While the CARD Act strengthened reforms already considered by the Federal Reserve under Regulation Z, and accelerated the time for adoption, some in Washington feel that it did not accelerate the timeline enough. Representatives Carolyn Maloney (D-NY) who authored the credit card reform bill, and Barney Frank (D-MA), Chair of the House Financial Services Committee, have introduced H.R. 3639, the ‘‘Expedited CARD Reform for Consumers Act of 2009.”  The current legislation calls for some provisions to become effective in February 2010 and others in August 2010. This new legislation would  accelerate the effective date for all of the CARD Act reforms to December 1, 2009. 

 “It’s clear that credit card companies are taking advantage of this period between the signing of my bill and the current effective date,” Rep. Maloney said. “The breadth and depth of the rate hikes happening now point to the need for faster consumer protections. Americans need relief now.” You can read the full text of H.R. 3639 here.

Some industry experts have asserted that advancing the compliance deadlines would be nearly impossible for credit card companies to comply with, given the sweeping changes in systems and products referenced in my previous post Countdown to the CARD Act – Part 2. Others argue that if companies can manage the necessary system changes and mailings to facilitate rate hikes to over 90% of the “card carrying public” in a few months, they can facilitate the changes necessary to change rates less frequently as would be mandated by the CARD Act. 

What do you think?

For card issuers already struggling with portions of the Act that go into effect this week (see Countdown to the CARD Act Part One) the clock is ticking to get all of these changes designed, coded and tested in advance of the February 2010 deadline. I’ve summarize the key content and formatting changes to each type of document below.

Credit Card Applications and Solicitations are currently required to disclose key costs and terms in a table commonly known as the “Shumer Box. “The CARD Act makes changes to the terminology intended to improve consumer understanding, such as requiring that issuers use the term “penalty rate” to describe the increased rate that may apply if a consumer is more than 60 days late with a minimum payment. The CARD Act also prevents issuers from including detailed information about the calculation of variable rates, which research has indicated consumers do not use in comparing credit card offers. The new box must also include a reference to the Federal Reserve website on consumer credit education and Annual Percentage Rates (APRs) must be shown in 18 point type.

Account-Opening Forms must also be modified to include the same or similar information as required for applications and solicitations. Currently, the required disclosures on these documents are interspersed with the legalese of credit agreements. The CARD Act requires creditors to provide a table summarizing the key terms to consumers at account opening. This new account-opening table is substantially similar to the modified “Schumer box” described above. Not surprisingly, consumer testing indicated that consumers tend not to read disclosures that are in small print and dense prose, but generally are familiar with the table on applications and solicitations. Maintaining consistency between solicitations and account opening documents is also, intended to make it easier for consumers to compare the terms of the offer for which they applied with the terms that they receive.

Change-in-terms Notices, whether mailed separately or included with the statement, are subject to new formatting requirements. Specifically, creditors must disclose changes in key terms in a summary table to enhance the effectiveness of the notice and maintain consistency with the Application, Solicitation and Account Opening documents.

Statements and Bills will require the largest amount of redesign and are likely to be at least one half page longer on average. The CARD Act requires that several new pieces of information be added to the bill:

• - A late payment warning is required to notify the consumer of the implications of late payment including the potential for triggering a penalty interest rate and late fees. The exact amount of the late fee and penalty APR must be listed. This warning must be located close to the payment due date and minimum payment amount on the bill.
• - A minimum payment warning is required to notify the consumer of the implications of making only the minimum payment. The warning must include an example indicating how many years it would take to pay off the balance by paying the minimum and a toll-free number for customers to get additional details about their accounts.

Changes have also been specified to formatting and terminology requiring that creditors group costs together and identify them individually as interest charges or fees rather than lumping them together in an “Effective APR.” They must also disclose year-to-date totals for interest charges and fees.

Key payment information such as the date a payment is due must be shown on the front of the monthly statement. The payment information must include both the due date and the number of days in the grace period.

Any changes in the terms of the credit card agreement must be included in a table on the monthly statement along with the effective dates of those changes. Key changes to be disclosed include increases in APR after the promotional period expires, triggering of penalty APRs due to late payment. Since under the law, new APRs cannot be applied to previous balances, the previous APR (with effective dates) must also be shown on the statement going forward as long as there are any balances subject to that rate. The specific APRs, fees if applicable and effective dates must be summarized in table form as well. The requirement to individually identify each rate and the balance it applies to is one of the key elements expanding the length of the statement.

In addition expanded information on interest rates applied, there are requirements to “do the math” for customers showing the dollar value of fees and interest for the current period and year-to-date. Fees must be broken out from transaction and listed in an individual section with a total that ties back to the account summary. Interest charged during the period must be itemized in an individual section with a total that ties back to the account summary (individual items would include Interest on purchases, interest on cash advances, interest on balance transfers etc.)

Separately from the dollar amount of interest, the statement must include a section, which shows the calculation of each individual APR applied to balances on the account with an indication of whether or not the rate is variable. The section must show the type of balance the rate is applied to, the APR (and variable indicator if applicable), the balance subject to the interest rate and the resulting interest charge for that type of balance. This information must tie back to the Interest Charged section.

While these changes have been forced on the credit card issuers, the result will be more effective and transparent communications. Once all of the mandated information is added to these documents, reorganized and stated in plain language – the door is open for white space management, relevant personalization, and transpromo messaging. There is a lot of work to do before February, but there are tremendous opportunities to move beyond compliance to make the mandated redesigns a profitable proposition.

On August 20, 2009 the first provisions of the CARD Act go into effect. By this date, card issuers must have made the changes necessary to ensure that:

• - Cardholders have a minimum of 21 days to pay their bill;
• - Cardholders receive 45 days’ advance notice of significant changes to their card agreements;
• - Notice is provided that cardholders have a right to opt out of significant changes in their account terms, including interest rate and fee increases, as long as they are not more than 60 days overdue on their payments.

These provisions will have significant benefits to cardholders and will require extensive systems and programming changes for card issuers, but they pale in comparison to what’s in store for 2010.  By next year, the CARD Act will fundamentally change the way credit card issuers advertise, market, and bill credit cards. The majority of these changes will need to be in place in little more than 6 months, only 9 months from passage of the law. Tick. Tick. Tick.

 Beginning in February 2010, the CARD Act entails changes that impact what card issuers can charge, who they can charge and how and when those terms are disclosed. The overarching theme is “Plain Language and Plain Sight” and affects the layout of every solicitation, application, notice, and periodic statement delivered to consumers. The Federal Reserve has been tasked with providing model disclosures, which are to be updated regularly, based on government-sponsored reviews of the market, empirical research and direct consumer testing.

In addition to disclosing terms, card issuers are required to provide information to consumers on the consequences of their financial decisions such as how long it would take to pay off the existing balance, and the total interest cost if the consumer paid only the minimum due each month. In addition, all terms and contracts must be made available online for easy comparison and monitoring.

 What’s at stake for card issuers and banks? An estimated 15 billion in annual revenue from late fees alone, the cost of retrofitting existing contracts and communications while issuing new (more profitable) products and the cost of lobbying against additional reforms likely to be imposed on the lending industry.

What’s at stake for service providers? Potentially a one-time opportunity to help your customers gain efficiencies by introducing them to new marketing techniques such as transpromo and relevant personalization that can make all of their documents more efficient and effective.

Card issuers are challenged to analyze, redesign and reprogram each of their marketing and customer communications over the next 6 months. Are you ready to help? Tick. Tick. Tick.

 (Stay tuned for the next post covering changes to individual communications mandated by the CARD Act of 2009)