A lawsuit by a former credit card customer against JPMorgan Chase is shining a light on an expanded provision of credit card reform laws set for full compliance Feb. 22: the right of a cardholder to cancel his card agreement if the interest rate is raised on future transactions.
Most importantly, the Federal Reserve stated in its “final rule” last month covering the new laws that such a cancellation by the cardholder “does not constitute a default under the existing cardholder agreement, and does not trigger an obligation to immediately repay the obligation in full,” or through a method “less beneficial” than those under the Truth in Lending Act amendments.
The “right to cancel” also prohibits — except with very few exceptions — the boosting of interest rates on any balance the cardholder is holding at the time of cancellation.
According to a report by Reuters, former card customer Barry Woldman alleged that Chase, the largest credit card issuer in the nation, told customers they could “opt out” of rate hikes by closing their accounts.
But Chase raised the rate on the balance he owed even after he exercised his right to cancel, alleges the lawsuit seeking class-action status and filed in the U.S. District Court in Chicago.
In some cases, including Woldman’s, Chase hiked rates on outstanding balances of closed accounts from 11.99 percent in October to 17.99 percent in November, according to the lawsuit. Woldman has an outstanding account balance of about $16,000, the lawsuit said.
Under credit card reform, card issuers can take certain actions on a customer that exercises the “right to cancel.” They can increase the monthly payment, subject to certain limitations — requiring the balance to be paid off in five years. Or they can double the percentage of the balance used to calculate the minimum payment — which will result in faster repayment than under the terms of the account, according to the Federal Reserve.
Many of the provisions that constitute the reform laws center around the new milestone protection against “retroactive” interest rate hikes, or increases on existing balances.
Key exceptions that allow a credit card issuer to raise rates on existing balances are when:
- A borrower is more than 60 days late in paying your bill;
- The card has a variable interest rate tied to an index;
- There is an “introductory rate,” but it must be in place for at least six months. After that, the rate can revert to the “go-to” rate the company disclosed when you got the card, the Fed rules say.
Rules that went into affect last August requires card issuers to provide customers with a notice 45 days before they can increase interest rates; change certain fees; or “make other significant changes to the terms of your card.”