Filed under: Credit CARD Act of 2009, interest rates, The WWR Letter | Tags: credit CARD Act, david wolfe, interest rates, wwr letter
The following is an article reprinted with permission from the upcoming Fall 2010 edition of The WWR Letter:
By: David A. Wolfe, Associate
With the passage of the Credit Card Accountability, Responsibility and Disclosure Act of 2009 (“The Act”), Congress sought to provide better protections to consumers. As part of that effort, that legislation removed the “floor” interest rates on credit cards. The interest rate floor is set by the card-issuer as the minimum annual interest rate, and is the lowest possible rate available after any introductory period is over for an account. The majority of credit card accounts have a variable interest rate where the annual percentage rate (“APR”) is based on the prime rate plus a margin that rises and falls in lock-step with the federal funds rate set by the Federal Reserve, which is currently at 3.25%.
Under the Credit CARD Act of 2009, the Federal Reserve prohibits accounts with interest rate floors because the card-issuers are preventing rates from freely dropping as the prime rate falls.
While the Fed has trumpeted its new rule as a benefit to those consumers who have variable rate interest credit card accounts, this may be an example of the law of unintended consequences where consumers may actually end up paying higher interest rates. According to the Federal Reserve, credit card charge-off rates peaked at 10.25% in the 3rd quarter of 2009 and remained at 9.95% in early 2010. The card-issuer controls the initial index and margin, and cost of funds and other expenses require the card issuer to charge a minimum rate just to remain profitable. If the card-issuer projects lower future margin interest rates without the protection of the floor rate, it is likely that the card-issuer will raise the index or margin rate, resulting in higher costs to the consumer.
In the Fed’s quarterly survey of senior loan officers released in May 2010*, banks indicated they tightened their lending standards on both consumer and small business credit cards in the first quarter of 2010. With interest rates at historic lows, rates are unlikely to fall much further.
Over the past couple of years, many consumers complained that their rates were raised as a result of minor infractions, including one missed payment. The Act contains revisions that took effect on August 22, 2010, designed to remedy this issue, including a requirement that the credit card issuer re-evaluate the borrower’s interest rate every six months if the borrower’s rate was raised after January 1, 2009. Examining the same criteria used by the issuer to evaluate new customers (including creditworthiness, current market conditions and other factors), if these conditions have improved, the issuer is required to lower the rate. If the rate is not lowered, the card issuer is required to reevaluate the rate every six months indefinitely. If the issuer raises customer rates in the future, it is required to provide an explanation for the increase, such as changes in the customer’s creditworthiness or account behavior.
While these new provisions regarding allowable interest-rates are designed to protect consumers, their effectiveness is not assured; they may result in additional costs to consumers and may reduce the availability of credit to financially disadvantaged consumers.
David A. Wolfe is an Associate in Consumer Collections; Consumer Collections (General), Corporate & Financial Services, Credit Union and Collateral Recovery/Replevin Groups and Litigation & Defense, Consumer Finance Litigation Group. David is based in the Detroit office and can be reached at (248) 362-6142 or firstname.lastname@example.org.
Filed under: collections, credit cards, credit unions, interest rates, operations, repossession | Tags: banking operations, car loan, credit card debt, Cuyahoga County, debt collection, Eighth District Court of Appeals, Fifth District Court of appeals, interest, interest rate, Ohio courts, post-judgment, pre-judgment interest, purchased debt, repossessed, retail installment contract, Richland County, statutory interest
by Joseph D. DeGiorgio, Esq.
Throughout the first nine months of 2009, Ohio courts issued several decisions with a significant impact on the laws governing banking operations and debt collection. Courts in Ohio have decided cases involving issues such as what proof is required for a bank to recover pre-judgment interest, what party or parties may bring an action on a purchased debt, and what rate of interest should be applied to judgments rendered as a result of a default on a retail installment contract. Following is a general summary of two of the most noteworthy recent decisions in Ohio; WWR clients seeking a more detailed analysis of any of the following decisions or advice on future strategy changes as a result of these holdings should, as a general rule, contact a WWR attorney directly.
On June 1, 2009, the Fifth District Court of Appeals in Richland County, Ohio, decided the case of John Soliday Financial Group, LLC v. Jason Starcher. The Fifth District heard the case on appeal from a decision of the Common Pleas Court; the Common Pleas case, involving an automobile purchase, was filed by John Soliday Financial Group, LLC, and was based on a retail installment credit contract originally signed in 2004. After Starcher defaulted on the car loan, the car was repossessed and sold, leaving more than $3,000.00 owing under the terms of the contract. The Common Pleas court granted judgment for John Soliday Financial Group, LLC on the principal amount, along with accrued interest at the rate specified in the contract, but granted all post-judgment interest at the statutory rate in effect at the time, rather than the rate specified in the contract between the parties. The plaintiff appealed, arguing that it was entitled to the interest rate set forth in the contract, a rate higher than the statutory rate.
The Court of Appeals, citing Ohio Revised Code Section 1343.03, held that since, “[t]he contract set forth the annual percentage rate in bold-faced type and boxed in at 24.95% . . . [and because the defendant] agreed to an annual percentage rate of 24.95% . . . the trial court erred in not awarding [John Soliday] interest [of] 24.95% per the terms of the contract.” The Court’s decision, therefore, stated that when parties to a retail installment contract agree to a specific rate of interest – and the evidence before the court shows the existence of that agreement – then courts should not grant post-judgment interest at any rate other than that specified in the contract (assuming no issue as to usurious interest is at stake), including any statutory rate of interest set by state statute. The decision may seem obvious – that the rate of interest on a judgment will be the rate the parties agreed to – but the fact that the case had to be appealed shows that not all courts apply the law uniformly.
In another important decision, the Eighth District Court of Appeals in Cuyahoga County, Ohio, decided the case of Capital One Bank vs. Linda D. Brown on June 25, 2009. At issue in the case was whether a party (here, Capital One Bank) was entitled to pre-judgment interest on a judgment that stemmed from a credit card debt. The Eighth District case was heard on appeal from a municipal court in Cuyahoga County; the municipal court’s decision granted default judgment in favor of Capital One, along with interest from the date of judgment, but did not grant Capital One the pre-judgment interest it requested in its Complaint. Capital One appealed the decision from the municipal court, arguing that it was entitled to judgment for the principal balance it was owed, interest from the date of judgment, and pre-judgment interest.
On appeal, the Eighth District partially agreed with Capital One, holding that, “when [a] credit card holder uses a card, he or she is then bound to the terms of the credit card agreement.” Therefore, the Court went on to state, since “[t]he agreement in the instant case set interest at 25 percent . . . the court erred in failing to award prejudgment interest at the contract rate.” The Court ultimately remanded the case back to the municipal court, ordering it to, “determine the date on which Brown’s debt became due and payable and . . . calculate and award prejudgment and post-judgment interest at the contract rate.” In sum, therefore, the Court of Appeals disagreed with and reversed the lower court’s decision to deny pre-judgment interest.
While the facts of any individual case may be different from any other, one thing is clear: not all Ohio courts agree on how to apply the laws regarding debt collection. All WWR clients should be aware that the state of the law – and the interpretation of the laws by various courts – are in constant flux, and all financial institutions and WWR clients should proceed with the understanding that a strategy for debt collection should evolve along with the laws.
Moreover, and this may be hard for a lender to imagine, despite these two very clear cases from the appeals courts, county and municipal courts may continue to award both pre- and post- judgment interest as they see fit instead of following precedence. In other words, if a municipal or county judge feels that a lender should not get the benefit of its bargain, precedence is not going to be a barrier to the judge to act according to his or her desire instead of adhering to the contract agreed to by the parties. The only remedy is to appeal and this costs money. Most lenders will find that it is cheaper to accept the lower interest rate and move on.
Joe DeGiorgio is an associate in the Collection Services department located in the Grove City, Ohio office. He can be reached directly at 614.801.2658 or via e-mail at email@example.com.
By: Doreen M. Abdullovski, Esq.
Pursuant to Ohio Revised Code 5703.47 , the Ohio Tax Commissioner is required annually to determine the interest rate that will be awarded on judgments in Ohio courts, absent a different rate in the contract between the parties. The rate is based on a formula utilizing certain Federal short-term interest rates. Currently the 2008 calendar year interest rate is eight percent (8%) per annum. The Tax Commissioner has determined that the interest rate for the calendar year 2009 will be five percent (5%) per annum. Any section of the Revised Code requiring interest to be computed at the statutory rate per annum beginning January 1, 2009 will use the new 5%.
The 2009 five percent (5%) rate is a significant decrease and is the lowest it has dropped since 2005. Historically, the interest rate has steadily increased or remained the same since 2005.
Pursuant to Ohio Revised Code 1343.03(A), the creditor is entitled to interest at the rate per annum determined pursuant to section 5703.47 of the Revised Code which for 2009 will be 5%, unless a written contract provides a different rate. In this case the creditor is entitled to interest at the rate provided in the contract.
The applicable rate is the rate in effect at the time the judgment is rendered. This means any judgments obtained in the year 2008 where the statutory rate is applicable will be calculated at the 2008 interest rate of 8%, and any judgments obtained in 2009 will be calculated at 5%. Once judgment is obtained in a given year the interest rate calculated is not subject to a yearly review or modification.
It is uncertain as to when a court may actually render judgment in a case. In order to not ask for a higher rate than what will be in effect when the judgment is ultimately rendered and to avoid any Fair Debt Collection Practices Act issue of asking for more than is legally owed, Weltman, Weinberg & Reis Co., L.P.A. requests for the principal balance, accrued interest, “plus interest thereafter on the balance due at the rate of interest per Ohio Revised Code 1343.03” in its complaint.
Because of what generally is a huge difference between the rate of interest provided in the contract and the statutory rate, we cannot stress enough the importance of providing documentation (the agreement and/or contract and statements) to support the account balances and the agreed interest rate between the parties to the debt. This allows us to pursue the maximum recovery for our clients. The higher rate is applicable from the time of default as well as on the judgment itself. When there is no contract rate and the client will have to accept the statutory rate, we apply the statutory interest rate to the ongoing account balances from default through the date of judgment. It then remains in effect until the judgment, decree or order is satisfied. ORC 1343.03(B)
The 2009 five percent (5%) statutory interest rate will amount to recovery of lower balances where we do not have the documentation to support a higher interest rate. Notwithstanding these realities, Weltman, Weinberg & Reis Co., L.P.A. continues to strive to protect your interests and looks forward to our continued representation in this recovery process.
Have a happy and health holiday season!
If you have any questions on this information, please contact Ms. Doreen M. Abdullovski, Esq.
Doreen M. Abdullovski is an associate in the Compliance department of the Brooklyn Heights operations center of Weltman, Weinberg & Reis Co., L.P.A. She can be reached at (216) 739-5646 or via email at firstname.lastname@example.org.
Client Advisory is published by Weltman, Weinberg & Reis Co., L.P.A. , an organization providing comprehensive creditor representation. The information contained in this advisory is a summary of legal information and is not intended to constitute legal advice on specific matters or create an attorney-client relationship. Contact any of our offices or visit our website at www.weltman.com for more real estate related information, company facts and attorney profiles. ©2008