PETERBOROUGH, N.H.-Even as the new CARD Act goes into effect, credit card issuers are racing to familiarize themselves with its sweeping provisions, as it will "impact every functional area of credit card lending. Not only processors, but credit unions' internal staffs will be greatly affected," according to one expert.
James Walsh, CEO of credit card consultancy Brookwood Capital, called the CARD Act the most significant regulatory change since the adoption of Regulation Z, due to its wide-ranging impact, touching upon areas from marketing and advertising to external processor service levels. A few examples of the changes:
* If issuers making a firm offer of credit advertise multiple rates or credit limits, they must disclose the factors that determine which rate and limit the cardholder will receive.
* Statements must contain a disclosure advising the cardholder how long it will take to pay off the account if only minimum payments are made.
* Issuers may not open any credit card account or increase any credit limit without considering the ability of the cardholder to make the required payment [Walsh believes this may eliminate automated credit line increases.]
* Issuers must establish and maintain a website with the written agreements for all credit card products offered to cardholders.
* When the cardholder keys in a balance and a pay-off term, the VRU must indicate what the payment will be.
"As of Feb. 22, 2010, issuers may increase rates only for three reasons: delinquency over 60 days, the expiration of a clearly identified introductory rate, or in the case of variable rates, and only if the Index increases," he said. "And the law has teeth. For non-compliance or an infraction on a single account, on any of these areas, there is a fine of twice the amount of the finance charge, with a minimum of $500 per account."
There is a stated maximum of $5,000 per account, but Walsh said higher amounts are authorized in the case of an "established pattern" of failures.
The implications are clear and potentially devastating, he continued. In the case of a smaller issuer, with just 2,000 accounts, infractions on just 10% of accounts could add up to penalties between $100,000 and $1 million. He said CUs should not count on their processors to "do it all."
The CARD Act has further implications, Walsh said. Because issuers largely will be forbidden increase the interest rate on existing balances, they will be unable to react to the fact high-FICO cardholders are reducing their credit card debt. Further complicating the picture are variable-rate cards-there is significant margin compression as Prime Rate Indexed APRs have dropped faster than cost of funds, he said.
