Posted by William Charles on August 15, 2017
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Published on August 15th, 2017 | by William Charles

69

Ask An Attorney: Is Chase’s 5/24 Rule Legal?

Introduction

Welcome back for round 2 from Alex & Darr, The Points Attorneys. If you missed our first post, you can find it here. We are lawyers who help points-and-miles enthusiasts bring claims against banks related to the miles-and-points hobby. In these posts, we’re looking forward to answering your questions and providing some general tips to help DoC readers. If you want to add your questions to the list, chime in in the comments of this post. They also have a great series of posts on Frequent Miler called the Fine Print Series that I’d strongly recommend reading.

The following is not legal advice. It is written for educational purposes only. If you have a question or if you believe you have a complaint, submit an inquiry on bachuwalaw.com

The Question

Just curious if there might be any remotely reasonable claim that can be possibly used to argue Chase’s 5/24 policy is unlawful? I know Federal law prohibits discriminating against credit applicants based on a variety of factors, could there be any way to argue that the 5/24 policy is not a reasonable evaluation of an applicant’s creditworthiness and even potentially unlawful? Not really familiar with law stuff so hope I wasn’t being unreasonable or absurd. Would love to see this answered. Thanks!

Darr’s Response

Banks, as private companies, have wide latitude in managing their relationships with customers, including choosing who will be their customer in the first place. The CreditBoards forums are full of information about “easy” banks to get credit versus “hard” banks. And, of course, the dreaded “blacklist” is employed by many banks. Each bank has its own nuances.

Chase has added another twist to credit card application roulette with its 5/24 rule. If an applicant has had 5 or more new accounts opened (regardless of the bank) within the last 24 months, the application is automatically denied. For the deep dive into the 5/24 Rule, I’d encourage you to read this post.

Of course, points-and-mile hobbyists care about the rule because it stops them from harvesting those sweet Chase signup bonuses. But our reader is also more generally curious about whether the rule is lawful. In short, I don’t see anything unlawful about it. As I said at the top of the article, banks have wide latitude in managing their relationships. For example, if you read through the Terms and Conditions that control your bank relationship, you’ll probably see something along the lines of “We reserve the right to close your account at any time.” Banks can set seemingly arbitrary limits and rules when managing banking relationships and opening accounts.

And banks don’t have to advertise their criteria for managing those relationships.  This shouldn’t come as too much of a surprise. If I call up American Express and ask them to commit on the record as to what credit score would yield an instant decline, I’m sure they’d politely refuse. Banks have all sorts of different criteria when they make credit decisions, all filtered through a sophisticated algorithm, that spits out a “yes” or “no.” Chase has made the decision to add another criteria, and nothing about that is unlawful. One could argue that Chase’s 5/24 policy is absurd and isn’t a good way of assessing creditworthiness. But that doesn’t mean there’s anything wrong with it from a legal perspective.

Final Thoughts

Two final thoughts: First, although a bank has broad discretion in opening, maintaining, and closing accounts, the bank must give you the reason why an account was closed or never opened in the first place (this is called “adverse action”). If a bank doesn’t give a reason for adverse action, they are likely breaking the law, and you may have a claim against the bank.

Second, banks cannot act discriminatorily. If a bank has an unpublished rule that it will not issue credit cards for a certain race or ethnicity, that’s illegal. Additionally, if a bank has a policy that is applicable across the board, but results in discriminating against a given group, that too could be unlawful. I’ve tried to think of a way that the 5/24 rule could have the effect of discriminating against a protected group, and I can’t think of a compelling argument (not until points-and-miles enthusiasts become a protected group of people).

If you have any follow-up questions please voice them in the comments. If you’d like to discuss anything privately, you can find us at DarrLawOffices.com or BachuwaLaw.com. Thanks for reading!



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Charlie
Charlie

Thanks for this information. What you say makes sense. I have no fondness for the 5/24 policy, and I have been a victim of it, but I can see why Chase uses it.

Darr
Darr

I’ve had many a nice Hyatt stay thanks to Chase signup bonuses. Sad to see them go.

Jay
Jay

At least the Hyatt card is still unaffected by 5/24, though. Not that it by itself would get you very far, but it’s something.

Credit
Credit

Can a company like comcast use my social securry number when I never gave it permission? This not for an account in default. They just routinely do it as matter of policy.

Darr
Darr

I recommend you shoot me or Alex a message on one of our websites with more detail.

BF
BF

I think this question is slightly misdirected since 5/24 isn’t a judgment on an applicant’s *creditworthiness* – i.e., how likely they are to default on debt. If you have that many cards and have still maintained excellent payment history, you’re probably extremely creditworthy. However, Chase’s internal judgment is that people above 5/24 are still likely to be *unprofitable*, not because they’re going to default and leave Chase holding the bag, but because people with that profile are highly likely to take the signup bonus without becoming a regular user of the card.

Bill
Bill

of course its not illegal. Not sure why we needed a lawyer article to state the obvious.

Tom
Tom

+1

Mh
Mh

+99

Abey
Abey

+1

Russ
Russ

Because far too many people are clueless and it’s nice to have an article to point them to.

XXX
XXX

Because many people are self-entitled jerks. For proof just look at the comments on a post when a bank ends a lucrative promotion.

Bub
Bub

+100

I think it is safe to assume the kegal team at Chase already went over this issue.

Darr
Darr

Just to play Devil’s advocate for a second, Google “bank discrimination” and you’ll see plenty of situations where the bank’s lawyers probably signed off on a policy that was later found to be discriminatory.

I don’t think 5/24 is discriminatory, but let’s not give the banks too much credit.

Steve
Steve

I for one would love to see Chase’s kegel team in action.

projectx
projectx

LOL

Patti
Patti

Lol! I have played that sport, not for Chase. It’s fun! 😉

RG
RG

Comment of the year!

Darr
Darr

Feel free to submit your own questions if you think there are better questions to be asked.

Bob Newbie
Bob Newbie

Right, they could simply just deem people that have more than 5 accounts in 24 months to be too risky, so they deny them.
Nothing illegal about that, just business.

Joshua
Joshua

Why would anyone assume this was illegal? It’s not in any way a protected class >.>

Darr
Darr

Hi Joshua,

As I said in the article, I think this one is lawful, but I wouldn’t be too quick to dismiss seemingly-neutral policies. The banks don’t have to be targeting a protected class. If a protected class is specifically adversely affected a rule could be unlawful.

Brian
Brian

I don’t think this is actually discriminatory, but I do think a well motivated regulator could attempt to build a case.

I suspect there are racial differences in credit worthiness (creditcards.com has an article on race statistics, I have not verified in any way). It looks like Whites would have easier access to credit and better scores, which I assume makes them more likely to be impacted by the 5/24 rule. Assuming this disparate impact can be proven, the remaining question is whether the rule provides enough benefit to the bank to justify the (otherwise illegal) disparate impact.

Again, I assume it does and the case wouldn’t go anywhere, and even if it had limited benefit, I wouldn’t want to be the schlub at some regulator stuck pushing litigation on discrimination against Whites over a rule that also likely has a disparate impact on the well off (not a protected class). But this would be the most likely legal recourse in my opinion.

This is similar to the line of thinking that the CFPB has pushed on the auto industry for the practice of participation (dealer markup) if you would like to read more about that. They have been successful in handing out fines and changing business practices.

Jake
Jake

Attaboy~! Make it all about race~! Unfair~! Unfair~!

Ender
Ender

While I never had accounts closed by banks, I heard a lot of horrifying closure story. In many cases the banks just tell them “we do not want to do business with you any more”. So per this article this is actually unlawful?

imperium2000
imperium2000

It’s a private company. If you went to a restaurant and ordered coffee but ate the free bread and demanded more free bread, the restaurant can refuse to do business with you. Do it often enough and they’ll refuse to even seat you. Try to take a banks money in bad faith and they’ll throw you out.

Ender
Ender

I am not sure why you seem to be so aggressive. People should not feel bad to make money from banks as I am sure they never feel bad to make money from people.

Besides, closing accounts is different from a restaurant refusing to serve someone. It has negative impact on one’s credit, this is why it’s called adverse action and needs to give out specific reasons. “Do not want to do business” is not a specific reason if you ask me.

XXX
XXX

There’s nothing aggressive about the comment you are replying to.If you read the TOS of the accounts you sign up for they give themselves wide latitute to close your account (including calling out “churning,” “gaming sign up bonuses,” and “abusing the rewards program” specifically)

It has absolutely nothing to do with “feeling bad,” or feeling any emotion at all. If a bank determines they are not making money off of you for pretty much any reason (except those disallowed by law – like race) they close your account.

Ender
Ender

Well yes I am aware of those fine prints. I am fine with those terms just don’t personally view open accounts for promotions as “bad faith”. But people have different opinions here.

My point is that bank should not just give “do not want to continue relationship” as reason for account closure. That means nothing and looks like trying to hide something.

imperium2000
imperium2000

The adverse action of being thrown out of a restaurant for taking their bread in bad faith is your reputation suffers. All the restaurants will then stop doing business with you ie a screwed credit. Playing the game is not an entitlement. Know the risks.

Ender
Ender

There might be some similarities between restaurants and credit card issuers but at least there is law for adverse action of the latter not the former. So that is really not a good analogy.

Plus, it’s crude to assume people got accounts closed because of “gaming”. At least I know chase had closed accounts for large cash deposit, wire transfer, etc.

Darr
Darr

Hi Ender, Sounds like there’s nothing unlawful there because they gave you a reason for the closure. The problem that I see a lot is when a bank closes a credit card and doesn’t give *any* reason at all. Not giving any reason for adverse action on a credit account is typically unlawful.

Ender
Ender

I see. So they are not required to give out a more specific reason? Like when reject for credit, they usually says “too many recent inquiry” or “income insufficient”, etc. “Do not want to continue relationship” sounds too arbitrary.

Bill M
Bill M

The 5/24 rule kicks in at “5 or more” new accounts in 24 months not “more than 5” as stated in the post.

Darr
Darr

Thanks for the feedback Bill.

skeptic
skeptic

It may not be illegal to make the rule but using the data from a credit report may be questionable, for example if there are regulations on how / why the data can be used I would think they may be using data too broadly. I can see them using data to see if you’re a risk as far as repayment, late payments, etc, but just because someone opened a lot of accounts doesn’t mean they’re a risk to the bank. If pressed they could not prove this as this rule is newly instituted and basically is just there to prevent churners, we all know that’s the real reason. So if they’re preventing churners with credit data that’s not a legitimate use of credit profiles. Of course I assume they would claim they are managing risk because of too many accounts, etc etc.

imperium2000
imperium2000

So? What’s not legitimate about IDing churners in a credit report?
You gave them permission to look at your credit report. It says right there next to box you clicked when you applied. If you think it violates the Fair Credit Reporting Act or Credit CARD Act of 2009, you can to start a class action. The uses of your credit report is spelled out in those 2 laws.

Banks want to make sure you’ll pay off your credit card and stay with them long term so you’ll make them money. If you’re a churner, they don’t want you to apply for their card. They’re not out to give away money for free.

artgriego
artgriego

Years ago BofA denied me a checking account ‘because of my address.’ It was a new apartment (more like a house though) I’d moved into, not the nicest part of town but certainly not the worst. They didn’t specify if their denial was based on the neighborhood or the actual street address. Is either case legal? For instance, we know some banks shut down an entire address’ accounts once they’ve identified one housemember as gaming them. But what about the case of unrelated residents in an apartment? And what of denying accounts to especially bad neighborhoods?

Darr
Darr

Would need more information to provide a fuller answer. However, refusing to bank with folks from “bad neighborhoods,” which often means people of a certain race or ethnicity, it typically unlawful.

As I said above, give “bank discrimination” a quick Google, and you’ll see lots of cases where the federal government is pursuing actions against banks for allegedly discriminatory lending.

David
David

Darr who are the protected classes?

imperium2000
imperium2000
Darr
Darr

Thanks, Imperium!

scott
scott

An enjoyable, well written exploration of the matter, one no doubt of great interest to most readers here. Thanks Doc(s) for hosting Alex & Darr here. I look forward to reading more of their contributions.

Darr
Darr

Thanks, Scott, and thanks DoC. We like it here and look forward to turning these out more regularly. Keep the suggestions coming!

jnrfalcon
jnrfalcon

Wells Fargo is more discriminatable since they have unpublished rule to refuse any application from people with legal study and working permit but not yet permanent residence. And even if they know, they still prequalify you for their credit cards

Bob
Bob

Yes, they just deny you if you don’t have a green card or not a citizen. That is what I call discrimination.

Mo
Mo

On the flip side of all this, look how many cards Chase allows you to get from them, 5/24 cards or otherwise. You don’t have to many questioning the legality of that abundance. So this negative is tempered by that positive.

Culinarykid92
Culinarykid92

Credit, or credit cards are almost a necessity in today’s world, as they determine loans, interest rates, and even potential landlords pull on renters. Seeing as credit cards are extremely hard to get in the first place without taking out a loan or getting a negative attribute with them at first (extremely high interest rates, an AF, account maintenance fees, etc), I got a question.

Is it legal for a lender to refuse an applicant for having no credit history when they apply for and have the money for a secured card deposit (as they are advertised for people trying to build credit)? And as a follow-up, is it legal to deny a card advertised for people with bad or no credit based on no/limited credit history?

As people with no credit history tend to be younger, it may discriminate based on age. And people with bad credit may be people who made bad decisions, but tend to be people who have lower income just using credit to get basic necessities (possibly due to an unforeseen circumstance like job loss).

no
no

Nothing illegal in a private business decision to not do business with someone as long as they’re not discriminating against a protected class. The credit reporting and scoring is basically a way to get around any protected class discrimination. They’re not denying because of age, they’re denying because the applicant’s credit isn’t up to their standards.

I don’t think you could be denied for a secured card, because that is kind-of the point and the bank isn’t risking any of their own money.

Culinarykid92
Culinarykid92

My step-brother applied for multiple secured cards with the big banks who issue MC and VS. Everyone denied him for no credit history other than Capital One (which was his last app). They were not done the same day so Capital One could see multiple HPs. So my questions stand. And if they ADVERTISE the card as a no credit/limited history card, and one is denied based on not having a history, there is reason to expect credit history to not be the decision one is denied. After all, wouldn’t that then make the bank liable for false advertisement? I would love to hear the lawyers thoughts on this.

imperium2000
imperium2000

Did your step brother check his credit report? You’ll be surprised that many people who think they don’t have a credit history has one due to a forgotten store card or student loans etc. especially ones with negative information or even completely wrong info.

imperium2000
imperium2000

No credit history definitely is a reason to deny someone an unsecured credit card. They don’t have any information on you to determine if you are credit worthy. Do you expect a bank to give you a car or home loan without any information? They can either pull your credit report or they can do it the old fashion way and demand your pay stubs, bill statements and tax returned.

The scoring systems leave out almost everything related to protected classes. Being young or poor in NOT a protected class. They can most definitely discriminate against you not having any income or have prior bankruptcies.

Being old is a protected class so scoring systems actually give a benefit to young people since they cannot include age of the creditor…but they can use the age of your credit accounts which is not a protected class. Sneaky aren’t they?

CHASEDAWAY
CHASEDAWAY

Screw legal or illegal it’s complete BS! I say we start CHASE PROTEST DAY every year (5/24) will be the date. Not to be confused with 4/20
Who’s with me?!

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