Banks, credit card issuers skirt CARD Act restrictions © Comstock/SuperStock

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Credit card issuers dodge new law

Last year's Credit CARD Act was intended to put a halt to excessive fees and sky-high interest rates, but banks are finding creative ways around the restrictions.

By The Wall Street Journal

U.S. banks are finding new ways to levy credit card fees and raise interest rates in the wake of a year-old law that was designed to limit such charges.

The banks' new approaches are being scrutinized by federal banking regulators.

First Premier Bank, known for wooing customers with weak credit, is circumventing a provision limiting fees assessed on accounts in their first year by charging a $95 processing fee before the card is ever used. Citigroup, mindful of the law's limits on raising the interest rates on customers who are late with payments, has increased some customers' interest rates in advance, then offered partial refunds on finance charges if the cardholders pay on time.

Both companies said their practices were within the law.

The jockeying underscores how the legislation's restrictions have inadvertently provided banks with opportunities to make up for lost profits through new practices.

"They're finding all these little ways to get you," said Emily Winters, a 54-year-old in Harrisburg, Pa., who saw the minimum monthly payment on her JPMorgan Chase credit card more than double, to $623. "How does that help us?"

JPMorgan's Chase unit raised the minimum monthly payments on some accounts with balances initially provided under promotional rates, unless cardholders agreed to give up those rates. The move, which increased minimum payments from 2% to 5% of affected cards' balances, affected a small group of customers, a Chase spokeswoman said. "Our desire is to have these balances paid back in a reasonable period of time," she added. The new law limits interest-rate increases, but it generally allows companies to raise minimum payments.

The Credit Card Accountability, Responsibility and Disclosure Act, which Congress passed in May 2009, marked the first major push toward tougher consumer financial regulation in the wake of the global financial crisis. The act's first provisions went into effect in February, banning most interest-rate increases on existing balances and barring companies from raising rates in the first year of a card's use.

Card issuers "are trying to figure out how to manage the new regulatory environment so they can serve their customers," said Kenneth Clayton, the senior vice president for card policy for the American Bankers Association, a trade group. "With that change, there's going to be lots of exploration on the part of issuers and consumers for what works."

Clayton said consumers who are unhappy with changes required by card issuers have the right to close any account they don't like.

The Federal Reserve is soon expected to release rules to take effect in August addressing a provision in the law requiring penalties to be "reasonable and proportional" to a company's costs. Another rule would force card companies to re-evaluate the interest rates every six months on any account that had previously seen an increase.

Meanwhile, the Fed and other regulators are fielding complaints from the public about banks' changing practices. But so far, the disputes over the credit card law have been private deliberations between issuers and regulators, and no public enforcement has been required.

The federal Office of the Comptroller of the Currency, which supervises national banks such as Citibank and Chase, recognizes "there are some issues that simply were not provided for in the legislation or that the legislation resolved in a way that is now raising concerns," spokesman Dean DeBuck said. "Where we find violations of new or existing requirements, we will insist on immediate correction and will take formal enforcement action where appropriate to the circumstances."

Many cases are far from clear-cut. Since last fall, Citibank has raised some customers' interest rates as high as 29.9%. But it also has offered them a rebate on up to 70% of their finance charges -- in some cases enough to bring borrowing costs near the original rates -- if they pay on time. The approach is designed to circumvent limits to raising rates on existing balances. The company told customers in a letter that it reserved the right to revoke the rebates at any time.

Citi said in a statement that "the rebate offer is clear, transparent, and we believe fully within the spirit of the CARD Act."

"It's a creative way to get around it," said Lauren Bowne, a staff attorney at Consumers Union, a watchdog group.

Josh Frank of the Center for Responsible Lending, one of several consumer groups that have complained to regulators about the practice, warned that "if you get this as an offer, don't trust the rebate because it could be revoked at any time without recourse."

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Among the offers from First Premier Bank is a credit card featuring a $300 credit limit and $75 annual fee. The credit-card law limits fees to no more than 25% of a card's credit line in the first year. Yet First Premier's Centennial card also adds a $95 processing fee for new customers, to be paid before using the card. A spokeswoman for First Premier Bank, headquartered in Sioux Falls, S.D., maintains that the 25% fee limit under the law "only applies to fees charged after the account is opened."

Chi Chi Wu, a staff attorney at the National Consumer Law Center, a consumer-interest group, said: "At best they're skirting the law. The whole idea of the fee limit was to prevent situations where you have a barely usable credit line and you're saddled with all these fees."

This article was reported by Sudeep Reddy for The Wall Street Journal.

Published June 24, 2010

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