The Credit Card Market: Recent Trends and Regulatory Proposals

The Credit Card Market: Recent Trends and Regulatory Proposals

The Credit Card Market: Recent Trends and
Regulatory Proposals
Darryl E. Getter
Specialist in Financial Economics
May 11, 2009
Congressional Research Service
7-5700
www.crs.gov
RL34393
CRS Report for Congress
P
repared for Members and Committees of Congress

The Credit Card Market: Recent Trends and Regulatory Proposals

Summary
Rising consumer indebtedness and increased reliance on credit cards over the past two decades
have generated concerns in Congress and among the general public that cardholders may be
paying excessive credit card rates and fees. Specifically, some borrowers have reportedly been
unaware of assessed penalty fees and interest rate increases. Consequently, legislation such as
H.R. 627, Credit Cardholders’ Bill of Rights Act of 2009 (introduced by Representative Carolyn
B. Maloney with 42 co-sponsors); S. 235, Credit Cardholders’ Bill of Rights Act of 2009
(introduced by Senators Charles E. Schumer and Mark Udall); and S. 414, Credit CARD Act of
2009 (introduced by Senator Christopher J. Dodd with 19 co-sponsors) have been introduced in
the 111th Congress.
This report examines developments in the revolving credit market, including trends in
profitability, consumer usage, funding, and repricing practices. It presents data on issuer profits,
U.S. household credit card usage, and delinquency patterns. Next, the funding of credit card
loans, with a particular focus on the securitization process, is discussed. Credit originators
increasingly relied upon securitization to fund revolving credit because this method minimizes the
costs to fund these loans. Payoff and default risks, however, may increase funding costs and result
in repricing of such risks. A review of typical repricing practices will follow.
Finally, the report presents a summary of recent Federal Reserve policy actions pertaining to
credit card repricing practices. A comparative analysis of H.R. 627, as passed by the House on
April 30, 2009, and S. 414, as reported by the Senate Banking Committee on March 31, 2009, is
also presented.
This report will be updated as events warrant.

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The Credit Card Market: Recent Trends and Regulatory Proposals

Contents
Introduction ................................................................................................................................ 1
Recent Profitability and Consumer Usage Trends ........................................................................ 2
The Funding and Pricing of Revolving Credit.............................................................................. 3
The Impact of Securitization on Funding Costs ..................................................................... 4
Other Risks to Yield .............................................................................................................. 5
Convenience Users and Early Amortization Risk............................................................. 5
Default Risk.................................................................................................................... 5
Summary of Current Risks to Yield ................................................................................. 7
The Repricing of Revolving Credit.............................................................................................. 7
Repricing Credit Card Loans ................................................................................................. 7
Policy Options ...................................................................................................................... 8
Federal Reserve Actions........................................................................................................ 9

Tables
Table A-1. Comparison of H.R. 627 and S. 414 ......................................................................... 11
Table B-1. Comparison of H.R. 627 and the Federal Reserve’s December 2008 Credit
Card Rules ............................................................................................................................. 18

Appendixes
Appendix A. Comparison of H.R. 627 and S. 414...................................................................... 11
Appendix B. Comparison of H.R. 627 and Federal Reserve December 2008 Regulations .......... 18
Appendix C. Credit Card Securitizations ................................................................................... 24

Contacts
Author Contact Information ...................................................................................................... 25
Key Policy Staff........................................................................................................................ 25

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The Credit Card Market: Recent Trends and Regulatory Proposals

Introduction
Financial innovations have increased credit availability for U.S. households over the last two
decades. For households with collateral assets, financial innovations, specifically those in the
mortgage market, have allowed households to take on debt and finance large expenditures they
might otherwise have had to forgo. Such developments can be advantageous because they make
some households less sensitive to temporary disruptions in income or cash flow. Financial
innovations, however, can also make consumers more vulnerable to unexpected changes in asset
prices. A sudden increase in the value of underlying collateral assets used to secure consumer
borrowing, such as house prices, may entice some households to increase their borrowing; a
sudden decrease in asset values may translate into financial distress.1
Financial innovations also gave borrowers greater access to revolving credit or credit card loans.
Although all types of lending may reduce sensitivity to cash flow disruptions, unsecured lending
can be used by borrowers who hold few, if any, collateral assets to draw upon to avoid a financial
crisis. Some credit card borrowers may therefore be less affected than those with collateralized or
secured loans when asset values fall. Credit card borrowers, however, generally pay higher rates
relative to secured credit borrowers. The relatively higher borrowing costs, fees, and repricing
practices, therefore, may undermine or offset the financial benefit of being detached from a
decline in collateral asset values, which adds to borrower financial distress.
Rising consumer indebtedness and increased reliance on credit cards over the past two decades
have generated concerns in Congress and among the general public that cardholders may be
paying excessive credit card rates and fees. Specifically, some borrowers have reportedly been
unaware of assessed penalty fees and interest rate increases.2 Because of this and other issues,
legislation such as H.R. 627, Cardholders’ Bill of Rights Act of 2009 (introduced by
Representative Carolyn B. Maloney with 42 co-sponsors); S. 235, Credit Cardholders’ Bill of
Rights Act of 2009 (introduced by Senators Charles E. Schumer and Mark Udall); and S. 414,
Credit CARD Act of 2009 (introduced by Senator Christopher J. Dodd with 19 co-sponsors) have
been introduced in the 111th Congress.
This report discusses developments in the revolving credit market, including recent trends in
profitability, usage, funding, and repricing practices that have prompted new regulatory action.
The first section provides a brief summary of information regarding issuer profits as well as
descriptive data documenting U.S. household credit card usage and delinquency patterns. The
next section analyzes the funding of credit cards, and specifically the securitization process in
detail, since this method minimizes those costs. Conversely, payoff and default risks, which are
also explained, tend to increase funding costs for credit card loans. A brief summary of credit card
repricing practices is presented, followed by policy responses by the Federal Reserve.

1 For more discussion about why households may increase their indebtedness, see Karen E. Dynan and Donald L.
Kohn, “The Rise in Household Indebtedness: Causes and Consequences,” Finance and Economics Discussion Series
2007-37, Board of Governors of the Federal Reserve System (August 2007), at http://www.federalreserve.gov/Pubs/
Feds/2007/200737/200737pap.pdf.
2 For example, see Martin H. Bosworth, “Credit Card Fees Rise, Disclosure Statements Inadequate,” at
http://www.consumeraffairs.com/news04/2006/10/gao_credit_cards.html and Anita Hamilton, “Exposing the Credit-
Card Fine Print,” at http://www.time.com/time/printout/0,8816,1715293,00.html#.
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Recent Profitability and Consumer Usage Trends
SourceMedia provides data that are useful for understanding industry profitability trends.3
According to this source, credit card issuers’ after-tax return on assets was $18.08 billion in 2007,
which was down from $18.37 billion in 2006 or 1.58%. Total revenue for Visa and MasterCard
issuers increased from $114.99 billion to $117.76 billion over this period or 2.41%. Penalty-fee
revenue increased to $7.54 billion in 2007 compared with $6.44 billion in 2006 or 17.1%.
Expenses, however, increased by 4% in part due to a 17% increase in charge-offs or account
receivables deemed uncollectible due to missed payments.
The Survey of Consumer Finances (SCF) is useful for tracking consumer usage trends. The SCF,
which is conducted tri-annually by the Federal Reserve Board, asks approximately 4,000
households to provide information about their income, assets, and debts. The most recent (2007)
SCF suggests the following changes from 1989.4 Approximately 73% of the U.S. families
surveyed in 2007 had credit cards, and 60.3% of those families carried a balance. In 1989, 69.9%
of families had credit cards, and 49.6% of those families carried a balance.
Several factors may arguably explain the SCF findings. First, households with riskier financial
characteristics were granted increased access to revolving credit.5 A greater proportion of low-
income households and households with lower liquid asset levels became new cardholders.
Although risk-based pricing, the practice of charging riskier borrowers higher rates to reflect the
credit or default risk, may have increased borrowing costs for some borrowers, there is evidence
to suggest that it allowed for increased participation in consumer credit markets and fewer credit
denials.6 Second, households increased their use of credit cards as a convenient way to make
payments.7 Third, the SCF also indicates a greater use of variable rate credit cards, with financing

3 See Cards & Payments’ 2008 Bankcard Profitability Study and Annual Report “Credit Card Issuers’ Collective After-
Tax Return on Assets Drops 1.58%,” May 12, 2008, at http://www.marketwire.com/mw/release.do?id=854884, which
summarizes industry profitability trends between 2006 and 2007. SourceMedia provides market information to the
financial services and related industries through various publications, seminars, and conferences. For more information,
see http://www.sourcemedia.com.
4 The 2007 data in this section are reported from Brian K. Bucks, Arthur B. Kennickell, and Traci L. Mack, et al.,
“Changes in U.S. Family Finances from 2004 to 2007: Evidence from the Survey of Conusmer Finances,” Federal
Reserve Bulletin, vol. 95 (February 2009), pp. A1-A55, http://www.federalreserve.gov/pubs/bulletin/2009/pdf/
scf09.pdf. The 1989 data in this section are reported from Arthur B. Kennickell and Martha Starr-McCluer, “Changes
in Family Finances from 1989 to 1992: Evidence from the Survey of Consumer Finances,” Federal Reserve Bulletin,
vol. 80 (October 1994), pp. 861-882, http://www.federalreserve.gov/pubs/oss/oss2/92/bull1094.pdf.
5 See Kathleen W. Johnson, “Recent Developments in the Credit Card Market and the Financial Obligations Ratio,”
Federal Reserve Bulletin, vol. 91, autumn 2005.
6 For discussions about how the increased use of risk-based pricing strategies led to fewer credit denials and greater
credit accessibility for higher risk borrowers, see Raphael W. Bostic, “Trends in Equal Access to Credit Products,” in
The Impact of Public Policy on Consumer Credit, eds. Thomas Durkin and Michael Staten, Massachusetts: Kluwer
Academic Publishers, 2002, pp. 171-202; Wendy M. Edelberg, “Risk-based Pricing of Interest Rates in Household
Loan Markets,” Finance and Economics Discussion Series 2003-62. Washington: Board of Governors of the Federal
Reserve System, 2003; Wendy M. Edelberg, “Risk-based Pricing of Interest Rates for Consumer Loans,” Journal of
Monetary Economics, vol. 53, November 2006, pp. 2283-2298; Mark Furletti and Christopher Ody, “Another Look at
Credit Card Pricing and Its Disclosure: Is the Semi-Annual Pricing Data Reported by Credit Card Issuers to the Fed
Helpful to Consumers or Researchers?”, Payment Cards Center Discussion Paper, Federal Reserve Bank of
Philadelphia, July 2006; Kathleen W. Johnson, “Recent Developments in the Credit Card Market and the Financial
Obligations Ratio,” Federal Reserve Bulletin, vol. 91, September 2005, pp. 473-486.
7 In 2001, the SCF reported that the number of households having at least one credit card rose to 76.2%, the highest
percentage reported to date; the percentage of families that reported carrying a balance was 44.4%. Despite the increase
(continued...)
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costs that fluctuate with market rates. Given more frequent usage of credit cards for making
convenience transactions, households arguably grew more responsive to the interest rate
movements, leading them to prefer cards that would allow them to benefit from market rate
declines. On the other hand, it is also likely that lenders may have offered more variable rate
cards to borrowers to benefit from market rate increases. All of these developments suggest
increases in both the supply and demand for revolving credit, resulting in growth of the revolving
credit market since 1989.
According to a Federal Reserve statistical release, card delinquency rates rose during 2008, at
least for commercial banks.8 Seasonally adjusted credit card delinquency rates, which dropped
below 4% during all of 2005, rose to 5.56% in the fourth quarter 2008. Given that approximately
40% of credit card loan originations remain on bank balance sheets, the delinquency rates for
commercial banks arguably reflect trends for the entire revolving credit industry. Nevertheless, it
is difficult to identify a single numerical measure to evaluate the health of this sector given the
dramatic increase in credit card receivables that have, in recent years, been funded or financed via
securitization in modern financial markets.9 Rising delinquency rates are likely to translate into
higher borrowing costs in this sector, and the next section provides the institutional background to
illustrate why this relationship may exist.
The Funding and Pricing of Revolving Credit
Credit cards were initially issued by department stores in the 1950s as a more efficient way to
increase customer convenience and manage their accounts.10 Stores selling big ticket items such
as major appliances eventually allowed customers to decide whether to pay in full or in
installments subject to a finance charge. Once commercial banks recognized the profit potential
from providing open-ended, unsecured financing to consumers, the general-purpose credit card
became more popular towards the late 1960s.11 Of course, since this occurred prior to the rise of
securitization, which will be discussed in more detail below, local banks set the rates on the credit
cards they issued.

(...continued)
in credit access (but decline in usage from 49.6% in 1989), higher risk consumers may not have borrowed as much as
desired given that their borrowing costs were relatively higher. See Ana M. Aizcorbe, Arthur B. Kennickell, and Kevin
B. Moore, “Recent Changes in the U.S. Family Finances: Evidence from the 1998 and 2001 Survey of Consumer
Finances,” Federal Reserve Bulletin, vol. 89 (January 2003), pp. 1-32, http://www.federalreserve.gov/pubs/oss/oss2/
2001/bull0103.pdf for the 2001 data; and Wendy M. Edelberg, “Risk-based Pricing of Interest Rates in Household
Loan Markets,” Finance and Economics Discussion Series 2003-62. Washington: Board of Governors of the Federal
Reserve System, 2003.
8 The Federal Reserve Board uses data from the Consolidated Reports of Conditions and Income, compiled by the
Federal Financial Institutions Examination Council (FFIEC), to calculate a statistical release entitled “Charge-off and
Delinquency Rates on Loans and Leases at Commercial Banks.” Loans and leases are considered delinquent after 30
days, and charge-offs are the value of these loans and leases (net of recoveries) removed from bank balance sheets and
charged against loss reserves. See http://www.federalreserve.gov/releases/chargeoff.
9 See Mark Furletti, “Measuring Credit Card Industry Chargeoffs: A Review of Sources and Methods,” Payment Cards
Center Discussion Paper, Federal Reserve Bank of Philadelphia, September 2003.
10 For more information on the historical development of the credit card market, see Glenn B. Canner, “Developments
in the Pricing of Credit Card Services,” Federal Reserve Bulletin, September 1992.
11 A charge card must be paid in full every month, unlike a credit card.
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During the late 1970s and early 1980s, the rise in inflation made unsecured lending unprofitable,
especially since state regulations limited the interest rates banks could charge. Credit card lenders
responded by charging annual fees and restricting the number of credit cards issued to supplement
the income loss. Banks also began moving their credit card operations to states with high or no
interest rate ceilings. 12 Inflation diminished towards the end of the 1980s; this development along
with less restrictive interest rate caps, reduced the need to charge annual fees. In addition to
falling inflation rates, the growth of banking on a national scale resulted in increased competition,
which contributed to a drop in revolving credit interest rates below the 18% to 19% levels
maintained through most of the 1980s and early 1990s.13 Whenever the Federal Reserve decided
to lower the federal funds rate, card-issuing banks also had the option to pass their lower
borrowing costs onto cardholders, which would translate into lower credit card rates.
The Impact of Securitization on Funding Costs
The funding of revolving credit through securitization, which first began in 1987, also helped
reduce the cost of credit.14 Securitization occurs when financial institutions that originate credit
card loans choose not to retain the loans on their balance sheets.15 Loans originated in the primary
market, where the credit card purchaser and the loan originator conduct business, are often sold in
the secondary market, where the loan originator and an investor conduct business.16 The
securitization of assets helps originators manage liquidity and credit risk, which then may
translate into lower interest rates for cardholders. Given that approximately 60% of credit card
loans are securitized, a more detailed discussion of the process is provided.
Although loans may be funded by originators using bank deposits or surplus capital,
securitization may be a lower cost funding alternative.17 When depository institutions fund loans
with deposits, the terms of the assets (loans), specifically the timing of the receivables, may not
match perfectly the terms of the liabilities (deposits) that must be repaid. Depository institutions,
therefore, are required to hold certain amounts of capital reserves against such timing mis-
matches in the event the assets do not perform as expected. An opportunity cost, however, is
incurred when capital held for regulatory safety reasons is not used for other, more profitable,
lending activities or investments. Moreover, non-bank or non-depository institutions may enjoy a
competitive funding cost advantage, since they are not subject to the same regulatory capital
requirements as depository institutions. Even if greater capital requirements were not an issue, as
in the case of non-bank institutions, originators would still incur servicing and monitoring costs if
loans are funded from balance sheet activities. Hence, securitization allows for the off-balance-
sheet funding of loans, which may lead to a reduction of funding costs and an elimination (to the

12 See Glenn B. Canner and Charles A. Luckett, “Developments in the Pricing of Credit Card Services,” Federal
Reserve Bulletin, September 1992.
13 See Glenn B. Canner and Charles A. Luckett, “The Profitability of Credit Card Operations of Depository
Institutions,” Federal Reserve Bulletin, June 1999.
14 See the Risk Management Credit Card Securitization Manual, The Federal Deposit Insurance Corporation, at
http://www.fdic.gov/regulations/examinations/credit_card_securitization/pdf_version/index.html.
15 The term “bank” may be used interchangeably to mean any type of financial institution that originates a credit card
with a specified loan amount.
16 For a more detailed explanation of the securitization process, see Mark Furletti, “Overview of Credit Card Asset-
Backed Securities,” Payment Cards Center Discussion Paper, Federal Reserve Bank of Philadelphia, December 2002.
17 See Charles T. Carlstrom and Katherine A. Samolyk, “Securitization: More than Just a Regulatory Artifact,”
Economic Commentary, Federal Reserve Bank of Cleveland, May 1992.
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depository institution) of risks associated with on-balance-sheet funding. These cost savings may
or may not be passed on to cardholders in the form of lower credit card rates. Credit card interest
rates, however, have become more responsive to issuers’ costs of funds in recent years.18 A more
detailed discussion of the securitization process for credit card receivables may be found in the
Appendix C.
Other Risks to Yield
The yield or return on investment from this lending activity must be sufficient enough to attract
investors, the ultimate lenders, from alternative lending opportunities. The previous section
explained how loans are held on or sold off the balance sheet of originators, depending upon
which funding option was less expensive. Consequently, lower funding costs translate into higher
yield. This section discusses other costs or risks that affect the profitability of credit card lending.
Convenience Users and Early Amortization Risk
The yield or profit from credit card receivables is dependent upon whether borrowers make
minimum payments or pay off their balances every month. Consumers have the option during
each billing cycle to pay the minimum balance, pay off the entire loan, or pay something in
between. When credit cards are used for convenience transactions rather than for borrowing, this
does not generate any investor yield. In addition, early amortization, which occurs when the
outstanding balance of a credit card account is suddenly paid off, also reduces yield. (Early
amortization also occurs when a credit card is paid off and the balance is transferred to another
card issued by a competing card issuer.) A reduction in yield ultimately makes investing in credit
card receivables less appealing to investors, a development which itself increases the funding
costs to provide these loans in the future.
Default Risk
A revolving credit loan is higher in credit or default risk relative to other forms of bank lending.
Credit card loans or receivables involve much higher operating costs and greater risks of default
per dollar of receivables than do other types of lending.19 The risk in revolving credit lending is
derived from several factors. First, the loan is unsecured, which means the card holder has put
forth no collateral assets that can be used to repay the loan in the event of default. Second, the
card holder has the option to use the card when unemployed or lacking sufficient cash flow to
cover routine expenses and payment obligations. The borrower may suddenly become highly
leveraged (up to the credit card limit) without any prior notice. Without knowing whether or not

18 See Glenn B. Canner and Charles A. Luckett, “The Profitability of Credit Card Operations of Depository
Institutions,” Federal Reserve Bulletin, June 1999. A publicly available index is typically used to express a component
of the lending costs to the borrower and may be used to calculate the coupon payment accruing to a credit card asset-
backed security investor. Hence, the use of a market index improves transparency for both the borrower and the
investor, who is the ultimate lender. A market index plus a margin reflects the total borrowing cost or total investment
return. The size of the margin or credit premium is tied to the default risk characteristics of cardholders included in the
pool, which may be funded by credit card fees. For more information on the pricing of credit card asset-backed
securities, see Mark Furletti, “An Overview of Credit Card Asset-Backed Securities,” Payment Cards Center
Discussion Paper, Federal Reserve Bank of Philadelphia, December 2002.
19 Glenn B. Canner, “Developments in the Pricing of Credit Card Services,” Federal Reserve Bulletin, vol. 78 no. 9,
September 1992. A more detailed discussion about the costs of credit card operations is also included.
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the cardholder intends to pay off the balance at the end of the billing cycle, every transaction
made with a credit card is potentially a new loan, and the outstanding principal balance can
change at any time. Next, a credit card is also far more susceptible to fraud than other types of
loan. Should unauthorized charges be made on a lost or stolen card, the Fair Credit Billing Act
limits the liability for cardholders to $50.20 Hence, unrecoverable fraudulent charges may
translate into sizeable losses for originators or investors.
Delinquencies may eventually turn into defaults, which are defined as 180 days delinquent. When
borrowers initially fail to make timely credit card payments, the servicer attempts to contact the
borrower within several days of delinquency to arrange payment. The servicer, and not
necessarily the loan originator, is the designated collector of credit card payments (and forwards
them directly to the lender or to a securitizer if the loan was sold). After 30 days, which is
considered one complete billing cycle, the servicer must decide whether to cut off credit to the
borrower and send the account to collections. Financial institutions may adopt various different
policies for dealing with delinquencies. If, however, accounts are sent to collections, the Fair
Debt Collection Practices Act (FDCPA) prohibits abusive, deceptive, and improper collection
practices of third party debt collectors.21 The collections process is regulated by federal
guidelines.22
If the credit card issuer owns the loans, contractual charge-offs (which are account receivables
deemed uncollectible due to missed payments) must be written off the issuer’s books after 6
billing cycles or 180 days of nonpayment, according to guidances issued by the Federal Financial
Institutions Examination Council (FFIEC).23 When a borrower files for bankruptcy, accounts
must be charged off 60 days after receipt of notification of the filing from the bankruptcy court.
One expert estimated that 60% of charge-offs result from 180 days, or six billing cycles, of
missed payments, and 40% of charge-offs are the result of bankruptcy.24 If the loans are
securitized, delinquency and default costs generated from the accounts may be subtracted from
the proceeds paid to the securitizer, which may translate into losses to investors.
When revolving credit is securitized, issuers may find it difficult to attract investors to fund
revolving credit loans without “implicit recourse.” Implicit recourse refers to a perception among
investors that credit card originators will repurchase non-performing loans from asset-backed
security (ABS) pools and absorb default losses, which may seem to negate the benefits of
securitization.25 A Removal of Account Provision (ROAP), which is a provision that allows

20P.L. 93-495, as codified at 15 U.S.C. 1666j. See http://fdic.gov/regulations/laws/rules/6500-500.html.
21 P.L. 90-321, as codified at 15 U.S.C. 1692 et. seq., and as amended by P.L. 109-351, §§ 801-02, 120 Stat. 1966
(2006). See http://www.ftc.gov/bcp/edu/pubs/consumer/credit/cre27.pdf.
22 For a summary of these guidelines, see http://www.ftc.gov/bcp/conline/pubs/credit/fdc.shtm.
23 See the February 10, 1999, FFIEC press release entitled “Federal Financial Institution Regulators Issue Revised
Policy For Classifying Retail Credits,” at http://www.ffiec.gov/press/pr021099.htm.
24 See Furletti, “Measuring Credit Card Industry Chargeoffs: A Review of Sources and Methods.”
25 According to FASB 140 accounting rules, a “true sale” means the seller is no longer responsible for the subsequent
performance of the financial assets sold. If poor performance is transferred back to the originator, then a true
accounting sale of assets did not occur, and the originator should be required to hold capital against the value of the
collateral. The only permissible exception to this recourse provision is when the originator wants to remove a
delinquent account from a pool to offer a workout solution to the borrower. The exception was not designed to simply
allow issuers to absorb losses, for example, by removing early amortization accounts to enhance the performance of
securitized tranches. For more details on this point, see Charles W. Calomiris and Joseph R. Mason, “Credit Card
Securitization and Regulatory Arbitrage,” Working Paper No. 03-7, Federal Reserve Bank of Philadelphia, April 2003.
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issuers to remove delinquent accounts, or accounts with fraudulent charges, from an ABS pool,
may be exercised. Exercising this option too often, however, may still imply that the ABS should
receive lower credit ratings, which could make it more difficult to attract some investors.
Summary of Current Risks to Yield
More convenience users, early amortizations, and defaults reduce the yield on credit card ABSs.
The impact on yield may be even more significant should all of these risks materialize
simultaneously. Slightly more consumers, however, are carrying a balance and the median
balance has increased, as discussed earlier in this report. Consequently, the payoff risk associated
with an increase in convenience users has seen some decline. On the other hand, defaults are
rising. Should defaults continue to accelerate, the increase in funding costs may encourage some
lenders to re-evaluate the profitability of providing revolving credit. One option may be to curtail
revolving lending activities and pursue more profitable business strategies. Another option may
be to employ various repricing practices.
The Repricing of Revolving Credit
Repricing Credit Card Loans
The previous historical discussion noted that fee income, a component of the total cost of
borrower credit, was used to help cover the increasing costs to supply credit during the late 1970s
and early 1980s. The securitization discussion shows how a particular funding method, that
minimizes the liquidity and default risk for credit card originators, may translate into lower rates
for cardholders. Interest rate charges and fees, therefore, change when costs change.
For example, when a borrower is delinquent, exceeds credit limits, or bounces payment checks,
the borrower may now be viewed as a greater credit risk. At that point, lenders may consider the
borrower as a candidate for being re-priced for the credit. Penalties, increased fees, and increased
loan rates are all tools available to credit suppliers to reprice the increased risk to yield. If
cardholders are sensitive to increasing charges, then repricing may be used to encourage
delinquent cardholders to repay their obligations faster and discourage them from further
borrowing. Repricing, therefore, is an extension of risk-based pricing in that higher risk
borrowers shoulder more of the costs associated with having access to borrowing services.
Repricing, however, can be initiated without any delinquency incident. When this happens, a
borrower may shop for other card issuers that are willing to provide them with credit cards at
lower prices or accept balance transfers. Hence, the lender’s decision to charge higher interest and
fees, whether to compensate for rising default risk or simply to increase profit margins, is likely
to be affected by an assessment of the borrower’s willingness and ability to shop for and find
other lower-priced credit.
Repricing practices typically include “hair-trigger” repricing and “universal default”; and, in
some cases, “double-cycle billing” practices may have the same effect.26 Hair-trigger repricing

26 For definitions of terms, see the following references. “Credit Cards: Increased Complexity in Rates and Fees
Heightens Need for More Effective Disclosures to Consumers,” GAO-06-929, Government Accountability Office
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refers to imposing fees and higher finance charges on cardholders almost immediately after a
payment is late without any grace period. Universal default occurs when a borrower defaults on a
loan serviced by a lender, and other revolving creditors respond by increasing the lending rates on
the loans they are servicing for that particular borrower, even if the borrower has not defaulted on
those loans. Double-cycle billing is the practice of calculating interest over a two-month billing
cycle period, as opposed to a one-month billing cycle, that may result in higher finance charges.
Although double-cycle billing may not often be described as a repricing practice, in particular if
this billing method is universally applied to all customers, the economic impact on cardholders
can be similar to standard repricing strategies. If the consumer misses a payment or switches from
being a convenience user to a revolver, the typical grace period, or a specified time period in
which payments can be made without incurring any finance charge, is retroactively eliminated
under double-cycle billing. Forfeiture of interest-free grace periods results in higher finance
charges; therefore, risk-based repricing has automatically been captured by the billing method.
Policy Options
Repricing practices are often unpopular with borrowers if they are perceived to be changes in the
credit terms that were not part of the original agreement when the card was issued. It is also
possible that borrowers unknowingly agreed to terms that were very difficult to understand.27
Many loan originators, however, are concerned with the cash flow necessary to maintain lower
funding costs, in particular at a time while defaults are rising. Moreover, maintaining cash flows
sufficient to cover losses accruing to the lower tranche is also important if the subordinate tranche
is being used as a credit enhancement for more senior tranches.
One policy response might be to eliminate repricing practices. A possible consequence of this
response, however, is to make this type of lending unattractive to future investors. Less cash may
be available to flow into excess spread tranches, which translates into a reduction either in profits
or in funds to cover bank charge offs. Economic theory, specifically the law of supply, suggests
that firms are less willing to supply products to the marketplace at lower prices. Credit card
issuers could respond in a variety of ways to pricing restrictions. To recapture the fee income,
issuers may increase loan rates across the board on all borrowers, making it more expensive for
both good and delinquent borrowers to use revolving credit. Other options may include increasing
minimum monthly payments, reducing credit limits, or reducing the number of credit cards issued
to people with impaired credit.28 Given that credit cards also serve a convenience transactions

(...continued)
(September 2006) located at http://www.gao.gov/new.items/d06929.pdf; Sheila Bair, Chairman, FDIC, Statement on
Improving Credit Card Consumer Protection: Recent Industry And Regulatory Initiatives before the Subcommittee On
Financial Institutions and Consumer Credit of the Financial Services Committee, U.S. House of Representatives, June
7, 2007, at http://www.fdic.gov/news/news/speeches/archives/2007/chairman/spjun0707.html; Mark Furletti, Credit
Card Pricing Developments and Their Disclosure, Federal Reserve Bank of Philadelphia, January 2003, at
http://www.philadelphiafed.org/pcc/papers/2003/CreditCardPricing_012003.pdf; a glossary of revolving credit terms
may be found at http://www.fdic.gov/regulations/examinations/credit_card/glossary.html; and see Testimony Before
the Committee of Homeland Security and Governmental Affairs Permanent Subcommittee on Investigations Regarding
Credit Card Practices: Fee, Interest Rates, and Grace Periods, March 7, 2007, at http://hsgac.senate.gov/public/_files/
STMTCohenNCLC.pdf.
27 The Government Accountability Office reported that disclosures of complex risk-based pricing practices in the credit
card industry have become extremely difficult for consumers to understand. See “Credit Cards: Increased Complexity
in Rates and Fees Heightens Need for More Effective Disclosures to Consumers,” GAO-06-929, Government
Accountability Office (September 2006) at http://www.gao.gov/new.items/d06929.pdf.
28 For studies on the regulatory effects of credit card rates and fees, see Diane Ellis, “The Effect of Consumer Interest
(continued...)
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The Credit Card Market: Recent Trends and Regulatory Proposals

purpose, a reduction in card accessibility may increase the difficulty for affected households to
make transactions.29
Other policy responses could include modifications or elimination of some repricing practices.
For example, credit card issuers may choose not to respond by increasing the costs or limiting the
availability of credit to borrowers. Some financial institutions had recently announced that they
would no longer use pricing practices such as double-cycle billing and universal default.30 When
these announcements were made, there was no indication that subsequent increases in minimum
payments or reductions in credit card issues would occur. Hence, it may be possible for other
institutions to manage their cash flows and delinquencies without relying upon these more
controversial pricing practices.31
Federal Reserve Actions
The Federal Reserve has conducted studies that use consumer focus groups and individuals to
determine what types of disclosures are effective with helping them understand the possible
charges they could face. Upon completion of the interviews, the Federal Reserve expects to
propose revisions to disclosure regulations know as Regulation Z. The goal is to design a format
that may be considered more transparent for consumers to evaluate the credit terms and facilitate
their usage of credit cards.32
On December 18, 2008, the Federal Reserve also issued new regulations regarding credit card
pricing practices.33 The rules amended Regulation AA (Unfair Acts or Practices), Regulation Z
(Truth in Lending), and Regulation DD (Truth in Savings). The rules prohibit unfair or deceptive
bank practices in connection with credit card accounts and overdraft services for deposit
accounts. For example, banks must give consumers a reasonable amount of time to make their
payments, safe harbor would be given to banks that send periodic statements at least 21 days prior
to the payment due date. Given that the double-cycle billing method eliminates an interest-free
grace period for the consumer, the rule also eliminates this billing practice. Banks are allowed to
apply rate increases to existing balances only when (1) the interest rate is variable; (2) a

(...continued)
Rate Deregulation on Credit Card Volumes, Charge-offs, and the Personal Bankruptcy Rate,” Bank Trends, FDIC
Division of Insurance, March 1998, at http://www.fdic.gov/bank/analytical/bank/bt_9805.html; and Jonathan M.
Orszag and Susan H. Manning, An Economic Assessment of Regulating Credit Card Fees and Interest Rates, a study
commissioned by the American Bankers Association, at http://www.aba.com/aba/documents/press/
regulating_creditcard_fees_interest_rates92507.pdf.
29 For example, some businesses, such as those that make reservations to provide various services, rely primarily on
credit cards to secure payment.
30 For example, see “Chase ends double-cycle billing” at http://www.bankrate.com/brm/
story_content.asp?story_uid=20919&prodtype=today; and “Citi Announces Industry Leading Changes to its Credit
Card Practices: To End ‘Universal Default’ & ‘Any Time for Any Reason’ Changes” at http://www.citigroup.com/
citigroup/press/2007/070301b.htm.
31 See Adam J. Levitin, All But Accurate: A Critique of the American Bankers Association Study of Credit Card
Regulation, at http://works.bepress.com/adam_levitin/4/.
32 See http://www.federalreserve.gov/newsevents/press/bcreg/20070523a.htm.
33 See http://www.federalreserve.gov/newsevents/press/bcreg/20081218a.htm.
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The Credit Card Market: Recent Trends and Regulatory Proposals

promotional rate expires; or (3) a minimum payment has not been received within 30 days of the
due date. These rules go into effect on July 1, 2010.34
The Federal Reserve, along with the Federal Trade Commission, has also proposed implementing
the risk-based pricing provisions in Section 311 of the Fair and Accurate Credit Transactions Act
of 2003.35 This rule would require creditors to notify consumers when an issuer used a credit
report to grant credit at a relatively higher interest rate in comparison to rates offered to most of
its customers, who are presumably more creditworthy.

34H.R. 627, S. 235, and S. 414 would put various repricing restrictions into statute, and such restrictions would be
effective 3 months after the legislation has passed.
35P.L. 108-159. See http://www.treas.gov/offices/domestic-finance/financial-institution/cip/pdf/fact-act.pdf. More
details about the proposed rule may be found at http://www.federalreserve.gov/newsevents/press/bcreg/20080508a.htm.
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The Credit Card Market: Recent Trends and Regulatory Proposals

Appendix A. Comparison of H.R. 627 and S. 41436
This appendix provides a comparative analysis of H.R. 627 (the Credit Cardholders’ Bill of
Rights Act of 2009), as passed by the House on April 30, 2009, and S. 414, (the Credit CARD Act
of 2009), as reported by the Senate Banking Committee on March 31, 2009. The table below sets
out the major provisions of the bills.
An amendment to S. 414 adopted in the Banking Committee would increase the borrowing
authority of the Federal Deposit Insurance Corporation (FDIC) and the National Credit Union
Association (NCUA), and would establish a restoration plan for the credit union deposit insurance
fund. Since these provisions—now Section 503 of the bill—do not affect credit card lending, and
the House bill has no comparable provisions, they are omitted from the table.
Table A-1. Comparison of H.R. 627 and S. 414
Provision
H.R. 627

S. 414
Short Title
Credit Cardholders’ Bill of Rights Act of

Credit Card Accountability Responsibility and
2009
Disclosure Act of 2009
Increasing Rates
Prohibits creditors from raising interest

Interest rate increases may not apply to existing
on Outstanding
rates on an existing balance of a credit
balances unless the increase is due to the
Balances
card account unless the increase is solely
expiration of an introductory percentage rate,
due to (1) a change in a published index
or due solely to a change in another rate of
not under the creditor’s control; (2) the
interest to which such rate is indexed. (Sec.
expiration of a promotional rate; (3)
101)
failure to comply with a workout plan
(see below); or (4) the consumer’s

minimum payment being at least 30 days
overdue. In the case of expiration of a
promotional rate, the new rate may not
exceed the rate that would have applied
under the terms of the agreement absent
the promotional rate. (Sec. 2(b)) Also
prohibits imposition of fees in lieu of a
rate increase on an existing balance. (Sec.
2(a))
Treatment of
If a creditor raises rates, but the higher

No comparable provision.
Existing Balances rate does not apply to an existing
After a Rate
balance, the creditor must offer a 5-year
Increase
amortization period for repayment of the
existing balance, and may not increase the
percentage of the existing balance
included in the minimum payment by
more than double. Creditors may also
offer an alternative method which is at
least as beneficial to the consumer. (Sec.
2 (a))

36 The analysis appearing in Appendix A was prepared by Mark Jickling, CRS Specialist in Financial Economics.
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The Credit Card Market: Recent Trends and Regulatory Proposals

Provision
H.R. 627

S. 414
Increasing Rates
No directly comparable provision.

Prohibits increases in rates based on adverse
on New
information not directly related to the account.
Balances and
Permits rate increases on new balances due to
Universal
(1) expiration of an introductory rate, (2) an
Default Clauses
indexed rate, (3) a specific, material action or
omission of a consumer in violation of an
agreement that is directly related to such
account and that is specified in the contract as
grounds for an increase, (4) a change that takes
effect when an account is renewed, or (5)
failure to comply with the terms of a workout
arrangement.
When increases are due to a violation of an
agreement, the creditor must disclose what the
violation was, and must reduce the rate to the
previous level after 6 months, if no further
violations occur. (Sec. 108)
Advance Notice
Requires creditors to provide written

No rate increase may take effect before a billing
of Credit Card
notice at least 45 days before any rate
cycle beginning at least 45 days after the date on
Rate Increases
increase takes effect. The notice must
which the consumer receives notice of the
or Changes in
describe in a complete and conspicuous
increase. The notice shall include a brief
Contract Terms
manner the change in the rate and the
statement of the right of the consumer to
extent to which such increase will apply
cancel the account before the higher rate takes
to an existing balance. Except under
effect. (Sec. 101)
specified circumstances (see “Increasing
Rates on Outstanding Balances” above),

banks may not increase rates for new

balances during the first year the account
is open.
Change of
45-day notice is required for significant

A card issuer may not amend or change the
Terms of an
changes in the terms of an account. 30-
terms of a credit card contract or agreement
Account
day notice is required before the creditor
until after the date on which the credit card will
closes an account. Promotional interest
expire if not renewed. (Sec. 108)
rates must be in effect for at least 6
months. (Sec. 2(c))
Limits on
Prohibits fees based on method of

Prohibits the charging of interest on fees,
Certain Fees
payment (e.g., payment by telephone or
including cash advance fees, late fees, over-the-
and Charges
electronic funds transfer).
limit fees, or balance transfer fees. Separate fees
linked to repayment of finance charges or
extensions of credit are also prohibited. Fees
for foreign currency exchange must be
reasonable (related to the bank’s actual
transaction costs), and the method for
calculating such fees must be disclosed. (Sec.
103)
Rates and Fees
No comparable provision.

If a consumer closes or cancels a credit card
on Cancelled
account, repayment of the outstanding balance
Card Accounts
shal be under the terms and rates that
prevailed just before cancellation. Closing an
account shal not constitute a default, nor
trigger a demand for immediate repayment in
full. (Sec. 102)
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The Credit Card Market: Recent Trends and Regulatory Proposals

Provision
H.R. 627

S. 414
Workout
If a rate is reduced pursuant to a

No comparable provision.
Agreements
workout agreement between borrower
and lender, and the borrower fails to
comply with the agreement, lender may
raise rates, but only to the level that
prevailed before the workout agreement.
Directs the Federal Reserve to set
standards for workout agreements. (Sec.
2(b))

Double-Cycle
Prohibits double-cycle billing, or finance

If credit card plan provides a time period within
Billing
charges on balances on a credit card
which a consumer may repay any portion of the
account that are based on days in billing
credit extended without incurring an interest
cycles preceding the most recent such
charge, and the consumer repays al or part of
cycle, as a result of the loss of a grace
such credit within the specified time period, the
period. Exceptions are provided for
creditor may not impose or collect an interest
finance charges following the return of a
charge on the portion of the credit that was
payment for insufficient funds, and for
repaid within the specified time period. (Sec.
adjustment of finance charges following
103)
resolution of a billing dispute. (Sec. 3(a))
Account
If the outstanding balance on a credit
No
provision.
Balances
card account consists only of accrued
Attributable
interest to previously-repaid credit, no
Only to Accrued fee may be imposed in connection with
Interest
such a balance, and failure to make timely
repayments on such a balance shal not
constitute a default on the account. (Sec.
3(b))
Periodic
Each periodic credit card account

No directly comparable provision, but Sec. 201
Account
statement shal contain a telephone
requires disclosures related to minimum
Statement
number and website address at which the
monthly payments and outstanding balances.
Disclosures
consumer may request the payoff balance
on the account. (Sec. 3(c))
Disclosure
Each periodic statement provided by

No comparable provision
Requirements
small credit card issuers (those with
for Small Credit
fewer than 50,000 credit cards issued)
Card Issuers
must include a tol -free number or
website at which the consumer may
request the outstanding balance on the
account.
Right to Cancel
Requires creditors to remove any

A creditor may not furnish any information to a
Account Before
information provided to a consumer
consumer reporting agency concerning a newly
First Notice of
reporting agency (credit bureau) if the
opened credit card account until the credit card
Open Account
consumer does not use or activate the
has been used or activated by the consumer.
Provided to
card, or cancels the account, during the
(Sec. 104)
Credit Bureau
45 days after opening the account.
Permits a creditor to furnish information
about an application for a credit card
account or any inquiry about such
account to a consumer reporting agency.
(Sec. 3(d))
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The Credit Card Market: Recent Trends and Regulatory Proposals

Provision
H.R. 627

S. 414
Use of Certain
Specifies the way certain terms may be

Identical provisions. (Sec. 105)
Terms
used. “Fixed rate” may only refer to a
Describing
rate that may not change for any reason
Interest Rates
over a specified time period. The term
“prime rate” must not be used to
describe a rate other than the rate
published in Federal Reserve statistical
releases. (Sec. 3(e))
Due Dates and
Payments received by 5 p.m. (local time)

Payments received by 5 p.m. on the date on
Timely Payments on the due date must be considered
which such payments are due shall be
timely; electronic payments received by 5
considered timely. If a card issuer makes a
p.m. must be credited to the consumer’s
material change in the mailing address or
account the same day; and evidence that
procedures for handling cardholder payments,
a payment was mailed 7 days before the
and such change causes a material delay in the
due date creates a presumption of timely
crediting of a cardholder payment made during
payment. If payments are not accepted on
the 60-day period following the change, no late
the due date (if it falls on a weekend or
fee or finance charge may be imposed for late
holiday), payment received the next
payment. Evidence that a payment was mailed 7
business day must be considered timely.
days before the due date creates a presumption
(Sec. 3(e))
of timely payment. (Sec. 106)
Payment
If the balance of a credit card account is

Upon receipt of a payment from a cardholder,
Allocations
charged 2 or more different interest rates
the card issuer shal (1) apply the payment first
(e.g., separate rates for cash advances and
to the card balance bearing the highest rate of
purchases), the creditor must allocate all
interest, and then to each successive balance
of a consumer’s payment (in excess of
bearing the next highest rate of interest, until
the monthly minimum) to the outstanding
the payment is exhausted; and (2) apply the
balance carrying the highest interest rate.
payment in a way that minimizes the amount of
Notwithstanding the above, a creditor
any finance charge to the account. (Sec. 106)
may al ocate the entire amount paid to a
balance on which interest has been
deferred for the past 2 billing cycles. (Sec.
3(f))
Prohibition on
If a creditor offers cardholders a grace

No comparable provision.
Restricted
period within which to pay in full and not
Grace Periods
incur finance charges, that grace period
must be available to cardholders who
receive a promotional rate or deferred
interest plan. (Sec. 3(f))
Timely Provision Creditors must send consumers periodic

Identical provision. (Sec. 107)
of Periodic
account statements not less than 21
Account
calendar days before the due date. (The
Statements
current standard is 14 days.) (Sec. 3(g))
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The Credit Card Market: Recent Trends and Regulatory Proposals

Provision
H.R. 627

S. 414
Consumer
If a credit card plan has a credit limit, and

If an account charges fees for exceeding a credit
Choice
fees are charged for exceeding that limit,
limit, consumers may elect to prohibit the
Regarding Over-
no such fee may be imposed unless the
creditor from completing any over-the-limit
the-limit
consumer elects to pay fees when the
transaction that will result in a fee or constitute
Transactions,
creditor completes transactions that
a default under the credit agreement, by
and Limits on
exceed the credit limit. (Federal Reserve
notifying the creditor of such election. Annual
Related Fees
would issue regulations to provide for
notice that this “opt-out” election is available
certain de minimis exceptions.) Over-the-
would be required.
limit fees may be imposed only once over
the two billing cycles following the
Over-the-limit fees may not be imposed if it was
transaction that exceeded the credit limit.
a fee or an interest charge that caused the limit
An over-the-limit fee due to a hold may
to be exceeded, and may be imposed only for a
not be imposed unless the actual
single billing cycle. (Sec. 103)
transaction for which the hold was placed
would have resulted in the consumer
exceeding the credit limit. (Sec. 4)
Notification
Small credit card issuers issuers (those

No comparable provision.
Requirements
with fewer than 50,000 credit cards
for Small Credit
issued) must establish either a toll-free
Card Issuers
number or website to allow consumers
to notify creditors not to authorize
transactions that would extend their
credit beyond the authorized amount,
which would result in an over-the-limit
fee. (Sec. 4)
Information
Directs the Federal Reserve to col ect

Similar provisions related to collection of data
Collection
semiannual data on the types of
on credit card interest rates, fees, and profits.
Regarding
transactions for which different rates are
(Sec. 110)
Credit Card
charged, the various types of fees, the
Lending
number of cardholders who pay fees,
finance charges, or interest, and other
matters. The Fed shal report annual y to
Congress on the amount of credit card
lenders’ income derived from: interest
paid at above and below 25%; fees from
cardholders and merchants; and other
material sources of income. (Sec. 5)
Subprime or
For cards whose annual fees exceed 25%
No
provisions.
“Fee Harvester”
of the credit limit, no payment of any fees
Cards
(other than late fees, over-the-limit fees,
or fees for payments returned for
insufficient funds) may be made from the
credit made available by the card. (Sec. 6)
Increased
No provision.

Sets money penalties for violations of the Truth
Penalties
in Lending Act related to credit cards and
unsecured lending. (Sec. 109)
Enhanced
No provision.

Directs bank regulators to evaluate lenders’
Oversight
credit card policies and procedures and to
promptly correct any violations. Directs the
banking agencies to report annual y to Congress
on compliance and enforcement efforts. (Sec.
110)
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Provision
H.R. 627

S. 414
Enhanced
Requires a “Minimum Payment Warning,”
Requires disclosures related to (1) the
Consumer
including information on how long it
consequences of making only the minimum
Disclosures
would take to pay off a balance by making
monthly payment, (2) late payment deadlines
only the minimum monthly payment, and
and penalties, and (3) any change in terms
a table showing the level of payment
effective upon renewal of an account. Requires
required to pay off a balance over various
lenders to provide a toll-free number where
time periods. (Sec. 11)
consumers may obtain credit counseling or debt
management information, and directs the
Requires disclosures to be made in a
Treasury to establish standards for debt
readable font, in at least 12-point type.
counselors. Provides penalties for failure to
(Sec. 14)
make required disclosures. (Secs. 201, 202, and
Requires stores that accept credit card
203)
applications to post signs containing
certain required disclosures. (Sec. 18)
Underage
Prohibits the issuing of credit cards to

No credit card may be issued to a consumer
Consumers
consumers less than 18 years old, except
less than 21 years old, unless the consumer
to consumers who are emancipated
submits a written application to the card issuer
under applicable state law, or unless a
that includes (1) the signature of the parent or
parent or guardian is designated as the
guardian indicating joint liability for debts
primary account holder. (Sec. 7)
incurred by the consumer in connection with
the account; (2) financial information indicating
an independent means of repaying any
obligation arising in connection with the
account; or (3) evidence of completion of a
Treasury-certified financial literacy or financial
education course designed for young
consumers. (Sec. 301)
Prohibits certain advertising and solicitation
practices, including “pre-screened” offers of
credit, aimed at consumers under 21, unless
they have “opted-in” for inclusion on related
marketing lists. (Sec. 303)
College Students For full-time college students at least 18

Prohibits issuance of “affinity” credit cards
years but under 21, credit extended in
linked to colleges or universities to consumers
any year may not exceed $500 or 20% of
under 21 years old. (Sec. 302)
the student’s gross income. (Sec. 7)
Active-Duty
Prohibits credit card lenders from making
No comparable provision.
Military
adverse credit reports for 2 years
Personnel and
regarding active duty personnel or
Recently
recently disabled veterans. (Sec. 9)
Disabled
Veterans
Posting
Requires lenders to post the terms of

No comparable provision.
Information on
credit card contracts on the Internet, and
the Internet
to furnish the Federal Reserve with
electronic copies to permit the creation
of a central repository of such
information. (Sec. 10)
Timely
Directs the Federal Reserve to issue

No comparable provision.
Settlement of
regulations requiring creditors to
Deceased
establish procedures ensuring that
Debtors’ Estates outstanding balances can be resolved in a
timely manner. (Sec. 16)
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Provision
H.R. 627

S. 414
Federal Agency
No provision.

Amends the Federal Trade Commission Act to
Coordination
authorize each banking agency to make and
enforce regulations governing unfair or
deceptive practices by banks and thrifts. (Sec.
401)
Implementation
Directs the Federal Reserve to report to

No comparable provision.
Reports
Congress on the implementation of this
legislation every 90 days until full industry
implementation is achieved. (Sec. 17)
Review of
Directs the Federal Reserve to conduct

No comparable provision.
Credit Card
biennial reviews of credit card terms and
Plans and
lenders’ practices, the effectiveness of
Regulations
required disclosures and protections
against unfair practices, and the impact of
this legislation. (Sec. 12)
Studies and
Directs the Federal Reserve, in

Directs GAO to study the impact of
Reports
consultation with other bank regulators
interchange fees on consumers and merchants
and the Federal Trade Commission, to
and the extent to which such fees are disclosed,
study and report on the extent to which
and to report to Congress within 180 days of
credit limits are lowered or interest rates
enactment. (Sec. 501)
raised based on (1) the type and
geographical location of a consumer’s
Requires GAO to establish a Credit Card Safety
transactions and (2) the identity of the
Rating System Commission to explore the idea
holder of the consumer’s home
of a rating system for credit card agreements.
mortgage. The report shall also include
(Sec. 502)
the numbers and identities of lenders that
engage in these practices and whether
such practices have an adverse effect on
minority and low-income consumers.
(Sec. 9)
Effective Date
Most provisions would take effect 12

9 months after enactment. (Sec. 2)
months after enactment, or June 1, 2010,
whichever is earlier. The exception is for
the required 45-day advance notification
of an interest rate increase: this
requirement would take effect 90 days
after enactment.
The regulatory agencies shall issue
implementing regulations 12 months after
enactment, or by or June 30, 2010,
whichever is earlier. (Sec. 19)
Source: Analysis provided by CRS
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Appendix B. Comparison of H.R. 627 and Federal
Reserve December 2008 Regulations
This appendix provides a comparative analysis of H.R. 627 (the Credit Cardholders’ Bill of
Rights Act of 2009), as passed by the House on April 30, 2009, and the Federal Reserve
regulations issued on December 18, 2008. The table below sets out the major provisions.
Table B-1. Comparison of H.R. 627 and the Federal Reserve’s December 2008
Credit Card Rules
Provision
H.R. 627

Federal Reserve Regulations
Increasing Rates
Prohibits creditors from raising interest

Requires banks, at the time an account is
on Outstanding
rates on an existing balance of a credit
opened, to disclose all interest rates that will
Balances
card account unless the increase is solely
apply to the account. Banks may not increase
due to (1) a change in a published index
those rates, except under certain conditions: (1)
not under the creditor’s control; (2) the
if a promotional rate expires, the rate may rise
expiration of a promotional rate; (3)
to a higher, previously-disclosed level; (2) rates
failure to comply with a workout plan
may rise in a variable rate account if the rate is
(see below); or (4) the consumer’s
linked to an index; (3) after one year, banks may
minimum payment being at least 30 days
raise rates for new balances after giving 45 days
overdue. In the case of expiration of a
advance notice; and (4) rates may increase if a
promotional rate, the new rate may not
minimum payment is received more than 30
exceed the rate that would have applied
days after the due date. (Reg. AA)
under the terms of the agreement absent
the promotional rate. (Sec. 2(b)) Also

prohibits imposition of fees in lieu of a

rate increase on an existing balance. (Sec.
2(a))
Treatment of
If a creditor raises rates, but the higher

No comparable provision.
Existing Balances rate does not apply to an existing
After a Rate
balance, the creditor must offer a 5-year
Increase
amortization period for repayment of the
existing balance, and may not increase the
percentage of the existing balance
included in the minimum payment by
more than double. Creditors may also
offer an alternative method which is at
least as beneficial to the consumer. (Sec.
2 (a))
Payment
If the balance of a credit card account is

When different interest rates apply to different
Allocations
charged 2 or more different interest rates
balances in a credit card account, banks must
(e.g., separate rates for cash advances and
allocate payments in excess of the monthly
purchases), the creditor must allocate all
minimum to the balance with the highest rate,
of a consumer’s payment (in excess of
or divide the excess payment among al balances
the monthly minimum) to the outstanding
on a pro rata basis. (Reg. AA)
balance carrying the highest interest rate.
Notwithstanding the above, a creditor
may al ocate the entire amount paid to a
balance on which interest has been
deferred for the past 2 billing cycles. (Sec.
3(f))
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Provision
H.R. 627

Federal Reserve Regulations
Advance Notice
Requires creditors to provide written

Consumers must be given written notice of an
of Credit Card
notice at least 45 days before any rate
interest rate increase at least 45 days before the
Rate Increases
increase takes effect. The notice must
higher rate takes effect. This includes rate
or Changes in
describe in a complete and conspicuous
increases stemming from default, delinquency,
Contract Terms
manner the change in the rate and the
or a penalty. Change-in-terms or penalty rate
extent to which such increase will apply
notices must include a summary table setting
to an existing balance. Except under
out the key terms being changed. (Reg. Z)
specified circumstances (see “Increasing
Rates on Outstanding Balances” above),

banks may not increase rates for new

balances during the first year the account
is open. (Sec. 2(c))
Change of
45-day notice is required for significant

45-day notice required before a changed term
Terms of an
changes in the terms of an account. 30-
can be imposed to better al ow consumer to
Account
day notice is required before the creditor
obtain alternative financing or change their
closes an account. Promotional interest
account usage.
rates must be in effect for at least 6
months. (Sec. 2(c))
Limits on
Aside from the exceptions mentioned

A bank may not charge security deposits and
Certain Fees
above in “Increasing Rates on
fees for the issuance or availability of credit to
and Charges
Outstanding Balances”, no increase in the
consumer credit card accounts that constitute a
annual percentage rate of interest shal be
majority of the initial credit limit for the
effective before the end of a 1-year
account.
period beginning when the account is
opened. Promotional rates must be in
effect for at least 6 months.
Prohibits fees based on method of
payment (e.g., payment by telephone or
electronic funds transfer).
Workout
If a rate is reduced pursuant to a

If a rate is reduced pursuant to a workout
Agreements
workout agreement between borrower
agreement between borrower and lender, and
and lender, and the borrower fails to
the borrower fails to comply with the
comply with the agreement, lender may
agreement, lender may raise rates, but only to
raise rates, but only to the level that
the level that prevailed before the workout
prevailed before the workout agreement.
agreement.
Directs the Federal Reserve to set
standards for workout agreements. (Sec.
2(b))
Double-Cycle
Prohibits double-cycle billing, or finance

Prohibits banks from imposing interest charges
Billing
charges on balances on a credit card
using the "two-cycle" billing method. (Interest
account that are based on days in billing
charges may not be calculated using the account
cycles preceding the most recent such
balance for days in the previous billing cycle.)
cycle, as a result of the loss of a grace
Exceptions are provided for deferred interest
period. Exceptions are provided for
that may have accrued over several billing
finance charges following the return of a
cycles, and for adjustment of finance charges
payment for insufficient funds, and for
following resolution of a billing dispute. (Reg.
adjustment of finance charges following
AA)
resolution of a billing dispute. (Sec. 3(a))
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The Credit Card Market: Recent Trends and Regulatory Proposals

Provision
H.R. 627

Federal Reserve Regulations
Account
If the outstanding balance on a credit

No comparable provision.
Balances
card account consists only of accrued
Attributable
interest to previously-repaid credit, no
Only to Accrued fee may be imposed in connection with
Interest
such a balance, and failure to make timely
repayments on such a balance shal not
constitute a default on the account. (Sec.
3(b))
Disclosure
Each periodic credit card account

Provides examples of new model forms
Requirements
statement shal contain a telephone
presented as a compliance aid to help
number and web site address at which
institutions meet disclosure requirements. For
the consumer may request the payoff
example, fees and charges must be grouped
balance on the account. (Sec. 3(c))
together. Both monthly and year-to-date totals
Creditors must post and maintain credit
for fees and interest charges are required. The
card agreements on the internet (Sec. 10)
effect of making only the minimum payment
Creditors must include enhanced
must also be disclosed. (Reg. Z)
minimum payment disclosures.
Disclosures shall be in the form and
manner prescribed by the Federal
Reserve Board by regulation. (Sec. 11)
Adds a readability requirement pertaining
to the font size of disclosures. (Sec.14)
Right to Cancel
Requires creditors to remove any

No comparable provision.
Account Before
information provided to a consumer
First Notice of
reporting agency (credit bureau) if the
Open Account
consumer does not use or activate the
Provided to
card, or cancels the account, during the
Credit Bureau
45 days after opening the account.
Permits a creditor to furnish information
about an application for a credit card
account or any inquiry about such
account to a consumer reporting agency.
(Sec. 3(d))
Use of Certain
Specifies the way certain terms may be

Advertising may use the term “fixed rate” only
Terms
used. “Fixed rate” may only refer to a
if the rate cannot be increased for any reason
Describing
rate that may not change for any reason
during a specified time period. If no time period
Interest Rates
over a specified time period. The term
is specified, the rate may not increase for any
“prime rate” must not be used to
reason as long as the account is open. (Reg. Z)
describe a rate other than the rate
published in Federal Reserve statistical
releases. (Sec. 3(e))
Due Dates and
Payments received by 5 p.m. (local time)

Mailed payments received by 5 p.m. shal be
Timely Payments on the due date must be considered
considered timely. If payments are not
timely; electronic payments received by 5
accepted on the due date (if it falls on a
p.m. must be credited to the consumer’s
weekend or holiday), payment received the
account the same day; and evidence that
next business day must be considered timely.
a payment was mailed 7 days before the
(Reg. Z)
due date creates a presumption of timely
payment. If payments are not accepted on
the due date (if it falls on a weekend or
holiday), payment received the next
business day must be considered timely.
(Sec. 3(e))
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The Credit Card Market: Recent Trends and Regulatory Proposals

Provision
H.R. 627

Federal Reserve Regulations
Prohibition on
If a creditor offers cardholders a grace

No comparable provision.
Restricted
period within which to pay in full and not
Grace Periods
incur finance charges, that grace period
must be available to cardholders who
receive a promotional rate or deferred
interest plan. (Sec. 3(f))
Timely Provision Creditors must send consumers periodic

Banks may not treat a payment as late unless
of Periodic
account statements not less than 21
the consumer has been given a reasonable
Account
calendar days before the due date. (The
amount of time to make that payment. The
Statements
current standard is 14 days.) (Sec. 3(g))
“reasonable” standard will be met if banks mail
statements at least 21 days before payment is
due. (Reg. AA)
Consumer
If a credit card plan has a credit limit, and

No comparable provisions. (A provision
Choice
fees are charged for exceeding that limit,
regarding holds on accounts that cause an
Regarding Over-
no such fee may be imposed unless the
account to go over-the-limit was part of the
the-limit
consumer elects to pay such fees if the
proposed regulations, but was not adopted in
Transactions,
creditor completes transactions that
the final rules. (See: Federal Register, Jan. 29,
and Limits on
exceed the credit limit. (Federal Reserve
2009, p. 5505.)
Related Fees
would issue regulations to provide for
certain de minimis exceptions.) Over-the-
limit fees may be imposed only once over
the two billing cycles following the
transaction that exceeded the credit limit.
An over-the-limit fee due to a hold may
not be imposed unless the actual
transaction for which the hold was placed
would have resulted in the consumer
exceeding the credit limit. (Sec. 4)
Information
Directs the Federal Reserve to col ect

No comparable provision.
Collection
semiannual data on the types of
Regarding
transactions for which different rates are
Credit Card
charged, the various types of fees, the
Lending
number of cardholders who pay fees,
finance charges, or interest, and other
matters. The Fed shal report annual y to
Congress on the amount of credit card
lenders’ income derived from: interest
paid at above and below 25%; fees from
cardholders and merchants; and other
material sources of income. (Sec. 5)
Subprime or
For cards whose annual fees exceed 25%

Banks are prohibited from providing financing
“Fee Harvester”
of the credit limit, no payment of any fees
for security deposits and fees (such as account-
Cards
(other than late fees, over-the-limit fees,
opening or membership fees) if such charges
or fees for payments returned for
during the first 12 months would exceed 50% of
insufficient funds) may be made from the
the initial credit limit. Such fees and deposits
credit made available by the card. (Sec. 6)
charged at the time the account is opened may
not exceed 25% of the credit limit. Any
additional fees (up to 50%) must be spread over
at least 5 billing periods. (Reg. AA)
Underage
Prohibits the issuing of credit cards to

No comparable provision.
Consumers
consumers less than 18 years old, except
to consumers who are emancipated
under applicable state law, or unless a
parent or guardian is designated as the
primary account holder. (Sec. 7)
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The Credit Card Market: Recent Trends and Regulatory Proposals

Provision
H.R. 627

Federal Reserve Regulations
College Students For full-time college students at least 18

No comparable provision.
years of age but under 21, credit
extended in any year may not exceed
$500 or 20% of the student’s gross
income. (Sec. 7)
Active-Duty
Prohibits credit card lenders from making
No comparable provision.
Military
adverse credit reports for 2 years
Personnel and
regarding active duty personnel or
Recently-
recently-disabled veterans. (Sec. 9)
Disabled
Veterans
Posting
Requires lenders to post the terms of

Lenders may post electronic forms to opt out
Information on
credit card contracts on the Internet, and
of over-the-limit fees, such as a form that can
the Internet
to furnish the Federal Reserve with
be accessed and processed at an Internet Web
electronic copies to permit the creation
site, provided that the institution directs the
of a central repository of such
consumer to the specific Web site address
information. (Sec. 10)
where the form is located, rather than solely
referring to the institution’s home page.
Timely
Directs the Federal Reserve to issue

No comparable provision.
Settlement of
regulations requiring creditors to
Deceased
establish procedures ensuring that
Debtors’ Estates outstanding balances can be resolved in a
timely manner. (Sec. 16)
Implementation
Directs the Federal Reserve to report to

No comparable provision.
Reports
Congress on the implementation of this
legislation every 90 days until full industry
implementation is achieved. (Sec. 17)
Review of
Directs the Federal Reserve to conduct

No comparable provision.
Credit Card
biennial reviews of credit card terms and
Plans and
lenders’ practices, the effectiveness of
Regulations
required disclosures and protections
against unfair practices, and the impact of
this legislation. (Sec. 12)
Studies and
Directs the Federal Reserve, in

No comparable provision
Reports
consultation with other bank regulators
and the Federal Trade Commission, to
study and report on the extent to which
credit limits are lowered or interest rates
raised based on (1) the type and
geographical location of a consumer’s
transactions and (2) the identity of the
holder of the consumer’s home
mortgage. The report shall also include
the numbers and identities of lenders that
engage in these practices and whether
such practices have an adverse effect on
minority and low-income consumers.
(Sec. 9)
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Provision
H.R. 627

Federal Reserve Regulations
Effective Date
Most provisions would take effect 12
July
1,
2010
months after enactment, or June 30,
2010, whichever is earlier. The exception
is for the required 45-day advance
notification of an interest rate increase:
this requirement would take effect 90
days after enactment.
The regulatory agencies shall issue
implementing regulations 12 months after
enactment, or by or June 30, 2010,
whichever is earlier. (Sec. 19)
Source: Analysis provided by CRS

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Appendix C. Credit Card Securitizations
The modern securitization process begins with a credit card issuer or loan originator who, after
approving and making loans with unsecured lines of credit for a specified amount to numerous
applicants, decides to securitize these assets.37 Next, the assets, which in this case are the loan
receivables or repayment streams from the credit card loans, are sold to a trust that will be
referred to as a special purpose entity (SPE).38 SPEs are created as trusts, typically by financial
institutions with a large amount of credit card originations, for two reasons. First, originators may
sell assets to trusts without paying taxes on the sale of those assets. Second, the investors’ rights
to cash flows generated from the underlying assets are protected if the originator were to become
insolvent or file for bankruptcy. Hence, the SPE may be defined as “bankruptcy remote.” Given
the associated tax and legal advantages, SPEs may not carry out any other activities unrelated to
the specific purpose for which they were created. The SPE’s specific purpose is typically to
transform individual receivables into new financial securities with specific risk and return
characteristics, the next step of the securitization process.39 Securities backed by credit card loans
can be created for any desired maturity, since new receivables are continually added to the pool as
older receivables are paid off by borrowers.
When transforming the individual credit card loans into new issues of asset-backed securities
(ABS), SPEs may subdivide them into various tranches, or groups of securities with specific risk
and return characteristics. The ultimate lenders or purchasers of such assets are typically large
investors, such as hedge funds, pension funds, or other financial institutions, who purchase
securities from the different tranches. A common tranche arrangement, for example, is a senior-
junior tranching structure. The senior tranche may be designated as the one that pays its investors
first, but the yield may be lower than the junior tranche, which is designated to pay its investors
last. When the securitizer decides to sell the tranches in the secondary market, the senior tranche
will appeal to investors that prefer lower risk, quick paying investments, while the junior tranche
will appeal to investors that prefer to take higher risks for the possibility of earning a higher yield.
The senior-junior tranching structure is only one of the numerous disbursement structures
securitizers use to entice investors.40
When the SPE can effectively identify and create ABS tranches satisfying specific needs, it can
appeal to more investors and attract more credit to fund credit card loan originations in the
primary market. To illustrate futher, suppose the SPE is currently using the senior-junior
tranching structure described above. The junior tranche would consist of the cash flow remaining
after both the principal and yield to senior tranche holders and any losses associated with default

37 For a more detailed overview of the underwriting and loan approval process, see the Credit Card Activities Manual,
The Federal Deposit Insurance Corporation, at http://www.fdic.gov/regulations/examinations/credit_card/.
38 See Gary Gorton and Nicholas S. Souleles, “Special Purpose Vehicles and Securitization,” Working Paper No. 05-
21, published by the Research Department of the Federal Reserve Bank of Philadelphia.
39 In many cases, two SPEs may be involved in the securitization process. The first SPE receiving the assets from the
originator subsequently transfers these receivables to a second SPE that does the actual repackaging and creates the
new credit-card backed securities, which are then sold to investors. Each SPE would be created in response to an
accounting and/or legal issue that would make it difficult for cash in-flows and out-flows to occur without financial
and/or legal consequences impacting the ability to issue, sell, and re-invest the securities.
40 Note that only the loan receivables are collected and securitized. Hence, the sum of all cash payments received is
disbursed according to SPE tranching guidelines, but individual loans do not have to be assigned to any particular
tranches.
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The Credit Card Market: Recent Trends and Regulatory Proposals

were paid. The holder of the junior tranche, therefore, keeps whatever cash remains. This
repayment structure reduces the credit risk for senior tranche holders, since junior tranche holders
incur most of the credit risk. The senior tranche receives payment first, followed by the junior
tranche; conversely, the junior tranche initially suffers the losses first, followed by the senior
tranche. Of course, the junior tranche holder receives a higher yield or rate of return in exchange
for assuming higher risk. The investors in the senior tranche would be adversely affected only if
default costs exceed the value of payments that would have accrued to the junior tranche
investors.41 Hence, a tranching structure may also serve as a credit enhancement, or a method of
reducing the credit risk of senior securities, which may attract more investors, in particular those
restricted to purchasing high quality investment grade securities.
Rather than sell all of the ABS tranches to third party investors, the loan originator may also want
to act as an investor in its own asset-backed securities. Whenever the originator chooses to keep
one or more tranches in its own portfolio, the retained tranche is referred to as excess spread.
Suppose an originator retains a junior tranche, which now is subsequently referred to as the
excess spread, then the originator is also providing credit enhancement to senior tranches issued
by the SPE. Again, the junior tranche consists of the cash flow remaining after the principal and
yield to senior tranche holders, and any losses associated with default, are paid. A holder of the
excess spread tranche, therefore, has a strong financial incentive to effectively minimize the costs
of defaults.

Author Contact Information

Darryl E. Getter

Specialist in Financial Economics
dgetter@crs.loc.gov, 7-2834

Key Policy Staff

Area of Expertise
Name
Phone
E-mail
Specialist in Financial Economics
Mark Jickling
7-7784
mjickling@crs.loc.gov

41 The “liquidity crisis” of August 2007 was triggered by senior tranche holders reassessing the riskiness of their
exposure to financial problems that exceeded expectations. See CRS Report RL34182, Financial Crisis? The Liquidity
Crunch of August 2007, by Darryl E. Getter et al. Rather than rely solely upon a tranching structure, investors may also
choose to purchase bond insurance, which may serve as additional credit enhancement.
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