One year after sweeping reforms of the credit card industry took effect, issuers have reduced penalty fees and stopped raising interest rates on existing balances, according to two government surveys released Tuesday.
But the studies also outlined new tactics used to skirt the law, prompting Harvard law professor Elizabeth Warren, who is tasked with setting up the new consumer protection agency, to call for a new approach to regulating the industry.
"Leaders in the industry deserve credit for moving in the right direction," she said. But, she added, "some industry lawyers were asked to find slightly different ways to accomplish that which the legislation was intended to outlaw."
The Credit CARD Act that took effect in February 2010 sharply curtailed the fees and interest rates that card issuers could charge and set new standards for how to disclose those charges. The federal law was designed to prevent issuers from loading down the most vulnerable - or, perhaps, risky - consumers with exorbitant fees. But the industry warned it could also lead to higher charges for more reliable customers and lower credit limits overall.
"These benefits have not come without trade-offs," said Kenneth J. Clayton, executive director of the American Bankers Association, a trade group.
The Consumer Financial Protection Bureau, which will be responsible for administering the law starting this summer, surveyed nine of the largest card issuers, which represent 90 percent of the market. It found that the number of accounts that showed interest-rate increases on existing balances - a practice prohibited under the law unless a customer is late on two consecutive payments - dropped from 15 percent of accounts to 2 percent. But issuers are still allowed to raise rates on new purchases, which one bank does periodically, according to the report, which did not name the banks.
Meanwhile, a study by the Office of the Comptroller of the Currency found that late-fee payments were slashed in half after the law took effect, down to $427 million in November. The CARD Act capped late fees at $25 for the first violation and $35 for the second, as long as the fee does not exceed the minimum payment. But there's a catch: The CFPB found that some banks were raising minimum payments, allowing them to charge higher fees.
The CFPB found that less than half of consumers are familiar with the law. Warren said that credit card statements and disclosures are still difficult to understand and that the CFPB will make clarity a top priority.
Meanwhile, at least one consumer advocacy group is pushing for greater changes. Consumers Union, a nonprofit group that publishes Consumer Reports, called on the CFPB to lower penalty fees to $10 for the first violation and $15 for the second. The group also urged the CFPB to curb increases in penalty interest rates. Under the law, once a customer has been late twice in paying a bill, there is no limit to how high card issuers can raise the rate.
The group acknowledged, however, that the law has been a win for consumers.
"Thanks to the new law, consumers stand a much better chance of avoiding the credit-card gotchas," said Pamela Banks, senior policy counsel for Consumers Union.