Big Issuers Make Concessions to Create Goodwill, but Onus is on Consumer
By Christina P. O’Neill
U.S. Senator Charles Schumer (D-NY) has denounced federal credit card reform since its passage last summer as being full of loopholes. But in September, he really went on the offensive after an August 28 report in The Wall Street Journal claimed that card issuers have been aggressively marketing business cards to non-business consumers. Business cards are not covered by the Credit Card Accountability Responsibility and Disclosure Act of 2009, more commonly known as the CARD Act, and the senator referenced the WSJ article in his September 1 statement, in which he said some issuers may be trying to skirt the CARD Act by expanding the market for business cards. He cited a 256 percent increase in issuer solicitations for business credit cards between first quarter 2009 and first quarter 2010, a figure that came from research firm Synovate.
The ABA responded quickly to the allegations, calling them “inaccurate, misinformed and misleading. …Any card issuer that engages in deceptive marketing of business cards as personal cards is subject to significant penalties and does so at their own peril.” Two of the nation’s biggest card issuers – Bank of America and CapitalOne – tell us that not only do they not target consumers for small-business card accounts, but that they have also changed some of the terms and conditions of their small-business credit cards to contain provisions which mirror those of the CARD Act.
Schumer had taken the Federal Reserve to task in July for pulling back on regulating penalty interest charges, calling them a “dangerous source of abuse” and said the Fed had the authority to curb penalty fees. Then, in a September 1 letter to Federal Reserve Chairman Benjamin Bernanke, Schumer commended Bank of America and others for their extension of CARD Act protections to business cardholders, but expressed concern that “the majority of the industry” would continue to market business cards to unsuspecting consumers.
Banks stand to lose an aggregate $390 million per year in fee revenue due to the CARD Act, according to published reports. That’s part of a larger loss figure they will incur as a result of all the other financial regulation passed this year. So, if consumers are getting more solicitations for business cards than they used to, “I don’t think there’s any evil intent on the part of the banks,” says Beverly Harzog, spokeswoman for Cardratings.com. Instead, the banks are “blanketing the market,” she says. “The more applications they send out, the better chance someone will buy.”
Schumer isn’t buying that. He suggested that the Fed require business card issuers to request a Tax Identification Number, rather than a Social Security Number, on corporate card applications, to weed out non-business consumer applicants (some banks, such as Chase, already do this). However, that measure would also exclude many sole proprietorships, which are allowed to use SSNs to apply for a business credit card. Schumer’s recommendation would require sole proprietorships to obtain a TIN or get a separate consumer card for their businesses – which, according to credit experts, is what they should be doing anyway.
So, what gives? It all began with the drafting of the CARD Act during the height of the financial crisis. Concerned that tightened regulation on business credit would further limit availability of small-business credit, Congress decided to leave business cards out of the CARD Act for that reason.
However, some larger issuers have elected to add some CARD Act protection to their business cards (or to emphasize that they had it in place before the law passed). For instance, both CapitalOne and Bank of America say their consumer and small-business credit cards fall under the CARD Act provisions. Bank of America’s changes include: No rate increases on existing balances; any payment amount that exceeds the minimum payment to be allocated to higher-rate balances first; at least 45 days’ notice on any rate changes on future balances; and a minimum of 25 days from statement closing date to statement due date. Bank of America spokesperson Betty Riess says, “We do not re-price customers if they go 60 days past due and [we] don’t have plans to do so.”
CapitalOne has a different repricing policy, which predates the CARD Act, and which it enforces at its discretion. Customers who pay late on a credit card account twice by three or more days in a 12-month period receive a penalty rate. However, “in many cases we choose not to” reprice such customers, says spokesperson Pam Girardo. The customer’s next billing statement after the late payment carries a prominent warning. And such customers, if they pay on time for 12 consecutive months, will be re-accepted at their former, lower rate, automatically (not at the bank’s discretion). “We do not reprice for going over limit, for returned checks, or for behavior on other accounts,” commonly called universal default. The bank’s repricing policy allows it to offer lower rates and expand credit access for small-business customers, the ones who do pay on time, she indicates.
Blurring the boundaries
Card issuers trying to extend fair credit at a fair price in a market with shrinking revenues face a blurring of the line between business and personal cards. More people are becoming self-employed, and are new at the business credit card game. While debit card use has been on the rise compared to credit card use among retail consumers for the past two or three years, credit cards have become the most widely used form of financing for small business – above even business earnings.
“For many years, I’ve been recommending business owners separate their business and personal credit cards,” says Gerri Detweiler, personal finance advisor for Credit.com. “You will find it very hard to write off annual fees and interest as a business expense if you mingle [business and personal purchases].” And since no one monitors whether a customer’s credit card is a business card or a personal card, the onus is on the consumer to keep them separate.
Jay S. Fleischman agrees. He’s a bankruptcy lawyer in New York, as well as the co-founder and past President of Bankruptcy Law Network. Not only does the intermingling of personal and business purchases on the same credit card pose a bookkeeping problem at tax time – it also poses a problem for consumers who are filing for bankruptcy. Under the U.S. Bankruptcy Code, filers are subjected to the means test only when more than 50 percent of debt is consumer debt. Individuals whose debt is more than 50 percent business debt will not be subjected to means testing. Using a card for both business and personal purchases will make it difficult to determine appropriate allocation of debt, he says.
There’s another wrinkle – card issuers are beginning to report a cardholder’s business credit to credit bureaus as part of the cardholder’s personal history. From a standpoint of full and fair assessment of risk, that’s good for the lender, but it can come as a surprise to the small-business cardholder who has to run up a large balance that can’t be paid in full until sales come in. “We did get a lot of complaints from small-business owners who saw their credit plummet when they weren’t able to pay debt right away,” Detweiler says. “One-third of a credit score is the debt you carry, and how close you are to the limits of the revolving credit you carry.” She adds, “If you carry a balance, it’s good to have a business card and keep it off your personal [credit profile], but you’re at the mercy of the card issuer.”
That last point is important. Consumer-protection concessions made by the larger card issuers are voluntary and not mandated, and can be revised at any time (with sufficient notice). The big issuers have the capital and the resources to be able to make and sustain such offers to cultivate customer goodwill. Smaller issuers may not. So, what consumer advocates call “abusive” practices of rate increases may be a matter of liquidity and survival to some lenders.
In a statement prepared before passage of the CARD Act, ABA President and CEO Edward Yingling noted, “It is important that everyone understand the trade-offs the Congress has made and the impact of these changes on the availability and pricing of credit.” The CARD Act rules, he stated, change credit-card financing from a short-term line of credit to a medium-term line of credit, which is “more risk and less ability to distinguish according to risk…” In other words, credit is credit.
“There’s a lot I like about [the CARD Act], but there’s a lot that leaves issuers a lot of wiggle room,” says Beverly Harzog. “In the end, consumers have to take
Christina P. O’Neill is custom publications editor for The Warren Group, publisher of
Banking New York.