Starting in the 1980’s and going forward, easy consumer credit was a hallmark of the American economy. Credit cards were (and are) a central feature of consumer credit and regulation of credit cards was historically viewed as an issue of disclosure as opposed to actual control of the terms and conditions of the credit card agreement.1 Known as open-ended credit accounts, they are broadly governed by the Truth In Lending Act (TILA) which in turn enables the Federal Reserve to issue regulations dealing with consumer credit issues.2 Passed in 1968, the concept of TILA through the years was to require certain uniform disclosures which, in theory, would allow the consumer to compare the terms of the credit offering, such as the annual percentage rates, annual fees and so forth.3 Although some incursions were made into this historical approach, the consumer credit crisis brought certain longstanding sore points to the forefront such that pressure built for Congress to “do something.” The result was the Credit Card Accountability Responsibility and Disclosure Act of 2009, known as the Credit CARD Act, in which Congress and the Federal Reserve are now openly governing features of credit card agreements, a trend that, once established, will likely continue.4

Most consumers and even most attorneys are unaware of the terms and conditions contained in a cardmember agreement (the “CMA”); nonetheless, the CMA governs the relationship between the credit card company and the consumer. The CMA contains a number of features which are a surprise to most customers and have led to confusion and anger. A prominent issue addressed by the CARD Act is the CMA itself which, under existing case law, could be changed unilaterally by the credit card company—but not by the consumer. Another perceived problem was the practice of increasing the APR on an account even though the consumer was not late or delinquent. The Credit CARD Act not only addressed these items but also, over limit/delinquent fees, damages under TILA, repayment ability (some times referred to as “suitability”), and access to debt management counseling.5

1. Advance Notice of Change in Terms
Courts have long recognized that credit card issuers have the right, pursuant to the CMA and in some cases by statute, to amend the terms of the CMA by sending out a mailer and allowing the consumer the opportunity to opt out.6 The underlying policy has been that creditors, with millions of customers, needed to have a method to change a term or condition (such as insertion of an arbitration clause) without requiring the explicit consent of the consumer. In other words, if the customer did not explicitly reject the change, then the new terms would apply to both the existing credit balance as well as purchases going forward.

Under the new Act, the creditor now must give 45 days notice of increases in APR or “significant changes” to the CMA.7 This provision is in response to the perception that companies “hooked” customers on the credit card and then raised the rate without sufficient notice to allow the debtor to either pay off or move the balance. In addition, consumer advocates were displeased at what they believed to be creditors’ alleged sneaky insertion of arbitration clauses into CMAs. There are exceptions to the rate increase notification, such as a rate being previously pegged to a published rate or due to a default. As for “significant changes,” those have yet to be detailed by the Fed. Should a consumer decide to opt out, the creditor may not treat it as a default nor may the creditor demand immediate payment. Further, the CARD Act asks the Fed to regulate the conspicuousness of the opt out provision.

2. Increase of APR to Outstanding Balance
As the sophistication of credit scoring and information processing techniques increased, creditors had the ability to periodically review a customer’s credit history and determine whether that customer posed an increased risk of default. If so, then, pursuant to the CMA the creditor would increase the APR and apply it to the outstanding balance, as opposed to purchases on a going forward basis. The CARD Act bars increases, penalties or fees to “outstanding balances,” unless they fall into one of four exceptions.8 Outstanding balances are defined as that amount owed by the consumer 14 days after the consumer receives notice of a fee increase.9 The exceptions, which some contend swallow the protection, are (1) if the APR increases after a specified time; (2) the APR increases after the consumer completes (or defaults) on a workout program; (3) a variable APR increases as disclosed in the CMA, based on changes in published index not under creditor’s control; and (4) the increased APR, fee, or finance charge is due “solely” to fact that the account creditor itself has not received “a minimum payment” within 60 days after its due date. A creditor must give a 45-day advance notice before it can apply a penalty APR to outstanding balances. An APR increase notice must describe how a consumer can close their account before the effective date of “subject rate increase.”10

3. Penalty Fees/Over Limit fees
With the announcement that record profits were being earned by the creditors in the midst of the credit crisis, and a large portion of that being derived from penalties and fees, there was pressure on Congress to include some restrictions in the CARD Act. Most of us are familiar with at least one of these fees: the dreaded “over limit” fee in which a transaction sends the outstanding balance over the limit previously set by the creditor. Typically, the consumer would then face multiple applications of this fee in such instances as subsequent transactions or a continued over limit balance in future billing cycles. Under the CARD Act, creditors can impose an over limit fee only once during the billing cycle in which the consumer goes over limit and once in each of the following two billing cycles, unless the consumer has “obtained an additional extension of credit in excess of such credit limit during any such subsequent cycle” OR “reduces the outstanding balance below the credit limit as of the end of such billing cycle.”11 However, Congress left it to the Fed to issue regulations governing the required disclosures and prohibit creditors from manipulating credit limits to increase over limit and other penalty fees. There is no indication as to when these regulations are expected to be issued nor the form that they might take.12

4. New Statutory TILA damages
One of the perceptions about the handling of credit card accounts was that, regardless of TILA or Reg Z standards, the penalties for violations by a creditor were not sufficiently stiff to deter misconduct. Now, creditors that violate TILA may face enhanced statutory damages in connection with an “open-end consumer credit plan.” As revised, the statutory damages for such open-end plans will equal “twice the amount of any finance charge in connection with the transaction, with a minimum of $500 and a maximum of $5,000, or such higher amount as may be appropriate in the case of an established pattern or practice of such failures.”13

5. Suitability—Repayment Ability
The Credit CARD Act cannot be viewed in a vacuum and is subject to and the product of broader trends in consumer finance. One of the hottest ideas in recent years is the doctrine of “suitability.” Suitability comes to consumer finance from the world of securities law in which a broker or investment advisor must consider the level of sophistication, intelligence, etc. of the consumer when deciding the level of risk that is acceptable for a suitable investment for that customer.14 As
expressed in the realm of consumer finance, and first espoused in terms of consumer mortgages, the burden would be placed upon the creditor to consider a consumer’s ability to repay a loan before extending credit to the debtor.15 This concept, much discussed in recent years and a favorite of House Representative Barney Frank (a primary mover behind much consumer finance legislation), was justified in the context of consumer mortgages under the belief that it would be an important tool to save people’s homes.16 The problem with the suitability doctrine is that neither the industry, consumer advocates, Congress nor the Fed has ever agreed upon an acceptable metric to determine whether a loan product is appropriate for a consumer.17 Regardless, the CARD Act fearlessly states that a creditor may not open any credit card account for any consumer, or increase any credit limit applicable to the account, unless the creditor considers the “ability of the consumer to make the required payments under the terms” of such account.18 No guidance is given on this front although it is expected that, again, the Fed will have to speak on the subject.19

6. Access to Debt Management/Credit Counseling Services
Suspicion that credit card issuers were making credit too easily available to consumers pervaded the debate concerning the sources of the credit crisis and filtered down to the Credit CARD Act. It was decided that consumers needed to be reminded about the risks of credit card debt. Further, it was deemed advisable that the customer receive information regarding credit counseling and/or debt management. To that end, the Fed must issue guidelines in consultation with the Secretary of the Treasury, for the establishment and maintenance by creditors of a toll-free number that can provide information about accessing credit counseling and debt management services.20

Conclusion
For many years, credit cards were viewed as a matter of convenience with the recognition that the responsibility lay with the user to exercise prudence in handling their purchases and corresponding debt. Congress and the courts agreed with this concept, focusing on “creditor disclosure” to allow consumers to make informed choices.21 Further, the convenience went hand-in-hand with the relatively cheap cost of credit which in turn helped fuel the expanding economy of the last 30 years. The Credit CARD Act moves away from this hands-off approach and in the direction of “protecting” the consumer from him or herself. No doubt some will argue that these protections were long overdue; however, with every incremental increase in protection, there could be a corresponding increase in the cost of credit or decrease in the availability of that credit. The law of unintended consequences may apply here.

David Smith is a partner in the Houston office of McGlinchey Stafford PLLC. He is Board Certified in Consumer and Commercial Law by the Texas Board of Legal Specialization.

Endnotes
1. The concept was known as “creditor disclose.” See Matthew A. Edwards, Empirical and Behavioral Critiques of Mandatory Disclosure: Socioeconomics and the Quest for Truth in Lending, 14 Cornell J.L. & Pub. Pol’y 199, 200-201 (2005); Christopher Peterson, Truth, Understanding, and High Cost Consumer Credit: The Historical Context of TILA, 55 Fla. L. Rev. 807, 818 (2003). 2. TILA itself was passed as a part of a larger series of legislative acts collectively known as the “Consumer Protection Act,” which perhaps foreshadowed the tension between the desire to overtly protect the consumer as opposed to merely relying on consumer sophistication in a free enterprise approach. Ralph C. Clontz, Jr., Truth-in-Lending Manual, ¶ 1.-02 (1997). 3. See 15 U.S.C. §1602 (f) (1968); Regulation Z, 12 C.F.R. § 226.3 4. See new TILA §171, et seq. 5. The CARD Act addresses many additional areas and should be read in its entirety. 6. See Grasso v. First USA Bank, 713 A.2d 304, 309 (Del. Super. 1998); Del. Code Ann. Tit. 5 §952 (b) (1) and (2), Amendment of Agreement. 7. New TILA §171(b)(1)-(3). 8. New TILA §171. 9. Id. 10. Id. 11. The CARD Act adds new sub-sections (j), (k) and (l) to the end of TILA §127 (15 USC §1637). 12. See Interim Final Rule and request for public comment, Regulation Z, 12 C.F.R. Part 226, Federal Register Vol. 74, No. 139, July 22, 2009. 13. 15 USC §1640(a)(2). 14. See §2310 of the NASD Rules: “In recommending to the customer a purchase of a security the member shall have reasonable grounds for believing that the recommendation is suitable for the customer based on the facts disclosed by the customer as to his other holdings, financial situation and needs.” 15. See Suitability and
HOEPA, Koren, Bennet, 2007 Consumer Finance Legal Conference. 16. Frank was quoted by the Wall Street Journal: “We will pass a bill that won’t allow companies to loan people more money than they can pay back...” (WSJ, April 25, 2007) (in the context of discussion about the mortgage crisis). 17. Koren, Suitability and HOEPA. 18. New TILA §150. 19. Interim Final Rule, Regulation Z, 12 C.F.R. Part 226, Federal Register Vol. 74, No. 139, July 22, 2009. 20. The CARD Act refers to new requirements in TILA, sub-section (iv) of TILA §127(b)(11)(B). 21. See Ralph J. Rohner and Fred H. Miller, Truth in Lending, Chapter 1 (2000).