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)
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