Bankruptcy Bill’s "Truth-in-Lending" Provisions Will Obscure the Truth
FOR IMMEDIATE RELEASE
CONTACT: John Rao
(617) 542-8010 jrao@nclc.org
March 1, 2005
Bill Does Nothing To Protect Consumers From Abusive Credit Card Practices
Supporters of bankruptcy legislation claim that the bill (S.256) is balanced and provides consumer protections, pointing to bill provisions that change the federal law that governs credit disclosures, the Truth In Lending Act. They have gone so far as to describe these provisions as a "debtor’s bill of rights." This could not be any further from the truth. These so-called "consumer protections" will do more harm than good. The provisions were cleverly designed by the credit industry to be nothing but a deliberate step backward.
The bill doesn’t address the primary ways in which credit card companies take advantage of consumers: high fees; deceptive promotions and disclosures; and unfair practices such as universal default.
The provisions that the bill does contain will hurt consumers by providing misleading or inaccurate information to consumers and by undermining existing remedies. Moreover, the changes will make any real improvements harder to achieve because they provide the illusion that consumers are protected.
Overview
The bill promotes misleading information about credit card minimum payments.
It requires inaccurate descriptions for consumers of the consequences of making minimum payments while failing to mandate easy access to accurate information about the consumer’s loan balance, interest rate, or minimum payment.
The bill allows credit card introductory "teaser" rate promotions that don’t place the permanent rate in an equally prominent position and that don’t prevent later rate changes.
Credit card teaser rates would not be placed side-by-side with the permanent rate. The bill leaves open the possibility that the introductory rate could be shown more prominently than the permanent rate. Moreover, the bill permits creditors to change the teaser or permanent rate with a change of terms or penalty rate.
The bill gives creditors license to post inaccurate and hard-to-find rate information in Internet credit card solicitations.
Internet disclosures only need to be updated "regularly." The burden would be on a consumer to contact the creditor to get up-to-date and accurate information. The bill also leaves open the possibility that disclosure information could be posted on a separate page from a solicitation, as long as it is in "close proximity."
The major new disclosures provided by the bill cannot be enforced by consumers in court.
These limited new protections thus ring hollow and undermine 30 years of effective Truth-in-Lending enforcement.
A minimum payment warning stating that making only minimum payments will increase interest payments and repayment time. Rather than provide actual payoff information based on the consumer’s account, the disclosure provides a hypothetical payoff scenario.
For credit card plans that require a minimum monthly payment of 4 percent or less of the outstanding balance (which is most plans), the disclosure states that a 2% payment on a $1,000 credit card balance at 17% interest will take 88 months to pay off.
For cards with a minimum monthly payment above 4 percent, the disclosure shows that a 5% monthly payment on a $300 balance at 17% interest would take 24 months to repay in full. Creditors with this minimum payment requirement may opt to use the first disclosure instead.
To get an "estimate" of repayment time based on the consumer’s actual balance, the consumer must call a toll free number set up by the creditor, the Federal Trade Commission, or a third party working on behalf of the creditor. The creditor is permitted to use an "automated device" to provide the estimate. These estimates must be based on FRB-generated tables that once again will not use the consumer’s actual account figures. For banks or credit unions with under $250 million in assets, the FRB would be required to maintain a toll-free number for two years after the Act takes effect.
Why it hurts consumers:
Consumers will not receive specific information on the billing statement about actual costs in interest and principal if they pay at the minimum rate or about the actual length of time to pay off the entire balance.
The burden is on the consumer to call a toll-free number for more useful information, and even then they only will be provided with an estimate. For patrons of small banks, it is not clear whether they will even have a number to call after two years.
The minimum payment warning is misleading because it assumes that the consumer pays 2% of the initial balance through the payment period rather than 2% of the balance at time of payment; when calculated correctly, the payoff time of 88 months more than doubles. The warning also is insufficient because American households with at least one credit card owe an average balance of more than $8,000 on all credit cards. With an $8,000 balance, the 88-month figure multiplies more than six-fold.
The minimum payment warning and estimated figures provided when a consumer calls a toll-free number are misleading because they do not warn consumers, or account for the fact that, payments will be applied to interest and fees first, so that making minimum payments when the consumer is being charged late fees, overlimit fees, and other charges could result in the debt never being paid off or actually increasing in amount.
Applications and solicitations (other than envelopes) offering a temporary annual percentage rate (APR) of interest must use the term "introductory" when providing the rate and must identify, in a clear and conspicuous manner, the time period for the introductory rate and the amount of the permanent fixed rate or, for variable rate products, the rate that will apply when the introductory rate ends. Such disclosures also shall provide information on the revocability of the introductory rate and the rate that will apply in case of revocation.
Why it hurts consumers:
The disclosure does not require the temporary and permanent rate to be disclosed side-by-side. Depending on how the FRB interprets "clear and conspicuous" in this context, the bill could continue existing law and allow the teaser rate to be shown more prominently than the permanent rate.
Currently, creditors can change a teaser or permanent rate with a change of terms or penalty rate. The bill leaves this problem unaddressed. Moreover, card companies can evade the disclosure requirement by simply claiming that the teaser rate is not an "introductory" rate for a "temporary rate period," and then increasing the rate at will at some later date using the change in terms provision of the card agreement. This type of evasion would deny consumers disclosure of important information relating to the trigger events for invoking a universal default clause in the card agreement because disclosure regarding revocability of a rate only is required where there is a teaser rate offered.
Solicitation disclosures must be in "close proximity" to the solicitation itself and must be "updated regularly."
Why it hurts consumers:
Rate information and other key disclosures don’t need to be accurate; they only need to be updated "regularly." This leaves open the possibility that rate changes that occur between regular intervals of website updating will not be reflected. The burden would be on a consumer to contact the creditor to get up-to-date and accurate information. The bill also leaves open the possibility that disclosure information could be posted on a separate page from a solicitation, as long as it is in "close proximity."
Required disclosures at application for open- and closed-end real-estate secured loans, and in advertisements for such products, warning consumers that the interest paid on the portion of the credit extension that is greater than the fair market value of the dwelling is not tax deductible.
Why it hurts consumers:
These disclosures give the illusion of providing useful information to consumers when in fact the real problem is that inflated appraisals and other fraudulent practices are making under-secured real-estate loans a rampant problem, particularly in poor, urban areas. Consumers with these loans are locked into unaffordable home loans, unable to sell their homes and unable to refinance.
Additional Provisions That Decline to Offer Real Protections
Section 1305 requires clear and conspicuous disclosure of payment due date and late payment fee amount. The late fee provision does not regulate the high fees and increases in interest rates due to universal default policies.
Section 1306 prohibits open-end account creditors from closing accounts only because the consumer hasn’t incurred any finance charges, although creditors may terminate an account for inactivity in three or more consecutive months. While this protection is welcome, consumers whose accounts remain open are still subject to an array of high fees and other unfair practices.
Absence of Remedies
The bill provides no private enforcement mechanism for the minimum payment disclosures, late fee disclosures, prohibitions on account terminations for failure to incur finance charges, and certain disclosures regarding tax deductions for under-secured real-estate loans.
Even where remedies exist, binding mandatory arbitration clauses require individuals to surrender due process rights by forcing consumers to bring their claims in an unreviewable, sometimes-biased forum with limited discovery rights, and often prevent class actions. The bill does nothing to curb this denial of court access.
and NCLC