The Credit CARD Act signed into law in May of this year aimed to protect cardholders from unfair and abusive credit card practices. Unfortunately, as most all cardholders know first hand by now, credit card companies have been raising interest rates aggressively in advance of the enactment of the new law, in an effort to minimize the impact of some of its provisions.
Well, there may be good news. If your interest rate has been raised anytime after January 1, 2009, credit card companies could be required to lower the interest rate back down, once an important new provision of the new Credit CARD Act steps into effect.
Congress put a bit of a poison pill into the Credit CARD Act, a.k.a. section 101(c). The section requires credit card companies to regularly review interest rate increases they make on credit cards, and lower rates back down, if the cardholder’s risk profile or general market conditions have improved. The interest rate reviews will step into effect in August 22, 2010. Most significantly, the reviews are to include credit card interest rate hikes dating back all the way to January 1, 2009.
Credit card companies are further required to set up and maintain “reasonable methodologies” for the interest rate review, and undertake reviews at least every six months. Based on the review, if any risk factor has declined, the card issuer shall reduce the annual percentage rate previously increased. Card issuers will also be required to provide a written notice of future interest rate increases, including a statement with the reasons for the interest rate increase.
That is the good news. The bad news is that the law leaves plenty of uncertainties. Most notably, it says nothing about how much the interest rate reduction should be, or whether credit card companies will be required to reset interest rates to their previous levels. It also leaves out any discussion about which criteria card issuers should use to go about determining what constitutes “reduced risk.”
These specifics and other details of how 101(c) will be implemented are left to the Federal Reserve Board to determine, as the nation’s primary financial regulatory agency. The Fed is required to issue rules for how the interest rate reviews are to be conducted by February 22, 2010, six months before the interest rate reviews become effective.
Disturbed by the recent interest rate hikes on credit cards, Senator Chris Dodd, Chairman of the Senate Banking Committee, recently sent a letter to Fed Chair Ben Bernanke along with the heads of key regulatory agencies. In the letter, Dodd called on the Federal Reserve Board to provide tough, clear specifics for what would be required by the interest rate reviews. He further called on the agencies charged with enforcing the Credit CARD Act to hold the credit card companies strictly accountable for conducting thorough reviews and decreasing rates.
Dodd asked Fed Chair Ben Bernanke to immediately notify credit card companies that they will be held accountable for all interest rate increases since January 1, 2009, and will be subject to the review requirement once it takes effect.
According to Senator Dodd, the January look-back provision was designed expressly as a means to deter card issuers from raising interest rates before the provisions of the Credit CARD Act take effect. “However,” Senator Dodd states in his letter to the Fed Chair, “the look-back provision will serve as a deterrent only if it will be implemented and enforced effectively.”
In view of the aggressive rate hikes that have hit consumers over the last six months, Section 101(c) could turn out to be one of the more important parts of the Credit CARD Act. Whether or not the regular interest rate reviews will have any teeth, however, will ultimately boil down to the criteria the Fed Reserve Board lays out for conducting the reviews and determining how much interest rates should be lowered.
We won’t know the details about that until the Fed issues the guidelines for interest rate reviews, sometime on or before February 22, 2010. After that, there will be a required public comment period, during which the public—and that means you and I—will be able to weigh in on whether or not the rules for interest rate reviews deliver on the intention of the law: to protect consumers against arbitrary and unreasonable interest rate increases.
