BILL ANALYSIS Ó
AB 1300
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Date of Hearing: April 22, 2013
ASSEMBLY COMMITTEE ON BANKING AND FINANCE
Roger Dickinson, Chair
AB 1300 (Hernández) - As Introduced: February 22, 2013
SUBJECT : Credit cards: oral disclosures.
SUMMARY : Requires a credit card issuer on or near the campus
of an institution of higher education or at an event sponsored
by or related to an institution of higher education to orally
disclose to a first-time cardholder between 18 and 26 years of
age certain information. Specifically, this bill :
1)Provides, pursuant to certain criteria, that a credit card
issuer, shall, at or prior to the time of the issuance of a
credit card, orally disclose the following to a first-time
cardholder between 18-26 years of age:
a) Annual percentage rate (APR);
b) Penalty rates;
c) Cash Advance fee;
d) Late payment fee;
e) Over-the-limit fee; and,
f) Any event specified in the credit card agreement that
would trigger an increase in the cardholder's APR.
2)Requires the issuer to orally disclose how long it would take
the cardholder to pay off the average credit card debt if the
cardholder only makes the minimum payments.
3)Mandates that the issuer, subsequent to providing the oral
disclosures, but prior to issuance of the card, shall provide
the cardholder with a written document containing each oral
disclosure example and the cardholder must initial each
disclosure. Additionally, requires the cardholder to sign the
written disclosure stating that he or she was provided with
the oral disclosures.
4)Provides that the oral disclosures must be provided in terms
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easy-to-understand and non-technical language.
EXISTING LAW
The Credit Card Accountability Responsibility and Disclosure
(CARD) Act of 2009, provides numerous requirements for the
issuance of credit cards and disclosure of the terms.
Specifically, the CARD Act provides for the following:
1)Requires issuers extending credit to young consumers under the
age of 21 to obtain an application that contains: the
signature of a parent, guardian, or other individual 21 years
or older who will take responsibility for the debt; or proof
that the applicant has an independent means of repaying any
credit extended;
2)Limits prescreened offers of credit to young consumers;
3)Prohibits increases in the credit limit on accounts where a
parent, legal guardian, spouse or other individual is jointly
liable unless the individual who is jointly liable approves
the increase;
4)Increases protections for students against aggressive credit
card marketing, and increases transparency of affinity
arrangements between credit card companies and universities;
5)Requires a credit card issuer who increases a cardholder's
interest rate to periodically review and decrease the rate if
indicated by the review;
6)Prohibits credit card issuers from increasing rates on a card
holder in the first year after a credit card account is
opened;
7)Requires promotional rates to last at least 6 months;
8)Prohibits issuers from charging a fee to pay a credit card
debt, whether by mail, telephone, or electronic transfer,
except for live services to make expedited payments;
9)Prohibits issuers from charging over limit fees unless the
cardholder elects to allow the issuer to complete over-limit
transactions, and also limits over limit fees on electing
cardholders;
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10)Requires penalty fees to be reasonable and proportional to
the omission or violation;
11)Requires payments in excess of the minimum to be applied
first to the credit card balance with the highest rate of
interest;
12)Prohibits issuers from setting early morning deadlines for
credit card payments;
13)Requires credit card statements to be mailed 21 days before
the bill is due rather than the previously required 14 days;
14)Prohibits interest charges on debt paid on time (doublecycle
billing ban);
15)Prohibits late fees if the card issuer delayed crediting the
payment;
16)Requires that payment at local branches be credited sameday;
17)Requires credit card companies to consider a consumers
ability to pay when issuing credit cards or increasing credit
limits;
18)Requires card holders to be given 45 days-notice of interest
rate, fee and finance charge increases;
19)Requires issuers to provide disclosures to consumers upon
card renewal when the card terms have changed;
20)Requires issuers to provide individual consumer account
information and to disclose the period of time and total
interest it will take to pay off the card balance if only
minimum monthly payments are made;
21)Requires full disclosure in billing statements of payment due
dates and applicable late payment penalties;
22)Requires each credit card issuer to post its credit card
agreements on the Internet, and provide those agreements to
the Federal Reserve Board (FRB) to post on its website;
23)Requires the FRB to review the consumer credit card market,
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including the terms of credit card agreements and the
practices of credit card issuers and the cost and availability
of credit to consumers;
24)Requires Federal Trade Commission rulemaking to prevent
deceptive marketing of free credit reports.
FISCAL EFFECT : None
COMMENTS :
AB 1300 would require a financial institution that issues a
credit card to someone between 18-26 years old at
higher-education institutions to provide oral disclosures of key
terms and conditions relating to the credit card at, or before
the time of issuance of that card.
According to the author,
As college tuition continues to rise, college students are
depending more on credit cards to pay for their expenses.
According to the Institute for College Access & Success'
Project on Student Debt, the average student of the 2011 class
owed $26,600 upon graduation. A 2009 national survey by Sallie
Mae reported 84% of undergraduates have at least one credit
card. Of those students, 92% report paying textbooks, school
supplies, or other direct education expenses with credit
cards.
According to the same survey, credit card usage and debt
increases by year in college. The National Foundation for
Credit Counseling found that almost one-half of college
students graduate with more than $3,000 in credit card debt.
One in ten students accumulates over $7,000 in credit card
debt by graduation.
AB 1300 allows students to become well informed consumers.
Sallie Mae's 2009 national survey revealed "one-third of
students rarely or never discussed credit card use with
parents." These students were "more likely to pay for tuition
with a credit card and were more likely to be surprised at
their credit card balance when they received the invoice."
The Federal Credit Card Accountability, Responsibility and
Disclosure (CARD) Act of 2009 prevents students under age 21
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from applying for credit cards without proven income or a
co-signer. However, the requirements for getting a credit card
are still lax.
As many college students begin to process credit for the first
time, it is vital they receive appropriate credit card
counseling to understand the terms of their contract.
AB 1300 would require a credit card issuer, on or near a
college campus, to orally explain, in easy to understand
language, certain terminology found in the application. The
bill would also require the card issuer to provide an example
of how long it would take the student to pay off the average
credit card debt if the student only makes minimum payments.
The card issuer would also be required to explain how credit
card interest rates are compounded and potential adverse
effects of late credit card payments. The student would then
initial and sign a document indicating they received credit
card counseling.
This bill is consistent with the federal and state laws
providing protections for young credit card holders and with
the intent for college students to receive counseling on
credit cards and debt.
AB 1300 helps empower college students with financial literacy
with respect to credit cards.
The relationship between credit card issuers and colleges and
universities has been an ongoing issue of controversy. Many
colleges and universities have affinity marketing relationships
with card issuers that have historically been significant
sources of revenue. These arrangements have been the subject of
criticism as college students have incurred significant credit
card debt that can add to student loan debt creating great
financial difficulties for students and graduates.
Statistically, college students have shown a propensity to run
up credit card debt at rates exceeding the general population,
often due to higher living expenses, lower wages, and a general
lack of financial literacy.
In 2009, Sallie Mae reported that 91% of undergraduates have at
least one credit card, up from 76% in the same study conducted
in 2004. The average number of cards has grown to 4.6%, with
half of college students having four or more cards. In 2012,
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credit card usage among college students declined to 35%, down
from 40% in 2011 and 42% the year before, with the sharpest
drops among sophomores and juniors. Of those with a card, the
average balance was $755. Thirty-three percent reported carrying
no balance on their credit card. Furthermore, Sallie Mae found
that the dollar amount of college expenses financed by student
credit cards had declined from $2,542 in 2008 to $2,169 in 2012.
Clearly, the usage and indebtedness of credit cards has declined
from 2009. This is not a coincidence as passage of the federal
CARD Act occurred in 2009. Among the numerous provisions of the
CARD Act are prohibitions on anyone under 21 acquiring a credit
card unless they have a co-signer or can document income. These
restrictions apply to every person under 21, not just college
students. Additionally, credit card issuers can no longer give
free gifts in exchange for a student signing up for a card.
While the CARD Act has had some impact, and may continue to do
so, on the use of credit cards by students, financial literacy
remains a contributing factor to increased debt.
The Inceptia National Financial Capability Study surveyed 962
first-year students from five colleges and universities across
the United States between September 2012 and November 2012.
Students answered 50 knowledge questions, based on five core
competencies specified by the U.S. Department of the Treasury
Financial Literacy and Education Commission: Earning, Spending,
Saving, Borrowing, and Protecting.
None of the students scored in the "A" range (45 to 50
correct); only 11 percent scored in the "B" range; 22
percent in the "C" range; and 67 percent either "D" or "F".
A sampling of results showed:
Four in 10 students did not know what the definition of
"Net Pay" was.
Too many students could not correctly identify the kinds
of items that appear on a paycheck stub.
Only 45 percent of students said they understand their
credit score may have an impact on their ability to get a
job.
Most students knew that the credit card companies are
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not the source of credit reports, but only half or less
could correctly identify the credit reporting agencies.
This lack of basic financial literacy raises a host of issues
and questions. For example, is it the terms and conditions of a
credit card that lead to debt, or a lack of understanding of
those terms and conditions? Would orally providing those
disclosures have any impact on understanding the product in
greater detail?
Discussion .
The requirements imposed by AB 1300 lack specificity and could
lead to further confusion in regard to credit cards. Various
terms are undefined and lack description, making it difficult
for a credit card issuer to know when they are in compliance
with the requirements. For example, if the card issuer is on
campus, or "near" the campus of a college or university they
would be required to provide the oral disclosure. No guidance
or definition is provided as to the meaning of "near" the
campus. Furthermore, the requirements become active if the card
issuer is at an "event sponsored by or related to" the college
or university. It may be possible to easily determine when an
event is sponsored by the college or university, but what
constitutes an event that is "related" to those institutions?
Some colleges and universities may have satellite offices in
urban areas that are located in the same building as a bank or
credit union. Would that be considered on or near the campus?
Due to the lack of clarity in the bill, it could be interpreted
that all credit card issuances by that financial institution to
first time cardholders between 18-26 years of age would have to
comply with the provisions of AB 1300 because the issuer has one
branch or kiosk on or near the campus. The requirements do not
specify when the obligation to provide the oral disclosure ends.
If Bank of ABC has a kiosk at UCLA, then they would have to
provide the disclosure at the location of all Bank of ABC's to
first time cardholders because the language of the bill doesn't
specify the time and place when the requirements end.
Furthermore, does the term "first-time" cardholder mean that
they are receiving a credit card for the first time from one
specific issuer, or does it mean that it's the sole credit card
they have. Additionally, what if the credit card is acquired by
joint applicants? Are both applicants to receive the disclosure
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at the same time?
Based on the wording of AB 1300, the issuer, if they meet the
criteria, would provide the oral disclosure at, or prior to the
issuance of the credit card. This means that the first-time
card holder between 18-26 years of age could apply for the card
at one point and time, subsequently be approved for the card,
and then the card issuer would have to either go to the
cardholder's address, or request that the cardholder visit the
card issuer's location in order to provide the oral disclosures.
The language of the bill assumes that all credit card decisions
would occur instantaneously and not involve a delay between
application and decision.
Among the required oral disclosures, is the requirement that the
issuer inform the card holder of how long it would take the
cardholder to pay off the average credit debt if the cardholder
only makes the minimum payments. If the card has just been
issued, one could assume that no debt exists on the card yet
making this provision difficult to comply with. On the other
hand, if this is assuming a disclosure of an average that is
independent of the individual card holder, that metric is not
referenced.
According to information supplied in the committee background,
the intent of this bill is to provide counseling on debt and
credit cards for college students. Counseling young adults on
the ramifications of credit utilization is not only a worthy
goal, but vital for their future financial success.
Unfortunately, as worthy as this goal may be, this bill does not
require counseling. Instead it requires credit card issuers to
orally disclose confusing and complicated credit card terms and
conditions.
Finally, the CARD Act, already discussed at length provides key
protections for those persons under 21 in regarding to credit
cards. Without a co-signer on the account or proof of income
to cover the credit obligation those under 21 cannot acquire a
credit card. Additionally, card issuers are prohibited from
offering gifts in exchange for applying for a card. Given these
protections do the provisions of AB 1300 provide any additional
benefit?
Federal Preemption.
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AB 1300 raises potential federal preemption issues as the
provisions of the bill would apply to federally chartered
financial institutions. Federal preemption is an issue decided
by the courts, however, it is important to note how the courts
have viewed these issues in previous cases. In American
Bankers Association et. Al. v Lockyer, (239 F. Supp. 2d 1000
E.D. Cal. 2002) the United States District Court, Eastern
Division of California determined that a civil code provision
(1748.13) that required credit card issuers to provide certain
state mandated disclosures was preempted. The court concluded
that while states are not without any power to regulate national
banks in regards to "contracts, debt collection, acquisition and
transfer of property, and taxation, zoning, criminal , and tort
law" the "court finds the statute is constitutionally
inapplicable in its entirety to all federally chartered credit
card issuers.
In Parks v MBNA (54 Cal. 4th 376 2012) the California Supreme
Court found, in a unanimous decision, that Civil Code section
1748.9 was preempted by the National Bank Act (NBA). Civil code
section 1748.9 required specific disclosers for convenience
checks which are preprinted check drafts sent to credit card
holders by their credit card issuer. Section 1748.9 required a
credit card issuer "that extends credit to a cardholder through
the use of a preprinted check or draft shall disclose..."
various terms and conditions concerning the use of the
convenience checks. The California Supreme Court found that
states have some latitude to regulate the activities of national
banks in those cases in which the regulation does not interfere
or stifle the national bank's exercise of its powers. However,
the court found that Section 1748.9 was a significant impairment
of a national bank's power under the NBA. Furthermore, the
court found that even if one could assume that the disclosure
requirement imposed by Section 1748.9 was not onerous, other
preemption case precedents established that preemption analysis
must also consider "the burden of disclosure." Due to analogous
provisions present in AB 1300 and those that were found in
Section 1748 a direct quotation from the Parks decision is
necessary.
Summarizing the principles established in Franklin and
Barnett Bank, the high court in Watters said: In the years
since the NBAs enactment, we have repeatedly made clear
that federal control shields national banking from unduly
burdensome and duplicative state regulation. [Citations.] .
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. . [] We have" interpret[ed] grants of both enumerated
and incidental -powers to national banks as grants of
authority not normally limited by, but rather ordinarily
pre-empting, contrary state law. [Citations.] States are
permitted to regulate the activities of national banks
where doing so does not prevent or significantly interfere
with the national bank's or the national bank regulator's
exercise of its powers. But when state prescriptions
significantly impair the exercise of authority, enumerated
or incidental under the NBA, the State's regulations must
give way." " (Watters, supra, 550 U.S. at pp. 11-12.)?
?Requiring compliance with section 1748.9 as a condition of
"loaning money on personal security" (12 U.S.C. § 24, par.
Seventh) through convenience checks "significantly
impair[s] the exercise of authority" granted to national
banks by the NBA (Watters, supra, 550 U.S. at p. 12).
Section 1748.9 prescribes the content of the disclosures by
specifying what must be disclosed on each convenience
check. Section 1748.9 prescribes specific language that a
credit card issuer must use ("use of the attached check or
draft will constitute a charge against your credit
account"). (§ 1748.9, subd. (a)(1).) In addition, section
1748.9 prescribes the manner and format of the disclosures:
the disclosures must appear "on the front of an
attachment," the attachment must be "affixed by perforation
or other means to the preprinted check," and the
disclosures must appear "in clear and conspicuous
language." These requirements as to the content, language,
manner, and format of disclosures seem no less prescriptive
than the New York law in Franklin that prohibited banks
other than the state's own chartered savings institutions
from using the word "saving" or "savings" in their
advertisements or business. (See Franklin, supra, 347 U.S.
at p. 374 fn. 1, citing N.Y. stat.) The New York law did
not bar national banks from receiving deposits or
soliciting deposits through advertisements. It simply
required national banks operating in New York to use other
words to entice people to deposit their money for
safe-keeping and to describe the business of protecting,
growing, and lending those deposits. (See Franklin, at p.
378 ["[The state] does not object to national banks taking
savings deposits or even to their advertising that fact so
long as they do not use the word -savings. ].)
Nevertheless, the high court held that the state law
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impermissibly interfered with the federally authorized
business of national banks. (See id. at pp. 377-378.)?
?Section 1748.9 is not a generally applicable law similar
to California's law against unconscionable contracts. It is
a law specifically directed at "credit card issuer[s]" and
at offers of "credit to a cardholder through the use of a
preprinted check or draft." (Ibid.) Section 1748.9 does not
state a background legal principle against fraudulent,
deceptive, or unconscionable practices. It prescribes
specific and affirmative conduct that credit card issuers
must undertake if they wish to lend money through
convenience checks.
The court further ruled that the disclosure requirements of
Section 1748.9 impose a "condition on the federally authorized
power of national banks to loan money on personal security."
Federal law authorizes the lending of money by national banks
without subjecting them to local restrictions. The restriction
on lending, unless providing the disclosure was viewed as a
significant impairment to the authorities granted to national
banks by the NBA.
Committee staff does not propose to predict how the courts may
view AB 1300 if it becomes law. However, previous efforts
mandating California specific disclosures for national banks
(most credit card issuers are national banks) have been struck
down in the courts thereby creating unhelpful preemption case
law that only weaken future efforts at consumer protection.
REGISTERED SUPPORT / OPPOSITION :
Support
None on file.
Opposition
California Bankers Association
California Credit Union League
California Independent Bankers (CIB)
Analysis Prepared by : Mark Farouk / B. & F. / (916) 319-3081
AB 1300
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