Is Bank of America About to Break the Law?

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Bank consumer advocates are up in arms over Bank of America’s (Stock Quote: BAC) pilot program that charges annual membership fees to credit card customers. But under the CARD act, Congress hiking fees on existing customers is strictly off limits.

So that begs the question: is BofA breaking the law?

Let’s look at both sides of the issue. First of all, charging fees for credit cards is, for right now anyway, perfectly legal. But in February 2010, when the Credit Card Reform Act is due to kick off, Congress has built a roadblock to credit card fees. In the legislation, interest rates will be off limits to credit card companies. OK, but interest rates aren’t fees, right?

Not exactly. Under the new rules, interest rates fall into the category of finance charges. And finance charges and membership fees are, in the eyes of Washington legislators, at least, one and the same. As Odysseas Papadimitriou, a veteran of Capital One’s credit card division and CEO of CardHub.com puts it; membership fees will fall under the definition of charges that shape the cost of holding a credit card account.

Now, back to Bank of America. The bank says that it plans to test the idea of establishing membership fees for existing customers, and will continue to do so into 2009. Papadimitriou says that by raising finance charges (through increased membership fees) Bank of America is raising costs for cardholders, and that’s unethical, if not illegal. In a letter to the media, Papadimitriou says:

“The introduction of new annual fees to existing credit card accounts will still result in increased finance charges for account holders, even if those finance charges are referred to and assessed by another name.  For insight, consider that the addition of an annual fee of $50, on a credit card account with $500 balance and a ten percent interest rate, would double the overall yearly finance charges associated with that card.”

Papadimitriou also cites an October 2009 promise from Bank of America to reduce interest rates. But with the new fee proposals, the bank is engineering a "bait-and-switch" that defies the “reasonable expectation” that the bank wouldn’t, as it said in October, raise card rates.

But there is a precedent. Early in 2009, New York went after JP Morgan Chase (Stock Quote: JPM) for raising card rates through membership fees. A class action lawsuit followed, and the bank was forced to abandon the plan, with Chase extending refunds to customers who had been charged membership fees. Chase had added a $10-per-month fee to card balances, where the fees would earn interest for the bank. Papadimitriou says that’s what Bank of America is planning to do with its membership fee rollout program.

Concludes Papadimitriou, “If Bank of America moves along with its plans to introduce membership fees to existing customers into next year, it will find itself in much hotter water than Chase did.  This is because after the legislation is enacted raising the interest rates (membership fees included) on existing balances will be illegal.”

Certainly, Bank of America doesn’t see it that way. But as word gets out about the new program, it will be interesting to see if BOFA pulls the plug anyway.

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