Getting around credit card reform

Banks are quietly changing the terms of millions of credit card accounts as they brace for a tough new law that will limit rate hikes.

The law would restrict interest rate increases unless a credit card has a variable rate. So at least two major lenders are switching their cards with fixed rates to -- you guessed it -- variable rates.

“It’s completely unfair,” said Linda Sherry, a spokeswoman for Consumer Action. “It’s an end run around the intent of the new law.”

That law is the Credit Card Accountability, Responsibility and Disclosure Act, which President Obama affixed with his signature in May. Its various provisions will be phased in between next month and February.

Congress passed the law to curb what politicians called abuses of cardholders by lenders, including runaway interest rates and constantly changing terms.

In response, banks have scrambled in recent weeks to make changes to their card offerings before the new rules take effect. I wrote last week about how JPMorgan Chase is increasing its monthly minimum payment to 5% from 2% of the balance for about 1 million cardholders.

Now comes the looming demise of fixed-rate accounts.

Los Angeles resident Victoria Afonina received a letter from Bank of America the other day informing her that “as a result of a change in our business practices, your annual percentage rate will use a variable rate formula based on the U.S. prime rate.”

“If the prime rate changes,” it said, “your APR will vary accordingly.”

Afonina, 44, told me she had to read the letter several times to understand what BofA was saying.

She said she’d been a cardholder with the bank for about five years and had enjoyed a relatively low fixed rate of 9.9% any time she carried a balance.

“When I finally understood what they were saying, and that my rate could change every month, I was shocked,” Afonina said. “I’m a good customer. Why are they treating me like that?”

Good question.

“The change from fixed to variable rates allows us to better manage our business as market conditions change,” said Betty Riess, a BofA spokeswoman.

And those new federal rules. . . ?

“Legislative and regulatory changes that limit our ability to re-price for risk were a factor in our decision,” Riess acknowledged.

Under the new variable-rate formula, BofA cardholders won’t experience a rate increase when the change is made next month.

In Afonina’s case, her current 9.9% rate means the bank will initially charge a variable rate of 6.65 percentage points above the current prime rate of 3.25%, keeping her at 9.9% at least for August.

After that, watch out.

Chase is also swapping variable rates for cardholders’ fixed rates.

Stephanie Jacobson, a Chase spokeswoman, confirmed that many cardholders were recently notified about the switch, but she declined to provide any details.

“Changing costs are requiring Chase to more closely examine the rates and terms we offer our customers,” she said. “Variable rates reflect Chase’s changing costs for funding credit card loans.”

Jacobson noted that “customers may benefit from lower rates when the costs to Chase are decreased.”

The problem with that notion is that those costs can only go up.

Short-term interest rates are at historically low levels. The Federal Reserve’s Federal Funds Target Rate, which is used by most banks as the benchmark for the prime rate, is now around 0.25%. Banks typically tack 3 percentage points to the Fed’s target rate, which is how we get the current prime rate of 3.25%.

As recently as August 2007, however, the Fed Funds Target Rate was 5.25%, which placed the prime rate above 8%.

Under BofA’s new formula, that would give cardholders like Afonina an interest rate of at least 15% for purchase balances and a hefty 30% for cash advances.

Representatives of Wells Fargo, Citibank and American Express said each company had no plans at the moment to change fixed-rate accounts to variable accounts. But they didn’t rule it out down the road.

“At present we’re not doing it,” said Marina Hoffmann, an AmEx spokeswoman. “We don’t talk about changes we may or may not do in the future.”

Banking industry insiders say the days of fixed-rate accounts are numbered because of the new requirements imposed by Congress.

For decades, banks have enjoyed being able to change rates and other conditions at any time for any reason. Now they’ll have to work within strict guidelines and give 45 days’ notice of any changes.

Among other rules, the new law requires that banks leave interest rates alone for the first year after a card is issued. The exception is if the card comes with a variable rate.

The law also prevents banks from raising rates on existing balances. That rule won’t apply if you’re already under a variable rate before the law takes effect.

Riess said BofA isn’t entirely doing away with fixed rates. They will still be offered for many new accounts.

Of course, such teaser rates can and typically do disappear when the promotional period ends. Don’t be surprised if you, like Afonina, then receive a letter saying your fixed-rate account will now fall under a variable rate.

Can you say bait and switch?

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David Lazarus’ column runs Wednesdays and Sundays. Send your tips or feedback to david.lazarus@latimes.com.