Even the best credit card companies can fall foul of regulators.

The IndexCreditCards.com news blog recently slammed the Platinum Trust Card. We implied that, if you could stretch the definition of a credit card company to include this product’s issuer, it was one of the worst. Now it turns out that even the best credit card companies can fall foul of regulators, although in much less predatory ways. Both American Express and Discover have recently announced that they could face enforcement actions by the Federal Deposit Insurance Corporation and, perhaps, the Consumer Financial Protection Bureau.

While the financial sector is no longer held in the high regard it once was, it seems inconceivable that senior executives at either company would knowingly flout the law. Indeed, it may well turn out that both enforcement actions revolve around differences of opinion between them and the regulators on how particular rules should be interpreted.

American Express and late fees

AmEx’s issue came to light on Feb. 24 in a regulatory filing issued by the company, and centers around late payment fees levied on some of its products. For both charge cards (where the balance normally has to be zeroed every month) and credit cards, the law is clear about the dollar value of such penalties and the circumstances in which they can be imposed, and there seems to be no problem with either of these.

However, the company has a third type of card, a hybrid charge card that allows balances to be carried forward. And it’s here that the confusion arose. American Express was charging late fees of 3 percent of the total balance on these, which is the correct amount for a charge card. However, regulators believe that that it should have been charging as if the products were credit cards: $25 for the first late payment and $35 for subsequent ones within any six-month period.

Sounds like small change, but when American Banker reported the story it said:

The company did not say how much the enforcement actions could cost. However, the filing said it is “reasonably possible” losses from legal proceedings and governmental examinations in excess of what it has already accrued for various matters could cost zero to $510 million.

Discover a problem

Discover’s regulatory difficulty is totally different, and concerns how it used to market payment protection plans, which are supposed to allow a cardholder to skip payments in the event of unemployment or illness. Some plans just suspend payments while others actually make minimum payments in full. In the event of death, credit card debt is often paid down completely.

These plans, according to Collections & Credit Risk magazine of Jan. 27, provide Discoverwith a significant revenue stream, and any reduction in their popularity could have an impact on its bottom line. Presumably, the extent to which the company’s revised marketing program (which it says it began to implement before the regulators became involved) proves more or less effective than the previous one is going to emerge only over time.

Credit card users can take heart

Neither American Express nor Discover is likely to be happy about falling afoul of regulators. But, in a way, their problems are good news for customers of all mainstream credit card companies. If these are the worst things card issuers are up to, then the industry is acting a whole lot better than it was a few years ago.

Published 03/02/12