Now that President Obama has signed the Credit Card Accountability, Responsibility and Disclosure Act of 2009, how ready is your credit union to comply with these new rules?
While for the most part this new law will have little impact on the fundamental business model that credit unions have used in operating credit card portfolios, it may be a bit more of an operational headache in the short term. And, in spite of what others have claimed, credit unions will still be able to manage the risk of their card program.
This is not to say the credit unions do not need to make adjustments, and among the biggest may be how they approach interest rates and managing risk.
This new law does not mean your portfolio must comprise variable-rate cards or that risk-based pricing is obsolete. Fixed-rate cards and risk-based pricing can still survive in this new environment.
What’s more, when you really look at the new stipulations, most credit unions will find this is fairly standard operating procedure.
There are a number of relevant parts of the new law to remember. Increasing rates on existing balances is no longer an option, but the card rate (either fixed or variable) can be increased on new balances and transactions at card renewal. Therefore, the credit union may want to consider reducing the expiration terms of cards to one or two years to allow the flexibility of maintaining options in a changing market. This will undoubtedly increase the plastic production expenses, so be sure to gain economies of scale with plastic in terms of debit, credit and ATM plastics or consider the increasingly popular instant issuance process to eliminate many of the processor-associated fees with card production, embossing, postage, card carriers and card activation costs.
Additionally, no rate increases are permitted for 12 months after an account has been opened or reissued. Exceptions to this rule include increases related to a variable-rate structure, the end of a promotional period of at least six months or the minimum payment is not received within 60 days after the due date.
The new rate can be applied to new balances only, as opposed to retroactive (grandfathering) on preexisting balances.
A 45-day written notice to cardholders of rate increases will be required. The cardholder must be given the right to opt-out of accepting the higher rate, closing the account and paying down the balances for up to five years under the original terms.
These terms must be outlined in your new terms and conditions disclosure and on the portion of your Web site advertising your credit card product.
Credit unions will likely feel the greatest income loss in the category of over-limit fees. Over-limit fee income typically represents less than 2% of a card program’s total revenue, although for some larger programs, this income category is significant. Determine what your existing over-limit fee income contribution is to total card program net income and make a plan to compensate in other areas. It may be time to assess an annual fee for rewards or an inactivity fee, reduce the late payment fee assessment to a tighter window, or as a last resort, institute a minimum monthly finance charge.
And of course, seeking ways to reduce the operating expenses of your card program is another alternative to maintaining previous card program net income levels.
Also keep in mind that your processor will be likely communicating a course of action to make the statement due date the same every month, as required by law, since this is driven by the processor system capability more than the credit union’s. The one exception is for those credit unions that process credit cards in-house.
Are your payments being allocated to the highest APR balance before lower or promotional APRs?
According to the new law, payments must be applied to the highest APR balance first and then subsequent lower APRs. Most processors already have this functionality, and it is a matter of ensuring your credit union is compliant.
Another item to review is whether your credit card statements clearly state how long it will take cardholders to repay their debt. Is the payment due date and any potential late-fee penalty clearly stated? Again, this is an area that will be your card processor’s responsibility as far as enhancing the current statement layouts where necessary.
Regarding over-limit fees, under the new law, cardholders must opt-in to exceed their credit line. If a member opts in, the fee can only apply if the account is over-limit on the cycle date and is limited to one fee per cycle. This is a big change from the previous caveat of assessing the over-limit fee at time of occurrence. The reality is that credit unions should no longer rely on over-limit fee income.
In the past, this represented 1%-2% of total card program revenue. In order to comply with the Credit CARD Act, I would suggest turning off all over-limit fee income settings so all members are starting at square one. Develop a form on your Web site to allow members to opt-in for the over-limit privilege. Some processors will need to make system enhancements, as in the past this functionality was not available at the cardholder level.
A few additional consumer protections from the Credit CARD Act to keep in mind: It moves up the Fed’s effective date to February 2010, protects consumers under the age of 21, restricts issuance fees on fee harvester cards, requires enhanced disclosures, and establishes gift card protections.