Chase Behaving Badly: Unintended Consequences of the Fed's New Credit Card Rules

From Calculated Risk:

In late December, banking regulators agreed to new rules to limit actions by credit card issuers that consumer advocates deemed to be abusive. While the new rules do not take effect until July 2010, regulators claim they will press banks to comply earlier (see here for a summary of the main provisions).

Experts argued that the pending rule changes would lead banks to restrict credit, particularly to riskier borrowers. What they may not have considered is that banks might also increase rates on existing balances (to make up for lost "gotcha" charges of various sorts) even to customers who are making payments on time but carrying balances.

Think they can't do that? Think twice. This comes from the Office of the Comptroller of the Currency:

The bank can generally change the account terms of credit cards or open-end lines of credit, including the interest rate, at any time, unless the open-end line of credit is secured by your home and is therefore subject to special rules limiting permissible changes in terms. The law requires notice to you when certain account terms, such as the interest rate, are changed. If the bank intends to change one of these loan terms, such as the interest rate, it must send the change in terms notice at least 15 days in advance of the change.

The 15-day advance notice requirement does not apply if

• the consumer has agreed to the change, or

• the change is due to delinquency (late payment) or default (such as going over the limit).

In both these instances, the bank must provide some notice prior to the effective date of the change, but there is no 15-day rule.

Be sure to review your account agreement, which is the contract governing your credit card account. It provides information on changes that may occur to your account.

If you received a change in terms notice, you should check to see whether the bank has provided a way to opt out of the change in terms. Some banks permit you to preserve the lower rate on the account by closing the account to future purchases and paying the balance under existing account terms. This may be important to you if you are carrying a balance.

Pay heed: you are stuck if the bank does not allow you to opt out. And Chase, and perhaps other banks, are going this route. Consider this e-mail from reader Olin:

My wife (whose three credit scores are all greater than 740 as of 1/10/09, no job loss, or anything else derogatory) signed up for balance transfer that was advertised as "3.99% fixed for the life of the balance" in 2006 with Chase. My wife has never had a late payment and given the high rate for purchases never purchased anything. The card doesn’t expire for another 28 months.

Chase claims to have sent a change in terms notice that gave the following options:

i) Rate change to 7.99% for the balances
or
ii) a $10 monthly service charge and a 5% of the balance minimum payment. (These options are per the customer service manager, as we didn't receive the change in terms.)

The credit limit is only $3K, the balance is only $1,750 and we are liquid enough to take care of it. However, I'm still rather irate at the following:

a) There was no reasonable counteroffer as to lower the rate for purchases to possibly entice us to actually make a purchase with the card (the purchase rate was 24.24%)

b) The $10 a month service charge is double the amount that was actually paid in interest each month. I realize the marketing goal was for us to use the card to accumulate balances that would be charged at 24.99% while payments were applied to only the 3.99%. However I figured the marketing people figured the promotion was similiar to rebate offers, where only a few people will fill out the rebate or in this case, just transfer the balance. I wish some enterprising lawyer would present a “false advertising” suit.

c) I’m nauseous at the thought that JP Morgan has received $25 bln at 5% and before the ink dries is desperately trying to pump up their profitability. I realize this could be one of the unintended consequences of the Fed’s new rules for credit card companies, however per Chase, their decision to do this was in September as the Change in Terms was mailed in early October. I guess Chase knew the gig was up and had to reset rates before the Fed clamped down on their disingenuous practices.

Chase was not alone in putting through interest rate changes in October. Congress planned to take action if Federal banking regulators did not, so the handwriting has been on the wall for some time.

Even if the OCC gives this sort of behavior a free pass, if the offer was presented as "fixed for the life of the balance" which I what I recall seeing on the deluge of fixed rate offers in 2002-2006, it would appear to be advertising fraud. But any case would have to be pursued on a class action basis, and it would be hard to ascertain how many people were affected by a particular bank rate action prior to the discovery phase of a case.

A warning: your bank may send a notice of changes in terms along with your monthly statement. If make payments online, be sure to check your mailed statement as well.