CARD Act Challenges
The 2009 act is already keeping CUs busy. And there's more to come.

By Jamie Swedberg

Editor's note: The following first appeared in the November 2009 issue of Credit Union Management.

In May, Congress passed the Credit Card Accountability, Responsibility and Disclosure (CARD) Act of 2009. The legislation was put in place to end complicated and misleading credit card agreements, unfair rate hikes and hidden fees. Time will tell if it accomplishes these goals. But one thing is certain: For financial institutions, it has already caused a flurry of panicked activity. And the work the act will require credit unions to undertake has only just begun.

"Let's just say it's been an interesting couple of months," says Bill Klewin, associate general counsel at CUNA Mutual Group, a CUES Supplier member based in Madison, Wis. Nearly 80 percent of credit unions use his company's Loanliner loan documents, which include compliance insurance in the purchase price. So he's been busy holding brainstorming sessions and conference calls with credit union executives, trying to arrive at the best compliance strategies.

Klewin says his credit union customers had to scramble to comply with the first group of CARD Act provisions, which went into effect Aug. 20. First, financial institutions are required to mail bills at least 21 days before payments are due, and to provide 45 days' notice before making any significant changes to rates or fees. Second, now CUs must warn customers if their fees or rates are changing because of missed payments or borrowing in excess of the credit limit. Third, they are required to allow borrowers to opt out of a card in case of a rate increase, and to pay off the outstanding balance at the original rate.

No Warning
A main reason the first phase threw credit unions for a loop was the short timeframe.

Robert W. Rutkowski points out that normally, when the Federal Reserve comes out with a proposed rule, the rule goes through a comment period and financial institutions have plenty of time to come to terms with its implications. That's not the case this time.

"When Congress did this, they didn't use the usual method," says Rutkowski, a partner at the Brooklyn Heights, Ohio, office of Weltman, Weinberg & Reis Co., L.P.A., a law firm representing clients on a variety of creditors' rights and legal issues and a CUES Supplier member. "They decided they needed immediate action, so they set this arbitrary deadline. So first, financial institutions had to realize that something had happened. Then they had to realize that they were not going to be able to do what they'd always done before. And then there was a panic. Many of the larger credit unions had compliance people internally who watched this stuff and who were able to get the resources to do something. But [as of mid-September], I'm still getting calls from credit unions who are just now hearing about the CARD Act."

Knowing that the act would present issues for its CU clients, Des Moines, Iowa-based The Members Group started putting together a team to deal with it before it was even passed. TMG's services include credit card processing.

"Early in 2009, we knew, in broad strokes, what was coming," says VP/Strategic Development Jeff Russell. "But we were focused on a 2010 implementation, which is when most of the rules were set to go into effect. Then, when the act passed in May, there were some additional provisions that weren't in the original rules, and it accelerated the components that had to do with the 21-day rule."

If the August provisions had been crystal clear, he says, it wouldn't have been a big problem. But because there had been a condensed review period, CUs had to spend valuable time trying to figure out how to comply.

21-Day Rule Confusion
Because of the way the CARD Act was worded, it was initially unclear whether it applied just to credit cards, or also to any open-ended line of credit.

Just days before this issue went to press, The House of Representatives approved the CARD Act Technical Corrections Act. If passed by the Senate and then signed into law, this legislation would insert language specifying that Section 106 of the CARD Act, which prevents creditors from treating payments as being late unless the creditor adopts reasonable procedures to ensure that periodic statements are mailed or delivered to the consumer no later than 21 days before the payment due date, only applies to credit card account holders. Until this "fix" becomes law, the 21-day rule applies to all open-end loans.

 "A lot of our credit union members use a vendor for their credit card system," says Anthony Demangone, director of regulatory compliance at the National Association of Federal Credit Unions and chief blogger for the NAFCU Compliance blog (see his Credit Card Reform posts). "So someone else was handling that. The problem, really, was other open-ended loans, especially the ones we call multi-featured open-end lending programs, which can include car loans, personal loans or other lines of credit."

Open-ended lending allows repeat borrow-ing with a reduced amount of checking on the member. Multi-featured open-end lending is a specific case of open-end lending in which a single account has different sub accounts for the different items contained within the plan.

Unlike credit cards, open-ended lines of credit are nearly always managed on CUs' core systems, which may require re-programming to accommodate the new rule, Russell says. And, financial institutions have historically not had to generate monthly statements for open-ended credit lines.

For instance, $84 million Pasadena Service Federal Credit Union, with 8,000 members, in Pasadena, Calif., sent out quarterly statements.

Then, too, many CUs have allowed members to set their own due dates-a policy that generates its own challenges.

"Unlike most credit card companies where they have multiple cycles and send out periodic statements many times during the month, most credit unions send out statements on the first, second or third for the previous calendar month," Klewin says. "That means that for members to be able to get the 21 days to make their payments, the due dates have to be sometime at the end of the month."

Quick On Your Feet
The quickest and easiest solution, for most CUs, has been to move all payment dates to the end of the month. That was the strategy adopted at Pasadena Service FCU.

"We're on [CUNA Mutual Group's] Loan-liner, which basically turns every consumer loan into an open-end loan," says CEO Ken Landis, a CUES member. "So auto loans and everything fell under this act. We moved all due dates to the 28th and made sure that anyone who has a loan with us gets a monthly statement. That satisfies the 21-day notice of payment that's required."

If members had automatic payments set up, the date didn't change automatically; the CU sent a letter notifying members of the option of manually changing it to later in the month.

The CU did receive some help from its core processor [Portico from CUES Supplier member Fiserv, Brookfield, Wis.], but that might not have been the case if Landis hadn't been so quick on his feet.

"We were one of the first ones, I think, to jump on it with them," he says. "So we were more or less first in line. They let us know that they were receiving a lot of calls after we had queued up."

Because of the confusion over whether the 21 days refers to the mail date or the receipt date, TMG counseled its credit unions to provide a couple days' buffer on the 21 days. To that end, it implemented a faster turnaround on statements so that members have about 23 or 24 days to pay.

"If you're not compliant, you can't collect late fees," says Landis. "That's what we wanted to avoid, because that's part of our non-interest income. Yes, coming into compliance had a financial impact on us. But not doing so would have been a much larger impact" of not being able to collect late fees or levy other penalties for lack of payment.

"It's really expensive for the credit unions," says Klewin. "And if you think about it from a collection standpoint, if you give a person a month free without following up and making sure they're paying, they could be long gone."

More on the Horizon
In late September, the Federal Reserve Board proposed rules to update Regulation Z to incorporate provisions of the 2009 CARD Act. This affects the provisions of the CARD Act that go into effect in February 2010. The remaining provisions of the CARD Act (those that go into effect on Aug. 22, 2010) will be detailed by the Federal Reserve at a later date.

"This proposal is another step forward in the Federal Reserve's efforts to ensure that consumers who rely on credit cards are treated fairly," said Federal Reserve Governor Elizabeth A. Duke in the announcement release. Among other things, the proposed rule would:

Russell says the February rules are much more significant than the August 2009 round because they focus not so much on disclosures as on the product itself. One important element is that a credit card issuer can only change the rate on existing balances in two situations: if the card has a variable rate tied to an index, or if the cardholder is more than 60 days late on payment.

 "There are a couple of implications in this," he says. "The first is that many credit unions have fixed-rate programs. If the prime rate goes up two percent, they can't change the rate on existing balances. They can change it on new purchases, but there are operations considerations there. We have a pretty big team working on how you calculate interest rates if you have to keep multiple balances at different rates through time."

Another implication is that the CU's ability to implement risk-based pricing is impaired. If a member's credit history deteriorates, the original balance will stay at the original rate of lending. That may have widespread impact on CUs' ability to manage risk vs. revenue.

Payments
There is also the issue of payments. The current interpretation of the February provisions is that payments must be applied to the highest-rate balance first.

"For the consumer, I think it's going to become more difficult to understand what their actual interest rate is, because there could be multiple interest rates depending on their situation," Russell says.

In anticipation of February, some major credit card issuers are starting to experiment with more annual fees-something that had lost popularity during the last decade. Many banks are changing all their fixed-rate cards to variable-rate cards so they'll be able to respond to changes in the prime rate. How CUs will react remains unknown, but many could do the same thing or simply raise the APR on their fixed-rate cards.

With the additional disclosure requirements taking effect in February, account agreements must be posted on financial institutions' Web sites, not just sent out on easily-lost slips of paper. And two types of tables must be included in statements: one that shows how long it will take to pay off the balance at the minimum payment, and how much money the consumer will eventually end up paying; and another that shows the monthly payment required to pay off the balance in 36 months.

"Everybody loves tabular formats," laughs Rutkowski. "The Fed hired a company to do a phone survey to get people's thoughts on how to make credit card statements more legible and understandable. Of course, nobody reads those anyway. But the overwhelming response was more tabular formats. So virtually every disclosure at every step of the lending process now has a tabular format under the new rules."

There's also a "lookback" provision. Demangone explains that if an interest rate is increased, the lending institution must re-examine the loan every six months to see if the rate should be lowered again, based on credit history. This is problematic from an operations standpoint, because it will require a lot of analysis.

"The nightmare is there are additional rules that kick in from the Federal Reserves, requiring additional formatting changes," says Klewin. "It's like being in a ring with Mike Tyson and he just keeps hitting you. It never ends, the changes that have to go on with periodic statements. And that's in addition to all of the other regulatory changes that are going on.

The Big Picture
"If you put it in context, there are also big changes to the way credit unions do first mortgage lending and home equity loans right now," Klewin points out. "The changes to the real estate rules go into effect on the first of January. It's an extraordinarily complicated time from a regulatory compliance standpoint. And there are just limited resources. It's not as though they can allocate all their resources to this one problem."

And credit card rule changes are happening industry-wide, so card and loan processors are swamped. Any time a credit union makes changes that require working with an outside vendor, it may be told to take a number and wait.

"You throw all of those changes in at once, and it's almost Bizzarro World," says Demangone. "Everything's changing all at once, so how do you pick your battle? I guess you choose the earlier deadline or what affects your CU the most."

Still, everyone's doing his or her best. "We've had some heroic efforts by the trade groups to get information out to the credit unions, and that was very positive," says Rutkowski. "From the reduction in the number of calls I'm getting, it seems that at least for now, most credit unions are getting a handle on it. So I'm just hoping Congress doesn't do it again with closed-end lending or something else."

Jamie Swedberg is a free-lance writer based in Georgia.

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