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This guest post comes from Odysseas Papadimitriou, CEO of Card Hub.
Bank of America, while not exactly breaking the letter of the Credit Card Act of 2009, is certainly violating its spirit this year. While the Fed recently closed a lot of loopholes in the act – which banks used to extract more money from their customers – B of A keeps searching for new ones.
The $59 “membership fee”
Bank of America recently announced it would add a $59 “membership fee” to about 5 percent of its credit card accounts – using a mix of below-average FICO scores, “high credit utilization,” and poor payment history to decide who gets hit. While not illegal, this new fee breaks the intent of the CARD Act, which prevents credit card companies from increasing interest rates on existing balances until account holders are 60 days delinquent. Sure, this membership fee isn’t an interest rate increase, but it does arbitrarily hike the cost of credit card debt – which is exactly what the CARD Act is designed to prevent.
CARD Act intent
This rule was implemented to prevent credit card companies from trapping customers and forcing them to abide by terms that were not advertised. If Bank of America’s fees were to be applied to customers without debt, they wouldn’t be a problem because these customers could just close their accounts and switch companies.
But Bank of America’s risk-based re-pricing exploits a semantic loophole. Membership fees and interest rate increases are effectively the same thing when applied to indebted accounts. Both are finance charges, according to Regulation Z – Truth in Lending Act. While the membership fees will help Bank of America increase profits in the short term, this type of fee could hurt consumers in the long term.
Credit card industry must self-police
Bank of America needs to focus less on stop-gap revenue schemes and more on improving the underwriting practices of a credit card division that lost more money than that of any other major bank in 2009, the worst year of the Great Recession.
This is especially true if the company wants to truly compete with the most sophisticated issuers – such as Capital One, whose credit card division made more money than any of its major bank counterparts during 2009.
And regulatory agencies aren’t going to stand pat. They’re going to keep closing legal loopholes and stop deceptive practices as they arise. This is particularly true considering that the Consumer Financial Protection Bureau is scheduled to gain new authority in July, under the leadership of consumer advocate Elizabeth Warren. In a speech given at the Department of the Treasury in February – the one-year anniversary of the CARD Act – Warren spoke to the importance of continuing regulation…
As soon as the CARD Act became law, it seems that some industry lawyers were asked to find slightly different ways to accomplish that which the legislation was intended to outlaw. To its credit, the Federal Reserve Board responded with a rule-making proceeding designed to close the loopholes. I doubt that anyone thinks this is the last time such a rule-making proceeding will be required.
Ultimately, regulators aren’t going to turn their attention from credit card companies until these organizations prove they can police themselves. So Bank of America, for its own sake, should not proceed with its planned membership fees.