Want to do a riddle? Try this.
Mrs. Marquez wrote herself a $5,000 check from her credit card company….you know, those ones that come in the mail with the bill? Her family makes just $40,000 a year, but the card company approved this loan, under an offer advertized as 0% interest for one full year, starting April 1, 2010, a transaction clearly covered by the Card Act. In July of 2010, Ms. Marquez needed another $5,000, so the company allowed her to take out another $5,000, same terms, with the 0% deal expiring on July 1, 2011. The fee was $150 per transaction, not bad in and of itself. The Marquez' diligently paid on the loan so that they'd pay the whole first $5,000, in full, by April 1, 2011. Now the credit card company says they owe interest at some huge amount, on an amount close to $5,000? Can the company do this? Hint: The Card Act requires that payments be applied to the highest interest portion of the loan first (after the minimum payment), but both loans are allegedly interest only.
Comments
12 responses to “How Credit Card Companies Get Around the Card Act”
Well that’s easy: the payments from July 1, 2010 to April 1, 2011 were applied to the second loan and now they’re charging interest on the first one.
If it was like one of those deals you sometimes get at a furniture or electronics store then as of April 2, 2011 they’ll back-date the interest to April 1, 2010 at whatever insane rate is being charged for cash advances.
OK, Brad C, so far you rocked it. But what if the customer directed the card co. to apply all the payments to the first loan? NM
I don’t believe the customer has the right to direct which balance buckets the payments are applied to…the allocation methodology should be described in the terms and conditions.
This depends on the card. I’ve got two cards which provide “no interest for XX months” which both apply the majority of the payment to the deal ending earliest. In one case they explicitly ask for a minimal amount for each piece of the bill and apply the rest to the one ending soonest, not sure about the other one as the amounts aren’t separated out the same way. Both of these are store type cards though, not generic credit cards.
I thought the version of the credit card bill I read had a provision about applying to the deal ending earliest. But that was the House version, after the Senate got done I remember the final version being much, much messier.
(b) APPLICATION OF PAYMENTS.—
‘‘(1) IN GENERAL.—Upon receipt of a payment from a cardholder, the card issuer shall apply amounts in excess of the minimum payment amount first to the card balance bearing the highest rate of interest, and then to each successive balance bearing the next highest rate of interest, until the payment is exhausted.
‘‘(2) CLARIFICATION RELATING TO CERTAIN DEFERRED
INTEREST ARRANGEMENTS.—A creditor shall allocate the entire amount paid by the consumer in excess of the minimum payment amount to a balance on which interest is deferred during the last 2 billing cycles immediately preceding the expiration of the period during which interest is deferred.
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Cute! First, it appears that there are no restrictions on how the minimum payment portion is allocated.
Second, revised 164(b)(2), er, “clarifies” these deferred-interest situations.
So Mrs. Marquez budgeted 12 payments of $416.67 from 4/1/10 to 4/1/11. But those payments must be bifurcated into minimum payments and excess payments. What we’re really interested in is what happened with payments beginning in 7/2010 thru 4/2011. One possible reading of the statute is that the full $10k balance was subject to 0% from 7/2010 to 4/2011, so the “higher interest rate” balance provision wouldn’t apply.
So we proceed to 164(b)(2), which says you look to the end of the zero-interest period and count back two billing cycles (i.e., months) to determine the proper balance to allocate to. But how do we define THE zero-interest period in a case in which there is are overlapping zero-interest periods?
If I’m the cc company, I want the end of THE period from 7/1/10 to 7/1/11 defined as 7/1/2011. Then I get to apply excess payments to the second $5000 balance and maximize the likelihood of charging interest on the first $5000. If I’m Mrs. Marquez, obviously I want the end to be set at 4/1/11.
So, at a minimum, it seems the CC company would be free to allocate minimum payments from 7/1/10 to 4/1/11 50%/50% between the two balances. That being the case, Mrs. Marques DOES NOT pay off her first $5000 by paying $416.67/month (total $5000) over 12 months. Terms of minimum payment allocation should be in the T&C disclosure.
Second, you might argue that 164(b)(2) is sufficiently ambiguous to lend itself to a reading that CC Company can apply the ENTIRE excess payment from 7/1/10 to 4/1/11 to Loan #2, if they are permitted to define THE period as the period expiring on 7/1/2011. Again, that’s the zero-interest loan still in place in the two billing cycles before 7/1/2011, since the first zero-interest period expires 4/1/11.
So… let’s tweak the facts slightly. What happens if she borrowed the second $5000 in June 2010 and not July 2010? In that case, the two billing cycles before June 2011 would be April (zero-interest still applies for BOTH #1 and #2) and May (zero-interest only applies for #2). Would that change the analysis under 164(b)(2)? I dunno.
When does happy hour start?
So, Transor Z, does this happy hour reference imply that I owe you a drink? I think so. Great statutory reading. One more question….would it make any difference if Mrs. Marquez requested that all payments be applied to the first loan, or do you agree with what Amnesiac says?
NM
Nathalie, forgive the laziness but I’m going to go with failed attempt at unilateral modification to card agreement/T&C, which always has a MOIW clause. Lazy b/c your question deserves better than a drive-by which is all I can offer atm.
By happy hour I was just saying I needed a drink after taking a stab at the crazy statute but, well, now you owe me a drink. 🙂
Building on Transor Z’s fine research I will add these Reg Z provisions to the mix, in case anyone else is faced with this same situation. Just don’t ask me exactly what they mean.
Reg. Z , § 226.53 Allocation of payments, says: 3. Consumer requests.
i. Generally. Section 226.53(b) does not require a card issuer to allocate amounts paid by the consumer in excess of the required minimum periodic payment in the manner requested by the consumer, provided that the card issuer instead allocates such amounts consistent with § 226.53(b)(1). For example, a card issuer may decline consumer requests regarding payment allocation as a general matter or may decline such requests when a consumer does not comply with requirements set by the card issuer (such as submitting the request in writing or submitting the request prior to or contemporaneously with submission of the payment), provided that amounts paid by the consumer in excess of the required minimum periodic payment are allocated consistent with § 226.53(b)(1). Similarly, a card issuer that accepts requests pursuant to § 226.53(b)(2) must allocate amounts paid by a consumer in excess of the required minimum periodic payment consistent with § 226.53(b)(1) if the consumer does not submit a request. Furthermore, in these circumstances, a card issuer must allocate consistent with § 226.53(b)(1) if the consumer submits a request with which the card issuer cannot comply (such as a request that contains a mathematical error), unless the consumer submits an additional request with which the card issuer can comply.
ii. Examples of consumer requests that satisfy § 226.53(b)(2). A consumer has made a request for purposes of § 226.53(b)(2) if:
A. The consumer contacts the card issuer orally, electronically, or in writing and specifically requests that a payment or payments be allocated in a particular manner during the period of time that the deferred interest or similar program applies to a balance on the account.
B. The consumer completes a form or payment coupon provided by the card issuer for the purpose of requesting that a payment or payments be allocated in a particular manner during the period of time that the deferred interest or similar program applies to a balance on the account and submits that form or coupon to the card issuer.
C. The consumer contacts the card issuer orally, electronically, or in writing and specifically requests that a payment that the card issuer has previously allocated consistent with § 226.53(b)(1) instead be allocated in a different manner.
iii. Examples of consumer requests that do not satisfy § 226.53(b)(2). A consumer has not made a request for purposes of § 226.53(b)(2) if:
A. The terms and conditions of the account agreement contain preprinted language stating that by applying to open an account or by using that account for transactions subject to a deferred interest or similar program the consumer requests that payments be allocated in a particular manner.
B. The card issuer’s on-line application contains a preselected check box indicating that the consumer requests that payments be allocated in a particular manner and the consumer does not deselect the box.
C. The payment coupon provided by the card issuer contains preprinted language or a preselected check box stating that by submitting a payment the consumer requests that the payment be allocated in a particular manner.
D. The card issuer requires a consumer to accept a particular payment allocation method as a condition of using a deferred interest or similar program, making a payment, or receiving account services or features.
Did the bank make required 226.7(b)(14) disclosures to Mrs. Marquez in the last two billing statements along the lines of:
You must pay your promotional balance in full by [date] to avoid paying accrued interest charges.
And speaking of statements, what exactly did the monthly statements indicate about the balances for Loan #1 and Loan #2? Did the statements lump together the two loans or treat them as separate?
I think we need to have Mrs. Marquez come in to the office.
I don’t think a statement like “You must pay your promotional balance in full by [date] to avoid paying accrued interest charges.” applies here.
If I read the original riddle correctly, the credit card offers 0% interest for a specified period. After this period the regular interest rate applies. There are no accrued interest charges because this is not deferred interest, but rather a reduced rate for a period of time.
It also shows why one needs a drink after trying to read statutes (or regulations). Reading the statute Transor Z posted, it refers to “deferred” interest, and may not apply to “reduced” interest offers. I remember a provision that payments over the minimum must be applied to the highest rate balance (card issuers traditionally applied everything to the lowest rate balance), and this has been my experience, but here both balances had a “0” rate.
Reg Z (from what Prof Martin posted) appears to apply to allocation of payments in any case where different conditions apply to different balances.
The moral of this story is only take out a single balance at a time on offers like this. Wait for the next card offer in the mail and get another card with the later date. Then you can allocate payments instead of the company. If Mrs. Marquez got one offer, she is probably getting more.
@Thomas: I was wondering the same thing, but interpreted the original fact pattern differently, for no particularly good reason. But you are entirely correct: the deferred interest provisions don’t apply unless the borrower is subject to retroactively applied interest after the promotional period ends.
The other thing is that I’m not sure 226.53 or any of the other new TILA/Reg Z CFR provisions even go into effect until the summer…
But, you know, any excuse to say I need a drink.
This is just another example of how big banks will try to take advantage of people regardless of their income qualifications. Charging additional fees after the loan has been paid off should be against the law.