Back in 2009, Wallet Blog broke the story that Chase had reneged on a promise it made to certain customers not to increase the interest rates on balances transferred to the company’s credit cards. While Chase did not increase interest rates per se, the company did begin assessing $10 monthly fees that increased the cost of consumer debt nonetheless. Working together with the New York Times, Wallet Blog made the story national news, causing then-New York Attorney General Andrew Cuomo to threaten legal intervention against the financial giant. As a result, Chase repealed the monthly fees and even provided refunds to the customers it had already charged.
Such actions were taken because, from a regulatory standpoint, there is no practical difference between interest rates and fees. Both are considered finance charges. In its Federal Truth in Lending Act (Regulation Z), the Federal Deposit Insurance Corporation defines finance charges as:
“The cost of consumer credit as a dollar amount. It includes any charge payable directly or indirectly by the consumer and imposed directly or indirectly by the creditor as an incident to or a condition of the extension of credit.”
Therefore, by assessing monthly fees, Chase had effectively broken its promise and was forced to make amends. While one might think that such an ordeal would serve as fair warning to any other company trying to substitute fee increases for interest rate increases in order to unfairly punish customers, it unfortunately has not as Bank of America recently announced plans to apply $59 annual membership fees to about 5% of its credit card customer base.
These fees would not be an issue if the company planned only to apply them to severely delinquent accounts or accounts without revolving balances. However, given that Bank of America says it will use high credit utilization, regularly late payments, and below-average FICO scores as the criteria for selecting whom to charge, these fees will most likely affect non-delinquent consumers carrying credit card debt. Bank of America therefore stands to break the intent of the CARD Act law that prevents credit card companies from changing interest rates on preexisting balances unless accountholders are at least 60 days delinquent. While Bank of America isn’t calling its plan to increase the cost of consumer debt an interest rate increase, the effect will be the same.
Seeing as Chase had to publicly admit fault and repay fees after only breaking only a marketing promise, one would assume that the backlash against Bank of America’s decision to skirt the edge of legality will be even more pronounced. This is especially true given the Fed’s proactiveness in blocking credit card company attempts to circumvent existing credit card laws and closing whatever loopholes exist in them.
Recent comments by consumer advocate Elizabeth Warren, the upcoming head of the Consumer Financial Protection Agency, indicate that such watchdog regulation will not soon dissipate either.
“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,” Warren said in a speech given at the Department of the Treasury on the one-year anniversary of the CARD Act. “To its credit, the Federal Reserve Board responded with a rulemaking proceeding designed to close the loopholes. … I doubt that anyone thinks this is the last time such a rulemaking proceeding will be required.”
As long as the credit card industry continues to illustrate that it cannot police itself, it will remain the subject of regulatory attention. Therefore, for its own sake and the sake of the industry as a whole, Bank of America should make the proactive decision to cancel its planned fees, except for those applied to customers who are at least 60 days delinquent or do not have balances at all. After all, doing so would be better than implementing them and, in the process, risking not only their repeal but further regulatory action as well.
[Disclosure: Some of the links within this article point to CardHub.com, which is owned by the same parent company as Wallet Blog.]