Surprise! Many credit card agreements allow repossession
By Fred O. Williams
People say, 'Oh my God, I didn't know I was agreeing to that.' But they are, every single time they sign a receipt.
Paul Donohue Jr.
Security interest clauses undercut protections against the seizure of household goods by creditors, consumer advocates said. Belongings subject to the clause are not protected by bankruptcy law or state debt collection laws designed to keep debtors from becoming destitute. A purchase money security interest typically allows repossession until 100 percent of the balance associated with the item is paid. In some card agreements, the security interest phrase is unexplained, leaving the repossession threat unclear.
The security interest language in some Capital One-backed store cards gives the bank a claim on payments from insurance or extended service contracts, as well as on merchandise. The term also makes the cardholder bear some of the responsibility for returning purchases.
"If we take back any good, we may charge you our costs and require you to make the goods available at a convenient place of our choice as allowed by law," the security clause states. Capital One also asserts the right to contact cardholders via personal visits, including at home and work.
Store card issuer Comenity Bank requires a security interest on your purchases from its Healthiplan Medical Credit Account, as well as numerous store cards ranging from Abercrombie to Petland and Victoria's Secret. GE Capital, the largest issuer of store cards, uses a security interest on just four cards, used for buying lawn mowers and other outdoor equipment, according to regulatory filings.
A potent threat, rarely enforced
Unlike mortgages and auto loans, threats to seize the collateral behind credit card loans are rarely carried out, according to the National Consumer Law Center and other experts. Repo men need a court order for the sheriff to enter your home, and it is difficult to resell people's used possessions.
"To be frank, nobody wants the stuff back," said Daniel Kreis, director of portfolio management with bank industry consultant First Annapolis.
However, the threat of repossession is more valuable as a collection tactic than the used goods themselves. Collectors use the legal claim as leverage to obtain a settlement check, consumer lawyers say, and debt-strapped households may pay rather than risk losing the fridge, TV or a laptop used for work.
Whether repossession threats are serious "depends on the dollar amount -- they probably could give you some trouble on it," said Jay Nixon, a bankruptcy attorney in Wisconsin. He recommends that clients offer to pay the market value of the used item, a fraction of the demanded amount. Although the likelihood of repossession is low, a collector could push civil action or even criminal theft charges, for ignoring claims on secured property.
While it drops the security interest, the new Best Buy card agreement adds a mandatory arbitration requirement. The clause means you must take a dispute to a private arbitration company rather than court, and bars you from joining forces with other consumers in a class action.
The overview of terms in card agreements is made possible by new regulatory requirements. The Credit CARD Act of 2009 requires consumer credit card agreements to be posted publicly, and the Consumer Financial Protection Bureau publishes template agreements for consumer cards on its website. There are exceptions for limited, market-testing cards and special purpose cards with fewer than 10,000 accounts, which don't have to file.
Changes in the template agreements filed by issuers don't necessarily mean that the offer tailored to an individual has changed. Many changes affect only new applicants for a card, or people with great or poor credit. You should receive notice of any changes in the terms governing your individual card, and you can check with the issuer for a copy of your specific agreement.
Fees quietly raise
Changes in fees can hike a card's costs without affecting the closely watched interest rate, and some fee hikes appeared in card agreements during the third quarter.
On some of its general purpose consumer cards, Citi eliminated a break on late fees for people who carry a low balance. Under the old agreement, first-time offenders were charged a $15 late fee if their balances were under $100. The third-quarter template agreement now dings everyone $25 -- the 2013 regulatory maximum -- regardless of balance. The hike did not affect the Citi Simplicity card.
Eliminating the break for low balances could increase hardship for people whose resources are already stretched. However, consumer advocates said that lower fees for lower-tier balances are more window dressing than reality. Research by the Center for Responsible Lending "pretty much concluded the lower-tier numbers rarely got used anyway," said Ellen Schloemer, executive vice president of the consumer group. "Most people who paid those fees had higher-tier balances."
|CHECK YOUR CARD CONTRACT|
Are your credit card purchases subject to repossession until you pay them off?
To find out, check your card agreement for the phrase "purchase money security interest." This term indicates your goods can be sized, even if the repossession right is not explained clearly.
The U.S. Consumer Financial Protection Bureau keeps a database of card agreements from most issuers on file at a searchable Web page. To obtain a copy of your individual card agreement, contact the issuer's customer service department.
There can also be fees for increasing your credit limit, whether you ask for the increase or not. These clauses appear in just 26 card agreements in the third quarter, relatively unchanged from the second quarter. Generally these fees are linked to subprime cards, such as one from First Premier Bank with a 36 percent interest rate and a pre-account opening fee in addition to an annual fee. The fee for the credit limit increase on this card equals 25 percent of the increase, the contract states.
Although the federal CARD Act made credit card deals more clear in general, complex fee structures still make it difficult for consumers to understand card costs, said Kevin Maher, community outreach coordinator with DebtHelper.com.
"The consumer really isn't equipped to make a decision based on what the cards are really costing them," Maher said.
At least card agreements are getting easier to understand, according to the CFPB's October 2013 study. Since 2008, the average agreement has shed about 2,100 words, a 24 percent slimming, and the readability level has improved, the bureau found.
Despite the improvement, Maher said that some debtors he counsels still react with shock when they plumb the terms of their card agreement. Card issuers "are always going to find different ways to market things, bury things," he said. "The agreements aren't that long ... Make sure you know what you're getting yourself into."
CreditCards.com research assistant Allie Brady contributed to this report.
See related: Credit CARD Act II coming?