BILL ANALYSIS SENATE JUDICIARY COMMITTEE Martha M. Escutia, Chair 2001-2002 Regular Session AB 865 A Assembly Member Hertzberg B As Amended June 28, 2001 Hearing Date: July 3, 2001 8 Civil Code 6 MTY 5 SUBJECT Consumer Credit: Credit Cards DESCRIPTION This bill would require credit card companies to provide information in a cardholder's billing statement regarding the time and cost associated with paying off a balance using minimum payments. The bill would also direct the Department of Financial Institutions to devise a table illustrating the time and cost of repaying an outstanding balance of various amounts subject to various rates and minimum payment amounts. BACKGROUND In the 1999-2000 session, the Legislature passed AB 1963 (Hertzberg) which required credit card companies to disclose the time and total cost of paying off a balance due using the minimum payment. That bill was vetoed by Governor Davis, who asked for a revised measure that required less individualized information but provided consumers with certain information and warnings regarding minimum payments. This bill responds to the Governor's request. CHANGES TO EXISTING LAW Existing law regulates credit card marketing practices and requires certain disclosures in credit card applications. (more) AB 865 (Hertzberg) Page 2 This bill would require that the following information be provided on the front of the first page of each cardholder's billing statement: A) a "minimum payment warning" that "Making only the minimum payment will increase the interest you pay and the time it takes to repay your balance"; B) either of the following: i) immediately following the minimum payment warning, a written statement of the time and total cost of paying off three different balances, as provided below, under the minimum payment and annual percentage rate of the account, or under terms as provided below; a) for retail credit card issuers, as defined, balances of $250, $500, and $750 using only minimum payments of 5% at an annual percentage rate (APR) of 21%; except that this statement is not required if the cardholder's balance is less than $500, the APR is less than 21%, and the required minimum payment is 5% or more; b) for all other credit card issuers balances of $1,000, $2,500, and $5,000 using only minimum payments of 2% at an annual percentage rate of 17%; ii) immediately following the minimum payment warning, a written statement providing individualized information in the form of an estimate of the number of years and months and approximate total cost to pay off the cardholder's balance on an open-ended account based on the terms of the card agreement. If the account is subject to a variable rate, the issuer may base its estimate on the rate at a specific date and indicate that rates may vary. In addition, the cardholder shall be provided with a referral to a credit counseling service. AB 865 (Hertzberg) Page 3 C) a written statement informing the cardholder that an estimate of the time and cost of repaying a balance using minimum payments can be obtained from a toll-free number. This bill would provide that if a cardholder has not paid more than the minimum payment for six consecutive months, the information provided under the requirement described in section 1B above shall be the individualized information described in section 1B(ii). This bill would not apply in any billing cycle where the account agreement requires a minimum payment of at least 10% of the outstanding balance. This bill also would not apply to any billing cycle where finance charges are not imposed or accrued. This bill would require that a toll-free telephone number be available from 8 a.m. to 12 a.m. EST where cardholders have an opportunity to speak to a person, rather than a recording, and request information about the time and cost of paying off a balance using minimum payments. This bill would require the Department of Financial Institutions to establish a detailed table illustrating the time and cost of repaying an outstanding balance using minimum payments. The table would use a significant number of different annual percentage rates, account balances, and minimum payment amounts. This bill would also provide that a credit card company can fulfill its obligation under this bill to provide cardholders with the estimated time and cost of repaying a balance using minimum payments by providing the cardholder with the table prepared by the Department of Financial Institutions. This bill would define a retail credit card as a credit card issued by or on behalf of a retailer that may only be used to make purchases at that retailer. This bill would define an "open-end credit card account" as an account in which consumer credit is granted by a creditor under a plan in which the creditor reasonably contemplates repeated financial transactions, the creditor may impose a finance charge from time to time on an unpaid balance, and the amount of credit that may be extended to AB 865 (Hertzberg) Page 4 the consumer during the term of the plan is generally made available to the extent that any outstanding balance is repaid. This bill would modify its own disclosure requirements if certain disclosures contemplated in the federal Bankruptcy Reform Act of 2001 are enacted into law. The modifications would prevent duplicate disclosure requirements. COMMENT 1. Need for the bill The bill's supporters argue that many credit cardholders do not have enough information to make sound financial decisions about the use of minimum payments to pay off outstanding credit card debt. The author's office states that "Most cardholders . . . do not realize that paying only the minimum payment . . . each month ultimately could cost the cardholder more interest than the actual debt. The intent of AB 865 is to give consumers some simple examples to help them understand credit debt and to help them make informed financial decisions." The bill would attempt to remedy this situation by placing a warning and basic information on the front page of each billing statement, and making additional information available to the cardholder upon request. It would also provide more specific information and credit counseling referrals to cardholders who only pay the minimum payment for six consecutive months, on the assumption that those cardholders may not fully understand the time and cost associated with using minimum payments. 2. Previous legislation In the 1999-2000 session, the Legislature passed AB 1963 (Hertzberg) which was vetoed by Governor Davis. AB 1963 would have required credit card companies to provide cardholders with individualized estimates of the time and cost of paying off their outstanding balances using minimum payments. AB 865 (Hertzberg) Page 5 In his veto message, Governor Davis argued that the bill "cast too broad a net by requiring detailed information to a vast number of consumers who are not minimum payers, thus, adding extra cost to consumers' credit" Governor Davis indicated that he would sign a bill this year if it incorporated his suggestions for a toll-free number, a minimum payment warning, and examples of the time and cost of paying off balances using minimum payments. This bill was introduced in response to Governor Davis's veto message. 3. Author's amendments and suggested amendments The author intends to offer an amendment to fill in certain blank sections in the bill relating to dollar amounts that had not yet been calculated at the time of the last amendments. The author also may want to consider an amendment that replaces the term "obligor" on page 4, line 33, with the term "cardholder." This amendment would clarify that that all of an issuers' customers are entitled to receive certain information upon request, not just those who currently have an unpaid balance. The author also may want to consider an amendment that strikes the sentence on page 3, line 28, beginning with the phrase "If the account" and replacing it with the following sentence: For purposes of this subsection only, if the account is subject to a variable rate, the creditor may make disclosures based on the rate for the entire balance as of the date of the disclosure and indicate that the rate may vary. This language would solve two potential problems: 1) as currently drafted, the language may provide variable rate card issuer with a loophole to avoid other disclosures required by the bill, and 2) as currently drafted, the language may allow a variable rate card issuer to provide AB 865 (Hertzberg) Page 6 out-of-date information or partial information if the account is subject to multiple rates depending on the balance. Support: Consumers Union Opposition: None Known HISTORY Source: Author's office Related Pending Legislation: None Known Prior Legislation: AB 1963 of 2000 (Hertzberg) was vetoed by Governor Davis Prior Vote: Assembly Cmte. on Business and Professions (6-2) Assembly Appropriations Cmte. (13-7) Assembly Floor (53-20) **************