The Weird Reality of the CARD Act

This is the third installment in what has turned out to be a series of posts about the CARD Act of 2009 and the Federal Reserve’s new regulations to implement same. Last week I discussed how new rules requiring lenders to C Cards (Andres Rueda) consider ability to pay were a non-event. And on Monday I explained that there were not, after all, meaningful restrictions against giving cards to those under 21.

Today I will round up some other don’t-know-if-I-should-laugh-or-cry oddities that I came across in my few hours of research. As good a place to start as any is the other prong in the attack on underage plastic, new draconian restrictions against marketing these evil things to college students.

Section 304 of the CARD Act reads, in part:

No card issuer or creditor may offer to a student at an institution of higher education any tangible item to induce such student to apply for or participate in an open end consumer credit plan offered by such card issuer or creditor, if such offer is made—
   (A) on the campus of an institution of higher education;
   (B) near the campus of an institution of higher education,
as determined by rule of the Board; or
   (C) at an event sponsored by or related to an institution
of higher education.

Working out what this actually means was left for the regulators at the Fed. What is "a student at an institution of higher education?" According to the Fed, it is any student, of any age, enrolled full or part time in post-secondary education at any level. The 45-year-old working on his MBA at night counts.

The word “tangible” turns out to be a big deal here. Some consumer groups argued that giving anything to a college student to sign up should be illegal, but the Fed ruled that Congress did not use the word tangible just to show off their extensive vocabulary. It must mean something, and thus this ban covers "any physical item, such as a gift card, a t-shirt, or a magazine subscription" but not "non-physical inducements … such as discounts, rewards points, or promotional credit terms." So you can’t give a college student a gift card worth $50, but you can give him rewards points worth $50.

And then there are the geographic provisions. The Fed has decided that "near" the campus means within 1000 feet. It is perfectly legal to offer a Frisbee to a college student for signing up outside those boundaries, so a mailer sent home is okay, even if it would be illegal if sent to the dorm. Unless, of course, that home is, like mine, within 1000 feet of a college campus. (There doesn’t seem to be a requirement that it be your campus, only a campus.)

As I read these rules, the following marketing tactics are perfectly kosher:

- Offer a college student a Frisbee for signing up for a credit card while he is anywhere other than a college campus.

- Offer to sell a college student a Frisbee for 1 cent, provided he applies for a card.

- Offer a college student a Frisbee for signing up for a deposit account, or any other financial product other than a credit card.

- Offer a college student a Frisbee for listening to your pitch about how great your credit card is.

- Offer a college student a Frisbee for getting his roommate, or the guy standing next to him on line, to apply for a credit card.

Oh, and here is another delicious detail: lenders can always legally offer Frisbees to college students as an inducement to apply for a card via email, which is probably the best way to contact a college student anyway. This because "An e-mail address does not physically exist anywhere, and therefore, cannot be considered an address on or near campus."

And then there is the prohibition against sending those under 21 pre-approved credit card offers. It took me a while to track this one down, as the Fed regulations do not mention it. Turns out, this particular bit of the CARD Act is an amendment to the Fair Credit Reporting Act, rather than Fed administered Truth in Lending Act, and, as we all know, the FTC administers the FCRA.

Continuing a trend that should surprise no one, contrary to media reports there is no ban against pre-approved offers to under-21s. What has been banned is credit reporting agencies providing credit reports to lenders so they can pre-screen potential customers if that credit report says the person is under 21. If the credit report just happened to not have an age on it, the lender is in the clear.

And it is not just rules about kids that get weird in the implementation. The CARD Act decreed that credit card payment due dates "shall be the same day each month." As the Fed pointed out when they released the draft regulations for public comment, because of the existence of February, this means that no credit cards may ever be due on the 29th, 30th, or 31st of any month.

After whining from lenders who would rather not have their payment processing departments experience two or three down days at the end of most months, the final regs do allow one exception. Credit cards may be due on the "last" day of the month. But other than that, due dates must be a single numerical value from 1 to 28, and not, for example, the second Friday of the month. Why? Because the Fed felt that allowing that kind of due date "would not as effectively promote predictability for consumers." That is, the second Friday thing is just too darn confusing.

And I will finish with a riddle: what is the difference between a credit card and a debit card that is used to access an overdraft line of credit? Answer: only the credit card is covered by the CARD Act. According to the Fed, just because it looks and acts like a credit card, doesn’t mean it is one.

If you were expecting me to end this with a dig at obviously incompetent politicians and/or bureaucrats, I am going to disappoint you. I actually believe that Congress did its sincere best to write a law that the voters wanted and that the Fed did all it could to turn that law into workable regulation.

In the end, this is a story about the limitations of government. Legislating is hard. Even when the subject matter (appears to be) simple and unambiguous, writing new laws to change the way things work is much, much more challenging than it seems. Our credit card system took decades to develop and, if we are being honest, we have to admit that by and large it works very well. Changing the way a system that complex operates by simple decree is not likely to get us the results we want.

It is often tempting to believe that what the problems of our world are actually not that hard. That a group of smart and earnest people can just sit down and write new rules to fix things. Not so much.

[Photo: Andres Rueda]


  • By Adam, February 17, 2010 @ 1:53 pm

    Really great stuff!

  • By Chuck, February 17, 2010 @ 2:18 pm

    I got a letter from Home Depot. They have a consumer card that offers 12 months with no interest or payments if you buy more than $300 of stuff in one go. I used it to buy a fridge, which I don’t have to pay for until December. The letter said that the “no payments” part of the deal is now illegal according to the CARD act, and while my current deal will still be valid until its completion, any new balance will be subject to minimum payments, according to the law. This won’t break me, but I thought that was a funny little consequence.

  • By Keith Morris, February 17, 2010 @ 3:10 pm

    This post makes me want to go outside and throw a Frisbee around. :)

    LifeTuner has some additional information about the credit card act as well, including some things to look out for in the fine print:

  • By jim, February 17, 2010 @ 3:59 pm

    I don’t really get why having payments due on a certain fixed date of the month is a big deal. Were credit card companies making the payment date a moving target or something?

    “writing new laws to change the way things work is much, much more challenging than it seems”

    Definitely. As soon as a law is written people will find ways around it. For the law to be effective it has to be excessively all encompassing to predict and nullify any loopholes or way around it. Once its extensive enought to cover everything it becomes burdensome and overly complex.

  • By jason, February 18, 2010 @ 12:45 am

    @Jim, yes, the card companies were moving the payment dates around. For example, you may have had a card that was always due on the 16th, so you setup your checking account setup to auto-pay on the 15th. If your payment due date moves to the 14th, suddenly your payment is a day late and you are slapped with a $35 late fee. Depending on closely you watch your bill, it may take a few months to realize this.

    I have a personal and business card from Chase, and they both did this. Luckily, I noticed the due date on one and realized it in time to go back and fix my payment for the other.

  • By Parker Bohn, February 18, 2010 @ 4:52 am

    It sure sounds like this bill says what it will do, but doesn’t actually do it.

    I suppose this is why most bills are considerably over 33 pages long. Writing actual and specific regulations is more like a novel, and less like a short story.

  • By Kosmo @ The Casual Observer, February 18, 2010 @ 3:28 pm

    Is it OK to recruit 18 year old HS seniors near their schools, since those are campuses of higher learning?

    Even if the card act resulted in payments never being due on the 29, 30, 31, this wouldn’t mean a shutdown of payment processing centers. They’d still be processing payments for the 1, 2, 3 … of the next month, as well as late payments. If anything, it would probably lessen the number of payments processed on the 26, 27, 28, as many people probably try to be a day or two early.

    Even with electronic payments, I always leave a couple of extra days, due to really bad experiences with Bank of America after the absorbed MBNA (payments scheduled as payment in full but processed as the minimum payment).

  • By Kosmo @ The Casual Observer, February 18, 2010 @ 4:36 pm

    oops, that should say

    Is it OK to recruit 18 year old HS seniors near their schools, since those are ** NOT ** campuses of higher learning?

  • By Holly, February 19, 2010 @ 2:35 pm

    I posted this on another PF blog, but thought it bears repeating (sorry for being a ‘two-timer’!)–

    These new rules are just going to force cc companies to re-write their old ones. For instance, I rec’d a cc statement yesterday…it stated that “the interest rate will no longer change w/the U.S. Prime Rate. Effective 2/22/10, your new non-variable interest rate for purchses will be 18.99%” !!!!! My int. rate was 8.99 % before this change. I paid the new balance in full immediately (I never carry a balance).

    Does anyone really think these laws are going to protect those who have been mis-using (abusing) their credit privelege!?

    Another notable change to my account. In the fine print it now reads:”If the New Balance is not paid in full, you will no longer get a 20-day grace period until AFTER the NEXT TWO billing statements have been paid in full.” I will no longer be using the cc’s.

    This is a warning: Be careful w/those cc’s. They’ll get you! LOL

    Does anyone else wish that we Americans would all just cancel our cards, Effective 2/22/10?!

  • By Holly, February 19, 2010 @ 2:37 pm

    Does anyone out there in the blogosphere want to start the cc war – ‘US’ vs. ‘THEM’ (Citibank, I’m talkin’ to YOU!!!)

  • By Holly, February 19, 2010 @ 2:38 pm

    BTW, If SO, sell your financial stocks A.S.A.P., ’cause them’s fightin’ words!!! LOL

  • By Holly, February 19, 2010 @ 2:40 pm

    INSURANCE COMPANY, YOU’RE NEXT!!!! (sorry, i had too much caffeine)

  • By Dil52, February 20, 2010 @ 1:53 am

    A couple yours ago, I was late on one cc payment and they raised the interest rate from 7.9% to 22.5%. For years I’d ALWAYS paid more than the minimum payment on all my cc’s. When I called and pleaded my case the response was that I’d have to make timely payments for 6 months in a row then request and reduction again.

    Fortunately, I had enough in savings to pay off the card immediately. I then closed all of my BAC accounts consisting of two savings and two checking accounts. When BAC asked why I was closing the account, I explained what had happened. Of course the response was that they had no control over VISA and it was the ccc’s policy. Since the cc was issued in their name, I merely suggested that THEY call VISA and explain to them why they had lost a valuable customer. LOL

    It is a considerabe inconvience to change banks, debit cards, and cc’s, since I make many online purchases and have periodic, auto deductions; however the time spent was to set an example for all the people who have been treated the same way.

    The best way to change the things we don’t like is for ALL OF US to fight back as individuals using common sense. Too many people want the government to fight for them by createing legislation containing hundreds of pages to solve a simple problem. Not only the fact that banks, and cc companies are loosing money, the time spent for their paid employees to process all the complaints will soon force them to change policies themselves.

    Another one, as Jason mentioned above. If your due date falls on a Sunday it’s due Sunday. Payments can only be processed one week days and not weekends or holidays even though the payment is processed electronically. These are the things that ALL of US should complain about as well.

    Moral of the story: Quit writing and crying about what’s wrong and go do something about it folks. I feel loney out

  • By Karen, February 27, 2010 @ 1:10 pm

    Your congressperson: “I am SHOCKED, just SHOCKED, that those banks are sneaking around our law!”

    This is just business as usual for Congress. Announce a law that sounds great so it makes the public happy, then keep your donors happy by writing it so that trucks can be driven through the loopholes.

    We REALLY need to get the $$$ out of politics. Sadly, our Supreme Court has made it so it will take a Constitutional amendment to get that done.

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