Chase Behaving Badly: Unintended Consequences of the Fed’s New Credit Card Rules

In late December, banking regulators agreed to new rules to limit actions by credit card issuers that consumer advocates deemed to be abusive. While the new rules do not take effect until July 2010, regulators claim they will press banks to comply earlier (see here for a summary of the main provisions).

Experts argued that the pending rule changes would lead banks to restrict credit, particularly to riskier borrowers. What they may not have considered is that banks might also increase rates on existing balances (to make up for lost “gotcha” charges of various sorts) even to customers who are making payments on time but carrying balances.

Think they can’t do that? Think twice. This comes from the Office of the Comptroller of the Currency:

The bank can generally change the account terms of credit cards or open-end lines of credit, including the interest rate, at any time, unless the open-end line of credit is secured by your home and is therefore subject to special rules limiting permissible changes in terms. The law requires notice to you when certain account terms, such as the interest rate, are changed. If the bank intends to change one of these loan terms, such as the interest rate, it must send the change in terms notice at least 15 days in advance of the change.

The 15-day advance notice requirement does not apply if

• the consumer has agreed to the change, or

• the change is due to delinquency (late payment) or default (such as going over the limit).

In both these instances, the bank must provide some notice prior to the effective date of the change, but there is no 15-day rule.

Be sure to review your account agreement, which is the contract governing your credit card account. It provides information on changes that may occur to your account.

If you received a change in terms notice, you should check to see whether the bank has provided a way to opt out of the change in terms. Some banks permit you to preserve the lower rate on the account by closing the account to future purchases and paying the balance under existing account terms. This may be important to you if you are carrying a balance.

Pay heed: you are stuck if the bank does not allow you to opt out. And Chase, and perhaps other banks, are going this route. Consider this e-mail from reader Olin:

My wife (whose three credit scores are all greater than 740 as of 1/10/09, no job loss, or anything else derogatory) signed up for balance transfer that was advertised as “3.99% fixed for the life of the balance” in 2006 with Chase. My wife has never had a late payment and given the high rate for purchases never purchased anything. The card doesn’t expire for another 28 months.

Chase claims to have sent a change in terms notice that gave the following options:

i) Rate change to 7.99% for the balances
or
ii) a $10 monthly service charge and a 5% of the balance minimum payment. (These options are per the customer service manager, as we didn’t receive the change in terms.)

The credit limit is only $3K, the balance is only $1,750 and we are liquid enough to take care of it. However, I’m still rather irate at the following:

a) There was no reasonable counteroffer as to lower the rate for purchases to possibly entice us to actually make a purchase with the card (the purchase rate was 24.24%)

b) The $10 a month service charge is double the amount that was actually paid in interest each month. I realize the marketing goal was for us to use the card to accumulate balances that would be charged at 24.99% while payments were applied to only the 3.99%. However I figured the marketing people figured the promotion was similiar to rebate offers, where only a few people will fill out the rebate or in this case, just transfer the balance. I wish some enterprising lawyer would present a “false advertising” suit.

c) I’m nauseous at the thought that JP Morgan has received $25 bln at 5% and before the ink dries is desperately trying to pump up their profitability. I realize this could be one of the unintended consequences of the Fed’s new rules for credit card companies, however per Chase, their decision to do this was in September as the Change in Terms was mailed in early October. I guess Chase knew the gig was up and had to reset rates before the Fed clamped down on their disingenuous practices.

Chase was not alone in putting through interest rate changes in October. Congress planned to take action if Federal banking regulators did not, so the handwriting has been on the wall for some time.

Even if the OCC gives this sort of behavior a free pass, if the offer was presented as “fixed for the life of the balance” which I what I recall seeing on the deluge of fixed rate offers in 2002-2006, it would appear to be advertising fraud. But any case would have to be pursued on a class action basis, and it would be hard to ascertain how many people were affected by a particular bank rate action prior to the discovery phase of a case.

A warning: your bank may send a notice of changes in terms along with your monthly statement. If make payments online, be sure to check your mailed statement as well.

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22 comments

  1. doc holiday

    I just recently burned about 40 pieces of junk mail from Chase, which were sent last year. I hate junk mail, but this collection amused me, so I kept putting them aside, because they seemed to drift in almost every week, for my self, my wife and my daughter — then they stopped coming, so I’m wondering what the hell happened? These seemed like collector items, and of course, now they don’t, so was I wrong to burn these, or did I screw up?

    Originally, I thought someone this desperate must either be totally friggn retarded, or part of some mafia — and in either case, desperate to churn accounts and play with accounting, kinda like Dell Computer … oh what was that little problem…

    Maybe this ?

    FBR found this manipulation to be “a strong indicator of earnings management,”ultimately determining that Dell’s per-share earnings had been “over-stated… in five of the last quarters.” FBR’s report commented on the fact that, although Dell’s disclosed rate of warranty claims had remained stable, Dell’s accrual rate for the associated expenses tended tovary widely.

    Maybe not, but when a company starts sending out mass mailings looking for rubes, you know they are full of Baby Ruth Bars

  2. Anonymous

    I’ve had a Bank of Hawaii credit card for 26 years. It was a Visa up until about 9 years ago when they converted to AmEx. About 7 years ago they handed off servicing to FIA Card Services, a BoA subsidiary. Over the years I’ve sometimes run a balance, often didn’t. I’ve got great credit and always pay on time and over the limit.

    A few months ago they doubled my interest rate for no reason other than, according to them “You’ve clearly been in pay-off mode for some time now so we just decided to make it official.”

    A whole lot of very frustrating back and forth ensued before I got them to go back to the rate I had. Before the resolution I made a decision for myself. I decided that if they didn’t take this unfair, unjustified rate increase back, I would never send them another dime. Those were MY changes in terms and conditions.

    If we all stand up to these thieves in bankers’ threads, maybe some real change would finally happen in this country. If the bankers don’t respect agreements, make mortgage contracts that are doomed to fail, use influence in Congress to write increasingly draconian bankruptcy law and avoid/evade regulation at every step then why the HELL should I live by the rules?

    And if I had followed through on my threat and stopped paying them, wouldn’t my FICO score be hurt? Who cares? In two more years of this debacle, there won’t be a dozen people left in America with a score over 550.

  3. Anonymous

    Dear Yves,

    PLEASE NOTE:

    I recently noted something in my Chase account relating to “Opting out of class action law suits” if I wanted to maintain my account.

    I will post more on this later. I’m curious why they just don’t charge me 1000% interest per day since they can apparently do anything!

  4. Anonymous

    The same thing happened to me with Chase, except I never received notice. How is this legal? Chase promises me a fixed 3.99% rate and then unilaterally jacks up the rate, abrogating the contract? I have a $30K balance and my monthly payment doubled to $1200 per month. I’m going to cancel the card and also close my bank account with Chase. What an idiotic move – by default, anyone that got the 3.99% offer was high income, highest credit quality.

  5. Dr Robert J Lahm Jr

    Every site I see, along with reports in the media generally focus on what banks can do legally, which is anything they want, almost. I am developing a protest site called ChangeInTerms.com, based on the premise that the only way to fight credit card company abuses such as those Chase is engaged in implementing, is to fight them on a “marketing protest basis.” Chase is really out of line, and so is our media (advertising revenues from the financial services sector keep a lid on this story), and so are our lawmakers. Could a car dealer raise a payment from $239 to $600 a month, no way! Only the credit card industry can get away with this. By the way, the OCC’s Comptroller Dugan doesn’t think that regulators should go down the “slippery slope” of overseeing the pricing practices of the credit card industry. The middle class man or woman, has no choice, but to protest elsewhere, on a grassroots basis.

  6. River

    Dr Lahm Jr said

    ‘I am developing a protest site called ChangeInTerms.com, based on the premise that the only way to fight credit card company abuses such as those Chase is engaged in implementing, is to fight them on a “marketing protest basis.”‘

    WRONG! I have found that I need a credit card only rarely for car rental, flying, and other uses involved almost entirely with travel. I have reduced the number of credit cards I own to 1 and it is used only for purposes listed above. All of my other transactions are cash or check. The best way to fight the banks/credit card scammers is to keep enough money on hand or in a checking account and tell them to stuff their cards and services! IOW…Get out of debt and stay out of debt.

  7. Expat

    Hmm, how about not spending more than you make. That way you don’t have to worry about credit card debt. Simply pay it off at the end of every month instead of letting the system screw you over.

    Let’s face it. If you walk into a casino drunk with thousands in cash, you are probably going to walk out drunker with no cash at all. Whose fault is it?

  8. ruetheday

    I’m not defending the CC companies, as there is no defense for this sort of unilateral change in terms on a whim behavior. However, the simple solution is to not carry a balance on credit cards. IMO, 95% of the population should never carry a CC balance across months and the remaining 5% should only carry a balance under certain very particular circumstances. Debt is slavery. There are certain things one should be willing to borrow for against one’s future (an education, a house, perhaps a car) but big screen TVs, vacations, and miscellaneous consumer junk items are not on that list.

  9. Anonymous

    Chase is not limiting its shenanigans to credit cards. I recently closed a Chase savings account. The Chase bank rep had a cashier’s check issued for the balance which I then delivered for deposit to another bank. About 10 days later, I received a notice from Chase that my savings account was overdrawn and, as a result, I was being charged an overdraft fee. I’m still working on resolution. Should any of us be surprised that banks are treating individuals as dishonestly as they have treated the market and the public Treasury?

  10. tiger

    Why not take a 1-page ad in the wall street journal, and ask mr. Dimon to take down this charge? This is how you take down giants, by embarrassing them in public.

  11. Jeff Westcott

    I’ve experienced too how Wells Fargo drastically lowered all of its credit limits on a systematic basis. My credit limit was $13,400 and was lowered to $3,500 even though my credit is in the mid sevens and I don’t carry a balance, haven’t been late on any payment in over a decade, etc.

    I heard horror stories how this same thing happened to a businessman while traveling and checking out of the hotel his (only) card – the WFC card – was declined. Or the woman that WFC lowered her credit limit to $250 (less than her balance) and started charging her over limit fees. Was really gets me is that we just gave WFC $25 billion to ease credit and this is what they do with it – shore up their balance sheets.

    And yes, in an ideal world, we would not carry credit card balances and pay for everything in cash (like I do), but unfortunately the small business owner has been gradually conditioned (by the banks) to rely upon the more lucrative credit cards as other credit has dried up. Now that banks are pulling the plug on credit cards as a source of credit, Main Street is truly {expletive}. We voted these people into office, what else should we expect?

  12. tiger

    main street is equally responsible for using cc’s as the banks are for disgusting practices. If you live on this earth, even if you are a financial idiot, chances are that during the last 15 years you heard some pundit SOMEWHERE tell you not to use cc’s. They never suggested that if they rate is low, it makes cc’s a good choice. Disclosure: I actually have cc balances but I can cover hem.

  13. Anonymous

    as someone who abused credit cards and other forms of credit so badly at a young age that i learned how to survive and thrive without financing due to necessity, i would suggest that those of us who live in this glass country should be wise and compassionate to not throw stones, if only that it fails to clearly illuminate the overall problem and discover a remedy.

    but yes, one of the remedies is to understand that it is possible to live and pursue ‘happiness’ without the possibilities of credit.

    another remedy is to understand that every dollar one deposits into a bank gives them the license to multiply that dollar in any way they see fit.

    anyone who has a checking account in any of the axis of usury (Chase, Citi, BofA, etc) should seriously consider closing their accounts IMMEDIATELY and finding a more reputable institution to bank with (yes, they’re out there if one is willing to take some time to research).

    perhaps the only way to slay the beasts is to starve them…

    …and then cross your fingers that they will fall decimated right into Elizabeth Warren’s lap…

    …so she (and we) can call BULLSHIT even louder…

  14. river

    John Steinbeck, the author of many novels, saw both sides of the poverty coin. None of the characters owned credit cards. Once in a while we need to remind ourselves that happiness is not dependent on credit, but having the necessities of life. Food, shelter, medical help, community and friendship.

    He brought to life many characters in Cannery Row and Sweet Thursday that were very poor but happy living in a functioning community.

    He brought to life many characters in The Grapes of Wrath that were very poor, but because they were forced off their land and migrate to an unknown place, California, they were not happy and in truth many of them starved to death.

  15. Anonymous

    I have two credit cards, both from credit unions. Each has, and has had for years, a limit of around $12,000.00. Interest goes up and down with the Prime and presently is 9.9% on each.
    Credit unions don’t play games and don’t send unsolicited offers.

  16. Anonymous

    jesus christ….when you signed the terms for the CC you agreed the banks could do what ever they wished….so now they change something and you bitch! get real…if you dont likr the terms go elswhere……or do without.

  17. Anonymous

    I am lawyer and have been looking into Chase’s changing the minimum payment from 2% to 5% and adding the service charge as it happened to my wife in this month’s statement. If you are interested in what I have found and live in California, please let me know at kfrkevin@yahoo.com.

  18. Anonymous

    Apparently 700,000 or more people have been snared by Chase’s coercive, unilateral, no-opt-out terms change (bump up minimum pmt by 2.5x, add nonsense $10 additional monthly fee), which is nothing more than coercion to “re-negotiate” the low-interest loans to a higher rate.

    More info on this issue here:
    http://www.ChangeInTerms.com/

    (I have no affiliation with this site, but this guy seems focused on this very specific issue w/Chase, so am providing the link here).

    As well, the following two law firms are exploring class-action lawsuits about this:

    http://www.pinnaclelawgroup.com/
    http://www.gslawny.com/lawyer-attorney-1383679.html

    (No affiliation w/these either — just providing the links for others).

  19. Dr Robert J Lahm Jr

    Dear “Anonymous” on January 20, 2009 at 11:16 PM,

    Thank you for recognizing my hard work on this issue (ChangeInTerms.com).

    Another post, from an author who seems to judge too quickly without reading all of the facts has been put in his or her proper place as a result of your support.

    This is an important issue, that transcends my own personal stake in the matter.

  20. Jo

    The 700,000 are less than one half of one percent of Chase’s credit card accounts. They are willing to let these accounts close b/c they aren’t making any money off you. They’re trying to trim the fat. They’re not the only ones, you know. Citibank is increasing the minimum payments AND the interest rate arbitrarily. B of A had a similar plan in place. I’ll allow that Chase may have been among the first to implement these changes, but they won’t be the only. First leson in life kids, is C Y A.

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