Banks Try New Fees to Work Around Fed Rules

Consumers, beware. As the deadline for implementing the CARD Act draws near, banks are on the hunt for loopholes that will allow them to keep profits up by tweaking their conditions even once the new rules are in place.

“[The banks] are paying big, big dollars to risk managers and the consultants who can figure out how to circumvent these rules and be able to maintain profitability,” says Robert McKinley, an industry analyst and the founder of CardWeb.com. “That’s where the emphasis is right now.”

Rate hikes, new fees and scaling back rewards programs have been among the most common tactics the banks have used in the past several months.

But a recent move by Citibank (C) adds a new level of creativity to those moves. Over the past several weeks, Citibank has notified an undisclosed number of cardholders of an increase to their annual percentage rate, or APR, to as high as 29.99%. The twist: Your rate will not increase as much if you pay your bills on time or charge a certain amount of new purchases on the card.

Here’s how it works. Each month a card holder pays on time, the bank will refund a percentage of the finance charges incurred that month. Other card holders can receive that refund if they reach a certain level of new purchases for the month. Citibank says the refunds will allow almost half of the cardholders affected by the new policy to earn back between 50% and 100% of the rate increase.

Citigroup spokesman Samuel Wang says that the bank recognizes that customers are frustrated by the “perceived lack of options” regarding rate hikes. “That’s why we are taking a very different approach than others in the industry by communicating these changes in a clear way and providing customers with a greater choice and more control,” he says.

Some industry analysts see it differently. “This is circumventing the Credit Card Act,” says McKinley. Even as retroactive rate increases become illegal in February (the new rules will allow banks to hike your rate only if you are more than 60 days late), Citibank’s new policy allows the bank to charge what was once deemed a penalty APR, as soon as a customer is a day late.

“It’s basically the stick and the carrot,” says Adil Moussa, an analyst with market research firm Aite Group. “Here’s what your new rate is and you can lower it by taking certain behaviors. Some are rewarding ones, like paying on time. Some are more forceful – if you reach a certain level of spending – and may backfire.”

Shannon Rembish LoBue, who was recently informed that the rate on her Citi Diamond Rewards card is going up to 29.99% from 15.99%, was not impressed by the offer to refund 45% of her interest charges each month she pays on time. “Whatever way they want to cut it, I’m still being penalized,” says LoBue, who is the chief financial officer of a family-owned electrical contracting company in Hardyston, N.J. “For someone who’s never defaulted, don’t make it rosy by saying ‘we’re giving you 45% back.’ No, you’re giving me a 45% increase.”

Richard Bove, a banking analyst with Rochdale Securities, says this move only marks the beginning of an onslaught of increases in bank charges, “wherever banks can get them.”

“The industry’s been moved into a direction in which profitability of a large number of customer accounts has been taken away,” he says. By giving the banks nine months between the signing of the CARD Act into law last May and its implementation in February, the industry has been given the opportunity to make these accounts profitable – or get rid of them.

“The bottom line is, if Congress continues to pass laws like the CARD Act, about one-third of people who have bank accounts today will be fired by the banks because they’re no longer profitable customers,” Bove says.