Consumer Law & Policy Blog

Fed Issues Interim Final Rule Implementing Credit CARD Act

by Jeff Sovern

The Fed announced today that it is issuing an Interim Final Rule implementing provisions of the Credit CARD Act that take effect in August.  The announcement states that the provisions "primarily pertain to advance notices of rate increases and changes in terms and the time consumers are given to make their payments."  Though the Rule will take effect August 20, comments (identified by Docket No. R-1364) may be submitted at http://www.federalreserve.gov/generalinfo/foia/ProposedRegs.cfm.  After noting that additional rulemakings are required to implement the Credit CARD Act, the Board said this about its plans for the regs adopted last winter:

To the extent appropriate, the Board intends to use its January 2009 rules and the underlying rationale as the basis for its rulemakings under the Credit Card Act. The Board also intends to retain those portions of its January 2009 Regulation Z Rule that are unaffected by the Credit Card Act. The Board is not withdrawing any provisions of the January 2009 Regulation Z Rule or its January 2009 FTC Act Rule at this time. The Board anticipates that in connection with finalizing rules for those provisions of the Credit Card Act that are effective February 22, 2010, it will amend or withdraw those portions of the January 2009 rules that are inconsistent with the requirements of the Credit Card Act. In particular, the Board anticipates that all of the requirements in its January 2009 FTC Act Rule will be withdrawn from Regulation AA and moved into Regulation Z, consistent with Congress’s approach of amending the Truth in Lending Act.  Finally, except as otherwise noted, the Board intends to consider comments received on the proposed clarifications and technical amendments that were published on May 5, 2009 and to incorporate final clarifications and amendments, to the extent appropriate, when it promulgates final rules in the second stage of its rulemaking.

 

The Credit CARD Act and Penalty Fees

by Jeff Sovern

One of the many interesting provisions of the Credit CARD Act that has not received much attention is the limits it imposes on penalty fees.  At present, such fees are set through contract, subject only to unconscionability limits.  When the new 15 U.S.C. § 1665d takes effect next February, however, penalty fees, including late payment fees and over-the-limit fees will have to be "reasonable and proportional" to the violation.  The statute directs the Fed to issue rules establishing standards for determining whether fees are reasonable and proportional, and identifies several factors for the Board to take into account in formulating those rules, including the costs incurred by the creditor, deterrence, and the conduct of the cardholder.  The Board can also provide for a safe harbor; that is, a presumptively acceptable fee.

This provision represents a significant change from past credit regulation.  It's rare for a governmental agency to specify fees in private transactions.  Congress generally prefers to let the market set them.  But in this case, such intervention seems justified.  Considerable empirical evidence indicates that consumers are generally over-optimistic about the likelihood that something will go wrong in their transactions.  Thus, consumers contemplating a particular credit card might ignore penalty fees, on the assumption (an assumption that will be mistaken for many) that they will not incur them.  The result is that the market will not restrain credit card issuers from charging fees that greatly exceed the costs the underlying conduct imposes on issuers; i.e., lenders can use fees as a source of profits without any check unless Congress intervenes.  This is an example of how the new law take account of actual, rather than theoretical, consumer behavior, as was more true of the original version of TILA.

No doubt the eventual proposal to issue those rules will generate lots of comments.  It will be interesting to see what the Fed does.

Fallout From Credit CARD Act?

by Jeff Sovern

This morning, the Pittsburgh Post-Gazette published the following essay I had written: 

Private Sector Commentary: New credit card law has teeth

Tuesday, June 30, 2009

By Jeff Sovern

The credit card legislation President Obama signed into law represents a sharp break from previous federal credit card statutes.

Ever since the landmark Truth in Lending Act was enacted in 1968, Congress has focused largely on disclosures of credit card terms on the theory that informed consumers would select the best credit terms available to them.

But rather than just mandating improved disclosures, the legislation contains outright prohibitions on certain credit card terms, such as increases in the interest rates charged on existing balances or sending monthly statements to consumers less than three weeks before the payment due date.

Put another way, you will not be able to agree to those terms with your credit card lender even if you wanted to. This shift reflects a better understanding of consumer decision-making. Classical economic theory of the sort in vogue 40 years ago presupposed that rational consumers, if properly informed, would choose wisely.

Cuomo Case Great News for State Attorneys General

by Christopher Peterson

The Supreme Court has issued an opinion striking down the federal banking regulatory preemption of state fair lending enforcement lawsuits. The Court confronted whether ambiguity in the National Bank Act left the Office of the Comptroller of the Currency free to preempt state fair lending litigation originally brought by former New York Attorney General Eliot Spitzer. In applying the administrative deference standard of Chevron U. S. A. Inc. v. Natural Resources Defense Council, Inc., the Court explained:

[T]he presence of some uncertainty does not expand Chevron deference to cover virtually any interpretation of the National Bank Act. We can discern the outer limits of the term “visitorial powers” even through the clouded lens of history. They do not include, as the Comptroller’s expansive regulation would provide, ordinary enforcement of the law. Evidence from the time of the statute’s enactment, a long line of our own cases, and application of normal principles of construction to the National Bank Act make that clear.

Cuomo v. Clearing House Association, LLC.,  No. 08-453, slip. op. at 3 (U.S. June 29, 2009).

The decision reverses the trend in recent years, discussed here and here, of giving free reign to federal banking regulators to squelch the consumer protection efforts of state attorneys general. While the long-term impact of the decision is yet to be clear, the opinion is likely to embolden some state AGs in litigation against national banks and their subsidiaries over the subprime mortgage debacle.

Reg Z Amendments Change Timing of Mortgage Disclosures

by Jeff Sovern

Critics of Truth in Lending have long complained about the timing of disclosures in mortgage loans: typically, lenders were not required to provide the final loan disclosures until the closing. That meant that if the interest rate, say, changed, as it often does, from the original good faith estimate, provided within three days after the consumer applied for the loan, consumers might not learn about the change until the closing, when they are unlikely to walk away from the deal.  But last month the Fed adopted new amendments to Regulation Z which change the timing rules and implement the Mortgage Disclosure Improvement Act of 2008.  See 74 Fed. Reg. 23,289 (May 19, 2009).  Under the new version of 226.19(a)(2)(ii), if the disclosures change materially from the estimated disclosures, the lender must provide corrected disclosures to be received by the consumer at least three days before consummation.  The new rules become effective July 30. 

This sounds like a real improvement over the old rules.  Consumers who have not monitored their loan terms regularly are less likely to be surprised at the closing.  In addition, consumers are more likely to pay attention to the disclosures if they arrive by themselves three days before the closing than if they are provided in a mountain of paper at the closing.  But will it facilitate comparison-shopping?  Are consumers more likely to walk away if they discover that the terms are not to their liking three days before the closing than at the closing?  I don't know.  I keep thinking of the testimony of "Jim Dough," the pseudonymous predatory lender: "I can get around any figure on any loan sheet. . . . The customers believe what I tell them."  Hearing before the Senate Special Committee on Aging on March 16, 1998, “Equity Predators: Stripping, Flipping and Packing Their Way to Profits.”  Will predatory lenders provide enough other paper at the same time to obscure the TILA disclosures?  Or come up with some other strategy to cause consumers to ignore the forms?  Still, it's better than  the existing rules.  And regulators can provide only so much notice without risking delaying closings unduly.  Some will recall that the original version of RESPA barred loan closings until 45 days after filing of the loan application, which outraged consumers eager to move into their new homes.  Angry fans at a Green Bay Packer football game surrounded Wisconsin Senator Proxmire and chanted "Down with RESPA." 

Jonathan Zinman on What Borrowers Do When States Limit Payday Loans

Jonathan Zinman of Dartmouth has written Restricting Consumer Credit Access: Household Survey Evidence on Effects Around the Oregon Rate Cap.  Here's the abstract: 

Many policymakers and some behavioral models hold that restricting access to expensive credit helps consumers by preventing overborrowing. I examine some short-run effects of restricting access, using household panel survey data on payday loan users collected around the imposition of binding restrictions on payday loan terms in Oregon. The results suggest that borrowing fell in Oregon relative to Washington, with former payday loan users shifting partially into plausibly inferior substitutes. Additional evidence suggests that restricting access caused deterioration in the overall financial condition of the Oregon households. The results suggest that restricting access to expensive credit harms consumers on average.

A Bit More About Steering

Yesterday I posted excerpts from an affidavit claiming that Wells Fargo steered lenders who could have had prime loans to more expensive subprime loans.  In markets that work properly, steering wouldn't be effective.  If, for example, you walked into a grocery store and they offered milk at $30 a quart--but said you should buy at that price because they saved you some paperwork--you'd buy elsewhere.  But obviously in the home loan market, many consumers did not go elsewhere.  Why is that?  There are a number of reasons.  Among them are that home loans are far more complicated than shopping for groceries, so that many consumers can't easily tell that they're being charged more than they should be.  Home loans have numerous price variables (monthly payments, length of term, points and fees, adjustable rates, and so forth) and prices vary according to how credit-worthy borrowers are, so that many borrowers undoubtedly did not realize that they could have saved thousands of dollars (and perhaps their homes if they later ended up in foreclosure because the payments were higher) by obtaining prime loans.  The very fact that steering occurred adds additional force to the argument that the home loan market does not work properly, that existing regulation has failed for many consumers, and to arguments that regulation is needed to fix that market.

What Will Happen to the December 2008 Amendments to Regulation Z?

by Jeff Sovern

Last December, various federal regulators adopted new credit card regulations (we blogged about them here, among other places).  Some aspects of the new Credit CARD Act (discussed here. as well as other places in the blog), such as the enhanced consumer disclosures in Title II, seemingly conflict with the disclosure requirements of the December regulations.  So what happens to the December amendments?  The December amendments for the most part aren't scheduled to take effect until next summer while most of the provisions in the Credit CARD Act take effect next February, though some provisions become effective in August. If anyone hears anything relevant, please post it in the comments below. 

Washington Post: Credit Card Reform Legislation Not Really Needed

Today's Washington Post has this editorial claiming that although the credit card reform legislation on its way to enactment is good in substance it is largely unnecessary because, the Post asserts, it mainly apes new Federal Reserve Board rules.

The Fed's rules do not include a provision permitting visitors to national parks to carry concealed weapons. (Though we hear that the Comptroller of the Currency is considering a new rule that would allow customers to carry bazookas into national banks. The Comptroller is, however, going to take the position that its new rule would preempt recent efforts by some states to require their citizens to be armed when they enter national banks.)

Times Sunday Magazine Money Issue

Yesterday's Sunday Times Magazine was devoted to money.  The entire issue was worth reading, but two articles in particular were striking.  One, written by Times economics reporter Edmund Andrews and titled My Personal Credit Crisis, was excerpted from his forthcoming book, Busted: Life Inside the Great Mortgage Meltdown.  A divorce and child support obligations left Andrews with take-home pay of $2,777.  Nevertheless, he and his second wife were able to qualify for a substantial mortgage that didn't require him to disclose his income, alimony or child support obligations.  The only problem was that his monthly payments exceeded $2,500 for the first five years, after which his payments would rise still higher.  Eventually, he ran out of money and despite refinancing, stopped making payments on the mortgage.  Here's a revealing passage in which he quotes Bob Andrews, a loan officer at the now-defunct American Home Mortgage Corporation:

“I am here to enable dreams,” he explained to me long afterward. Bob’s view was that if I’d been unemployed for seven years and didn’t have a dime to my name but I wanted a house, he wouldn’t question my prudence. “Who am I to tell you that you shouldn’t do what you want to do? I am here to sell money and to help you do what you want to do. At the end of the day, it’s your signature on the mortgage — not mine.”

The other article is titled What Does Your Credit-Card Company Know About You? and is about how credit card companies have discovered that consumers who charge some items, like chrome skull accessories, are more likely to default than consumers who charge other items, like premium wild birdseed.  That, of course, is relevant to who gets a credit card and the rates they get charged.  The article also explores how credit card companies have learned which strategies are more likely to help in collections than others, based on what they know about the particular consumer.  An excerpt:

[C]redit-card companies are becoming much more interested in understanding their customers’ lives and psyches, because, the theory goes, knowing what makes cardholders tick will help firms determine who is a good bet and who should be shown the door as quickly as possible.

Luckily for the industry, small groups of executives at most of the large firms have spent the last decade studying cardholders from almost every angle, and collection agencies have developed more sophisticated dunning techniques. They have sought to draw psychological and behavioral lessons from the enormous amounts of data the credit-card companies collect every day. They’ve run thousands of tests and crunched the numbers on millions of accounts. One result of all that labor is the conversation between [credit card employee] Santana — a former bouncer whose higher education consists solely of corporate-sponsored classes like “the Psychology of Collections” — and the [consumer] from Massachusetts. When Santana contacted the [consumer] last month, he was armed with detailed information about his life and trained in which psychological approaches were most likely to succeed.