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Stacking The Cards:

How MBNA and Bank of America Measure Up

to the Consumer Bill of Rights for Credit Cards

A Report by the Community Reinvestment Association of North Carolina

September, 2005

Introduction

Credit cards play a large role in the finances of most American households.  Americans carry 1.2 billion credit cards.  The average household carries $8400 in credit card debt.  Put in context, the assets of the average American household, including home equity, are less than $40,000.  Twenty-four percent of personal expenditures are made with credit cards.[i]

Credit card consumers are protected by The Truth In Lending Act (TILA).  This bill was passed by Congress in 1968.  TILA, as the law quickly became known, recognized three trends in society.

First, Congress realized that consumer credit card debt had grown as a share of household liabilities.  Households were putting more money into servicing debt.  Consumer credit had grown seventeen fold in the years since the end of World War II, to almost $96 billion.

Second, Congress worried that consumers would have trouble adequately gauging the cost of credit.   There was no universally agreed-upon method of determining how interest was calculated.  Consumers had to work harder to compare the price of debt.  In some cases, issuers did not even disclose that interest rates on their cards.[1]

Finally, TILA reflected a concern by many in Congress over the high incidence of bankruptcy in the United States.

The need for credit card reform has become more serious since then.  Some major changes have occurred to the relationship between borrowers and credit card issuers.  Not the least of this is the deregulation of usury laws.  An FDIC analysis summed up the changes that have taken place in the wake of Marquette:  “A tightly regulated world, marked by restricted access to consumer credit and a low level of personal bankruptcies was exchanged for a deregulated world, marked by expanded access to consumer credit and a higher level of personal bankruptcies.”[2]

In 1968, consumers and businesses made 189,627 bankruptcy filings.  In 2004 there were 1,618,987 filings.[3]  The next chart, taken from a 1998 FDIC report, maps the growth in bankruptcies and credit card usage since TILA.  It includes a marker for the 1978 Marquette decision. 

Some gains have been made in helping consumers understand the terms of their credit.  Schumer boxes, which indicate an APR for credit card interest and some fees, add transparency to loan pricing.

Still, terms of lending and new disclosure techniques muddy the communication of pricing.  An individual has very little leverage in negotiations with credit card issuers.  Mandatory arbitration clauses weaken the position of borrowers.  In these clauses, borrowers forfeit their right to a jury trial in the event of a legal conflict.  Instead, they must resort to take complaints to a hearing with a private arbiter.  The arbiter is selected by the credit card company.

Why the Changes? 

Why are there so many more bankruptcies?  In part, it reflects some important changes in the governance of debt.  In the 1978 Supreme Court decision Marquette National Bank of Minneapolis vs. First of Omaha Service Corp., banks were allowed to import the usury laws of their home state into the locales where they did business.  It said that a Minnesota bank could charge the interest rates determined to be legal in Minnesota, even if the credit card transactions occurred in North Carolina.  In the wake of this ruling, banks quickly relocated to the states with the highest usury law ceilings.  To this day, most credit card bills must be mailed to North Dakota, Delaware or Utah.  That is not an accident.  Those states allow the highest rates. 

Bankruptcies may also reflect the decrease in savings among consumers.  When TILA was written, consumers saved more than 7 percent of their income.  Now savings are below one percent.  Most asset-building takes place through the appreciation of home equity. 

The Community Reinvestment Association of North Carolina, a nonprofit dedicated to helping people build and preserve wealth, has proposed the Consumer Bill of Rights for Credit Cards, a set of standards for credit cards issued in the United States.  These simple standards, if implemented, would return fairness to the relationship between borrowers and credit card issuers. 

In this report, we examine the Consumer Bill of Rights’ provisions and measure them against credit cards issued by two of the nation’s largest financial institutions - MBNA and Bank of America.

Consumer Bill of Rights for Credit Cards

1)  Credit card companies may not unilaterally change the price, terms and conditions during the credit card agreement period.  Revised pricing is prohibited and consumers are protected from rate increases on existing balances for any reason. 

Consumer critics have questioned the fairness of this practice.  Under “universal default,” credit card issuers can reconfigure the terms of credit in the event that a customer defaults or makes a late payment on a separate and independent account.  For example, a customer’s Metris MasterCard might change its interest rate because a customer was late on their Sears card payment.

When the change occurs, it can even govern interest on debt that was incurred prior to the trigger event.  This is known as revised pricing.  For example, under revised pricing, a customer who transfers a balance under a teaser rate would lose their promotional rate in the event of a late car payment. 

“The real question here,” says Elizabeth Warren, Ph.D, “is whether or not you can change the price, not for new items you buy after your credit score has changed, but for old credit that you've already taken out. My mortgage company agreed to an interest rate, and if I lost my job, my mortgage company does not get to double my mortgage. Credit card companies can say, "Remember how you bought the big-screen TV at 9.8 percent interest? We've decided we want 29.9 percent interest." And there's not a darn thing you could do about it right now.”[ii] 

2)  Accounting should be straightforward and fair to the consumer. 

There are many ways that special accounting devices change the cost of credit, normally to the benefit of the card issuer.  American Express settled a class action lawsuit for the hidden two percent fee it added to all purchases made in foreign currencies.  The portion of a charge that came from this fee was never broken out on a bill.  A lawsuit in California courts pointed out that Amex did not reveal the policy in statements or in solicitations. 

Source: Bankrate June 24^th, 2005 

3)  Credit card underwriting must consider the borrower’s ability to repay. 

The new bankruptcy laws make it harder for consumers to discharge debt.  It is CRA-NC’s hope that this will not embolden card companies to offer more credit to people than they can afford.

4)  Binding arbitration is a violation of consumers’ right to due process and is prohibited. 

 Consumer protections within the Truth-In-Lending Act and other laws like it have no weight in arbitration.

5)  Fees must relate to the cost of providing credit services. 

In 1996, in Smiley vs. Citibank, the Supreme Court lifted a limit on the amount of fees that a bank could charge for a late payment.  Fees have doubled since then.  In 2004, banks collected $14.8 billion in penalty fees.[iii] A former Citibank attorney who worked on the case predicts that within a year, some fees may reach as high as $50.[iv] 

6)  Interest rates may be priced according to risk, but must be conscionable. 

A premium, based upon a figure that floats above the prime rate, should serve to define a reasonable rate.  In fact, it was the high interest rates in the 1970s that prompted the ceilings for usury laws to be dropped in some states.  In states where interest rates were capped at 10 or 15 percent, banks had no interest in extending credit when the prime rate had exceeded that level.  The policy response was to drop ceilings altogether.  In 1991, President George H.W. Bush proposed a 14 percent cap on interest rates.  A better response, and one that could easily be corrected now, would return a ceiling to the market but allow it to fluctuate with the prime rate.  The National Consumer Research Council called for a prime plus 10 percent cap. 

7)  Billing procedures must be fair with the benefit of doubt given to the consumer.  Lenders must accept the postmarked date as proof of on-time payments with no arbitrary cutoff time on the due date.   The billing cycle must be consistent and preferably 30 days.

In recent years, credit card processors have sped up the billing cycle.  Most people pay their bills monthly.  Many are paid monthly or semi-monthly.  When bills come every 20 days or every 22 days, it increases the chance that consumers will either carry a balance or miss a payment. 

Another popular procedure pivots on posting time for the acceptance of payments.  We believe that if a consumer’s check arrives in the afternoon mail, the payment that it contains should be credited to their account on that same day.  The most common abuse is to set the cut-off time prior to the expected arrival time of the afternoon mail.  This deceives customers, because this practice really means that bills are due one day earlier than the stated date.  In months when the due date falls on a Monday, this practice means that the bill is actually due on Friday.  In 1999, Providian admitted to delaying the crediting of payments, a practice that generated $20 million in late fees against customers.[v]  MBNA apparently once set the payment cut off time as early as 6:00 AM.[vi] 

8)  Minimum balance payments must be sufficient to reduce the principle and an explanation should be provided of how long and at what cost repayment of the existing balance will take if no further charges are made.

Creditors have allowed minimum monthly payments to fall.  The possibility exists that by paying a monthly minimum, borrowers will fall into a trap where their debt negatively amortizes.  The debt grows even as a customer meets the terms of the credit. 

A new law will require issuers to give customers minimum payments that will, at the very least, allow them to pay back all debt within 7 to 10 years.

9)  If the company approves charges above the credit limit, then an over limit penalty may not be charged without first granting the borrower an opportunity to lower the balance. 

The Minnesota Attorney General’s office pointed out that Capital One often changed credit limits.  In some cases, after reducing a credit limit, it imposed an over-the-limit fee and then pasted the consumer with a new penalty interest rate.[vii] 

Many banks reserve the right to change the terms of credit at any time, and only disclose changes to the extent required by state law.  Delaware, for example, allows disclosures to be sent in separate notices from cardholder statements.[viii] 

10)  Consumers have a right to clear, simple and understandable explanation on the full cost, terms and conditions for credit cards. 

If credit cards are held by