[Federal Register: June 14, 2007 (Volume 72, Number 114)]
[Proposed Rules]               
[Page 32947-33145]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr14jn07-19]                         
 

[[Page 32947]]

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Part II





Federal Reserve System





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12 CFR Part 226



Truth in Lending; Proposed Rule


[[Page 32948]]


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FEDERAL RESERVE SYSTEM

12 CFR Part 226

[Regulation Z; Docket No. R-1286]

 
Truth in Lending

AGENCY: Board of Governors of the Federal Reserve System.

ACTION: Proposed rule; request for public comment.

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SUMMARY: The Board proposes to amend Regulation Z, which implements the 
Truth in Lending Act (TILA), and the staff commentary to the 
regulation, following a comprehensive review of TILA's rules for open-
end (revolving) credit that is not home-secured. The proposed revisions 
take into consideration comments from the public on an initial advance 
notice of proposed rulemaking (ANPR) published in December 2004 on a 
variety of issues relating to the format and content of open-end credit 
disclosures and the substantive protections provided under the 
regulation. The proposal also considers comments received on a second 
ANPR published in October 2005 that addressed several amendments to 
TILA's open-end credit rules contained in the Bankruptcy Abuse 
Prevention and Consumer Protection Act of 2005. Consumer testing was 
conducted as a part of the review.
    Except as otherwise noted, the proposed changes apply solely to 
open-end credit. Disclosures accompanying credit card applications and 
solicitations would highlight fees and reasons penalty rates might be 
applied, such as for paying late. Creditors would be required to 
summarize key terms at account opening and when terms are changed. The 
proposal would identify specific fees that must be disclosed to 
consumers in writing before an account is opened, and give creditors 
flexibility regarding how and when to disclose other fees imposed as 
part of the open-end plan. Periodic statements would break out costs 
for interest and fees. Two alternatives are proposed dealing with the 
``effective'' or ``historical'' annual percentage rate disclosed on 
periodic statements.
    Rules of general applicability such as the definition of open-end 
credit and dispute resolution procedures would apply to all open-end 
plans, including home-equity lines of credit. Rules regarding the 
disclosure of debt cancellation and debt suspension agreements would be 
revised for both closed-end and open-end credit transactions. Loans 
taken against employer-sponsored retirement plans would be exempt from 
TILA coverage.

DATES: Comments must be received on or before October 12, 2007.

ADDRESSES: You may submit comments, identified by Docket No. R-1286, by 
any of the following methods:
     Agency Web Site: http://www.federalreserve.gov Follow the instructions for submitting comments at http://www.federalreserve.gov/.

.

     Federal eRulemaking Portal: http://www.regulations.gov. 

Follow the instructions for submitting comments.
     E-mail: regs.comments@federal reserve.gov. Include the 
docket number in the subject line of the message.
     Fax: (202) 452-3819 or (202) 452-3102.
     Mail: Jennifer J. Johnson, Secretary, Board of Governors 
of the Federal Reserve System, 20th Street and Constitution Avenue, 
NW., Washington, DC 20551.
    All public comments are available from the Board's Web site at 
http://www.federalreserve.gov/generalinfo/foia/ProposedRegs.cfm as 

submitted, unless modified for technical reasons. Accordingly, your 
comments will not be edited to remove any identifying or contact 
information. Public comments may also be viewed electronically or in 
paper in Room MP-500 of the Board's Martin Building (20th and C 
Streets, NW.) between 9 a.m. and 5 p.m. on weekdays.

FOR FURTHER INFORMATION CONTACT: Amy Burke or Vivian Wong, Attorneys, 
Krista Ayoub, Dan Sokolov, Ky Tran-Trong, or John Wood, Counsels, or 
Jane Ahrens, Senior Counsel, Division of Consumer and Community 
Affairs, Board of Governors of the Federal Reserve System, at (202) 
452-3667 or 452-2412; for users of Telecommunications Device for the 
Deaf (TDD) only, contact (202) 263-4869.

SUPPLEMENTARY INFORMATION: 

I. Background on TILA and Regulation Z

    Congress enacted the Truth in Lending Act (TILA) based on findings 
that economic stability would be enhanced and competition among 
consumer credit providers would be strengthened by the informed use of 
credit resulting from consumers' awareness of the cost of credit. The 
purposes of TILA are (1) to provide a meaningful disclosure of credit 
terms to enable consumers to compare credit terms available in the 
marketplace more readily and avoid the uninformed use of credit; and 
(2) to protect consumers against inaccurate and unfair credit billing 
and credit card practices.
    TILA's disclosures differ depending on whether consumer credit is 
an open-end (revolving) plan or a closed-end (installment) loan. TILA 
also contains procedural and substantive protections for consumers. 
TILA is implemented by the Board's Regulation Z. An Official Staff 
Commentary interprets the requirements of Regulation Z. By statute, 
creditors that follow in good faith Board or official staff 
interpretations are insulated from civil liability, criminal penalties, 
or administrative sanction.

II. Summary of Major Proposed Changes

    The goal of the proposed amendments to Regulation Z is to improve 
the effectiveness of the disclosures that creditors provide to 
consumers at application and throughout the life of an open-end (not 
home-secured) account. The proposed changes are the result of the 
Board's review of the provisions that apply to open-end (not home-
secured) credit. The Board's last comprehensive review of Regulation Z 
was in 1981. The Board is proposing changes to format, timing, and 
content requirements for the five main types of open-end credit 
disclosures governed by Regulation Z: (1) Credit and charge card 
application and solicitation disclosures; (2) account-opening 
disclosures; (3) periodic statement disclosures; (4) change-in-terms 
notices; and (5) advertising provisions.
    Applications and solicitations. The proposal contains changes to 
the format and content to make the credit and charge card application 
and solicitation disclosures more meaningful and easier for consumers 
to use. The proposed changes include:
     Adopting new format requirements for the summary table, 
including rules regarding: Type size and use of boldface type for 
certain key terms, placement of information, and the use of cross-
references.
     Revising content, including: A requirement that creditors 
disclose the duration that penalty rates may be in effect, a shorter 
disclosure about variable rates, new disclosures highlighting the 
effect of creditors' payment allocation practices, and a reference to 
consumer education materials on the Board's Web site.
    Account-opening disclosures. The proposal also contains revisions 
to the cost disclosures provided at account opening to make the 
information more conspicuous and easier to read. The proposed changes 
include:

[[Page 32949]]

     Disclosing certain key terms in a summary table at account 
opening, which would be substantially similar to the table required for 
credit and charge card applications and solicitations, in order to 
summarize for consumers key information that is most important to 
informed decision-making.
     Adopting a different approach to disclosing fees, to 
provide greater clarity for identifying fees that must be disclosed. In 
addition, creditors would have flexibility to disclose charges (other 
than those in the summary table) in writing or orally.
    Periodic statement disclosures. The proposal also contains 
revisions to make disclosures on periodic statements more 
understandable, primarily by making changes to the format requirements, 
such as by grouping fees, interest charges, and transactions together. 
The proposed changes include:
     Itemizing interest charges for different types of 
transactions, such as purchases and cash advances, and providing 
separate totals of fees and interest for the month and year-to-date.
     Modifying the provisions for disclosing the ``effective 
APR,'' including format and terminology requirements to make it more 
understandable. Because of concerns about the disclosure's 
effectiveness, however, the Board is also soliciting comment on whether 
this rate should be required to be disclosed.
     Requiring disclosure of the effect of making only the 
minimum required payment on repayment of balances (changes required by 
the Bankruptcy Act).
    Changes in consumer's interest rate and other account terms. The 
proposal would expand the circumstances under which consumers receive 
written notice of changes in the terms (e.g., an increase in the 
interest rate) applicable to their accounts, and increase the amount of 
time these notices must be sent before the change becomes effective. 
The proposed changes include:
     Generally increasing advance notice before a changed term 
can be imposed from 15 to 45 days, to better allow consumers to obtain 
alternative financing or change their account usage.
     Requiring creditors to provide 45 days' prior notice 
before the creditor increases a rate due to the consumer's delinquency 
or default.
     When a change-in-terms notice accompanies a periodic 
statement, requiring a tabular disclosure on the front of the periodic 
statement of the key terms being changed.
    Advertising provisions. The proposal would revise the rules 
governing advertising of open-end credit to help ensure consumers 
better understand the credit terms offered. These proposed revisions 
include:
     Requiring advertisements that state a minimum monthly 
payment on a plan offered to finance the purchase of goods or services 
to state, in equal prominence to the minimum payment, the time period 
required to pay the balance and the total of payments if only minimum 
payments are made.
     Permitting advertisements to refer to a rate as ``fixed'' 
only if the advertisement specifies a time period for which the rate is 
fixed and the rate will not increase for any reason during that time, 
or if a time period is not specified, if the rate will not increase for 
any reason while the plan is open.

III. The Board's Review of Open-End Credit Rules

A. December 2004 Advance Notice of Proposed Rulemaking

    The Board began a review of Regulation Z in December 2004.\1\ The 
Board initiated its review of Regulation Z by issuing an advance notice 
of proposed rulemaking (December 2004 ANPR). 69 FR 70925; December 8, 
2004. At that time, the Board announced its intent to conduct its 
review of Regulation Z in stages, focusing first on the rules for open-
end (revolving) credit accounts that are not home-secured, chiefly 
general-purpose credit cards and retailer credit card plans. The 
December 2004 ANPR sought public comment on a variety of specific 
issues relating to three broad categories: the format of open-end 
credit disclosures, the content of those disclosures, and the 
substantive protections provided for open-end credit under the 
regulation. The December 2004 ANPR solicited comment on the scope of 
the Board's review, and also requested commenters to identify other 
issues that the Board should address in the review. The comment period 
closed on March 28, 2005.
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    \1\ The review was initiated pursuant to requirements of section 
303 of the Riegle Community Development and Regulatory Improvement 
Act of 1994, section 610(c) of the Regulatory Flexibility Act of 
1980, and section 2222 of the Economic Growth and Regulatory 
Paperwork Reduction Act of 1996.
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    The Board received over 200 comment letters in response to the 
December 2004 ANPR. More than half of the comments were from individual 
consumers. About 60 comments were received from the industry or 
industry representatives, and about 20 comments were received from 
consumer advocates and community development groups. The Office of the 
Comptroller of the Currency, one state agency, and one member of 
Congress also submitted comments.
    Scope. Commenters' views on a staged review of Regulation Z were 
divided. Some believe reviewing the regulation in stages makes the 
process manageable and focuses discussion and analysis. Others 
supported an independent focus on open-end credit rules because they 
believe open-end credit by its nature is distinct from other credit 
products covered by TILA and Regulation Z.
    Some commenters supported the Board's approach generally, but 
voiced concern that looking at the regulation in a piecemeal fashion 
may lead to decisions in the early stages of the review that may need 
to be revisited later. If the review is staged, these commenters want 
all changes implemented at the same time, to ensure consistency between 
the open-end and closed-end rules.
    Some commenters urged the Board to include open-end rules affecting 
home-equity lines of credit (HELOCs) in the initial stage of the 
review. If the Board chooses not to expand its review of open-end 
credit rules to cover home-secured credit, these commenters urged the 
Board to avoid making any revisions that would be inconsistent with 
existing HELOC requirements.
    A few commenters concurred with the Board's approach of reviewing 
Regulation Z in stages, but they preferred that the Board start with 
rules of general applicability, such as definitions. These commenters 
generally urged the Board to provide additional clarity on the 
definition of ``finance charge,'' TILA's dollar cost of credit.
    Finally, a few commenters stated the Board needs to review the 
entire regulation at the same time. They suggested a staged approach is 
not workable, and cited concerns about duplicating efforts, creating 
inconsistencies, and revisiting changes made in earlier stages of a 
lengthy review.
    Format. In general, commenters representing both consumers and 
industry stated that the tabular format requirements for TILA's direct-
mail credit card application and solicitation disclosures have proven 
useful to consumers, although a variety of suggestions were made to add 
or delete specific disclosures. Many, however, noted that typical 
account-opening disclosures are lengthy and complex, and suggested that 
the effectiveness of account-opening disclosures could be improved if 
key terms were summarized in a standardized format, perhaps in the same 
format as TILA's direct-mail credit card application and solicitation

[[Page 32950]]

disclosures. These suggestions were consistent with the views of some 
members of the Board's Consumer Advisory Council. Industry commenters 
supported the Board's plan to use focus groups or other consumer 
research tools to test the effectiveness of any proposed revisions.
    To combat ``information overload,'' many commenters asked the Board 
to emphasize only the most important information that consumers need at 
the time the disclosure is given. They asked the Board to avoid rules 
that require the repetitive delivery of complex information, not all of 
which is essential to comparison shopping, such as a lengthy 
explanation of the creditor's method of calculating balances now 
required at account opening and on periodic statements. Commenters 
suggested that the Board would most effectively promote comparison 
shopping by focusing on essential terms in a simplified way. They 
believe some information could also be provided to consumers through 
nonregulatory, educational methods. Taken together, these approaches 
could lead to simpler disclosures that consumers might be more inclined 
to read and understand.
    Content. In general, commenters provided a variety of views on how 
to simplify TILA's cost disclosures. For example, some suggested that 
creditors should disclose only interest as the ``finance charge'' and 
simply identify all other fees and charges. Others suggested all fees 
associated with an open-end plan should be disclosed as the ``finance 
charge.'' Creditors sought, above all, clear rules.
    Comments were divided on the usefulness of open-end APRs. TILA 
requires creditors to disclose an ``interest rate'' APR for shopping 
disclosures (such as in advertisements and solicitations) and at 
account opening, and an ``effective'' APR on periodic statements that 
reflects interest and fees, such as transaction charges assessed during 
the billing period. In general, consumer groups suggested that the 
Board mandate for shopping disclosures an ``average'' or ``typical'' 
effective APR based on an historical average cost to consumers with 
similar accounts. An average APR, consumer representatives stated, 
would give consumers a more accurate picture of what consumers' actual 
cost might be. Regarding the effective APR on periodic statements, 
consumer advocates stated that it is a key disclosure that is helpful, 
and can provide ``shock value'' to consumers when fees cause the APR to 
spike for the billing cycle. Commenters representing industry argued 
that an effective APR is not meaningful, confuses consumers, and is 
difficult to explain. Some commenters suggested that a disclosure on 
the periodic statement that provides context by explaining what costs 
are included in the effective APR might improve its usefulness.
    Regarding advance notice of changes to rates and fees, comments 
were sharply divided. Creditors generally believe the current notice 
requirements are adequate, although for rate (and other) changes not 
involving a consumer's default, a number of creditors supported 
increasing the advance notice requirement from 15 to 30 days. Consumers 
and consumer representatives generally believe that when terms change, 
consumers should have the right under TILA to opt out of the new terms, 
or be allowed a much longer time period to find alternative credit 
products. They suggested a two-billing cycle advance notice or as long 
as 90 days. More fundamentally, these commenters believe card issuers 
should be held to the initial terms of the credit contract, at least 
until the credit card expires.
    Where triggering events are set forth in the account agreement such 
as events that might trigger penalty pricing, creditors believe there 
is no need to provide additional notice when the event occurs; they are 
not changing a term, they stated, but merely implementing the 
agreement. Some suggest that instead of providing a notice when penalty 
pricing is triggered, penalty pricing and the triggers should be better 
emphasized in the application and account-opening disclosures. 
Consumers and consumer representatives agree that creditors' policies 
about when terms may change should be more prominently displayed, 
including in the credit card application disclosures. They further 
believe the Board should provide new substantive protections to 
consumers, such as prohibiting the practice of increasing rates merely 
because the consumer paid late on another credit account.

B. The Bankruptcy Act's Amendments to TILA and October 2005 Advance 
Notice of Proposed Rulemaking

    The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 
(the ``Bankruptcy Act'') primarily amended the federal bankruptcy code, 
but also contained several provisions amending TILA. Public Law 109-8, 
119 Stat. 23. The Bankruptcy Act's TILA amendments principally deal 
with open-end credit accounts and require new disclosures on periodic 
statements, on credit card applications and solicitations, and in 
advertisements.
    In October 2005, the Board published a second ANPR to solicit 
comment on implementing the Bankruptcy Act amendments (October 2005 
ANPR). 70 FR 60235; October 17, 2005. In the October 2005 ANPR, the 
Board stated its intent to implement the Bankruptcy Act amendments as 
part of the Board's ongoing review of Regulation Z's open-end credit 
rules. The comment period for the October 2005 ANPR closed on December 
16, 2005.
    The Board received approximately 50 comment letters in response to 
the October 2005 ANPR. Forty-five letters were submitted by financial 
institutions and their trade groups. Five letters were submitted by 
consumer groups.
    Minimum payment warnings. Under the Bankruptcy Act, creditors that 
offer open-end accounts must provide standardized disclosures on each 
periodic statement about the effects of making only minimum payments, 
including an example of how long it would take to pay off a specified 
balance, along with a toll-free telephone number that consumers can use 
to obtain an estimate of how long it will take to pay off their own 
balance if only minimum payments are made. The Board must develop a 
table that creditors can use in responding to consumers requesting such 
estimates.
    Industry commenters generally favored limiting the minimum payment 
disclosure to credit card accounts (thus, excluding HELOCs and 
overdraft lines of credit) and to those consumers who regularly make 
only minimum payments. Consumer groups generally favored broadly 
applying the rule to all types of open-end credit and to all open-end 
accountholders.
    Industry commenters supported having an option to provide 
customized information (reflecting a consumer's actual account status) 
on the periodic statement or in response to a consumer's telephone 
call, but also wanted the option to use a standardized formula 
developed by the Board. Consumer group commenters asked the Board to 
require creditors to provide more customized estimates of payoff 
periods through the toll-free telephone number and to not allow 
creditors to use a standardized formula, and supported disclosure of an 
``actual'' repayment time on the periodic statement.
    Late-payment fees. Under the Bankruptcy Act, creditors offering 
open-end accounts must disclose on each periodic statement the earliest 
date on which a late payment fee may be charged, as well as the amount 
of the fee.
    Industry commenters urged the Board to base the disclosure 
requirement on

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the contractual payment due date and to disregard any ``courtesy'' 
period that creditors informally recognize following the contractual 
payment due date. Although the industry provided mixed comments on any 
format requirements, most opposed a proximity requirement for 
disclosing the amount of the fee and the date. Comments were mixed on 
adding information about penalty APRs and ``cut-off times'' to the late 
payment disclosures. While supporters (a mix of industry and consumer 
commenters) believe the additional information is useful, others were 
concerned about the complexity of such a disclosure, and opposed the 
approach for that reason. Consumer commenters suggested substantive 
protections to ensure consumers' payments are timely credited, such as 
considering the postmark date to be the date of receipt.
    Internet solicitations. The Bankruptcy Act provides that credit 
card issuers offering cards on the Internet must include the same 
tabular summary of key terms that is currently required for 
applications or solicitations sent by direct mail.
    Although the Bankruptcy Act refers only to solicitations (where no 
application is required), most commenters (both industry and consumer 
groups) agreed that Internet applications should be treated the same as 
solicitations. Many industry commenters stated that the Board's interim 
final rule on electronic disclosures, issued in 2001, would be 
appropriate to implement the Bankruptcy Act. Regarding accuracy 
standards, the majority of industry commenters addressing this issue 
indicated that issuers should be required to update Internet 
disclosures every 30 days, while consumer groups suggested that the 
disclosures should be updated in a ``timely fashion,'' with 30 days 
being too long in some instances.
    Introductory rate offers. Under the Bankruptcy Act, credit card 
issuers offering discounted introductory rates must clearly and 
conspicuously disclose in marketing materials the expiration date of 
the offer, the rate that will apply after that date, and an explanation 
of how the introductory rate may be revoked (for example, if the 
consumer makes a late payment).
    In general, industry commenters asked for flexibility in complying 
with the new requirements. Consumer groups supported stricter 
standards, such as requiring an equivalent typeface for the word 
``introductory'' in immediate proximity to the temporary rate and 
requiring the expiration date and subsequent rate to appear either 
side-by-side with, or immediately under or above, the most prominent 
statement of the temporary rate.
    Account termination. Under the Bankruptcy Act, creditors are 
prohibited from terminating an open-end account before its expiration 
date solely because the consumer has not incurred finance charges on 
the account. Creditors are permitted, however, to terminate an account 
for inactivity.
    Regarding guidance on what should be considered an ``expiration 
date,'' several industry commenters suggested using card expiration 
dates as the account expiration date. Others cautioned against using 
such an approach, because accounts do not terminate upon a card 
expiration date. Regarding what constitutes ``inactivity,'' many 
industry commenters stated no further guidance is necessary. Among 
those suggesting additional guidance, most suggested ``activity'' 
should be measured only by consumers' actions (charges and payments) as 
opposed to card issuer activity (for example, refunding fees, billing 
inactivity fees, or waiving unpaid balances).
    High loan-to-value mortgage credit. For home-secured credit that 
may exceed the dwelling's fair-market value, the Bankruptcy Act 
amendments require creditors to provide additional disclosures at the 
time of application and in advertisements (for both open-end and 
closed-end credit). The disclosures would warn consumers that interest 
on the portion of the loan that exceeds the home's fair-market value is 
not tax deductible and encourage consumers to consult a tax advisor. 
Because these amendments deal with home-secured credit, the Board is 
not proposing revisions to Regulation Z to implement these provisions 
at this time. The Board anticipates implementing these provisions in 
connection with the upcoming review of Regulation Z's rules for 
mortgage transactions. Nevertheless, the following is a summary of the 
comments received.
    In general, creditors asked for flexibility in providing the 
disclosure, either by permitting the notice to be provided to all 
mortgage applicants, or to be provided later in the approval process 
after creditors have determined the disclosure is triggered. Similarly, 
a number of industry commenters advocated limiting the advertising rule 
to creditors that specifically market high loan-to-value mortgage 
loans. Creditor commenters asked for guidance on loan-to-value 
calculations and safe harbors for how creditors determine property 
values. Consumer advocates favored triggering the disclosure when the 
possibility of negative amortization could occur.

C. Consumer Testing

    A principal goal for the Regulation Z review is to produce revised 
and improved credit card disclosures that consumers will be more likely 
to pay attention to, understand, and use in their decisions, while at 
the same time not creating undue burdens for creditors. In April 2006, 
the Board retained a research and consulting firm (Macro International) 
that specializes in designing and testing documents to conduct consumer 
testing to help the Board review Regulation Z's credit card rules. 
Specifically, the Board used consumer testing to develop proposed model 
forms for the following credit card disclosures required by Regulation 
Z:
     Summary table disclosures provided in direct-mail 
solicitations and applications;
     Disclosures provided at account opening;
     Periodic statement disclosures; and
     Subsequent disclosures, such as notices provided when key 
account terms are changed, and notices on checks provided to access 
credit card accounts.
    Working closely with the Board, Macro International conducted 
several tests. Each round of testing was conducted in a different city, 
throughout the United States. In addition, the consumer testing groups 
contained participants with a range of ethnicities, ages, educational 
levels, credit card behavior, and whether a consumer likely has a prime 
or subprime credit card.
    Exploratory focus groups. In May and June 2006, the Board worked 
with Macro International to conduct two sets of focus groups with 
credit card consumers, in part, to learn more about what information 
consumers currently use in making decisions about their credit card 
accounts. Each focus group consisted of between eight and thirteen 
people that discussed issues identified by the Board and raised by a 
moderator from Macro International. Through these focus groups, the 
Board gathered information on what credit terms consumers usually 
consider when shopping for a credit card, what information they find 
useful when they receive a new credit card in the mail, and what 
information they find useful on periodic statements.
    Cognitive interviews on existing disclosures. In August 2006, the 
Board worked with Macro International to conduct nine cognitive 
interviews with credit card customers. These cognitive interviews 
consisted of one-on-one discussions with consumers, during

[[Page 32952]]

which consumers were asked to view existing sample credit card 
disclosures. The goals of these interviews were: (1) To learn more 
about what information consumers read when they receive current credit 
card disclosures; (2) to research how easily consumers can find various 
pieces of information in these disclosures; and (3) to test consumers' 
understanding of certain credit card-related words and phrases.
    1. Initial design of disclosures for testing. In the fall of 2006, 
the Board worked with Macro International to develop sample credit card 
disclosures to be used in the later rounds of testing, taking into 
account information learned through the focus groups and the cognitive 
interviews.
    2. Additional cognitive interviews and revisions to disclosures. In 
late 2006 and early 2007, the Board worked with Macro International to 
conduct four rounds of cognitive interviews (between seven and nine 
participants per round), where consumers were asked to view new sample 
credit card disclosures developed by the Board and Macro International. 
The rounds of interviews were conducted sequentially to allow for 
revisions to the testing materials based on what was learned from the 
testing during each previous round.
    Results of testing. Several of the model forms were developed 
through the testing. A report summarizing the results of the testing is 
available on the Board's public Web site: http://www.federalreserve.gov
.

    Testing participants generally read the summary table provided in 
direct-mail credit card solicitations and applications and ignored 
information presented outside of the table. Thus, the proposal requires 
that information about events that trigger penalty rates and about 
important fees (late-payment fees, over-the-credit-limit fees, balance 
transfer fees, and cash advance fees) be placed in the table. 
Currently, this information may be placed outside the table.
    With respect to the account-opening disclosures, consumer testing 
indicates that consumers commonly do not review their account 
agreements, which are often in small print and dense prose. The 
proposal would require creditors to include a table summarizing the key 
terms applicable to the account, similar to the table required for 
credit card applications and solicitations. Setting apart the most 
important terms in this way will better ensure that consumers are 
apprised of those terms.
    With respect to periodic statement disclosures, testing 
participants found it beneficial to have the different types of 
transactions grouped together by type. Thus, the proposal requires 
creditors to group transactions together by type, such as purchases, 
cash advances, and balance transfers. In addition, many consumers more 
easily noticed the number and amount of fees when the fees were 
itemized and grouped together with interest charges. Consumers also 
noticed fees and interest charges more readily when they were located 
near the disclosure of the transactions on the account. Thus, under the 
proposal, creditors would be required to group all fees together and 
describe them in a manner consistent with consumers' general 
understanding of costs (``interest charge'' or ``fee''), without regard 
to whether the fees would be considered ``finance charges,'' ``other 
charges'' or neither under the regulation.
    With respect to change-in-terms notices, consumer testing indicates 
that much like the account-opening disclosures, consumers may not 
typically read such notices, because they are often in small print and 
dense prose. To enhance the effectiveness of change-in-terms notices, 
when a creditor is changing terms which were required to be disclosed 
in the summary table provided at account opening, the proposed rules 
would require the creditor to include a table summarizing any such 
changed terms. Creditors commonly provide notices about changes to 
terms or rates in the same envelope with periodic statements. Consumer 
testing indicates that consumers may not typically look at the notices 
if they are provided as separate inserts given with periodic 
statements. Thus, in such cases, a table summarizing the change would 
have to appear on the periodic statement directly above the transaction 
list, where consumers are more likely to notice the changes.
    Additional testing after comment period. After receiving comments 
from the public on the proposal and the revised disclosure forms, the 
Board will work with Macro International to revise the model 
disclosures. Macro International then will conduct additional rounds of 
cognitive interviews to test the revised disclosures. After the 
cognitive interviews, quantitative testing will be conducted. The goal 
of the quantitative testing is to measure consumers' comprehension and 
the usability of the newly-developed disclosures relative to existing 
disclosures and formats.

D. Other Outreach and Research

    The Board also solicited input from members of the Board's Consumer 
Advisory Council on various issues presented by the review of 
Regulation Z's open-end credit rules. During 2005 and 2006, for 
example, the Council discussed the feasibility and advisability of 
reviewing Regulation Z in stages, ways to improve the summary table 
provided on or with credit card applications and solicitations, issues 
related to TILA's substantive protections (including dispute resolution 
procedures), and issues related to the Bankruptcy Act amendments. In 
addition, the Board met or conducted conference calls with various 
industry and consumer group representatives throughout the review 
process leading to this proposal. The Board also reviewed disclosures 
currently provided by creditors, consumer complaints received by the 
federal banking agencies, and surveys on credit card usage to help 
inform the proposal.\2\
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    \2\ Surveys reviewed include: Thomas A. Durkin, Credit Cards: 
Use and Consumer Attitudes, 1970-2000, Federal Reserve Bulletin, 
(September 2000); Thomas A. Durkin, Consumers and Credit 
Disclosures: Credit Cards and Credit Insurance, Federal Reserve 
Bulletin (April 2002).
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E. Reviewing Regulation Z in Stages

    Based on the comments received and upon its own analysis, the Board 
is proceeding with a review of Regulation Z in stages. This proposal 
largely contains revisions to rules affecting open-end plans other than 
HELOCs subject to Sec.  226.5b. These open-end (not home-secured) plans 
are distinct from other TILA-covered products, and conducting a review 
in stages allows for a manageable process. Possible revisions to rules 
affecting HELOCs will be considered in the Board's review of home-
secured credit, currently underway. To minimize compliance burden for 
creditors offering HELOCs as well as other open-end credit, many of the 
open-end rules would be reorganized to delineate clearly the 
requirements for HELOCs and other forms of open-end credit. Although 
this reorganization would increase the size of the regulation and 
commentary, the Board believes a clear delineation of rules for HELOCs 
and other forms of open-end credit pending the review of HELOC rules 
provides a clear compliance benefit to creditors. Creditors that 
generate a single periodic statement for all open-end products would be 
given the option to retain the existing periodic statement disclosure 
scheme for HELOCs, or to disclose information on periodic statements 
under the revised rules for other open-end plans.

F. Implementation Period

    The Board contemplates providing creditors sufficient time to 
implement

[[Page 32953]]

any revisions that may be adopted. The Board seeks comment on an 
appropriate implementation period.

IV. The Board's Rulemaking Authority

    TILA mandates that the Board prescribe regulations to carry out the 
purposes of the act. TILA also specifically authorizes the Board, among 
other things, to do the following:
     Issue regulations that contain such classifications, 
differentiations, or other provisions, or that provide for such 
adjustments and exceptions for any class of transactions, that in the 
Board's judgment are necessary or proper to effectuate the purposes of 
TILA, facilitate compliance with the act, or prevent circumvention or 
evasion. 15 U.S.C. 1604(a).
     Exempt from all or part of TILA any class of transactions 
if the Board determines that TILA coverage does not provide a 
meaningful benefit to consumers in the form of useful information or 
protection. The Board must consider factors identified in the act and 
publish its rationale at the time it proposes an exemption for comment. 
15 U.S.C. 1604(f).
     Add or modify information required to be disclosed with 
credit and charge card applications or solicitations if the Board 
determines the action is necessary to carry out the purposes of, or 
prevent evasions of, the application and solicitation disclosure rules. 
15 U.S.C. 1637(c)(5).
     Require disclosures in advertisements of open-end plans. 
15 U.S.C. 1663.
    In the course of developing the proposal, the Board has considered 
the information collected from comment letters submitted in response to 
its ANPRs, its experience in implementing and enforcing Regulation Z, 
and the results obtained from testing various disclosure options in 
controlled consumer tests. For the reasons discussed in this notice, 
the Board believes this proposal is appropriate to effectuate the 
purposes of TILA, to prevent the circumvention or evasion of TILA, and 
to facilitate compliance with the act.
    Also as explained in this notice, the Board believes that the 
specific exemptions proposed are appropriate because the existing 
requirements do not provide a meaningful benefit to consumers in the 
form of useful information or protection. In reaching this conclusion, 
the Board considered (1) the amount of the loan and whether the 
disclosure provides a benefit to consumers who are parties to the 
transaction involving a loan of such amount; (2) the extent to which 
the requirement complicates, hinders, or makes more expensive the 
credit process; (3) the status of the borrower, including any related 
financial arrangements of the borrower, the financial sophistication of 
the borrower relative to the type of transaction, and the importance to 
the borrower of the credit, related supporting property, and coverage 
under TILA; (4) whether the loan is secured by the principal residence 
of the borrower; and (5) whether the exemption would undermine the goal 
of consumer protection. The rationales for these proposed exemptions 
are explained below.

V. Discussion of Major Proposed Revisions

    The goal of the proposed revisions is to improve the effectiveness 
of the Regulation Z disclosures that must be provided to consumers for 
open-end accounts. A summary of the key account terms must accompany 
applications and solicitations for credit card accounts. For all open-
end credit plans, creditors must disclose costs and terms at account 
opening, generally before the first transaction. Consumers must receive 
periodic statements of account activity, and creditors must provide 
notice before certain changes in the account terms may become 
effective.
    To shop for and understand the cost of credit, consumers must be 
able to identify and understand the key terms of open-end accounts. But 
the terms and conditions affecting credit card account pricing can be 
complex. The proposed revisions to Regulation Z are intended to provide 
the most essential information to consumers when the information would 
be most useful to them, with content and formats that are clear and 
conspicuous. The proposed revisions are expected to improve consumers' 
ability to make informed credit decisions and enhance competition among 
credit card issuers. Many of the changes are based on the consumer 
testing that was conducted in connection with the review of Regulation 
Z.
    In considering the proposed revisions, the Board has also sought to 
balance the potential benefits for consumers with the compliance 
burdens imposed on creditors. For example, the proposed revisions seek 
to provide greater certainty to creditors in identifying what costs 
must be disclosed for open-end plans, and when those costs must be 
disclosed. More effective disclosures may also reduce customer 
confusion and misunderstanding, which may also ease creditors' costs 
relating to consumer complaints and inquiries.

A. Credit Card Applications and Solicitations

    Under Regulation Z, credit and charge card issuers are required to 
provide information about key costs and terms with their applications 
and solicitations.\3\ This information is abbreviated, to help 
consumers focus on only the most important terms and decide whether to 
apply for the credit card account. If consumers respond to the offer 
and are issued a credit card, creditors must provide more detailed 
disclosures at account opening, before the first transaction occurs.
---------------------------------------------------------------------------

    \3\ Charge cards are a type of credit card for which full 
payment is typically expected upon receipt of the billing statement. 
To ease discussion, this notice will refer simply to ``credit 
cards.''
---------------------------------------------------------------------------

    The application and solicitation disclosures are considered among 
the most effective TILA disclosures principally because they must be 
presented in a standardized table with headings, content, and format 
substantially similar to the model forms published by the Board. In 
2001, the Board revised Regulation Z to enhance the application and 
solicitation disclosures by adding rules and guidance concerning the 
minimum type size and requiring additional fee disclosures.
    Penalty pricing. The proposal would make several revisions that 
seek to improve consumers' understanding of default or penalty pricing. 
Currently, credit card issuers must disclose inside the table the APR 
that will apply in the event of the consumer's ``default.'' Some 
creditors define a ``default'' as making one late payment or exceeding 
the credit limit once. The actions that may trigger the penalty APR are 
currently required to be disclosed outside the table.
    Consumer testing indicated that many consumers did not notice the 
information about penalty pricing when it was disclosed outside the 
table. Under the proposal, card issuers would be required to include in 
the table the specific actions that trigger penalty APRs (such as a 
late payment), the rate that will apply, the balances to which the 
penalty rate will apply, and the circumstances under which the penalty 
rate will expire or, if true, the fact that the penalty rate could 
apply indefinitely. The regulation would require card issuers to use 
the term ``penalty APR'' because the testing demonstrated that some 
consumers are confused by the term ``default rate.''
    Similarly, the proposal requires card issuers to disclose inside 
(rather than outside) the table the fees for paying late, exceeding a 
credit limit, or making a payment that is returned, along with

[[Page 32954]]

a cross-reference to the penalty rate if, for example, paying late 
could also trigger the penalty rate. Cash advance fees and balance 
transfer fees would also be disclosed inside the table. This proposed 
change is also based on consumer testing results; fees disclosed 
outside the table were often not noticed. Requiring card issuers to 
disclose returned-payment fees would be a new disclosure.
    Variable-rate information. Currently, applications and 
solicitations offering variable APRs must disclose inside the table the 
index or formula used to make adjustments and the amount of any margin 
that is added. Additional details, such as how often the rate may 
change, must be disclosed outside the table. Under the proposal, 
information about variable APRs would be reduced to a single phrase 
indicating the APR varies ``with the market,'' along with a reference 
to the type of index, such as ``Prime.'' Consumer testing indicated 
that few consumers use the variable-rate information when shopping for 
a card. Moreover, participants were distracted or confused by details 
about margin values, how often the rate may change, and where an index 
can be found.
    Payment allocation. The proposal would add a new disclosure to the 
table about the effect on credit costs of creditors' payment allocation 
methods when payments are applied entirely to transferred balances at 
low introductory APRs. If, as is common, a creditor allocates payments 
to low-rate balances first, consumers who make purchases on the account 
will not be able to take advantage of any ``grace period'' on 
purchases, without paying off the entire balance, including the low-
rate balance transfer. Consumer testing indicated that consumers are 
often confused about this aspect of balance transfer offers. The new 
disclosure would alert consumers that they will pay interest on their 
purchases until the transferred balance is paid in full.
    Web site reference. The proposal would also require card issuers to 
include a reference to the Board's Web site, where additional 
information is available about how to compare credit cards and what 
factors to consider. This responds to commenters who suggested that the 
Board consider nonregulatory approaches to provide opportunities for 
consumers to learn about credit products.
    Subprime accounts. The proposal also addresses a concern that has 
been raised about subprime credit cards, which are generally offered to 
consumers with low credit scores or credit problems. Subprime credit 
cards often have substantial fees associated with opening the account. 
Typically, fees for the issuance or availability of credit are billed 
to consumers on the first periodic statement, and can substantially 
reduce the amount of credit available to the consumer. For example, the 
initial fees on an account with a $250 credit limit may reduce the 
available credit to less than $100. Consumer complaints received by the 
federal banking agencies state that consumers were unaware when they 
applied for cards of how little credit would be available after all the 
fees were assessed at account opening.
    To address this concern, the proposal would require additional 
disclosures if the card issuer requires fees or a security deposit to 
issue the card that are 25 percent or more of the minimum credit limit 
offered for the account. In such cases, the card issuer would be 
required to include an example in the table of the amount of available 
credit the consumer would have after paying the fees or security 
deposit, assuming the consumer receives the minimum credit limit.
    Balance computation methods. TILA requires creditors to identify 
their balance computation method by name, and Regulation Z requires 
that the disclosure be inside the table. However, consumer testing 
suggests that these names, such as the ``two-cycle average daily 
balance method,'' hold little meaning for consumers, and that consumers 
do not consider such information when shopping for accounts. 
Accordingly, the proposed rule requires creditors to place the name of 
the balance computation method outside the table, so that the 
disclosure does not detract from information that is more important to 
consumers.

B. Account-Opening Disclosures

    Regulation Z requires creditors to disclose costs and terms before 
the first transaction is made on the account. The disclosures must 
specify the circumstances under which a ``finance charge'' may be 
imposed and how it will be determined. A ``finance charge'' is any 
charge that may be imposed as a condition of or an incident to the 
extension of credit, and includes, for example, interest, transaction 
charges, and minimum charges. The finance charge disclosures include a 
disclosure of each periodic rate of interest that may be applied to an 
outstanding balance (e.g., purchases, cash advances) as well as the 
corresponding annual percentage rate (APR). Creditors must also explain 
any grace period for making a payment without incurring a finance 
charge. They must also disclose the amount of any charge other than a 
finance charge that may be imposed as part of the credit plan (``other 
charges''), such as a late-payment charge. Consumers'' rights and 
responsibilities in the case of unauthorized use or billing disputes 
must also be explained. Currently, there are few format requirements 
for these account-opening disclosures, which are typically interspersed 
among other contractual terms in the creditor's account agreement.
    Account-opening summary table. Account-opening disclosures have 
often been criticized because the key terms TILA requires to be 
disclosed are often interspersed within the credit agreements, and such 
agreements are long and complex. The proposal to require creditors to 
include a table summarizing the key terms addresses that concern by 
making the information more conspicuous. Creditors may continue, 
however, to provide other account-opening disclosures, aside from the 
fees and terms specified in the table, with other terms in their 
account agreements.
    The new table provided at account opening would be substantially 
similar to the table provided with direct-mail credit card applications 
and solicitations. Consumer testing and surveys indicate that consumers 
generally are aware of the table on applications and solicitations. 
Consumer testing also indicates that consumers may not typically read 
their account agreements, which are often in small print and dense 
prose. Thus, setting apart the most important terms in a summary table 
will better ensure that consumers are aware of those terms.
    The table required at account opening would include more 
information than the table required at application. For example, it 
would include a disclosure of any fee for transactions in a foreign 
currency or that take place in a foreign country. However, to reduce 
compliance burden for creditors that provide account-opening 
disclosures at application, the proposal would allow creditors to 
provide the more specific and inclusive account-opening table at 
application in lieu of the table otherwise required at application.
    How charges are disclosed. Under the current rules, a creditor must 
disclose any ``finance charge'' or ``other charge'' in the written 
account-opening disclosures. A subsequent written notice is required if 
one of the fees disclosed at account opening increases or if certain 
fees are newly introduced during the life of the plan. The terms 
``finance charge'' and ``other charge'' are given broad and flexible 
meanings in the regulation and commentary. This ensures that TILA 
adapts to changing

[[Page 32955]]

conditions, but it also creates uncertainty. The distinctions among 
finance charges, other charges, and charges that do not fall into 
either category are not always clear. As creditors develop new kinds of 
services, some find it difficult to determine if associated charges for 
the new services meet the standard for a ``finance charge'' or ``other 
charge'' or are not covered by TILA at all. This uncertainty can pose 
legal risks for creditors that act in good faith to comply with the 
law. Examples of included or excluded charges are in the regulation and 
commentary, but these examples cannot provide definitive guidance in 
all cases. Creditors are subject to civil liability and administrative 
enforcement for underdisclosing the finance charge or otherwise making 
erroneous disclosures, so the consequences of an error can be 
significant. Furthermore, overdisclosure of rates and finance charges 
is not permitted by Regulation Z for open-end credit.
    The fee disclosure rules also have been criticized as being 
outdated. These rules require creditors to provide fee disclosures at 
account opening, which may be months, and possibly years, before a 
particular disclosure is relevant to the consumer, such as when the 
consumer calls the creditor to request a service for which a fee is 
imposed. In addition, an account-related transaction may occur by 
telephone, when a written disclosure is not feasible.
    The proposed rule is intended to respond to these criticisms while 
still giving full effect to TILA's requirement to disclose credit 
charges before they are imposed. Accordingly, under the proposal, the 
rules would be revised to (1) specify precisely the charges that 
creditors must disclose in writing at account opening (interest, 
minimum charges, transaction fees, annual fees, and penalty fees such 
as for paying late), which would be listed in the summary table, and; 
(2) permit creditors to disclose other less critical charges orally or 
in writing before the consumer agrees to or becomes obligated to pay 
the charge. Although the proposal would permit creditors to disclose 
certain costs orally for purposes of TILA, the Board anticipates that 
creditors will continue to identify fees in the account agreement for 
contract or other reasons.
    Under the proposal, some charges would be covered by TILA that the 
current regulation, as interpreted by the staff commentary, excludes 
from TILA coverage, such as fees for expedited payment and expedited 
delivery. It may not have been useful to consumers to cover such 
charges under TILA when such coverage would have meant only that the 
charges were disclosed long before they became relevant to the 
consumer. The Board believes it would be useful to consumers to cover 
such charges under TILA as part of a rule that permits their disclosure 
at a relevant time. Further, as new services (and associated charges) 
are developed, the proposal minimizes risk of civil liability 
associated with the determination as to whether a fee is a finance 
charge or an other charge, or is not covered by TILA at all.

C. Periodic Statements

    Creditors are required to provide periodic statements reflecting 
the account activity for the billing cycle (typically, about one 
month). In addition to identifying each transaction on the account, 
creditors must identify each ``finance charge'' using that term, and 
each ``other charge'' assessed against the account during the statement 
period. When a periodic interest rate is applied to an outstanding 
balance to compute the finance charge, creditors must disclose the 
periodic rate and its corresponding APR. Creditors must also disclose 
an ``effective'' or ``historical'' APR for the billing cycle, which, 
unlike the corresponding APR, includes not just interest but also 
finance charges imposed in the form of fees (such as cash advance fees 
or balance transfer fees). Periodic statements must also state the time 
period a consumer has to pay an outstanding balance to avoid additional 
finance charges (the ``grace period''), if applicable.
    Fees and interest costs. The proposal contains a number of 
revisions to the periodic statement to improve consumers' understanding 
of fees and interest costs. Currently, creditors must identify on 
periodic statements any ``finance charges'' that have been added to the 
account during the billing cycle, and creditors typically list these 
charges with other transactions, such as purchases, chronologically on 
the statement. The finance charges must be itemized by type. Thus, 
interest charges might be described as ``finance charges due to 
periodic rates.'' Charges such as late payment fees, which are not 
``finance charges,'' are typically disclosed individually and are 
interspersed among other transactions.
    Consumer testing indicated that consumers generally understand that 
``interest'' is the cost that results from applying a rate to a balance 
over time and distinguish ``interest'' from other fees, such as a cash 
advance fee or a late payment fee. Consumer testing also indicated that 
many consumers more easily determine the number and amount of fees when 
the fees are itemized and grouped together.
    Thus, under the proposal, creditors would be required to group all 
charges together and describe them in a manner consistent with 
consumers' general understanding of costs (``interest charge'' or 
``fee''), without regard to whether the charges would be considered 
``finance charges,'' ``other charges,'' or neither. Interest charges 
would be identified by type (for example, interest on purchases or 
interest on balance transfers) as would fees (for example, cash advance 
fee or late-payment fee).
    Consumer testing also indicated that many consumers more quickly 
and accurately determined the total dollar cost of credit for the 
billing cycle when a total dollar amount of fees for the cycle was 
disclosed. Thus, the proposal would require creditors to disclose the 
(1) total fees and (2) total interest imposed for the cycle. The 
proposal would also require disclosure of year-to-date totals for 
interest charges and fees. For many consumers, costs disclosed in 
dollars are more readily understood than costs disclosed as percentage 
rates. The year-to-date figures are intended to assist consumers in 
better understanding the overall cost of their credit account and would 
be an important disclosure and an effective aid in understanding 
annualized costs, especially if the Board were to eliminate the 
requirement to disclose the effective APR on periodic statements, as 
discussed below.
    The effective APR. The ``effective'' APR disclosed on periodic 
statements reflects the cost of interest and certain other finance 
charges imposed during the statement period. For example, for a cash 
advance, the effective APR reflects both interest and any flat or 
proportional fee assessed for the advance.
    For the reasons discussed below, the Board is proposing two 
alternative approaches to address the effective APR. The first approach 
would try to improve consumer understanding of this rate and reduce 
creditor uncertainty about its calculation. The second approach would 
eliminate the requirement to disclose the effective APR.
    Creditors believe the effective APR should be eliminated. They 
believe consumers do not understand the effective APR, including how it 
differs from the corresponding (interest rate) APR, why it is often 
``high,'' and which fees the effective APR reflects. Creditors say they 
find it difficult, if not impossible, to explain the effective APR to 
consumers who call them with questions or concerns. They note that

[[Page 32956]]

callers sometimes believe, erroneously, that the effective APR signals 
a prospective increase in their interest rate, and they may make 
uninformed decisions as a result. And, creditors say, even if the 
consumer does understand the effective APR, the disclosure does not 
provide any more information than a disclosure of the total dollar 
costs for the billing cycle. Moreover, creditors say the effective APR 
is arbitrary and inherently inaccurate, principally because it 
amortizes the cost for credit over only one month (billing cycle) even 
though the consumer may take several months (or longer) to repay the 
debt.
    Consumer groups acknowledge that the effective APR is not well 
understood, but argue that it nonetheless serves a useful purpose by 
showing the higher cost of some credit transactions. They contend the 
effective APR helps consumers decide each month whether to continue 
using the account, to shop for another credit product, or to use an 
alternative means of payment such as a debit card. Consumer groups also 
contend that reflecting costs, such as cash advance fees and balance 
transfer fees, in the effective APR creates a ``sticker shock'' and 
alerts consumers that the overall cost of a transaction for the cycle 
is high and exceeds the advertised corresponding APR. This shock, they 
say, may persuade some consumers not to use certain features on the 
account, such as cash advances, in the future. In their view, the 
utility of the effective APR would be maximized if it reflected all 
costs imposed during the cycle (rather than only some costs as is 
currently the case).
    As part of the consumer testing, mock periodic statements were 
developed in an attempt to improve consumers' understanding of the 
effective APR. A written explanation and varying terminology were 
tested. In most rounds participants showed little understanding of the 
effective APR, but the form was adjusted between rounds as to 
terminology and format, and in the last round a number of participants 
showed more understanding of the effective APR.
    Thus, the draft proposal includes a number of revisions to the 
presentation of the effective APR intended to help consumers understand 
the figure. In addition, the proposal seeks to improve consumer 
understanding and reduce creditor uncertainty by specifying more 
clearly which fees are to be included in the effective APR.\4\ As 
mentioned, however, the Board is also seeking comment on an alternative 
proposal to eliminate the disclosure on the basis that it may not 
provide consumers a meaningful benefit.
---------------------------------------------------------------------------

    \4\ The proposal also would reverse a staff commentary provision 
that excludes ATM fees from the finance charge and effective APR; 
and it would address for the first time foreign transaction fees, 
which it would clarify are to be included in the finance charge and 
effective APR.
---------------------------------------------------------------------------

    Transactions. Currently, there are no format requirements for 
disclosing different types of transactions, such as purchases, cash 
advances, and balance transfers on periodic statements. Often, 
transactions are presented together in chronological order. Consumer 
testing indicated that participants found it helpful to have similar 
types of transactions grouped together on the statement. Consumers also 
found it helpful, within the broad grouping of fees and transactions, 
when transactions were segregated by type (e.g., listing all purchases 
together, separate from cash advances or balance transfers). Further, 
consumers noticed fees and interest charges more readily when they were 
located near the transactions. For these reasons, the proposal requires 
creditors to: (1) Group similar transactions together by type, such as 
purchases, cash advances, and balance transfers, and (2) group fees and 
interest charges together, itemized by type, with the list of 
transactions.
    Late payments. Currently, creditors must disclose the date by which 
consumers must pay a balance to avoid finance charges. Creditors must 
also disclose any cut-off time for receiving payments on the payment 
due date; this is usually disclosed on the reverse side of periodic 
statements. The Bankruptcy Act amendments expressly require creditors 
to disclose the payment due date (or if different, the date after which 
a late-payment fee may be imposed) along with the amount of the late-
payment fee.
    Under the proposal, creditors would be required to disclose the 
payment due date on the front side of the periodic statement and, 
closely proximate to the date, any cut-off time if it is before 5 p.m. 
Consumer testing indicates that many consumers believe cut-off times 
are the close of the business day and more readily notice the cut-off 
time when it is located near the due date.
    Creditors would also be required to disclose, in close proximity to 
the due date, the amount of the late-payment fee and the penalty APR 
that could be triggered by a late payment. Applying the penalty APR to 
outstanding balances can significantly increase costs. Thus, it is 
important for consumers to be alerted to the consequence of paying 
late.
    Minimum payments. The Bankruptcy Act requires creditors offering 
open-end plans to provide a warning about the effects of making only 
minimum payments. The proposal would implement this requirement solely 
for credit card issuers. Under the proposal, card issuers must provide 
(1) a ``warning'' statement indicating that making only the minimum 
payment will increase the interest the consumer pays and the time it 
takes to repay the consumer's balance; (2) a hypothetical example of 
how long it would take to pay a specified balance in full if only 
minimum payments are made; and (3) a toll-free telephone number that 
consumers may call to obtain an estimate of the time it would take to 
repay their actual account balance using minimum payments. Most card 
issuers must establish and maintain their own toll-free telephone 
numbers to provide the repayment estimates. However, the Board is 
required to establish and maintain, for two years, a toll-free 
telephone number for creditors that are depository institutions having 
assets of $250 million or less. This number is for the customers of 
those institutions to call to get answers to questions about how long 
it will take to pay their account in full making only the minimum 
payment. The Federal Trade Commission (FTC) must maintain a similar 
toll-free telephone number for use by customers of creditors that are 
not depository institutions. In order to standardize the information 
provided to consumers through the toll-free telephone numbers, the 
Bankruptcy Act amendments direct the Board to prepare a ``table'' 
illustrating the approximate number of months it would take to repay an 
outstanding balance if the consumer pays only the required minimum 
monthly payments and if no other advances are made (``generic repayment 
estimate'').
    Pursuant to the Bankruptcy Act amendments, the proposal also allows 
a card issuer to establish a toll-free telephone number to provide 
customers with the actual number of months that it will take consumers 
to repay their outstanding balance (``actual repayment disclosure'') 
instead of providing an estimate based on the Board-created table. A 
card issuer that does so need not include a hypothetical example on its 
periodic statements, but must disclose the warning statement and the 
toll-free telephone number.
    The proposal also allows card issuers to provide the actual 
repayment disclosure on their periodic statements. Card issuers would 
be encouraged to use this approach. Participants in consumer testing 
who typically carry

[[Page 32957]]

credit card balances (revolvers) found an estimated repayment period 
based on terms that apply to their own account more useful than a 
hypothetical example. To encourage card issuers to provide the actual 
repayment disclosure on their periodic statements, the proposal 
provides that if card issuers do so, they need not disclose the 
warning, the hypothetical example and a toll-free telephone number on 
the periodic statement, nor need they maintain a toll-free telephone 
number to provide the actual repayment disclosure.
    As described above, the Bankruptcy Act also requires the Board to 
develop a ``table'' that creditors, the Board and the FTC must use to 
create generic repayment estimates. Instead of creating a table, the 
proposal contains guidance for how to calculate generic repayment 
estimates. Consumers that call the toll-free telephone number could be 
prompted to input information about their outstanding balance and the 
APR applicable to their account. Although issuers have the ability to 
program their systems to obtain consumers' account information from 
their account management systems, for the reasons discussed in the 
section-by-section analysis to Appendix M-1, the proposal does not 
require issuers to do so.

D. Changes in Consumer's Interest Rate and Other Account Terms

    Regulation Z requires creditors to provide advance written notice 
of some changes to the terms of an open-end plan. The proposal includes 
several revisions to Regulation Z's requirements for notifying 
consumers about such changes.
    Currently, Regulation Z requires creditors to send, in most cases, 
notices 15 days before the effective date of certain changes in the 
account terms. However, creditors need not inform consumers in advance 
if the rate applicable to their account increases due to default or 
delinquency. Thus, consumers may not realize until they receive their 
monthly statement for a billing cycle that their late payment triggered 
application of the higher penalty rate, effective the first day of the 
month's statement.
    Timing. Currently, Regulation Z generally requires creditors to 
mail a change-in-terms notice 15 days before a change takes effect. 
Consumer groups and others have criticized the 15-day period as 
providing too little time after the notice is sent for the consumer to 
receive the notice, shop for alternative credit and possibly pay off 
the existing credit card account. Under the proposal, notice must be 
sent at least 45 days before the effective date of the change, which 
would give consumers about a month to pursue their options.
    Penalty rates. Currently, creditors must inform consumers about 
rates that are increased due to default or delinquency, but not in 
advance of implementation of the increase. Contractual thresholds for 
default are sometimes very low, and penalty pricing commonly applies to 
all existing balances, including low-rate promotional balances. An 
event triggering the default may occur a year or more after the account 
is opened. For example, a consumer may open an account, and a year or 
more later may take advantage of a low promotional rate to transfer 
balances from another account. That consumer reasonably may not recall 
reading in the account-opening disclosure that a single transaction 
exceeding the credit limit could cause the interest rates on existing 
balances, including on the promotional transfer, to increase. Thus, the 
proposal would expand the events triggering advance notice to include 
increases triggered by default or delinquency. Advance notice of a 
potentially significant increase in the cost of credit is intended to 
allow consumers to consider alternatives before the increase is 
imposed, such as making other financial arrangements or choosing not to 
engage in additional transactions that will increase the balances on 
their account. Comment is solicited on whether a shorter time period 
than 45 days' advance notice would be adequate. Actions creditors may 
engage in to mitigate risk, such as by lowering credit limits or 
suspending credit privileges, are not affected by the proposal.
    Format. Currently, there are few format requirements for change-in-
terms disclosures. As with account-opening disclosures, creditors 
commonly intersperse change-in-terms notices with other amendments to 
the account agreement, and both are provided in pamphlets in small 
print and dense prose. Consumer testing indicates many consumers set 
aside and do not read densely-worded pamphlets.
    Under the proposal, creditors may continue to notify consumers 
about changes to terms required to be disclosed by Regulation Z, along 
with other changes to the account agreement. However, if a changed term 
is one that must be provided in the account-opening summary table, 
creditors must provide that change in a summary table to enhance the 
effectiveness of the change-in-terms notice.
    Creditors commonly enclose notices about changes to terms or rates 
with periodic statements. Under the proposal, if a notice enclosed with 
a periodic statement discusses a change to a term that must be 
disclosed in the account-opening summary table, or announces that a 
penalty rate will be imposed on the account, a table summarizing the 
impending change must appear on the periodic statement. The table would 
have to appear directly above the transaction list, in light of testing 
that shows many consumers tend to focus on the list of transactions. 
Consumers who participated in testing set aside change-in-terms 
pamphlets that accompanied periodic statements. Participants uniformly 
looked at the front side of periodic statements and reviewed at least 
the transactions.

E. Advertisements

    Advertising minimum payments. Consumers commonly are offered the 
option to finance the purchase of goods or services (such as appliances 
or furniture) by establishing an open-end credit plan. The monthly 
minimum payments associated with the purchase are often advertised as 
part of the offer. Under current rules, advertisements for open-end 
credit plans are not required to include information about the time it 
will take to pay for a purchase or the total cost if only minimum 
payments are made; if the transaction were a closed-end installment 
loan, the number of payments and the total cost would be disclosed. 
Under the proposal, advertisements stating a minimum monthly payment 
for an open-end credit plan that would be established to finance the 
purchase of goods or services must state, in equal prominence to the 
minimum payment, the time period required to pay the balance and the 
total of payments if only minimum payments are made.
    Advertising ``fixed'' rates. Creditors sometimes advertise the APR 
for open-end accounts as a ``fixed'' rate even though the creditor 
reserves the right to change the rate at any time for any reason. 
Consumer testing indicated that many consumers believe that a ``fixed 
rate'' will not change, and do not understand that creditors may use 
the term ``fixed'' as a shorthand reference for rates that do not vary 
based on changes in an index or formula. Under the proposal, an 
advertisement may refer to a rate as ``fixed'' if the advertisement 
specifies a time period the rate will be fixed and the rate will not 
increase during that period. If a time period is not specified, the 
advertisement may refer to a rate as ``fixed'' only if the rate will 
not increase while the plan is open.

[[Page 32958]]

F. Other Disclosures and Protections

    ``Open-end'' plans comprised of closed-end features. Some creditors 
give open-end credit disclosures on credit plans that include closed-
end features, that is, separate loans with fixed repayment periods. 
These creditors treat these loans as advances on a revolving credit 
line for purposes of Regulation Z even though the consumer's credit 
information is separately evaluated and he or she may have to complete 
a separate application for each ``advance,'' and the consumer's 
payments on the ``advance'' do not replenish the ``line.'' Provisions 
in the commentary lend support to this approach. The proposal would 
revise these provisions to indicate closed-end disclosures rather than 
open-end disclosures are appropriate when the credit being extended is 
individual loans that are individually approved and underwritten.
    Checks that access a credit card account. Many credit card issuers 
provide accountholders with checks that can be used to obtain cash, pay 
the outstanding balance on another account, or purchase goods and 
services directly from merchants. The solicitation letter accompanying 
the checks may offer a low introductory APR for transactions that use 
the checks. The proposed revisions would require the checks mailed by 
card issuers to be accompanied by cost disclosures.
    Currently, creditors need not disclose costs associated with using 
the checks if the finance charges that would apply (that is, the 
interest rate and transaction fees) have been previously disclosed, 
such as in the account agreement. If the check is sent 30 days or more 
after the account is opened, creditors must refer consumers to their 
account agreements for more information about how the rate and fees are 
determined.
    Consumers may receive these checks throughout the life of the 
credit card account. Thus, significant time may elapse between the time 
account-opening disclosures are provided and the time a consumer 
considers using the check. In addition, consumer testing indicates that 
consumers may not notice references to other documents such as the 
account-opening disclosures or periodic statements for rate information 
because they tend to look for percentages and dollar figures when 
looking for the costs of using the checks. Under the proposed 
revisions, checks that can access credit card accounts must be 
accompanied by information about the rates and fees that will apply if 
the checks are used, and about whether a grace period exists. To ensure 
the disclosures are conspicuous, creditors would be required to provide 
the information in a table, on the front side of the page containing 
the checks.
    Credit insurance, debt cancellation, and debt suspension coverage. 
Under Regulation Z, premiums for credit life, accident, health, or 
loss-of-income insurance are considered finance charges if the 
insurance is written in connection with a credit transaction. However, 
these costs may be excluded from the finance charge and APR (for both 
open-end and closed-end credit transactions), if creditors disclose the 
cost and the fact that the coverage is not required to obtain credit, 
and the consumer signs or initials an affirmative written request for 
the insurance. Since 1996, the same rules have applied to creditors' 
``debt cancellation'' agreements, in which a creditor agrees to cancel 
the debt, or part of it, on the occurrence of specified events.
    Under the proposal, the existing rules for debt cancellation 
coverage would also be applied to ``debt suspension'' coverage (for 
both open-end credit and closed-end transactions). ``Debt suspension'' 
products are related to, but different from, debt cancellation. Debt 
suspension products merely defer consumers' obligation to make the 
minimum payment for some period after the occurrence of a specified 
event. During the suspension period, interest may continue to accrue, 
or it may be suspended as well. Under the proposal, to exclude the cost 
of debt suspension coverage from the finance charge and APR, creditors 
must inform consumers that the coverage suspends, but does not cancel, 
the debt.
    Under the current rules, charges for credit insurance and debt 
cancellation coverage are deemed not to be finance charges if a 
consumer requests coverage after an open-end credit account is opened 
or after a closed-end credit transaction is consummated (the coverage 
is deemed not to be ``written in connection'' with the credit 
transaction). Because in such cases the charges are defined as non-
finance charges, Regulation Z does not require a disclosure or written 
evidence of consent to exclude them from the finance charge. The 
proposed revisions to Regulation Z would implement a broader 
interpretation of ``written in connection'' with a credit transaction 
and require creditors to provide disclosures, and obtain evidence of 
consent, on sales of credit insurance or debt cancellation or 
suspension coverage during the life of an open-end account. If a 
consumer requests the coverage by telephone, creditors may provide the 
disclosures orally, but in that case they must mail written disclosures 
within three days of the call.\5\
---------------------------------------------------------------------------

    \5\ The proposed revisions to Regulation Z requiring disclosures 
to be mailed within three days of a telephone request for these 
products are consistent with the rules of the federal banking 
agencies governing insured depository institutions' sales of 
insurance and with guidance published by the Office of the 
Comptroller of the Currency (OCC) concerning national banks' sales 
of debt cancellation and debt suspension products.
---------------------------------------------------------------------------

VI. Section-by-Section Analysis

    In reviewing the rules affecting open-end credit, the Board has 
reorganized some provisions to make the regulation easier to use. Rules 
affecting home-equity lines of credit (HELOCs) subject to Sec.  226.5b 
are separately delineated in Sec.  226.6 (account-opening disclosures), 
Sec.  226.7 (periodic statements), and Sec.  226.9 (subsequent 
disclosures) Footnotes have been moved to the text of the regulation or 
commentary, as appropriate. These proposed revisions are identified in 
a table below.

See IX. Redesignation Table.

Introduction

    The official staff commentary to Regulation Z begins with an 
Introduction. Comment I-6 discusses reference materials published at 
the end of each section of the commentary adopted in 1981. 46 FR 
50,288; October 9, 1981. The references were intended as a compliance 
aid during the transition to the 1981 revisions to Regulation Z. The 
Board would delete these references and comment I-6, as obsolete. 
Comment I-3, I-4(b), and I-7, which address 1981 rules of transition, 
also would be deleted as obsolete.

Section 226.1 Authority, Purpose, Coverage, Organization, Enforcement, 
and Liability

    Section 226.1(c) generally outlines the persons and transactions 
covered by Regulation Z. Comment 1(c)-1 provides, in part, that the 
regulation applies to consumer credit extended to residents (including 
resident aliens) of a state. Technical revisions are proposed for 
clarity. Comment is requested if further guidance on the scope of 
coverage would be helpful.
    Section 226.1(d)(2), which summarizes the organization of the 
regulation's open-end credit rules (Subpart B), would be amended to 
reinsert text inadvertently deleted in a previous rulemaking. See 54 FR 
24670; June 9, 1989. Section 226.1(d)(4), which summarizes 
miscellaneous provisions in the regulation (Subpart D), would be 
updated to describe amendments made in 2001 to Subpart D relating to

[[Page 32959]]

disclosures made in languages other than English. See 66 FR 17339; 
March 30, 2001. The substance of Footnote 1 would be deleted as 
unnecessary.

Section 226.2 Definitions and Rules of Construction

2(a) Definitions
2(a)(2) Advertisement
    For clarity, the Board proposes technical revisions to the 
commentary to Sec.  226.2(a)(2), with no intended change in substance 
or meaning. No changes are proposed for the text of Sec.  226.2(a)(2).
2(a)(4) Billing Cycle
    TILA Section 127(b) provides that, for an open-end credit plan, the 
creditor shall send the consumer a periodic statement for each billing 
cycle at the end of which there is an outstanding balance or with 
respect to which a finance charge is imposed. 15 U.S.C. 1637(b). 
``Billing cycle'' is not defined in the statute, but is defined in 
Sec.  226.2(a)(4) of Regulation Z as ``the interval between the days or 
dates of regular periodic statements.'' In addition, Sec.  226.2(a)(4) 
requires that billing cycles be equal and no longer than a quarter of a 
year, and allows a variance of up to four days from the regular day or 
date of the statement. Comment 2(a)(4)-3 provides an exception to the 
requirement for equal cycles: the ``transitional billing cycle that can 
occur when the creditor occasionally changes its billing cycles so as 
to establish a new statement day or date.'' Under the proposal, the 
Board would clarify that creditors may also vary the length of the 
first cycle on an open-end account in certain situations.
    Questions have sometimes arisen about the first cycle that occurs 
when a consumer opens an open-end credit account, and specifically, 
about whether the first cycle may vary by more than four days from the 
regular cycle interval without violating the equal-cycle requirement. 
For example, in order to establish the consumer's account on the 
creditor's billing system, the first cycle may need to be longer or 
shorter than a monthly period by more than four days, depending upon 
the date the account is opened. The Board believes that such a variance 
for a first cycle, within reason, would not harm consumers and would 
facilitate compliance. Comment 2(a)(4)-3 would be revised to clarify 
this point.
2(a)(15) Credit Card
    TILA defines ``credit card'' as ``any card, plate, coupon book or 
other credit device existing for the purpose of obtaining money, 
property, labor, or services on credit.'' TILA Section 103(k); 15 
U.S.C. 1602(k). In addition, Regulation Z provides that a credit card 
is a ``single credit device that may be usable from time to time to 
obtain credit.'' See Sec.  226.2(a)(15). The definition of ``credit 
card'' in the regulation would remain largely unchanged; however, the 
current reference to a ``coupon book'' in the definition would be 
deleted as obsolete.
    Checks that access credit card accounts. Credit card issuers 
sometimes provide cardholders with checks that access a credit card 
account, which can be used to obtain cash, purchase goods or services, 
or pay the outstanding balance on another account. These checks are 
often mailed to consumers unsolicited, sometimes with consumers' 
monthly statements. When a consumer uses such a check, the amount of 
the check will be billed to the cardholder's account.
    Historically, checks that access credit card accounts have not been 
treated as ``credit cards'' under TILA because each check can be used 
only once and not ``from time to time.'' See comment 2(a)(15)-1. As a 
result, TILA's protections involving merchant disputes, unauthorized 
use of the account, and the prohibition against unsolicited issuance, 
which apply only to ``credit cards,'' do not apply to these checks. See 
Sec.  226.12. However, other protections do apply to such checks. See 
Sec.  226.13. In the December 2004 ANPR, the Board solicited comment as 
to whether it should extend TILA's protections for credit cards to 
other extensions on credit card accounts, in particular checks that 
access credit card accounts. Q45. The Board also asked whether the 
industry is developing open-end credit plans that would allow consumers 
to conduct transactions using only account numbers and that do not 
involve the issuance of physical devices traditionally considered to be 
credit cards. Q44.
    In response to the December 2004 ANPR, several consumer commenters 
urged the Board to expand the definition of ``credit card'' to include 
checks that access a credit card account, in particular to address the 
risk of increased fraud and heightened identity theft stemming from the 
unrestricted issuance of such checks. Specifically, these commenters 
cited concerns that these checks could be sent to a consumer at any 
time without the consumer's request. Alternatively, some consumer 
commenters suggested that if these checks continued to be issued on an 
unsolicited basis, consumers should at least be able to opt out from 
receiving them. In addition, one consumer group commented that the 
Board could address non-physical credit cards by clarifying that the 
term ``device'' as it appears in the definition of ``credit card'' can 
include any physical object or a method or process.
    Industry commenters opposed expanding the definition of ``credit 
card'' to cover checks that access credit card accounts, for various 
reasons. In general, industry commenters stated that they were aware of 
few complaints regarding such checks, and that in their experience, 
most consumers find the checks useful and convenient, as demonstrated 
by their frequent use. In addressing unsolicited issuance concerns 
specifically, industry commenters noted that upon a consumer's request, 
most issuers will discontinue sending checks that access a credit card 
account.
    Industry commenters also stated that it was unnecessary to extend 
the unauthorized use protections to convenience checks because 
convenience check transactions are generally subject to the Uniform 
Commercial Code (UCC) provisions governing checks, and thus a consumer 
generally would not have any liability for a forged check, provided the 
consumer complies with certain timing requirements. Industry commenters 
also opposed applying the merchant dispute provisions (in Sec.  226.12) 
to checks that access a credit card account, stating that these checks 
are not processed through the payment card associations' networks. 
Because card issuers may have no connection to or relationship with 
merchants that accept these checks, industry commenters stated that 
issuers do not have the ability to charge back to that merchant 
transactions conducted with these checks. Accordingly, industry 
commenters believed that the consumer was in the best position to 
contact the merchant in the event of a dispute involving a transaction 
using one of these checks.
    In the proposal, the definition of ``credit card'' would remain 
unchanged. The Board believes it may be unnecessary to address 
unauthorized use concerns by treating checks that access credit card 
accounts as credit cards, to the extent existing law or agreements 
provide protections to these transactions. Moreover, under Regulation 
Z, a consumer is currently able to assert billing error claims for 
transactions involving checks that access a credit card account because 
the billing error provisions in Sec.  226.13 apply to any extension of 
credit under an open-end plan, and are not limited to credit cards. The 
Board also does not

[[Page 32960]]

believe that it is necessary to require issuers to provide consumers 
with the ability to opt out of receiving checks that access credit card 
accounts. The Board understands that in many instances, issuers will 
honor consumer requests to opt out of receiving such checks, and the 
Board encourages creditors to continue the practice. In addition, as 
noted above, consumers would be able to assert a billing error claim 
with respect to any unauthorized transactions involving such checks and 
is not liable for unauthorized transactions, as provided for under 
Sec.  226.13.
    Plans in which no physical device is issued. The proposal does not 
address circumstances where a consumer may conduct a transaction on an 
open-end plan that does not have a physical device. The Board had 
solicited comment on such plans because it has received anecdotal 
information about limited cases in which consumers obtained credit by 
providing an account number (for example, to obtain food and services 
at a resort) and where a physical device was not issued to the 
consumer. Industry commenters stated that, in general, they were 
unaware of any plans to provide open-end accounts that did not involve 
the issuance of a card or other physical device. In particular, 
industry commenters noted that creditors will continue to issue 
physical devices because transactions where a card or other physical 
device is present are generally far more secure and less likely to 
involve fraud compared to those in which only the account number, along 
with other information, is used to verify the identity of the user. 
Moreover, industry commenters noted that consumers still need a 
tangible device bearing account information that they can easily carry 
with them. As a result, industry commenters generally believed that 
issuers would be unlikely to abandon the issuance of a physical card or 
device.
    The Board believes that it is not necessary at this time to address 
this issue, but it will continue to monitor developments in the 
marketplace. Of course, to the extent a creditor has issued a device 
that meets the definition of a ``credit card'' for an account, 
transactions on that account are subject to the provisions that apply 
to transactions involving the use of a ``credit card,'' even if the 
particular transaction itself is not conducted using the device (for 
example, in the case of phone or Internet transactions).
    Coupon books. As noted above, the definition of ``credit card'' 
under both TILA and Regulation Z includes a reference to a ``coupon 
book.'' Neither the statute nor the regulation provides any guidance on 
the types of devices that would constitute a ``coupon book'' so as to 
qualify as a ``credit card'' under the definition. Comment 2(a)(15)-1, 
as discussed above, states that checks and similar instruments that can 
be used only once to obtain a single credit extension are not ``credit 
cards,'' and, logically such instruments, even if issued in a separate 
booklet or in conjunction with a periodic statement, also would not be 
considered to be coupon books. Thus, as the Board is not aware of 
devices existing today that would qualify as a coupon book under the 
statute and regulation, the Board is proposing to delete the reference 
to such devices in the definition of ``credit card'' as obsolete. 
Comment is requested as to whether removal of the reference to ``coupon 
book'' in Sec.  226.2(a)(15) would help clarify the definition of 
``credit card'' without inadvertently limiting the availability of 
Regulation Z protections.
    Charge cards. Comment 2(a)(15)-3 discusses charge cards and 
identifies provisions in Regulation Z in which a charge card is 
distinguished from a credit card. As discussed in detail in the 
section-by-section analysis to Sec.  226.7(b)(11) and Sec.  
226.7(b)(12), the new late payment and minimum payment disclosure 
requirements contained in the Bankruptcy Act do not apply to charge 
card issuers. Thus, comment 2(a)(15)-3 is updated to reflect those 
changes.
2(a)(17) Creditor
    For reasons explained in the section-by-section analysis to Sec.  
226.3, the Board is proposing to exempt from TILA coverage credit 
extended under employee-sponsored retirement plans. Comment 
2(a)(17)(i)-8, which provides guidance on whether such a plan is a 
creditor for purposes of TILA, would be deleted. The guidance would no 
longer be necessary because loans granted under such plans would be 
exempt from TILA and, as such, the definition of ``creditor'' would not 
need to be clarified.
    In addition, the substance of footnote 3 would be moved to a new 
Sec.  226.2(a)(17)(v), and references revised, accordingly. The dates 
used to illustrate numerical tests for determining whether a creditor 
``regularly'' extends consumer credit are updated in comments 2(a)(17)-
3 through -6.
2(a)(20) Open-End Credit
    Under TILA Section 103(i), as implemented by Sec.  226.2(a)(20) of 
Regulation Z, ``open-end credit'' is consumer credit extended by a 
creditor under a plan in which (1) the creditor reasonably contemplates 
repeated transactions, (2) the creditor may impose a finance charge 
from time to time on an outstanding unpaid balance, and (3) the amount 
of credit that may be extended to the consumer during the term of the 
plan, up to any limit set by the creditor, generally is made available 
to the extent that any outstanding balance is repaid. Comment 2(a)(20)-
1 reiterates that consumer credit must meet all three of these criteria 
to be open-end credit. Comment 2(a)(20)-5 currently states, with 
respect to replenishment of the credit line, that a creditor need not 
establish a specific credit limit for the line of credit and that the 
line need not always be replenished to its original amount.
    ``Spurious'' open-end credit. The Board has received comments from 
time to time from state attorneys general and consumer groups voicing 
concern that the definition of open-end credit permits creditors to 
treat as open-end plans certain credit transactions that would be more 
properly characterized as closed-end credit. These commenters note that 
as a practical matter, such ``spurious'' open-end credit is unlikely to 
be used for repeated transactions and the credit line does not 
replenish to the extent that the consumer pays down his or her balance. 
Furthermore, these open-end plans may be established primarily to 
finance an infrequently purchased product or service, the credit limits 
for many of the creditor's customers may be close to the cost of that 
product or service, and the creditor may have no reasonable grounds for 
expecting that there will be repeated transactions by many of its 
customers. When open-end disclosures are given for such products, the 
concern voiced by state attorneys general and consumer groups is that 
those disclosures fail to adequately disclose the period of time that 
it will take to repay the balance, the total of the payments that a 
consumer will be required to make (assuming in both cases that the 
consumer makes only the minimum required payments).
    In an effort to address these concerns, in 1997 the Board proposed 
adding two sets of factors to the commentary, one set that creditors 
should consider when determining whether they ``reasonably contemplate 
repeated transactions,'' and another set to provide guidance on whether 
a credit line is ``reusable.'' \6\

[[Page 32961]]

The Board received many comments from industry in response to this 
proposal, most of which criticized the factors on the grounds that they 
would result in excluding from the definition of ``open-end credit'' 
legitimate open-end credit products. In particular, commenters were 
concerned about the status of private label credit cards that offer an 
incentive to the consumer to make a large initial purchase. In response 
to these concerns, the two sets of factors were not adopted in the 
final commentary revisions.
---------------------------------------------------------------------------

    \6\ The factors that were proposed regarding the ``repeated 
transactions'' portion of the definition were: (1) Whether the 
product is something that consumers would most likely not purchase 
in multiples, (2) whether the line of credit is established for the 
purpose of purchasing a designated item, (3) the amount of the 
initial purchase relative to the credit limit, (4) the extent to 
which the creditor reasonably solicits customers to make additional 
purchases, and (5) whether the creditor has information on consumers 
with the credit line showing that they have made repeat purchases. 
The proposed revisions also would have provided that a line of 
credit generally is not self-replenishing if the initial line of 
credit is less than, or not much more than, the amount of the item 
purchased to open the credit line (or the minimum monthly payments 
are so low that the credit line is not reusable for an extended 
period of time). See 62 FR 64,769, December 9, 1997.
---------------------------------------------------------------------------

    As discussed further in the section-by-section analysis to Sec.  
226.16, the Board proposes to address potential ``spurious'' open-end 
credit transactions through improved advertising disclosures. The Board 
believes this to be a more targeted and effective approach than 
revising the definition of open-end credit. One of the major problems 
with ``spurious'' open-end credit highlighted by commenters is that 
creditors advertise a low minimum monthly payment which can mislead 
consumers, who may not be aware of the total amount of payments they 
would be required to make, or the term over which they would be 
obligated to make those payments. As discussed below in the section-by-
section analysis to Sec.  226.16(b), the proposed rule would require a 
creditor that states a minimum monthly payment in an advertisement also 
to state the term that it will take to repay the debt at that minimum 
payment level, as well as the total amount of the payments. The 
proposed rule would require that disclosure of the term and total 
amount of payments be equally prominent to the advertisement of the 
minimum payment. The Board believes that disclosure of the term and 
total of payments in advertisements will help to improve consumer 
understanding about the cost of credit products for which a low monthly 
payment is advertised, addressing one of the major concerns regarding 
``spurious'' open-end credit.
    ``Open-end'' plans comprised of closed-end features. The Board also 
is concerned that, under current guidance in the commentary, some 
credit products are treated as open-end plans, with open-end 
disclosures given to consumers, when such products would more 
appropriately be treated as closed-end transactions. Closed-end 
disclosures are more appropriate than open-end disclosures when the 
credit being extended is individual loans that are individually 
approved and underwritten. The Board is particularly concerned about 
certain credit plans, where each individual credit transaction is 
separately evaluated.
    For example, under certain so-called multifeatured open-end plans, 
creditors may offer loans to be used for the purchase of an automobile. 
These automobile loan transactions are approved and underwritten 
separately from other credit made available on the plan. (In addition, 
the consumer typically has no right to borrow additional amounts on the 
automobile loan ``feature'' as the loan is repaid.) If the consumer 
repays the entire automobile loan, he or she may have no right to take 
further advances on that ``feature,'' and must separately reapply if he 
or she wishes to obtain another automobile loan, or use that aspect of 
the plan for similar purchases. Typically, while the consumer may be 
able to obtain additional advances under the plan as a whole, the 
creditor separately evaluates each request.
    Currently, some creditors may be treating such plans as open-end 
credit, in light of several sections in the current commentary. Current 
comment 2(a)(20)-2 provides that if a program as a whole meets the 
definition of open-end credit, such a program may be considered a 
single multifeatured plan, notwithstanding the fact that certain 
features might be used infrequently. In addition, current comment 
2(a)(20)-3 indicates that, for a multifeatured open-end plan, a 
creditor need not believe a consumer will reuse a particular feature of 
the plan. Also, current comment 2(a)(20)-5 indicates that a creditor 
may verify credit information such as a consumer's continued income and 
employment status or information for security purposes.
    The Board believes that in certain circumstances treating such 
credit as open-end is inappropriate under Regulation Z, and accordingly 
proposes a number of revisions to Sec.  226.2(a)(20) and the 
accompanying commentary. Closed-end disclosures are more appropriate 
than open-end disclosures unless the consumer's credit line generally 
replenishes to the extent that he or she repays outstanding balances so 
that the consumer may continue to borrow and take advances under the 
plan without having to obtain separate approval for each subsequent 
advance. Replenishment of the amount of credit available to a consumer 
in good standing without the need for separate underwriting or approval 
of each advance distinguishes open-end credit from a series of advances 
made pursuant to separate closed-end loan commitments, such as the 
automobile loan described above. For example, if a consumer makes two 
payments of $500 that reduce the outstanding principal balance on the 
line of credit, the consumer generally should be able to obtain an 
additional $1,000 of credit under the open-end plan without having a 
creditor separately underwriting or evaluating whether the consumer can 
borrow the $1,000.
    The Board proposes to revise comment 2(a)(20)-2 to clarify that 
while a consumer's account may contain different sub-accounts, each 
with different minimum payment or other payment options, each sub-
account must meet the self-replenishing criterion. In particular, 
proposed comment 2(a)(20)-2 would provide that repayments of an advance 
for any sub-account must generally replenish a single credit line for 
that sub-account so that the consumer may continue to borrow and take 
advances under the plan to the extent that he or she repays outstanding 
balances without having to obtain separate approval for each subsequent 
advance.
    Due to the concerns noted above regarding closed-end automobile 
loans being characterized as features of so-called open-end plans, the 
Board proposes to delete comment 2(a)(20)-3.ii. While there may be 
circumstances under which it would be more reasonable for a financial 
institution to make advances from an open-end line of credit for the 
purchase of an automobile than for an automobile dealer to sell a car 
under an open-end plan, the Board believes that the current example 
places inappropriate emphasis on the identity of the creditor rather 
than the type of credit being extended by that creditor.
    TILA Section 103(i) provides that a plan can be an open-end credit 
plan even if the creditor verifies credit information from time to 
time. 15 U.S.C. 1602(i). The Board believes this provision is not 
intended to permit a creditor to separately underwrite each advance 
made to a consumer under an open-end plan or account. Such a process 
could result in closed-end credit being deemed open-end credit. The 
Board proposes to clarify in comment 2(a)(20)-5 that in general, a 
credit line is self-replenishing if a consumer can obtain further 
advances or funds without being required to separately

[[Page 32962]]

apply for those additional advances, and without undergoing a separate 
review by the creditor of that consumer's credit information, in order 
to obtain approval for each such additional advance.
    Notwithstanding this proposed change, a creditor could verify 
credit information to ensure that the consumer's creditworthiness has 
not deteriorated (and could revise the consumer's credit limit or 
account terms accordingly). However, to perform such an inquiry for 
each specific credit request would go beyond verification and would 
more closely resemble underwriting of closed-end credit. The Board 
recognizes that a creditor may need to review, and as appropriate, 
decrease the amount of credit available to a consumer from time to time 
to address safety and soundness and other concerns. Such a review would 
not be affected by the proposed changes, as explained in proposed 
comment 2(a)(20)-5.
    These revisions are not intended to impact home-equity lines of 
credit (HELOCs), which may have a fixed draw period (during which time 
a consumer may continue to take advances to the extent that he or she 
repays the outstanding balance) followed by a repayment period where 
the consumer may no longer draw against the line, as closed-end credit. 
The Board seeks comment regarding the proposed rule's impact on HELOCs.
    Comment 2(a)(20)-5.ii. currently notes that a creditor may reduce a 
credit limit or refuse to extend new credit due to changes in the 
economy, the creditor's financial condition, or the consumer's 
creditworthiness. The Board's proposal would delete the reference to 
changes in the economy to simplify this provision.
    The Board also proposes a technical update to comment 2(a)(20)-4 to 
delete a reference to ``china club plans,'' which may no longer be very 
common. No substantive change is intended.
2(a)(24) Residential Mortgage Transaction
    Comment 2(a)(24)-1, which identifies key provisions affected by the 
term ``residential mortgage transaction,'' is revised to include a 
reference to Sec.  226.32, correcting an inadvertent omission.

Section 226.3 Exempt Transactions

    Section 226.3 implements TILA Section 104 and provides exemptions 
for certain classes of transactions specified in the statute. 15 U.S.C. 
1603.
    The Board proposes a number of substantive and technical revisions 
to Sec.  226.3 as described below. The substance of footnote 4 is moved 
to the commentary. See comment 3-1.
3(a) Business, Commercial, Agricultural, or Organizational Credit
    Section 226.3(a) provides, in part, that the regulation does not 
apply to extensions of credit primarily for business, commercial or 
agricultural purposes. The Board received no comments regarding this 
exemption in regard to the December 2004 ANPR. Questions have arisen 
from time to time, however, regarding whether transactions made for 
business purposes on a consumer purpose credit card are exempt from 
TILA. The Board seeks to provide clarification regarding this question. 
The determination as to whether a credit card account is primarily for 
consumer purposes or business purposes is best made when the account is 
opened, rather than on a transaction-by-transaction basis, and thus the 
Board is proposing to add a new comment 3(a)-2 to clarify that 
transactions made for business purposes on a consumer-purpose credit 
card are covered by TILA (and, conversely, that purchases made for 
consumer purposes on a business-purpose credit card are exempt from 
TILA). Other sections of the commentary regarding Sec.  226.3(a) would 
be renumbered accordingly. A new comment 3(a)-7 would provide guidance 
on card renewals, consistent with proposed comment 3(a)-2.
3(b) Credit Over $25,000 Not Secured by Real Property or a Dwelling
    Section 226.3(b) exempts from Regulation Z extensions of credit not 
secured by real property or a dwelling, in which the amount financed 
exceeds $25,000 or in which there is an express written commitment to 
extend credit in excess of $25,000. The $25,000 threshold in Sec.  
226.3(b) is the same as the statutory threshold set in TILA Section 
104(3). 15 U.S.C. 1603(3).
    In the December 2004 ANPR, the Board solicited comment as to 
whether the rules implementing TILA Section 104 needed to be updated. 
Q58. The Board received several comments regarding the $25,000 
threshold. One consumer group noted that the $25,000 figure is outdated 
due to inflation and should be increased. One bank noted that the 
threshold remains appropriate for unsecured credit but suggested that 
the Board might consider at a later stage of the Regulation Z review 
whether the $25,000 figure should be raised for secured credit, such as 
automobile loans. The Board agrees that the Sec.  226.3(b) threshold 
would be more appropriately considered in connection with its planned 
review of the closed-end credit provisions of Regulation Z and is not 
proposing to take any action at the present time. In delaying 
consideration of the $25,000 threshold to the closed-end Regulation Z 
review, the Board expresses no view on whether the $25,000 threshold is 
appropriate for open-end (not home-secured) credit. Rather, the Board 
proposes to review the threshold for all credit covered by TILA at the 
same time.
3(c) Public Utility Credit
    Section 226.3(c) exempts from Regulation Z extensions of credit 
involving public utility services provided through pipe, wire, other 
connected facilities, or radio or similar transmission, if the charges 
for service, delayed payment, or any discounts for prompt payment are 
filed with or regulated by any government unit. 15 U.S.C. 1603(4).
    The Board received no comments on the December 2004 ANPR regarding 
the applicability and scope of Sec.  226.3(c). However, the Board has 
received inquiries from time to time regarding the applicability of 
Regulation Z to service plans for cellular telephones. In addition, in 
light of the deregulation in recent years by some states of utilities 
such as gas and electric services, the Board believes that it may be 
appropriate to reconsider the scope of the public utility credit 
exemption more generally. The Board also notes that due to 
technological advances, there may be additional types of services, such 
as certain Internet services, for which exemption from Regulation Z may 
be appropriate. The Board is not proposing to take any action at the 
present time, however, because these issues would be better considered 
in the context of the Board's upcoming rulemaking regarding the closed-
end credit provisions of Regulation Z.
3(g) Employer-Sponsored Retirement Plans
    The Board has received questions from time to time regarding the 
applicability of TILA to loans taken against employer-sponsored 
retirement plans. Pursuant to TILA Section 104(5), the Board has the 
authority to exempt transactions for which it determines that coverage 
is not necessary in order to carry out the purposes of TILA. 15 U.S.C. 
1603(5). The Board also has the authority pursuant to TILA Section 
105(a) to provide adjustments and exceptions for any class of 
transactions, as in the judgment of the Board are necessary or proper 
to effectuate the purposes of TILA. 15 U.S.C. 1604(a). The Board 
proposes to add to the regulation a new Sec.  226.3(g), which

[[Page 32963]]

would exempt loans taken by employees against their employer-sponsored 
retirement plans qualified under Section 401(a) of the Internal Revenue 
Code and tax-sheltered annuities under Section 403(b) of the Internal 
Revenue Code, provided that the extension of credit is comprised of 
fully-vested funds from such participant's account and is made in 
compliance with the Internal Revenue Code. 26 U.S.C. 1 et seq.; 26 
U.S.C. 401(a); 26 U.S.C. 403(b).
    The Board believes that an exemption for loans taken against funds 
invested in such types of employer-sponsored retirement plans is 
appropriate for the following reasons. The consumer's interest and 
principal payments on such a loan are reinvested in the consumer's own 
account, and there is no third-party creditor imposing finance charges 
on the consumer. Also, TILA disclosures would be of very limited, if 
any, value. The costs of a loan taken against assets invested in a 
401(k) plan, for example, are not comparable to the costs of a third 
party loan product, because a consumer pays the interest on a 401(k) 
loan to himself or herself rather than to a third party. Moreover, plan 
administration fees must be disclosed under Department of Labor 
regulations. See 29 CFR 2520.1023(1).
Family Trusts
    The Board also has from time to time received inquiries regarding 
TILA coverage of family trusts created for estate planning purposes. 
Because most of these questions pertain to real-estate secured loans, 
the applicability of the exemptions in Sec.  226.3 to these types of 
estate planning arrangements would be better considered in the context 
of the Board's upcoming closed-end Regulation Z review.

Section 226.4 Finance Charge

    Various provisions of TILA and Regulation Z specify how and when 
the cost of consumer credit as a dollar amount, the ``finance charge,'' 
is to be disclosed. The rules for determining which charges make up the 
finance charge are set forth in TILA Section 106 and Regulation Z Sec.  
226.4. 15 U.S.C. 1605. Some rules apply only to open-end credit and 
others apply only to closed-end credit, while some apply to both. With 
limited exceptions discussed below, the Board is not proposing to 
change Sec.  226.4 for either closed-end credit or open-end credit.
    The Board is aware of longstanding criticisms that the definition 
of the ``finance charge'' in Sec.  226.4, as interpreted in the 
regulation and the related commentary, is too narrow, too broad, or too 
vague. In a 1998 report to Congress, the Board discussed these 
concerns, and proposed solutions, in the context of closed-end mortgage 
loans.\7\ In this proposal, the Board addresses concerns about the 
definition of the ``finance charge'' in the context of open-end (not 
home-secured) plans through changes to Sec.  226.5, Sec.  226.6, and 
Sec.  226.7 to simplify disclosure of charges on such plans. The Board 
is not proposing to address these concerns through changes to Sec.  
226.4, with limited exceptions. The Board proposes to revise Sec.  
226.4 and related commentary to address (1) transaction charges imposed 
by credit card issuers, such as charges for obtaining cash advances 
from ATMs and for making purchases in foreign currencies, and (2) 
charges for credit insurance, debt cancellation coverage, and debt 
suspension coverage.
---------------------------------------------------------------------------

    \7\ Board of Governors of the Federal Reserve System and 
Department of Housing and Urban Development, Joint Report to the 
Congress Concerning Reform to the Truth in Lending Act and the Real 
Estate Settlement Procedures Act, July 1998.
---------------------------------------------------------------------------

4(a) Definition
    Under the definition of ``finance charge'' in TILA Section 106 and 
Regulation Z Sec.  226.4(a), a charge specific to a credit transaction 
is ordinarily a finance charge. 15 U.S.C. 1605. See also Sec.  
226.4(b)(2). However, also under Section 106 and Sec.  226.4(a), the 
finance charge does not include any charge of a type payable in a 
``comparable cash transaction.'' Under the staff commentary to Sec.  
226.4(a), in determining whether a charge associated with a credit 
transaction is a finance charge, the creditor should compare the credit 
transaction in question with a ``similar'' cash transaction, if one 
exists. See comment 4(a)-1. The commentary states a general principle 
for applying this rule in the case of credit that finances the sale of 
property or services: the creditor should compare charges with those 
that would be payable if the services or property were purchased using 
cash rather than a loan. Thus, for example, if an escrow agent charges 
the same fee regardless of whether real estate is bought in cash or 
with a mortgage loan, then the agent's fee is not a finance charge.
    In other cases, however, particularly in cases involving credit 
cards, determining which, if any, transaction is a ``similar'' or 
``comparable'' cash transaction for purposes of Sec.  226.4(a) can be 
difficult. For example, when consumers became able to take cash 
advances on credit card accounts using ATMs, a question arose as to 
whether a fee charged by a card issuer for the transaction was a 
finance charge if the issuer charged the same fee for using a debit 
card to withdraw cash from an asset account. The Board solicited 
comment on this question in 1983 and adopted staff comment 4(a)-4 in 
1984. 48 FR 54,642; December 6, 1983 and 49 FR 40,560; October 17, 
1984. That comment indicates that the fee is not a finance charge to 
the extent that it does not exceed the charge imposed by the card 
issuer on its cardholders for using the ATM to withdraw cash from a 
consumer asset account, such as a checking or savings account. Another 
comment indicates that the fee is an ``other charge.'' See current 
comment 6(b)-1(vi). Accordingly, the fee must be disclosed at account 
opening and on the periodic statement, but it is not labeled as a 
``finance charge'' nor included in the effective APR.
    Since comment 4(a)-4 was adopted, questions have been raised about 
its scope and application. For example, the comment does not address 
whether it applies when an affiliate of the card issuer, but not the 
card issuer itself, issues a debit card. Even in the seemingly simple 
case where the credit card issuer itself issues a debit card, a variety 
of complexities arise. The issuer may assess an ATM fee for one kind of 
deposit account (for example, an account with a low minimum balance) 
but not for another. The comment does not indicate which account is the 
proper basis for comparison.
    Questions have also been raised about whether disclosure of the 
charge pursuant to comments 4(a)-4 and 6(b)-1.iv. is meaningful to 
consumers. Under the comment, the disclosure a consumer receives after 
incurring a fee for taking a cash advance through an ATM depends on the 
structure of the institution that issued the credit card. If the credit 
card issuer does not provide asset accounts and is not affiliated with 
an institution that does, then it must disclose the charge as a finance 
charge. If the credit card issuer provides asset accounts and offers 
debit cards on those accounts, then, depending on the circumstances, 
the issuer must not disclose the charge as a finance charge. It is not 
clear that the distinction is meaningful to consumers.
    Recently, a question has arisen about the proper disclosure of 
another kind of transaction fee imposed on credit cards. The question 
is whether fees that credit cardholders are assessed for making 
purchases in a foreign currency or outside the United States--for 
example, when the cardholder travels abroad-- are finance charges. The 
question has arisen in litigation between consumers

[[Page 32964]]

and major card issuers.\8\ Some card issuers have argued by analogy to 
comment 4(a)-4 that a foreign transaction fee is not a finance charge 
if the fee does not exceed the issuer's fee for using a debit card for 
the same purchase. Some card issuers disclose the foreign transaction 
fee as a finance charge and include it in the effective APR, but others 
do not.
---------------------------------------------------------------------------

    \8\ See Third Consolidated Amended Class Action Complaint at 47-
48, In re Currency Conversion Fee Antitrust Litigation, MDL Docket 
No. 1409 (S.D.N.Y.). The court approved a settlement on a 
preliminary basis on November 8, 2006.
---------------------------------------------------------------------------

    The uncertainty about proper disclosure of charges for foreign 
transactions and for cash advances from ATMs reflects the inherent 
complexity of seeking to distinguish transactions that are ``comparable 
cash transactions'' to credit card transactions from transactions that 
are not. The Board believes that clearer guidance may result from a new 
and simpler approach that treats as a finance charge any fee charged by 
credit card issuers for transactions on their credit card plans. This 
guidance may be helpful to creditors in determining which charges must 
be included in the computation of the effective APR, if the Board 
retains the effective APR. See section-by-section analysis to Sec.  
226.7(b)(7). Such an approach would also provide more meaningful 
disclosures to consumers by assuring a consistent approach to the 
disclosure of transaction fees.
    The current approach of providing guidance on a case-by-case (fee-
by-fee) basis, such as for ATM fees, has not provided sufficient 
certainty for many creditors about how to disclose transaction charges 
on credit cards. Moreover, to the extent creditors have adopted 
different disclosure practices in the face of regulatory uncertainty, 
consumers may have had difficulty understanding the disclosures, since, 
for example, one creditor might disclose an ATM fee as a finance charge 
while another creditor may disclose the fee as an ``other'' charge. 
Thus, while the Board could adopt guidance specific to fees as they 
arise, such as the Board did in 1984 for the ATM fee and could do for 
the foreign transaction fee, it is not clear that fee-by-fee guidance 
is sufficient to both facilitate compliance by credit card issuers and 
promote understanding by consumers.
    It is also not clear that an attempt to adopt general rules for 
distinguishing comparable transactions from non-comparable 
transactions, in the case of credit cards, would adequately facilitate 
compliance by credit card issuers and promote understanding by 
cardholders. One major difficulty in formulating such rules would be 
deciding whether to adopt the perspective of the card issuer or that of 
the cardholder. For example, a transaction on an asset account with a 
card issuer may be comparable to a credit card transaction from the 
perspective of the card issuer, but not from the perspective of a 
cardholder who does not have an asset account with the issuer. A rule 
based on the issuer's perspective may confuse consumers; it may not be 
reasonable to expect a consumer to understand that one transaction fee 
is a finance charge and the other is not because one card issuer issues 
a debit card and the other does not. Yet a rule based on the 
cardholder's perspective may not be practicable for the issuer to 
implement; the issuer may not be able to determine whether a particular 
consumer has an asset account with another institution and, if so, the 
amount of the fee charged on the account. As explained above in the 
context of the fee for cash advances from ATMs, even when a rule is 
based on the card issuer's perspective, the card issuer may have 
difficulty determining which asset account, precisely, is the relevant 
basis for comparison. The difficulty of determining which perspective 
to adopt increases in a case such as a fee for a purchase conducted in 
a foreign currency. From the perspective of the consumer, the debit 
card is not the only alternative to the credit card; the consumer may 
also pay in cash.
    Thus, having considered alternative approaches, the Board is 
proposing to adopt a simple interpretive rule that any transaction fee 
on a credit card plan is a finance charge, regardless of whether the 
issuer in its capacity as a depository institution imposes the same or 
lesser charge on withdrawals of funds from an asset account such as a 
checking or savings account. This proposal would be implemented by 
removing staff comment 4(a)-4 and replacing it with a new comment of 
the same number reflecting this rule. The comment would give as 
examples of such finance charges a fee imposed by the issuer for 
foreign transactions and a fee imposed by the issuer for taking a cash 
advance at an ATM.\9\ Such guidance would be consistent with TILA 
Section 106, 15 U.S.C. 1605, which gives the Board discretion to 
determine whether a given credit transaction has a comparable cash 
transaction within the meaning of the statute. This guidance would also 
facilitate compliance and promote consumer understanding. See TILA 
Section 105(a), 15 U.S.C. 1604(a).
---------------------------------------------------------------------------

    \9\ The proposed change to comment 4(a)-4 would not affect 
disclosure of ATM fees assessed by institutions other than the 
credit card issuer. See proposed Sec.  226.6(b)(1)(ii)(A).
---------------------------------------------------------------------------

    The Board seeks comment on whether this new approach would 
facilitate compliance and improve consumer understanding without 
causing unintended consequences.
    Comment 4(a)-1 provides examples of charges in comparable cash 
transactions that are not finance charges. Among the examples are 
discounts available to a particular group of consumers because they 
meet certain criteria, such as being members of an organization or 
having accounts at a particular institution. The Board solicits comment 
on whether the example is still useful, or should be deleted as 
unnecessary or obsolete.
4(b) Examples of Finance Charges
    Charges for credit insurance or debt cancellation or suspension 
coverage. Premiums or other charges for credit life, accident, health, 
or loss-of-income insurance are finance charges if the insurance or 
coverage is ``written in connection with'' a credit transaction. 15 
U.S.C. 1605(b); Sec.  226.4(b)(7). Creditors may exclude from the 
finance charge premiums for credit insurance if they disclose the cost 
of the insurance and the fact that the insurance is not required to 
obtain credit. In addition, the statute requires creditors to obtain an 
affirmative written indication of the consumer's desire to obtain the 
insurance, which, as implemented in Sec.  226.4(d)(1)(iii), requires 
creditors to obtain the consumer's initials or signature. 15 U.S.C. 
1605(b). In 1996, the Board expanded the scope of the rule to include 
plans involving charges or premiums for debt cancellation coverage. See 
Sec.  226.4(b)(10), Sec.  226.4(d)(3). See also 61 FR 49,237; September 
19, 1996. Currently, however, insurance or coverage sold after 
consummation of a closed-end credit transaction or after the opening of 
an open-end plan and upon a consumer's request is considered not to be 
``written in connection with the credit transaction,'' and, therefore, 
a charge for such insurance or coverage is not a finance charge. See 
comment 4(b)(7) and (8)-2.
    The Board is proposing a number of revisions to these rules:
    (1) The same rules that apply to debt cancellation coverage would 
be applied explicitly to debt suspension coverage. However, to exclude 
the cost of debt suspension coverage from the finance charge, creditors 
would be required to inform consumers, as applicable, that the 
obligation to pay loan principal and interest is only suspended, and 
that interest will continue to accrue during the period of suspension. 
These

[[Page 32965]]

proposed revisions would apply to all open-end plans and closed-end 
credit transactions.
    (2) Creditors could exclude from the finance charge the cost of 
debt cancellation and suspension coverage for events beyond those 
permitted today, namely, life, accident, health, or loss-of-income. 
This proposed revision would also apply to all open-end plans and 
closed-end credit transactions.
    (3) The meaning of insurance or coverage ``written in connection 
with'' an open-end plan would be expanded to cover sales made 
throughout the life of an open-end (not home-secured) plans. Under the 
proposal, for example, consumers solicited for the purchase of optional 
insurance or debt cancellation or suspension coverage for existing 
credit card accounts would receive disclosures about the cost and 
optional nature of the product at the time of the consumer's request to 
purchase the insurance or coverage. Home-equity lines of credit 
(HELOCs) subject to Sec.  226.5b and closed-end transactions would not 
be affected by this proposed revision.
    (4) For telephone sales, creditors offering open-end (not home-
secured) plans would be provided with flexibility in evidencing 
consumers' requests for optional insurance or debt cancellation or 
suspension coverage, consistent with rules published by federal banking 
agencies to implement Section 305 of the Gramm-Leach-Bliley Act 
regarding the sale of insurance products by depository institutions and 
guidance published by the Office of the Comptroller of the Currency 
(OCC) regarding the sale of debt cancellation and suspension products. 
See 12 CFR part 208.81 et seq. regarding insurance sales; 12 CFR part 
37 regarding debt cancellation and debt suspension products. For 
telephone sales, creditors could provide disclosures orally, and 
consumers could request the insurance or coverage orally, if the 
creditor maintains evidence of compliance with the requirements, and 
mails written information within 3 days after the sale. HELOCs subject 
to Sec.  226.5b and closed-end transactions would not be affected by 
this proposed revision.
    All of these products serve similar functions but some are 
considered insurance under state law and others are not. Taken 
together, the proposed revisions would provide consistency in how 
creditors deliver, and consumers receive, information about the cost 
and optional nature of similar products.
4(b)(7) and (8) Insurance Written in Connection With Credit Transaction
    Premiums or other charges for insurance for credit life, accident, 
health, or loss-of-income, loss of or damage to property or against 
liability arising out of the ownership or use of property are finance 
charges if the insurance or coverage is written in connection with a 
credit transaction. 15 U.S.C. 1605(b) and (c); Sec.  226.4(b)(7) and 
(8). Comment 4(b)(7) and (8)-2 provides that insurance is not written 
in connection with a credit transaction if the insurance is sold after 
consummation on a closed-end transaction or after an open-end plan is 
opened and the consumer requests the insurance. The Board believes this 
approach remains sound for closed-end transactions, which typically 
consist of a single transaction with a single advance of funds. 
Consumers with open-end plans, however, retain the ability to obtain 
advances of funds long after account opening, so long as they pay down 
the principal balance. That is, a consumer can engage in credit 
transactions throughout the life of a plan.
    Accordingly, under proposed revisions to comment 4(b)(7) and (8)-2, 
insurance purchased after an open-end (not home-secured) plan was 
opened would be considered to be written ``in connection with a credit 
transaction.'' Proposed new comment 4(b)(10)-2 would give the same 
treatment to purchases of debt cancellation or suspension coverage. As 
proposed, therefore, purchases of voluntary insurance or coverage after 
account opening would trigger disclosure and consent requirements. For 
purchases by telephone, creditors would be permitted to provide 
disclosures and obtain consent orally, so long as they meet 
requirements intended to ensure the purchase is voluntary. See proposed 
Sec.  226.4(d)(4).
4(b)(9) Discounts
    Comment 4(b)(9)-2, which addresses cash discounts to induce 
consumers to use cash or other payment means instead of credit cards or 
open-end plans is revised for clarity. No substantive change is 
intended.
4(b)(10) Debt Cancellation and Debt Suspension Fees
    As discussed above, premiums or other charges for credit life, 
accident, health, or loss-of-income insurance are finance charges if 
the insurance or coverage is written in connection with a credit 
transaction. In 1996, the Board amended Sec.  226.4 to make clear that 
the term ``finance charge'' includes charges or premiums paid for debt 
cancellation coverage. See Sec.  226.4(b)(10). Although debt 
cancellation fees meet the definition of ``finance charge,'' they may 
be excluded from the finance charge on the same conditions as credit 
insurance premiums. See Sec.  226.4(d)(3).
    Recent years have seen two developments in the market for coverage 
of this type. First, creditors have been selling a related, but 
different, product called debt suspension. Debt suspension is 
essentially the creditor's agreement to suspend, on the occurrence of a 
specified event, the consumer's obligation to make the minimum 
payment(s) that would otherwise be due. During the suspension period, 
interest may continue to accrue or it may be suspended as well, 
depending on the plan. The borrower may be prohibited from using the 
credit plan during the suspension period. In a second development, 
creditors have been selling debt suspension coverage for events other 
than loss of life, health, or income, such as a wedding, a divorce, the 
birth of child, a medical emergency, and military deployment.
    The Board is proposing to revise Sec.  226.4(b)(10) to make it 
explicit that charges for debt suspension coverage are finance charges. 
In the proposed commentary, debt suspension coverage would be defined 
as coverage that suspends the consumer's obligation to make one or more 
payments on the date(s) otherwise required by the credit agreement, 
when a specified event occurs. The commentary would clarify that the 
term debt suspension coverage as used in Sec.  226.4(b)(10) does not 
include ``skip payment'' arrangements in which the triggering event is 
the borrower's unilateral election to defer repayment, or the bank's 
unilateral decision to allow a deferral of payment. (A skip payment 
fee, although a finance charge, would not be factored into the 
effective APR under the proposal. See proposed Sec.  226.14(e).) These 
revisions would apply to closed-end as well as open-end credit 
transactions. It appears appropriate to consider charges for debt 
suspension products to be finance charges, because these products 
operate in a similar manner to debt cancellation, and re-allocate the 
risk of non-payment between the borrower and the creditor. The 
conditions under which debt cancellation and debt suspension charges 
may be excluded from the finance charge are discussed under Sec.  
226.4(d)(3), below.

[[Page 32966]]

4(c) Charges Excluded From the Finance Charge
4(c)(1)
    Section 226.4(c)(1) excludes from the finance charge application 
fees charged to all applicants for credit, whether or not credit is 
actually extended. Application fees are charged for both closed-end and 
open-end credit transactions, and represent an additional cost to 
consumers who obtain credit. Because application fees are more 
prevalent for home-secured credit, the Board will consider whether to 
revise Sec.  226.4(c)(1) in its upcoming review of rules for home-
secured credit.
    As discussed below in the section-by-section analysis to Sec.  
226.6, the Board proposes to require for open-end (not home-secured) 
plans, the disclosure of charges imposed as part of the plan, which 
include fees that must be paid to receive access to the plan, without 
regard to whether the fees are or are not finance charges. Application 
fees charged to all applicants for credit, whether or not credit is 
actually extended, would be considered charges imposed as part of the 
plan, and would be included in the account-summary table given at 
account opening. See proposed Sec.  226.6(b)(1)(i). This would provide 
useful information to consumers about the total cost of obtaining 
credit. The fee, if financed, would also be included among the fees 
required to be grouped on periodic statements. See proposed Sec.  
226.7(b)(6).
4(d) Insurance and Debt Cancellation Coverage
4(d)(3) Voluntary Debt Cancellation or Debt Suspension Fees
    As explained under Sec.  226.4(b)(10), debt cancellation fees and, 
as clarified in this proposal, debt suspension fees meet the definition 
of ``finance charge.'' Under current Sec.  226.4(d)(3), debt 
cancellation fees may be excluded from the finance charge on the same 
conditions as credit insurance premiums. These conditions are: The 
coverage is not required and this fact is disclosed in writing, and the 
consumer affirmatively indicates in writing a desire to obtain the 
coverage after written disclosure to the consumer of the cost. Debt 
cancellation coverage that may be excluded from the finance charge is 
limited to coverage that provides for cancellation of all or part of a 
debtor's liability (1) in case of accident or loss of life, health, or 
income; or (2) for amounts exceeding the value of collateral securing 
the debt (commonly referred to as ``gap'' coverage, frequently sold in 
connection with motor vehicle loans). See current Sec.  
226.4(d)(3)(ii).
    To address the development of debt cancellation and debt suspension 
coverage discussed earlier, the OCC adopted, for national banks, 
substantive limitations and procedures for disclosure and affirmative 
election on the sale of such coverage. See 12 CFR part 37. Some states 
have also adopted regulations that address these products, or 
incorporate the OCC regulations under parity laws.
    The Board solicited comment in 2003 on whether and how to address 
disclosure of these kinds of coverage under TILA. 68 FR 68,793; 
December 10, 2003. About 30 commenters responded, the vast majority of 
them creditors or vendors. Several creditors and vendors urged the 
Board to expressly permit creditors to exclude from the finance charge 
fees for products that cover any event to which a creditor and borrower 
agree, not just the events listed in the regulation, and fees for 
agreements that suspend, rather than cancel, debt repayment. Some 
commenters disagreed. A major consumer group urged the Board to include 
even voluntary credit insurance premiums and debt cancellation fees in 
the finance charge. The Board deferred a decision on these issues until 
this review.
    The December 2004 ANPR did not specifically seek comment again on 
these issues. Nonetheless, a coalition of companies that issue or 
administer debt cancellation and debt suspension agreements submitted 
two comments in response to the December 2004 ANPR reiterating the 2003 
request by industry commenters that the Board modify Sec.  226.4(d)(3) 
to cover any triggering event and explicitly recognize that debt 
suspension agreements are also covered by that provision. These 
companies also requested that the Board revise Sec.  226.4(d)(3) to 
provide that the disclosures and consumer affirmative request required 
as conditions to excluding the fee from the finance charge may be 
provided orally.
    Debt cancellation coverage and debt suspension coverage are 
fundamentally similar to the extent they offer a consumer the ability 
to pay in advance for the right to reduce the consumer's obligations 
under the plan on the occurrence of specified events that could impair 
the consumer's ability to satisfy those obligations. The two types of 
coverage are, however, different in a key respect. One cancels debt, at 
least up to a certain agreed limit, while the other merely suspends the 
payment obligation while the debt remains constant or increases, 
depending on coverage terms.
    The Board proposes to revise Sec.  226.4(d)(3) to expressly permit 
creditors to exclude charges for voluntary debt suspension coverage 
from the finance charge when, after receiving certain disclosures, the 
consumer affirmatively requests such a product. The Board also proposes 
to add a disclosure, to be provided as applicable, that the obligation 
to pay loan principal and interest is only suspended, and that interest 
will continue to accrue during the period of suspension. These 
revisions would apply to closed-end as well as open-end credit 
transactions. Model Clauses and Samples are proposed at Appendix G-
16(A) and G-16(B) and H-17(A) and H-17(B).
    The same industry coalition has also requested that charges for 
debt cancellation or debt suspension coverage be excludable from the 
finance charge when the coverage applies to events other than the 
events covered by the product lines identified in current Sec.  
226.4(d)(3)(ii), namely, accident or loss of life, health, or income. 
The identification of those events in Sec.  226.4(d)(3)(ii) is based on 
TILA Section 106(b), which addresses credit insurance for accident or 
loss of life or health. 15 U.S.C. 1605(b). That statutory provision 
reflects the regulation of credit insurance by the states, which may 
limit the types of insurance that insurers may sell. Many states, 
however, do not restrict debt cancellation or debt suspension coverage 
to a select few events, and regulations of the OCC expressly permit 
national banks to sell debt cancellation and debt suspension coverage 
for any event.
    The Board proposes to continue to limit the exclusion permitted by 
Sec.  226.4(d)(3) to charges for coverage for accident or loss of life, 
health, or income. The Board also proposes, however, to add comment 
4(d)(3)-3 to clarify that, if debt cancellation or debt suspension 
coverage for two or more events is sold at a single charge, the entire 
charge may be excluded from the finance charge if at least one of the 
events is accident or loss of life, health, or income. This approach 
would recognize that debt cancellation and suspension coverage often 
are not limited by applicable law to the events allowed for insurance 
and it also would be consistent with the purpose of Section 106(b). 15 
U.S.C. 1605(b).
    The regulation provides guidance on how to disclose the cost of 
debt cancellation coverage. See proposed Sec.  226.4(d)(3)(ii). The 
Board seeks comment on whether additional

[[Page 32967]]

guidance is needed for debt suspension coverage, particularly for 
closed-end loans.
    For the reasons discussed below, Sec.  226.4(d)(4) would be added 
to provide flexibility in telephone sales to obtain consumers' requests 
for voluntary debt cancellation and debt suspension coverage on open-
end (not home-secured) plans.
    In a technical revision, the substance of footnotes 5 and 6 would 
be moved to the text.
4(d)(4) Telephone Purchases
    As discussed above, TILA Section 106(b), 15 U.S.C. 1605(b), permits 
creditors to exclude from the finance charge premiums for credit 
insurance if, among other conditions, the creditor obtains a specific 
written indication of the consumer's desire to obtain the insurance. 
This requirement is implemented in Sec.  226.4(d)(1) by requiring 
written initials or a signature. The Board expanded in 1996 the types 
of products covered by the exclusion to include debt cancellation 
agreements, and now proposes to extend the exclusion to debt suspension 
products. As mentioned, an industry coalition has requested that the 
Board permit the disclosures and affirmative consumer request, which 
are conditions to this exclusion, to be provided orally.
    Congress has recognized the practice of telephone sales for the 
purchase of insurance products. 12 U.S.C. 1831x(c)(1)(E). Similarly, 
the OCC has issued telephone sales guidelines for national banks that 
sell debt cancellation and debt suspension coverage. 12 CFR parts 
37.6(c)(3), 37.7(b). Accordingly, the Board is proposing an exception 
to the requirement to obtain a written signature or initials for 
telephone purchases of credit insurance or debt cancellation and debt 
suspension coverage on an open-end (not home-secured) plan. Under new 
Sec.  226.4(d)(4), for telephone purchases the creditor may make the 
disclosures orally and the consumer may affirmatively request the 
insurance or coverage orally, provided that the creditor (1) maintains 
reasonable procedures to provide the consumer with the oral disclosures 
and maintains evidence that demonstrates the consumer then 
affirmatively elected to purchase the insurance or coverage; and (2) 
mails the disclosures under Sec.  226.4(d)(1) or Sec.  226.4(d)(3) 
within three business days after the telephone purchase. Comment 
4(d)(4)-1 would provide that a creditor does not satisfy the 
requirement to obtain an affirmative request if the creditor uses a 
script with leading questions or negative consent.
    Requiring a consumer's written signature or initials is intended to 
evidence that the consumer is purchasing the product voluntarily; the 
proposal contains safeguards intended to insure that oral purchases are 
voluntary. Under the proposal, creditors must maintain tapes or other 
evidence that the consumer received required disclosures orally and 
affirmatively requested the product. Comment 4(d)(4)-1 indicates that a 
creditor does not satisfy the requirement to obtain an affirmative 
request if the creditor uses a script with leading questions or 
negative consent. In addition to oral disclosures, under the proposal 
consumers will receive written disclosures shortly after the 
transaction. The fee will also appear on the first monthly periodic 
statement after the purchase, and, as applicable, thereafter. Consumer 
testing conducted for the Board suggests that consumers review the 
transactions on their statements carefully. Moreover, the Board 
proposes to better highlight fees, including insurance and coverage 
fees, on statements. Consumers who are billed for insurance or coverage 
they did not purchase may dispute the charge as a billing error. These 
safeguards are expected to ensure that purchases of credit insurance or 
debt cancellation or suspension coverage by telephone are voluntary.
    The Board proposes this approach pursuant to its exception and 
exemption authorities under TILA Section 105. Section 105(a) authorizes 
the Board to make exceptions to TILA to effectuate the statute's 
purposes, which include facilitating consumers' ability to compare 
credit terms and helping consumers avoid the uniformed use of credit. 
15 U.S.C. 1601(a), 1604(a). Section 105(f) authorizes the Board to 
exempt any class of transactions (with an exception not relevant here) 
from coverage under any part of TILA if the Board determines that 
coverage under that part does not provide a meaningful benefit to 
consumers in the form of useful information or protection. 15 U.S.C. 
1604(f)(1). Section 105(f) directs the Board to make this determination 
in light of specific factors. 15 U.S.C. 1604(f)(2). These factors are 
(1) the amount of the loan and whether the disclosure provides a 
benefit to consumers who are parties to the transaction involving a 
loan of such amount; (2) the extent to which the requirement 
complicates, hinders, or makes more expensive the credit process; (3) 
the status of the borrower, including any related financial 
arrangements of the borrower, the financial sophistication of the 
borrower relative to the type of transaction, and the importance to the 
borrower of the credit, related supporting property, and coverage under 
TILA; (4) whether the loan is secured by the principal residence of the 
borrower; and (5) whether the exemption would undermine the goal of 
consumer protection.
    The Board has considered each of these factors carefully, and based 
on that review, believes it is appropriate to exempt, for open-end (not 
home-secured) plans, telephone sales of credit insurance or debt 
cancellation or debt suspension plans from the requirement to obtain a 
written signature or initials from the consumer. As noted above, the 
consumer would continue to be protected by a variety of safeguards to 
assure that the purchase is voluntary, including a requirement that the 
creditor maintain tapes or other evidence of the transaction, the 
receipt of written disclosures shortly after the transaction, and 
inclusion of fees on periodic statements, for which consumers may 
dispute billing errors. At the same time, the proposal should 
facilitate the convenience to both consumers and creditors of 
conducting transactions by telephone. The proposal, therefore, has the 
potential to better inform consumers and further the goals of consumer 
protection and the informed use of credit for open-end (not home-
secured) credit. The Board welcomes comment on this matter.

Section 226.5 General Disclosure Requirements

    Section 226.5 contains format and timing requirements for open-end 
credit disclosures. Under the current rules, a creditor must disclose a 
charge that is a ``finance charge'' or ``other charge'' before the 
account is opened, before the charge is added to the plan after account 
opening and before the charge is increased. These disclosures must be 
in writing. As discussed below, the proposal seeks to reform the rules 
governing disclosure of charges before they are imposed. Under the 
proposal: (1) All charges imposed as part of the plan would be 
disclosed before they are imposed; (2) specified charges would continue 
to be disclosed in writing at account opening, and before being 
increased or newly introduced; and (3) other charges imposed as part of 
the plan could be disclosed orally at any relevant time before the 
consumer becomes obligated to pay the charge. The proposed reform is 
intended to assure that all charges imposed as part of the plan are 
disclosed before they are imposed, simplify the rules for identifying 
such charges, and better

[[Page 32968]]

match the timing and method of disclosure with reasonable industry 
practices and consumer expectations. The proposal responds to comments 
received on the December 2004 ANPR that criticize current rules (1) as 
unduly vague and inconsistent in identifying charges covered by TILA, 
and (2) as failing to recognize that some transactions on the plan 
between the consumer and the creditor are appropriately, or even 
necessarily, conducted by telephone.
5(a) Form of Disclosures
    The Board is proposing substantive changes to Sec.  226.5(a) and 
the associated commentary regarding the standard to provide ``clear and 
conspicuous'' disclosures. In addition, creditors would be required to 
use consistent terminology in all open-end TILA-required disclosures. 
In technical revisions, the Board proposes to rearrange certain 
provisions in Sec.  226.5(a) for clarity.
5(a)(1) General
    Clear and conspicuous standard. TILA Section 122(a) mandates that 
all TILA-required disclosures be made clearly and conspicuously. 15 
U.S.C. 1632(a). The Board has implemented this requirement for open-end 
credit plans in Sec.  226.5(a)(1). Under current comment 5(a)(1)-1, the 
Board has interpreted clear and conspicuous to mean that the disclosure 
must be in a reasonably understandable form. In most cases, this 
standard does not require that disclosures be segregated from other 
material or located in any particular place on the disclosure 
statement, nor that numerical amounts or percentages be in any 
particular type size.
    However, the Board has previously determined that certain 
disclosures in Subpart B of Regulation Z are subject to a higher 
standard in meeting the clear and conspicuous requirement due to the 
importance of the disclosures and the context in which they are given. 
Specifically, disclosures in credit and charge card applications and 
solicitations subject to Sec.  226.5a must be both in a reasonably 
understandable form and readily noticeable to the consumer. See current 
comment 5a(a)(2)-1, which the Board is proposing to amend as discussed 
below.
    1. Readily noticeable standard. The Board is proposing to highlight 
certain information in a tabular format in the account-opening 
disclosures pursuant to Sec.  226.6(b)(4); on checks that access a 
credit card account pursuant to Sec.  226.9(b)(3); in change-in-terms 
notices pursuant to Sec.  226.9(c)(2)(iii)(B); and in disclosures when 
a rate is increased due to delinquency, default or as a penalty 
pursuant to Sec.  226.9(g)(3)(ii). As discussed in further detail in 
the section-by-section analysis to Sec. Sec.  226.6(b), 226.9(b), 
226.9(c), and 226.9(g), consumer testing conducted for the Board 
suggests that highlighting important information in a tabular format 
helps consumers locate the information disclosed in these tables much 
more easily. Because these disclosures would be highlighted in a 
tabular format similar to the table required with respect to credit 
card applications and solicitations under Sec.  226.5a, the Board is 
proposing that these disclosures also be in a reasonably understandable 
form and readily noticeable to the consumer. The Board is proposing to 
amend comment 5(a)(1)-1 accordingly. The Board also is proposing to 
move the guidance on the meaning of ``reasonably understandable form'' 
to comment 5(a)(1)-2. Current comment 5(a)(1)-2, which provides 
guidance on what constitutes an ``integrated document,'' is moved to 
comment 5(a)(1)-4.
    The Board also proposes to add comment 5(a)(1)-3 to provide 
guidance on the meaning of the readily noticeable standard. 
Specifically, new comment 5(a)(1)-3 provides that to meet the readily 
noticeable standard, disclosures for credit card applications and 
solicitations under Sec.  226.5a, highlighted account-opening 
disclosures under Sec.  226.6(b)(4), highlighted disclosures on checks 
that access a credit card account under Sec.  226.9(b)(3); highlighted 
change-in-terms disclosures under Sec.  226.9(c)(2)(iii)(B), and 
highlighted disclosures when a rate is increased due to delinquency, 
default or as a penalty under Sec.  226.9(g)(3)(ii) must be given in a 
minimum of 10-point font. The Board believes that with respect to these 
disclosures, special formatting requirements, such as a tabular format 
and font size requirements, are needed to highlight for consumers the 
importance and significance of the disclosures. The Board notes that 
this approach of requiring a minimum of 10-point font for certain 
disclosures is consistent with the approach taken recently by eight 
federal agencies (including the Board) in issuing a proposed model form 
that financial institutions may use to comply with the privacy notice 
requirements under Section 503 of the Gramm-Leach-Bliley Act. 15 U.S.C. 
6803(e); 72 FR 14,940; Mar. 29, 2007. In the privacy proposal, the 
eight federal agencies indicate that financial institutions that use 
the privacy model form must use an easily readable type font; easily 
readable type font includes a minimum of 10-point font and sufficient 
spacing between the lines of type.
    2. Disclosures subject to the clear and conspicuous standard. The 
Board has received questions on the types of communications that are 
subject to the clear and conspicuous standard. Thus, the Board proposes 
comment 5(a)(1)-5 to make clear that all required disclosures and other 
communications under Subpart B of Regulation Z are considered 
disclosures required to be clear and conspicuous. This would include, 
for example, the disclosure by a person other than the creditor of a 
finance charge imposed at the time of honoring a consumer's credit card 
under Sec.  226.9(d) and the correction notice required to be sent to 
the consumer under Sec.  226.13(e).
    Oral disclosure. In order to give guidance about the meaning of 
clear and conspicuous for oral disclosures, the Board proposes to amend 
the guidance on what constitutes a ``reasonably understandable form,'' 
in proposed comment 5(a)(1)-2. This amendment is based in part on the 
Federal Trade Commission's (FTC) guidance on oral disclosure in its 
publication Complying with the Telemarketing Sales Rule (available at 
the FTC's Web site). Oral disclosures would be considered to be in a 
reasonably understandable form when they are given at a volume and 
speed sufficient for a consumer to hear and comprehend the disclosures.
5(a)(1)(ii)
    Section 226.5(a)(1)(ii) provides that in general, disclosures for 
open-end plans must be provided in writing and in a retainable form.
    Oral disclosures. The Board is proposing that certain charges may 
be disclosed after account opening. See proposed Sec.  226.5(b)(1)(ii). 
The goal of this proposal is to better ensure that consumers receive 
disclosures at relevant times; some charges may not be relevant to a 
consumer at account opening but may become relevant later. The Board is 
also proposing to permit creditors to make the form of disclosure more 
relevant to consumers. A written form of disclosure has obvious merit 
at account opening, when a consumer must assimilate a lot of 
information that may influence major decisions by the consumer about 
how, or even whether, to use the account. During the life of the 
account, in contrast, a consumer will sometimes need to decide whether 
to purchase a single service from the creditor, a service that may not 
be central to the consumer's use of the account (for example, the 
service of

[[Page 32969]]

providing documentary evidence of transactions). Moreover, during the 
life of the account, the consumer may become accustomed to purchasing 
such services by telephone. The consumer and the creditor may find it 
convenient to conduct the transaction by telephone, and will, 
accordingly, expect to receive a disclosure of the charge for the 
service during the same telephone call. For these reasons, the Board is 
proposing to permit creditors to disclose orally charges not 
specifically identified by the proposed regulation in Sec.  226.6(b)(4) 
as critical to disclose in writing at account opening. Further, the 
Board proposes that creditors be provided with the same flexibility 
when the cost of such a charge changes or is newly introduced, as 
discussed in the section-by-section analysis to Sec.  226.9(c). The 
proposal, set forth inSec.  226.5(a)(1)(ii)(A), is intended to be 
consistent with consumers' expectations and with the business practices 
of card issuers.
    Under the proposal, creditors may continue to comply with TILA by 
providing written disclosures at account-opening for all fees. In 
proposing to permit creditors to disclose certain costs orally for 
purposes of TILA, the Board anticipates that creditors will continue to 
identify fees in the account agreement for contract and other reasons, 
although the proposal would not require creditors to do so. For 
example, some creditors identify the types of fees that could be 
assessed on the account in the account agreement. The Board anticipates 
that such practices will continue.
    Creditors are permitted to provide in electronic form any TILA 
disclosure that is required to be provided or made available to 
consumers in writing if the consumer affirmatively consents to receipt 
of electronic disclosures in a prescribed manner. Electronic Signatures 
in Global and National Commerce Act (the E-Sign Act), 15 U.S.C. 7001 et 
seq. The Board requests comment on whether there are circumstances in 
which creditors should be permitted to provide cost disclosures in 
electronic form to consumers who have not affirmatively consented to 
receive electronic disclosures for the account, such as when a consumer 
seeks to make a payment online, and the creditor imposes a fee for the 
service.
    In technical revisions, the Board proposes to move to proposed 
Sec.  226.5(a)(1)(ii)(A) the current exemption that disclosures 
required by Sec.  226.9(d) need not be in writing. (This exemption 
currently is in footnote 7 under Sec.  226.5(a)(1).) Section 226.9(d) 
requires disclosure when a finance charge is imposed by a person other 
than the card issuer at the time of a transaction.
    In another technical revision, the substance of footnote 8, 
regarding disclosures that do not need to be in a retainable form the 
consumer may keep, is moved to proposed Sec.  226.5(a)(1)(ii)(B).
    Electronic communication. In April 2007, the Board issued for 
public comment a proposal on electronic communication which would 
withdraw portions of the interim final rules issued in 2001 and to 
implement certain provisions of the Bankruptcy Act (``2007 Electronic 
Disclosure Proposal''). See 72 FR 21,141; April 30, 2007. Proposed 
Sec.  226.5(a)(1)(iii) and the proposal to delete current Sec.  
226.5(a)(5) is also proposed in the 2007 Electronic Disclosure 
Proposal. The language in proposed Sec.  226.5(a)(1)(iii) clarifies 
that creditors may provide open-end disclosures to consumers in 
electronic form, subject to compliance with the consumer consent and 
other applicable provisions of the E-Sign Act. 15 U.S.C. 1001, et seq. 
The language also provides that the open-end disclosures required by 
Sec. Sec.  226.5a, 226.5b, and 226.16 may be provided to the consumer 
in electronic form, under the circumstances set forth in those 
sections, without regard to the consumer consent or other provisions in 
the E-Sign Act.
5(a)(2) Terminology
    Consistent terminology. Currently, disclosures given pursuant to 
Sec. Sec.  226.5a(b), 226.6, and 226.7 must use consistent terminology. 
See current Sec.  226.5a(a)(2)(iv), comment 5a(a)(2)-6, and comment 6-
1. The Board proposes to expand this requirement more generally in new 
Sec.  226.5(a)(2)(i) to include other disclosures required by the open-
end provisions of the regulation (Subpart B), such as subsequent 
disclosures under Sec.  226.9. A new comment 5(a)(2)-4 would clarify 
that terms do not need to be identical but must be close enough in 
meaning to enable the consumer to relate the disclosures to one 
another, which is consistent with current guidance in current comment 
5a(a)(2)-6 and current comment 6-1. The Board believes that the use of 
consistent terminology should be applied to all open-end TILA-required 
disclosures to allow consumers to better identify the terms across all 
disclosures.
    As discussed above, the Board is proposing to highlight certain 
information in a tabular format in the account-opening disclosures 
pursuant to Sec.  226.6(b)(4); on checks that access a credit card 
account pursuant to Sec.  226.9(b)(3); in change-in-terms notices 
pursuant to Sec.  226.9(c)(2)(iii)(B); and in disclosures when a rate 
is increased due to delinquency, default or as a penalty pursuant to 
Sec.  226.9(g)(3)(ii). These disclosures are meant to be highlighted in 
a tabular format similar to the table currently required with respect 
to credit card applications and solicitations under Sec.  226.5a.
    Currently, disclosures required for credit card applications and 
solicitation under Sec.  226.5a must use the term ``grace period'' to 
describe the date by which or the period within which any credit 
extended for purchases may be repaid without incurring a finance 
charge. The Board proposes in new Sec.  226.5(a)(2)(iii) to extend this 
requirement to use the term ``grace period'' to all references to such 
a term for the disclosures required to be in the form of a table as 
discussed above. In addition, proposed Sec.  226.5(a)(2)(iii) provides 
that if disclosures are required to be presented in a tabular format, 
the term ``penalty APR'' shall be used to describe an increased rate 
that may result because of the occurrence of one or more specific 
events specified in the account agreement, such as a late payment or an 
extension of credit that exceeds the credit limit. For example, 
creditors would be required to provide information about penalty rates 
in the table given with credit card applications and solicitations 
under Sec.  226.5a; in the summary table given at account opening under 
Sec.  226.6(b)(4); if the penalty rate is changing, in the summary 
table given on or with the change-in-terms notice under Sec.  
226.9(c)(2)(iii)(B), or if a penalty rate is triggered, in the table 
given under Sec.  226.9(g)(3)(ii).
    Requiring card issuers to use a uniform term to describe the grace 
period and disallowing variants like ``free-ride period'' may improve 
consumers' understanding of the concept. Similarly, requiring card 
issuers to use a uniform term to describe the increased rate may 
improve consumers' understanding of the rate and when it applies. In 
the consumer testing conducted for the Board, many participants 
believed the term ``Penalty APR'' as opposed to ``Default APR'' or 
``Highest Possible APR'' more clearly conveyed the increased rate. In 
testing the term ``Default APR,'' some participants said that the word 
``default'' indicated to them that it would only apply when the account 
was closed due to delinquent payments. Some other participants said 
that the word ``default'' seemed like the ``normal'' rate, not 
something that occurs because a cardholder does something wrong. Some 
participants

[[Page 32970]]

also were confused by the term ``Highest Possible APR;'' one 
participant, for example, assumed that this was the highest point to 
which variable rates could increase.
    Moreover, if credit insurance or debt cancellation or debt 
suspension coverage is required as part of the plan and information 
about that coverage is required to be disclosed in a tabular format, 
proposed Sec.  226.5(a)(2)(iii) requires that in describing the 
coverage, the term ``required'' shall be used and the program shall be 
identified by its name. For example, creditors would be required to 
provide information about the required coverage in the table given with 
credit card applications and solicitations under Sec.  226.5a, in the 
summary table given at account opening under Sec.  226.6(b)(4), and if 
certain information about the coverage is changing, in the summary 
table given in change-in-terms notice under Sec.  226.9(c)(2)(iii)(B). 
In consumer testing conducted for the Board, the Board tested 
disclosing information about the required debt suspension coverage in 
the disclosure table given with a mock credit card solicitation. The 
Board found that describing the coverage by its name allowed 
participants to link disclosures that were provided in the table to 
other information about the coverage that was provided elsewhere in the 
solicitation materials given to the participants.
    Furthermore, the Board proposes in Sec.  226.5(a)(2)(iii) that if 
required to be disclosed in a tabular format, APRs may be described as 
``fixed'' or any similar term only if that rate will remain in effect 
unconditionally until the expiration of a specified time period. If no 
time period is specified, then the term ``fixed'' or any similar term 
may not be used unless the rate remains in effect unconditionally until 
the plan is closed. As further discussed in the section-by-section 
analysis to proposed Sec.  226.16(g) below, the Board is proposing 
these rules in order to avoid consumer confusion and the uninformed use 
of credit.
    Terms required to be more conspicuous than others. TILA Section 
122(a) requires that the terms ``annual percentage rate'' and ``finance 
charge'' be disclosed more conspicuously than other terms, data, or 
information. 15 U.S.C. 1632(a). The Board has implemented this 
provision in current Sec.  226.5(a)(2)(iii) by requiring that the terms 
``finance charge'' and ``annual percentage rate,'' when disclosed with 
a corresponding amount or percentage rate, be disclosed more 
conspicuously than any other required disclosure. Under current 
footnote 9, however, the terms do not need to be more conspicuous when 
used under Sec. Sec.  226.5a, 226.7(d), 226.9(e), and 226.16.
    In September 2006, the United States Government Accountability 
Office (GAO) issued a report that analyzed current credit card 
disclosures and recommended improvements to these disclosures (GAO 
Report on Credit Card Rates and Fees).\10\ The GAO criticized credit 
card disclosure documents that ``unnecessarily emphasized specific 
terms.'' GAO Report on Credit Card Rates and Fees, p. 43. As an 
illustration of this point, the GAO reprinted a paragraph of text from 
a creditor's credit card disclosure documents where the phrase 
``periodic finance charge'' was singled out for emphasis each time the 
phrase was used, even when such term was not disclosed with a 
corresponding amount or percentage rate. The usability consultant used 
by the GAO commented that this type of emphasis potentially required 
readers to work harder to understand the passage's message.
---------------------------------------------------------------------------

    \10\ United States Government Accountability Office, Credit 
Cards: Increased Complexity in Rates and Fees Heightens Need for 
More Effective Disclosures to Consumers, 06-929 (September 2006).
---------------------------------------------------------------------------

    The Board agrees that overemphasis of these terms may make 
disclosures more difficult for consumers to read. In order to address 
this problem, the Board considered a proposal to prohibit the terms 
``finance charge'' and ``annual percentage rate'' from being disclosed 
more conspicuously than other required disclosures except when the 
regulation so requires. However, this proposal could produce unintended 
consequences. For example, in a change-in-terms notice, the term 
``annual percentage rate'' may appear as a heading, and thus be 
disclosed more conspicuously than other disclosures in the notice even 
though the term is not disclosed with a rate figure. It appears, 
therefore, that a rule prohibiting more conspicuous terms in certain 
cases would need to include detailed safe harbors or exceptions, which 
might make it unworkable. Therefore, the Board seeks comment on how to 
address this issue.
    Furthermore, the Board is proposing to amend the regulation to 
expand the list of disclosures where the terms ``finance charge'' and 
``annual percentage rate'' need not be more conspicuous to include the 
account-opening disclosures that would be highlighted under proposed 
Sec.  226.6(b)(4), the disclosure of the effective APR under proposed 
Sec.  226.7(b)(7), disclosures on checks that access a credit card 
account under proposed Sec.  226.9(b)(3), the information on change-in-
terms notices that would be highlighted under proposed Sec.  
226.9(c)(2)(iii)(B), the disclosures given when a rate is increased due 
to delinquency, default or as a penalty under proposed Sec.  
226.9(g)(3)(ii). Currently, the requirement that the terms ``finance 
charge'' and ``annual percentage rate'' be more conspicuous than other 
disclosures does not apply to disclosures highlighted in the tabular 
format used for credit card application and solicitations under Sec.  
226.5a. All of the disclosures discussed above must be highlighted in a 
tabular format similar to the table required for credit card 
applications and solicitations under Sec.  226.5a. The Board believes 
the rule should be consistent across these disclosures. Moreover, the 
Board believes that the tabular format sufficiently highlights the 
disclosures, so that the ``more conspicuous'' rule is not needed. 
Finally, for organizational purposes, the Board proposes to consolidate 
current Sec.  226.5(a)(2) and current footnote 9 into Sec.  
226.5(a)(2)(ii).
5(a)(3) Specific Formats
    There are special rules regarding the specific format for 
disclosures under Sec.  226.5a for credit and charge card applications 
and solicitations and Sec.  226.5b for home-equity plans, as noted in 
current Sec.  226.5(a)(3) and current Sec.  226.5(a)(4), respectively. 
These rules would be consolidated in proposed Sec.  226.5(a)(3), for 
clarity. In addition, as discussed below, the Board is proposing that 
certain account-opening disclosures, periodic statement disclosures and 
subsequent disclosures, such as change-in-terms disclosures, must be 
provided in specific formats under proposed Sec.  226.6(b)(4); 
Sec. Sec.  226.7(b)(6), (b)(7) and (b)(13); and Sec. Sec.  226.9(b), 
(c) and (g) and these special format rules are noted in proposed Sec.  
226.5(a)(3).
5(b) Time of Disclosures
5(b)(1) Account-opening Disclosures
    TILA Section 127(a) requires creditors to provide disclosures 
``before opening any account.'' 15 U.S.C. 1637(a). Section 226.5(b)(1) 
requires these disclosures (identified in Sec.  226.6) to be furnished 
``before the first transaction is made under the plan,'' which is 
interpreted as ``before the consumer becomes obligated on the plan.'' 
Comment 5(b)(1)-1. Also under the existing commentary, creditors may 
provide the disclosures required by Sec.  226.6 after the first 
transaction only in limited circumstances. This guidance would be moved 
from the commentary to the

[[Page 32971]]

regulation. See proposed Sec.  226.5(b)(1)(iii)-(v). In addition, the 
Board is proposing revisions to the timing rules for disclosing certain 
costs imposed on an open-end (not home-secured) plan, and in connection 
with certain transactions conducted by telephone, as discussed below. 
Additional guidance is proposed on providing timely disclosures when 
the first transaction is a balance transfer. Technical revisions would 
change references from ``initial'' disclosures required by Sec.  226.6 
to ``account-opening'' disclosures, without any intended substantive 
change. In today's marketplace, there are few open-end products for 
which consumers receive the disclosures required under Sec.  226.6 as 
their ``initial'' Truth in Lending disclosure. See Sec. Sec.  226.5a, 
226.5b, which require creditors to provide disclosures before consumers 
apply for a credit or charge card, or for a HELOC.
5(b)(1)(i) General Rule
    Section 226.5(b)(1)(i), as renumbered, would state the general 
timing rule for furnishing account-opening disclosures. Specifically, 
creditors generally must provide the account-opening disclosures before 
the first transaction is made under the plan.
    Balance transfers. Creditors commonly extend credit to consumers 
for the purpose of paying off consumers' existing credit balances with 
other creditors. Requests for these ``balance transfers'' are often 
part of an offer to open a credit card account, and consumers may 
request transfers as part of the application for the new account. 
Comment 5(b)(1)(i)-5, as renumbered, provides that creditors must 
provide account-opening disclosures before the balance transfer occurs.
    The Board proposes to update this comment to reflect current 
business practices. Some creditors provide account-opening disclosures, 
including APRs, along with the balance transfer offer and account 
application, and these creditors would not be affected by the proposal. 
Other creditors offer balance transfers for which the APRs that may 
apply are disclosed as a range, depending on the consumer's 
creditworthiness. Consumers who respond to such an offer and apply for 
the transfer later receive account-opening disclosures, including the 
APR that will apply to the transferred balance. The proposed change 
would clarify that the creditor must provide disclosures sufficiently 
in advance of the transfer to allow the consumer to respond to the 
terms that will apply to the transfer, including to contact the 
creditor before the balance is transferred and decline the transfer.
    Guidance in current comment 5(b)(1)-1 regarding account-opening 
disclosures provided with cash advance checks would be deleted as 
unnecessary.
    Assessing fees on an account as acceptance of the account. Comment 
5(b)(1)(i)-1(i), as renumbered, currently provides that if after 
receiving the account-opening disclosures, the consumer uses the 
account, pays a fee or negotiates a cash advance check, the creditor 
may consider the account not rejected. The comment would be amended to 
clarify that if the only activity on account is the creditors' 
assessment of fees (such as start-up fees), the consumer is not 
considered to have accepted the account until the consumer is provided 
with a billing statement and makes a payment. The clarification 
addresses concerns about some subprime card accounts that assess a 
large number of fees at account opening. Consumers who have not made 
purchases or otherwise obtained credit on the account would have an 
opportunity to review their account-opening disclosures and decide 
whether to reject the account and decline to pay the fees.
5(b)(1)(ii) Charges Imposed as Part of an Open-End (Not Home-Secured) 
Plan
    Currently, charges imposed on an open-end plan that are a ``finance 
charge'' or an ``other charge'' must be disclosed before the first 
transaction. 15 U.S.C. 1637(a); current Sec.  226.5(b)(1) and Sec.  
226.6(a) and (b). When a new service (and associated charge) is 
introduced or an existing charge is increased, creditors must provide a 
change-in-terms notice to update account-opening disclosures for all 
accountholders if the new charge is a finance charge or an other 
charge. See current Sec.  226.9(c).
    For the reasons discussed in the section-by-section analysis to 
Sec.  226.6, the Board is proposing revisions to the rules identifying 
charges required to be disclosed under open-end (not home-secured) 
plans. The current rule requiring the disclosure of costs before the 
first transaction (in writing and in a retainable form) would continue 
to apply to specified costs. See proposed Sec.  226.6(b)(4)(iii) for 
the charges, and Sec.  226.9(c)(2) where such charges are changing or 
newly introduced. These costs are fees of which consumers should be 
aware before using the account such as annual or late payment fees, or 
fees that the creditor would not otherwise have an opportunity to 
disclose before the fee is triggered, such as a fee for using a cash 
advance check during the first billing cycle. The Board proposes to 
except charges imposed as part of an open-end (not home-secured) plan, 
other than those specified in proposed Sec.  226.6(b)(4)(iii), from the 
requirement to disclose charges before the first transaction. Creditors 
would be permitted, at their option, to disclose those charges either 
before the first transaction or later, though before the cost is 
imposed. Examples of these charges would be fees to obtain documentary 
evidence or to expedite payments or delivery of a credit card. 
Creditors may, of course, continue to disclose any charge imposed as 
part of an open-end (not home-secured) plan at account opening (or when 
increased or newly introduced under Sec.  226.9(c)(2)).
    The charges covered by the proposed exception are triggered by 
events or transactions that may take place months, or even years, into 
the life of the account, when the consumer may not reasonably be 
expected to recall the amount of the charge from the account-opening 
disclosure, nor readily to find or obtain a copy of the account-opening 
disclosure or most recent change-in-term notice. Requiring such charges 
to be disclosed before account opening may not provide a meaningful 
benefit to consumers in the form of useful information or protection. 
Consumers would benefit, however, from a rule that permits creditors to 
disclose charges when consumers reasonably expect to receive the 
disclosures, and, thus, are most likely to notice and use the 
disclosures. The proposal assures that consumers continue to receive 
disclosure of charges imposed as part of the plan before they become 
obligated to pay them.
    Examples of the charges to which the proposed exception would apply 
are fees to expedite payments or delivery of a card. Fees to expedite 
payments or card delivery are now excluded from TILA coverage. In a 
2003 rulemaking concerning those two charges, the Board determined that 
neither was required to be disclosed under TILA. 68 FR 16,185; April 3, 
2003. In the supplementary information accompanying the final rule, the 
Board noted some commenters' views that requiring a written disclosure 
of a charge for a service long before the consumer might consider 
purchasing the service did not provide the consumer material benefit. 
The Board also noted creditors' practice of disclosing the charge when 
the service is requested, and encouraged them to continue that 
practice. The Board believes that flexible disclosure of such charges 
may better serve TILA's purposes than the present exclusion of the 
charges from TILA's coverage altogether.

[[Page 32972]]

    The Board also believes the proposed exception may facilitate 
compliance by creditors. As stated earlier, it can be challenging under 
the current rule to determine whether charges are a finance charge or 
an other charge or not covered by TILA, and thus whether advance notice 
is required if a charge is increased or newly introduced. The proposal 
reduces these uncertainties and risks. Under the proposal, the creditor 
could disclose a new or increased charge only to those consumers for 
whom it is relevant because they are considering at the time of 
disclosure whether to take the action that would trigger the charge. 
Moreover, the creditor would not have to determine whether a charge was 
a finance charge or other charge or not covered by TILA so long as the 
creditor disclosed the charge, orally or in writing, before the 
consumer became obligated to pay it, which creditors, in general, 
already do for business and other legal reasons.
    The proposal would allow flexibility in the timing of certain cost 
disclosures. In proposing to permit creditors to disclose certain 
charges--orally or in writing--before the fee is imposed, the Board 
would require creditors to disclose a charge at a time consumers would 
likely notice the charge when the consumer decides whether to take the 
action that would trigger the charge, such as purchasing a service. 
Proposed comment 5(b)(1)(ii)-1 would provide an example that 
illustrates the standard.
    The limited exception to TILA's requirement to disclose charges 
imposed as part of the plan before the first transaction is proposed 
pursuant to TILA Section 105(a). Specifically, the Board has authority 
under TILA Section 105(a) to adopt ``such adjustments and exceptions 
for any class of transactions, as in the judgment of the Board are 
necessary or proper to effectuate the purposes of the title, to prevent 
circumvention or evasion thereof, or to facilitate compliance 
therewith.'' 15 U.S.C. 1604(a). The class of transactions that would be 
affected is transactions on open-end plans not secured by a dwelling, 
though only with respect to certain charges. On the basis of the 
information currently available to the Board, a narrow adjustment and 
exception appears necessary and proper to effectuate TILA's purpose to 
assure meaningful disclosure and informed credit use, and to facilitate 
compliance.
5(b)(1)(iii) Telephone Purchases
    Consumers who call a retailer to order goods by telephone commonly 
use an existing credit card account to finance the purchase. Some 
retailers, however, offer discounted purchase prices or promotional 
payment plans to consumers who finance the purchase by establishing a 
new open-end credit plan with the retailer. Under the current timing 
rule, retailers must provide TILA account-opening disclosures before 
the first transaction. This means retailers must delay the shipment of 
goods until a consumer has received the disclosures. Consumers who want 
goods shipped immediately may use another credit card to finance the 
purchase but they lose any discount or promotion that may be associated 
with opening a new plan. The Board proposes to provide additional 
flexibility to retailers and consumers for such transactions.
    Under proposed Sec.  226.5(b)(1)(iii), retailers that establish an 
open-end plan in connection with a telephone purchase of goods or 
services initiated by the consumer may provide account-opening 
disclosures as soon as reasonably practicable after the first 
transaction if the retailer (1) permits consumers to return any goods 
financed under the plan at the time the plan is opened and provides the 
consumer sufficient time to reject the plan and return the items free 
of cost after receiving the written disclosures required by Sec.  
226.6, and (2) informs the consumer about the return policy as a part 
of the offer to finance the purchase. Alternatively, the retailer may 
delay shipping the goods until after the account disclosures have been 
provided.
    Proposed commentary provisions would clarify that creditors may 
provide disclosures with the goods, or for creditors that have separate 
distribution systems for credit documents and for goods, by 
establishing procedures reasonably designed to have the disclosures 
sent within the same time period after the purchase as when the goods 
will be sent. A return policy would be of sufficient duration if the 
consumer is likely to receive the disclosures and have sufficient time 
to decide about the financing plan. A return policy would include 
returns via the United States Postal Service for goods delivered by 
private couriers. The commentary would also clarify that retailers' 
policies regarding the return of merchandise need not provide a right 
to return goods if the consumer consumes or damages the goods. The 
proposal does not affect merchandise purchased after the plan was 
initially established, or purchased by other means such as a credit 
card issued by another creditor. See proposed comments 5(b)(1)(iii)-1.
5(b)(2) Periodic Statements
    TILA Sections 127(b) and 163 provide the timing requirements for 
providing periodic statements for open-end credit accounts. 15 U.S.C. 
1637(b) and 15 U.S.C. 1666b. The Board proposes to retain the existing 
regulation and commentary, with a few changes discussed below.
5(b)(2)(i)
    TILA Section 127(b) establishes that creditors generally must send 
periodic statements at the end of billing cycles in which there is an 
outstanding balance or a finance charge is imposed. Section 
226.5(b)(2)(i) provides for a number of exceptions to a creditor's duty 
to send periodic statements.
    De minimis amounts. Creditors need not send periodic statements if 
an account balance (debit or credit) is $1 or less (and no finance 
charge is imposed). In the December 2004 ANPR, the Board requested 
comment on whether the de minimis amount should be adjusted. Q53. Few 
commented on this issue; there was little support for an adjustment. 
One major credit card issuer stated that the cost to reprogram systems 
would exceed the benefit. Thus, the Board proposes to retain the $1 
threshold.
    Uncollectible accounts. Creditors are not required to send periodic 
statements on accounts the creditor has deemed ``uncollectible.'' That 
term is not defined. The Board understands that creditors typically 
send statements on past-due accounts until the account is charged-off 
for purposes of loan-loss provisions, which is typically after 180 days 
of nonpayment. The Board is not proposing regulatory or commentary 
provisions on when an account is deemed ``uncollectible'' but seeks 
comment on whether additional guidance would be helpful.
    Instituting collection proceedings. Creditors need not send 
statements if ``delinquency collection proceedings have been 
instituted.'' Over the years, the Board's staff has been asked for 
guidance on what actions a creditor must take to be covered by the 
exception. The Board proposes to add comment 5(b)(2)(i)-3 to clarify 
that a collection proceeding entails a filing of a court action or 
other adjudicatory process with a third party, and not merely assigning 
the debt to a debt collector.
    Workout arrangements. Comment 5(b)(2)(i)-2 provides that creditors 
must continue to comply with all the rules for open-end credit, 
including sending a periodic statement, when credit privileges end, 
such as when a consumer stops taking draws and pays off the outstanding 
balance over time. Another comment provides that ``if an open-end 
credit account is converted to

[[Page 32973]]

a closed-end transaction under a written agreement with the consumer, 
the creditor must provide a set of closed-end credit disclosures before 
consummation of the closed-end transaction.'' See comment 17(b)-2.
    Over the years, the Board's staff has received requests for 
guidance on the effect of certain work-out arrangements for past-due 
open-end accounts. For example, a borrower with a delinquent credit 
card account may agree by telephone to a workout plan to reduce or 
extinguish the debt and the conversation is later memorialized in a 
writing. The Board proposes to clarify that creditors entering into 
workout agreements for delinquent open-end plans without converting the 
debt to a closed-end transaction comply with the regulation if 
creditors continue to follow the regulations and procedures under 
Subpart B during the work-out period. The Board's proposal is intended 
to provide flexibility and reduce burden and uncertainty. The Board 
seeks comment on whether further guidance would be helpful, such as by 
establishing a safe harbor for when an open-end plan is deemed to be 
satisfied and replaced by a new closed-end obligation.
5(b)(2)(ii)
    Credit card issuers commonly offer consumers a ``grace period'' or 
``free-ride period'' during which consumers can avoid finance charges 
on purchases by paying the balance in full. TILA does not require 
creditors to provide a grace period, but if creditors provide one, TILA 
Section 163(a) requires them to send statements at least 14 days before 
the grace period ends. 15 U.S.C. 1666c(a). The rule is a ``mailbox'' 
rule; that is, the 14-day period runs from the date creditors mail 
their statements, not from the end of the statement period nor from the 
date consumers receive their statements.
    The Board is aware of anecdotal evidence of consumers receiving 
statements relatively close to the payment due date, with little time 
remaining before the payment must be mailed to meet the due date. This 
may be due to the fact that at the end of a billing cycle, it may take 
several days for a consumer to receive a statement. In addition, for 
consumers who mail their payments, they may need to mail their payments 
several days before the due date to ensure that the payment is receive 
by the creditor by the due date. Although the Board notes that using 
the Internet to make payments is increasingly common, the Board 
requests comment on (1) whether it should recommend to Congress that 
the 14-day period be increased to a longer time period, so that 
consumer will have additional time to receive their statements and mail 
their payments to ensure that payments will be received by the due 
date, and (2) if so, what time period the Board should recommend to 
Congress.
5(b)(2)(iii)
    In a technical revision, the substance of footnote 10 is moved to 
the regulatory text.
5(c) Through 5(e)
    Sections 226.5(c), (d), and (e) address, respectively: The basis of 
disclosures and the use of estimates; multiple creditors and multiple 
consumers; and the effect of subsequent events. The Board does not 
propose any changes to these provisions, except that the Board proposes 
to add new comment 5(d)-3, referencing the statutory provisions 
pertaining to charge cards with plans that allow access to an open-end 
credit plan maintained by a person other than the charge card issuer. 
TILA 127(c)(4)(D); 15 U.S.C. 1637(c)(4)(D). (See the section-by-section 
analysis to Sec.  226.5a(f).)

Section 226.5a Credit and Charge Card Applications and Solicitations

    TILA Section 127(c), implemented by Sec.  226.5a, requires card 
issuers to provide certain cost disclosures on or with an application 
or solicitation to open a credit or charge card account.\11\ 15 U.S.C. 
1637(c). The format and content requirements differ for cost 
disclosures in card applications or solicitations, depending on whether 
the applications or solicitations are given through direct mail, 
provided electronically, provided orally, or made available to the 
general public such as in ``take-one'' applications and in catalogs or 
magazines. Disclosures in applications and solicitations provided by 
direct mail or electronically must be presented in a table. For oral 
applications and solicitations, certain cost disclosures must be 
provided orally, except that issuers in some cases are allowed to 
provide the disclosures later in a written form. Applications and 
solicitations made available to the general public, such as in a take-
one application, must contain one of the following: (1) The same 
disclosures as for direct mail presented in a table; (2) a narrative 
description of how finance charges and other charges are assessed, or 
(3) a statement that costs are involved, along with a toll-free 
telephone number to call for further information.
---------------------------------------------------------------------------

    \11\ Charge cards are a type of credit card for which full 
payment is typically expected upon receipt of the billing statement. 
To ease discussion, this memorandum will refer simply to ``credit 
cards.''
---------------------------------------------------------------------------

    The Board proposes a number of substantive and technical revisions 
to Sec.  226.5a and the accompanying commentary, as described in more 
detail below. For example, the proposal contains a number of revisions 
to the format and content of application and solicitation disclosures, 
to make the disclosures more meaningful and easier to understand. 
Format changes would affect type size, placement of information within 
the table, use of cross-references to related information, and use of 
boldface type for certain key terms. Information concerning penalty 
APRs and the reasons they may be triggered would be more noticeable, 
and information would be added about how long penalty APRs may apply. 
The existing disclosures about how variable rates are determined would 
be shortened and simplified. Creditors that allocate payments to 
transferred balances that carry low rates would be required to disclose 
to consumers that they will pay interest on their (higher rate) 
purchases until (lower rate) transferred balances are paid in full. 
Creditors also would be required to include a reference to the Board's 
Web site where additional information about shopping for credit cards 
is available.
    To address concerns about subprime credit cards programs that have 
high fees with low credit limits, additional disclosures would be 
required if the fees or security deposits required to receive the card 
are 25 percent or more of the minimum credit limit that the consumer 
may receive. For example, the initial fees on an account with a $250 
credit limit may reduce the available credit to less than $100.
    Under the proposal, the disclosure of the balance computation 
method, which now appears in the table, would be required to be outside 
the table so that the table emphasizes information that is more useful 
to consumers when they are shopping for a card.
    With respect to take-one applications and solicitations, under the 
proposal, card issuers that provide cost disclosures in take-one 
applications and solicitations would be required to provide the 
disclosures in the form of a table, and would no longer be allowed to 
meet the requirements of Sec.  226.5a by providing a narrative 
description of account-opening disclosures. This proposed revision is 
consistent with other revisions contained in the proposal that would 
require certain account-opening information (such as information about 
key rates and fees) to be given in the form of a table. See

[[Page 32974]]

section-by-section analysis to Sec.  226.6(b)(4).
5a(a) General Rules
    Combining disclosures. Currently, comment 5a-2 states that account-
opening disclosures required by Sec.  226.6 do not substitute for the 
disclosures required by Sec.  226.5a; however, a card issuer may 
establish procedures so that a single disclosure document meets the 
requirements of both sections. The Board proposes to retain this 
comment, but to revise it to account for proposed revisions to Sec.  
226.6. Specifically, the Board is proposing to require that certain 
information given at account opening must be disclosed in the form of a 
table. See proposed Sec.  226.6(b)(4). The account-opening table would 
be substantially similar to the table required by Sec.  226.5a, but the 
content required would not be identical. The account-opening table 
would require information that would not be required in the Sec.  
226.5a table, such as a reference to billing error rights. The Board 
proposes to revise comment 5a-2 to provide that a card issuer may 
satisfy Sec.  226.5a by providing the account-opening summary table on 
or with a card application or solicitation, in lieu of the Sec.  226.5a 
table. For various reasons, card issuers may want to provide the 
account-opening disclosures with the card application or solicitation. 
When issuers do so, this comment allows them to provide the account-
opening summary table in lieu of the table containing the Sec.  226.5a 
disclosures.
    Clear and conspicuous standard. Section 226.5(a) requires that 
disclosures made under subpart B (including disclosures required by 
Sec.  226.5a) must be clear and conspicuous. Currently, comment 
5a(a)(2)-1 provides guidance on the clear and conspicuous standard as 
applied to the Sec.  226.5a disclosures. The Board proposes to provide 
guidance on applying the clear and conspicuous standard to the Sec.  
226.5a disclosures in comment 5(a)(1)-1. Thus, guidance currently in 
comment 5a(a)(2)-1 would be deleted as unnecessary. The Board proposed 
to add comment 5a-3 to cross reference the clear and conspicuous 
guidance in comment 5a(a)(1)-1.
5a(a)(1) Definition of Solicitation
    Firm offers of credit. The term ``solicitation'' is defined in 
Sec.  226.5a(a)(1) of Regulation Z to mean ``an offer by the card 
issuer to open a credit card account that does not require the consumer 
to complete an application.'' 15 U.S.C. 1637(c). Board staff has 
received questions about whether card issuers making ``firm offers of 
credit'' as defined in the Fair Credit Reporting Act (FCRA) are 
considered to be making solicitations for purposes of Sec.  226.5a. 15 
U.S.C. 1681 et seq. The Board proposes to amend the definition of 
``solicitation'' to clarify that such ``firm offers of credit'' for 
credit cards are solicitations for purposes of Sec.  226.5a, as 
discussed below.
    The definition ``solicitation'' was adopted in 1989 to implement 
part of the Fair Credit and Charge Card Disclosure Act of 1988. It 
captures situations where an issuer has preapproved a consumer to 
receive a card, and thus, no application is required. In 1996, the FCRA 
was amended to allow creditors to use consumer report information in 
connection with pre-selecting consumers to receive ``firm offers of 
credit.'' 15 U.S.C. 1681a(l), 1681b(c). A ``firm offer of credit'' is 
an offer that must be honored by a creditor if a consumer continues to 
meet the specific criteria used to select the consumer for the offer. 
15 U.S.C. 1681a(l). Creditors may obtain additional credit information 
from consumers, such as income information, when the consumer responds 
to the offer. However, creditors may decline to extend credit to the 
consumer based on this additional information only where the consumer 
does not meet specific criteria established by the creditor before 
selecting the consumer for the offer. Thus, because consumers who 
receive ``firm offers of credit'' have been preapproved to receive a 
credit card and may be turned down for credit only under limited 
circumstances, the Board believes that these preapproved offers are of 
the type intended to be captured as a ``solicitation,'' even though 
consumers are asked to provide some additional information in 
connection with accepting the offer.
    Invitations to apply. The Board also proposes to add comment 
5a(a)(1)-1 to distinguish solicitations from ``invitations to apply,'' 
which are not covered by Sec.  226.5a. An ``invitation to apply'' 
occurs when a card issuer contacts a consumer who has not been 
preapproved for a card account about opening an account (whether by 
direct mail, telephone, or other means) and invites the consumer to 
complete an application, but the contact itself does not include an 
application. The Board believes that these ``invitations to apply'' do 
not meet the definition of ``solicitation'' because the consumer must 
still submit an application in order to obtain the offered card. Thus, 
proposed comment 5a(a)(1)-1 would clarify that this ``invitation to 
apply'' is not covered by Sec.  226.5a unless the contact itself 
includes an application form in a direct mailing, electronic 
communication or ``take one,'' an oral application in a telephone 
contact initiated by the card issuer, or an application in an in-person 
contact initiated by the card issuer.
5a(a)(2) Form of Disclosures and Tabular Format
    Fees for late payment, over-the-credit-limit, balance transfers and 
cash advances. Currently, Sec.  226.5a(a)(2)(ii) and comment 5a(a)(2)-
5, which implement TILA Section 127(c)(1)(B), provide that card issuers 
may disclose late payment fees, over-the-credit-limit fees, balance 
transfer fees, and cash advance fees in the table or outside the table. 
15 U.S.C. 1637(c)(1)(B). In the December 2004 ANPR, the Board requested 
comment on whether these fees should be required to be in the table. 
Q8. Many commenters indicated that the Board should require these fees 
to be in the table, because these are core fees, and uniformity in the 
placement of the fees would make the disclosures more familiar and 
predictable for consumers. Some commenters, however, urged the Board to 
retain the flexibility for card issuers to place the fee disclosures 
either in the table or immediately outside the table.
    The Board proposes to require that these fees be disclosed in the 
table. In the consumer testing conducted for the Board, participants 
consistently identified these fees as among the most important pieces 
of information they consider as part of the credit card offer. With 
respect to the disclosure of these fees, the Board tested placement of 
these fees in the table and immediately below the table. Participants 
who were shown forms where the fees were disclosed below the table 
tended not to notice these fees compared to participants who were shown 
forms where the fees were presented in the table. The Board proposes to 
amend Sec.  226.5a(a)(2)(i) to require these fees to be disclosed in 
the table, so that consumers can easily identify them. Current Sec.  
226.5a(a)(2)(ii) and comment 5a(a)(2)-5, which currently allow issuers 
to place the fees outside the table, would be deleted. These proposed 
revisions are based in part on TILA Section 127(c)(5), which authorizes 
the Board to add or modify Sec.  226.5a disclosures. 15 U.S.C. 
1637(c)(5).
    Highlighting APRs and fee amounts in the table. Section 226.5a 
generally requires that certain information about rates and fees 
applicable to the card offer be disclosed to the consumer in

[[Page 32975]]

card applications and solicitations. This information includes not only 
the annual percentage rates and fee amounts that will apply, but also 
explanatory information that gives context to these figures. The Board 
seeks to enable consumers to identify easily the rates and fees 
disclosed in the table. Thus, the Board proposes to add Sec.  
226.5a(a)(2)(iv) to require that when a tabular format is required, 
issuers must disclose in bold text any APRs required to be disclosed, 
any discounted initial rate permitted to be disclosed, and any fee 
amounts or percentages required to be disclosed, except for any maximum 
limits on fee amounts disclosed in the table. Proposed Samples G-10(B) 
and G-10(C) provide guidance on how to show the rates and fees 
described in bold text. Proposed Samples G-10(B) and G-10(C) also 
provide guidance to issuers on how to disclose the percentages and fees 
described above in a clear and conspicuous manner, by including these 
percentages and fees generally as the first text in the applicable rows 
of the table so that the highlighted rates and fees generally are 
aligned vertically. In consumer testing conducted for the Board, 
participants who saw a table with the APRs and fees in bold and 
generally before any text in the table were more likely to identify the 
APRs and fees quickly and accurately than participants who saw other 
forms in which the APRs and fees were not highlighted in such a 
fashion.
    Electronic applications and solicitations. Section 1304 of the 
Bankruptcy Act amends TILA Section 127(c) to require solicitations to 
open a card account using the Internet or other interactive computer 
service to contain the same disclosures as those made for applications 
or solicitations sent by direct mail. Regarding format, the Bankruptcy 
Act specifies that disclosures provided using the Internet or other 
interactive computer service must be ``readily accessible to consumers 
in close proximity'' to the solicitation. 15 U.S.C. 1637(c)(7).
    In September 2000, the Board revised Sec.  226.5a, and as part of 
these revisions, provided guidance on how card issuers using electronic 
disclosures may comply with the Sec.  226.5a requirement that certain 
disclosures be ``prominently located'' on or with the application or 
solicitation. 65 FR 58,903; October 3, 2000. In March 2001, the Board 
issued interim final rules, which are not mandatory, containing 
additional guidance for the electronic delivery of disclosures under 
Regulation Z, consistent with the requirements of the E-Sign Act. 66 FR 
17,329; March 30, 2001. As discussed above, in April 2007, the Board 
issued for public comment the 2007 Electronic Disclosure Proposal. See 
section-by-section analysis to Sec.  226.5(a)(1).
    The Bankruptcy Act provision applies to solicitations to open a 
card account ``using the Internet or other interactive computer 
service.'' The term ``Internet'' is defined as the international 
computer network of both Federal and non-Federal interoperable packet-
switched data networks. The term ``interactive computer service'' is 
defined as any information service, system or access software provider 
that provides or enables computer access by multiple users to a 
computer server, including specifically a service or system that 
provides access to the Internet and such systems operated or services 
offered by libraries or educational institutions. 15 U.S.C. 1637(c)(7). 
Based on the definitions of ``Internet'' and ``interactive computer 
service,'' the Board believes that Congress intended to cover card 
offers that are provided to consumers in electronic form, such as via 
e-mail or an Internet Web site.
    In addition, although this Bankruptcy Act provision refers to 
credit card solicitations (where no application is required), the Board 
requested comment in the October 2005 ANPR on whether the provision 
should be interpreted also to include applications. Q93. Almost all 
commenters on this issue stated that there is no reason to treat 
electronic applications differently from electronic solicitations. With 
respect to both electronic applications and solicitations, it is 
important for consumers who are shopping for credit to receive accurate 
cost information before submitting an electronic application or 
responding to an electronic solicitation. The Board proposes to apply 
the Bankruptcy Act provision relating to electronic offers to both 
electronic solicitations and applications to promote the informed use 
of credit and avoid circumvention of TILA. 15 U.S.C. 1601(a), 1604(a). 
Thus, in implementing the Bankruptcy Act provision, the Board proposes 
to amend Sec.  226.5a(c) to require that applications and solicitations 
that are provided in electronic form contain the same disclosures as 
applications and solicitations sent by direct mail. The same proposal 
is included in the Board's 2007 Electronic Disclosure Proposal.
    With respect to the form of disclosures required under Sec.  
226.5a, the Board proposes to amend Sec.  226.5a(a)(2) by adding a new 
paragraph (v) to provide that if a consumer accesses an application or 
solicitation for a credit card in electronic form, the disclosures 
required on or with an application or solicitation for a credit card 
must be provided to the consumer in electronic form on or with the 
application or solicitation. A consumer accesses an application or 
solicitation in electronic form when, for example, the consumer views 
the application or solicitation on his or her personal computer. On the 
other hand, if a consumer receives an application or solicitation in 
the mail, the creditor would not satisfy its obligation to provide 
Sec.  226.5a disclosures at that time by including a reference in the 
application or solicitation to the Web site where the disclosures are 
located. See proposed comment 5a(a)(2)-6. The same proposal is included 
in the Board's 2007 Electronic Disclosure Proposal. See Sec.  
226.5a(a)(2)(v) and comment 5a(a)(2)-9 in the 2007 Electronic 
Disclosure Proposal.
    The Board also proposes to revise existing comment 5a(a)(2)-8 added 
by the 2001 interim final rule, which states that a consumer must be 
able to access the electronic disclosures at the time the application 
form or solicitation reply form is made available by electronic 
communication. The Board proposes to revise this comment to describe 
alternative methods for presenting electronic disclosures. This comment 
is intended to provide examples of the methods rather than an 
exhaustive list. The same proposal was included in the Board's 2007 
Electronic Disclosure Proposal.
    The Board also proposes to provide guidance on a Bankruptcy Act 
provision requiring that the Sec.  226.5a disclosures must be ``readily 
accessible to consumers in close proximity'' to an application or 
solicitation that is made electronically. In the October 2005 ANPR, the 
Board asked whether additional or different guidance is needed from the 
guidance previously issued by the Board in 2000 regarding how card 
issuers using electronic disclosures may comply with the Sec.  226.5a 
requirement that certain disclosures be ``prominently located'' on or 
with the application or solicitation. Q95.
    In particular, the 2000 guidance states that the disclosures 
required by Sec.  226.5a must be prominently located on or with 
electronic applications and solicitations. 65 FR 58,903; October 3, 
2000. The guidance provides flexibility for satisfying this 
requirement. For example, a card issuer could provide on the 
application or reply form a link to disclosures provided elsewhere, as 
long as consumers cannot bypass the disclosures before submitting the 
application or reply form. Alternatively, if a link to the disclosures 
is not used,

[[Page 32976]]

the electronic application or reply form could clearly and 
conspicuously indicate where the fact that rate, fee or other cost 
information could be found. Or the disclosures could automatically 
appear on the screen when the application or reply form appears. (See 
current comment 5a(a)(2)-2, which would be renumbered as 5a(a)(2)-1 
under the proposal.)
    Most commenters stated that the Board should retain this existing 
guidance to interpret the ``close proximity'' standard. A few industry 
commenters stated that the existing guidance should not apply, and 
that, for example, it should suffice to provide a link to the 
disclosures that the consumer could choose to access or not. Some 
commenters urged the Board generally to allow maximum flexibility to 
creditors regarding the display of electronic disclosures, and stated 
that no guidance or specific rules were necessary.
    The Board proposes to revise the existing guidance to interpret the 
``close proximity'' standard. The existing guidance would be revised to 
be consistent with proposed changes to comment 5a(a)(2)-8, that 
provides guidance to issuers on providing access to electronic 
disclosures at the time the application form or solicitation reply form 
is made available by electronic communication. Specifically, the Board 
proposes to provide that electronic disclosures are deemed to be 
closely proximate to an application or solicitation if, for example, 
(1) they automatically appear on the screen when the application or 
reply form appears, (2) they are located on the same Web ``page'' as 
the application or reply form without necessarily appearing on the 
initial screen, if the application or reply form contains a clear and 
conspicuous reference to the location of the disclosures and indicates 
that the disclosures contain rate, fee, and other cost information, as 
applicable, or (3) they are posted on a Web site and the application or 
solicitation reply form is linked to the disclosures in a manner that 
prevents the consumer from by-passing the disclosures before submitting 
the application or reply form. See proposed comment 5a(a)(2)-1.ii.
    The Board proposes to retain the requirement that if an electronic 
link to the disclosures is used, the consumer must not be able to 
bypass the link before submitting an application or a reply form. The 
Board believes that the ``close proximity'' standard is designed to 
ensure that the disclosures are easily noticeable to consumers, and 
this standard is not met when consumers are only given a link to the 
disclosures, but not to the disclosures themselves. The Board proposes 
to incorporate the ``close proximity'' standard for electronic 
applications and solicitations in Sec.  226.5a(a)(2)(vi)(B), and the 
guidance regarding the location of the Sec.  226.5a disclosures in 
electronic applications and solicitations in comment 5a(a)(2)-1.ii.
    Terminology. Section 226.5a currently requires terminology in 
describing the disclosures required by Sec.  226.5a must be consistent 
with terminology describing the account-opening disclosures (Sec.  
226.6) and for the periodic statement disclosures (Sec.  226.7). TILA 
and Sec.  226.5a also require that the term ``grace period'' be used to 
describe the date by which or the period within which any credit 
extended for purchases may be repaid without incurring a finance 
charge. 15 U.S.C. 1632(c)(2)(C). The Board proposes that all guidance 
for terminology requirements with respect to Sec.  226.5a disclosures 
be placed in proposed Sec.  226.5(a)(2)(iii). The Board proposes to add 
comment 5a(a)(2)-7 to cross-reference the guidance in Sec.  
226.5(a)(2).
5a(a)(4) Certain Fees That Vary by State
    Currently, under Sec.  226.5a, if the amount of a late-payment fee, 
over-the-credit-limit fee, cash advance fee or balance transfer fee 
varies from state to state, a card issuer may disclose the range of the 
fees instead of the amount for each state, if the disclosure includes a 
statement that the amount of the fee varies from state to state. See 
existing Sec.  226.5a(a)(5), renumbered as new Sec.  226.5a(a)(4). As 
discussed below, the Board proposes to require card issuers to disclose 
in the table any fee imposed when a payment is returned. See proposed 
Sec.  226.5a(b)(12). The Board proposes to amend new Sec.  226.5a(a)(4) 
to add returned payment fees to the list of fees for which an issuer 
may disclose a range of fees. The Board requests comment on whether 
other fees required to be disclosed under Sec.  226.5a should be added 
to the list of fees for which the issuer may disclose a range of fees, 
such as fees for required insurance or debt cancellation or suspension 
coverage under proposed Sec.  226.5a(b)(14).
5a(a)(5) Exceptions
    Section 226.5a currently contains several exceptions to the 
disclosure requirements. Some of these exceptions are in the regulation 
itself, while others are contained in the commentary. For clarity, all 
exceptions would be placed together in new Sec.  226.5a(a)(5), as 
indicated in the redesignation table below.
5a(b) Required Disclosures
    Section 226.5a(b) specifies the disclosures that are required to be 
included on or with certain applications and solicitations.
5a(b)(1) Annual Percentage Rate
    Section 226.5a requires card issuers to disclose the rates 
applicable to the account, such as rates applicable to purchases, cash 
advances, and balance transfers. 15 U.S.C. 1637(c)(1)(A)(i)(I).
    16-point font for disclosure of purchase APRs. Currently, under 
Sec.  226.5a(b)(1), the purchase rate must be disclosed in the table in 
at least 18-point font. This font requirement does not apply to (1) a 
temporary initial rate for purchases that is lower than the rate that 
will apply after the temporary rate expires; or (2) a penalty rate that 
will apply upon the occurrence of one or more specified events. In 
response to the December 2004 ANPR, several industry commenters 
suggested that the Board delete this 18-point font requirement. These 
commenters indicated that disclosing the purchase rate in 18-point font 
size might distract consumers from other important terms being 
disclosed, and that disclosing the purchase rate in the table in large 
font size is not necessary because simply disclosing the purchase rate 
in the table provides consumers meaningful and comparable disclosure of 
that term.
    The Board is proposing to reduce the 18-point font requirement to a 
16-point font. The purchase rate is one of the most important terms 
disclosed in the table, and it is essential that consumers be able to 
identify that rate easily. A 16-point font size requirement for the 
purchase APR appears to be sufficient to highlight the purchase APR. 
(The Board is proposing that other disclosures in the table are 
required to be in 10-point type. See proposed comment 5(a)(1)-3.) In 
consumer testing conducted for the Board, versions of the table in 
which the purchase rate was the same font as other rates included in 
the table were reviewed. In other versions, the purchase rate was in 
16-point type while other disclosures were in 10-point type. 
Participants tended to notice the purchase rate more often when it was 
in a font bigger than the font used for other rates. Nonetheless, there 
was no evidence from consumer testing that it was necessary to use a 
font size of 18-point in order for the purchase APR to be noticeable to 
participants. Given that the proposal is requiring a minimum of 10-
point type for the disclosure of other terms in the table, based on 
document design principles, the Board believes that a 16-point font 
size for the purchase

[[Page 32977]]

APR would be effective in highlighting the purchase APR in the table.
    Periodic rate. Currently, comment 5a(b)(1)-1 allows card issuers to 
disclose the periodic rate in the table in addition to the required 
disclosure of the corresponding APR. The Board proposes to delete 
comment 5a(b)(1)-1, and thus, prohibit disclosure of the periodic rate 
in the table. Based on consumer testing conducted for the Board, 
consumers do not appear to shop using the periodic rate, nor is it 
clear that this information is important to understanding a credit card 
offer. Allowing the periodic rate to be disclosed in the table may 
distract from more important information in the table, and contribute 
to ``information overload.'' Thus, in an effort to streamline the 
information that appears in the table, the Board proposes to prohibit 
disclosure of the periodic rate in the table. Nonetheless, card issuers 
may disclose this information outside of the table.
    Variable rate information. Section 226.5a(b)(1)(i), which 
implements TILA Section 127(c)(1)(A)(i)(II), currently requires for 
variable-rate accounts, that the card issuer must disclose the fact 
that the rate may vary and how the rate is determined. 15 U.S.C. 
1637(c)(1)(A)(i)(II). In disclosing how the applicable rate will be 
determined, the card issuer is required to provide the index or formula 
used and disclose any margin or spread added to the index or formula in 
setting the rate. The card issuer may disclose the margin or spread as 
a range of the highest and lowest margins that may be applicable to the 
account. A disclosure of any applicable limitations on rate increases 
or decreases may also be included in the table. See current comment 
5a(b)(1)-3.
    1. Index and margins. Currently, the variable rate information is 
required to be disclosed separately from the applicable APR, in a row 
of the table with the heading ``Variable Rate Information.'' Some card 
issuers will include the phrase ``variable rate'' with the disclosure 
of the applicable APR and include the details about the index and 
margin under the ``Variable Rate Information'' heading. In the consumer 
testing conducted for the Board, many participants who saw the variable 
rate information presented as described above understood that the label 
``variable'' meant that a rate could change, but could not locate 
information on the tested form regarding how or why these rates could 
change. This was true even if the index and margin information was 
taken out of the row of the table with the heading ``Variable Rate 
Information'' and placed in a footnote to the phrase ``variable rate.'' 
Many participants who did find the variable rate information were 
confused by the variable-rate margins, often interpreting them 
erroneously as the actual rate being charged. In addition, very few 
participants indicated that they would use the margins in shopping for 
a credit card account.
    Accordingly, the Board proposes to amend Sec.  226.5a(b)(1)(i) to 
specify that issuers may not disclose the amount of the index or 
margins in the table. Specifically, card issuers would not be allowed 
to disclose in the table the current value of the index (for example, 
that the prime rate currently is 7.5 percent) or the amount of the 
margin that is used to calculate the variable rate. Card issuers would 
be allowed to indicate only that the rate varies and the type of index 
used to determine the rate (such as the ``prime rate,'' for example.) 
In describing the type of index, the issuer may not include details 
about the index in the table. For example, if the issuer uses a prime 
rate, the issuer must just describe the rate as tied to a ``prime 
rate'' and may not disclose in the table that the prime rate used is 
the highest prime rate published in the Wall Street Journal two 
business days before the closing date of the statement for each billing 
period. See proposed comment 5a(b)(1)-2. Also, the Board would require 
that the disclosure about a variable rate (the fact that the rate 
varies and the type of index used to determine the rate) must be 
disclosed with the applicable APRs, so that consumers can more easily 
locate this information. See proposed Model Form G-10(A), Samples G-
10(B) and G-10(C). Proposed Samples G-10(B) and G-10(C) provide 
guidance to issuers on how to disclose the fact that the applicable 
rate varies and how it is determined.
    2. Rate floors and ceilings. Currently, card issuers may disclose 
in the table, at their option, any limitations on how high (i.e., a 
rate ceiling) or low (i.e., a rate floor) a particular rate may go. For 
example, assume that the purchase rate on an account could not go below 
12 percent or above 24 percent. An issuer would be required to disclose 
in the table the current rate offered on the credit card (for example, 
18 percent), and would be permitted to disclose in the table that the 
rate would not go below 12 percent and above 24 percent. See current 
comment 5a(b)(1)-4. The Board proposes to revise the commentary to 
prohibit the disclosure of the rate floors and ceilings in the table. 
Based on consumer testing conducted for the Board, consumers do not 
appear to shop based on these rate floors and ceilings, and allowing 
them to be disclosed in the table may distract from more important 
information in the table, and contribute to ``information overload.'' 
Thus, in an effort to streamline the information that may appear in the 
table, the Board proposes to prohibit disclosure of the rate floors and 
ceilings in the table. Nonetheless, card issuers may disclose this 
information outside of the table.
    Discounted initial rates. Currently, comment 5a(b)(1)-5 specifies 
that if the initial rate is temporary and is lower than the rate that 
will apply after the temporary rate expires, a card issuer must 
disclose the rate that will otherwise apply to the account. A 
discounted initial rate may be provided in the table along with the 
rate required to be disclosed if the card issuer also discloses the 
time period during which the introductory rate will remain in effect. 
The Board proposes to move comment 5a(b)(1)-5 to new Sec.  
226.5a(b)(1)(ii). The Board also proposes to add new comment 5a(b)(1)-3 
to specify that if a card issuer discloses the discounted initial rate 
and expiration date in the table, the issuer is deemed to comply with 
the standard to provide this information clearly and conspicuously if 
the issuer uses the format specified in proposed Samples G-10(B) and G-
10(C) to present this information.
    In addition, under TILA Section 127(c)(6)(A), as added by Section 
1303(a) of the Bankruptcy Act, the term ``introductory'' must be used 
in immediate proximity to each listing of a discounted initial rate in 
the application, solicitation, or promotional materials accompanying 
such application or solicitation. Thus, the Board proposes to revise 
new Sec.  226.5a(b)(1)(ii) to specify that if an issuer provides a 
discounted initial rate in the table along with the rate required to be 
disclosed, the card issuer must use the term ``introductory'' in 
immediate proximity to the listing of the initial discounted rate.
    In the October 2005 ANPR, commenters asked the Board to consider 
permitting creditors to use the term ``intro'' as an alternative to the 
word ``introductory.'' Because ``intro'' is a commonly understood 
abbreviation of the term ``introductory,'' and consumer testing 
indicates that consumers understand this term, the Board proposes to 
allow creditors to use ``intro'' as an alternative to the requirement 
to use the term ``introductory'' and is proposing to clarify this 
approach in new Sec.  226.5a(b)(1)(ii). Also, to give card issuers 
guidance on the meaning of ``immediate proximity,'' the Board is

[[Page 32978]]

proposing to provide guidance for creditors that place the word 
``introductory'' or ``intro'' within the same phrase as each listing of 
the discounted initial rate. This guidance is set forth in proposed 
comment 5a(b)(1)-3. The Board believes that interpreting ``immediate 
proximity'' to mean adjacent to the rate may be too restrictive. 
Moreover, the Board has proposed the ``within the same phrase'' 
standard as a safe harbor instead of requiring this placement, 
recognizing that even if the term ``introductory'' is not ``within the 
same phrase'' as the rate it may still meet the ``immediate proximity'' 
standard.
    Penalty rates. Currently, comment 5a(b)(1)-7 requires that if a 
rate may increase upon the occurrence of one or more specific events, 
such as a late payment or an extension of credit that exceeds the 
credit limit, the card issuer must disclose the increased penalty rate 
that may apply and the specific event or events that may result in the 
increased rate. If a tabular format is required, the issuer must 
disclose the penalty rate in the table under the heading ``Other 
APRs,'' along with any balance transfer or cash advance rates.
    The specific event or events must be described outside the table 
with an asterisk or other means to direct the consumer to the 
additional information. At its option, the issuer may include outside 
the table with the explanation of the penalty rate the period for which 
the increased rate will remain in effect, such as ``until you make 
three timely payments.'' The issuer need not disclose an increased rate 
that is imposed if credit privileges are permanently terminated.
    In the December 2004 ANPR, the Board solicited comment on whether 
the table was effective as currently designed. Q7. In response to this 
question, many commenters suggested that the specific event or events 
that may result in the penalty rate should be disclosed in the table 
along with the penalty rate, because this would enhance comparison 
shopping and consumer understanding by highlighting penalty pricing and 
its effect on the other rates for the account.
    In the consumer testing conducted for the Board, when reviewing 
forms in which the specific events that trigger the penalty rate were 
disclosed outside the table, many participants did not readily notice 
the penalty rate triggers when they initially read through the document 
or when asked follow-up questions. In addition, many participants did 
not readily notice the penalty rate when it was included in the row 
``Other APRs'' along with other rates. The GAO also found that 
consumers had difficulty identifying the default rate and circumstances 
that would trigger rate increases. See GAO Report on Credit Card Rates 
and Fees, at page 49. In the testing conducted for the Board, when the 
penalty rate was placed in a separate row in the table, participants 
tended to notice the rate more often. Moreover, participants tended to 
notice the specific events that result in the penalty rate more often 
when these events were included with the penalty rate in a single row 
in the table. For example, two types of forms related to placement of 
the events that could trigger the penalty rate were tested--several 
versions showed the penalty rate in one row of the table and the 
description of the events that could trigger the penalty rate in 
another row of the table. Several other versions showed the penalty 
rate and the triggering events in the same row. Participants who saw 
the versions of the table with the penalty rate in a separate row from 
the description of the triggering events tended to skip over the row 
that specified the triggering events when reading the table. 
Nonetheless, participants who saw the versions of the table in which 
the penalty rate and the triggering events were in the same row tended 
to notice the triggering events when they reviewed the table.
    As a result, the Board proposes to add Sec.  226.5a(b)(1)(iv) and 
amend new comment 5a(b)(1)-4 (previously comment 5a(b)(1)-7) to require 
card issuers to briefly disclose in the table the specific event or 
events that may result in the penalty rate. In addition, the Board is 
proposing that the penalty rate and the specific events that cause the 
penalty rate to be imposed must be disclosed in the same row of the 
table. See proposed Model Form G-10(A). In describing the specific 
event or events that may result in an increased rate, new comment 
5a(b)(1)-4 provides that the descriptions of the triggering events in 
the table should be brief. For example, if an issuer may increase a 
rate to the penalty rate if the consumer does not make the minimum 
payment by 5 p.m., Eastern time, on its payment due date, the issuer 
should describe this circumstance in the table as ``make a late 
payment.'' Proposed Samples G-10(B) and G-10(C) provide additional 
guidance on the level of detail that issuers should use in describing 
the specific events that result in the penalty rate.
    The Board also proposes to specify in new Sec.  226.5a(b)(1)(iv) 
that in disclosing a penalty rate, a card issuer also must specify the 
balances to which the increased rate will apply. Typically, card 
issuers apply the increased rate to all balances on the account. The 
Board believes that this information helps consumers better understand 
the consequences of triggering the penalty rate.
    In addition, the Board proposes to specify in new Sec.  
226.5a(b)(1)(iv) that in disclosing the penalty rate, a card issuer 
must describe how long the increased rate will apply. Proposed comment 
5a(b)(1)-4 provides that in describing how long the increased rate will 
remain in effect, the description should be brief, and refers issuers 
to Samples G-10(B) and G-10(C) for guidance on the level of detail that 
issuer should use to describe how long the increased rate will remain 
in effect. Also, proposed comment 5a(b)(1)-4 provides that if a card 
issuer reserves the right to apply the increased rate indefinitely, 
that fact should be stated. The Board believes that this information 
may help consumers better understand the consequences of triggering the 
penalty rate.
    Also, the Board proposes to add language to new Sec.  
226.5a(b)(1)(iv) to specify that in disclosing a penalty rate, card 
issuers must include a brief description of the circumstances under 
which any discounted initial rates may be revoked and the rate that 
will apply after the discounted initial rate is revoked. Section 
1303(a) of the Bankruptcy Act requires that a credit card application 
or solicitation must contain in a prominent location on or with the 
application or solicitation a clear and conspicuous disclosure of a 
general description of the circumstances that may result in revocation 
of a discounted initial rate offered with the card, and the rate that 
will apply after the discounted initial rate is revoked. 15 U.S.C. 
1637(c)(6)(C). The Board is proposing that this information be 
disclosed in the table along with other penalty rate information. 
Often, the same events that trigger a loss of a discounted initial rate 
and an increase to the penalty rate also trigger an increase in other 
rates on the account.
    Rates that depend on consumers' creditworthiness. Credit card 
issuers often engage in risk-based pricing such that the rates offered 
on a credit card will depend on later determinations of a consumer's 
creditworthiness. For example, an issuer may use information collected 
in a consumer's application or solicitation reply form (e.g., income 
information) or obtained through a credit report from a consumer 
reporting agency to determine the rate for which a consumer qualifies. 
For preapproved solicitations, issuers that engage in risk-based 
pricing typically will disclose the

[[Page 32979]]

specific rates offered to the consumer, because for these offers, 
issuers typically will have some indication of a consumer's 
creditworthiness based on the prescreening process done through a 
consumer reporting agency. For applications not involving prescreens, 
however, issuers that use risk-based pricing may not be able to 
disclose the specific rate that would apply to a consumer, because 
issuers may not have sufficient information about a consumer's 
creditworthiness at the time the application is given.
    In response to the December 2004 ANPR, industry commenters asked 
for guidance on how rates should be disclosed under Sec.  226.5a when 
an issuer does not know the specific rate for which the consumer will 
qualify at the time the disclosures are made because the specific rate 
depends on a later determination of the consumer's creditworthiness. 
Some industry commenters asked the Board to clarify that issuers may 
disclose the range of possible rates, with an explanation that the rate 
obtained by the consumer is based on the consumer's creditworthiness. 
Another industry commenter suggested that the Board should allow 
issuers to disclose a recent APR or the median rate within the range of 
possible rates, with an explanation that the rate could be higher or 
lower depending on the consumer's creditworthiness. Several consumer 
group commenters suggested that the Board should not allow issuers to 
disclose a range of possible rates. Instead, issuers should be required 
to disclose the actual APR that the creditor is offering, because 
otherwise, consumers do not know the rate for which they are applying.
    The Board proposes to add Sec.  226.5(b)(1)(v) and comment 
5a(b)(1)-5 to clarify that in circumstances in which an issuer cannot 
state a single specific rate being offered at the time disclosures are 
given because the rate will depend on a later determination of the 
consumer's creditworthiness, issuers must disclose the possible rates 
that might apply, and a statement that the rate for which the consumer 
may qualify at account opening depends on the consumer's 
creditworthiness. A card issuer may disclose the possible rates as 
either specific rates or a range of rates. For example, if there are 
three possible rates that may apply (e.g., 9.99, 12.99 or 17.99 
percent), an issuer may disclose specific rates (9.99, 12.99 or 17.99 
percent) or a range of rates (9.99 to 17.99 percent). Proposed Samples 
G-10(B) and G-10(C) provide guidance for issuers on how to meet these 
requirements. In addition, the Board solicits comment on whether card 
issuer should alternatively be permitted to list only the highest 
possible rate that may apply instead of a range of rates (e.g., up to 
17.99 percent).
    As discussed above, one industry commenter suggested that the Board 
should allow issuers to disclose a recent APR or the median rate within 
the range of possible rates, with an explanation that the APR could be 
higher or lower depending on the consumer's creditworthiness. The Board 
believes that requiring card issuers to disclose all the possible rates 
(as either specific rates, or as a range of rates) provides more useful 
information to consumers than allowing issuers to disclose a median APR 
within the range. If only one rate is disclosed in the table, consumers 
may mistake the rate disclosed as the specific rate offered on the 
account, and not understand that it is a median rate within a certain 
range, even if there is an explanation that the rate could be higher or 
lower. If a consumer sees a range or several specific rates, the 
consumer may be better able to determine that more than one rate is 
being disclosed.
    Transactions with both rate and fee. When a consumer initiates a 
balance transfer or cash advance, card issuers typically charge 
consumers both interest on the outstanding balance of the transaction, 
and a fee to complete the transaction. It is important that consumers 
understand when both a rate and a fee apply to specific transactions. 
In the consumer testing conducted for the Board, several ways of 
presenting rate and fee information were reviewed. In some tests, the 
cash advance and balance transfer rates were included in a section with 
other rates, and cash advance and balance transfer fees were included 
in a section with other fees. In other tests, cash advance and balance 
transfer fees were not included with other fees, but instead were 
included with the cash advance and balance transfer rates. Participants 
in the first test (the one where balance transfer and cash advance fees 
were grouped with other fees) were more likely to notice the balance 
transfer and cash advance fees than participants in the other tests. 
Participants tended to notice rates more easily when they were grouped 
together, and fees more easily when they are grouped together. Thus, 
the Board is proposing to group APRs together in the table and fees 
together in the table, rather than grouping APRs and fees related to 
cash advances together and APRs and fees related to balance transfers 
together.
    Nonetheless, because the rates and the fees related to cash 
advances and balance transfers are not grouped together, a cross 
reference from the cash advance and balance transfer rates to the 
applicable fees may help consumers notice both the rate and the fee. In 
consumer testing conducted for the Board, some participants were more 
aware that an interest rate applies to cash advances and balance 
transfers than they were aware of the fee component, so a cross 
reference between the rate and the fee may help those consumers notice 
both the rate and the fee components. Therefore, the Board proposes to 
add new Sec.  226.5a(b)(1)(vi) to require that if a rate and fee both 
apply to a balance transfer or cash advance transaction, a card issuer 
must disclose that a fee also applies when disclosing the rate, and a 
cross-reference to the fee. 15 U.S.C. 1637(c)(5).
    Typical APR. In response to the December 2004 ANPR, several 
consumer groups indicated that the current disclosure requirements in 
Sec.  226.5a allow card issuers to promote low APRs, that include 
interest but not fees, while charging high penalty fees and penalty 
rates when consumers, for example, pay late or exceed the credit limit. 
As a result, these consumer groups suggested that the Board require 
credit card issuers to disclose in the table a ``typical rate'' that 
would include fees and charges that consumers pay for a particular 
open-end credit products. This rate would be calculated as the average 
effective rate disclosed on periodic statements over the last three 
years for customers with the same or similar credit card product. These 
consumer groups believe that this ``typical rate'' would reflect the 
real rate that consumers pay for the credit card product.
    The Board is not proposing that card issuers disclose the ``typical 
rate'' as part of the Sec.  226.5a disclosures. Although a single cost 
figure (like the APR on closed-end credit) is a laudable objective, the 
Board does not believe that the proposed typical APR would be helpful 
to consumers that seek credit cards. There are many different ways 
consumers may use their credit cards, such as the features they use, 
what fees they incur, and whether a balance is carried from month to 
month. For example, some consumers use their cards only for purchases, 
always pay off the bill in full, and never pay fees. Other consumers 
may use their cards for purchases, balance transfers or cash advances, 
but never pay late-payment fees, over-the-credit-limit fees or other 
penalty fees. Still others may pay penalty fees and incur penalty 
rates. A ``typical rate,'' however, would be based

[[Page 32980]]

on average fees and average balances that may not be typical for many 
consumers. Moreover, such a rate may confuse consumers about the actual 
rate that may apply to their account.
    Nonetheless, the Board believes it is important that consumers 
understand the penalty rates and penalty fees that apply to a credit 
card account. Thus, the Board is proposing to make penalty rates more 
prominent in the table and require card issuers to describe in the 
table the reasons why a penalty rate may apply and how long the penalty 
rate will apply. See proposed Sec.  226.5a(b)(1)(iv). Likewise, the 
Board is proposing to highlight penalty fees by requiring that late 
payment fees, over-the-credit-limit fees, and returned-payment fees be 
disclosed in the table. See proposed Sec.  226.5a(a)(2)(i).
5a(b)(2) Fees for Issuance or Availability
    Section 226.5a(b)(2), which implements TILA Section 
127(c)(1)(A)(ii)(I), requires card issuers to disclose any annual or 
other periodic fee, expressed as an annualized amount, that is imposed 
for the issuance or availability of a credit card, including any fee 
based on account activity or inactivity. 15 U.S.C. 
1637(c)(1)(A)(ii)(I). In 1989, the Board used its authority under TILA 
Section 127(c)(5) to require that issuers also disclose non-periodic 
fees related to opening the account, such as one-time membership or 
participation fees. 15 U.S.C. 1637(c)(5); 54 FR 13,855, April 6, 1989.
    Fees for issuance or availability of credit card products targeted 
to subprime borrowers. Often, subprime credit cards will have 
substantial fees related to the issuance and availability of credit. 
For example, these cards may impose an annual fee, and a monthly 
maintenance fee for the card. In addition, these cards may impose 
multiple one-time fees when the consumer opens the card account, such 
as an application fee and a program fee. The Board believes that these 
fees should be clearly explained to consumers at the time of the offer 
so that consumers better understand when these fees will be imposed.
    The Board proposes to amend Sec.  226.5a(b)(2) to require 
additional information about periodic fees. 15 U.S.C. 1637(c)(5). 
Currently, issuers are required to disclose only the annualized amount 
of the fee. The Board proposes to amend Sec.  226.5a(b)(2) to require 
issuers also to disclose the amount of the periodic fee, and how 
frequently it will be imposed. For example, if an issuer imposes a $10 
monthly maintenance fee for a card, the issuer must disclose in the 
table that there is a $10 monthly maintenance fee, and that the fee is 
$120 on an annual basis.
    In addition, the Board proposes to amend Sec.  226.5a(b)(2) to 
require additional information about non-periodic fees related to 
opening the account. Currently, issuers are required to disclose the 
amount of the non-periodic fee, but not that it is a one-time fee. The 
Board proposes to amend Sec.  226.5a(b)(2) to require card issuers to 
disclose the amount of the fee and that it is a one-time fee. This 
additional information will allow consumers to better understand set-up 
and maintenance fees that are often imposed in connection with subprime 
credit cards. For example, the proposed changes would provide consumers 
with additional information about when the fees will be imposed by 
identifying which fees are one-time fees, which fees are periodic fees 
(such as monthly fees), and which fees are annual fees.
    In addition, application fees that are charged regardless of 
whether the consumer receives credit currently are not considered fees 
as imposed for the issuance or availability of a credit card, and thus 
are not disclosed in the table. See current comment 5a(b)(2)-3 and 
Sec.  226.4(c)(1). The Board proposes to delete the exception for these 
application fees and require that they be disclosed in the table as 
fees imposed for the issuance or availability of a credit card. The 
Board believes that consumers should be aware of these fees when they 
are shopping for a credit card.
5a(b)(3) Minimum Finance Charge
    Currently, Sec.  226.5a(b)(3), which implements TILA Section 
127(c)(1)(A)(ii)(II), requires that card issuers must disclose any 
minimum or fixed finance charge that could be imposed during a billing 
cycle. Card issuers typically impose a minimum charge (e.g., $.50) in 
lieu of interest in those months where a consumer would otherwise incur 
an interest charge that is less than the minimum charge (a so-called 
``minimum interest charge''). In response to the December 2004 ANPR, 
one industry commenter suggested that the Board no longer require that 
the minimum finance charge be disclosed in the table because these fees 
are typically small (e.g., $.50) and consumers do not shop on them. 
Another industry commenter suggested that the Board only require that 
the minimum finance charge be included in the table if the charge is a 
significant amount. On the other hand, several consumer groups urged 
the Board to continue to include the minimum finance charge in the 
table because this charge can have a significant effect on the cost of 
credit.
    The Board proposes to retain the minimum finance charge disclosure 
in the table. Although minimum charges currently may be small, card 
issuers may increase these charges in the future. Also, Board is aware 
of at least one credit card product for which no APR is charged, but 
each month a fixed charge is imposed based on the outstanding balance 
(for example, $6 charge per $1,000 balance). If the minimum finance 
charge disclosure was eliminated from the table, card issuers that 
offer this type of pricing would no longer be required to disclose the 
fixed charge in the table. The Board is not proposing to require the 
minimum finance charge only if it is a significant amount. This 
approach could undercut the uniformity of the table, and could be 
misleading to consumers. If consumers do not see a minimum finance 
charge disclosed in the table, the Board is concerned that most 
consumers might assume that there is not a minimum finance charge on 
the card, when the charge was below a certain threshold.
    Under Sec.  226.5a(b)(3), card issuers are only required to 
disclose the amount of any minimum or fixed finance charge that could 
be imposed during a billing cycle. Card issuers currently are not 
required to provide a description of when this charge may be imposed. 
In consumer testing conducted for the Board, model forms were tested 
that only included the amount of the minimum interest charge in the 
table. In viewing these forms, some participants misunderstood that 
they would pay the minimum interest charge every month, not just those 
months where they otherwise would incur interest that was less than the 
minimum charge. Thus, the Board proposes to amend Sec.  226.5a(b)(3) to 
require card issuers to disclose in the table a brief description of 
the minimum finance charge, to give consumers context for when this 
charge will be imposed. 15 U.S.C. 1637(c)(5). Proposed Samples G-10(B) 
and G-10(C) provide guidance regarding how to disclose a minimum 
interest charge.
5a(b)(4) Transaction Charges
    Section 226.5a(b)(4), which implements TILA Section 
127(c)(1)(A)(ii)(III), requires that card issuers disclose any 
transaction charge imposed on purchases. The current commentary to this 
provision clarifies that only transaction fees on purchases imposed by 
the issuer must be disclosed. (See comment 5a(b)(4)-1.) For clarity, 
the Board would amend Sec.  226.5a(b)(4) to incorporate this commentary 
provision.

[[Page 32981]]

    In addition, the Board proposes to amend Sec.  226.5a(b)(4) to 
specify that fees charged for transactions in a foreign currency or 
that take place in a foreign country may not be disclosed in the table. 
In an effort to streamline the contents of the table, the Board 
proposes to highlight only those fees that may be important for a 
significant number of consumers. In consumer testing for the Board, 
participants did not tend to mention foreign transaction fees as 
important fees they use to shop. There are few consumers who may pay 
these fees with any frequency. Thus, the Board proposes to except 
foreign transaction fees from disclosure of transaction fees. The Board 
proposes to include foreign transaction fees in the account-opening 
summary table that is required under Sec.  226.6(b)(4), so that 
interested consumers can learn of the fees before using the card.
5a(b)(5) Grace Period
    Section 226.5a(b)(5), which implements TILA Section 
127(c)(A)(iii)(I), requires that card issuers disclose in the table the 
date by which or the period within which any credit extended for 
purchases may be repaid without incurring a finance charge. If no grace 
period is provided, that fact must be disclosed. Comment 5a(b)(5)-1 
provides that a card issuer may, but need not, refer to the beginning 
or ending point of any grace period and briefly state any conditions on 
the applicability of the grace period. For example, the grace period 
disclosure might read ``30 days'' or ``30 days from the date of the 
periodic statement (provided you have paid your previous balance in 
full by the due date).''
    The consumer testing conducted for the Board indicated that some 
participants misunderstood the word ``grace period'' to mean the time 
after the payment due date that an issuer may give the consumer to pay 
the bill without charging a late-payment fee. The GAO found similar 
misunderstandings by consumers in its consumer testing. Furthermore, 
many participants in the GAO testing incorrectly indicated that the 
grace period was the period of time promotional interest rates applied. 
See GAO Report on Credit Card Rates and Fees, at page 50.
    In consumer testing conducted for the Board, participants tended to 
understand the grace period more clearly when additional context was 
added, such as describing that if the consumer paid the bill in full 
each month, the consumer would have some period of time (e.g., 25 days) 
to pay the new purchase balance in full to avoid interest. Thus, the 
Board proposes to amend Sec.  226.5a(b)(5) to require card issuers to 
disclose briefly any conditions on the applicability of the grace 
period. 15 U.S.C. 1637(c)(5). The Board also proposes to amend comment 
5a(b)(5)-1 to provide guidance for how issuers may meet the 
requirements in proposed Sec.  226.5a(b)(5).
5a(b)(6) Balance Computation Method
    TILA Section 127(c)(1)(A)(iv) calls for the Board to name not more 
than five of the most common balance computation methods used by credit 
card issuers to calculate the balance on which finance charges are 
computed. 15 U.S.C. 1637(c)(1)(A)(iv). If issuers use one of the 
balance computation methods named by the Board, Sec.  226.5a(b)(6) 
requires that issuers must disclose the name of that balance 
computation method in the table as part of the disclosures required by 
Sec.  226.5a, and issuers are not required to provide a description of 
the balance computation method. If the issuer uses a balance 
computation method that is not named by the Board, the issuer must 
disclose a detailed explanation of the balance computation method. See 
current Sec.  226.5a(b)(6); Sec.  226.5a(a)(2)(i).
    In response to the December 2004 ANPR, several commenters suggested 
that the Board delete the description of the balance computation method 
from the table. These commenters believed that the implications of the 
balance computation method on the actual cost of credit are simply too 
complex and too contingent on future purchasing patterns to be of any 
use to consumers in shopping for credit.
    The Board agrees that balance computation methods are too complex 
to explain in a simple fashion in the table. Most card issuers use one 
of two methods--either the ``average daily balance method (including 
new purchases)'' or the ``two-cycle average daily balance method 
(including new purchases).'' For consumers that carry a balance on 
their credit card every month or for consumers that pay off their 
balance in full every month, there essentially is no difference between 
these two methods. There is a difference between the two methods only 
in those months where a consumer paid off their previous balance in 
full, but did not pay off their current balance in full. In those 
months, the consumer will pay more interest under the ``two-cycle 
average daily balance method'' than under the ``average daily balance 
method.'' How much more interest the consumer pays depends on the 
amount of the purchases in the previous billing cycle, when those 
purchases were made, the amount of any payments made in that billing 
cycle, and when those payments were made.
    In consumer testing conducted for the Board, virtually no 
participants understood the two balance computation methods most used 
by card issuers--the average daily balance method and the two-cycle 
average daily balance method--when those methods were just described by 
name. The GAO found similar results in its consumer testing. See GAO 
Report on Credit Card Rates and Fees, at pages 50-51. In the consumer 
testing conducted for the Board, a version of the table was used which 
attempted to explain briefly that the ``two-cycle average daily balance 
method'' would be more expensive than the ``average daily balance 
method'' for those consumers that sometimes pay their bill in full and 
sometimes do not. Participants' answers suggested they did not 
understand this disclosure. They appeared to need more information 
about how balances are calculated. Nonetheless, the addition of more 
information would likely add too much detail to the disclosures and 
result in ``information overload.'' In addition, it is unclear whether 
most consumers would consider the balance computation method when 
shopping for a credit card.
    As a result, the Board proposes to retain a brief reference to the 
balance computation method, but move the disclosure from the table to 
directly below the table. See Sec.  226.5a(a)(2)(iii). TILA Section 
122(c)(2) states that for certain disclosures set forth in Section TILA 
127(c)(1)(A), including the balance computation method, the Board shall 
require that the disclosure of such information shall, to the extent 
the Board determines to be practicable and appropriate, be in the form 
of a table. 15 U.S.C. 1632(c)(2). The Board believes that it is no 
longer appropriate to continue to disclose the balance computation 
method in the table, because the name of the balance computation method 
used by issuers does not appear to be meaningful to consumers without 
additional context and may distract from more important information 
contained in the table. The Board proposes to continue to require that 
issuers disclose the name of the balance computation method beneath the 
table, so that consumers and others will have access to this 
information if they find it useful.
5a(b)(8) Cash Advance Fee
    Currently, comment 5a(b)(8)-1 provides that a card issuer must 
disclose only those fees it imposes for a cash advance that are finance 
charges under

[[Page 32982]]

Sec.  226.4. For example, a charge for a cash advance at an automated 
teller machine (ATM) would be disclosed under Sec.  226.5a(b)(8) if no 
similar charge is imposed for ATM transactions not involving an 
extension of credit. As discussed in the section-by-section analysis to 
Sec.  226.4, the Board proposes to provide that all transaction fees on 
credit cards would be considered finance charges. Thus, the Board 
proposes to delete the current guidance discussed in comment 5a(b)(8)-1 
as obsolete.
5a(b)(12) Returned Payment Fee
    Currently, Sec.  226.5a does not require a card issuer to disclose 
a fee imposed when a payment is returned. The Board proposes to add 
Sec.  226.5a(b)(12) to require issuers to disclose this fee in the 
table. Typically, card issuers will impose a fee and a penalty rate if 
a cardholder's payment is returned. As discussed above, the Board 
proposes to require card issuers to disclose in the table the reasons 
that a penalty rate may be imposed. See proposed Sec.  
226.5a(b)(1)(iv). The Board proposes that the returned payment fee be 
disclosed too, so that consumers are told both consequences of returned 
payments.
5a(b)(13) Cross References from Fees to Penalty Rate
    Card issuers often impose both a fee and penalty rate for the same 
behavior--such as a consumer paying late, exceeding the credit limit, 
or having a payment returned. In consumer testing conducted for the 
Board, participants tended to associate paying penalty fees with 
certain behaviors (such as paying late or going over the credit limit), 
but they did not tend to associate rate increases with these same 
behaviors. By linking the penalty fees with the penalty rate, 
participants more easily understood that if they engage in certain 
behaviors, such as paying late, their rates may increase in addition to 
incurring a fee. Thus, the Board proposes to add Sec.  226.5a(b)(13) to 
provide that if a card issuer may impose a penalty rate for any of the 
reasons that a penalty fee would be disclosed in the table (such as 
late payments, going over the credit limit, or returned payments), the 
issuer in disclosing the fee also must disclose that the penalty rate 
may apply, and a cross-reference to the penalty rate. Proposed Samples 
G-10(B) and G-10(C) provide guidance on how to provide these 
disclosures.
5a(b)(14) Required Insurance, Debt Cancellation Or Debt Suspension 
Coverage
    Credit card issuers often offer optional insurance or debt 
cancellation or suspension coverage with the credit card. Under the 
current rules, costs associated with the insurance or debt cancellation 
or suspension coverage are not considered ``finance charges'' if the 
coverage is optional, the issuer provides certain disclosures to the 
consumer about the coverage, and the issuer obtain an affirmative 
written request for coverage after the consumer has received the 
required disclosures. Card issuers frequently provide the disclosures 
discussed above on the application form and a space to sign or initial 
an affirmative written request for the coverage. Currently, issuers are 
not required to provide any information about the insurance or debt 
cancellation or suspension coverage in the table that contains the 
Sec.  226.5a disclosures.
    In the event that a card issuer requires the insurance or debt 
cancellation or debt suspension coverage (to the extent permitted by 
state or other applicable law), the Board proposes new Sec.  
226.5a(b)(14) to require that the issuer disclose any fee for this 
coverage in the table. In addition, new Sec.  226.5a(b)(14) would 
require that the card issuer also disclose a cross-reference to where 
the consumer may find more information about the insurance or debt 
cancellation or debt suspension coverage, if additional information is 
included on or with the application or solicitation. Proposed Sample G-
10(B) provides guidance on how to provide the fee information and the 
cross-reference in the table. If insurance or debt cancellation or 
suspension coverage is required in order to obtain a credit card, the 
Board believes that fees required for this coverage should be 
highlighted in the table so that consumers are aware of these fees when 
considering an offer, because they will be required to pay the fee for 
this coverage every month in order to have the credit card.
5a(b)(15) Payment Allocation
    Some credit card issuers will allocate payments first to balances 
that are subject to the lowest APR. For example, if a cardholder made 
purchases using a credit card account and then initiated a balance 
transfer, the card issuer might allocate a payment (less than the 
amount of the balances) to the transferred balance portion of the 
account if that balance was subject to a lower APR than the purchases. 
Card issuers often will offer a discounted initial rate on balance 
transfers (such as 0 percent for an introductory period) with a credit 
card solicitation, but not offer the same discounted rate for 
purchases. In addition, the Board is aware of at least one issuer that 
offers the same discounted initial rate for balance transfers and 
purchases for a specified period of time, where the discounted rate for 
balance transfers (but not the discounted rate for purchases) may be 
extended until the balance transfer is paid off if the consumer makes a 
certain number of purchases each billing cycle. At the same time, 
issuers typically offer a grace period for purchases if a consumer pays 
his or her bill in full each month. Card issuers, however, do not 
typically offer a grace period on balance transfers or cash advances. 
Thus, on the offers described above, a consumer cannot take advantage 
of both the grace period on purchases and the discounted rate on 
balance transfers. Because the payments will be allocated to the 
balance transfers first, the only way for a consumer to avoid paying 
interest on purchases--and thus have the benefit of the grace period--
is to pay off the entire balance, including the balance transfer 
subject to the discounted rate.
    The Board believes that it is important that consumers understand 
payment allocation in these circumstances, so that they can better 
understand the offer and decide whether to use this particular card for 
purchases. For example, if consumers knew that they would pay interest 
on all purchases made while paying off the balance transfer at the 
discounted rate, they might not use that particular card for purchases. 
They might use another card for purchases and pay that card in full 
every month to take advantage of the grace period on purchases. Or they 
might use another card with a lower purchase rate, if they did not plan 
to pay off the purchases in full each month.
    In the consumer testing conducted for the Board, many participants 
did not understand that they could not take advantage of the grace 
period on purchases and the discounted rate on balance transfers at the 
same time. Model forms were tested that included a disclosure notice 
attempting to explain this to consumers. Nonetheless, testing showed 
that a significant percentage of participants still did not fully 
understand how payment allocation can affect their interest charges, 
even after reading the disclosure tested. The Board plans to conduct 
further testing of the disclosure to determine whether the disclosure 
can be improved to be more effectively communicate to consumers how

[[Page 32983]]

payment allocation can affect their interest charges. Nonetheless, 
because some participants did benefit from the disclosure, and in light 
of further testing, the Board, under its authority pursuant to TILA 
Section 127(c)(5), proposes to add Sec.  226.5a(b)(15) to require a 
card issuer to explain payment allocation to consumers. 15 U.S.C. 
1637(c)(5). Proposed Sec.  226.5a(b)(15) states that if (1) a card 
issuer offers a discounted initial rate on a balance transfers or cash 
advance that is lower than the rate on purchases, (2) the issuer offers 
a grace period on purchases, and (3) the issuer may allocate payments 
to the lower rate balance first, then the issuer must make certain 
disclosures in the table. Specifically, issuers would be required to 
disclose: (1) that the discounted initial rate applies only to balance 
transfers or cash advances, as applicable, and not to purchases; (2) 
that payments will be allocated to the balance transfer or cash advance 
balance, as applicable, before being allocated to any purchase balance 
during the time the discounted initial rate is in effect; and (3) that 
the consumer will incur interest on the purchase balance until the 
entire balance is paid, including the transferred balance or cash 
advance balance, as applicable. The Board would require these 
disclosures in the table only if the discounted initial rate applies to 
balance transfers or cash advances that consumers can request as part 
of accepting the offer. If the discounted initial rate only applies to 
subsequent balance transfers or checks that access a credit card 
account, the issuer would not need to provide this disclosure with the 
offer. The Board proposes to add comment 5a(b)(15)-1 to provide 
examples of when these disclosures must be given. The Board also 
proposes to add comment 5a(b)(15)-2 to specify that a card issuer may 
comply with the requirements in new Sec.  226.5a(b)(15) by providing 
the applicable disclosures contained in proposed Samples G-10(B) and G-
10(C).
5a(b)(16) Available Credit
    Subprime credit cards often have substantial fees assessed when the 
account is opened. Those fees will be billed to the consumer as part of 
the first statement, and will substantially reduce the amount of credit 
that the consumer initially has available with which to make purchases 
or other transactions on the account. For example, for cards for which 
a consumer is given a minimum credit line of $250, after the start-up 
fees have been billed to the account, the consumer may have less than 
$100 of available credit with which to make purchases or other 
transactions in the first month. In addition, consumers will pay 
interest on these fees until they are paid in full.
    The federal banking agencies have received a number of complaints 
from consumers with respect to cards of this type. Complainants often 
claim that they were not aware of how little available credit they 
would have after all the fees were assessed. Thus, the Board is 
proposing to add Sec.  226.5a(b)(16) to inform consumers about the 
impact of these fees on their initial available credit. Specifically, 
Sec.  226.5a(b)(16) would provide that if (1) a card issuer imposes 
required fees for the issuance or availability of credit, or a security 
deposit, that will be charged against the card when the account is 
opened, and (2) the total of those fees and/or security deposit equal 
25 percent or more of the minimum credit limit applicable to the card, 
a card issuer must disclose in the table an example of the amount of 
the available credit that a consumer would have remaining after these 
fees or security deposit are debited to the account, assuming that the 
consumer receives the minimum credit limit offered on the relevant 
account. In determining whether the 25 percent threshold test is met, 
the issuer must only consider fees for issuance or availability of 
credit, or a security deposit, that are required. If certain fees for 
issuance or availability are optional, these fees should not be 
considered in determining whether the disclosure must be given. 
Nonetheless, if the 25 percent threshold test is met in connection with 
the required fees or security deposit, the issuer must disclose the 
available credit after excluding any optional fees from the amounts 
debited to the account, and the available credit after including any 
optional fees in the amounts debited to the account. The Board believes 
that 25 percent is an appropriate threshold because it represents a 
significant reduction in the initial available credit as a result of 
the imposition of fees or security deposit. The Board solicits comment 
on this threshold amount.
    In addition, the Board proposes comment 5a(b)(16)-1 to clarify that 
in calculating the amount of available credit that must be disclosed in 
the table, an issuer must consider all fees for the issuance or 
availability of credit described in Sec.  226.5a(b)(2), and any 
security deposit, that will be imposed when the account is opened and 
charged to the account, such as one-time issuance and set-up fees that 
will be imposed when the card is opened. For example, in calculating 
the available credit, issuers must consider the first year's annual fee 
and the first month's maintenance fee (if applicable) if they are 
charged to the account immediately at account opening. Proposed Sample 
G-10(C) provides guidance to issuers on how to provide this disclosure. 
(See proposed comment 5a(b)(16)-2).
    As described above, a card issuer would consider only required fees 
for issuance or availability of credit, or a security deposit, that 
will be charged against the card when the account is opened in 
determining whether the 25 percent threshold test is met. The Board 
requests comment on whether there are other fees (other than fees 
required for issuance or availability of credit) that are typically 
imposed on these types of accounts when the account is opened, and 
should be included in determining whether the 25 percent threshold test 
is met.
5a(b)(17) Reference to Board Web Site for Additional Information
    In the December 2004 ANPR, the Board requested comment on 
suggestions for non-regulatory approaches that may further the Board's 
goal of improving the effectiveness of TILA's disclosures and 
substantive protections. Q57. In response to the ANPR, several 
commenters encouraged the Board to develop educational materials, such 
as pamphlets, targeted media, and interactive Web sites, that could 
educate consumers on a variety of topics related to shopping for and 
using credit cards. These commenters believe that certain topics that 
are difficult to explain to consumers, such as balance computation 
methods, are better provided in educational materials than in the TILA 
disclosures.
    The Board proposes to revise Sec.  226.5a to require that credit 
card issuers must disclose in the table a reference to a Board Web site 
and a statement that consumers can find on this Web site educational 
materials on shopping for and using credit card accounts. See proposed 
Sec.  226.5a(b)(17). Such materials would expand those already 
available on choosing a credit card at the Board's Web site.\12\ The 
Board recognizes that some consumers may need general education about 
how credit cards work and an explanation of typical account terms that 
apply to credit cards. In the consumer testing conducted for the Board, 
participants showed a wide range of knowledge about how credit cards 
work generally, with some participants showing a firm understanding of 
terms that relate to

[[Page 32984]]

credit card accounts, while others had difficulty expressing basic 
financial concepts, such as how the interest rate differs from a one-
time fee. The Board's current Web site explains some basic financial 
concepts--such as what an annual percentage rate is--as well as terms 
that typically apply to credit card accounts. Through the Web site, the 
Board could expand the explanation of other credit card terms, such as 
balance computation methods, that may be difficult to explain concisely 
in the disclosures given with applications and solicitations.
---------------------------------------------------------------------------

    \12\ The materials can be found at http://www.federalreserve.gov/pubs/shop/default.htm
.

---------------------------------------------------------------------------

    As part of consumer testing, participants were asked whether they 
would use a Board Web site to obtain additional information about 
credit cards generally. Some participants indicated they might use the 
Web site, while others indicated that it was unlikely they would use 
such a Web site. Although it is hard to predict from the results of the 
testing how many consumers might use the Board's Web site, and 
recognizing that not all consumers have access to the Internet, the 
Board believes that this Web site may be helpful to some consumers as 
they shop for a credit card and manage their account once they obtain a 
credit card. Thus, the Board is proposing that a reference to a Board 
Web site be included in the table because this is a cost-effective way 
to provide consumers with supplemental information on credit cards. The 
Board seeks comments on the content for the Web site.
    Additional disclosures. In response to the December 2004 ANPR, 
several consumer groups suggested that the Board require information 
about the minimum payment formula, credit limit, any security interest, 
and all fees imposed on the account be disclosed in the table. The 
Board has decided not to propose this additional information in the 
table for the reasons detailed below.
    1. Minimum payment formula. In the consumer testing conducted for 
the Board, participants did not tend to mention the minimum payment 
formula as one of the terms on which they shop for a card. In addition, 
minimum payment formulas used by card issuers can be complicated 
formulas that would be hard to describe concisely in the table. For 
example, while some issuers still use a percentage to calculate the 
payment, such as 2 percent of the outstanding balance or $10, whichever 
is less, other issuers use much more complicated formulas, such as 
``the greater of (1) $15 or (2) 2 percent of the balance or (3) the 
applicable finance charges, and if the finance charges are largest, add 
$15 to that amount.'' Even if the Board were to require issuers to 
provide an example showing the amount of the minimum payment for a 
certain balance (for example, $1000), this example would be of doubtful 
usefulness for the many consumers who have balances different from the 
example. In addition, the example might mislead consumers, because one 
card might yield a lower minimum payment amount than another card for 
one balance (for example, $1000), but the second card might yield a 
lower minimum payment than the first card if the minimum payment was 
calculated on a different balance.
    2. Credit limit. Card issuers often indicate a credit limit in a 
cover letter sent with an application or solicitation. Frequently, this 
credit limit is not stated as a specific amount but, instead, is stated 
as an ``up to'' amount, indicating the maximum credit limit for which a 
consumer may qualify. The actual credit limit for which a consumer 
qualifies depends on the consumer's creditworthiness, which is 
evaluated after the application or solicitation is submitted. Several 
consumer groups suggested that the Board include the credit limit in 
the table because it is a key factor for many consumers in shopping for 
a credit card. These groups also suggested that the Board require 
issuers to state a specific credit limit, and not an ``up to'' amount.
    The Board is not proposing to include the credit limit in the 
table. As explained above, in most cases, the credit limit for which a 
consumer qualifies depends on the consumer's creditworthiness, which is 
fully evaluated after the application or solicitation has been 
submitted. In addition, in consumer testing conducted for the Board, 
participants were not generally confused by the ``up to'' credit limit. 
Most participants understood that the ``up to'' amount on the 
solicitation letter was a maximum amount, rather than the amount the 
issuer was promising them. Almost all participants tested understood 
that the credit limit for which they would qualify depended on their 
creditworthiness, such as credit history.
    3. Security interest. Several consumer groups suggested that any 
required security interest should be disclosed in the table. These 
commenters suggest that if a security interest is required, the 
disclosure in the table should describe it briefly, such as ``in items 
purchased with card'' or ``required $200 deposit.'' These commenters 
indicated that a security deposit is a very important consideration in 
credit shopping, especially for low-income consumers. In addition, they 
stated that many credit cards issued by merchants are secured by the 
goods that the consumer purchases, but consumers are often unaware of 
the security interest.
    The Board is not proposing to include a disclosure of any required 
security interest in the table at this time. Credit card-issuing 
merchants may include in their account agreements a security interest 
in the goods that are purchased with the card. It is not apparent that 
consumers would shop on whether a retail card has this type of security 
interest. Requiring or allowing this type of security interest to be 
disclosed in the table may distract from important information in the 
table, and contribute to ``information overload.'' Thus, in an effort 
to streamline the information that may appear in the table, the Board 
is not proposing to include this disclosure in the table.With respect 
to security deposits, if a consumer is required to pay a security 
deposit prior to obtaining a credit card and that security deposit is 
not charged to the account but is paid by the consumer from separate 
funds, a card issuer must necessarily disclose to the consumer that a 
security deposit is required, so that the consumer knows to submit the 
deposit in order to obtain the card. A security deposit in these 
instances may already be sufficiently highlighted in the materials 
accompanying the application or solicitation, and may not need to 
appear in the table. Nonetheless, the Board recognizes that a security 
deposit may need to be highlighted when the deposit is not paid from 
separate funds but is charged to the account when the account is 
opened. In those cases, consumers may not realize that the security 
deposit may significantly decrease their available credit when the 
account is opened. Thus, as described above, the Board proposes to 
provide that if (1) a card agreement requires payment of a fee for 
issuance or availability of credit, or a security deposit, (2) the fee 
or security deposit will be charged to the account when it is opened, 
and (3) the total of those fees and security deposit equal 25 percent 
or more of the minimum credit limit offered with the card, the card 
issuer must disclose in the table an example of the amount of the 
available credit that a consumer would have remaining after these fees 
or security deposit are debited to the account, assuming that the 
consumer receives the minimum credit limit offered on the card.
    4. Fees. In response to the December 2004 ANPR, several consumer 
groups suggested that all fees imposed on an account should be included 
in the table. They believed that by requiring only certain fees in the 
table, card issuers have an incentive to devise new fees

[[Page 32985]]

that do not have to be disclosed so prominently. They indicate that if 
the Board excludes any fees, the list of such fees should be an 
exclusive list. They also suggested that the Board should require card 
issuers to report periodically on the volume of the excluded fees 
collected. If a certain type of fee increases in volume, these 
commenters suggested that the Board should delete this fee from the 
list of excluded fees on the grounds that that fee has become a more 
significant component of the cost of credit.
    As described above, the Board is proposing to include certain 
transaction fees and penalty fees, such as cash advance fees, balance 
transfer fees, late-payment fees, and over-the-credit limit fees, in 
the table because these fees are frequently paid by consumers, and 
consumers have indicated these fees are important for shopping 
purposes. The Board is not proposing to include other fees in the 
table, such as copying fees and stop-payment fees, in the table because 
these fees tend to be imposed less frequently and are not fees on which 
consumers tend to shop. In consumer testing conducted for the Board, 
participants tended to mention cash advance fees, balance transfer 
fees, late-payment fees, and over-the-credit-limit fees as the most 
important fees they would want to know when shopping for a credit card. 
In addition, most participants understood that issuers were allowed to 
impose additional fees, beyond those disclosed in the table. Thus, the 
Board believes it is important to highlight in the table the fees that 
consumers want to know when shopping for a card, rather than including 
infrequently-paid fees, to avoid creating ``information overload'' such 
that consumers could not easily identify the fees that are most 
important to them. Nonetheless, the Board recognizes that fees can 
change over time, and the Board plans to monitor the market and update 
the fees required to be disclosed in the table as necessary.
5a(c) Direct-Mail and Electronic Applications
5a(c)(1) General
    Electronic applications and solicitations. As discussed above, the 
Bankruptcy Act amends TILA Section 127(c) to require that solicitations 
to open a card account using the Internet or other interactive computer 
service must contain the same disclosures as those made for 
applications or solicitations sent by direct mail. 15 U.S.C. 
1637(c)(7). The interim final rules adopted by the Board in 2001 
revised Sec.  226.5a(c) to apply the direct mail rules to electronic 
applications and solicitations. The Board proposes to retain these 
provisions in Sec.  226.5a(c)(1). (Current Sec.  226.5a(c) would be 
revised and renumbered as new Sec.  226.5a(c)(1).) The same proposal 
was included in the Board's 2007 Electronic Disclosure Proposal.
    The Bankruptcy Act also requires that the disclosures for 
electronic offers must be ``updated regularly to reflect the current 
policies, terms, and fee amounts.'' In the October 2005 ANPR, the Board 
also solicited comment on what guidance the Board should provide on how 
to apply that standard for credit card accounts. The Board's 2001 
interim final rules provided guidance that disclosures for a variable-
rate credit card plan provided electronically must be based on an APR 
in effect within the last 30 days. The 2001 guidance did not contain 
specific guidance on accuracy requirements for other disclosures 
provided electronically, such as disclosure of fees. The majority of 
commenters on the October 2005 ANPR which addressed the accuracy of 
variable rates agreed that a 30-day standard would be appropriate to 
implement the ``updated regularly'' standard in the Bankruptcy Act. 
Some commenters advocated longer periods such as 60 days or shorter 
periods such as daily or weekly updating, or suggested that the Board 
should not provide specific guidance or rules, instead allowing maximum 
flexibility in this area.
    The Board proposes to revise Sec.  226.5a(c) to implement the 
``updated regularly'' standard in the Bankruptcy Act with regard to the 
accuracy of variable rates. A new Sec.  226.5a(c)(2) would be added to 
address the accuracy of variable rates in direct mail and electronic 
applications and solicitations. This new section would require issuers 
to update variable rates disclosed on mailed applications and 
solicitations every 60 days and variable rates disclosed on 
applications and solicitations provided in electronic form every 30 
days, and to update other terms when they change. The Board believes 
the 30-day and 60-day accuracy requirements for variable rates strike 
an appropriate balance between seeking to ensure consumers receive 
updated information and avoiding imposing undue burdens on creditors. 
The Board believes it is unnecessary for creditors to disclose to 
consumers the exact variable APR in effect on the date the application 
or solicitation is accessed by the consumer, so long as consumers 
understand that variable rates are subject to change. Moreover, it 
would be costly and operationally burdensome for creditors to comply 
with a requirement to disclose the exact variable APR in effect at the 
time the application or solicitation is accessed. The obligation to 
update the other terms when they change ensures that consumers receive 
information that is accurate and current, and should not impose 
significant burdens on issuers. These terms generally do not fluctuate 
with the market like variable rates. In addition, based on discussions 
with industry representatives concerning operational issues, the Board 
staff understands that issuers typically change other terms 
infrequently, perhaps once or twice a year.
    Section 226.5a(c)(2) consists of two subsections. Section 
226.5a(c)(2)(i) would provide that Sec.  226.5a disclosures mailed to a 
consumer must be accurate as of the time the disclosures are mailed. 
This section would also provide that an accurate variable APR is one 
that is in effect within 60 days before mailing. Section 
226.5a(c)(2)(ii) would provide that Sec.  226.5a disclosures provided 
in electronic form (except for a variable APR) must be accurate as of 
the time they are sent to a consumer's e-mail address, or as of the 
time they are viewed by the public on a Web site. For the reasons 
discussed above, this section would provide that a variable APR is 
accurate if it is in effect within 30 days before it is sent, or viewed 
by the public. Presently, variable APRs on most credit cards may change 
on a monthly basis, so a 30-day accuracy requirement for variable APRs 
appears appropriate.
    Many of the provisions included in proposed Sec.  226.5a(c)(2) have 
been incorporated from current Sec.  226.5a(b)(1). To eliminate 
redundancy, the Board proposes to revise Sec.  226.5a(b)(1) by deleting 
Sec.  226.5a(b)(1)(ii), Sec.  226.5a(b)(1)(iii), and comment 5a(c)-1. 
The same revisions were included in the Board's 2007 Electronic 
Disclosure Proposal.
5a(d) Telephone Applications and Solicitations
5a(d)(2) Alternative Disclosure
    Section 226.5a(d) specifies rules for providing cost disclosures in 
oral applications and solicitations initiated by a card issuer. Card 
issuers generally must provide certain cost disclosures during the oral 
conversation in which the application or solicitation is given. 
Alternatively, an issuer is not required to give the oral disclosures 
if the card issuer either does not impose a fee for the issuance or 
availability of a credit card (as described in Sec.  226.5a(b)(2)) or 
does not impose such a fee unless the

[[Page 32986]]

consumer uses the card, provided that the card issuer provides the 
disclosures later in a written form. Specifically, the issuer must 
provide the disclosures required by Sec.  226.5a(b) in a tabular format 
in writing within 30 days after the consumer requests the card (but in 
no event later than the delivery of the card), and disclose the fact 
that the consumer need not accept the card or pay any fee disclosed 
unless the consumer uses the card. The Board proposes to add comment 
5a(d)-2 to indicate that an issuer may disclose in the table that the 
consumer is not required to accept the card or pay any fee unless the 
consumer uses the card.
5a(d)(3) Accuracy
    Proposed Sec.  226.5a(d)(3) would provide guidance on the accuracy 
of telephone disclosures. Current comment 5a(b)(1)-3 specifies that for 
variable-rate disclosures in telephone applications and solicitations, 
the card issuer must provide the rates currently applicable when oral 
disclosures are provided. For the alternative disclosures under Sec.  
226.5a(d)(2), an accurate variable APR is one that is (1) in effect at 
the time the disclosures are mailed or delivered; (2) in effect as of a 
specified date (which rate is then updated from time to time, for 
example, each calendar month); or (3) an estimate in accordance with 
Sec.  226.5(c). Current comment 5a(b)(1)-3 would be moved to Sec.  
226.5a(d)(3), except that the option of estimating a variable APR would 
be eliminated as the least meaningful of the three options. Proposed 
Sec.  226.5a(d)(3) also would specify that if an issuer discloses a 
variable APR as of a specified date, the issuer must update the rate on 
at least a monthly basis, the frequency with which variable rates on 
most credit card products are adjusted. The Board also would amend 
proposed Sec.  226.5a(d)(3) to specify that oral disclosures under 
Sec.  226.5a(d)(i) must be accurate when given, consistent with the 
requirement in Sec.  226.5(c) that disclosures must reflect the terms 
of the legal obligation between the parties. For the alternative 
disclosures, terms other than variable APRs must be accurate as of the 
time they are mailed or delivered. See proposed Sec.  226.5a(d)(3).
5a(e) Applications and Solicitations Made Available to General Public
    TILA Section 127(c)(3) and Sec.  226.5a(e) specify rules for 
providing disclosures in applications and solicitations made available 
to the general public such as ``take-one'' applications and catalogs or 
magazines. 15 U.S.C. 1637(c)(3). These applications and solicitations 
must either contain: (1) The disclosures required for direct mail 
applications and solicitations, presented in a table; (2) a narrative 
that describes how finance charges and other charges are assessed; or 
(3) a statement that costs are involved, along with a toll-free 
telephone number to call for further information.
    Narrative that Describes How Finance Charges and Other Charges Are 
Assessed. TILA Section 127(c)(3)(D) and Sec.  226.5a(e)(2) allow 
issuers to meet the requirements of Sec.  226.5a for take-one 
applications and solicitations by giving a narrative description of 
certain account-opening disclosures (such as information about how 
finance charges and other charges are assessed), a statement that the 
consumer should contact the card issuer for any change in the required 
information, and a toll-free telephone number or a mailing address for 
that purpose. 15 U.S.C. 1637(c)(3)(D). Currently, this information does 
not need to be in the form of a table, but may be a narrative 
description, as is also currently allowed for account-opening 
disclosures. The Board is proposing, however, to require that certain 
account-opening information (such as information about key rates and 
fees) must be given in the form of a table. See the section-by-section 
analysis to Sec.  226.6(b)(4). Therefore, the Board also is proposing 
that card issuers give this same information in a tabular form in take-
one applications and solicitations. Thus, the Board proposes to delete 
Sec.  226.5a(e)(2) and comments 5a(e)(2)-1 and -2 as obsolete. Card 
issuers that provide cost disclosures in take-one applications and 
solicitations would be required to provide the disclosures in the form 
of a table, for which they could use the account-opening summary table. 
See Sec.  226.5a(e)(1) and comment 5a-2.
5a(e)(4) Accuracy
    For applications or solicitations that are made available to the 
general public, if a creditor chooses to provide the cost disclosures, 
Sec.  226.5a(b)(1)(ii) currently requires that any variable APR 
disclosed must be accurate within 30 days before printing. The proposal 
would move this provision to Sec.  226.5a(e)(4). Proposed Sec.  
226.5a(e)(4) also would specify that other disclosures must be accurate 
as of the date of printing.
5a(f) In-Person Applications and Solicitations
    Card issuer and person extending credit are not the same. Existing 
Sec.  226.5a(f) and its accompanying commentary contain special charge 
card rules that address circumstances in which the card issuer and the 
person extending credit are not the same person. (These provisions 
implement TILA Section 127(c)(4)(D), 15 U.S.C. 1637(c)(4)(D).) The 
Board understands that these types of cards are no longer being 
offered. Thus, the Board proposes to delete these provisions and the 
Model Clause G-12 from Regulation Z as obsolete, recognizing that the 
statutory provision in TILA Section 127(c)(4)(D) will remain in effect 
if these products are offered in the future. The Board requests comment 
on whether these provisions should be retained in the regulation. A 
commentary provision referencing the statutory provision would be added 
to Sec.  226.5(d), which addresses disclosure requirements for multiple 
creditors. See proposed comment 5(d)-3.
    In-person applications and solicitations. The Board is proposing a 
new Sec.  226.5a(f) and accompanying commentary to address in-person 
applications and solicitations initiated by the card issuer. In in-
person applications, a card issuer initiates a conversation with a 
consumer inviting the consumer to apply for a card account, and if the 
consumer responds affirmatively, the issuer takes application 
information from the consumer. For example, in-person applications 
include instances in which a retail employee, in the course of 
processing a sales transaction using the customer's bank credit card, 
invites the customer to apply for the retailer's credit card and the 
customer submits an application.
    In in-person solicitations, a card issuer offers a consumer in-
person to open an account that does not require an application. For 
example, in-person solicitations include instances where a bank 
employee offers a preapproved credit card to a consumer who came into 
the bank to open a checking account.
    Currently, in-person applications in response to an invitation to 
apply are exempted from Sec.  226.5a because they are considered 
applications initiated by consumers. (See current comments 5a(a)(3)-2 
and 5a(e)-2.) On the other hand, in-person solicitations are not 
specifically addressed in Sec.  226.5a. Neither in-person applications 
nor solicitations are specifically addressed in TILA.
    The Board proposes to cover in-person applications and 
solicitations under Sec.  226.5a, pursuant to the Board's authority 
under TILA Section 105(a). Requiring in-person applications and 
solicitations to include credit terms under Sec.  226.5a could help 
serve TILA's purpose to provide meaningful disclosure of credit terms 
so that

[[Page 32987]]

consumers will be able to compare more readily the various credit terms 
available to him or her, and avoid the uninformed use of credit. 15 
U.S.C. 1601(a). Also, the Board understands that card issuers routinely 
provide Sec.  226.5a disclosures in these circumstances; therefore, any 
additional compliance burden would be minimal.
    Card issuers must provide the disclosures required by Sec.  226.5a 
in the form of a table, and those disclosures must be accurate when 
given (consistent with the direct mail rules) or when printed 
(consistent with one option for the take-one rules). See Sec.  
226.5a(c), (e)(1). These two alternatives appear to provide issuers 
flexibility, while also providing consumers with the information they 
need to make informed credit decisions. Existing comment 5a(a)(3)-2 
(which would be moved to comment 5a(a)(5)-1) and comment 5a(e)-2 would 
be revised to be consistent with Sec.  226.5a(f).
5a(g) Balance Computation Methods Defined
    TILA Section 127(c)(1)(A)(iv) calls for the Board to name not more 
than five of the most common balance computation methods used by credit 
card issuers to calculate the balance on which finance charges are 
computed. 15 U.S.C. 1637(c)(1)(A)(iv). If issuers use one of the 
balance computation methods named by the Board, the issuer must 
disclose that name of the balance computation method as part of the 
disclosures required by Sec.  226.5a, and is not required to provide a 
description of the balance computation method. If the issuer uses a 
balance computation method that is not named by the Board, the issuer 
must disclose a detailed explanation of the balance computation method. 
See current Sec.  226.5a(b)(6). Currently, the Board has named four 
balance computation methods: (1) Average daily balance (including new 
purchases) or (excluding new purchases); (2) two-cycle average daily 
balance (including new purchases) or (excluding new purchases); (3) 
adjusted balance; and (4) previous balance. The Board proposes to 
retain these four balance computation methods. The Board requests 
comment on whether the list should be revised, along with data 
indicating why.

Section 226.6 Account-Opening Disclosures

    TILA Section 127(a), implemented in Sec.  226.6, requires creditors 
to provide information about key credit terms before an open-end plan 
is opened, such as rates and fees that may be assessed on the account. 
Consumers' rights and responsibilities in the case of unauthorized use 
or billing disputes are also explained. 15 U.S.C. 1637(a). See also 
Model Forms G-2 and G-3 in Appendix G.
    Home-equity lines of credit. Account-opening disclosure and format 
requirements for home-equity lines of credit (HELOCs) subject to Sec.  
226.5b would be unaffected by the proposal, consistent with the Board's 
plan to review Regulation Z's disclosure rules for home-secured credit 
in a separate rulemaking. To facilitate compliance, the substantively 
unrevised rules applicable only to HELOCs are grouped together in 
proposed Sec.  226.6(a), including rules relating to the disclosure of 
finance charges, other charges, and specific HELOC-related disclosures. 
(See redesignation table below.) For the reasons set forth in the 
section-by-section analysis to Sec.  226.6(b)(1), the Board would 
update references to ``free-ride period'' as ``grace period'' in the 
regulation and commentary, without any intended substantive change.
    Open-end (not home-secured) plans. The Board proposes two 
significant revisions to account-opening disclosures for open-end (not 
home-secured) plans, which are set forth in proposed Sec.  226.6(b). 
The rule would (1) require a tabular summary of key terms to be 
provided before an account is opened (see proposed Sec.  226.6(b)(4)), 
and (2) reform how and when cost disclosures must be made (see proposed 
Sec.  226.6(b)(1) for content, Sec.  226.5(b) and Sec.  226.9(c) for 
timing). The Board proposes to apply the tabular summary requirement to 
all open-end loan products, except HELOCs. Such products include credit 
card accounts, traditional overdraft credit plans, personal lines of 
credit, and revolving plans offered by retailers without a credit card. 
The benefit to consumers from receiving a concise summary of rates and 
important fees appears to outweigh the costs, such as developing the 
new disclosures and revising them as needed.
    Disclosure requirements in Sec.  226.6 that potentially affect all 
open-end creditors, namely rules relating to security interests and 
billing error disclosure requirements, are grouped together in proposed 
Sec.  226.6(c). The section also would be retitled ``Account-opening 
disclosures'' to more accurately reflect the timing of the disclosures. 
In today's marketplace, there are few open-end products for which 
consumers receive the disclosures required under Sec.  226.6 as their 
``initial'' Truth in Lending disclosure. See Sec.  226.5a, Sec.  
226.5b. The substance of footnotes 11 and 12 is moved to the 
regulation; the substance of footnote 13 is moved to the commentary. 
(See redesignation table below.)
    In technical revisions, comments 6-1 and 6-2 would be deleted. The 
substance of comment 6-1, which requires consistent terminology, is 
discussed more generally in proposed Sec.  226.5(a)(2). Comment 6-2 
addresses certain open-end plans involving more than one creditor, and 
is proposed to be deleted as obsolete. See section-by-section analysis 
to Sec.  226.5a(f).
    Tabular summary. As provided by Regulation Z, creditors may, and 
typically do, include account-opening disclosures as a part of an 
account agreement document that also contains other contract terms and 
state-law disclosures. The agreement is typically lengthy and in small 
print. In the December 2004 ANPR, the Board sought comment on possible 
approaches to ease consumers' ability to navigate account-opening 
disclosures, such as a summary paragraph, a table similar to the one 
required on or with credit and charge card applications, or a table of 
contents to highlight key features and terms of the account. Q2-Q3.
    Commenters generally encouraged the Board to consider format rules 
that focus on providing essential terms in a simplified way. In 
general, commenters suggested that a summary of key terms would improve 
the effectiveness of the now-lengthy and complex account agreement 
documents. Some industry commenters, however, opposed a summary. These 
commenters noted that the current format rules integrating account 
terms and TILA disclosures allow creditors to explain features 
coherently, and noted that summarizing information and repeating it in 
detail in the contract document may result in information overload. As 
a part of consumer research conducted for the Board regarding consumer 
understanding of current TILA disclosures, tests simulated consumers' 
review of packets of information typically received when new accounts 
are opened. Most of the consumers in the Board's sample group set aside 
the lengthy multi-fold account agreement pamphlets without reading 
them, saying they were too long, the type was too small, and the 
language too legalistic. Consumers who reviewed packets that included a 
summary of account terms generally noticed and reviewed the summary, 
even if they set aside the contract document.
    Based on public comment, consumer testing, and its own analysis, 
the Board is proposing to introduce format requirements for account-
opening disclosures for open-end (not home-

[[Page 32988]]

secured) plans. The Board proposes to summarize key information most 
important to informed decision-making in a table similar to that 
required on or with credit and charge card applications and 
solicitations. The proposal would permit TILA disclosures that are 
typically lengthy or complex and less-often used in determining how to 
use an account, such as how variable rates are determined, to be 
integrated with the account agreement terms. The content requirements 
for the proposed summary are set forth in new Sec.  226.6(b)(4) and are 
discussed below; proposed Model Form G-17(A) and Samples G-17(B) and G-
17(C) in Appendix G illustrate the table.
    Charges imposed as part of the plan. The Board proposes to reform 
its rules regarding cost disclosures provided at account opening for 
open-end (not home-secured) plans. Under TILA and current Regulation Z, 
account-opening disclosures must include charges that are either a 
``finance charge'' or an ``other charge'' (TILA charges). According to 
TILA, a charge is a finance charge if it is payable directly or 
indirectly by the consumer and imposed directly or indirectly by the 
creditor ``as an incident to the extension of credit.'' The Board 
implemented the definition by including as a finance charge under 
Regulation Z, any charge imposed ``as an incident to or a condition of 
the extension of credit.'' TILA also requires a creditor to disclose, 
before opening an account, ``other charges which may be imposed as part 
of the plan * * * in accordance with regulations of the Board.'' The 
Board implemented the provision virtually verbatim, and the staff 
commentary interprets the provision to cover ``significant charges 
related to the plan.'' 15 U.S.C. 1605(a), Sec.  226.4; 15 U.S.C. 
1637(a)(5), Sec.  226.6(b), current comment 6(b)-1.
    The terms ``finance charge'' and ``other charge'' are given broad 
and flexible meanings in the regulation and commentary. This ensures 
that TILA adapts to changing conditions, but it also creates 
uncertainty. The distinctions among finance charges, other charges, and 
charges that do not fall into either category are not always clear. As 
creditors develop new kinds of services, some find it difficult to 
determine if associated charges for the new services meet the standard 
for a ``finance charge'' or ``other charge'' or are not covered by TILA 
at all. This uncertainty can pose legal risks for creditors that act in 
good faith to classify fees. Examples of charges that are included or 
excluded charges are in the regulation and commentary, but they cannot 
provide definitive guidance in all cases.
    A 2003 rulemaking concerning charges for two services--expediting 
payments and expediting card delivery--illustrates the challenges in 
applying current rules. 68 FR 16,185; April 3, 2003. Public comments on 
the proposal reflected a lack of consensus about the proposed 
interpretations of expedited payment fee as an ``other charge'' and 
expedited card delivery fee as not covered by TILA. More broadly, the 
comments reflected a lack of consensus over the basic principles that 
should determine whether a charge is a finance charge or an ``other 
charge.''
    In the final rule, staff adopted official interpretations 
indicating that neither charge was a charge covered by TILA. In the 
supplementary information accompanying the final rule, Board staff 
recognized that requiring a written disclosure of a charge for a 
service long before the consumer might consider purchasing the service 
did not provide the consumer with any material benefit. The staff also 
noted creditors' current practice of disclosing the charge when the 
service is requested, and encouraged the continuation of that practice.
    Board staff also indicated that a more comprehensive review of 
existing rules was needed. Accordingly, the December 2004 ANPR 
solicited comment on the effectiveness of the rules governing 
disclosure of charges covered by TILA, and on potential alternatives. 
The comments indicated a consensus that the current approach should be 
replaced with a new one. Commenters split, however, on the proper 
approach. Most focused on the definition of ``finance charge'' or 
``other charge.'' Approaches ranged from industry's suggestions to 
restrict finance charges to interest or to charges required as a 
condition to the extension of credit, to consumer groups' suggestion to 
include virtually all charges the consumer would pay. While commenters 
disagreed over which approach would best serve TILA's purposes, they 
shared a common objective: Provide a clear test.
    In light of the comments received, consumer testing, and the 
Board's experience and analysis, the Board is proposing to reform the 
rules governing disclosure of charges before they are imposed, as 
discussed below. The proposed rule is intended to respond collectively 
to these concerns by (1) giving full effect to TILA's requirement that 
all charges imposed as part of an open-end (not home-secured) plan be 
disclosed before they are imposed, (2) specifying precisely important 
costs that must be disclosed in writing at account opening (e.g., 
interest rates, annual fees, and late-payment or over-the-credit-limit 
fees), and (3) permitting the creditor to disclose all other charges 
imposed as part of the plan (e.g., fees to expedite payments or to 
provide an additional card) at account opening or orally at any time 
before the consumer agrees to or becomes obligated to pay the charge. 
Charges added or increased during the life of the plan would be subject 
to similar rules. See Sec.  226.9(c)(2).
    Under the proposal, some charges would be covered by TILA that the 
current regulation, as interpreted by the staff commentary, excludes 
from TILA coverage, such as fees for expedited payment and expedited 
delivery. It may not have been useful to consumers to cover such 
charges under TILA when such coverage would have meant only that the 
charges were disclosed long before they became relevant to the 
consumer. It may, however, be useful to cover such charges under TILA 
as part of a rule that permits their disclosure at a (later) more 
relevant time. Further, as new services (and associated charges) are 
developed, the proposal is intended to reduce uncertainty of how to 
disclose such fees and risks of civil liability. The list of charges 
creditors must disclose in the account-opening table would be specific 
and exclusive, not open-ended as is the case today. Creditors could 
otherwise comply with the rule by disclosing other costs at any other 
relevant time.
6(a) Rules Affecting Home-Equity Plans
    For the reasons discussed above and as illustrated in the 
redesignation table below, the proposal would set forth in Sec.  
226.6(a) all requirements applying exclusively to home-equity plans 
subject to Sec.  226.5b (HELOCs). Rules relating to the disclosure of 
finance charges currently in Sec.  226.6(a)(1) through (4) would be 
moved to proposed Sec.  226.6(a)(1)(i) through (iv); those rules and 
accompanying official staff interpretations are substantively 
unchanged. Rules relating to the disclosure of other charges would be 
moved from current Sec.  226.6(b) to proposed Sec.  226.6(a)(2), and 
specific HELOC-related disclosure requirements would be moved from 
current Sec.  226.6(e) to proposed Sec.  226.6(a)(3). Several technical 
revisions to commentary provisions are proposed for clarity and in some 
cases for consistency with corresponding comments to proposed Sec.  
226.6(b)(2), which addresses rate disclosures for open-end (not home-
secured) plans, but these revisions are not intended to be substantive. 
See, for example, proposed comments 6(a)(1)(ii)-1 and 6(b)(2)(i)(B)-1, 
which address disclosing ranges of balances. Also, commentary 
provisions that

[[Page 32989]]

currently apply to open-end plans generally but are inapplicable to 
HELOCs would not be moved. For example, guidance in current 6(a)(2)-2 
regarding a creditor's general reservation of the right to change terms 
would not be moved to proposed comment 6(a)(1)(ii)-2, because Sec.  
226.5b(f)(1) prohibits ``rate-reservation'' clauses for HELOCS. Comment 
6-1, which addresses the need for consistent terminology with periodic 
statement disclosures, would be deleted as duplicative. See proposed 
Sec.  226.5(a)(2)(i).
6(b) Rules Affecting Open-End (Not Home-Secured) Plans
6(b)(1) Charges Imposed as Part of Open-End (Not Home-Secured) Plans
    Proposed Sec.  226.6(b)(1) would apply to all open-end plans except 
HELOCs subject to Sec.  226.5b. It retains TILA's general requirements 
for disclosing costs for open-end plans: Creditors would be required to 
continue to disclose the circumstances under which charges are imposed 
as part of the plan, including the amount of the charge (e.g., $3.00) 
or an explanation of how the charge is determined (e.g., 3 percent of 
the transaction amount). For finance charges, creditors must include a 
statement of when the finance charge begins to accrue and an 
explanation of whether or not a ``grace period'' or ``free-ride 
period'' exists (a period within which any credit that has been 
extended may be repaid without incurring the charge). Regulation Z 
generally refers to this period as a ``free-ride period.'' Since 1989, 
creditors have been required to use the term ``grace period'' in 
complying with disclosure requirements for credit and charge card 
applications and solicitations in Sec.  226.5a. 15 U.S.C. 
1632(c)(2)(C); current Sec.  226.5a(a)(2)(iii); 54 FR 13,856; April 6, 
1989. For consistency and the reasons set forth in the section-by-
section analysis to Sec.  226.6(b)(1), the Board would update 
references to ``free-ride period'' as ``grace period'' in the 
regulation and commentary, without any intended substantive change.
    Currently, the rules for disclosing costs related to open-end plans 
create two categories of charges covered by TILA: finance charges 
(Sec.  226.6(a)) and ``other charges'' (Sec.  226.6(b)). Under the 
proposal, the rules would create a single category of ``charges imposed 
as part of an open-end (not home-secured) plan'' as identified in 
proposed Sec.  226.6(b)(1)(i). This new section would identify a 
complete description of the types of charges that would be considered 
to be imposed as part of a plan. These charges include finance charges 
under Sec.  226.4(a) and (b), penalty charges, taxes, and charges for 
voluntary credit insurance, debt cancellation or debt suspension 
coverage.
    Charges to be disclosed would also include any charge the payment, 
or nonpayment, of which affects the consumer's access to the plan, 
duration of the plan, the amount of credit extended, the period for 
which credit is extended, and the timing or method of billing or 
payment. This proposed provision is intended to be broad but provide 
greater clarity than current rules and capture charges that relate to 
the key attributes of a credit plan. The proposed commentary would 
provide examples of charges covered by the provision, such as 
application fees and participation fees (which affect access to the 
plan), fees to expedite card delivery (which also affect access to the 
plan), and fees to expedite payment (which affect the timing and method 
of payment). See proposed comment 6(b)(1)(i)-2.
    Three examples of types of charges that are not imposed as part of 
the plan are listed in proposed Sec.  226.6(b)(1)(ii). These examples 
include charges imposed on a cardholder by an institution other than 
the card issuer for the use of the other institution's ATM; and charges 
for a package of services that includes an open-end credit feature, if 
the fee is required whether or not the open-end credit feature is 
included and the non-credit services are not merely incidental to the 
credit feature. Comment 6(b)(1)(ii)-1 provides examples of fees for 
packages of services that are considered to be imposed as part of the 
plan and fees for packages of services that are not. This comment is 
substantively identical to current comment 6(b)-1.v.
    The proposal would not completely eliminate ambiguity about what 
are TILA charges. To mitigate ambiguity, however, the proposal provides 
a complete list in new Sec.  226.6(b)(4) of which charges identified 
under Sec.  226.6(b)(1) must be disclosed in writing at account opening 
(or before they are increased or newly introduced). See proposed Sec.  
226.5(b)(1) and Sec.  226.9(c)(2) for timing rules. Any fees aside from 
those identified in proposed Sec.  226.6(b)(4) would not be required to 
be disclosed in writing at account opening. However, other charges 
imposed as part of an open-end (not home-secured) plan may be disclosed 
at account opening, or orally at any relevant time before the consumer 
agrees to or becomes obligated to pay the charge. This approach is 
intended in part to reduce creditor burden. Creditors presumably 
disclose fees at relevant times, such as when a consumer orders a 
service by telephone, for business reasons and to comply with other 
state and federal laws. Moreover, compared to the approach reflected in 
the current regulation, the proposed broad application of the statutory 
standard of fees ``imposed as part of the plan'' should make it easier 
for a creditor to determine whether a fee is a charge covered by TILA, 
and reduce litigation and liability risks. In addition, this approach 
will help ensure that consumers receive the information they need when 
it would be most helpful to them.
6(b)(2) Rules Relating to Rates for Open-End (Not Home-Secured) Plans
    Rules for disclosing rates that affect the amount of interest that 
will be imposed would be reorganized and consolidated in proposed Sec.  
226.6(b)(2). (See redesignation table below.)
6(b)(2)(i)
    Finance charges attributable to periodic rates. Currently, 
creditors must disclose finance charges attributable to periodic rates. 
These costs are typically interest but may include other costs such as 
premiums for required credit insurance. As discussed earlier, in 
consumer testing for the Board, participants understood credit costs in 
terms of interest and fees. The text of proposed Sec.  226.6(b)(2)(i) 
reflects the Board's intention to make the distinction between interest 
and fees clear.
    Balance computation methods. Proposed Sec.  226.6(b)(2)(i) sets 
forth rules relating to the disclosure of rates. Proposed Sec.  
226.6(b)(2)(i)(D) (currently Sec.  226.6(a)(3)) requires creditors to 
explain the method used to determine the balance to which rates apply. 
15 U.S.C. 1637(a)(2). Model Clauses that explain commonly used methods, 
such as the average daily balance method, are at Appendix G-1. The 
Board requests comment on whether model clauses for methods such as 
``adjusted balance'' and ``previous balance'' should be deleted as 
obsolete, and more broadly, whether G-1 should be eliminated entirely 
because creditors no longer use the model clauses.
    In the December 2004 ANPR, the Board sought comment on how 
significantly the choice of a balance computation method might affect 
consumers' cost of credit, and on possible ways to enhance the 
effectiveness of any required disclosure. Q28-Q30. Commenters 
acknowledged that balance computation methods can affect consumers' 
cost of credit but in

[[Page 32990]]

general would favor an approach that emphasizes other key cost terms 
instead of the details of balance computation methods. The Board 
concurs with these views.
    Calculating balances on open-end plans can be complex, and requires 
an understanding of how creditors allocate payments, assess fees, and 
record transactions as they occur during a billing cycle. Currently, 
neither TILA nor Regulation Z requires creditors to disclose all the 
information necessary to compute balances to which periodic rates are 
applied, and requiring that level of detail would not appear to benefit 
consumers because consumers are unlikely to review such detailed 
information. Although the Board's model clauses are intended to assist 
creditors in explaining common methods, consumers continue to find 
explanations in account agreements to be lengthy and complex, and are 
not understood. The proposal would require creditors to continue to 
explain the balance computation methods in the account-opening 
agreement, but the explanation would not be permitted in the account-
opening summary. As discussed below, along with the account-opening 
summary proposed in Sec.  226.6(b)(4), creditors would name the balance 
computation method and refer consumers to the account-opening 
disclosures for an explanation of the balance computation method.
6(b)(2)(ii)
    New Sec.  226.6(b)(2)(ii) would set forth the rules for variable-
rate disclosures now contained in footnote 12. In addition, guidance on 
the accuracy of variable rates provided at account opening would be 
moved from the commentary to the regulation, and revised. Currently, 
comment 6(a)(2)-3 provides that creditors may provide the current rate, 
a rate as of a specified date if the rate is updated from time to time, 
or an estimated rate under Sec.  226.5(c). The Board proposes an 
accuracy standard that is consistent with the Board's 2007 Electronic 
Disclosure Proposal; that is, the rate disclosed is accurate if it was 
in effect as of a specified date within 30 days before the disclosures 
are provided. See 72 FR 21,1141; April, 30, 2007. The proposal would 
eliminate creditors' option to provide an estimate as the rate in 
effect for a variable-rate account. The Board believes creditors are 
provided with sufficient flexibility under the proposal to provide a 
rate as of a specified date, so the use of an estimate would not be 
appropriate. New proposed comment 6(b)(2)(ii)-5, which addresses 
discounted variable-rate plans and is substantively unchanged from 
current comment 6(a)(2)-10, contains technical revisions.
    The Board also proposes to require that, in describing how a 
variable rate is determined, creditors must disclose the applicable 
margin, if any. See proposed Sec.  226.6(b)(2)(ii)(B). Creditors state 
the margin for purposes of contract or other law and are currently 
required to disclose margins related to penalty rates, if applicable. 
No particular format requirements would apply. Thus, the Board does not 
expect the revision would add burden.
6(b)(2)(iii)
    New Sec.  226.6(b)(2)(iii) would consolidate existing rules for 
rate changes that are specifically set forth in the account agreement 
but are not due to changes in an index or formula, such as rules for 
disclosing introductory and penalty rates. In addition to identifying 
the circumstances under which a rate may change (such as the end of an 
introductory period or a late payment), creditors would be required to 
disclose how existing balances would be affected by the new rate. The 
proposed change is intended to improve consumer understanding as to 
whether a penalty rate triggered by, for example, a late payment would 
apply not only to outstanding balances for purchases but to existing 
balances that were transferred at a low promotional rate. If the 
increase in rate is due to an increased margin, creditors must disclose 
the increase; the highest margin can be stated if more than one might 
apply. See proposed comment 6(b)(2)(iii)-2.
6(b)(3) Voluntary Credit Insurance; Debt Cancellation or Suspension
    As discussed in the section-by-section analysis to Sec.  226.4, the 
Board is proposing revisions to the requirements to exclude charges for 
voluntary credit insurance or debt cancellation or debt suspension 
coverage from the finance charge. See proposed Sec.  226.4(d). 
Creditors must provide information about the voluntary nature and cost 
of the credit insurance or debt cancellation or suspension product, and 
about the nature of coverage for debt suspension products. Because 
creditors must obtain the consumer's affirmative request for the 
product as a part of the disclosure requirements, the Board expects the 
disclosures proposed under Sec.  226.4(d) will be provided at the time 
the product is offered to the consumer. Thus, consumers may receive the 
disclosures at the time they open an open-end account, or earlier in 
time, such as at application.
6(b)(4) Tabular Format Requirements for Open-End (Not Home-Secured) 
Plans
    Proposed Sec.  226.6(b)(4) would introduce format requirements for 
account-opening disclosures for open-end (not home-secured) plans. The 
proposed summary of account-opening disclosures is based on the format 
and content requirements for the tabular disclosures provided with 
direct mail applications for credit and charge cards under Sec.  
226.5a, as it would be revised under the proposal. Proposed forms under 
G-17 in Appendix G illustrate the account-opening tables. As proposed, 
comment 6(b)(4)-1 would refer generally to guidance in Sec.  226.5a 
regarding format and disclosure requirements for the application and 
solicitation table. For clarity, rules under Sec.  226.5a that do not 
apply to account-opening disclosures are specifically noted. Comment is 
requested on this approach, or whether importing essentially identical 
guidance from Sec.  226.5a to Sec.  226.6 would ease compliance.
    Rates. Proposed Sec.  226.6(b)(4)(ii) sets forth disclosure 
requirements for rates that would apply to accounts. Periodic rates and 
index and margin values would not be permitted to be disclosed in the 
table, for the same reasons underlying, and consistent with, the 
proposed requirements for the table provided with credit card 
applications and solicitations. See comment 6(b)(4)(ii)-1. Creditors 
would continue to disclose periodic rates, and index and margin values 
as part of the account opening disclosures, and these could be provided 
in the credit agreement, as is likely currently the case.
    The rate disclosures required for the account-opening table differ 
from those required for the table provided with credit card 
applications and solicitations. For applications and solicitations, 
creditors may provide a range of APRs or specific APRs that may apply, 
where the APR is based on a later determination of the consumer's 
creditworthiness. At account opening, creditors must disclose the 
specific APRs that will apply to the account.
    Fees. Fees that would be highlighted in the account-opening summary 
are identified in Sec.  226.6(b)(4)(iii). The Board believes that these 
fees, among the charges that TILA covers, are the most important fees, 
at least in the current marketplace, for consumers to know about before 
they start to use an account. They include charges that the consumer 
could incur without creditors otherwise being able to disclose the cost 
in advance of the consumers' act that triggers the cost, such as fees 
triggered

[[Page 32991]]

by a consumer's use of a cash advance check or by a consumers' late 
payment. Transaction fees imposed for transactions in a feign currency 
or that take place in a foreign country would be among the fees 
disclosed at account opening, though the Board is not proposing to 
require that foreign transaction fees be disclosed in the table 
provided with credit card applications and solicitations. See section-
by-section analysis to Sec.  226.5a(b)(4). Although consumer testing 
for the Board indicated that consumers do not choose to apply for a 
card based on foreign transaction fees, the Board believes highlighting 
the fee may be useful for some consumers before they obtain credit on 
the account.
    The Board intends this list of fees to be exclusive, for two 
reasons. An exclusive list eases compliance and reduces the risk of 
litigation; creditors have the certainty of knowing that as new 
services (and associated fees) develop, the new fees need not be 
highlighted in the account-opening summary unless and until the Board 
requires their disclosure after notice and public comment. And as 
discussed in the section-by-section analysis to Sec.  226.5(a)(1) and 
Sec.  226.5(b)(1), charges required to be highlighted under new Sec.  
226.6(b)(4) would have to be provided in a written and retainable form 
before the first transaction and before being increased or newly 
introduced. Creditors would have more flexibility regarding disclosure 
of other charges imposed as part of an open-end (not home-secured) 
plan.
    The exclusive list of fees also benefits consumers. The list 
focuses on fees consumer testing conducted for the Board showed to be 
most important to consumers. The list is manageable and focuses on key 
information rather than attempting to be comprehensive. Since all fees 
imposed as part of the plan must be disclosed before the cost is 
incurred, not all fees need to be included in the table.
    The Board notes that if the amount of a fee such as a late-payment 
fee or balance transfer fee varies from state to state, for disclosures 
required to be provided with credit card applications and 
solicitations, card issuers may disclose a range of fees and a 
statement that the amount of the fee varies from state to state. See 
existing Sec.  226.5a(a)(5), renumbered as new Sec.  226.5a(a)(4). A 
goal of the proposed account-opening summary table is to provide to a 
consumer with key information about the terms of the account. 
Permitting creditors to disclose a range of fees seems not to meet that 
standard. Nonetheless, the Board solicits comment on whether there are 
any operational issues presented by the proposed rule to disclose fees 
applicable to the consumer's account in the account-opening summary 
table, and if so, suggested solutions.
    Grace period. Under TILA, creditors providing disclosures with 
applications and solicitations must discuss grace periods on purchases; 
at account opening, creditor must explain grace periods more generally. 
15 U.S.C. 1637(c)(1)(A)(iii); 15 U.S.C. 1637(a)(1). Under proposed 
Sec.  226.6(b)(4)(iv), creditors would state for all balances on the 
account, whether or not a period exists in which consumers may avoid 
the imposition of finance charges, and if so, the length of the period.
    Required insurance, debt cancellation or debt suspension. For the 
reasons discussed in the section-by-section analysis to Sec.  
226.5a(b)(14), as permitted by applicable law, creditors that require 
credit insurance, or debt cancellation or debt suspension coverage, as 
part of the plan would be required to disclose the cost of the product 
and a reference to the location where more information about the 
product can be found with the account-opening materials, as applicable. 
See proposed Sec.  226.6(b)(4)(v).
    Payment allocation. In the December 2004 ANPR, the Board asked 
about creditors' payment allocation methods, how the methods are 
typically disclosed, and whether additional disclosures about payment 
allocation should be required. Q34-Q36. Responses suggest that in 
general, creditors tend to apply consumers' payments to satisfy low-
rate balances first, but that payment allocation methods vary. The 
timing and detail of disclosures also vary. Some card issuers disclose 
their payment allocation policies in materials accompanying credit card 
applications, while others provide information as part of the account 
agreement. Descriptions of payment allocation are typically general.
    The Board proposes in Sec.  226.6(b)(4)(vi) to require creditors to 
disclose, if applicable, the information proposed to be required with 
credit card applications and solicitations regarding how payments will 
be allocated if the consumer transfers balances at a low rate and then 
makes purchases on the account. The Board believes the information is 
useful to the consumer, although perhaps more so at the time of 
application when consumers may establish an account to take advantage 
of a promotional balance transfer rate. Because the Board is proposing 
to allow the account-opening table to substitute for the table given 
with an application or solicitation, the Board proposes also to include 
the payment allocation disclosure in the account-opening summary, to 
ensure that consumers receive this information, if applicable, at the 
time of application or solicitation.
    Available credit. For the reasons discussed under Sec.  
226.5a(b)(16), the Board proposes a disclosure targeted at subprime 
card accounts that assess substantial fees at account opening and leave 
consumers with a limited amount of available credit. Proposed Sec.  
226.6(b)(4)(vii) would require creditors to disclose in the account-
opening table the disclosures required under Sec.  226.5a(b)(16). The 
proposed requirements would apply to creditors that require fees for 
the availability or issuance of credit, or a security deposit, that 
equals 25 percent or more of the minimum credit limit offered on the 
account. If that threshold is met, card issuers must disclose in the 
table an example of the amount of available credit the consumer would 
have after the fees or security deposit are debited to the account, 
assuming the consumer receives the minimum credit limit.
    Web site reference. For the reasons stated under Sec.  
226.5a(b)(17), credit card issuers would be required under proposed 
Sec.  226.6(b)(4)(viii) to provide a reference to the Board's Web site 
for additional information about shopping for and using credit card 
accounts.
    Balance computation methods. TILA requires creditors to explain as 
part of the account-opening disclosures the method used to determine 
the balance to which rates are applied. 15 U.S.C. 1637(a)(2). 
Explaining balance computation methods in the account-opening table may 
not benefit consumers, because the explanations can be lengthy and 
complex, and consumer testing indicates the explanations are not 
understood. Including an explanation in the table also may undermine 
the goal of presenting essential information in a simplified way. 
Nonetheless, some balance computation methods are more favorable to 
consumers than others, and the Board believes it is appropriate to 
highlight the method used, if not the technical computation details. 
For those reasons, the Board proposes that the name of balance 
computation methods used be disclosed beneath the table, along with a 
statement that an explanation of the method is provided in the account 
agreement or disclosure statement. See proposed Sec.  226.6(b)(4)(ix). 
To determine the name of the balance computation method to be 
disclosed, creditors would refer to Sec.  226.5a(g) for a list of 
commonly-used

[[Page 32992]]

methods; if the method used is not among those identified, creditors 
would provide a brief explanation in place of the name.
    Billing error rights reference. All creditors offering open-end 
plans must provide notices of billing rights at account opening. See 
current Sec.  226.6(d); proposed Sec.  226.6(c)(2). This information is 
important, but lengthy. The Board proposes to draw consumers' attention 
to the notices by requiring a statement that information about billing 
rights and how to exercise them is provided in the account-opening 
disclosures. See proposed Sec.  226.6(b)(4)(x). The statement, along 
with the name of the balance computation method, would be located 
directly below the table.
6(c) Rules of General Applicability
6(c)(1) Security Interests
    Comments to proposed Sec.  226.6(c)(1) (current Sec.  226.6(c)) are 
revised for clarity, without any substantive change. &
6(c)(2) Statement of Billing Rights
    Creditors offering open-end plans must provide information to 
consumers at account opening about consumers' billing rights under 
TILA, in the form prescribed by the Board. 15 U.S.C. 1637(a)(7). This 
requirement is implemented in the Board's Model Form G-3. The Board is 
proposing revisions to Model Form G-3, proposed as G-3(A). The proposed 
revisions are not based on consumer testing, although design techniques 
and changes in terminology are proposed to improve consumer 
understanding of TILA's billing rights. Creditors offering HELOCs 
subject to Sec.  226.5b could continue to use current Model Form G-3, 
or proposed G-3(A), at the creditor's option.

Section 226.7 Periodic Statement

    TILA Section 127(b), implemented in Sec.  226.7, identifies 
information about an open-end account that must be disclosed when a 
creditor is required to provide periodic statements. 15 U.S.C. 1637(b).
    Home-equity lines of credit. Periodic statement disclosure and 
format requirements for home-equity lines of credit (HELOCs) subject to 
Sec.  226.5b would be unaffected by the proposal, consistent with the 
Board's plan to review Regulation Z's disclosure rules for home-secured 
credit in a separate rulemaking. To facilitate compliance, the 
substantively unrevised rules applicable only to HELOCs are grouped 
together in proposed Sec.  226.7(a). (See redesignation table below.)
    Open-end (not home-secured) plans. The Board proposes a number of 
significant revisions to periodic statement disclosures for open-end 
(not home-secured) plans. These rules are grouped together in proposed 
Sec.  226.7(b). First, interest and fees imposed as part of the plan 
during the statement period would be disclosed in a simpler manner and 
in a consistent location. Second, the Board is proposing for comment 
two alternative approaches to disclose the effective APR: The first 
approach would try to improve consumer understanding of this rate and 
reduce creditor uncertainty about its computation. The second approach 
would eliminate the requirement to disclose the effective APR. Third, 
if an advance notice of changed rates or terms is provided on or with a 
periodic statement, a summary of the change would be required on the 
front of the periodic statement. Model clauses would illustrate the 
proposed revisions, to facilitate compliance. In addition, the Board 
proposes to add new paragraphs Sec.  226.7(b)(11) and (12) to implement 
disclosures regarding late-payment fees and the effects of making 
minimum payments in Section 1305(a) and 1301(a) of the Bankruptcy Act 
(further discussed below). TILA Section 127(b)(11) and (12); 15 U.S.C. 
1637(b)(11) and (12).
    A number of technical revisions are made for clarity. For the 
reasons set forth in the section-by-section analysis to Sec.  
226.6(b)(1), the Board would update references to ``free-ride period'' 
as ``grace period'' in the regulation and commentary, without any 
intended substantive change. Current comment 7-2, which addresses open-
end plans involving more than one creditor, would be deleted as 
obsolete and unnecessary.
    Format requirements for periodic statements. TILA and Regulation Z 
contain few formatting requirements for periodic statement disclosures. 
In the December 2004 ANPR, the Board noted that some information about 
past account activity also may be useful to consumers in making future 
decisions concerning the plan. The Board sought comment on possible 
ways to format information to improve the effectiveness of periodic 
statement disclosures, including proximity requirements or grouping of 
terms or fees. Q4-Q6.
    Commenters' views were mixed. Industry commenters generally opposed 
mandating specific format requirements. They suggested that consumers 
are not confused by basic information conveyed on periodic statements, 
and that mandated format requirements would be expensive to implement 
and could stifle creditors' ability to tailor statements to specific 
products. Some of these commenters suggested that grouping of terms or 
fees might be helpful, but cautioned against a total of fees that would 
not differentiate interest from other charges such as penalty fees 
(late or over-the-credit-limit, for example). Some consumer group 
commenters suggested importing format requirements similar to the 
tabular disclosures for credit card applications and solicitations.
    Consumer testing conducted for the Board has shown that targeted 
proximity requirements on periodic statements tend to improve the 
effectiveness of cost disclosures for consumers. For the reasons 
discussed below, the Board proposes several proximity requirements. For 
example, the proposal would link by proximity the payment due date with 
the late payment fee and penalty rate that could be triggered by an 
untimely payment. The minimum payment amount also would be linked by 
proximity with the new warning required by the Bankruptcy Act about the 
effects of making such payments on the account. The Board believes 
grouping these disclosures together would enhance consumers' informed 
use of credit.
    To ensure consumers are alerted to rate increases and other changes 
that increase the cost of using their account, a summary of key rate 
and term changes would precede the transactions when an advance notice 
of a change in term or rate accompanies a periodic statement. 
Transactions would be grouped by type, and fee and interest charge 
totals would be located with the transactions. Participants in the 
consumer testing conducted for the Board tended to review their 
transactions and to notice fees and interest charges when placed there. 
The Board notes that some financial institutions presently group 
transactions by type. Form G-18(A) would illustrate these requirements.
    The Board is publishing for the first time forms illustrating front 
sides of a periodic statement. The Board is publishing forms G-18(G) 
and G-18(H) to illustrate how a periodic statement might be designed to 
comply with the requirements of Sec.  226.7. Forms G-18(G) and G-18(H) 
contain some additional disclosures that are not required by Regulation 
Z. The forms also present information in some additional formats that 
are not required by Regulation Z. The Board is publishing the front 
side of a statement form as a compliance aid.
    Consumer testing for the Board indicates that the effectiveness of 
periodic statement disclosures is improved when certain information is 
grouped together. The Board seeks comment on any alternative approaches 
that would provide creditors more flexibility in grouping related

[[Page 32993]]

information together on the periodic statement.
7(a) Rules Affecting Home-Equity Plans
    For HELOCs, creditors are required to comply with the disclosure 
requirements under proposed Sec.  226.7(a)(1) through (10), including 
existing rules and guidance regarding the disclosure of finance charges 
and other charges, which would be combined in a new Sec.  226.7(a)(6). 
These rules and accompanying commentary are substantively unchanged 
from current Sec.  226.7(a) through (k). Proposed Sec.  226.7(a) also 
provides that at their option, creditors offering HELOCs may comply 
with the requirements of Sec.  226.7(b). The Board understands that 
some creditors may use a single processing system to generate periodic 
statements for all open-end products they offer, including HELOCs. 
These creditors would have the option to generate statements according 
to a single set of rules.
    In technical revisions, the substance of footnotes referenced in 
Sec.  226.7(d) is moved to proposed Sec.  226.7(a)(4) and comment 
7(a)(4)-6.
7(a)(7) Annual Percentage Rate
    The Board is proposing two alternative approaches to address 
concerns about the effective APR. These approaches are discussed in 
detail in the section-by-section analysis to proposed Sec.  
226.7(b)(7). The first approach seeks to improve the effective APR. For 
HELOCs subject to Sec.  226.5b, creditors would have an option to 
comply with the new rules or continue to comply with the current rules 
applicable to the effective APR. This is intended as a temporary 
measure until the Board reviews comprehensively the rules for HELOCs 
subject to Sec.  226.5b. The second approach would eliminate the 
requirement to disclose the effective APR; thus, under this approach, 
the effective APR would be optional for HELOC creditors pending the 
Board's review of home-secured disclosure rules.
7(b) Rules Affecting Open-End (Not Home-Secured) Plans
    Current comment 7-3 provides guidance on various periodic statement 
disclosures for deferred-payment transactions, such as when a consumer 
may avoid interest charges if a purchase balance is paid in full by a 
certain date. Under the proposal, the substance of comment 7-3, revised 
to conform to other proposed revisions in Sec.  226.7(b), is proposed 
as comment 7(b)-1. The Board believes the guidance is unnecessary for 
HELOCs.
7(b)(2) Identification of Transactions
    Proposed Sec.  226.7(b)(2) requires creditors to identify 
transactions in accordance with rules set forth in Sec.  226.8. The 
Board proposes to revise and significantly simplify those rules, as 
discussed in the section-by-section analysis relating to Sec.  226.8 
below.
    The Board would introduce a format requirement to group 
transactions by type, such as purchases and cash advances. In consumer 
testing conducted for the Board, participants found such groupings 
helpful. Moreover, consumers noticed fees and interest charges more 
readily when transactions were grouped together, the fees imposed for 
the statement period were not interspersed among the transactions, and 
the interest and fees were disclosed in proximity to the transactions. 
Comment 7(b)(2)-1 would reflect the new requirement. Sample G-18(A) 
would illustrate the proposal.
7(b)(3) Credits
    Creditors are required to disclose any credits to the account 
during the billing cycle. Creditors typically disclose credits among 
other transactions. The Board proposes no substantive changes to the 
disclosure requirements for credits. However, consistent with the 
format requirements proposed in Sec.  226.7(b)(2), the proposal would 
require credits and payments to be grouped together. Consumers who 
participated in testing conducted for the Board consistently identified 
credits as statement information they review each month, and favored a 
separation of credits and payments among the transactions.
    Current comment 7(c)-2, which permits creditors to commingle 
credits related to extensions of credit and credits related to non-
credit accounts, such as a deposit account, is not proposed under new 
Sec.  226.7(b)(3). The Board solicits comment on the need for 
alternatives to the proposed format requirements to segregate 
transactions and credit, such as when a depository institution provides 
on a single periodic statement account activity for a consumer's 
checking account and an overdraft line of credit. Sample G-18(A) would 
illustrate the proposal. Comment 7(b)(3)-3, as renumbered, is revised 
for clarity.
7(b)(4) Periodic Rates
    Periodic rates. TILA Section 127(b)(5) and current Sec.  226.7(d) 
require creditors to disclose all periodic rates that may be used to 
compute the finance charge, and an APR that corresponds to the periodic 
rate multiplied by the number of periods in the years. 15 U.S.C. 
1637(b)(5); Sec.  226.14(b). The Board is proposing to eliminate, for 
open-end (not home-secured) plans, the requirement to disclose periodic 
rates on periodic statements.
    The Board proposes this approach pursuant to its exception and 
exemption authorities under TILA Section 105. Section 105(a) authorizes 
the Board to make exceptions to TILA to effectuate the statute's 
purposes, which include facilitating consumers' ability to compare 
credit terms and helping consumers avoid the uniformed use of credit. 
15 U.S.C. 1601(a), 1604(a). Section 105(f) authorizes the Board to 
exempt any class of transactions (with an exception not relevant here) 
from coverage under any part of TILA if the Board determines that 
coverage under that part does not provide a meaningful benefit to 
consumers in the form of useful information or protection. 15 U.S.C. 
1604(f)(1). Section 105(f) directs the Board to make this determination 
in light of specific factors. 15 U.S.C. 1604(f)(2). These factors are 
(1) the amount of the loan and whether the disclosure provides a 
benefit to consumers who are parties to the transaction involving a 
loan of such amount; (2) the extent to which the requirement 
complicates, hinders, or makes more expensive the credit process; (3) 
the status of the borrower, including any related financial 
arrangements of the borrower, the financial sophistication of the 
borrower relative to the type of transaction, and the importance to the 
borrower of the credit, related supporting property, and coverage under 
TILA; (4) whether the loan is secured by the principal residence of the 
borrower; and (5) whether the exemption would undermine the goal of 
consumer protection.
    The Board has considered each of these factors carefully, and based 
on that review, believes that proposing the exemption is appropriate. 
In consumer testing conducted for the Board, consumers indicated they 
do not use periodic rates to verify interest charges. Consistent with 
the Board's proposal to not allow periodic rates to be disclosed in the 
tabular summary on or with credit card applications and disclosures, 
the Board believes that requiring periodic rates to be disclosed on 
periodic statements may distract from more important information on the 
statement, and contribute to information overload. The proposal to 
eliminate periodic rates from the periodic statement therefore has the 
potential to better inform consumers and further the goals of consumer 
protection and the

[[Page 32994]]

informed use of credit for open-end (not home-secured) credit. The 
Board welcomes comment on this matter.
    Labeling APRs. Currently creditors are provided with considerable 
flexibility in identifying the APR that corresponds to the periodic 
rate. Current comment 7(d)-4 permits labels such as ``corresponding 
annual percentage rate,'' ``nominal annual percentage rate,'' or 
``corresponding nominal annual percentage rate.'' To promote 
uniformity, creditors offering open-end (not home-secured) plans would 
be required to label the annual percentage rate disclosed under 
proposed Sec.  226.7(b)(4) as ``annual percentage rate.'' In 
combination with the Board's proposed approach to improve consumers' 
understanding of the effective APR discussed in the section-by-section 
analysis to proposed Sec.  226.7(b)(7), it is important that the 
``interest only'' APR be uniformly distinguishable from the effective 
APR that includes interest and fees. Forms G-18(G) and G-18(H) 
illustrate periodic statements that disclose an APR but no periodic 
rates.
    Rates that ``may be used.'' Currently, comment 7(d)-1 interprets 
the requirement to disclose all periodic rates that ``may be used'' to 
mean ``whether or not [the rate] is applied during the cycle.'' For 
example, rates on cash advances must be disclosed on all periodic 
statements, even for billing periods with no cash advance activity or 
balances. The regulation and commentary do not clearly state whether 
promotional rates, such as those offered for using checks accessing 
credit card accounts, that ``may be used'' should be disclosed under 
current Sec.  226.7(d) regardless of whether they are imposed during 
the period. See current comment 7(d)-2. The Board is proposing a 
limited exception to TILA Section 127(b)(5) to effectuate the purposes 
of TILA to require disclosures that are meaningful and to facilitate 
compliance.
    Under the proposal, creditors would be required to disclose 
promotional rates only if the rate actually applied during the billing 
period. See proposed Sec.  226.7(b)(4)(ii). For example, a card issuer 
may impose a 22 percent APR for cash advances but offer for a limited 
time a 1.99 percent promotional APR for advances obtained through the 
use of a check accessing a credit card account. Creditors are currently 
required to disclose, in this example, the 22 percent cash advance APR 
on periodic statements whether or not the consumer obtains a cash 
advance during the previous statement period. The proposal would make 
clear that creditors are not required to disclose the 1.99 percent 
promotional APR unless the consumer used the check during the statement 
period. The Board believes that interpreting TILA to require the 
disclosure of all promotional rates would be operationally burdensome 
for creditors and result in information overload for consumers. The 
proposed exception would not apply to HELOCs covered by Sec.  226.5b. 
The Board requests comment on whether the class of transactions under 
the proposed exceptions should be tailored more broadly to include 
HELOCs subject to Sec.  226.5b, and if so, why.
    Combining interest and other charges. Currently, creditors must 
disclose finance charges attributable to periodic rates. These costs 
are typically interest but may include other costs such as premiums for 
required credit insurance. If applied to the same balance, creditors 
may disclose each rate, or a combined rate. See current comment 7(d)-3. 
As discussed earlier, consumer testing for the Board indicates that 
participants appeared to understand credit costs in terms of 
``interest'' and ``fees,'' and the proposal would require disclosures 
to distinguish between interest and fees. To the extent consumers 
associate periodic rates with ``interest,'' it seems unhelpful to 
consumers' understanding to permit creditors to include periodic rate 
charges other than interest into the dollar cost disclosed. Thus, 
guidance about combining periodic rates attributable to interest and 
other finance charges would be retained for HELOCs in proposed comment 
7(a)(4)-3, but would be eliminated for open-end (not home-secured) 
plans.
    A new comment 7(b)(4)-7 would be added to provide guidance to 
creditors when a fee is imposed, remains unpaid, and accrues interest 
on the unpaid balance. The comment provides that creditors disclosing 
fees in accordance with the format requirements of Sec.  226.7(b)(6) 
need not separately disclose which periodic rate applies to the unpaid 
fee balance.
    In technical revisions, the substance of footnotes referenced in 
Sec.  226.7(d) is moved to the regulation and comment 7(b)(4)-5.
7(b)(5) Balance on which Finance Charge is Computed
    Creditors must disclose the amount of the balance to which a 
periodic rate was applied and an explanation of how the balance was 
determined. The Board provides model clauses creditors may use to 
explain common balance computation methods. 15 U.S.C. 1637(b)(7); 
current Sec.  226.7(e); Model Clauses G-1, Appendix G. The staff 
commentary to current Sec.  226.7(e) interprets how creditors may 
comply with TILA in disclosing the ``balance,'' which typically changes 
in amount throughout the cycle, on periodic statements.
    Amount of balance. The proposal does not change how creditors are 
required to disclose the amount of the balance on which finance charges 
are computed. It would, however, permit creditors, at their option, not 
to include an explanation of how the finance charge may be verified for 
creditors that use a daily balance method. Currently, creditors that 
use a daily balance method are permitted to disclose an average daily 
balance for the period, provided they explain that the amount of the 
finance charge can be verified by multiplying the average daily balance 
by the number of days in the statement period, and then applying the 
periodic rate. The Board would retain the rule permitting creditors to 
disclose an average daily balance but would eliminate the requirement 
to provide the explanation. Consumer testing conducted for the Board 
suggests that the explanation may not be used by consumers as an aid to 
calculate their interest charges. Participants suggested that if they 
attempted without satisfaction to calculate balances and verify 
interest charges based on information on the periodic statement, they 
would call the creditor for assistance.
    The section-by-section analysis to Sec.  226.7(b)(6) discusses 
proposed revisions intended to further consumers' understanding of 
interest charges, as distinguished from fees. To complement those 
proposed revisions, the Board would require creditors to refer to the 
balance as ``balances subject to interest rate,'' for consistency. 
Forms G-18(G) and 18(H) illustrate this format requirement. For the 
reasons discussed regarding guidance on disclosing periodic rates, 
guidance about disclosing balances to which periodic rates attributable 
to interest and other finance charges are applied would be retained for 
HELOCs in proposed comment 7(a)(5)-1, but would be eliminated for open-
end (not home-secured) plans.
    Explanation of balance computation method. The Board is proposing 
an alternative to providing an explanation of how the balance was 
determined. Under the proposal, a creditor that uses a balance 
computation method identified in Sec.  226.5a(g) has two options. The 
creditor may: (1) Provide an explanation, as the rule currently 
requires, or (2) identify the name of the balance computation method 
and

[[Page 32995]]

provide a toll-free telephone number where consumers may obtain more 
information from the creditor about how the balance is computed and 
resulting finance charges are determined. If the creditor uses a 
balance computation method that is not identified in Sec.  226.5a(g), 
the creditor would provide a brief explanation of the method. The 
Board's proposal is guided by the following factors.
    Calculating balances on open-end plans can be complex, and requires 
an understanding of how creditors allocate payments, assess fees, and 
record transactions as they occur during the cycle. Currently, neither 
TILA nor Regulation Z requires creditors to disclose on periodic 
statements all the information necessary to compute a balance, and 
requiring that level of detail appears not to be warranted. Although 
the Board's model clauses are intended to assist creditors in 
explaining common methods, consumers continue to find these 
explanations lengthy and complex. As stated earlier, consumer testing 
indicates that consumers call the creditor for assistance when they 
attempt without satisfaction to calculate balances and verify interest 
charges.
    The Board believes that providing the name of the balance 
computation method (or a brief explanation, if the name is not 
identified in Sec.  226.5a(g)), along with a reference to where 
additional information may be obtained provides essential information 
in a simplified way, and in a manner consistent with how consumers 
obtain further balance computation information. The proposal is 
consistent with the views of some commenters who responded to the 
December 2004 ANPR and suggested that the Board simplify some of the 
more complex disclosures not used by most consumers. Current comment 
7(e)-6, which refers creditors to guidance in Sec.  226.6 about 
disclosing balance computation methods would be deleted as unnecessary.
7(b)(6) Charges Imposed
    As discussed in the section-by-section analysis to Sec.  226.6, the 
Board proposes to reform cost disclosure rules for open-end (not home-
secured) plans, in part, to ensure that all charges assessed as part of 
an open-end (not home-secured) plan are disclosed before they are 
imposed and to simplify the rules for creditors to identify such 
charges. Consistent with the proposed revisions at account opening, the 
proposed revisions to cost disclosures on periodic statements are 
intended to simplify how creditors identify the dollar amount of 
charges imposed during the statement period.
    Consumer testing conducted for the Board indicates that most 
participants reviewing mock periodic statements could not correctly 
explain the term ``finance charge.'' The proposed revisions are 
intended to conform labels of charges more closely to common 
understanding, ``interest'' and ``fees.'' Format requirements would 
also help ensure that consumers notice charges imposed during the 
statement period.
    Two alternatives are proposed: One addresses interest and fees in 
the context of an effective APR disclosure, the second assumes no 
effective APR is disclosed.
    Charges imposed as part of the plan. Proposed Sec.  226.7(b)(6) 
would require creditors to disclose the amount of any charge imposed as 
part of an open-end (not home-secured) plan, as stated in Sec.  
226.6(b)(1). Guidance on which charges are deemed to be imposed as part 
of the plan is in proposed Sec.  226.6(b)(1) and accompanying 
commentary. Although coverage of charges would be broader under the 
proposed standard of ``charges imposed as part of the plan'' than under 
current standards for finance charges and other charges, the Board 
understands that creditors have been disclosing on the statement all 
charges debited to the account regardless of whether they are now 
defined as ``finance charges,'' ``other charges,'' or charges that do 
not fall into either category. Accordingly, the Board understands that 
creditors already disclose all charges that would be considered 
``imposed as part of the plan,'' and it does not expect this proposed 
change to affect significantly the disclosure of charges on the 
periodic statement.
    Interest charges and fees. For creditors complying with the new 
proposed cost disclosure requirements, the current requirement in Sec.  
226.7(f) to label finance charges as such would be eliminated. See 
current Sec.  226.7(f). Testing of this term with consumers found that 
it did not help them to understand charges. Instead, charges imposed as 
part of an open-end (not home-secured) plan would be disclosed under 
the labels of ``interest charges'' and ``fees.'' Consumer testing 
supplies evidence that consumers may generally understand interest as 
the cost of borrowing money over time and characterize other costs--
regardless of their characterization under TILA and Regulation Z--as 
fees (other than interest). The Board's proposal is consistent with 
this evidence.
    TILA Section 127(b)(4) requires creditors to disclose on periodic 
statements the amount of any finance charge added to the account during 
the period, itemized to show amounts due to the application of periodic 
rates and the amount imposed as a fixed or minimum charge. 15 U.S.C. 
1637(b)(4). This requirement is currently implemented in Sec.  
226.7(f), and creditors are given considerable flexibility regarding 
totaling or subtotaling finance charges attributable to periodic rates 
and other fees. See current Sec.  226.7(f) and comments 7(f)-1, -2, and 
-3. To improve uniformity and promote the informed use of credit, 
creditors would be required under proposed Sec.  226.7(b)(6)(ii) to 
itemize finance charges attributable to interest, by type of 
transaction labeled as such, and would be required to disclose, for the 
statement period, a total interest charge, labeled as such. Although 
creditors are not currently required to itemize interest charges by 
transaction type, creditors often do so. For example, creditors may 
disclose the dollar interest costs associated with cash advance and 
purchase balances. Based on consumer testing, the Board believes 
consumers' ability to make informed decisions about the future use of 
their open-end plans--primarily credit card accounts--may be promoted 
by a simply-labeled breakdown of the current interest cost of carrying 
a purchase or cash advance balance. The breakdown would enable 
consumers to better understand the cost for using each type of 
transaction, and uniformity among periodic statements would allow 
consumers to compare one account with other open-end plans the consumer 
may have. Under the proposal, finance charges attributable to periodic 
rates other than interest charges, such as required credit insurance 
premiums, would be identified as fees and would no longer be permitted 
to be combined with interest costs. See proposed comment 7(b)(4)-3.
    Current Sec.  226.7(h) requires the disclosure of ``other charges'' 
parallel to the requirement in TILA Section 127(a)(5) and current Sec.  
226.6(b) to disclose such charges at account opening. 15 U.S.C. 
1637(a)(5). Consistent with current rules to disclose ``other 
charges,'' revised Sec.  226.7(b)(6)(iii) would require that other 
costs be identified consistent with the feature or type, and itemized. 
The proposal differs from current requirements in the following 
respect: fees would be required to be grouped together and a total of 
all fees for the statement period would be required. Currently, 
creditors typically include fees among other transactions identified

[[Page 32996]]

under Sec.  226.7(b). In consumer testing, consumers were able to more 
accurately and easily determine the total cost of non-interest charges 
when fees were grouped together and a total of fees was given than when 
fees were scattered among the transactions without a total. (Section 
226.7(b)(6)(iii) also would require that certain fees that are included 
in the computation of the effective APR pursuant to Sec.  226.14 must 
be labeled either as ``transaction fees'' or ``fixed fees.'' This 
proposed requirement is discussed in further detail in the section-by-
section analysis to Sec.  226.7(b)(7).)
    To highlight the overall cost of the credit account to consumers, 
creditors would disclose the total amount of interest charges and fees 
for the statement period and calendar year to date. Participants in 
consumer testing conducted for the Board noticed the year-to-date cost 
figures and indicated they would find the numbers helpful in making 
future financial decisions. The Board believes that disclosure of year-
to-date totals would better inform consumers about the cumulative cost 
of their credit plans over a significant period of time. Comment 
7(b)(6)-3 would provide guidance on how creditors may disclose the year 
to date totals at the end of a calendar year.
    Proposed Sec.  226.7(b)(6)(iv) in Alternative 1 contains 
requirements for calculating and disclosing totals for interest and 
certain fees in connection with the disclosure of the effective APR 
pursuant to Sec.  226.7(b)(7). These requirements are in addition to 
the total interest and fee disclosures disclosed in proximity to 
transactions, and are discussed in further detail in the section-by-
section analysis to Sec.  226.7(b)(7).
    Format requirements. In consumer testing, consumers consistently 
reviewed transactions identified on their periodic statements and 
noticed fees and interest charges, itemized and totaled, when they were 
grouped together with transactions. Some creditors also disclose these 
costs in account summaries or in a progression of figures associated 
with disclosing finance charges attributable to periodic rates. The 
proposal would not affect creditors' flexibility to provide this 
information in such summaries. See Forms G-18(G) and G-18(H), which 
illustrate, but do not require, such summaries. However, the Board 
believes TILA's purpose to promote the informed use of credit would be 
furthered significantly if consumers are uniformly provided, in a 
location they routinely review, basic cost information--interest and 
fees--that enables consumers to compare costs among their open-end 
plans. The Board proposes that charges required to be disclosed under 
Sec.  226.7(b)(6)(i) would be grouped together with the transactions 
identified under Sec.  226.7(b)(2), substantially similar to Sample G-
18(A) in Appendix G. Proposed Sec.  226.7(b)(6)(iii) would require non-
interest fees to be itemized and grouped together, and a total of fees 
would be disclosed for the statement period and calendar year to date. 
Interest charges would be itemized by type of transaction, grouped 
together, and a total of interest charges would be disclosed for the 
statement period and year to date. Sample G-18(A) in Appendix G 
illustrates the proposal.
7(b)(7) Effective Annual Percentage Rate
    TILA Section 127(b)(6) requires disclosure of an APR calculated as 
the quotient of the total finance charge for the period to which the 
charge relates divided by the amount on which the finance charge is 
based, multiplied by the number of periods in the year. 15 U.S.C. 
1637(b)(6). This rate has come to be known as the ``historical APR'' or 
``effective APR.'' (This APR will be referred to as the ``effective 
APR'' in this section-by-section analysis, and in the regulation and 
accompanying commentary.) Section 127(b)(6) exempts a creditor from 
disclosing an effective APR when the total finance charge does not 
exceed 50 cents for a monthly or longer billing cycle, or the pro rata 
share of 50 cents for a shorter cycle. In such a case, TILA Section 
127(b)(5) requires the creditor to disclose only the periodic rate and 
the annualized rate that corresponds to the periodic rate. 15 U.S.C. 
1637(b)(5). When the finance charge exceeds 50 cents, the act requires 
creditors to disclose the periodic rate but not the corresponding APR. 
Since 1970, however, Regulation Z has required disclosure of the 
corresponding APR in all cases. See current Sec.  226.7(d). Current 
Sec.  226.7(g) implements TILA Section 127(b)(6)'s requirement to 
disclose an effective APR.
    The effective APR and corresponding APR for any given plan feature 
are the same when the finance charge in a period arises only from 
application of the periodic rate to the applicable balance (the balance 
calculated according to the creditor's chosen method, such as average 
daily balance method). When the two APRs are the same, Regulation Z 
requires that the APR be stated just once. The effective and 
corresponding APRs diverge when the finance charge in a period arises 
(at least in part) from a charge not determined by application of a 
periodic rate and the total finance charge exceeds 50 cents. When they 
diverge, Regulation Z requires that both be stated.
    The following example illustrates the relationship between the 
effective APR and the corresponding APR in a simple case. A credit 
cardholder with no balance in the previous cycle takes a cash advance 
of $100 on the first day of the cycle. A cash advance fee of 3 percent 
applies (a finance charge of $3), as does a periodic rate of 1\1/2\ 
percent per month on the average daily balance of $100 (a finance 
charge of $1.50). No other transactions, and no payments, occur during 
the cycle, which is 30 days. The corresponding APR is 18 percent (1\1/
2\ percent times 12). To determine the effective APR, first the total 
finance charge of $4.50 is divided by the balance of $100. This 
quotient, 4\1/2\ percent, is the rate of the total finance charge on a 
monthly basis. The monthly rate is annualized, or multiplied by 12, to 
yield an effective APR of 54 percent. Under Regulation Z, the creditor 
would disclose on the periodic statement both the corresponding APR of 
18 percent and the effective APR of 54 percent.
    The controversy over the effective APR. The statutory requirement 
of an effective APR is intended to provide the consumer with an annual 
rate that reflects the total finance charge, including both the finance 
charge due to application of a periodic rate (interest) and finance 
charges that take the form of fees. This rate, like other APRs required 
by TILA, presumably was intended to provide consumers information about 
the cost of credit that would help consumers compare credit costs and 
make informed credit decisions and, more broadly, strengthen 
competition in the market for consumer credit. 15 U.S.C. 1601(a). There 
is, however, a longstanding controversy about the extent to which the 
requirement to disclose an effective APR advances TILA's purposes or, 
as some argue, undermines them. This controversy has been reflected in 
such forums as discussions by the Board's Consumer Advisory Council and 
comments on the ANPR. Q23-Q25. The following discussion seeks to place 
the controversy over the effective APR in the context of certain 
objective characteristics of the disclosure.
    The effective APR is essentially retrospective, or ``historical.'' 
An effective APR on a particular periodic statement represents the cost 
of transactions in which the consumer engaged during the cycle to which 
that statement pertains. It is not likely, however, that the effective 
APR for a transaction in a given cycle will predict accurately the cost 
of a transaction in a


[[Continued on page 32997]]


From the Federal Register Online via GPO Access [wais.access.gpo.gov]
]                         
 
[[pp. 32997-33046]] Truth in Lending

[[Continued from page 32996]]

[[Page 32997]]

future cycle. If any one of several factors is different in the future 
cycle than it was in the past cycle, such as the balance at the 
beginning of the cycle or the amount and timing of each transaction and 
payment during the cycle, then the effective APRs in the two cycles 
will be different, too.\13\ In short, the effective APR is by nature 
retrospective and idiosyncratic and, therefore, provides limited 
information about the cost of future transactions.
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    \13\ An example demonstrates how the effective APR depends 
critically on the timing of transactions during two different 
cycles. Assume for the sake of simplicity that the transaction 
amount and beginning balance remain the same in both cycles. In the 
example discussed above, a cash advance of $100 on the first day of 
a 30-day cycle yielded an effective APR of 54 percent, three times 
the corresponding APR of 18 percent. If in a later cycle the 
consumer were to take the cash advance on the last day of the 30-day 
cycle, the effective APR would be 36.6 percent, about twice the 
corresponding APR. (The finance charge produced by the periodic rate 
would be $.05 (1\1/2\ percent times the average daily balance of 
$3.33). The total finance charge of $3.05 divided by the transaction 
amount of $100 yields a quotient of 3.05 percent, which is 
multiplied by 12 to yield an effective APR of 36.6 percent.)
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    Consumer groups argue that the information the rate provides about 
the cost of future transactions, even if limited, is meaningful. The 
effective APR for a specific transaction or set of transactions in a 
given cycle may provide the consumer a rough indication that the cost 
of repeating such transactions is high in some sense or, at least, 
higher than the corresponding APR alone conveys. Industry commenters 
respond that the cost of a transaction is not usually as high as the 
effective APR makes it appear, and that this tendency of the rate to 
exaggerate the cost makes this APR misleading. Commenters generally 
agree that the effective APR can be ``shocking,'' but they disagree as 
to whether it conveys meaningful information.
    One reason that effective APRs appear high is the assumption built 
into the disclosure that the borrower paid the balance at the end of 
the cycle. This assumption tends to make the APR higher, and more 
volatile, than if a longer repayment period were used. In the example 
given above, the effective APR on cash advances, 54 percent, is three 
times the corresponding APR, 18 percent. Moreover, the effective APR 
would have been 18 percent (the same as the corresponding APR) in the 
previous cycle if no cash advances had been taken then, and it will 
fall back to 18 percent in the next cycle if no cash advance is taken 
then (assuming the rate is fixed). Use of a longer repayment period 
would, other things being equal, yield a lower, and less volatile, 
effective APR. A lower APR based on available information about the 
consumer's expected time to repay might seem more realistic. But its 
disclosure would require making assumptions about activity in future 
cycles, such as the timing and amount of future transactions and 
payments--or it would require assuming that there is to be no activity 
on the account until the balance is repaid. Such assumptions would 
often appear arbitrary and unrealistic. Accordingly, Regulation Z has 
always required that the effective APR be calculated on the premise 
that payment was made at the end of the cycle. The likelihood that the 
premise is often wrong accounts, at least in part, for the controversy 
as to whether the effective APR can supply meaningful information about 
credit costs.
    Consumer advocates and industry representatives also disagree as to 
whether the effective APR promotes credit shopping. The dependence of 
the effective APR on the particular activity in a given cycle means 
that any given effective APR in any given cycle is not typically a 
practical shopping tool. Comparing two particular effective APRs for 
any two cycles on two different accounts is not usually a reliable 
basis to determine which account costs the consumer more. Moreover, an 
effective APR for a given month on an existing account cannot be 
compared reliably to the corresponding APR advertised on a different 
account, which by definition does not reflect any finance charges 
imposed in the form of fees. There may be cases in which repeated 
disclosure of effective APRs in consecutive cycles, as opposed to one 
effective APR for one cycle, would facilitate shopping. For example, if 
an account had a periodic rate and a corresponding APR of zero, the 
effective APRs disclosed on the account might provide the most 
practical basis for assessing the cost of the account in relationship 
to other advertised accounts. This example, though, does not appear to 
be common in today's market.
    Although the effective APR is not commonly usable as a shopping 
tool in itself, consumer group commenters argue that the effective APR 
promotes credit shopping by encouraging consumers to seek out other 
sources of credit, especially when the rate reaches levels that 
``shock'' consumers. Industry commenters respond, however, that the 
tendency of the effective APR to exaggerate the cost of credit may lead 
consumers to make invalid comparisons. They say that disclosure of a 
high effective APR in a cycle may cause a consumer to discontinue using 
the account in favor of another account that appears less expensive 
based on its corresponding APR but is in fact more expensive, because 
of fixed or minimum charges or other factors.
    Supporters of the effective APR also argue that high effective APRs 
typical for cash advances and balance transfers benefit consumers by 
discouraging them from engaging in these transactions. Industry 
commenters respond that consumers do not necessarily benefit if they 
refrain categorically from a particular kind of credit transaction; 
depending on the alternatives consumers choose, they may be worse-off 
rather than better-off. Some of these commenters also argue that 
discouraging particular kinds of credit transactions is not a valid 
objective of Regulation Z.
    Industry and community group commenters find some common ground in 
their observations that consumers do not understand the effective APR 
well. Industry commenters argue from their experience with their 
customers that consumers do not understand how this APR differs from 
the corresponding APR, why it is ``so high,'' or which fees it 
reflects. Creditor commenters say that when their customers call them 
and express alarm or confusion over the effective APR, the creditors 
find it difficult, if not impossible, to make the caller understand the 
disclosure. Nor, they argue, does a consumer find the disclosure any 
more useful than disclosure of interest and fees in dollars and cents, 
even if the consumer understands the disclosure. Consumer groups 
concede that, as implemented today, the effective APR is difficult for 
consumers to understand, and they support efforts to make it more 
understandable, such as improved presentation on the periodic 
statement. Industry commenters expressed doubt that such efforts would 
be worthwhile.
    Industry commenters also claim the effective APR imposes direct 
costs on creditors that consumers pay indirectly. They represent that 
the effective APR raises compliance costs when they introduce new 
services, including legal analysis of Regulation Z to determine whether 
the fee for the new service must be included in the effective APR and 
software programming if it is included; they are also concerned about 
litigation risks. Also, responding to telephone inquiries from confused 
customers and accommodating them (e.g., with fee waivers or rebates) 
increases operational costs. Costs associated with adverse consumer 
reactions to the effective APR may influence creditors to take steps to 
minimize the frequency with which

[[Page 32998]]

they must disclose it. One such step would be to price credit mostly 
through a periodic rate rather than fees. Although this effect is 
difficult to measure, a trade association commenter concedes a policy 
argument for retaining the effective APR as a hedge against creditors 
shifting their pricing from periodic rates to transaction-triggered 
fees and charges.
    Like most other industry commenters, however, this same commenter 
concludes that the effective APR should be eliminated because, for the 
reasons discussed above, its costs outweigh its benefits. Some industry 
commenters support replacing the effective APR with enhanced fee 
disclosures (for example, grouping fees on the statement or summing 
them for each period or for the year), but many do not. Consumer groups 
urge the Board not only to retain the effective APR, but to expand it 
in two respects: (1) Include in the rate all charges, including charges 
not currently defined as finance charges in Regulation Z; and (2) 
require creditors to disclose a ``typical effective APR'' (an average 
of effective APRs) on solicitations and account-opening 
disclosures.\14\
---------------------------------------------------------------------------

    \14\ Consumer group comments about a ``typical APR'' disclosure 
are summarized in the section-by-section analysis to Sec.  226.5a.
---------------------------------------------------------------------------

    Consumer research conducted for the Board. It is difficult to 
measure directly how the effective APR ultimately affects consumers, 
creditors, and the credit market generally. It is feasible, however, at 
a minimum, to assess to some degree consumers' awareness and 
understanding of the disclosure. Such assessments may support 
inferences about the disclosure's effectiveness.
    Accordingly, the Board undertook research, through a consultant, to 
shed light on consumer awareness and understanding of the effective 
APR; and on whether changes to the presentation of the disclosure could 
increase awareness and understanding. A Board consultant used a 
qualitative testing method, one-on-one cognitive interviews with 
consumers. Consumers were provided mock disclosures of periodic 
statements that included effective APRs and asked questions about the 
disclosure designed to elicit their understanding of the rate. In the 
first round the statements were copied from examples in the market. For 
subsequent testing rounds, however, statements were modified in 
language and design to better convey how the effective APR differs from 
the corresponding APR. Several different approaches and many variations 
on those approaches were tested.
    In most of the rounds, a minority of participants correctly 
explained that the effective APR for cash advances in the last cycle 
was higher than the corresponding APR for cash advances because a cash 
advance fee had been imposed. A smaller minority correctly explained 
that the effective APR for purchases was the same as the corresponding 
APR for purchases because no transaction fee had been imposed on 
purchases. A majority offered incorrect explanations or did not offer 
any explanation. Results changed at the final testing site, however, 
when a majority of participants evidenced an understanding that the 
effective APR for cash advances would be elevated for the statement 
period when a cash advance fee was imposed during that period, that the 
effective APR would not be as elevated for periods where a cash advance 
balance remained outstanding but no fee had been imposed, and that the 
effective APR for purchases was the same as the corresponding APR for 
purchases because no transaction fee had been imposed on purchases.
    The form in the final round labeled the rate ``Fee-Inclusive APR'' 
and placed it in a table separate from the corresponding APR. The 
``Fee-Inclusive APR'' table included the amount of interest and the 
amount of transaction fees. An adjacent sentence stated that the ``Fee-
Inclusive APR'' represented the cost of transaction fees as well as 
interest. Similar approaches had been tried in some of the earlier 
rounds, except that the effective APR had been labeled ``Effective 
APR.''
    The Board's two alternative proposals. The considerations and data 
discussed above lead the Board to propose two alternative approaches 
for disclosing the effective APR: The first approach would try to 
improve consumer understanding of this rate and reduce creditor 
uncertainty about its computation. The second approach would eliminate 
the requirement to disclose the effective APR. The evidence of consumer 
understanding of the effective APR supplied by the qualitative research 
conducted for the Board is mixed, but it suggests that it may be 
possible to increase current levels of understanding by modifying the 
presentation of the rate on the periodic statement. The Board's 
experience with Regulation Z also suggests that it may be possible to 
reduce burdens by simplifying computation of the effective APR.
    The Board plans to conduct further research into consumer 
understanding of the effective APR after the comment period has ended. 
The Board will evaluate this additional research with the research 
conducted to date, and with other information, including comments 
received on this proposal, and determine whether the effective APR 
should be retained with modifications as proposed, eliminated, or 
addressed in some other way.
    1. First alternative proposal. Under the first alternative, the 
Board proposes to impose uniform terminology and formatting on 
disclosure of the effective APR and the fees included in its 
computation. See proposed Sec. Sec.  226.7(b)(7)(i), 226.7(b)(6)(iv). 
This proposal is based largely on a form developed through several 
rounds of one-on-one interviews with consumers. The Board also proposes 
under this alternative to revise Sec.  226.14, which governs 
computation of the effective APR, in an effort to increase certainty 
about which fees the rate must include. See proposed Sec.  226.14(d). 
See section-by-section analysis to Sec.  226.7(a)(7) regarding how the 
proposal affects HELOCs subject to Sec.  226.5b.
    Under proposed Sec.  226.7(b)(7)(i) and Sample Form G-18(B), 
creditors would label the effective APR ``Fee-Inclusive APR'' and 
indicate that the Fee-inclusive APRs are the ``APRs that you paid this 
period when transactions or fixed fees are taken into account as well 
as interest.'' Creditors would disclose an effective APR for each 
feature, such as purchases and cash advances, in a tabular format. A 
composite effective APR for two or more features would no longer be 
permitted, as it is more difficult to explain to consumers. The 
effective APR(s) would appear in a table, by feature, with the total of 
interest, labeled as ``interest charges,'' and the total of the fees 
included in the effective APR, labeled as ``transaction and fixed 
charges.'' To facilitate understanding, proposed Sec.  226.7(b)(6)(iii) 
would require creditors to label the specific fees used to calculate 
the effective APR either as ``transaction'' or ``fixed'' fees, 
depending whether the fee relates to a specific transaction; such fees 
would be disclosed in the list of transactions. If the only finance 
charges in a billing cycle are interest charges, the corresponding and 
effective APRs are identical. In those cases, creditors would disclose 
only the corresponding APRs and would not be required to label fees as 
``transaction'' or ``fixed'' fees. These requirements would be 
illustrated in forms under G-18 in Appendix G, and creditors would be 
required to use the model or a substantially similar presentation.
    To facilitate compliance, the proposed regulation would give 
specific guidance about how to attribute fees to account

[[Page 32999]]

features. For convenience and uniformity, two kinds of charges, when 
used to calculate the effective APR, would be grouped under the 
purchase feature of the account: (1) Charges that relate to specific 
purchase transactions; and (2) minimum, fixed and other non-interest 
charges not related to a specific transaction. See proposed Sec.  
226.7(b)(6)(iv)(B). If there are purchase features other than the 
standard purchase feature--such as a promotional purchase feature--then 
the minimum, fixed or other non-interest charges would be grouped with 
other charges relating to the balance on the standard purchase feature. 
See proposed comment 7(b)(6)-5. In addition, a minimum charge would be 
disclosed as a fee, rather than as interest, and it would be grouped 
together with other fees related to standard purchases and used to 
calculate the effective APR with respect to the standard purchase 
feature. See proposed comment 7(b)(6)-4.
    The proposal also seeks to simplify computation of the effective 
APR, both to increase consumer understanding of the disclosure and 
facilitate creditor compliance. New Sec.  226.14(e) would provide a 
specific and exclusive list of finance charges that would be included 
in calculating the effective APR.\15\ This proposed change is discussed 
further in the section-by-section analysis to Sec.  226.14.
---------------------------------------------------------------------------

    \15\ Under the statute, the numerator of the quotient used to 
determine the historical APR is the total finance charge. See 
Section 107(a)(2), 15 U.S.C. 1606(a)(2). The Board has authority to 
make exceptions and adjustments to this calculation method to serve 
TILA's purposes and facilitate compliance. See Section 105(a), 15 
U.S.C. 1604(a). The Board has used this authority before to exclude 
certain kinds of finance charges from the historical APR. See 
current Sec.  226.14(c)(2), fn. 33.
---------------------------------------------------------------------------

    The Board seeks comment on the potential benefits and costs of the 
first alternative proposal.
    2. Second alternative proposal. Under the second alternative 
proposal, for the reasons discussed in the introduction to the 
discussion of the effective APR, the effective APR would no longer be 
disclosed. The Board proposes this approach pursuant to its exception 
and exemption authorities under TILA Section 105. Section 105(a) 
authorizes the Board to make exceptions to TILA to effectuate the 
statute's purposes, which include facilitating consumers' ability to 
compare credit terms and helping consumers avoid the uniformed use of 
credit. 15 U.S.C. 1601(a), 1604(a). Section 105(f) authorizes the Board 
to exempt any class of transactions (with an exception not relevant 
here) from coverage under any part of TILA if the Board determines that 
coverage under that part does not provide a meaningful benefit to 
consumers in the form of useful information or protection. 15 U.S.C. 
1604(f)(1). Section 105(f) directs the Board to make this determination 
in light of specific factors. 15 U.S.C. 1604(f)(2). These factors are 
(1) the amount of the loan and whether the disclosure provides a 
benefit to consumers who are parties to the transaction involving a 
loan of such amount; (2) the extent to which the requirement 
complicates, hinders, or makes more expensive the credit process; (3) 
the status of the borrower, including any related financial 
arrangements of the borrower, the financial sophistication of the 
borrower relative to the type of transaction, and the importance to the 
borrower of the credit, related supporting property, and coverage under 
TILA; (4) whether the loan is secured by the principal residence of the 
borrower; and (5) whether the exemption would undermine the goal of 
consumer protection.
    The Board has considered each of these factors carefully, and based 
on that review, believes that proposing the exemption is appropriate. 
Consumer testing suggests that consumers find the current requirement 
of disclosing an APR that combines rates and fees to be confusing. The 
proposal would require disclosure of the nominal interest rate and fees 
in a manner that is more readily understandable and comparable across 
institutions. It therefore has the potential to better inform consumers 
and further the goals of consumer protection and the informed use of 
credit for all types of open-end credit. A potentially competing 
consideration is the extent to which ``sticker shock'' from the 
effective APR benefits consumers, even if the disclosure is somewhat 
arbitrary. A second consideration is whether the effective APR is a 
hedge against fee-intensive pricing by creditors, and if so, the extent 
to which it promotes transparency. On balance, however, the Board 
believes that the benefits of the proposal would outweigh these 
considerations.
    The Board welcomes comment on this matter.
7(b)(9) Address for Notice of Billing Errors
    Consumers who allege billing errors must do so in writing. 15 
U.S.C. 1666; Sec.  226.13(b). Creditors must provide on or with 
periodic statements an address for this purpose. See current Sec.  
226.7(k). Currently, comment 7(k)-2 provides that creditors may also 
provide a telephone number along with the mailing address as long as 
the creditor makes clear a telephone call to the creditor will not 
preserve consumers' billing error rights. The Board would update 
comment 7(k)-2, renumbered as comment 7(b)(9)-2, to address 
notification by e-mail or via a Web site. The comment would provide 
that the address is deemed to be clear and conspicuous if a 
precautionary instruction is included that telephoning or notifying the 
creditor by e-mail or Web site will not preserve the consumer's billing 
rights, unless the creditor has agreed to treat billing error notices 
provided by electronic means as written notices, in which case the 
precautionary instruction is required only for telephoning.
7(b)(10) Closing Date of Billing Cycle; New Balance
    Creditors must disclose the closing date of the billing cycle and 
the account balance outstanding on that date. As a part of its proposal 
to implement TILA amendments in the Bankruptcy Act regarding late 
payment and the effect of making minimum payments, the Board is 
proposing to require creditors to group together, as applicable, 
disclosures of related information about due dates and payment amounts, 
including the new balance. This is discussed in the section-by-section 
analysis to Sec. Sec.  226.7(b)(11) and (b)(13) below, and illustrated 
in Forms G-18(G) and G-18(H) in Appendix G.
7(b)(11) Due Date; Late Payment Costs
    TILA Section 127(b)(12), added by Section 1305(a) of the Bankruptcy 
Act, requires creditors that charge a late-payment fee to disclose on 
the periodic statement (1) the payment due date or, if different, the 
earliest date on which the late-payment fee may be charged, and (2) the 
amount of the late-payment fee. 15 U.S.C. 1637(b)(12). The October 2005 
ANPR solicited comment on the need for additional guidance on the date 
to be disclosed under the new rule, and whether the Board should 
consider any format requirements, such as proximity rules, or the 
publication of model disclosures. Q97-Q99.
    Home-equity plans. The Board intends to implement the late payment 
disclosure for HELOCs as a part of its review of rules affecting home-
secured credit. Creditors offering HELOCs may comply with proposed 
Sec.  226.7(b)(11), at their option.
    Charge card issuers. TILA Section 127(b)(12) applies to 
``creditors.'' TILA's definition of ``creditor'' includes card issuers 
and other persons that offer consumer open-end credit. Issuers of 
``charge cards'' (which are typically products where outstanding 
balances cannot be carried over from one billing

[[Page 33000]]

period to the next and are payable when a periodic statement is 
received) are ``creditors'' for purposes of specifically enumerated 
TILA disclosure requirements. 15 U.S.C. 1602(f); Sec.  226.2(a)(17). 
The new disclosure requirement in TILA Section 127(b)(12) is not among 
those specifically enumerated.
    The Board proposes that charge card issuers are not subject to the 
late payment disclosure requirements contained in the Bankruptcy Act 
and to be implemented in new Sec.  226.7(b)(11); the new requirement is 
not specifically enumerated to apply to charge card issuers. In 
addition, the Board understands that for some charge card issuers, 
payments are not considered ``late'' for purposes of imposing a fee 
until a second statement is received without a payment. The Board 
believes it would be undesirable to encourage consumers who in January 
receive a statement with the balance due upon receipt, for example, to 
avoid paying the balance when due because a late-payment fee may not be 
assessed until mid-February; such a disclosure could cause issuers to 
change such a practice.
    Payment due date. Under the proposal, creditors must disclose the 
due date for a payment if a late-payment fee could be imposed under the 
credit agreement. The Board interprets this to be a date that is 
required by the legal obligation and not to encompass informal 
``courtesy periods'' that are not part of the legal obligation and that 
creditors may observe for a short period after the stated due date 
before a late-payment fee is imposed, to account for minor delays in 
payments such as mail delays. Several commenters asked the Board to 
clarify that in complying with the new late-payment fee disclosure, 
creditors need not disclose informal ``courtesy periods'' not part of 
the legal obligation. The Board proposes a comment to this effect. See 
proposed comment 7(b)(11)-1.
    Under the statute, creditors must disclose on periodic statements 
the payment due date or, if different, the earliest date on which the 
late-payment fee may be charged. Some state laws require that a certain 
number of days must elapse following a due date before a late-payment 
fee may be imposed. Under such a state law, the later date arguably 
would be required to be disclosed on periodic statements. The Board is 
concerned, however, that such a disclosure would not provide a 
meaningful benefit to consumers in the form of useful information or 
protection and would result in consumer confusion. For example, assume 
a payment is due on March 10 and state law provides that a late payment 
fee cannot be assessed before March 21. The Board is concerned that 
highlighting March 20 as the last date to avoid a late payment fee may 
mislead consumers into thinking that a payment made any time on or 
before March 20 would have no adverse financial consequences. However, 
failure to make a payment when due is considered an act of default 
under most credit contracts, and can trigger higher costs due to 
interest accrual and perhaps penalty APRs. Particularly in the case of 
an increased rate that applies to all account balances, the cost of 
paying late may be significant.
    The Board considered additional disclosures on the periodic 
statement that would more fully explain the consequences of paying 
after the due date and before the date triggering the late-payment fee, 
but such an approach appears cumbersome and overly complicated. For 
those reasons, the Board proposes that creditors must disclose the due 
date under the terms of the legal obligation, and not a date different 
than the due date, such as when creditors are required by state or 
other law to delay for a specified period imposing a late-payment fee 
when a payment is received after the due date. Consumers' rights under 
state laws to avoid the imposition of late-payment fees during a 
specified period following a due date are unaffected by the proposal; 
that is, in the above example, the creditor would disclose March 10 as 
the due date for purposes of Sec.  226.7(b)(11), but could not, under 
state law, assess a late-payment fee before March 21. However, the 
proposal would provide additional protections to consumers by not 
requiring a disclosure that a late-payment fee will be imposed only 
after a specified period after the due date, which, if followed, may 
result in even more costly consequence of an increased penalty rate.
    Cut-off time for making payments. As discussed in the section-by-
section analysis to Sec.  226.10(b), the Board proposes to require that 
creditors disclose any cut-off time for receiving payments closely 
proximate to each reference of the due date, if the cut-off time is 
before 5 p.m. on the due date. If cut-off times prior to 5 p.m. differ 
depending on the method of payment (such as by check or via the 
Internet), the creditor must state the earliest time without specifying 
the method to which it applies. This avoids information overload by 
potentially identifying several cut-off times. Cut-off hours of 5 p.m. 
or later may continue to be disclosed under the existing rule 
(including on the reverse side of periodic statements).
    Amount of late payment fee; penalty APR. Creditors must disclose 
the amount of the late-payment fee and the payment due date on periodic 
statements, under TILA amendments contained in the Bankruptcy Act. The 
purpose of the new late payment disclosure requirement is to ensure 
consumers know the consequences of paying late. To fulfill that 
purpose, the Board proposes that the amount of the late-payment fee 
must be disclosed in close proximity to the due date. If the amount of 
the late-payment fee is based on outstanding balances, the proposal 
would permit the creditor to disclose either the fee that would apply 
to that specific balance, or the highest fee in the range (e.g., ``up 
to'' a stated dollar amount).
    In addition, the Board believes that an equally (or more) important 
consequence of paying late is the potential increase in APRs. The 
extent of rate increases may be substantial, particularly where the 
increased APR applies to all existing balances, including balances at 
low promotional rates. Further, the increased APR may apply for a 
lengthy period of time (although if the creditor imposes a penalty 
rate, the increase would not become effective for at least 45 days, 
under the Board's proposal). See proposed Sec.  226.9(g). The Board is 
concerned that if the disclosure refers to only the late payment fee, 
consumers may overlook the more costly consequence of penalty rates. 
Therefore, the Board proposes to require creditors to disclose any 
increased rate that may apply if consumers' payments are received after 
the due date. If, under the terms of the account agreement, a late 
payment could result in the loss of a promotional rate, the imposition 
of a penalty rate, or both, the creditor must disclose the highest rate 
that could apply, to avoid information overload. Under the proposal, 
the increased APR would be disclosed closely proximate to the fee and 
due date, as set forth in proposed Sec.  226.7(b)(13). The Board 
believes this fulfills Congress's intent to warn consumers about the 
effects of paying late.
7(b)(12) Minimum Payment
    The Bankruptcy Act amends TILA Section 127(b) to require creditors 
that extend open-end credit to provide a disclosure on the front of 
each periodic statement in a prominent location about the effects of 
making only minimum payments. 15 U.S.C. Sec.  1637(b)(11). This 
disclosure must include: (1) A ``warning'' statement indicating that

[[Page 33001]]

making only the minimum payment will increase the interest the consumer 
pays and the time it takes to repay the consumer's balance; (2) a 
hypothetical example of how long it would take to pay off a specified 
balance if only minimum payments are made; and (3) a toll-free 
telephone number that the consumer may call to obtain an estimate of 
the time it would take to repay their actual account balance.
    Under the Bankruptcy Act, depository institutions may establish and 
maintain their own toll-free telephone numbers or use a third party. In 
order to standardize the information provided to consumers through the 
toll-free telephone numbers, the Bankruptcy Act directs the Board to 
prepare a ``table'' illustrating the approximate number of months it 
would take to repay an outstanding balance if the consumer pays only 
the required minimum monthly payments and if no other advances are 
made. The Board is directed to create the table by assuming a 
significant number of different APRs, account balances, and minimum 
payment amounts; instructional guidance must be provided on how the 
information contained in the table should be used to respond to 
consumers' requests. The Board is also required to establish and 
maintain, for two years, a toll-free telephone number for use by 
customers of creditors that are depository institutions having assets 
of $250 million or less. The Federal Trade Commission (FTC) must 
maintain a toll-free telephone number for creditors that are not 
depository institutions. 15 U.S.C. 1637(b)(11)(A)-(C).
    The Bankruptcy Act provides that consumers who call the toll-free 
telephone number may be connected to an automated device through which 
they can obtain repayment information by providing information using a 
touch-tone telephone or similar device, but consumers who are unable to 
use the automated device must have the opportunity to be connected to 
an individual from whom the repayment information may be obtained. 
Creditors, the Board and the FTC may not use the toll-free telephone 
number to provide consumers with repayment information other than the 
repayment information set forth in the ``table'' issued by the Board. 
15 U.S.C. 1637(b)(11)(F)-(H).
    Alternatively, a creditor may use a toll-free telephone number to 
provide the actual number of months that it will take consumers to 
repay their outstanding balance instead of providing an estimate based 
on the Board-created table. A creditor that does so also need not 
include a hypothetical example on its periodic statements, but must 
disclose the warning statement and the toll-free telephone number on 
its periodic statements. 15 U.S.C. 1637(b)(11)(J)-(K).
    For ease of reference, the Board will refer to the above 
disclosures about the effects of making only the minimum payment as 
``the minimum payment disclosures.''
    Proposal to limit the minimum payment disclosure requirements to 
credit card accounts. Under the Bankruptcy Act, the minimum payment 
disclosures apply to all open-end accounts (such as credit card 
accounts, HELOCs, and general-purpose credit lines). The Act expressly 
states that these disclosure requirements do not apply, however, to any 
``charge card'' account, the primary aspect of which is to require 
payment of charges in full each month.
    In the October 2005 ANPR, the Board requested comment on whether 
certain open-end accounts should be exempted from some or all of the 
minimum payment disclosure requirements. Q59. Many industry commenters 
urged the Board to limit the minimum payment disclosure requirements to 
credit card accounts because they believed that Congress intended the 
minimum payment disclosures only for such accounts. On the other hand, 
several consumer groups urged the Board to apply the minimum payment 
disclosures to all open-end plans because they believed that these 
disclosures could be useful to consumers for all open-end products, 
including HELOCs.
    The Board is proposing to exempt open-end credit plans other than 
credit card accounts from the minimum payment disclosure requirements. 
This exemption would cover, for example, HELOCs (including open-end 
reverse mortgages), overdraft lines of credit and other general-purpose 
personal lines of credit.
    The debate in Congress about the minimum payment disclosures 
focused on credit card accounts. For example, Senator Grassley, a 
primary sponsor of the Bankruptcy Act, in discussing the minimum 
payment disclosures, stated:

    [The Bankruptcy Act] contains significant new disclosures for 
consumers, mandating that credit card companies provide key 
information about how much [consumers] owe and how long it will take 
to pay off their credit card debts by only making the minimum 
payment. That is very important consumer education for every one of 
us.
    Consumers will also be given a toll-free number to call where 
they can get information about how long it will take to pay off 
their own credit card balances if they only pay the minimum payment. 
This will educate consumers and improve consumers' understanding of 
what their financial situation is.

Remarks of Senator Grassley (2005), Congressional Record (daily 
edition), vol. 151, March 1, p. S 1856.
    Thus, it appears the principal concern of Congress was that 
consumers may not be fully aware of the length of time it takes to pay 
off their credit card accounts if only minimum monthly payments are 
made. The concern expressed by Congress for credit card accounts does 
not necessarily apply to other types of open-end credit accounts. These 
other types of open-end accounts are discussed below.
    1. HELOCs. Many industry commenters requested that HELOCs be 
exempted from the minimum payment disclosure requirements. These 
commenters indicated that most HELOCs have a fixed repayment period 
specified in the account agreement, so that consumers know from the 
account agreement the length of the draw period and the length of the 
repayment period. Nonetheless, several consumer groups urged that 
HELOCs should not be exempted entirely. They advocated a warning to 
HELOC consumers that they can pay down the balance faster and save on 
finance charges if they pay more than the minimum monthly payment 
required.
    Based on the comments received in response to the October 2005 ANPR 
as well as other information, the Board understands that most HELOCs 
have a fixed repayment period. Thus, for those HELOCs, consumers could 
learn from the current disclosures the length of the draw period and 
the repayment period. See current Sec.  226.6(e)(2). The minimum 
payment disclosures would not appear to provide useful information to 
consumers that is not already disclosed to them. The cost of providing 
this information a second time, including the costs to reprogram 
periodic statement systems and to establish and maintain a toll-free 
telephone number, may not be justified by the limited benefit to 
consumers. Thus, the Board proposes to exempt HELOCs from the minimum 
payment disclosures requirements at this time, but will consider 
changes to HELOC disclosures as part of the HELOC review.
    2. Open-end reverse mortgages. An open-end reverse mortgage is a 
HELOC that is designed to allow consumers to convert the equity in 
their homes into cash. During an extended ``draw'' period consumers 
continue living in their homes, can draw on the line of credit to the 
extent they repay any outstanding balance. The principal and interest 
become due when the homeowner

[[Page 33002]]

moves, sells the home, or dies. Consumers with open-end reverse 
mortgages would not likely benefit from the minimum payment 
disclosures, because these disclosures would be based on assumptions 
about events difficult to predict, such as when the homeowner will 
move, sell the house or die.
    3. Overdraft lines of credit and other general-purpose personal 
lines of credit. In response to the October 2005 ANPR, several industry 
commenters suggested that the Board exempt overdraft lines of credit 
from the minimum payment disclosure requirements. For example, one 
industry trade group indicated that overdraft lines of credit have 
relatively low credit limits and are not intended as a long term credit 
option. The commenter also indicated that features and terms of 
overdraft lines of credit vary widely from institution to institution. 
Some banks require that an overdraft line of credit be paid in full 
within a short period after the consumer receives notice that the 
overdraft line has been used. Other banks permit longer periods of time 
to repay, but those periods and the size of any minimum payment vary 
significantly from bank to bank. This commenter indicated that the cost 
to small institutions of providing the minimum payment disclosures 
might cause them to stop providing overdraft products.
    The Board is proposing to exempt overdraft lines of credit and 
other general-purpose credit lines from the minimum payment disclosure 
requirements for several reasons. First, these lines of credit are not 
in wide use. The 2004 Survey of Consumer Finances data indicates that 
few families--1.6 percent--had a balance on lines of credit other than 
a home-equity line or credit card at the time of the interview. (In 
terms of comparison, 74.9 percent of families had a credit card, and 58 
percent of these families had a credit card balance at the time of the 
interview.) \16\ Second, these lines of credit typically are neither 
promoted, nor used, as long-term credit options of the kind for which 
the minimum payment disclosures are intended. Third, the Board is 
concerned that the operational costs of requiring creditors to comply 
with the minimum payment disclosure requirements with respect to 
overdraft lines of credit and other general-purpose lines of credit may 
cause some institutions to no longer provide these products as 
accommodations to consumers, to the detriment of consumers who 
currently use these products. For these reasons, the Board is proposing 
to exempt overdraft lines of credit and other general-purpose credit 
lines from the minimum payment disclosure requirements.
---------------------------------------------------------------------------

    \16\ Brian Bucks, et al., Recent Changes in U.S. Family 
Finances: Evidence from the 2001 and 2004 Survey of Consumer 
Finances, Federal Reserve Bulletin (March 2006).
---------------------------------------------------------------------------

7(b)(12)(i) General Disclosure Requirements
    Under the Bankruptcy Act, the hypothetical example that creditors 
must disclose on periodic statements varies depending on the creditor's 
minimum payment requirement. Generally, creditors that require minimum 
payments equal to 4 percent or less of the account balance must 
disclose on each statement that it takes 88 months to pay off a $1,000 
balance at an interest rate of 17 percent if the consumer makes a 
``typical'' 2 percent minimum monthly payment. Creditors that require 
minimum payments exceeding 4 percent of the account balance must 
disclose that it takes 24 months to pay off a balance of $300 at an 
interest rate of 17 percent if the consumer makes a ``typical'' 5 
percent minimum monthly payment (but a creditor may opt instead to 
disclose the statutory example for 2 percent minimum payments). The 5 
percent minimum payment example must be disclosed by creditors for 
which the FTC has the authority under the Truth in Lending Act to 
enforce the act and this regulation. Creditors also have the option to 
substitute an example based on an APR that is greater than 17 percent. 
The Bankruptcy Act authorizes the Board to periodically adjust the APR 
used in the hypothetical example and to recalculate the repayment 
period accordingly. 15 U.S.C. 1637(b)(11)(A)-(E).
    Wording of the examples. The Bankruptcy Act sets forth specific 
language for issuers to use in disclosing the applicable hypothetical 
example on the periodic statement. The Board proposes to amend the 
statutory language to facilitate consumers' use and understanding of 
the disclosures, pursuant to its authority under TILA Section 105(a) to 
make adjustments that are necessary to effectuate the purposes of TILA. 
15 U.S.C. 1604(a). First, the Board proposes to require that issuers 
disclose the payoff periods in the hypothetical examples in years, 
rounding fractional years to the nearest whole year, rather than in 
months as provided in the statute. Thus, issuers would disclose that it 
would take over 7 years to pay off the $1,000 hypothetical balance, and 
about 2 years for the $300 hypothetical balance. The Board believes 
that disclosing the payoff period in years allows consumers to better 
comprehend the repayment period without having to convert it themselves 
from months to years. Participants in the consumer testing conducted 
for the Board reviewed disclosures with the estimated payoff period in 
years, and they indicated they understood the length of time it would 
take to repay the balance if only minimum payments were made. Consumers 
may also appreciate more that the repayment periods are merely 
estimates.
    Second, the statute requires that issuers disclose in the examples 
the minimum payment formula used to calculate the payoff period. In the 
$1,000 example above, the statute would require issuers to indicate 
that a ``typical'' 2 percent minimum monthly payment was used to 
calculate the repayment period. In the $300 example above, the statute 
would require issuers to indicate that a 5 percent minimum monthly 
payment was used to calculate the repayment period. The Board proposes 
to eliminate the specific minimum payment formulas from the examples. 
The references to the 2 percent minimum payment in the $1,000 example, 
and a 5 percent minimum payment in the $300 example, are incomplete 
descriptions of the minimum payment requirement. In the $1,000 example, 
the minimum payment formula used to calculate the repayment period is 
the greater of 2 percent of the outstanding balance or $20. In the $300 
example, the minimum payment formula used to calculate the repayment 
period is the greater of 5 percent of the outstanding balance or $15. 
In fact, in each example, the hypothetical consumer always pays the 
absolute minimum ($20 or $15, depending on the example).
    The Board believes that including the entire minimum payment 
formula, including the floor amount, in the disclosure could make the 
example too complicated and have the unintended consequence of 
misleading a consumer who reads the language set out in the statute 
into concluding that the payment is smaller than it actually is. While 
the disclosures could be revised to indicate that the repayment period 
in the $1,000 balance was calculated based on a $20 payment, and 
repayment period in the $300 balance was calculated based on a $15 
payment, the Board believes that revising the statutory language in 
this way changes the disclosure to focus consumers on the effects of 
making a fixed payment each month as opposed to the effects of making 
minimum payments. Moreover, disclosing the

[[Page 33003]]

minimum payment formula is not necessary for consumers to understand 
the essential point of the examples--that it can take a significant 
amount of time to pay off a balance if only minimum payments are made. 
In testing conducted for the Board, the $1,000 balance example was 
tested without including the 2 percent minimum payment disclosure 
required by the statute. Consumers appeared to understand the purpose 
of the disclosure--that it would take a significant amount of time to 
repay a $1,000 balance if only minimum payments were made. For these 
reasons, the Board is proposing to require the hypothetical examples 
without a minimum payment formula.
    The proposed regulatory language for the examples is set forth in 
new Sec.  226.7(b)(12)(i). In addition to the revisions mentioned 
above, the Board also proposes several stylistic revisions to the 
statutory language, based on plain language principles, in an attempt 
to make the language of the examples more understandable to consumers.
    Adjustments to the APR used in the examples. The Bankruptcy Act 
specifically authorizes the Board to periodically adjust the APR used 
in the hypothetical example and to recalculate the repayment period 
accordingly. In the October 2005 ANPR, the Board requested comment on 
whether the Board should adjust the APR used in the hypothetical 
examples, because current APRs on credit cards may be less than the 17 
percent APR in the examples. Q62. Commenters were split on whether the 
Board should adjust the APR in the examples.
    The Board is not proposing to adjust the APR used in the 
hypothetical examples. The Board recognizes that the examples are 
intended to provide consumers with an indication that it can take a 
long time to pay off a balance if only minimum payments are made. 
Revising the APR used in the example to reflect the average APR paid by 
consumers would not significantly improve the disclosure, because for 
many consumers an average APR would not be the APR that applies to the 
consumer's account. Moreover, consumers will be able to obtain a more 
tailored disclosure of a repayment period based on the APR applicable 
to their accounts by calling the toll-free telephone number provided as 
part of the minimum payment disclosure.
7(b)(12)(ii) Estimate of Actual Repayment Period
    Under the Bankruptcy Act, a creditor may use a toll-free telephone 
number to provide consumers with the actual number of months that it 
will take consumers to repay their outstanding balance instead of 
providing an estimate based on the Board-created table. Creditors that 
choose to give the actual number via the telephone number need not 
include a hypothetical example on their periodic statements. Instead, 
they must disclose on periodic statements a warning statement that 
making the minimum payment will increase the interest the consumer pays 
and the time it takes to repay the consumer's balance and a toll-free 
telephone number that consumers may use to obtain the actual repayment 
disclosure. 15 U.S.C. 1637(b)(11)(I) and (K). The Board proposes to 
implement this statutory provision in new Sec.  226.7(b)(12)(ii)(A).
    In addition, the Board proposes to provide that if card issuers 
provide the actual repayment disclosure on the periodic statement, they 
need not disclose the warning, the hypothetical example and a toll-free 
telephone number on the periodic statement, nor need they maintain a 
toll-free telephone number to provide the actual repayment disclosure. 
See proposed Sec.  226.7(b)(12)(ii)(B).
    The Board strongly encourages card issuers to provide the actual 
repayment disclosure on periodic statements, and solicits comments on 
whether the Board can take other steps to provide incentives to card 
issuers to use this approach. A recent study conducted by the GAO on 
minimum payments suggests that certain cardholders would find the 
actual repayment disclosure more helpful than the generic disclosures 
required by the Bankruptcy Act. For this study, the GAO interviewed 112 
consumers and collected data on whether these consumers preferred to 
receive on the periodic statement (1) customized minimum payment 
disclosures that are based on the consumers' actual account terms (such 
as the actual repayment disclosure), (2) generic disclosures such as 
the warning statement and the hypothetical example required by the 
Bankruptcy Act; or (3) no disclosure.\17\ According to the GAO's 
report, in the interviews with the 112 consumers, most consumers who 
typically carry credit card balances (revolvers) found customized 
disclosures very useful and would prefer to receive them in their 
billing statements. Specifically, 57 percent of the revolvers preferred 
the customized disclosures, 30 percent preferred the generic 
disclosures, and 14 percent preferred no disclosure. In addition, 68 
percent of the revolvers found the customized disclosure extremely 
useful or very useful, 9 percent found the disclosure moderately 
useful, and 23 percent found the disclosure slightly useful or not 
useful. According to the GAO, the consumers that preferred the 
customized disclosures liked that such disclosures would be specific to 
their accounts, would change based on their transactions, and would 
provide more information than generic disclosures. GAO Report on 
Minimum Payments, pages 25, 27.
---------------------------------------------------------------------------

    \17\ United States Government Accountability Office, Customized 
Minimum Payment Disclosures Would Provide More Information to 
Consumers, but Impact Could Vary, 06-434 (April 2006). (The GAO 
indicated that the sample of 112 consumers was not designed to be 
statistically representative of all cardholders, and thus the 
results cannot be generalized to the population of all U.S. 
cardholders.)
---------------------------------------------------------------------------

    In addition, the Board believes that disclosing the actual 
repayment disclosure on the periodic statement would simplify the 
process for consumers and creditors. Consumers would not need to take 
the extra step to call the toll-free telephone number to receive the 
actual repayment disclosure, but instead would have that disclosure 
each month on their periodic statements. Card issuers (other than 
issuers that may use the Board or the FTC toll-free telephone number) 
would not have the operational burden of establishing a toll-free 
telephone number to receive requests for the actual repayment 
disclosure and the operational burden of linking the toll-free 
telephone number to consumer account data in order to calculate the 
actual repayment disclosure.
    The Board proposes this approach pursuant to its exception and 
exemption authorities under TILA Section 105. Section 105(a) authorizes 
the Board to make exceptions to TILA to effectuate the statute's 
purposes, which include facilitating consumers' ability to compare 
credit terms and helping consumers avoid the uniformed use of credit. 
15 U.S.C. 1601(a), 1604(a). Section 105(f) authorizes the Board to 
exempt any class of transactions (with an exception not relevant here) 
from coverage under any part of TILA if the Board determines that 
coverage under that part does not provide a meaningful benefit to 
consumers in the form of useful information or protection. 15 U.S.C. 
1604(f)(1). Section 105(f) directs the Board to make this determination 
in light of specific factors. 15 U.S.C. 1604(f)(2). These factors are 
(1) the amount of the loan and whether the disclosure provides a 
benefit to consumers who are parties to the transaction involving a 
loan of such amount; (2) the extent to which the requirement 
complicates, hinders, or

[[Page 33004]]

makes more expensive the credit process; (3) the status of the 
borrower, including any related financial arrangements of the borrower, 
the financial sophistication of the borrower relative to the type of 
transaction, and the importance to the borrower of the credit, related 
supporting property, and coverage under TILA; (4) whether the loan is 
secured by the principal residence of the borrower; and (5) whether the 
exemption would undermine the goal of consumer protection.
    The Board has considered each of these factors carefully, and based 
on that review, believes it is appropriate to provide an exemption from 
the requirement to provide on periodic statements a warning about the 
effects of making minimum payments, a hypothetical example, and a toll-
free telephone number consumers may call to obtain repayment periods, 
and to maintain a toll-free telephone number for responding to 
consumers' requests, if the creditor instead provides the actual 
repayment period on the periodic statement. As noted above, consumer 
testing indicated that actual repayment period information is more 
useful to consumers than estimated information. Providing that 
disclosure on a statement rather than over the telephone provides 
consumers with easier access to the information. Thus, the proposal has 
the potential to better inform consumers and further the goals of 
consumer protection and the informed use of credit for credit card 
accounts. The Board welcomes comment on this matter.
7(b)(12)(iii) Exemptions
    As explained above, the Board proposes to require the minimum 
payment disclosures only for credit card accounts. See proposed Sec.  
226.7(b)(12)(i). Thus, creditors would not need to provide the minimum 
payment disclosures for HELOCs (including open-end reverse mortgages), 
overdraft lines of credit or other general-purpose personal lines of 
credit. For the same reasons, the Board proposes to exempt these 
products regardless of whether they can be accessed by a credit card 
device. Specifically, proposed Sec.  226.7(b)(12)(iii) would exempt the 
following types of credit card accounts: (1) HELOCs accessible by 
credit cards that are subject to Sec.  226.5b; (2) overdraft lines of 
credit tied to asset accounts accessed by check-guarantee cards or by 
debit cards; and (3) lines of credit accessed by check-guarantee cards 
or by debit cards that can be used only at automated teller machines. 
See proposed Sec.  226.7(b)(12)(iii)(A)-(C). The Board also proposes to 
exempt charge cards from the minimum payment disclosure requirements, 
to implement TILA Section 127(b)(11)(I). 15 U.S.C. 1637(b)(11)(I); See 
proposed Sec.  226.7(b)(12)(iii)(D).
    Exemption for credit card accounts with a specific repayment 
period. In the October 2005 ANPR, the Board requested comment on 
whether certain open-end accounts should be exempted from some or all 
of the minimum payment disclosure requirements, such as open-end plans 
that have a fixed repayment period. Q59. Industry commenters generally 
supported an exemption for open-end plans that have a fixed repayment 
period. These commenters indicated that the minimum payment disclosures 
are not necessary in this context, because the consumer will already 
know from the account agreement how long it will take to repay the 
balance.
    The Board proposes to exempt credit card accounts where a fixed 
repayment period for the account is specified in the account agreement 
and the required minimum payments will amortize the outstanding balance 
within the fixed repayment period. See proposed Sec.  
226.7(b)(12)(iii)(E). The minimum payment disclosures would not appear 
to provide useful information to consumers that they do not already 
have in their account agreements. The cost of providing this 
information a second time, including the costs to reprogram periodic 
statement systems and to establish and maintain a toll-free telephone 
number, may not be justified by the limited benefit to consumers.
    In order for this proposed exemption to apply, a fixed repayment 
period must be specified in the account agreement. As proposed, this 
exemption would include, for example, accounts where the account has 
been closed due to delinquency and the required monthly payment has 
been reduced or the balance decreased to accommodate a fixed payment 
for a fixed period of time designed to pay off the outstanding balance. 
See proposed comment 7(b)(12)(iii)-1. This exemption would not apply 
where the credit card may have a fixed repayment period for one credit 
feature, but an indefinite repayment period on another feature. For 
example, some retail credit cards have several credit features 
associated with the account. One of the features may be a general 
revolving feature, where the minimum payment for this feature does not 
pay off the balance in a specific period of time. The card also may 
have another feature that allows consumers to make specific types of 
purchases (such as furniture purchases, or other large purchases), and 
the minimum payments for that feature will pay off the purchase within 
a fixed period of time, such as one year. New comment 7(b)(12)(iii)-1 
makes clear that the exemption relating to a fixed repayment period 
does not apply to the above situation, because the retail card account 
as a whole does not have a fixed repayment period.
    Exemption where cardholders have paid their accounts in full for 
two consecutive months. In the October 2005 ANPR, the Board requested 
comment on whether the Board should exempt credit card accounts of 
consumers who typically do not revolve balances or make monthly 
payments that regularly exceed the minimum. Q60. In response to the 
October 2005 ANPR, several industry commenters urged the Board to 
exempt card issuers from providing minimum payment disclosures to 
consumers who do not regularly make minimum payments. These commenters 
indicated that excluding non-minimum payers is appropriate because the 
minimum payment disclosures are less meaningful to those consumers. On 
the other hand, several consumer groups indicated that the Board should 
not provide an exemption based on the characteristics or habits of the 
accountholder, such as whether they typically pay in full. These 
commenters indicated that the typical behavior of a particular consumer 
can change quickly, due either to a temporary change in circumstances 
(a move, a layoff, or a major medical expense) or a permanent change 
(the death of a spouse or a disability). The consumer groups believed 
that in these circumstances, it is important that consumers have 
disclosure about the effects of paying the minimum payments in a timely 
fashion, before an outstanding balance grows unmanageable.
    The Board proposes to provide that card issuers are not required to 
comply with minimum payment disclosure requirements for a particular 
billing cycle if a consumer has paid the entire balance in full for the 
previous two billing cycles. See proposed Sec.  226.7(b)(12)(iii)(F). 
The GAO found in its study on minimum payment disclosures that 
cardholders who pay their balances in full each month (non-revolvers) 
were generally satisfied with receiving generic disclosures or none at 
all, and did not prefer customized disclosures such as actual repayment 
disclosures. Thirty-seven percent of non-revolvers found the customized 
disclosure extremely or very useful. Eight percent of non-revolvers 
found the customized disclosure moderately

[[Page 33005]]

useful and 55 percent found it slightly or not useful. The GAO 
indicated that many of the non-revolvers it interviewed who preferred 
not to receive a customized disclosure explained that they paid their 
balance in full each month, already understood the consequences of 
making only minimum payments, and did not need the additional reminder. 
See GAO Report on Minimum Payments, pages 26, 30-31.
    Thus, because non-revolvers may not find the minimum payment 
disclosures very useful or meaningful, the Board proposes to exempt 
card issuers from the requirement to provide the minimum payment 
disclosures in a particular billing cycle if a consumer has paid the 
entire balance in full for the two previous billing cycles. For 
example, if a consumer paid the entire balance in full for account 
activity in March and April, the creditor would not be required to 
provide the minimum payment disclosure for the statement representing 
account activity in May. The Board believes this approach strikes an 
appropriate balance between benefits to consumers from the disclosures, 
and compliance burdens on issuers in providing the disclosures. 
Consumers who might benefit from the disclosures will receive them. 
Consumers who carry a balance each month will always receive the 
disclosure, and consumers who pay in full each month will not. 
Consumers who sometimes pay their bill in full and sometimes do not 
will receive the minimum payment disclosures if they do not pay in full 
the prior two consecutive months (cycles). Also, if a consumer's 
typical payment behavior changes from paying in full to revolving, the 
consumer will begin receiving the minimum payment disclosures after not 
paying in full one billing cycle, when the disclosures would appear to 
be timely. In addition, creditors already typically track whether a 
consumer has paid their balance in full for two consecutive months. 
Typically, creditors provide a grace period on new purchases to 
consumers (that is, creditors do not charge interest to consumers on 
new purchases) if consumers paid both the current balance and the 
previous balance in full. Thus, creditors currently capture payment 
history for consumers for two billing cycles.
    In response to the October 2005 ANPR, one industry commenter 
indicated that many creditors do not have the processing systems that 
are capable of selectively pricing the disclosures from month-to-month 
based on customers' prior payment patterns. Card issuers are not 
required to take advantage of this exemption from providing the minimum 
payment disclosures for a particular billing cycle if a consumer has 
paid the entire balance in full for the previous two billing cycles. 
Card issuers may provide the minimum payment disclosures to all of its 
cardholders, even to those cardholders that fall within this exemption. 
If issuers choose to provide voluntarily the minimum payment 
disclosures to those cardholders that fall within this exemption, 
issuers should follow the disclosures rules set forth in Sec.  
226.7(b)(12), the accompanying commentary, and Appendices M1-M3 (as 
appropriate) for those cardholders.
    Exemption where balance has fixed repayment period. In response to 
the October 2005 ANPR, several industry commenters urged the Board to 
exempt credit cards with fixed payment features from the minimum 
payment disclosures. As described above, some retail credit cards may 
have several features on the card. One of those features may allow 
consumers to make certain types of purchases with the feature (such as 
furniture purchases, or other large purchases), and the minimum 
payments for that feature will pay off the purchase within a specific 
period of time, such as one year. Some commenters indicated that these 
types of accounts should be exempted from the minimum payment 
disclosure requirements because consumers would know the repayment 
period from the account agreement.
    The Board proposes to exempt credit card issuers from providing the 
minimum payment disclosures on periodic statements in a billing cycle 
where the entire outstanding balance held by consumers in that billing 
cycle is subject to a fixed repayment period specified in the account 
agreement and the required minimum payments applicable to this feature 
will amortize the outstanding balance within the fixed repayment 
period. This exemption is meant to cover the retail cards described 
above in those cases where the entire outstanding balance held by a 
consumer in a particular billing cycle is subject to a fixed repayment 
period specified in the account agreement. The minimum payment 
disclosures would not appear to provide useful information to consumers 
in this context because consumers would be able to learn from their 
account agreements how long it would take to repay the balance. The 
cost of providing this information a second time, including the costs 
to reprogram periodic statement systems and to establish and maintain a 
toll-free telephone number, may not be justified by the limited benefit 
to consumers. See proposed comment 7(b)(12)(iii)-2.
    Other exemptions. In response to the October 2005 ANPR, several 
commenters suggested other exemptions to the minimum payment 
requirements, as discussed below. For the reasons discussed below, the 
Board is not proposing to include these exemptions.
    1. Exemption for discontinued credit card products. In response to 
the October 2005 ANPR, one commenter urged the Board to provide a 
partial exemption for credit card products for which no new accounts 
are being opened and for which existing accounts are closed to new 
transactions. With respect to these products, the commenter urged the 
Board to exempt issuers of these products from having to place the 
minimum payment disclosures on the periodic statement, but instead 
allow issuers to provide these notices in freestanding inserts to the 
periodic statements. The commenter indicates that the number of 
accounts that are discontinued are usually very small and the computer 
systems used to produce the statements for the closed accounts are 
being phased out.
    The Board solicits further comment on why this exemption is needed. 
What are the costs of redesigning the old computer systems to provide 
the minimum payment disclosures (that is, the warning statement, the 
hypothetical example, and the toll-free telephone number) on the 
periodic statements?
    2. Exemption for credit card accounts purchased within the last 18 
months. In response to the October 2005 ANPR, one commenter urged the 
Board to provide an exemption for accounts purchased by a credit card 
issuer. With respect to these purchased accounts, the commenter urged 
the Board to exempt issuers from placing the minimum payment 
disclosures on the periodic statement during a transitional period (up 
to 18 months) while the purchasing issuer converts the new accounts to 
its statement system. In this situation, the commenter indicated that 
issuers should be allowed to provide these notices in freestanding 
inserts to the periodic statements.
    The Board solicits further comment on why this exemption is needed. 
Why could the purchasing issuer not continue to use the periodic 
statement system and toll-free telephone numbers used by the selling 
issuer to meet the requirements of the minimum payment disclosures, 
until the purchased accounts are converted to the purchaser's systems?
    3. Credit card products that do not use declining balance 
amortization. One commenter suggested that the Board

[[Page 33006]]

exempt from the minimum payment disclosure requirements credit card 
products that do not use declining balance amortization to calculate 
the minimum payment. For example, some retail credit cards base their 
minimum payment formula on the original purchase price or similar 
amount, rather than on the declining balance. The commenter indicates 
that these products should be exempt because amortization schedules for 
these products result in far shorter repayment periods. The Board is 
proposing not to adopt this exemption because even though the 
amortization schedules for these products may be shorter than for cards 
where the minimum payment is calculated on the declining balance, the 
payoff time may not be so short as to justify an exemption. For 
example, assume the minimum payment formula is 3.33 percent of the 
highest balance or $10, whichever is greater. It could still take 
around 4 years to pay off a $500 balance at a 21.9 percent APR if a 
consumer only made minimum payments. (For contrast, the repayment 
period would be around 7 years if the minimum payment was calculated 
based on the outstanding balance, instead of the highest balance.)
    4. Credit cards with balances of less than $500. One commenter 
suggested that the Board exempt credit card accounts from the minimum 
payment disclosure requirements in cases where the balance on the card 
is less than $500. This commenter indicated in cases of low balances, 
the repayment period is fairly short and so the minimum payment 
disclosure is less needed. The Board is not proposing to exempt these 
credit card accounts. Depending on how the minimum payment is 
calculated, it can still take a significant amount of time to pay off a 
$500 balance if only minimum payments are made. For example, assume the 
minimum payment is calculated based on the following formula: the 
greater of (1) 1 percent of the outstanding balance plus interest 
charges that accrued in the past month; or (2) $10. It could still take 
around 5 years to repay a $500 balance at a 7.99 percent APR if only 
minimum payments are made.
7(b)(12)(iv) Toll-free Telephone Numbers
    Under Section 1301(a) of the Bankruptcy Act, depository 
institutions generally must establish and maintain their own toll-free 
telephone numbers or use a third party to disclose the repayment 
estimates based on the ``table'' issued by the Board. 15 U.S.C. 
1637(b)(11)(F)(i). At the issuer's option, the issuer may disclose the 
actual repayment disclosure through the toll-free telephone number. The 
Board also is required to establish and maintain, for two years, a 
toll-free telephone number for use by customers of depository 
institutions having assets of $250 million or less. 15 U.S.C. 
1637(b)(11)(F)(ii). The FTC must maintain a toll-free telephone number 
for creditors other than depository institutions. 15 U.S.C. 
1637(b)(11)(F).
    The Bankruptcy Act also provides that consumers who call the toll-
free telephone number may be connected to an automated device through 
which they can obtain repayment information by providing information 
using a touch-tone telephone or similar device, but consumers who are 
unable to use the automated device must have the opportunity to be 
connected to an individual from whom the repayment information may be 
obtained. Unless the issuer is providing an actual repayment 
disclosure, the issuer may not provide through the toll-free telephone 
number a repayment estimate other than estimates based on the ``table'' 
issued by the Board. 15 U.S.C. 1637(b)(11)(F). These same provisions 
apply to the FTC's and the Board's toll-free telephone numbers as well.
    The Board proposes to add new Sec.  226.7(b)(12)(iv) and 
accompanying commentary to implement the above statutory provisions 
related to the toll-free telephone numbers. In addition, new comment 
7(b)(12)(iv)-3 would provide that once a consumer has indicated that he 
or she is requesting the generic repayment estimate or the actual 
repayment disclosure, as applicable, card issuers may not provide 
advertisements or marketing information to the consumer prior to 
providing the repayment information required or permitted by Appendix 
M1 or M2, as applicable.
7(b)(12)(v) Definitions
    As discussed above, Section 1301(a) of the Bankruptcy Act requires 
the Board to establish and maintain, for two years, a toll-free 
telephone number for use by customers of depository institutions having 
assets of $250 million or less. 15 U.S.C. 1637(b)(11)(F)(ii). For ease 
of reference in the regulation, the Board proposes to define the above 
depository institutions as ``small depository institution issuers.'' 
See proposed Sec.  226.7(b)(12)(v).
7(b)(13) Format Requirements
    As discussed throughout this section-by-section analysis to Sec.  
226.7, consumer testing conducted for the Board indicates improved 
understanding when related information is grouped together. Under the 
proposal, creditors would group together when a payment is due (due 
date and cut-off time if before 5 p.m.), how much is owed (minimum 
payment and ending balance), and what the potential costs are for 
paying late (late-payment fee, and penalty APR if triggered by a late 
payment). See proposed Samples G-18(E) and G-18(F) in Appendix G. The 
proposed format requirements are intended to fulfill Congress's intent 
to have the new late payment and minimum payment disclosures ensure 
consumers' ability to understand the consequences of paying late or 
making only minimum payments.
7(b)(14) Change-in-Terms and Increased Penalty Rate Summary for Open-
End (Not Home-Secured) Plans
    A major goal of its review of Regulation Z's open-end credit rules 
is to address consumers' surprise at increased rates (and/or fees). In 
part, the Board is addressing the issue in Sec.  226.9(c) and Sec.  
226.9(g) to give more time before new rates and changes to significant 
costs become effective. See proposed Sec.  226.9(c)(2) and Sec.  
226.9(g). The proposed new Sec.  226.7(b)(14) is intended to enable 
consumers to notice more easily changes in their account terms. 
Increasing the time period to act is ineffective if consumers do not 
see the change-in-term notice. Consumers who participated in testing 
conducted for the Board consistently set aside change of term notices 
that accompanied periodic statements. Research conducted for the Board 
indicates that consumers do look at the front side of periodic 
statements and do look at transactions. Therefore, when a change-in-
terms notice is provided on or with a periodic statement the proposal 
would require a summary of key changes to precede transactions. In 
addition, when a notice of a rate increase due to delinquency or 
default or as a penalty is provided on or with a periodic statement, 
the proposal would require this notice to precede transactions. Samples 
G-20 and G-21 in Appendix G illustrate the proposed format requirement 
under Sec.  226.7(b)(14) and the level of detail required for the 
notice under Sec.  226.9(c)(2)(iii) and Sec.  226.9(g)(3). Forms G-
18(G) and G-18(H) illustrate the placement of these notices on a 
periodic statement.

Section 226.8 Identifying Transactions on Periodic Statements

    TILA Section 127(b)(2) requires creditors to identify on periodic 
statements credit extensions that occurred during a billing cycle. 15

[[Page 33007]]

U.S.C. 1637(b)(2). The statute calls for the Board to implement 
requirements that are sufficient to identify the transaction or to 
relate the credit extension to sales vouchers or similar instruments 
previously furnished. The rules for identifying transactions are 
implemented in Sec.  226.8, and vary depending on whether: (1) The 
sales receipt or similar credit document is included with the periodic 
statement, (2) the transaction is sale credit (purchases) or nonsale 
credit (cash advances, for example), and (3) the creditor and seller 
are the ``same or related.'' TILA's billing error protections include 
consumers' requests for additional clarification about transactions 
listed on a periodic statement. 15 U.S.C. 1666(b)(2); Sec.  
226.13(a)(6).
    The Board proposes to update and simplify the rules for identifying 
sales transactions when the sales receipt or similar document is not 
provided with the periodic statement (so called ``descriptive 
billing''), which is typical today. The rules for identifying 
transactions where such receipts accompany the periodic statement are 
not affected by the proposal. The proposed changes reflect current 
business practices and consumer experience, and are intended to ease 
compliance. Currently, creditors that use descriptive billing are 
required to include on periodic statements an amount and date as a 
means to identify transactions, and the proposal would not affect those 
requirements. As an additional means to identify transactions, current 
rules contain description requirements that differ depending on whether 
the seller and creditor are ``same or related.'' For example, a retail 
department store with its own credit plan (seller and creditor are same 
or related) sufficiently identifies purchases on periodic statements by 
providing the department such as ``jewelry'' or ``sporting goods;'' 
item-by-item descriptions are not required. Periodic statements 
provided by issuers of general purpose credit cards, where the seller 
and creditor are not the same or related, identify transactions by the 
seller's name and location.
    The Board proposes to provide additional flexibility to creditors 
that do not provide sales slips or similar documents with the periodic 
statement. Under the proposal, all creditors would be permitted to 
identify sales transactions (in addition to the amount and date) by the 
seller's name and location. Thus, creditors and sellers that are the 
same or related could, at their option, identify transactions by a 
brief identification of goods or services, which they are currently 
required to do in all cases, or they could provide the seller's name 
and location for each transaction. Guidance on the level of detail 
required to describe amounts, dates, the identification of goods, or 
the seller's name and location remains unchanged.
    The Board's proposal is guided by several factors. The standard set 
forth by TILA for identifying transactions on periodic statements is 
quite broad. 15 U.S.C. 1637(b)(2). Whether a general description such 
as ``sporting goods'' or the store name and location would be more 
helpful to a consumer can depend on the situation. Many retailers 
permit consumers to purchase in a single transaction items from a 
number of departments; in that case, the seller's name and location may 
be as helpful as the description of a single department from which 
several dissimilar items were purchased. Also, the seller's name and 
location has become the more common means of identifying transactions, 
as the use of general purpose cards increases and the number of store-
only cards decreases. Under the proposed rule, retailers that commonly 
accept general purpose credit cards but also offer a credit card 
account or other open-end plan for use only at their store would not be 
required to maintain separate systems that enable different 
descriptions to be provided, depending on the type of card used. 
Finally, it appears that any consumer benefits would be minimally 
affected by the proposed change because many retailers permit purchases 
from different departments to be charged in a single transaction. 
Moreover, consumers are likely to carefully review transactions on 
periodic statements and inquire about transactions they do not 
recognize, such as when a retailer is identified by its parent company 
on sales slips which the consumer may not have noticed at the time of 
the transaction. Moreover, consumers are protected under TILA with the 
ability to assert a billing error to seek clarification about 
transactions listed on periodic statements, and are not required to pay 
the disputed amount while the creditor obtains the necessary 
clarification. Maintaining rules that require more standardization and 
detail would be costly, and likely without significant corresponding 
consumer benefit. Thus, the proposal is intended to provide flexibility 
for creditors without reducing consumer protection.
    The Board notes, however, that some retailers offering their own 
open-end credit plans tie their inventory control systems to their 
systems for generating sales receipts and periodic statements. In these 
cases, purchases listed on periodic statements may be described item by 
item, for example, to indicate brand name such as ``XYZ Sweater.'' This 
item-by-item description, while not required under current or proposed 
rules, would remain permissible under the proposal; thus, no 
operational changes would be required for these retailers.
    To implement the approach described above, Sec.  226.8 would be 
revised as follows. Section 226.8(a)(1) would set forth the proposed 
rule providing flexibility in identifying sales transactions, as 
discussed above. Section 226.8(a)(2) would contain the existing rules 
for identifying transactions when sales receipts or similar documents 
accompany the periodic statement. Section 226.8(b) is revised for 
clarity. A new Sec.  226.8(c) would be added to set forth rules now 
contained in footnotes 16 and 19; and, without references to ``same or 
related'' parties, footnotes 17 and 20. The substance of footnote 18, 
based on a statutory exception where the creditor and seller are the 
same person, would be deleted as unnecessary. The title of the section 
would be revised for clarity.
    The commentary to Sec.  226.8 would be reorganized and consolidated 
but would not be substantively changed. Comments 8-1, 8(a)-1, and 
8(a)(2)-4 would be deleted as duplicative. Similarly, comments 8-6 
through 8-8, which provide creditors with flexibility in describing 
certain specific classes of transactions regardless of whether they are 
``related'' or ``nonrelated'' sellers or creditors, would be deleted as 
unnecessary. Existing comments 8-4 and 8(a)(2)-3, which provide 
guidance when copies of credit or sales slips accompany the statement, 
also would be deleted. The Board believes this practice is no longer 
common, and to the extent sales or similar credit documents accompany 
billing statements, additional guidance seems unnecessary. Proposed 
Sec.  226.8(a)(1)(ii) and comments 8(a)-3 and 8(a)-7, which provide 
guidance for identifying mail or telephone transactions, also would 
refer to Internet transactions. Proposed comment 8(a)-1 would provide 
an example of new services that are now commonly purchased from 
creditors as well as third party service providers (sale credit).

Section 226.9 Subsequent Disclosure Requirements

    Section 226.9 sets forth a number of disclosure requirements that 
apply after an account is opened, including a requirement to provide 
billing rights

[[Page 33008]]

statements annually, a requirement to provide at least 15 days advance 
notice whenever a term required to be disclosed in the account-opening 
disclosures is changed, and a requirement to provide finance charge 
disclosures whenever credit devices or features are added on terms 
different from those previously disclosed.
    With respect to open-end (not home-secured) plans, the Board 
proposes a number of substantive and technical revisions to Sec.  226.9 
and the accompanying commentary, as further described below. The 
proposal would require certain disclosures to accompany checks that 
access a credit card account. In addition, the proposal would require 
creditors to provide a summary table of a limited number of key terms 
if those terms are changed. The summary table would appear on the first 
page of the notice or a separate piece of paper. Moreover, if the 
change-in-terms notice is included with a periodic statement, that 
summary table would be required to be provided on the front of the 
first page of the periodic statement, before the list of transactions 
for the statement period. Also, the Board would require creditors to 
provide advance notice when a rate is increased due to a consumer's 
delinquency or default or as a penalty. The Board's proposal also would 
require creditors to provide 45 days advance notice for changes in 
terms or increases in rates due to delinquency or default or penalty 
pricing. Home-equity lines of credit (HELOCs) subject to Sec.  226.5b 
would not be affected by these proposed revisions. For the reasons set 
forth in the section-by-section analysis to Sec.  226.6(b)(1), the 
Board would update references to ``free-ride period'' as ``grace 
period'' in the regulation and commentary, without any intended 
substantive change.
9(a) Furnishing Statement of Billing Rights
    TILA Section 127(a)(7) and Sec.  226.9(a) require creditors to mail 
or deliver a billing error rights statement annually, either to all 
consumers or to each consumer entitled to receive a periodic statement. 
15 U.S.C. 1637(a)(7). (See Model Form G-3.) Alternatively, creditors 
may provide a billing rights statement on each periodic statement. (See 
Model Form G-4.) Both the regulation and commentary would be unchanged 
under the proposal. However, the Board proposes to revise both Model 
Forms G-3 and G-4 to improve the readability of these notices. The 
revised forms are in G-3(A) and G-4(A) of Appendix G. For open-end (not 
home-secured) plans, creditors may use Model Forms G-3(A) and G-4(A). 
For HELOCs subject to the requirements of Sec.  226.5b, creditors may 
use the current Model Forms G-3 and G-4, or the revised forms.
9(b) Disclosures for Supplemental Credit Access Devices and Additional 
Features
    Section 226.9(b) requires certain disclosures when a creditor adds 
a credit device or feature to an existing open-end plan. When a 
creditor adds a credit feature or delivers a credit device to the 
consumer within 30 days of mailing or delivering the account-opening 
disclosures under current Sec.  226.6(a), and the device or feature is 
subject to the same finance charge terms previously disclosed, the 
creditor is not required to provide additional disclosures. If the 
credit feature or credit device is added more than 30 days after 
mailing or delivering the account-opening disclosures, and is subject 
to the same finance charge terms previously disclosed in the account-
opening agreement, the creditor must disclose that the feature or 
device is for use in obtaining credit under the terms previously 
disclosed. However, if the added credit device or feature has finance 
charge terms that differ from the disclosures previously given under 
Sec.  226.6(a), then the disclosures required by Sec.  226.6(a) that 
are applicable to the added feature or device must be given before the 
consumer uses the new feature or device.
    In the December 2004 ANPR, the Board solicited comment as to 
whether there are formatting tools or navigational aids that could more 
effectively link information in account-opening disclosures with 
information provided in subsequent disclosures under Sec.  226.9(b), 
such as checks that access a credit card account. Q45. Many creditors 
commented that there would be no benefit to linking subsequent 
disclosures and account-opening disclosures because many consumers fail 
to retain the information they receive at account opening. Several 
creditors commented that improved formatting could improve consumer 
understanding; however, they were concerned about overly prescriptive 
requirements that might hinder creditors' ability to tailor their 
disclosure formats to their products and product terms. Some creditors 
and consumer groups suggested importing the tabular format used to 
disclose information in credit card or charge card applications and 
solicitations to the subsequent disclosure context.
    The Board is proposing to retain the current rules set forth in 
Sec. Sec.  226.9(b)(1) and 226.9(b)(2) for all credit devices and 
credit features except checks that access a credit card account. With 
respect to such checks, the Board is concerned that the current rule in 
Sec.  226.9(b)(1) may not communicate effectively to the consumer the 
material terms of checks that access a credit card account, when those 
checks are mailed or sent to a consumer 30 days or more after the Sec.  
226.6 disclosures for the underlying account are provided. The Board 
agrees with commenters that, after a significant time has passed, it 
becomes less likely that consumers will still have a copy of the 
account-opening disclosures, and all relevant change-in-terms notices.
    With respect to open-end (not home-secured) plans, the Board is 
proposing to create a new Sec.  226.9(b)(3) that would require that 
certain information be disclosed each time that checks that access a 
credit card account are mailed to a consumer, for checks mailed more 
than 30 days following the delivery of the account-opening disclosures. 
This provision would apply regardless of whether that information was 
previously included in the account-opening disclosures. As under the 
current regulation, no additional disclosures would be required when a 
creditor provides, within 30 days of the account-opening disclosures, 
checks that access a credit card account, if the finance charge terms 
are the same as those that were previously disclosed. HELOCs would not 
be affected by this proposed revision.
    Creditors would be required to provide the new Sec.  226.9(b)(3) 
disclosures on the front of the page containing the checks that access 
a credit card account. Specifically, the proposed amendments would 
require the following key terms be disclosed on the front of the page 
containing the checks: (1) Any discounted initial rate, and when that 
rate will expire, if applicable; (2) the type of rate that will apply 
to the checks after expiration of any discounted initial rate (such as 
whether the purchase or cash advance rate applies) and the applicable 
annual percentage rate; (3) any transaction fees applicable to the 
checks; and (4) whether a grace period applies to the checks, and if 
one does not apply, that interest will be charged immediately. If a 
discounted initial rate applies, a creditor must disclose the type of 
rate that will apply after the discounted initial rate expires, and the 
rate that will apply after the discounted initial rate expires. The 
disclosures must be accurate as of the time the disclosures are given. 
A variable annual percentage rate is accurate if it was in effect 
within 30 days of when the disclosures are given. Proposed Sec.  
226.9(b)(3) would

[[Page 33009]]

require that these key terms be disclosed in a tabular format 
substantially similar to Sample G-19 in Appendix G.
    It is the Board's understanding that checks that access a credit 
card account often are mailed with the periodic statement, so consumers 
will frequently receive an updated disclosure of the periodic rate in 
the same envelope as the checks. The Board considered permitting 
creditors to disclose the rate that applies to a check by means of a 
reference to the type of applicable periodic rate (e.g., balance 
transfer or cash advance) accompanied by a reference to the consumer's 
periodic statement. However, consumer testing conducted for the Board 
showed that while participants looked at actual numbers on the front of 
the page of checks, they generally did not notice or pay attention to a 
cross reference to the periodic statement.
    Thus, the Board proposes that the actual APRs and fees applicable 
to the checks must be disclosed pursuant to Sec.  226.9(b)(3). The 
Board understands, however, that creditors may engage in risk-based 
pricing with regard to checks used by consumers, and seeks with this 
proposal to strike an appropriate balance between meaningful disclosure 
for consumers and the operational burden on creditors. The proposed 
rule would require that creditors customize each set of checks sent to 
reflect a particular consumer's rate. The Board seeks comment on the 
operational burden associated with customizing the checks, and on 
alternatives, such as whether providing a reference to the type of rate 
that will apply, accompanied by a toll-free telephone number that a 
consumer could call to receive additional information, would provide 
sufficient benefit to consumers while limiting burden on creditors.
    The Board also seeks comment as to whether there are other credit 
devices or additional features that creditors add to consumers' 
accounts to which this proposed rule should apply.
    The Board has proposed several technical revisions to improve the 
clarity of Sec.  226.9(b) and the associated commentary.
9(c) Change in Terms
    Under Sec.  226.9(c) of Regulation Z, certain changes to the terms 
of an open-end plan require specific notice of the change. (TILA does 
not address changes in terms to open-end plans.) The general rule is 
that creditors must provide 15 days' advance notice of changes in terms 
required to be included in the account-opening disclosures, with some 
exceptions, or to increase the minimum payment. See current Sec.  
226.9(c)(1).
    Advance notice currently is not required in all cases. For example, 
if an interest rate or other finance charge increases due to a 
consumer's default or delinquency, notice is required, but need not be 
given in advance. See current Sec.  226.9(c)(1); comment 9(c)(1)-3. 
Furthermore, no change-in-terms notice is required if the specific 
change is set forth initially by the creditor in the account-opening 
disclosures. See current comment 9(c)-1. For example, some credit card 
account agreements permit the card issuer to increase the periodic rate 
if the consumer makes a late payment. Because the circumstances of the 
increase are specified in advance in the account agreement, the 
creditor currently need not provide a change-in-terms notice; under 
current Sec.  226.7(d) the new rate will appear on the periodic 
statement for the cycle in which the increase occurs.
    In the December 2004 ANPR, the Board sought comment as to whether 
mailing a notice 15 days prior to the effective date of a change in an 
interest rate provided timely notice to consumers. Q26. The Board also 
asked whether existing disclosure rules for increases to interest rates 
and other finance charges were adequate to enable consumers to make 
timely decisions about how to manage their accounts. Q27. Some 
commenters noted that consumers are surprised by changes to the terms 
of their accounts and are not aware that such changes are possible 
before they take effect, because they do not receive advance notice of 
those changes and do not remember the information regarding those 
changes that was contained in the account-opening disclosures. Consumer 
advocates expressed concern that consumers are not aware when they have 
triggered rate increases, for example by paying late, and thus are 
unaware that it might be in their best interest to shop for alternative 
financing before the rate increase takes effect. Some consumer 
commenters requested that the Board ban certain practices, such as 
``universal default clauses,'' which permit a creditor to raise a 
consumer's interest rate to the penalty rate if the consumer, for 
example, makes a late payment on any account, not just on accounts with 
that creditor.
    The Board proposes three revisions to the regulation and commentary 
to improve consumers' awareness about changes in their account terms or 
increased rates due to delinquency or default or as a penalty. These 
revisions also are intended to enhance consumers' ability to shop for 
alternative financing before such account terms become effective. The 
proposed revisions generally apply when a creditor is changing terms 
that must be disclosed in the account-opening summary table under Sec.  
226.6(b)(4). See section-by-section analysis to Sec.  226.6(b)(4). 
First, the Board proposes to expand the circumstances under which 
consumers receive advance notice of changed terms, or increased rates 
due to delinquency, or for default or as a penalty. Second, the Board 
proposes to give consumers earlier notice of a change in terms, or for 
increased rates due to delinquency or default or as a penalty. Third, 
the Board proposes to introduce format requirements to make the 
disclosures about changes in terms or for increased rates due to 
delinquency, default or as a penalty more effective. HELOCs would not 
be affected by these proposed revisions. The provisions dealing with 
notices about increased rates due to delinquency, or default or as a 
penalty are discussed in the section-by-section analysis to Sec.  
226.9(g).
    Changes in late-payment fees and over-the-credit limit fees. 
Creditors currently do not have to provide notice of changes to late-
payment fees and over-the-credit-limit charges, pursuant to current 
Sec.  226.9(c)(2). For open-end (not home-secured) plans, the Board's 
proposal would require 45 days advance notice for changes involving 
late-payment charges or over-the-credit-limit charges, other than a 
reduction in the amount of the charges. See proposed Sec.  
226.9(c)(2)(i). The Board believes that it would be beneficial for 
consumers to have advance notice of changes to these charges, which can 
be substantial depending on how a consumer uses his or her account. 
Late-payment charges and over-the-credit-limit charges can have a large 
aggregate effect, particularly since they need not be one-time charges, 
and can be charged month after month if a consumer repeatedly makes 
late payments or exceeds his or her credit limit. Advance notice 
regarding changes in the amount of these charges may assist consumers 
to make better decisions regarding their account usage and regarding 
when and in what amount they should make payments in order to avoid 
these potentially recurring charges. This amendment would require that 
45 days' advance notice be given only when the amount of a late-payment 
fee or over-the-credit-limit fee changes, not when such a fee is 
applied to a consumer's account.
    Timing. As discussed above, Sec.  226.9(c)(1) currently provides 
that whenever any term required to be disclosed under Sec.  226.6 is 
changed or the required minimum payment is

[[Page 33010]]

increased, a written notice must be mailed or delivered to the consumer 
at least 15 days before that change becomes effective. Commenters 
responding to the December 2004 ANPR expressed a number of opinions 
about this requirement. One consumer group and a number of individual 
consumers stated that 15 days is not enough time for a consumer to seek 
alternative financing, and recommended that consumers be given more 
time. Some creditors stated that 15 days' advance notice was adequate. 
Other industry commenters stated that they did not oppose increasing 
the notice period from 15 days to 30 days, and added that many 
consumers already receive notice approximately one month before a 
change in terms becomes effective, because the notices often are sent 
with periodic statements. A few consumer group commenters recommended 
90 days' advance notice for all changes to terms.
    In light of the comments received and upon further consideration of 
this issue, for open-end (not home-secured) plans, the Board proposes 
to add Sec.  226.9(c)(2)(i) to extend the notice period from 15 days to 
45 days. For changes that require advance notice, the Board believes 
that consumers should have sufficient time, following the notice and 
before the change becomes effective, to change the usage of their plan 
or to pursue alternative means of financing their purchases, such as 
using another credit card, utilizing a home-equity line or installment 
loan, or shopping for a new credit card.
    The Board considered requiring that advance notice of changes in 
terms be sent 30 days in advance, but concluded that 30 days could be 
inadequate in some circumstances. The rule governs when notices must be 
sent, not received by the consumer, so in practice the notice will be 
received by the consumer with less days remaining to act than the full 
advance notice period specified in the rule. In light of delays in mail 
delivery, for example, a notice sent to a consumer 30 days in advance 
may give a consumer only 25 days to seek alternative financing before 
the change in terms takes effect. For example, if a consumer wants to 
shop for another credit card, apply for, open, and transfer a balance 
from an existing card to a new card, 30 days may be too short a time in 
some cases. The Board's proposal that notice be sent 45 days in advance 
should ensure, in most cases, that a consumer will have at least one 
calendar month following receipt of the notice and before the change in 
terms takes effect, to seek alternative financing or otherwise mitigate 
the effect of the new terms.
    The proposed 45 day notice period would not apply when the changes 
affect charges that are not required to be disclosed under Sec.  
226.6(b)(4). See proposed Sec.  226.9(c)(2)(ii). Specifically, if a 
creditor increases any component of a charge, or introduces a new 
charge, that is imposed as part of the plan under Sec.  226.6(b)(1) but 
is not required to be disclosed as part of the account-opening summary 
table under Sec.  226.6(b)(4), the creditor may either, at its option 
(1) provide at least 45 days written advance notice before the change 
becomes effective, or (2) provide notice orally or in writing of the 
amount of the charge to an affected consumer at a relevant time before 
the consumer agrees to or becomes obligated to pay the charge. For 
example, a fee for expedited delivery of a credit card is a charge 
imposed as part of the plan under Sec.  226.6(b)(1) but is not required 
to be disclosed in the account-opening summary table under Sec.  
226.6(b)(4). If a creditor changes the amount of that expedited 
delivery fee, the creditor may provide written advance notice of the 
change to affected consumers at least 45 days before the change becomes 
effective. Alternatively, the creditor may provide notice orally or in 
writing of the amount of the charge to an affected consumer at a 
relevant time before the consumer agrees to or becomes obligated to pay 
the charge. See comment 9(c)(2)(ii)-1. Creditors meet the standard to 
provide the notice at a relevant time if the oral or written notice of 
a charge is given when a consumer would likely notice it, such as when 
deciding whether to purchase the service that would trigger the charge. 
For example, if a consumer telephones a card issuer to discuss a 
particular service, a creditor would meet the standard if the creditor 
clearly and conspicuously discloses the fee associated with the service 
that is the topic of the telephone call. See comment 9(c)(2)(ii)-2. The 
Board believes that for these charges, consumers do not need advance 
notice of the current amount of the charge.
    As discussed in the section-by-section analysis to Sec.  
226.5(a)(1)(ii), creditors are permitted under the E-Sign Act to 
provide in electronic form any TILA disclosure that is required to be 
provided or made available to consumers in writing if the consumer 
affirmatively consents to receipt of electronic disclosures in a 
prescribed manner. 15 U.S.C. 7001 et seq. The Board requests comment on 
whether there are circumstances in which creditors should be permitted 
to provide cost disclosures in electronic form to consumers who have 
not affirmatively consented to receive electronic disclosures for the 
account, such as when a consumer seeks to make a payment online, and 
the creditor imposes a fee for the service.
    Format. Section 226.9 currently contains no restrictions or 
requirements with regard to how change-in-terms notices are presented 
or formatted. The consumer testing conducted for the Board explored the 
usability of current change-in-terms notices. The results of this 
consumer testing suggest that typical change-in-terms notices are not 
formatted in a manner that is noticeable and easy for consumers to 
understand. Consumer testing also suggests that improvements can be 
made to these notices. A typical change-in-terms notice contains dense 
blocks of contractual language in a small font, and may be on an 
accordion-style pamphlet included with the consumer's periodic 
statement. Consumer testing indicated that consumers may not look at 
these pamphlets when they are included with periodic statements, and 
that some consumers have trouble navigating these notices even when 
their attention is explicitly drawn to the disclosures. These pamphlets 
generally are not designed to draw attention to the changes because 
they provide a disclosure of contractual provisions.
    For open-end (not home-secured) plans, the Board proposes that 
creditors be required to provide a summary table of a limited specified 
number of key terms on the front of the first page of the change-in-
terms notice, or segregated on a separate sheet of paper. See proposed 
Sec.  226.9(c)(2)(iii), Sample G-20 in Appendix G. Creditors would be 
required to utilize the same headings as in the account-opening tables 
in Model Form G-17(A) and Samples G-17(B) and G-17(C) in Appendix G. If 
the change-in-terms notice were included with a periodic statement, a 
summary table would be required to appear on the front of the periodic 
statement, preceding the list of transactions for the period. See 
Sec. Sec.  226.7(b)(14), 226.9(c)(2)(iii).
    The Board believes that requiring a tabular summary of the key 
terms of the consumer's account would make change-in-terms notices more 
useful to consumers by highlighting those terms that may be of most 
interest to them. Based on consumer testing conducted for the Board, 
when a summary of key terms was included on change-in-terms notices 
tested, consumers tended to read the notice and appeared to understand 
better what key terms were being changed than when a summary was not 
included.

[[Page 33011]]

    The proposal also would require that creditors provide other 
information in the change-in-terms notice, specifically (1) a statement 
that changes are being made to the account; (2) a statement indicating 
the consumer has the right to opt out of these changes, if applicable, 
and a reference to additional information describing the opt out right 
provided in the notice, if applicable; (3) the date the changes to 
terms described in the summary table will become effective; (4) if 
applicable, an indication that the consumer may find additional 
information about the summarized changes, and other changes to the 
account, in the notice; and (5) if the creditor is changing a rate on 
the account, other than a penalty rate, a statement that if a penalty 
rate applies to the consumer's account, the new rate described in the 
notice does not apply to the consumer's account until the consumer's 
account balances are no longer subject to the penalty rate. This 
information must be placed directly above the summary of key changes 
described above. This information is intended to give context to the 
summary of key changes.
    With respect to the reference to a right to opt out of the changes, 
the Board is not requiring that creditors provide such an opt out 
right. State law or other applicable laws may provide consumers with a 
right to opt out of certain changes. If a consumer has the right to opt 
out of the changes in the notice, a creditor must include a statement 
indicating the consumer has the right to opt out of these changes, if 
applicable, and a reference to additional information describing the 
opt out right provided in the notice, if applicable.
    Reduction in credit limit. Under Regulation Z, a creditor generally 
may decrease a consumer's credit limit without providing any notice, 
except with regard to HELOCs. As a result, there could be situations 
where a consumer may exceed his or her credit limit without realizing 
it, potentially triggering late-payment fees and penalty pricing. Under 
new Sec.  226.9(c)(2)(v), for open-end (not home-secured) plans, if a 
creditor decreases the credit limit on an account, advance notice of 
the decrease must be provided before an over-the-limit fee or a penalty 
rate can be imposed solely as a result of the consumer exceeding the 
newly decreased credit limit. Under the proposal, notice must be 
provided in writing or orally at least 45 days prior to imposing the 
over-the-limit fee or penalty rate and shall state that the credit 
limit on the account has been or will be decreased. The Board and other 
federal banking agencies in the past have received a number of 
complaints from consumers who were not notified when their credit 
limits were decreased, and were surprised at the subsequent imposition 
of an over-the-credit-limit fee. The Board is not proposing that 
creditors may not reduce a consumer's credit limit. The Board 
recognizes that creditors have a legitimate interest in mitigating the 
risk of loss when a consumer's creditworthiness deteriorates, and that 
a consumer's creditworthiness can deteriorate quickly. Therefore, the 
Board's proposal would simply require that a creditor provide a notice 
that it has reduced or will be reducing a consumer's credit limit 45 
days before imposing any fee or penalty rate for exceeding that new 
limit. This proposed amendment would apply only when the over-the-
credit-limit fee is imposed solely as a result of a reduction in the 
credit limit; if the over-the-credit-limit fee would have been charged 
notwithstanding the reduction in a credit limit, no advance notice 
would be required. This provision is not intended to permit creditors 
to provide a general notice at account opening that a consumer's credit 
limit may change from time to time; rather, the notice should be sent 
with regard to a specific credit limit reduction that has occurred or 
will be occurring.
    Rules affecting home-equity plans. The Board proposes at the 
present time to retain in proposed Sec.  226.9(c)(1), without intended 
substantive change, the current rules regarding the circumstances, 
timing, and content of change-in-terms notices for HELOCs. These rules 
will be reviewed in the Board's upcoming review of the provisions of 
Regulation Z addressing closed-end and open-end (home-secured) credit.
    The Board is aware that the current change-in-terms rules, which 
have applicability both to HELOCs and open-end (not home-secured) 
credit, address several types of changes in terms that are 
impermissible for HELOCs subject to Sec.  226.5b. Section 226.5b 
imposes substantive restrictions on which terms of HELOCs may be 
changed, and in retaining the current change-in-terms rules for HELOCs, 
the Board does not intend to amend or in any way change the substantive 
restrictions imposed by Sec.  226.5b. Accordingly, the Board proposes 
to make several deletions in proposed Sec.  226.9(c)(1) and the related 
commentary with respect to HELOCs. For example, the Board proposes 
deleting in new comment 9(c)(1)-1 the requirement that notice ``be 
given if the contract allows the creditor to increase the rate at its 
discretion but does not include specific terms for an increase,'' 
because such a contractual term would be prohibited under Sec.  226.5b.
    The Board welcomes comment on whether there are any remaining 
references in Sec.  226.9(c)(1) and the related commentary to changes 
in terms that would be impermissible for open-end (home-secured) credit 
pursuant to Sec.  226.5b.
9(e) Disclosures Upon Renewal of Credit or Charge Card
    TILA Section 127(d), which is implemented in Sec.  226.9(e), 
requires card issuers that assess an annual or other periodic fee, 
including a fee based on activity or inactivity, on a credit card 
account of the type subject to Sec.  226.5a to provide a renewal notice 
before the fee is imposed. 15 U.S.C. 1637(d). The creditor must provide 
disclosures required for credit card applications (although not in a 
tabular format) and must inform the consumer that the renewal fee can 
be avoided by terminating the account by a certain date. The notice 
must generally be provided at least 30 days or one billing cycle, 
whichever is less, before the renewal fee is assessed to the account. 
However, there is an alternative delayed notice procedure where the fee 
can be assessed; the fee must be reversed if the consumer terminates 
the account provided the consumer is given notice.
    Creditors are given considerable flexibility in the placement of 
the disclosures required under Sec.  226.9(e). For example, the notice 
can be preprinted on the periodic statement, such as on the back of the 
statement. See Sec.  226.9(e)(3) and comment 9(e)(3)-2. However, 
creditors that place any of the disclosures on the back of the periodic 
statement must include a reference to those disclosures under Sec.  
226.9(e)(3). To aid in compliance, a model clause that may, but is not 
required to, be used is proposed for creditors that use the delayed 
notice method. See proposed comment 9(e)(3)-1.
    Comment 9(e)-4, which addresses accuracy standards for disclosing 
rates on variable rate plans, would be revised, for the same reasons 
and consistent with the proposed accuracy standard for account-opening 
disclosures. See section-by-section analysis to Sec.  
226.6(b)(2)(ii)(G).
    Other proposed changes to Sec.  226.9(e) are minor with no intended 
substantive change. For example, footnote 20a, dealing with format, is 
deleted as unnecessary. The proposed reorganization of Sec.  226.5a is 
intended, in part, to separate more clearly content and format 
requirements in that section.

[[Page 33012]]

Nonetheless, to avoid any possible confusion, comment 9(e)-2, which 
generally repeats footnote 20a, would be retained.
9(g) Increase in Rates Due to Delinquency or Default or Penalty Pricing
    As discussed above with respect to Sec.  226.9(c), in the December 
2004 ANPR, the Board asked whether existing disclosure rules for 
increases to interest rates and other finance charges were adequate to 
enable consumers to make timely decisions about how to manage their 
accounts. Q27. Consumer advocates expressed concern that consumers are 
not aware when they have triggered rate increases, for example by 
paying late, and thus are unaware that it might be in their interest to 
shop for alternative financing before the rate increase takes effect. 
Some consumer commenters requested that the Board ban certain 
practices, such as ``universal default clauses,'' which permit a 
creditor to raise a consumer's interest rate to the penalty rate if the 
consumer defaults on any accounts, not just on accounts with that 
creditor.
    The Board is not proposing at the present time to prohibit 
universal default clauses or similar practices. Instead, as discussed 
in the section-by-section analysis to Sec.  226.5a, the Board's 
proposal seeks to improve the effectiveness of the disclosures given to 
consumers regarding the conditions in which penalty pricing will apply. 
In addition, the Board seeks to improve the ability of consumers to use 
the disclosures given to them by proposing that disclosures be provided 
prior to the application of penalty pricing to their accounts. To this 
end, with respect to open-end (not home-secured) plans, the Board's 
proposed rule would add Sec.  226.9(g)(1) to require creditors to 
provide 45 days advance notice when a rate is increased due to a 
consumer's delinquency or default, or if a rate is increased as a 
penalty for one or more events specified in the account agreement, such 
as a late payment or an extension of credit that exceeds the credit 
limit. This notice would be required even if, as is currently the case, 
the creditor specifies the penalty rate and the specific events that 
may trigger the penalty rate in the account-opening disclosures.
    Neither Regulation Z nor TILA defines what a ``default'' is, and 
the Board is aware that credit agreements of some creditors permit 
penalty pricing based on a single late payment by the consumer to that 
creditor. The Board is concerned that the imposition of penalty pricing 
can come as a costly surprise to consumers who are not aware of, or do 
not understand, what behavior is considered a ``default'' under their 
agreement. As discussed in the section-by-section analysis to Sec.  
226.5a, consumer testing conducted for the Board indicated that some 
consumers do not understand what factors can give rise to penalty 
pricing, such as the fact that one late payment may constitute a 
``default.'' Moreover, when penalty pricing is imposed, it may apply to 
all of the balances on a consumer's account and often applies to 
balances for several months or longer. Penalty rates can be more than 
twice as much as the consumer's normal rate on purchases; for example, 
default rates in excess of 30 percent are not uncommon.
    The Board believes that the way to address penalty pricing is 
through improved disclosures regarding the conditions under which 
penalty pricing may be imposed. In part, the Board is proposing, in 
connection with the disclosures given with credit card applications and 
solicitations and at account opening, to enhance disclosures about 
penalty pricing and revise terminology to address consumer confusion 
regarding the meaning of ``default.'' However, in light of the 
relatively low contractual threshold for rate increases based on 
consumer delinquency, default or as a penalty, the Board believes that 
consumers also would benefit from advance notice of these rate 
increases, which they otherwise may not expect. Advance notice would 
give consumers an opportunity to shop for alternate sources of credit, 
pay down account balances before the rate increase takes effect, or 
contact the card issuer to rectify any errors before penalty rates are 
imposed. To make this opportunity viable, the Board is proposing that 
the notice be provided at least 45 days before the increase takes 
effect. The Board requests comment on whether a shorter time period, 
such as 30 days' advance notice, would be adequate notice for consumers 
whose interest rates are being increased due to default or delinquency, 
or as a penalty.
    The proposed rule would impose a de facto limitation on the 
implementation of contractual terms between a consumer and creditor, in 
that creditors would no longer be permitted to provide for the 
immediate application of penalty pricing upon the occurrence of certain 
events specified in the contract. The Board believes that this delay in 
implementing contract terms is appropriate in light of the potential 
benefit to consumers. Many consumers are likely unaware of the events 
that will trigger such pricing. The account-opening disclosures may be 
provided to the consumer too far in advance for the consumer to recall 
the circumstances that may cause his or her rates to increase. In 
addition, the consumer may not have retained a copy of the account-
opening disclosures and may not be able to effectively link the 
information disclosed at account opening to the current repricing of 
his or her account.
    The Board notes that this advance notice provision does not, in any 
manner, limit the contractual ability of creditors to establish the 
events that trigger penalty pricing, or to establish the rates that 
apply for such events. The Board also notes that use of this sort of de 
facto delay in implementing contract terms has precedent in Regulation 
Z. For example, since 1988, Sec.  226.20(c) has provided that 25 days' 
advance notice must be given for certain increases in the payment for 
an adjustable rate mortgage, even if the circumstances of the increase 
are specified in advance in the contract.
    Under the proposed rule, creditors would retain the ability to 
mitigate risk by freezing credit accounts or lowering the credit limit 
without providing advance notice (subject to proposed Sec.  
226.9(c)(2)(v) discussed above, which addresses over-the-credit-limit 
fees or penalty rates). Thus, creditors would be able to effectively 
mitigate risk on accounts that are delinquent or in default 
notwithstanding the fact that they would be required to provide a 
notice 45 days before increasing the rate.
    The rule also would not require that 45 days' advance notice be 
given for certain changes made in accordance with the contract, 
provided that such adjustment is not due to delinquency, default or as 
a penalty. For example, if an employee offers an open-end plan with 
discounted rates to its employees, the employer would not be required 
to give a former employee 45 days' advance notice before increasing the 
rate on that individual's account from the preferential employees' rate 
to the standard rate, provided that the rate increase was set forth in 
the account agreement.
    Disclosure content and format. With respect to open-end (not home-
secured) plans, under the Board proposal, if a creditor is increasing 
the rate due to delinquency or default or as a penalty, the creditor 
must provide a notice with the following information: (1) A statement 
that the delinquency or default rate or penalty rate has been 
triggered, as applicable; (2) the date as of which the delinquency or 
default rate or penalty rate will be applied to the account, as 
applicable; (3) the

[[Page 33013]]

circumstances under which the delinquency or default rate or penalty 
rate, as applicable, will cease to apply to the consumer's account, or 
that the delinquency or default rate or penalty rate will remain in 
effect for a potentially indefinite time period; and (4) a statement 
indicating to which balances on the account the delinquency or default 
rate or penalty rate will be applied, as applicable. See proposed Sec.  
226.9(g)(3)(i). In consumer testing conducted for the Board, some 
participants did not appear to understand that penalty rates can apply 
to all of their balances, including existing balances. Some 
participants also did not appear to understand how long a penalty rate 
could be in effect. Without information about the balances to which the 
penalty rate applies and how long it applies, consumers might have 
difficultly determining whether they should shop for another card or 
pursue alternate sources of financing. Consumers also may consider the 
duration of penalty pricing when shopping for alternative sources of 
credit which would enhance their ability to make prudent decisions.
    If the notice regarding increases in rates due to delinquency, 
default or penalty pricing were included on or with a periodic 
statement, this notice must be in a tabular format. Under the proposal, 
the notice also would be required to appear on the front of the 
periodic statement, preceding the list of transactions for the period. 
See proposed Sec. Sec.  226.7(b)(14), 226.9(g)(3)(ii)(A). If the notice 
is not included on or with a periodic statement, the information 
described above must be disclosed on the front of the first page of the 
notice. See Sec.  226.9(g)(3)(ii)(B).

Section 226.10 Prompt Crediting of Payments

    Section 226.10, which implements TILA Section 164, generally 
requires a creditor to credit to a consumer's account a payment that 
conforms to the creditor's instructions (also known as a conforming 
payment) as of the date of receipt, except when a delay in crediting 
the account will not result in a finance or other charge. 15 U.S.C. 
1666c; Sec.  226.10(a). Section 226.10 also requires a creditor that 
accepts a non-conforming payment to credit the payment within five days 
of receipt. See Sec.  226.10(b). The Board has interpreted Sec.  226.10 
to permit creditors to specify cut-off times indicating the time when a 
payment is due, provided that the requirements for making payments are 
reasonable, to allow most consumers to make conforming payments without 
difficulty. See comments 10(b)-1 and -2. Pursuant to Sec.  226.10(b) 
and comment 10(b)-1, if a creditor imposes a cut-off time, it must be 
disclosed on the periodic statement; many creditors put the cut-off 
time on the back of statements.
    The December 2004 ANPR solicited comment regarding the cut-off 
times used currently by most issuers for receiving payments, whether 
cut-off times differ based on the type of payment (e.g., check, EFT, 
telephone, or Internet), and whether the operating times of third party 
processors differ from those of creditors. Q47-Q48, Q50. The December 
2004 ANPR also requested comment regarding the adequacy and clarity of 
current disclosures of payment due dates and cut-off times, and asked 
whether the Board should issue a rule requiring creditors to credit 
payments as of the date they are received, regardless of the time. Q49, 
Q51.
    Disclosure of cut-off times. In response to the December 2004 ANPR, 
the Board received a number of comments describing issuers' current 
practices regarding cut-off times. The majority of industry commenters 
noted that they do set cut-off times that are in the early or mid-
afternoon, but that cut-off times may differ based on the means by 
which a consumer makes his or her payment, with telephone and Internet 
payments often having later cut-off times than payments made by mail. 
These industry commenters argued that current disclosure of these cut-
off times is clear. Consumer groups and consumers commented that the 
majority of banks now set a cut-off time on payment due dates and that 
these cut-off times are a problem because they could result in a due 
date that is one day earlier in practice than the date disclosed. 
Consumer groups expressed particular concern about cut-off times 
because they believe that issuers simultaneously may be decreasing the 
time period between the end of the statement period and the time when 
the payment is due.
    Almost all industry comments opposed the Board's suggestion to 
require creditors to credit payments as of the date they are received, 
regardless of the time, noting that issuers need flexibility to work 
with external vendors and that creditors' internal processes and 
systems will to some extent dictate the timing of payment crediting. 
Consumer and consumer group comments proposed a rule that would require 
banks to consider the postmark to be the day the payment is received.
    The Board is not proposing to require a minimum cut-off time. 
Instead, as discussed above, the Board is proposing, in what would be 
new Sec.  226.7(b)(11), to require that for open-end (not home-secured) 
plans, creditors must disclose the earliest of their cut-off times for 
payments near the due date on the front page of the periodic statement, 
if that earliest cut-off time is before 5 p.m. on the due date. The 
Board believes that the disclosure-based approach may benefit consumers 
without imposing an unreasonable operational burden on creditors. 
Consumers would be able to make better decisions about when to make 
payments in order to avoid late-payment fees and default rates if 
earlier cut-off times such as 12:00 p.m. were more prominently 
disclosed on the periodic statement. In recognition of the fact that 
creditors may have different cut-off times depending on the type of 
payment (e.g., mail, Internet, or telephone), the Board's proposal 
would require that creditors disclose only the earliest cut-off time, 
if earlier than 5 p.m. on the due date. See proposed Sec.  
226.7(b)(11). HELOCs would not be affected by the disclosure rule in 
Sec.  226.7(b)(11).
    Receipt of electronic payments made through a creditor's Web site. 
The Board also proposes to add an example to comment 10(a)-2 that 
states that for payments made through a creditor's Web site, the date 
of receipt is the date as of which the consumer authorizes the creditor 
to debit that consumer's account electronically. Industry comments to 
the December 2004 ANPR stated that most credit card payments are still 
received by mail. Nevertheless, the Internet is an increasingly 
utilized resource for making credit card payments and for receiving 
information about accounts. Unlike payments delivered by mail, payments 
made via a creditor's Web site may be received almost immediately by 
that creditor.
    The proposed comment would refer to the date on which the consumer 
authorizes the creditor to effect the electronic payment, not the date 
on which the consumer gives the instruction. The consumer may give an 
advance instruction to make a payment and some days may elapse before 
the payment is actually made; accordingly, comment 10(a)-2 would refer 
to the date on which the creditor is authorized to debit the consumer's 
account. If the consumer authorized an immediate payment, but provided 
the instruction after a creditor's cut-off time, the relevant date 
would be the following business day. For example, a consumer may go 
online on a Sunday evening and instruct that a payment be made; 
however, the creditor could not transmit the request for the debit to 
the

[[Page 33014]]

consumer's account until the next day, Monday. Under proposed comment 
10(a)-2 the date on which the creditor was authorized to effect the 
electronic payment would be deemed to be Monday, not Sunday. Proposed 
comment 10(b)-1.i.B would clarify that the creditor may, as with other 
means of payment, specify a cut-off time for an electronic payment to 
be received on the due date in order to be credited on that date. The 
Board solicits comment regarding the incidence of, and types of, any 
delays that may prevent creditors or their third party processors from 
receiving electronic payments on the date on which the creditor is 
authorized to effect the payment.
    The Board considered expanding this comment to cover electronic 
payments received by other means (e.g., if the consumer authorizes a 
payment to his deposit account-holding bank's Web site), because it is 
likely that such electronic payments made through such parties also may 
be received by the creditor on the same day that they are authorized. 
However, it could be difficult for a creditor to monitor when a 
consumer gives a third party an instruction to send a payment, and, in 
addition, the creditor has no direct control over how long it takes the 
third party to process that instruction. As a result, the Board's 
proposed clarification of comment 10(a)-2 is limited to electronic 
payments effected through the creditor's own Web site, over which the 
creditor has control.
    Promotion of payment via the creditor's Web site. The Board also 
proposes to update the commentary to clarify that if a creditor 
discloses that payments can be made on that creditor's Web site, then 
payments made through the creditor's Web site will be considered 
conforming payments for purposes of Sec.  226.10(b). Many creditors now 
permit consumers to make payments via their Web site. Payment on the 
creditor's Web site may not be specified on or with the periodic 
statement as conforming payments, but it may be promoted in other ways, 
such as in the account-opening agreement, via e-mail, in promotional 
material, or on the Web site itself. It would be reasonable for a 
consumer who receives materials from the creditor promoting payment on 
the creditor's Web site to believe that it would be a conforming 
payment and credited on the date of receipt. Therefore, the Board 
proposes to amend comment 10(b)-2 to clarify that if a creditor 
promotes that it accepts payments via its Web site (such as disclosing 
on the Web site itself or on the periodic statement that payments can 
be made via the Web site), then it is considered a conforming payment 
for purposes of Sec.  226.10(b).
    Third party processors. With regard to third party processors, 
industry commenters noted that current practice is that payments 
received by a third party processor are treated as if they were 
received directly by the creditor, and that no further clarification is 
necessary. Accordingly, the Board is not currently proposing any 
amendments to specifically address third party processors.

Section 226.11 Treatment of Credit Balances; Account Termination

11(a) Credit Balances
    TILA Section 165, implemented in Sec.  226.11, sets forth specific 
steps that a creditor must take to return any credit balance in excess 
of $1 on a credit account, including making a good faith effort to 
refund any credit balance remaining in the consumer's account for more 
than six months. 15 U.S.C. 1666d. The substance of Sec.  226.11 would 
remain unchanged; however, the commentary would be revised to provide 
that a creditor may comply with this section by refunding any credit 
balance upon receipt of a consumer's oral or electronic request. See 
proposed comment 11(a)-1. In addition, the Board proposes to move the 
current rules in Sec.  226.11 to a new paragraph (a), with the 
commentary renumbered accordingly, and to add a new paragraph (b) which 
implements the account termination prohibition for certain open-end 
accounts in Section 1306 of the Bankruptcy Act (further discussed 
below). See TILA Section 127(h); 15 U.S.C. 1637(h). The section title 
would be amended to reflect the new subject matter.
11(b) Account Termination
    TILA Section 127(h), added by the Bankruptcy Act, prohibits an 
open-end creditor from terminating open-end accounts for certain 
reasons. Creditors cannot terminate an open-end plan before its 
expiration date solely because the consumer has not incurred finance 
charges on the account. The prohibition does not prevent a creditor 
from terminating an account for inactivity in three or more consecutive 
months. The October 2005 ANPR solicited comment on the need for 
additional guidance, such as when an account ``expires'' and when an 
account is ``inactive.'' Q106-Q108.
    The Board proposes to implement TILA Section 127(h) in new Sec.  
226.11(b). The general rule is stated in Sec.  226.11(b)(1) and mirrors 
the statute; the prohibition would apply to all open-end plans.
    Commenters expressed differing views on how the Board might 
interpret ``expiration date.'' Some suggested using the expiration date 
on credit cards as the date the account is deemed to expire. Others 
noted that while cards may expire from time to time, the underlying 
open-end plans commonly do not have maturity or expiration dates. These 
commenters were concerned that if an account were deemed to ``expire'' 
when a credit card's expiration date occurs, new account-opening 
disclosures would be required for the account to continue. The Board 
believes that Congress did not intend such a result. Therefore, comment 
11(b)(1)-1 would clarify that the underlying credit agreement, not the 
credit card, determines if there is a stated expiration (maturity) 
date. Creditors offering accounts without a stated expiration date 
could not terminate those accounts solely because the consumer does not 
incur finance charges on the account.
    Under the proposal, a new Sec.  226.11(b)(2) would be added to 
provide that the new rule in Sec.  226.11(b)(1) does not prevent 
creditors from terminating an account under an open-end plan (with or 
without an expiration date) that is inactive for three consecutive 
months. Commenters were split on the need for guidance on an 
``inactive'' account. Of those that suggested guidance, commenters 
generally concurred that ``activity'' includes purchases or cash 
advances, for example. But commenters disagreed whether an account with 
an outstanding balance was ``active.'' Because f