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]

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