confirm receipt of notice [alongside two billing cycles not spanning more than 90 days,] the pandemic extended that period due to operational issues.
The Bureau’s flexible supervisory and enforcement approach depicts the maximum timeframe for billing error resolution, if the credit card company can show good faith efforts to obtain the necessary information and make a determination as quickly as possible, and complies with all other requirements pending resolution of the error. Regardless of the maximum timeframe, the credit card company is absolutely not allowed to [A.] ask the consumer to pay the amount in dispute, [B.] report the amount in dispute as ‘unpaid’ to credit reporting, or [C.] close the consumer account solely due to a good faith billing error
While a singular annual credit report may be accessed without cost, currently, the three major national credit reporting agencies are allowing for weekly report checks. At any point, however, if the consumer opted for formal assistance during the time of the coronavirus, it must be remembered that [A.] if the consumer has met the terms of the credit card relief package, the company must report to the credit reporting agencies that the consumer is “current” on the account and [B.] that there must be a written agreement delineating the terms of the relief package.
Companies need to take adequate steps before tacking on late charges or a late indicator onto consumers. The late payment is added to one’s credit report when the payment is more than 30 days late, but entry is added to their credit report and can stay for seven years. Because payment history makes up 35 percent of a credit score, late payments can have a significant effect on the consumer’s ability to obtain future credit, and the fallout can be extremely difficult to recuperate from for the consumer. While the CARD Act protects the consumer to a large degree, further safeguards must be taken to prevent further abuses of power by the companies.
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1.OCC Advisory Letter AL 2003-2 describes predatory lending as including the following:
- Loan “flipping” – frequent refinancings that result in little or no economic benefit to the borrower and are undertaken with the primary or sole objective of generating additional loan fees, prepayment penalties, and fees from the financing of credit-related products;
- Refinancings of special subsidized mortgages that result in the loss of beneficial loan terms;
- “Packing” of excessive and sometimes “hidden” fees in the amount financed;
- Using loan terms or structures – such as negative amortization – to make it more difficult or impossible for borrowers to reduce or repay their indebtedness;
- Using balloon payments to conceal the true burden of the financing and to force borrowers into costly refinancing transactions or foreclosures;
- Targeting inappropriate or excessively expensive credit products to older borrowers, to persons who are not financially sophisticated or who may be otherwise vulnerable to abusive practices, and to persons who could qualify for mainstream credit products and terms;
- Inadequate disclosure of the true costs, risks and, where necessary, appropriateness to the borrower of loan transactions;
- The offering of single premium credit life insurance; and the use of mandatory arbitration clause
2.Codified to 12 C.F.R. § 1026.54 Limitations on the imposition of finance charges.
(a) Limitations on imposing finance charges as a result of the loss of a grace period. (1) General rule. Except as provided in paragraph (b) of this section, a card issuer must not impose finance charges as a result of the loss of a grace period on a credit card account under an open-end (not home-secured) consumer credit plan if those finance charges are based on:
(i) Balances for days in billing cycles that precede the most recent billing cycle; or
(ii) Any portion of a balance subject to a grace period that was repaid prior to the expiration of the grace period.
(2) Definition of grace period. For purposes of paragraph (a)(1) of this section, “grace period” has the same meaning as in § 1026.5(b)(2)(ii)(B)(3).
(b) Exceptions. Paragraph (a) of this section does not apply to:
(1) Adjustments to finance charges as a result of the resolution of a dispute under § 1026.12 or § 1026.13; or
(2) Adjustments to finance charges as a result of the return of a payment.
3. Pub. L. No. 111-24, 123 Stat. 1734 (2009)
4.Text of H.R. 627 (111th)”. www.govtrack.us.
5.Title I of the Consumer Credit Protection Act, Pub.L. 90–321, 82 Stat. 146, enacted May 29, 1968; codified at 12 C.F.R. 226.
6.Calculation in the TILA which is implemented by the Consumer Financial Protection Bureau (CFPB) in Regulation Z of the Act
7.Consumer Financial Protection Bureau. “The Card Issuer Increased My Interest Rate on My Existing Balance. Can They Do That? What Can I Do to Get the Rate Back Down?”
8.Bureau’s April 1, 2020 “Statement on Supervisory and Enforcement Practices Regarding the Fair Credit Reporting Act and Regulation V in Light of the CARES Act.” The statement is available at: https://files.consumerfinance.gov/f/documents/cfpb_credit-reporting-policy-statement_cares-act_2020-04.pdf.
9.Office of the Federal Register. “Safe Harbor Penalty Fees—§ 1026.52(b)(1)(ii)(A) and (B).”
10.However, if already behind on your payments at the time of relief, the lender is not required to report that the consumer is current.