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)
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           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.

                                                                       




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          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  
                                                                       




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          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.
                                                                       




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            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  
                                                                       




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            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)
          
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