It has been almost five years since the Credit CARD Act was passed by Congress and more than four years since the compliance dates set by the Federal Reserve Board (many compliance professionals may still be haunted by the date February 22, 2010). While it would seem like credit card compliance issues are in the rearview mirror, now is the perfect time for credit unions to review their procedures to ensure they remain compliant.
And, a lot has happened in the past four years – most notably the passage of the Dodd-Frank Act and the subsequent creation of the Consumer Financial Protection Bureau (CFPB). Now that the CFPB has met its Dodd-Frank mandates, its attorneys are freed-up to review other areas of concern – including credit cards.
Below are 5 Common Credit Card Violations that credit unions should be reviewing and, if necessary, correcting.
1. Increasing APR or Fees in First Year
One of the key components of the Credit CARD Act was the restrictions on when credit unions could increase a member’s APR or a fee on a credit card account. Now, credit unions must utilize one of the exceptions in Regulation Z before taking an action that would be adverse to members. A common approach is using the 45-day advance notice exception – which allows credit unions to increase the APR (on future purchases) or a fee provided the credit union has properly notified members in advance of the increase.
However, this exception comes with one large compliance hurdle: it cannot be used during the first year a member’s credit card account has been opened. Thus, credit unions that are implementing “across the board” APR or fee increases must be tracking and monitoring which members opened their credit card accounts in the prior twelve months and delay the increase on those accounts until the first year has ended.
2. Rate Reevaluations Every 6 Months
Related to the first common violation, the Credit CARD Act added an affirmative requirement to monitor – at least every six months – accounts where the credit union increased the APR. This requirement applies for both “across the board” and “individual” APR increases, such as when a particular member’s credit score has dropped. In these situations, the credit union must review the rationale for the APR increase and, importantly, document its decision to not reduce (or only partial reduce) the APR on the account. Unfortunately, this rate reevaluation obligation only ends when the member’s account is reduce to the original APR.
Additionally, credit unions that have acquired credit card portfolios through a merger are obligated to review the APR increases conducted by the prior credit union.
3. Caps on Penalty Fees
In a unique move, Congress also gave the Federal Reserve Board (and, now, the CFPB) the ability to place caps on certain penalty fees. These include late payment fees, returned payment fees and over-the-limit fees. In these situations, credit unions are limited in the amount of the fee that can be charged. For the first violation in a six month period, credit unions have a “safe harbor” of compliance if their fee is $26.00 or less and for the second violation – of the same type – in the same six month period, credit unions can charge up to $37.00.
Beyond the initial caps, credit unions are prohibited from charging a fee that is larger the amount of the transaction. This “reasonable and proportional” requirement means a credit union cannot charge a $26.00 late fee if a member misses a $20.00 minimum payment on their credit card. In that situation, a credit union could not charge more than $20.00 for the late fee.
4. Increased Credit Limits
The Credit CARD Act created an ability to pay test that credit unions must consider prior to opening a credit card account or increasing a member’s credit limit. Additionally, specific protections were put in place for members who were under the age of 21. In these situations, a member under the age of 21 must have their own independent ability to pay the required minimum payments or have a cosigner, guarantor or joint applicant who is at least 21 years old that has the ability to pay and will agree to assume liability for making the payments.
Importantly, these additional requirements for members under the age of 21 apply beyond the initial opening of the credit card account. In fact, Regulation Z requires the credit union to obtain the cosigner, guarantor or joint applicant’s written agreement prior to any increases in the credit limit on the account. Thus, credit unions need to have systems in place to determine which credit card accounts are held by members under the age of 21 and procedures to obtain and document the written agreement prior to the credit limit increase.
5. Reducing Credit Limits
On the flip side, credit unions often have disclosure requirements when reducing a member’s credit limit on a credit card account. In general, a 45 day advance notice is not required as the credit union needs the ability to reduce credit limits for safety and soundness purposes. However, the reduced credit limit could be “adverse action” triggering notices under the Equal Credit Opportunity Act and the Fair Credit Reporting Act (FCRA). For example, if the credit union noticed a drop in a member’s credit score during a routine review of the member’s credit and wanted to reduce the member’s credit limit on the credit card account – both adverse action notices would be required and the credit union would need to be sure to include the specific “credit score disclosure” information that was added to the FCRA requirements by Dodd-Frank.
While credit unions are focused on complying with the myriad of regulatory changes – especially the CFPB’s mortgage regulations – they should not lose focus of the detailed Credit CARD Act requirements in Regulation Z. And, by ensuring compliance with the existing regulations now credit unions will be better prepared for the CFPB’s future changes to credit card requirements.