[Federal Register: May 19, 2008 (Volume 73, Number 97)]
[Proposed Rules]
[Page 28865-28901]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr19my08-20]
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Part II
Federal Reserve System
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12 CFR Part 226
Truth in Lending; Proposed Rule
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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: On June 14, 2007, the Board published proposed amendments to
Regulation Z, which implements the Truth in Lending Act (TILA), and to
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 addressed disclosures provided
with credit card applications and solicitations, at account-opening, on
periodic statements, when terms are changed on an account, and in
advertisements.
The Board is seeking comment on a limited number of additional
revisions to the regulation and commentary. New proposed amendments
address creditors' responsibilities to establish reasonable
instructions for receiving timely payments and when a due date falls on
a weekend or holiday. Creditors' responsibilities when investigating a
claim of unauthorized transactions or an allegation of a billing error
are also addressed. Advertisements for deferred interest plans would be
required to provide additional information about how interest could be
imposed. Comments submitted to the Board in response to the June 2007
proposed revisions remain under consideration by the Board and need not
be submitted a second time.
DATES: Comments must be received on or before July 18, 2008.
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/
generalinfo/foia/ProposedRegs.cfm.
Federal eRulemaking Portal: http://www.regulations.gov.
Follow the instructions for submitting comments.
E-mail: regs.comments@federalreserve.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: Benjamin K. Olson, Attorney, Amy Burke
or Vivian Wong, Senior Attorneys, Krista Ayoub, Ky Tran-Trong, or John
C. 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. Review of Regulation Z's Rules for Open-End (Not Home-Secured)
Plans
The Board published proposed amendments to Regulation Z's rules for
open-end plans that are not home-secured in June 2007 (June 2007
Proposal). 72 FR 32948, June 14, 2007. The goal of the amendments 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 affect the 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-term
notices; and (5) advertisements.
The June 2007 Proposal was preceded by two advance notices of
proposed rulemaking (ANPR). In December 2004, the Board announced its
intent to conduct a review of Regulation Z in stages, starting with the
rules for open-end (revolving) credit accounts that are not home-
secured, chiefly general-purpose credit cards and retail credit card
plans (December 2004 ANPR). 69 FR 70925, December 8, 2004. 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.
In October 2005, the Board published a second ANPR (October 2005
ANPR). 70 FR 60235, October 17, 2005. The October 2005 ANPR solicited
comment on implementing amendments to TILA contained in the Bankruptcy
Abuse Prevention and Consumer Protection Act of 2005 (the ``Bankruptcy
Act''). Public Law 109-8, 119 Stat. 23. The Bankruptcy Act's TILA
amendments principally affect open-end credit accounts and require new
disclosures on periodic statements, on credit card applications and
solicitations, and in advertisements. 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.
In developing the June 2007 Proposal, the Board conducted consumer
research, in addition to considering comments received on the two
ANPRs. Specifically, the Board retained a research and consulting firm
(Macro International) to assist the Board in using consumer testing to
develop proposed model forms for the 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
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terms are changed, and notices on checks provided to access credit card
accounts. A report summarizing the results of the Board's testing
efforts is available on the Board's Web site: http://
www.federalreserve.gov.
The Board received over 2,500 comments on the June 2007 Proposal.
About 85% of these were from consumers and consumer groups, and of
those, nearly all (99%) were from individuals. Regarding comments from
industry representatives, about 10% were from financial institutions or
their trade associations. The vast majority (90%) of the industry
letters were from credit unions and their trade associations. Those
latter comments were mainly about a proposed revision to the definition
of open-end credit that could affect how many credit unions currently
structure their consumer loan products.
A summary of comments received in response to the June 2007
Proposal and this rulemaking (May 2008 Proposal) will be included in
the Board's final revisions to Regulation Z's open-end credit rules. In
general, commenters generally supported the June 2007 Proposal and the
Board's use of consumer testing to develop revisions to disclosure
requirements. There was opposition to some aspects of the proposal. For
example, industry representatives opposed many of the format
requirements for periodic statements, as being overly prescriptive.
They also opposed the Board's proposal to require creditors to provide
at least 45 days' advance notice before certain key terms change or
interest rates are increased due to default or delinquency. Consumer
groups opposed the Board's proposed alternative that would eliminate
the effective annual percentage rate (APR) as a periodic statement
disclosure. Consumers and consumer groups also believe the Board's
proposal was too limited in scope and urged the Board to provide more
substantive protections and prohibit certain card issuer practices.
In early 2008, the Board worked with its testing consultant, Macro
International, to revise model disclosures in response to comments
received, and in March 2008, the Board conducted an additional round of
one-on-one cognitive interviews on revised disclosures provided with
applications and solicitations, on periodic statements, and with checks
that access a credit card account. The results of these interviews are
discussed throughout the section-by-section analysis below, to the
extent the March 2008 testing influenced the matters being proposed in
this May 2008 Proposal.
The Board will continue to work with its consultant to revise the
model disclosures, based on comments received on the June 2007 and May
2008 Proposals. 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.
III. Effect of Additional Rulemaking on June 2007 Proposal
The Board is publishing additional proposed revisions to a limited
number of provisions affecting Regulation Z's rules for open-end credit
(May 2008 Proposal). Proposed amendments to Regulation Z that were
published in June 2007 and are not addressed in VI. Section-by-section
Analysis below remain under the Board's consideration as proposed.
Comments submitted to the Board in response to those June 2007 proposed
revisions to Regulation Z need not be submitted a second time.
The Board, along with the Office of Thrift Supervision and the
National Credit Union Administration, is also publishing elsewhere in
today's Federal Register a proposal to adopt rules prohibiting specific
unfair acts or practices with respect to consumer credit card accounts
under their authority under the Federal Trade Commission Act (FTC
Act).\1\ See 15 U.S.C. 57a(f)(1). The Board's proposal would add a new
Subpart C to the Board's Regulation AA, Unfair or Deceptive Acts or
Practices (2008 Regulation AA Proposal). 12 CFR part 227. The proposal
would, among others, (1) prohibit banks from treating payments on a
consumer credit card account as late unless the consumer is provided
with a reasonable amount of time to make a payment, (2) establish rules
governing the allocation of payments on outstanding balances, (3) limit
banks' ability to increase the rate of interest applicable to any
outstanding balance, and (4) prohibit banks from computing finance
charges based on balances for days in billing cycles preceding the most
recent billing cycle.
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\1\ For simplicity, this notice will refer only to the Board's
proposal.
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At the end of the period for public comment for the May 2008
Proposal and the 2008 Regulation AA Proposal, the Board will review the
comments received and continue to conduct additional consumer tests on
revised disclosures to consider any appropriate changes. The comment
period for this May 2008 Proposal is 60 days (rather than 75 days, as
provided in the Regulation AA Proposal) after this notice is published
in the Federal Register, to facilitate a timely resumption and
completion of the Board's consumer testing efforts. Following the
Board's analysis of the comments (including comments from the June 2007
Proposal) and the results of consumer testing, the Board anticipates
adopting at the same time final rules for these related proposals. The
Board will provide creditors and processors with an adequate time to
implement the necessary changes.
IV. Summary of Proposed Revisions
Applications and Solicitations. The June 2007 Proposal contained
changes to the format and content of credit and charge card application
and solicitation disclosures to make them more meaningful and easier
for consumers to use. The May 2008 Proposal would revise the content
requirements on several disclosures, as follows:
Grace period labels. The June 2007 proposed requirement to
use the term ``grace period'' as a heading in the summary table
provided at application (and elsewhere such as at account opening or
with checks that access credit card accounts) would be eliminated. The
phrase ``how to avoid interest'' (or ``paying interest'' if no grace
period exists) or substantially similar terminology would be required
instead.
Minimum interest charge. The May 2008 Proposal would add a
de minimis dollar amount trigger of $1.00 for disclosing minimum
interest or finance charges. Currently, card issuers must disclose in
the summary table at application and account opening any minimum
interest or finance charge. The $1.00 trigger would be adjusted when
cumulative percentage changes to the Consumer Price Index added to the
$1.00 trigger equals or exceeds the next whole dollar.
Foreign transaction fees. The May 2008 Proposal would
require issuers to disclose fees for purchase transactions in a foreign
currency or conducted outside the United States in the table provided
at application or solicitation. The June 2007 Proposal required
creditors to disclose these fees in the summary table provided at
account-opening but not in the table provided at application or
solicitation.
Penalty rate when credit privileges are terminated.
Currently, card issuers are not required to disclose in the
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application summary table increased rates that apply when credit
privileges are terminated. The May 2008 Proposal would eliminate the
exception.
Oral disclosures. Card issuers generally must provide cost
disclosures in oral applications or solicitations initiated by the
issuer. The May 2008 Proposal would require additional oral disclosures
for issuers that require fees or a security deposit to issue the card
that are 25 percent or more of the minimum credit limit offered for the
account. These issuers would be required to orally provide the amount
of available credit the consumer would have after paying the fees or
security deposit, assuming the consumer receives the minimum credit
limit.
Account-opening Disclosures. The May 2008 Proposal would require
creditors assessing fees at account opening that are 25 % or more of
the minimum credit limit to provide a notice of the consumer's right to
reject the plan after receiving disclosures if the consumer has not
used the account or paid a fee (other than certain application fees).
Changes regarding ``grace period'' terminology and minimum interest
charge disclosure requirements are proposed to conform the disclosure
requirements for the account-opening table to the requirements for the
table required with applications or solicitations. Model forms are
proposed to ease compliance for creditors offering open-end (not home-
secured) plans that are not accessed by credit cards, such as lines of
credit or overdraft plans.
Checks that Access Credit Card Accounts. The June 2007 Proposal
required creditors to disclose on the front of the page containing the
checks that access credit card accounts information such as the rates
that will apply if the checks are used, any transaction fees, and
whether or not a grace period exists. The May 2008 Proposal would add a
requirement to disclose any date by which consumers must use the check
to receive the disclosed rates.
Changes in Consumer's Interest Rate and Other Account Terms. The
June 2007 Proposal required that when a change-in-terms notice
accompanies a periodic statement, creditors provide a tabular
disclosure on the front of the periodic statement of the key terms
being changed. Consistent with the 2008 Regulation AA Proposal that
restricts creditors' ability to apply increased rates to certain
existing balances, creditors would be required to clarify how existing
or new balances would be affected by any rate increase.
Crediting Payments. Currently, creditors may require consumers to
comply with reasonable payment instructions, including a cut-off hour
for receiving payments. The May 2008 Proposal deems a cut-off hour for
mailed payments before 5 p.m. on the due date to be an unreasonable
instruction. Creditors that set due dates on a weekend or holiday but
do not accept mailed payments on those days would not be able to
consider a payment received on the next business day as late for any
reason.
Investigating Claims of Unauthorized Transactions or Allegations of
Billing Errors. Currently, creditors must conduct a reasonable
investigation before imposing liability for an unauthorized
transaction, and may reasonably request a consumer's cooperation. The
May 2008 Proposal clarifies that a creditor may not, however, deny a
claim solely if the consumer does not comply with a request to sign a
written affidavit or file a police report, and for consistency extends
guidance for reasonably investigating claims of unauthorized
transactions to allegations of billing errors.
Advertising Provisions. For deferred interest plans that advertise
``no interest'' or similar terms, the May 2008 Proposal would add
notice and proximity requirements to require advertisements to state
the circumstances under which interest is charged from the date of
purchase and, if applicable, that the minimum payments required will
not pay off the balance in full by the end of the deferral period.
Model clauses are proposed to ease compliance.
V. 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.
For the reasons discussed in this notice, the Board is using its
specific authority under TILA, in concurrence with other TILA
provisions, to effectuate the purposes of TILA, to prevent the
circumvention or evasion of TILA, and to facilitate compliance with the
act.
VI. Section-By-Section Analysis
Section 226.5 General Disclosure Requirements
5(a) Form of Disclosures
5(a)(1) General
Paragraph 5(a)(1)(ii)(A)
Under Sec. 226.5(a)(1)(ii)(A) in the June 2007 Proposal, certain
disclosures need not be written, including disclosures under Sec.
226.6(b)(1) of charges that are imposed as part of the plan and may be
provided at any time before the consumer agrees to pay or becomes
obligated to pay for the charge, pursuant to the disclosure timing
requirements of Sec. 226.5(b)(1)(ii). 72 FR 32948, 33043, June 14,
2007. Under proposed Sec. 226.5(b)(1)(ii), these charges are charges
that are imposed as part of the plan but that are not required to be
disclosed in a tabular format under Sec. 226.6(b)(4). 72 FR 32948,
33044, June 14, 2007. Such charges would include, for example, a charge
to make an on-line payment on the account. In addition, under proposed
Sec. 226.5(a)(1)(ii)(A), change-in-terms disclosures, under Sec.
226.9(c)(2)(ii)(B), related to the disclosures discussed above (for
example, an increase in the amount of an on-line payment charge) also
need not be provided in writing.
Commenters on the June 2007 Proposal suggested that creditors
should be permitted to provide disclosures in electronic form, without
having to comply with the consumer notice and consent procedures of the
Electronic Signatures in Global and National Commerce Act (E-Sign Act),
15 U.S.C. 7001 et seq., at the time an on-line or other electronic
service is used. For example, commenters suggested, if a consumer
wishes to make an on-line payment on the account, for which the
creditor imposes a fee (which has not previously been disclosed), the
creditor should be allowed to disclose the fee electronically, without
E-Sign notice and consent, at the time the on-line payment service is
requested.
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Commenters contended that such a provision would not harm consumers and
would expedite transactions, and also that it would be consistent with
the Board's proposal to permit oral disclosure of such fees.
Under section 101(c) of the E-Sign Act, if a statute or regulation
requires that consumer disclosures be provided in writing, certain
notice and consent procedures must be followed in order to provide the
disclosures in electronic form. Since, under the Board's June 2007
Proposal, the disclosures discussed above are not required to be
provided in writing, the Board believes that the E-Sign notice and
consent requirements do not apply when the consumer requests the
service in electronic form. The Board proposes to add comment
5(a)(1)(ii)(A)-1 to clarify this matter.
Paragraph 5(a)(1)(iii)
Under Sec. 226.5(a)(1)(iii) in the June 2007 Proposal, certain
disclosures may be provided in electronic form without regard to the
consumer notice and consent provisions of the E-Sign Act. The Board
proposes to add comment 5(a)(1)(iii)-1 to clarify that the disclosures
specified in Sec. 226.5(a)(1)(ii)(A) also may be provided in
electronic form without regard to the E-Sign Act when the consumer
requests the service in electronic form, such as on a creditor's Web
site.
5(a)(2) Terminology
Use of the term ``grace period''. Under Sec. 226.5(a)(2)(iii) in
the June 2007 Proposal, the term ``grace period'' would be required to
be used, as applicable, in any disclosure that must be in tabular
format under proposed Sec. 226.5(a)(3). 72 FR 32948, 33044, June 14,
2007. TILA Section 122(c)(2)(C), which is implemented currently in
Sec. 226.5a(a)(2)(ii), requires credit card applications and
solicitations under Sec. 226.5a to 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. 15 U.S.C. 1632(c)(2)(C). The Board's proposal was meant to
promote uniformity in the use of this term across other disclosures and
thereby improve consumer understanding of the concept.
Some industry commenters argued, however, that the Board should
reconsider requiring use of the term ``grace period.'' One industry
commenter noted that research conducted by the Board and by the United
States Government Accountability Office (GAO), as well as the
commenter's own research, demonstrated that the term is confusing as a
descriptor of the interest-free period between the purchase and the due
date for customers who pay their balances in full.\2\ This commenter
suggested that the Board revise the disclosure of the grace period in
the credit card application and solicitation table to use the heading
``interest-free period'' instead of ``grace period.''
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\2\ 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)
(GAO Report on Credit Card Rates and Fees).
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The Board further tested alternative disclosures for the grace
period in March 2008. Based on the results from consumer testing, as
discussed in greater detail in the section-by-section analysis to Sec.
226.5a(b)(5) below, the Board is using its authority under TILA
Sections 105(a) and (f), and TILA Section 127(c)(5) to delete the
requirement to use the term ``grace period'' in the table required by
Sec. 226.5a. 15 U.S.C. 1604(a) and (f), 1637(c)(5). To maintain
consistent terminology across other disclosures, the Board is also
withdrawing its proposal under Sec. 226.5(a)(2)(iii) to require the
term ``grace period'' to be used, as applicable, in any disclosure that
must be in tabular format under proposed Sec. 226.5(a)(3). If this
approach is adopted as proposed, conforming changes will also be made
to remove the term ``grace period'' from all model forms and associated
commentary when the Board adopts revisions to the Regulation Z rules
for open-end (not home-secured) plans.
The Board also notes that with the removal of the term ``grace
period'' from the table required by Sec. 226.5a, use of the term
``grace period'' in subsequent disclosures to the consumer would not be
appropriate pursuant to the proposed requirement that creditors use
consistent terminology under proposed Sec. 226.5(a)(2)(i). While the
use of identical language is not required under proposed comment
5(a)(2)-4, creditors are still required to use terms close enough in
meaning to enable the consumer to relate the different disclosures. As
discussed further below with respect to the proposed revisions to Sec.
226.5a(b)(5), the Board proposes to require using language focused on
the terms ``how to avoid paying interest'' or ``paying interest.''
Consequently, subsequent disclosures to consumers should also use
similar terms.
5(b) Time of Disclosures
5(b)(1) Account-Opening Disclosures
5(b)(1)(ii) Charges Imposed as Part of an Open-End (Not Home-Secured)
Plan
Comment 5(b)(1)(ii)-1, under the June 2007 Proposal, states that
charges that are imposed as part of an open-end (not home-secured)
plan, other than those specified in Sec. 226.6(b)(4), may be disclosed
orally or in writing at any time before a consumer agrees to pay the
charge or becomes obligated for the charge. 72 FR 32948, 33104, June
14, 2007. The Board proposes to revise the comment to clarify that
electronic disclosure of these charges, without regard to the E-Sign
Act notice and consent requirements, is also permissible as an
alternative to oral or written disclosure, when a consumer requests a
service in electronic form, such as on a creditor's Web site.
5(b)(1)(iv) Membership Fees
TILA Section 127(a) requires creditors to provide specified
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. In
the June 2007 Proposal, guidance currently in comment 5(b)(1)-1 about
creditors' ability to assess certain membership fees before consumers
receive the account-opening disclosures was moved to Sec.
226.5(b)(1)(iv). Currently and under the June 2007 Proposal, creditors
may collect or obtain the consumer's promise to pay, a membership fee
before the disclosures are provided, if the consumer can reject the
plan after receiving the disclosures. If a consumer rejects the plan,
the creditor must promptly refund the fee if it has been paid or take
other action necessary to ensure the consumer is not obligated to pay
the fee. 72 FR 32948, 33044, June 14, 2007.
Comment 5(b)(1)-1 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, renumbered as comment 5(b)(1)(i)-1
in the June 2007 Proposal, was amended to clarify that if the only
activity on account is the creditor's 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. 72 FR 32948, 33103, June 14, 2007. The June 2007
proposed clarification was intended to address concerns about some
subprime card accounts that
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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.
Few comments were received on the June 2007 proposed interpretation
regarding when a consumer is considered to have accepted an account.
Consumer groups supported the proposal but urged the Board to require a
disclosure on periodic statements that would inform consumers about
their right to reject the plan and not pay fees agreed to prior to
receiving account-opening disclosures. An industry commenter also
supported the proposal but suggested the Board provide a safe harbor
for considering the account as accepted, such as 30 days after a
consumer received a new credit card and account-opening disclosures.
The Board proposes additional clarifications to ease compliance and
to address further the concerns raised in the June 2007 Proposal.
Comment 5(b)(1)-1, renumbered as comment 5(b)(1)(i)-1 in the June 2007
Proposal, addresses a creditor's general duty to provide account-
opening disclosures ``before the first transaction.'' The comment is
reorganized for clarity to provide existing examples of ``first
transactions.''
The Board further clarifies consumers' right not to pay fees that
were assessed or agreed to be paid before the consumer received
account-opening disclosures, if a consumer rejects a plan after
receiving the disclosures, as stated in Sec. 226.5(b)(1)(iv) of the
June 2007 Proposal. Currently and under the June 2007 Proposal,
creditors may collect or obtain the consumer's agreement to pay
``membership fees'' before providing account-opening disclosures if the
consumer may reject the plan after receiving the disclosures, but the
term ``membership fee'' is not defined. The Board proposes in revised
Sec. 226.5(b)(1)(iv) and new comment 5(b)(1)(iv)-1 that ``membership
fee'' has the same meaning as fees for issuance or availability of a
credit or charge card under Sec. 226.5a(b)(2), for consistency and
ease of compliance. Such fees include annual or other periodic fees, or
``start-up'' fees such as account-opening fees. 72 FR 32948, 33046,
33108, June 14, 2007.
Comment 5(b)(1)-1, renumbered as comment 5(b)(1)(i)-1 in the June
2007 Proposal, currently provides that home equity lines of credit
(HELOCs) are not subject to the prohibition on the payment of fees
other than application or refundable membership fees before account-
opening disclosures are provided. See Sec. 226.5b(h) regarding
limitations on the collection of fees. This existing guidance is moved
to revised Sec. 226.5(b)(1)(iv) and a new comment 5(b)(1)(iv)-4 for
clarity.
Also, under revised Sec. 226.5(b)(1)(iv), the Board proposes to
clarify that if a consumer rejects an open-end (not home-secured) plan
as permitted under that provision (i.e., if the creditor collects or
obtains the consumer's agreement to pay ``membership fees'' before
providing account-opening disclosures), consumers are not obligated to
pay any membership fee, or any other fee or charge (other than an
application fee that is charged to all applicants whether or not they
receive the credit). The revision is intended to remove ambiguity that
if a consumer rejects a plan under Sec. 226.5(b)(1)(iv), the consumer
could nevertheless be obligated for fees or charges (including interest
on unpaid fee balances) other than a ``membership fee'' or certain
application fees.
Comments 5(b)(1)(iv)-2 and -3 are proposed to provide guidance on
when a consumer is considered to have rejected the plan. Comment
5(b)(1)(iv)-2 provides guidance currently in comment 5(b)(1)-1,
renumbered as comment 5(b)(1)(i)-1 in the June 2007 Proposal, that a
consumer who has received account-opening disclosures and uses the
account or makes a payment on the account after receiving a billing
statement is deemed not to have rejected the plan. The Board proposes
to provide a safe harbor: A creditor may deem the plan to be rejected
if, 60 days after the creditor mailed the account-opening disclosures,
the consumer has not used the account or made a payment on the account.
The Board requests comment on whether another time period would be more
appropriate.
New comment 5(b)(1)(iv)-3 provides guidance currently in comment
5(b)(1)-1, renumbered as comment 5(b)(1)(i)-1 in the June 2007
Proposal, regarding when a consumer is considered to have ``used'' the
account. The Board proposes to add that a consumer is not considered to
use an account when, for example, a consumer receives a credit card in
the mail and calls to activate the card for security purposes. This is
added in response to requests for Board staff to provide guidance on
the issue. The Board also proposes additional guidance about the
assessment of creditors' fees, as a further response to concerns raised
in the June 2007 Proposal. The comment would clarify that a consumer
does not ``use'' an account when the creditor assesses fees (such as
start-up fees or fees associated with credit insurance or debt
cancellation or suspension programs agreed to as a part of the
application and before the consumer receives account-opening
disclosures) to the account. Similarly, the consumer does not ``use''
an account when, for example, a creditor sends a billing statement with
start-up fees, there is no other activity on the account, the consumer
does not pay the fees, and the creditor subsequently assesses a late
fee or interest on the unpaid fee balances.
As discussed in the section-by-section analysis to Sec.
226.6(b)(4)(vii), the Board also proposes a disclosure requirement for
creditors that require substantial fees at account opening and leave
consumers with a limited amount of available credit. Those creditors
would be required to provide a notice of the consumer's right to reject
the plan and not pay fees unless the consumer uses the account or pays
the fees. The proposed revision to the timing rules in Sec.
226.5(b)(1)(iv) regarding the collection of fees prior to the delivery
of account-opening disclosures would apply to all open-end (not home-
secured) plans, although the Board believes the impact of the proposal
would primarily affect some subprime credit card issuers. The Board
solicits comment on the appropriate scope.
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.\3\ 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
[[Page 28871]]
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.\4\
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\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 memorandum will refer simply to ``credit
cards.''
\4\ In the June 2007 Proposal, the Board proposed revising the
rule applicable to take-ones to delete the option to satisfy the
provisions of Sec. 226.5a by including a narrative description of
how finance charge and other charges are assessed. See proposed
Sec. 226.5a(e), 72 Fr 32948, 33048, June 14, 2007.
---------------------------------------------------------------------------
5a(b) Required Disclosures
5a(b)(1) Annual Percentage Rate
Currently, Sec. 226.5a(b)(1), which implements TILA Section
127(c)(1)(A)(i)(I), requires issuers to disclose each APR that may be
used to compute the finance charge on an outstanding balance for
purchases, a cash advance, or a balance transfer. 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. 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. Comment 5a(b)(1)-7 also
specifies that an issuer need not disclose an increased rate that would
be imposed if credit privileges are permanently terminated.
In the June 2007 Proposal, the Board proposed a number of changes
to how penalty rates are disclosed in the table to enhance consumers'
awareness of these rates and the specific event or events that may
result in the increase of rates. See proposed Sec. 226.5a(b)(1)(iv)
and new comment 5a(b)(1)-4 (previously comment 5a(b)(1)-7). 72 FR
32948, 33046, June 14, 2007. For example, the Board proposed 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
proposed 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), 72 FR 32948, 33069, June 14,
2007. The Board proposed to retain the current provision that an issuer
need not disclose an increased rate that would be imposed if credit
privileges are permanently terminated, but proposed to move this
provision from current comment 5a(b)(1)-7 to proposed Sec.
226.5a(b)(1)(iv).
In response to the June 2007 Proposal, some consumer groups
requested that the Board delete the statement that the card issuer need
not disclose the increased rate that would be imposed if credit
privileges are permanently terminated. They viewed this provision as
inconsistent with the Board's other efforts to ensure that consumers
are aware of penalty rates. They believed card issuers should be
required to disclose this information in the table if the rate is
different than the penalty rate that otherwise applies.
The Board proposes to delete the current provision that an issuer
need not disclose an increased rate that would be imposed if credit
privileges are permanently terminated. The provision may be
unnecessary. The Board is not aware of any issuers that are imposing an
increased rate when credit privileges are permanently terminated that
is different from the penalty rate. Moreover, the Board agrees that to
the extent an issuer is charging a different rate when credit is
permanently terminated than the penalty rate, this different rate
should be disclosed along with the penalty rate.
Elsewhere in today's Federal Register the Board proposes under
Regulation AA that card issuers making firm offers of credit and
offering a range of APRs or credit limits must also disclose clearly
and conspicuously that if the consumer is approved for the credit, the
APR and credit limit on the account will depend on the specific
criteria bearing on creditworthiness. Model language is proposed that
issuers may use to comply with the requirements. Under the June 2007
Proposal, card issuers offering APRs that will depend on a later
determination of the consumer's creditworthiness must disclose in the
table provided with applications or solicitations, within prescribed
format requirements, either specific rates or a range of rates, and a
statement that the rate for which the consumer may qualify at account
opening depends on the creditor's creditworthiness. 72 FR 32948, 33045,
33046, June 14, 2007. If the approach under Regulation AA is adopted as
proposed, appropriate conforming changes will be made to ensure
consistency among the regulatory requirements and to facilitate
compliance when the Board adopts revisions to the Regulation Z rules
for open-end (not home-secured) credit.
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 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, some 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.
In the June 2007 Proposal, the Board proposed to retain the minimum
finance charge disclosure in the table. Although minimum charges
currently may be small, the Board was concerned that card issuers may
increase these charges in the future. Also, the Board noted that it was
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 also did not propose to
require the minimum finance charge only if it is a significant amount.
The Board was concerned that this approach could undercut the
uniformity of the table, and could be misleading to consumers. The
Board also proposed 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.
72 FR 32948, 33046, June 14, 2007.
In response to the June 2007 Proposal, several industry commenters
again recommended that the Board delete this disclosure from the table
unless the minimum finance charge is over a certain nominal amount.
They indicated that in most cases, the minimum interest charge is so
small as to be irrelevant to consumers. They believed that it should
only be in the table if the minimum finance charge is a significant
amount. Also, they believed that the purpose of the summary table is to
highlight the most relevant terms that
[[Page 28872]]
consumers use in evaluating credit card applications. They suggested
that it is unlikely that consumers would choose a card based on a
minimal charge. Also, they believed that the retention of an irrelevant
fee clutters the summary table, detracting from other more important
terms. One commenter recommended that minimum interest charges under
$2.00 should be excluded from disclosure in the table, and another
commenter recommended a cut off of $1.00. Consumer groups agreed with
the Board's proposal to require the disclosure of the minimum interest
charge in all cases and not to allow issuers to exclude the minimum
interest charge from the table if the charge was under a certain
specific amount.
The Board proposes to revise proposed Sec. 226.5a(b)(3) to provide
that an issuer must disclose in the table any minimum or fixed finance
charge in excess of $1.00 that could be imposed during a billing cycle
and a brief description of the charge, pursuant to its authority under
TILA Section 127(c)(5). 15 U.S.C. 1637(c)(5). The $1.00 amount would be
adjusted to the next whole dollar amount when the sum of annual
percentage changes in the Consumer Price Index in effect on the June 1
of previous years equals or exceeds $1.00. See proposed comment
5a(b)(3)-2. This approach in adjusting the dollar amount that triggers
the disclosure of a minimum or fixed finance charge is similar to
TILA's rules for adjusting a dollar amount of fees that trigger
additional protections for certain home-secured loans. TILA 103(aa), 15
U.S.C. 1602(aa). At the issuer's option, the issuer may disclose in the
table any minimum or fixed finance charge below the threshold. This
flexibility is intended to facilitate compliance when adjustments are
made to the dollar threshold. For example, if an issuer has disclosed a
$1.50 minimum finance charge in its application and solicitation table
at the time the threshold is increased to $2.00, the issuer could
continue to use forms with the minimum finance charge disclosed, even
though the issuer would no longer be required to do so.
The Board recognizes that most issuers currently charge a minimum
interest charge of $1.00 or less. In consumer testing conducted by the
Board in March 2008, participants were asked to compare disclosure
tables for two credit card accounts and decide which account they would
choose. In one of the disclosure tables, a small minimum interest
charge was disclosed. In the other disclosure table, no minimum
interest charge was disclosed. None of the participants indicated that
they would choose the account where no minimum interest charge was
disclosed because of this fact. Thus, the Board agrees that when the
minimum interest charge is a de minimis amount (i.e., $1.00 or less, as
adjusted for inflation), disclosure of the minimum interest charge is
not information that consumers will use to shop for a card. The rule
would continue to require disclosure in the table if the minimum
interest charge is over this de minimis amount to ensure that consumers
are aware of significant minimum interest charges that might impact
them. The Board requests comment on whether $1.00 is the appropriate
initial threshold amount.
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. In the June 2007 Proposal, the
Board proposed to amend Sec. 226.5a(b)(4) to explicitly exclude from
the table fees charged for transactions in a foreign currency or that
take place in a foreign country. 72 FR 32948, 33046, June 14, 2007. In
an effort to streamline the contents of the table, the Board proposed
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. In addition, there are few consumers who may pay these
fees with any frequency. Thus, the Board proposed to except foreign
transaction fees from disclosure of transaction fees. The Board
proposed to include foreign transaction fees in the account-opening
summary table that is required under proposed Sec. 226.6(b)(4), so
that interested consumers can learn of the fees before using the card.
In response to the June 2007 Proposal, some consumer groups
recommended that the Board require foreign transaction fees in the
table required under Sec. 226.5a. They questioned the utility of the
Board requiring foreign transaction fees in the account-opening table
required under Sec. 226.6, but prohibiting those fees to be disclosed
in the table under Sec. 226.5a. They believed that consumers as well
as the industry would be better served by eliminating the few
differences between the disclosures required at the two stages. In
addition, one industry commenter recommended that the table required
under Sec. 226.5a include foreign transaction fees. This commenter
believed that the foreign transaction fee is relevant to any consumer
who travels in other countries, and the ability to choose a credit card
based on the presence of the fee is important. In addition, the
commenter noted that the large amount of press attention that the issue
has received suggests that the presence or absence of the fee is now of
interest to a significant number of consumers.
The Board proposes to require that foreign transaction fees must be
disclosed in the table required under Sec. 226.5a. Specifically, the
Board proposes to withdraw proposed Sec. 226.5a(b)(4)(ii) that would
have prevented a card issuer from disclosing a foreign transaction fee
in the table required by Sec. 226.5a. In addition, the Board proposes
to add comment 5a(b)(4)-2 to indicate that foreign transaction fees
charged by the card issuer are considered transaction charges for the
use of a card for purchases, and thus must be disclosed in the table
required under Sec. 226.5a. The Board is concerned about the
inconsistency in requiring foreign transaction fees in the account-
opening table required by Sec. 226.6, but prohibiting that fee in the
table required by Sec. 226.5a. In the June 2007 Proposal, the Board
proposed that issuers may substitute the account-opening table for the
table required by Sec. 226.5a. See proposed comment 5a-2, 72 FR 32948,
33105, June 14, 2007. The Board is concerned about those cases where
one issuer substitutes the account-opening table for the table required
under Sec. 226.5a (and thus is required to disclose the foreign
transaction fee) but another issuer provides the table required under
Sec. 226.5a (and thus is prohibited from disclosing the foreign
transaction fee). If a consumer was comparing the disclosures for these
two offers, it may appear to the consumer that the issuer providing the
account-opening table charges a foreign transaction fee and the issuer
providing the table required under Sec. 226.5a does not, even though
the second issuer may charge the same or higher foreign transaction fee
than the first issuer. Thus, to promote uniformity, the Board proposes
to require issuers to disclose the foreign transaction fee in both the
account-opening table required by Sec. 226.6 and the table required by
Sec. 226.5a. See proposed comment 5a(b)(4)-2. The Board also proposes
that foreign transaction fees would be disclosed in the table required
by Sec. 226.5a similar to how those fees are disclosed in the proposed
account-opening tables published in the June 2007 Proposal. See Model
Forms and Samples G-17(A), (B) and (C) 72 FR
[[Page 28873]]
32948, 33074, 33075, 33076, June 14, 2007.
5a(b)(5) Grace Period
Currently, Sec. 226.5a(b)(5), which implements TILA Section
127(c)(A)(iii)(I), requires that card issuers disclose in the table
required by Sec. 226.5a, the date by which or the period within which
any credit extended for purchases may be repaid without incurring a
finance charge. Section 226.5a(a)(2)(ii), which implements TILA Section
122(c)(2)(C), requires credit card applications and solicitation under
Sec. 226.5a to 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. 15 U.S.C. 1632(c)(2)(C).
In the June 2007 Proposal, the Board proposed 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, such as the account-opening table. 72 FR
32948, 33044, June 14, 2007.
In response to the June 2007 Proposal, one industry commenter
recommended that the Board no longer mandate the use of the term
``grace period'' in the table. Although TILA specifically requires use
of the term ``grace period,'' this commenter urged the Board to use its
exception authority to choose a term that is more understandable to
consumers. This commenter pointed out that research conducted by the
Board, by the GAO and by that commenter demonstrated that the term is
confusing as a descriptor of the interest-free period between the
purchase and the due date for customers who pay their balances in full.
This commenter suggested that the Board revise the disclosure of the
grace period in the table to use the heading ``interest-free period''
instead of ``grace period.''
As discussed in the section-by-section analysis to Sec.
226.5(a)(2), the Board proposes to use its exemption authority to
delete the requirement to use the term ``grace period'' in the table
required by Sec. 226.5a. 15 U.S.C. Sec. Sec. 1604(a) and (f) and
1637(c)(5). As the Board discussed in the June 2007 Proposal, consumer
testing conducted for the Board prior to that proposal 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 in its Report
on Credit Card Rates and Fees 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. Nonetheless, in
consumer testing conducted for the Board prior to the June 2007
Proposal, the Board found that participants tended to understand the
term 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
proposed to retain the term ``grace period.''
As discussed above, in response to the June 2007 Proposal, one
commenter performed its own testing with consumers on the grace period
disclosure proposed by the Board. This commenter found that the term
``grace period'' was still confusing to the consumers it tested, even
with the additional context given in the grace period disclosure
proposed by the Board. The commenter found that consumers understood
the term ``interest-free period'' to more accurately describe the
interest-free period between the purchase and the due date for
customers who pay their balances in full.
In consumer testing conducted by the Board prior to issuing the
June 2007 Proposal, the Board tested the phrase ``interest-free
period.'' The Board found that some consumers believed the phrase
``interest-free period'' referred to the period of time that a 0%
introductory rate would be in effect, instead of the grace period. In
consumer testing conducted by the Board in March 2008, the Board tested
disclosure tables for a credit card solicitation that used the phrase
``How to Avoid Paying Interest on Purchases'' as the heading for the
row containing the information on the grace period. Participants in
this testing generally seemed to understand this phrase to describe the
grace period. In addition, in the March 2008 consumer testing, the
Board also tested the phrase ``Paying Interest'' in the context of a
disclosure relating to a check that accesses a credit card account,
where a grace period was not offered on this access check.
Specifically, the phrase ``Paying Interest'' was used as the heading
for the row containing information that no grace period was offered on
the access check. Likewise, participants seemed to understand this
phrase to mean that no grace period was being offered on the use of the
access check. Thus, the Board proposes to revise proposed Sec.
226.5a(b)(5) to require that issuers use the phrase ``How to Avoid
Paying Interest on Purchases,'' or a substantially similar phrase, as
the heading for the row describing the grace period. If no grace period
on purchases is offered, when an issuer is disclosing this fact in the
table, the issuer must use the phrase ``Paying Interest,'' or a
substantially similar phrase, as the heading for the row describing
that no grace period is offered.
As discussed above, Sec. 226.5a(b)(5) requires that card issuers
disclose in the table required by Sec. 226.5a, the date by which or
the period within which any credit extended for purchases may be repaid
without incurring a finance charge. 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).''
In the June 2007 Proposal, the Board proposed 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). 72 FR
32948, 33046, June 14, 2007. The Board also proposed to amend comment
5a(b)(5)-1 to provide guidance for how issuers may meet the
requirements in proposed Sec. 226.5a(b)(5). Specifically, proposed
comment 5a(b)(5)-1 provided that an issuer that conditions the grace
period on the consumer paying his or her balance in full by the due
date each month, or on the consumer paying the previous balance in full
by the due date the prior month will be deemed to meet requirements in
disclosing the grace period by providing the following disclosure: ``If
you pay your entire balance in full each month, you have [at least] --
-- days after the close of each period to pay your balance on purchases
without being charged interest.'' 72 FR 32948, 33109, June 14, 2007.
In response to the June 2007 Proposal, several commenters suggested
that the Board revise the model language provided in proposed comment
5a(b)(5)-1 to describe the grace period. One commenter suggested the
following language: ``Your due date is [at least] 25 days after your
bill is totaled each month. If you don't pay your bill in full by your
due date, you will be charged interest on the remaining balance.''
Other commenters also recommended that the Board revise the disclosure
of the grace period to make clearer that the consumer must pay the
total balance in full each month by the due date to avoid
[[Page 28874]]
paying interest on purchases. In addition, some consumer groups
commented that if the issuer does not provide a grace period, the Board
should mandate specific language that draws the consumer's attention to
this fact.
In the March 2008 consumer testing, the Board tested the following
language to describe a grace period: ``Your due date is [at least] ----
days after the close of each billing cycle. We will not charge you
interest on purchases if you pay your entire balance (excluding
promotional balances) by the due date each month.'' Participants that
read this language appeared to understand it correctly. Thus, the Board
proposes to amend comment 5a(b)(5)-1 to provide this language as
guidance to issuers on how to disclose a grace period. The Board notes
that currently issuers typically require consumers to pay their entire
balance in full each month to qualify for a grace period on purchases.
Nonetheless, the Board proposes elsewhere in today's Federal Register
to prohibit most issuers from requiring consumers to pay off
promotional balances in order to receive any grace period offered on
purchases. Thus, consistent with this proposed prohibition, the
language in proposed comment 5a(b)(5)-1 indicates that the entire
balance (excluding promotional balances) must be paid each month to
avoid interest charges on purchases.
Also, in the March 2008 consumer testing, the Board tested language
to describe that no grace period was being offered. Specifically, in
the context of testing a disclosure related to an access check where a
grace period was not offered on this access check, the Board tested the
following language: ``We will begin charging interest on these check
transactions on the transaction date.'' Most participants that read
this language understood there was no way to avoid paying interest on
this check transaction, and therefore, that no grace period was being
offered on this check transaction. Thus, the Board proposes to add
comment 5a(b)(5)-2 to provide guidance on how to disclose the fact that
no grace period on purchases is offered on the account. Specifically,
proposed comment 5a(b)(5)-2 would provide that issuers may use the
following language to describe that no grace period on purchases is
offered, as applicable: ``We will begin charging interest on purchases
on the transaction date.''
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 the June 2007
Proposal, the Board proposed to retain a brief reference to the balance
computation method, but move the disclosure from the table to directly
below the table. See June 2007 proposed Sec. 226.5a(a)(2)(iii), 72 FR
32948, 33045, June 14, 2007.
Currently, the Board in Sec. 226.5a(g) 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. In the June 2007 Proposal,
the Board proposed to retain these four balance computation methods.
Elsewhere in today's Federal Register, the Board proposes to
prohibit some issuers from using a balance computation method commonly
referred to as the ``two-cycle'' balance method. Nonetheless, the Board
does not propose deleting the two-cycle average daily balance method
from the list in Sec. 226.5(g) because the prohibition, if adopted,
would not apply to all issuers, such as state chartered credit unions
that are not subject to National Credit Union Association rules.
5a(b)(15) Payment Allocation
Some credit card issuers will allocate payments in excess of the
minimum payment 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. 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.
In the consumer testing conducted for the Board prior to the June
2007 Proposal, 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. In the supplementary information accompanying the June 2007
Proposal, the Board indicated its plans to conduct further testing of
the disclosure to determine whether the disclosure can be improved to
more effectively communicate to consumers how payment allocation can
affect their interest charges.
In the June 2007 Proposal, the Board proposed to add Sec.
226.5a(b)(15) to require card issuers to explain payment allocation to
consumers. Specifically, the Board proposed that issuers explain how
payment allocation would affect consumers, if an initial discounted
rate was offered on balance transfers or cash advances but not
purchases. The Board proposed that issuers must disclose to consumers
that (1) the initial discounted 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
[[Page 28875]]
purchase balance until the entire balance is paid, including the
transferred balance or cash advance balance, as applicable. 72 FR
32948, 33047, June 14, 2007.
In response to the June 2007 Proposal, several commenters
recommended the Board test a simplified payment allocation disclosure
that covers cases other than low rate balance transfers offered with a
credit card. In consumer testing conducted for the Board in March 2008,
the Board tested the following payment allocation disclosure:
``Payments may be applied to balances with lower APRs first. If you
have balances at higher APRs, you may pay more in interest because
these balances cannot be paid off until all lower-APR balances are paid
in full (including balance transfers you make at the introductory
rate).'' Some participants understood from prior experience that
issuers typically will apply payments to lower APR balances first and
the fact that this method causes them to incur higher interest charges.
For those participants that did not know about payment allocation
methods from prior experience, the disclosure tested was not effective
in explaining payment allocation to them.
Elsewhere in today's Federal Register, the Board proposes
substantive provisions on how issuers may allocate payments. To the
extent these substantive provisions are adopted, the Board would
withdraw its proposal to require a card issuer to explain payment
allocation to consumers in the table.
5a(b)(16) Available Credit
Elsewhere in today's Federal Register, the Board proposes under
Regulation AA to address concerns regarding subprime credit cards by
prohibiting institutions from financing security deposits and fees for
credit availability (such as account-opening fees or membership fees)
if those charges would exceed 50 percent of the credit limit during the
first twelve months and from collecting at account opening fees that
are 25 percent or more of the credit limit. Under the June 2007
Proposal, card issuers that require fees or a security deposit to issue
a card that are 25 percent or more of the minimum credit limit offered
on the account must offer an example in the table provided with
applications and solicitations of the amount of available credit the
consumer would have after paying the fees or security deposit, assuming
the creditor receives the minimum credit limit. 72 FR 32948, 33047,
June 14, 2007. If the approach under Regulation AA is adopted as
proposed, appropriate revisions will be made to ensure consistency
among the regulatory requirements and to facilitate compliance when the
Board adopts revisions to the Regulation Z rules for open-end (not
home-secured) credit.
5a(d) Telephone Applications and Solicitations
5a(d)(1) Oral Disclosure
Section 226.5a(d) specifies rules for providing cost disclosures in
oral applications and solicitations initiated by a card issuer.
Pursuant to TILA 127(c)(2), 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 consumer
uses the card, provided that the card issuer provides the disclosures
later in a written form. 15 U.S.C. 1637(c)(2).
Currently, under Sec. 226.5a(d)(1), if the issuer provides the
oral disclosures, the issuer must provide information required to be
disclosed under Sec. 226.5a(b)(1) through Sec. 226.5a(b)(7). This
includes information about (1) APRs; (2) fees for issuance or
availability of credit; (3) minimum interest charges; (4) transaction
charges for purchases; (5) grace period on purchases; (6) balance
computation method; and (7) as applicable, a statement that charges
incurred by use of the charge card are due when the periodic statement
is received.
In the June 2007 Proposal, the Board did not propose to revise
Sec. 226.5a(d)(1). In response to the June 2007 Proposal, some
consumer groups suggested that the Board revise Sec. 226.5a(d)(1) to
require issuers that are marketing credit cards by telephone, to
disclose additional information to consumers at the time of the phone
call, such as the cash advance fee, the late payment fee, the over-
limit fee, the balance transfer fee, information about penalty rates,
any fees for required insurance, or the disclosure about available
credit in proposed Sec. 226.5a(b)(16). 72 FR 32948, 33047, June 14,
2007.
The Board proposes to amend Sec. 226.5a(d)(1) to require that if
an issuer provides the oral disclosures, the issuer must also disclose
orally the information about available credit in proposed Sec.
226.5a(b)(16) if required to do so, pursuant to its authority under
TILA Section 127(c)(5). 15 U.S.C. 1637(c)(5). Proposed Sec.
226.5a(b)(16) provides 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, 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
required fees or security deposit are debited to the account, assuming
that the consumer receives the minimum credit limit offered on the
relevant account. The issuer also must disclose the available credit
remaining after including any optional fees for issuance or
availability of credit that may be debited to the account.
Currently, issuers that provide the oral disclosures must inform
consumers about the fees for issuance and availability of credit that
are applicable to the card. The Board believes that the information
about available credit would complement this disclosure, by disclosing
to consumers the impact of these fees on the available credit. The
Board does not propose to require issuers to provide orally other fees
applicable to the account, such as the cash advance fee, the late
payment fee, the over-limit fee, the balance transfer fee or fees for
required insurance. The Board is concerned that providing this
information in oral conversations about credit cards would lead to
information overload for consumers. The Board notes that issuers
providing oral disclosures currently would be required to provide
information about the penalty rate to consumers because this
information is required to be disclosed pursuant to Sec. 226.5a(b)(1).
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.
Descriptions of balance computation methods. Creditors are
required, under Sec. 226.6(a)(1)(iii) and Sec. 226.6(b)(2)(i)(D) of
the June 2007 Proposal, to explain the method used to determine the
balance upon which rates are applied. 72 FR 32948, 33049, June 14,
2007. Model Clauses that explain commonly used methods, such as the
average daily balance method, are at Appendix G-1.
[[Page 28876]]
The Model Clauses at Appendix G-1 were republished without change
in the June 2007 Proposal. 72 FR 32948, 33066, June 14, 2007. The Board
requested comment on whether model clauses for methods such as the
``previous balance'' or ``adjusted balance'' method should be
eliminated because they are no longer used. Few commenters addressed
the issue. Commenters recommended retaining the existing clauses, and
two commenters asked the Board to add a model clause explaining the
daily balance method. The Board proposes to add a new paragraph (f) to
describe a daily balance method in G-1 and in a new G-1A. In addition,
a new Appendix G-1A is proposed for open-end (not home-secured) plans.
The clauses in G-1A refer to ``interest charges'' rather than ``finance
charges'' to explain balance computation methods. The Board's consumer
testing prior to the June 2007 Proposal indicated that consumers
generally had a better understanding of ``interest charge'' than
``finance charge,'' which is reflected in the Board's use of
``interest'' (rather than ``finance charge'') in proposed Account-
opening Samples and to describe costs other than fees on periodic
statements. See proposed Samples G-17(B) and G-17(C) and Sec.
226.7(b)(6)(iii). 72 FR 32948, 33075, 33076, and 33052, June 14, 2007.
Comment App. G-1 is revised to clarify that for HELOCs subject to Sec.
226.5b, creditors may properly use the model clauses in either Appendix
G-1 or G-1A. References throughout the regulation and commentary to
Model Clauses in G-1 will be updated to reflect the addition of G-1A
when the Board adopts revisions to the rules for open-end credit (not
home-secured) plans.
6(b)(2) Rules Relating to Rates for Open-End (Not Home-Secured) Plans
The June 2007 Proposal sets forth in Sec. 226.6(b)(2) rules
related to disclosing rates for open-end (not home-secured) plans. 72
FR 32948, 33049, June 14, 2007. Creditors must disclose information
about any rates that initially apply, and about rates that may apply
after the initial rate ends. Under current rules, comment 6(a)(2)-11
provides that creditors need not disclose increased rates that may
apply if credit privileges are permanently terminated. That rule was
retained in the June 2007 Proposal, but was moved to Sec.
226.6(b)(4)(ii)(C) and comment 6(b)(2)(iii)-2.iii., to be consistent
with Sec. 226.5a(b)(1)(iv) in the June 2007 Proposal. 72 FR 32948,
33050, 33115, June 14, 2007. As discussed in the section-by-section
analysis to Sec. 226.5a(b)(1), the Board proposes to eliminate that
exception; accordingly, the references to increased rates upon
permanently terminated credit privileges in Sec. 226.6(b)(4)(ii)(C)
and in paragraph iii. to comment 6(b)(2)(iii)-2 are removed in this May
2008 Proposal.
6(b)(4) Tabular Format Requirements for Open-End (Not Home-Secured)
Plans
In June 2007, the Board proposed in Sec. 226.6(b)(4) to 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
June 2007 Proposal. Proposed forms under G-17 in Appendix G illustrate
the account-opening tables. 72 FR 32948, 33049, 33074, 33075, 33076,
June 14, 2007.
Lines of credit without credit cards. The June 2007 Proposal to
require a tabular summary of key terms to be provided before an account
is opened applies to all open-end loan products, except HELOCs. This
would include products such as credit card accounts, traditional
overdraft credit plans, personal lines of credit, and revolving plans
offered by retailers without a credit card.
Some industry commenters asked the Board to limit any new
disclosure rules to credit card accounts. They acknowledged that credit
card accounts typically have complex terms, and a tabular summary is an
effective way to present key disclosures. In contrast, these commenters
noted that other open-end (not home-secured) products such as personal
lines of credit or overdraft plans have very few of the cost terms
required to be disclosed. Alternatively, if the Board continued to
apply the new requirements to open-end plans other than HELOCs,
commenters asked that the Board consider publishing model forms to ease
compliance.
The Board continues to believe that even for non-credit card
accounts 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. To ease
compliance and address commenters' concerns, the Board is publishing
proposed Sample G-17(D) for open-end plans such as lines of credit or
overdraft plans.
6(b)(4)(iii) Fees
6(b)(4)(iii)(D) Minimum Finance Charge
TILA Section 127(a)(3), which is currently implemented in Sec.
226.6(a)(4), requires creditors to disclose in account-opening
disclosures the amount of the finance charge, including any minimum or
fixed amount imposed as a finance charge. 15 U.S.C. 1637(a)(3). In the
June 2007 Proposal, the Board required creditors to disclose in
account-opening disclosures the amount of any finance charges in Sec.
226.6(b)(1)(A), and further required creditors to disclose any minimum
finance charge in the account-opening table in Sec.
226.6(b)(4)(iii)(D). 72 FR 32948, 33049, 33050, June 14, 2007.
In this May 2008 Proposal, the Board would require card issuers to
disclose in the table provided with applications or solicitations
minimum or fixed finance charges in excess of $1 that could be imposed
during a billing cycle (along with a formula for adjusting the
threshold over time) and a brief description of the charge, for the
reasons discussed in the section-by-section analysis to Sec.
226.5a(b)(3). At the card issuer's option, the card issuer may disclose
in the table any minimum or fixed finance charge below the threshold.
The Board proposes the same disclosure requirements to apply to the
account-opening table for the same reasons. Section 226.6(b)(4)(iii)(D)
would be revised and new comments 6(b)(4)(iii)-1 and -2 would be added,
accordingly. As noted in the section-by-section analysis to Sec.
226.5a(b)(4), under the June 2007 Proposal, card issuers may substitute
the account-opening table for the table required by Sec. 226.5a.
Conforming the minimum finance charge disclosure requirement for the
two tables promotes consistency and uniformity.
Under proposed Sec. 226.5(b)(1)(ii) of the June 2007 Proposal,
charges that are imposed as part of the plan may be provided at any
time before the consumer agrees to pay or becomes obligated to pay for
the charge, pursuant to the disclosure timing requirements of Sec.
226.5(b)(1)(ii). 72 FR 32948, 33044, June 14, 2007. Creditors may
provide disclosures of these charges in writing but creditors are not
required to do so. 72 FR 32948, 33043, June 14, 2007. See section-by-
section analysis to Sec. 226.5(a)(1) above. If creditors are required
to disclose in the account-opening table minimum finance charges in
excess of $1, minimum or fixed finance charges of $1 or less would no
longer be required to be disclosed in writing at account-opening. The
Board believes creditors will continue to do so, to meet the timing
requirement to
[[Page 28877]]
disclose the fee before the consumer becomes obligated for the charge.
And creditors that choose to charge more than $1 would be required to
include the cost in the account-opening table.
6(b)(4)(iv) Grace Period
Under TILA, creditors providing disclosures with applications and
solicitations must discuss grace periods on purchases; at account
opening, creditors must explain grace periods more generally. 15 U.S.C.
1637(c)(1)(A)(iii); 15 U.S.C. 1637(a)(1). Section 226.6(b)(4)(iv) in
the June 2007 Proposal required creditors to 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. 72 FR 32948, 33050, June 14, 2007. As discussed in the section-
by-section analysis to Sec. 226.5(a)(2) and to Sec. 226.5a(b)(5), the
Board is revising provisions relating to the description of grace
periods. Section Sec. 226.6(b)(4)(iv) is revised and comment
6(b)(4)(iv)-1 is added, consistent with the proposed revisions to Sec.
226.5a(b)(5) and commentary. A reference to required use of the phrase
``grace period'' in comment 6(b)(4)-3 of the June 2007 Proposal is
withdrawn. 72 FR 32948, 33115, June 14, 2007.
6(b)(4)(vi) Payment Allocation
Section 226.6(b)(4)(vi) of the June 2007 Proposal required
creditors to disclose in the account-opening tabular summary, if
applicable, the information regarding how payments will be allocated if
the consumer transfers balances at a low rate and then makes purchases
on the account. 72 FR 32948, 33050, June 14, 2007. The payment
allocation disclosure requirements proposed for the account-opening
table mirror the proposed requirements in Sec. 226.5a(b)(15) to be
provided in the table given at application or solicitation. 72 FR
32948, 33047, June 14, 2007. Elsewhere in today's Federal Register, the
Board proposes limitations on how creditors may allocate payments on
outstanding credit card balances. For the reasons discussed in the
section-by-section analysis to Sec. 226.5a(b)(15), the Board would
withdraw proposed Sec. 226.6(b)(4)(vi) to the extent the substantive
rule is adopted.
6(b)(4)(vii) Available Credit
The Board proposed in June 2007 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) applied 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. 72 FR 32948, 33050, June
14, 2007. The account-opening disclosures regarding available credit
are also required for credit and charge card applications or
solicitations. See proposed Sec. 226.5a(b)(16), 72 FR 32948, 33047,
June 14, 2007.
The Board proposes an additional disclosure to inform consumers
about their right to reject a plan when fees have been charged and the
consumer receives account-opening disclosures but has not used the
account or paid a fee after receiving a billing statement (other than
an application fee that is charged to all consumers who apply for the
account whether or not they are accepted for the credit). Creditors
must provide consumers with notice about the right to reject the plan
in such circumstances. The Board believes that tailoring the disclosure
to impact creditors offering subprime credit card accounts is
appropriately narrow, but seeks comment on the scope of the proposed
disclosure. The Board proposes a new comment 6(b)(4)(vii)-1 to provide
creditors with model language to comply with the disclosure
requirement, and conforming changes would be made to account-opening
model forms and samples, if the revision to Sec. 226.6(b)(4)(vii) is
adopted.
As discussed in the section-by-section analysis to Sec.
226.5a(b)(16), elsewhere in today's Federal Register, the Board
proposes rules under Regulation AA regarding card issuers' ability to
finance certain fee amounts, and when start-up fees may be collected
during the first twelve months after the account is opened. If the
approach under Regulation AA is adopted as proposed, appropriate
revisions will be made to ensure consistency among the regulatory
requirements and to facilitate compliance when the Board adopts
revisions to the Regulation Z rules for open-end (not home-secured)
credit.
Section 226.7 Periodic Statements
7(b) Rules Affecting Open-End (Not Home-Secured) Plans
7(b)(11) Due Date; Late Payment Costs
In the June 2007 Proposal, the Board added Sec. 226.7(b)(11) to
implement TILA amendments in the Bankruptcy Act that require 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 Board also proposed to require
that creditors disclose on the periodic statement any cut-off hour for
receiving payments closely proximate to each reference of the due date,
if the cut-off hour is before 5 p.m. on the due date. If the cut-off
hours prior to 5 p.m. differ depending on the method of payment (such
as by check or via the Internet), creditors would have been required to
state the earliest time without specifying the method to which the cut-
off hour applies, to avoid information overload. See proposed Sec.
226.7(b)(11)(i)(B), Sec. 226.7(b)(13). Under the June 2007 Proposal,
cut-off hours of 5 p.m. or later could continue to be disclosed under
the existing rule (including on the reverse side of periodic
statements). 72 FR 32948, 33053, June 14, 2007.
Comments were divided on the proposed cut-off hour disclosure for
periodic statements. Industry representatives that have a cut-off hour
earlier than 5 p.m. for an infrequently used payment means expressed
concern about consumer confusion if the more commonly used payment
method is later than 5 p.m. Consumer groups urged the Board also to
adopt a ``postmark'' date on which consumers could rely to demonstrate
their payment was mailed sufficiently in advance for the payment to be
timely received, or to eliminate cut-off hours altogether. Both
consumer groups and industry representatives asked the Board to clarify
what time zone by which the cut-off hour should be measured.
As discussed in the section-by-section analysis to Sec. 226.10(b),
the Board proposes that to comply with the requirement in Sec. 226.10
to provide reasonable payment instructions, a creditor's cut-off hour
for receiving payments by mail can be no earlier than 5 p.m. in the
location where the creditor has designated the payment to be sent.
Comment is requested on whether there continues to be a need for
creditors to disclose cut-off hours before 5 p.m. for payments made by
telephone or electronically.
Section 226.9 Subsequent Disclosure Requirements
9(b) Disclosures for Supplemental Credit Access Devices and Additional
Features
Section 226.9(b) currently requires certain disclosures when a
creditor adds a credit device or feature to an existing
[[Page 28878]]
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 at account opening, then disclosure of the differing
terms must be given before the consumer uses the new feature or device.
The June 2007 Proposal addressed disclosures that must be provided
with checks that access credit card accounts (that are not home-
secured). A new Sec. 226.9(b)(3) would require certain information to
be disclosed each time that such checks are mailed to a consumer, for
checks mailed more than 30 days following the delivery of the account-
opening disclosures. Specifically, the June 2007 Proposal would require
that 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
APR; (3) any transaction fees applicable to the checks; and (4) whether
a grace period applies to the checks, and if one does not apply, a
statement that interest will be charged immediately. Proposed Sec.
226.9(b)(3) would require that these key terms be disclosed in a
tabular format substantially similar to Sample G-19 in Appendix G. 72
FR 32948, 33056, 33082, June 14, 2007.
The Board proposes to add a disclosure to the summary table
required by Sec. 226.9(b)(3) in the June 2007 Proposal, pursuant to
its authority under TILA Section 105(a). 15 U.S.C. 1604(a). The
additional disclosure is set forth in proposed Sec. 226.9(b)(3)(C) and
would require additional information regarding the expiration date of
any offer of a discounted initial rate. If a discounted initial rate
applies to the checks, the creditor would be required to disclose any
date by which the consumer must use the checks in order to receive the
discounted initial rate. If the creditor will honor the checks if they
are used after the disclosed date but will apply to the advance an APR
other than the discounted initial rate, the creditor must disclose that
fact and the type of APR that will apply under those circumstances.
The Board believes that it is important that consumers receive
clear disclosures regarding the expiration date of any offer of a
promotional rate that would be applicable to checks that access a
credit card account. This disclosure is particularly important if the
creditor will honor the checks, but at a higher interest rate, after
the expiration date of the promotional rate offer. A consumer who is
unaware of the expiration date for the offer of a promotional rate may
use the check with the expectation of receiving the promotional rate,
only to later discover, after he or she is contractually bound on the
advance, that the check was subject to a higher interest rate than
expected. This disclosure is designed to enable a consumer to better
evaluate what the cost of using the check will be, and to make an
informed decision whether to use the check or an alternative source of
credit.
In consumer testing conducted for the Board in March 2008, the
Board tested a disclosure of the date by which a consumer must use
checks that access a credit card account in order to qualify for a
discounted initial rate offer. This disclosure was labeled ``Use by
Date'' and stated ``You must use this check by 4/1/08 for the
promotional APR to apply. If you use the check after that date, we may
still honor the check but you will not receive the promotional APR.
Instead, the standard APR for Cash Advances will apply.'' The responses
given by testing participants indicated that they generally did not
understand prior to the testing that there may be a use-by date
applicable to an offer of a promotional rate for a check that accesses
a credit card account. However, the participants that read the tested
language understood that the standard cash advance rate, not the
promotional rate, would apply if the check was used after April 1,
2008. Thus, the Board believes that this disclosure may improve
consumer understanding of the terms applicable to these checks. In
addition to proposed Sec. 226.9(b)(3)(C), the Board also proposes a
corresponding change to Sample G-19 to include the language that was
tested in March 2008.
Paragraph 9(b)(3)(E)
Section 226.9(b)(3)(D) in the June 2007 Proposal required creditors
offering access checks to disclose, among other information, whether or
not a period exists in which consumers may avoid the imposition of
finance charges and, if so, the length of the period. 72 FR 32948,
33056, June 14, 2007. As discussed in the section-by-section analysis
to Sec. 226.5(a)(2), Sec. 226.5a(b)(5) and Sec. 226.6(b)(4)(iv), the
Board is revising provisions relating to the description of grace
periods. Section 226.9(b)(3)(E), as renumbered in the May 2008
Proposal, is revised and comment 9(b)(3)(E)-1 is added, consistent with
the proposed revisions to Sec. 226.5a(b)(5) and Sec. 226.6(b)(4)(iv)
and related commentary. The Board also proposes to revise Sample G-19
for conformity with the proposed revisions.
Finally, the Board also is deleting from Sec. 226.9(b)(3)(A), as
proposed in June 2007, the requirement that a creditor use the term
``introductory'' or ``intro'' in immediate proximity to the listing of
the discounted initial rate for checks that access a credit card
account. This change is proposed for consistency with proposed
revisions to Sec. 226.16(e)(2), which is discussed in more detail in
the section-by-section analysis below and creates a new definition of
``promotional rate'' to be used to describe offers of discounted
initial interest rates that are made in connection with existing
accounts. The Board is aware that checks that access a credit card
account are provided to consumers that already have an existing credit
card account, so the term ``promotional rate'' may be a more
appropriate term than `` introductory rate'' for describing any
discounted initial rate applicable to such checks. Sample G-19 is
revised accordingly.
9(c) Change in Terms
9(c)(2) Rules Affecting Open-End (Not Home-Secured) Plans
9(c)(2)(ii) Charges Not Covered by Sec. 226.6(b)(4)
In the June 2007 Proposal, the Board proposed Sec.
226.9(c)(2)(ii), which stated that if a creditor increases a charge, or
introduces a new charge, required to be disclosed under Sec.
226.6(b)(1) but not covered by Sec. 226.6(b)(4), the creditor may
provide notice to the consumer at a relevant time before the consumer
agrees to or becomes obligated to pay the charge, and may provide the
notice orally or in writing. 72 FR 32948, 33056, June 14, 2007. The
Board proposes to amend comment 9(c)(2)(ii)-1 to reflect the
permissibility of electronic notice and to clarify (by a cross-
reference to
[[Page 28879]]
comment 5(a)(1)(ii)(A)-1) that electronic notice may be provided
without regard to the notice and consent requirements of the E-Sign Act
when a consumer requests a service in electronic form.
9(c)(2)(iii) Disclosure Requirements
As discussed elsewhere in today's Federal Register, subject to
certain exceptions, the Board proposes to prohibit increasing the APR
applicable to balances outstanding at the end of the fourteenth day
after a notice disclosing the change in the APR is provided to the
consumer. A creditor would, however, be permitted to apply a rate
increase to such outstanding balances when the rate increase is due to:
the operation of an index or formula; the expiration of a promotional
rate; the loss of a promotional rate due to one or more events
specified in the account agreement, provided that the bank increases
the rate to the rate that would have applied after expiration of the
promotional rate; or the consumer's failure to make the required
minimum periodic payment within 30 days from the due date for that
payment.
For consistency with the proposed substantive restrictions
regarding the application of increased APRs to pre-existing balances,
the Board proposes a new Sec. 226.9(c)(2)(iii)(A)(7) to clarify that a
creditor that provides a change in terms notice in connection with an
increase in an APR must disclose the balances to which the increased
rate will be applied, pursuant to its authority under TILA Section
105(a). 15 U.S.C. 1604(a). If the creditor is subject to restrictions
on rate increases to existing balances proposed elsewhere in today's
Federal Register or other applicable law, the creditor would also
identify the balances to which the current rate will continue to apply.
The Board believes that it is important for consumers to be clearly
notified when the current rate, rather than the increased rate, will
continue to apply to balances already outstanding on their accounts.
This disclosure could assist consumers to make better-informed
decisions regarding usage of their accounts. For example, if a consumer
erroneously believed that a rate increase would be applicable to the
outstanding balance on the account, that consumer might seek an
alternative source of credit with which to pay off the outstanding
balance, even if the cost of such alternative credit may be higher than
the rate that is in fact applicable to such balance.
The Board proposes to revise Sample G-20 in Appendix G in order to
include a disclosure that would comply with the new proposed
requirement. Comment 9(c)(2)(iii)(A)-8, which discusses the content of
Sample G-20, is revised accordingly.
9(g) Increase in Rates Due to Delinquency or Default as a Penalty
In the June 2007 Proposal, the Board proposed to add a new section
226.9(g), which would require that a creditor provide a consumer with
45 days' advance notice when a rate is increased due to the 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. 72 FR
32948, 33058, June 14, 2007. As discussed elsewhere in today's Federal
Register, the Board also proposes to prohibit the application of a
penalty rate to balances that are outstanding at the end of the
fourteenth day after a notice disclosing the change in the APR is
provided to the consumer, except in the event that a consumer fails to
make the required minimum periodic payment within 30 days from the due
date for that payment.
The Board proposes to add new illustrations to comment 9(g)-1, to
provide guidance on the impact of substantive protections regarding the
application of increased APRs to pre-existing balances on the timing
requirements of 45 days' advance notice before delinquency or default
rates or penalty rates may be imposed.
The Board also proposes to revise Sec. 226.9(g)(3)(i)(D) of the
June 2007 Proposal, which required creditors to disclose the balances
to which a delinquency or default rate or penalty rate would be
applied, and a new Sec. 226.9(g)(3)(i)(E), for conformity with the
proposed substantive restriction regarding increased APRs on pre-
existing balances. Section 9(g)(3)(i)(D) would be revised to require
creditors subject to the proposed substantive restrictions to disclose
how balances may be affected if the consumer fails make the required
minimum periodic payment within 30 days from the due date for that
payment. New Sec. 226.9(g)(3)(i)(E) would require a description of any
balances to which the current rate will continue to apply as of the
effective date of the rate increase, unless the consumer fails to make
a required minimum periodic payment within 30 days from the due date
for that payment. Conforming changes are also made to Sample G-21 in
Appendix G.
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 previously 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 currently must be disclosed on the periodic
statement; many creditors put the cut-off time on the back of
statements.
10(b) Specific Requirements for Payments
Reasonable requirements for cut-off times. In the June 2007
Proposal, the Board sought to address concerns that cut-off times may
effectively result in a due date that is one day earlier in practice
than the due date disclosed. The Board did not propose to require a
minimum cut-off time. Rather, the Board proposed a disclosure-based
approach, which would have created a 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 in close proximity to 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. 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 have required that creditors disclose only the earliest
cut-off time, if earlier than 5 p.m. on the due date. 72 FR 32948,
33053, 33054, June 14, 2007.
Although some consumers supported the proposed cut-off time
disclosure, other consumers and consumer groups thought that the
proposed disclosure would provide only a minimal benefit to consumers.
These commenters recommended that the Board consider other approaches
to more effectively address cut-off times. Consumer groups recommended
that the Board adopt a postmark rule, under which the timeliness of a
consumer's payment would be evaluated based on the date on which the
payment was postmarked.
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Some consumers commented that cut-off times are unfair and should be
abolished, while other consumers suggested that the Board establish
minimum cut-off times, for example, 4:00 p.m. in the time zone in which
the billing center is located.
Industry commenters expressed concern that the proposed disclosure
would prove confusing to consumers. They noted that many creditors vary
their cut-off times by payment channel and that disclosure of only the
earliest cut-off hour would be inaccurate and misleading. They
suggested that, if the Board retains this requirement, a creditor
should be permitted to identify to which payment method the cut-off
time relates, disclose the cut-off hours for all payment channels, or
to disclose the cut-off hour for the payment method used by the
consumer, if known. Industry commenters also asked that the Board relax
the location requirement for the cut-off time disclosure on the
periodic statement.
Both consumer groups and industry commenters urged the Board to
clarify which time zone should be considered when determining if the
cut-off time is prior to 5 p.m.
In light of feedback received on the June 2007 Proposal, the Board
proposes to address cut-off times for mailed payments by providing
guidance as to the types of requirements that would be reasonable for
creditors to impose for payment received by mail. In part, the Board
proposed to move guidance currently contained in the commentary to the
regulation. Currently, comment 10(b)-1 provides examples of specific
payment requirements creditors may impose, and comment 10(b)-2 states
that payment requirements must be reasonable, in particular that it
should not be difficult for most consumers to make conforming payments.
The Board proposes to move the substance of comments 10(b)-1 and 10(b)-
2 to Sec. Sec. 226.10(b)(1) and (2) of the regulation. Under the May
2008 Proposal, Sec. 226.10(b)(1) would state the general rule, namely
that a creditor may specify reasonable requirements that enable most
consumers to make conforming payments. The Board would expand upon the
example in current comment 10(b)-1(i)(B) in new Sec. 226.10(b)(2)(ii),
which would state that it would not be reasonable for a creditor to set
a cut-off time for payments by mail that is earlier than 5 p.m. at the
location specified by the creditor for receipt of such payments.
The language in current comment 10(b)-2 stating that it should not
be difficult for most consumers to make conforming payments would not
be included in the proposed regulatory text. The Board believes that
this language is unnecessary and that in substance is duplicative of
the requirement that any payment requirements be reasonable and enable
most consumers to make conforming payments.
The Board believes that it is important that the requirements that
a creditor sets for payments be reasonable, so that most consumers will
be able to make payments that conform with those requirements. If the
creditor's requirements make it unduly burdensome for a consumer to
make a conforming payment, then a consumer may become subject to the
fees and other penalties associated with late payments, without having
a reasonable opportunity to avoid those adverse consequences. With
regard to cut-off times, any cut-off time specified by a creditor on
the due date for payments should afford consumers a reasonable
opportunity to make payment on that date.
At the same time, the Board is mindful of the burden that
specifying a particular cut-off time or times by regulation could have
on creditors. Each creditor may have different internal processes and
systems, and may work with different vendors and service providers, so
a one-size-fits-all approach may not be feasible. As a result, while
the proposed regulation would contain one example of an unreasonable
cut-off time for payments made by mail, it would not impose a single
cut-off time on all creditors for all methods of payment. The Board
requests comment on the operational burden that the proposed rule would
impose on creditors.
The Board has not proposed a postmark rule as suggested by consumer
group commenters. In part, this is because the Board proposes elsewhere
in today's Federal Register a rule that would require a creditor to
provide consumers with a reasonable time to make payments. The Board
believes this substantive protection effectively addresses the concerns
expressed by consumer groups regarding insufficient time to make
payments. The Board also believes that it would be difficult for
consumers to retain proof of when their payments were postmarked, in
order to challenge the prompt crediting of payments under such a rule.
A consumer generally is not given proof of the postmark date at the
time that he or she mails a payment; to effectively retain evidence of
the postmark date, a consumer would in many cases need to pay extra
postage charges in order to receive a proof of mailing. In addition, a
mailed payment may not have a legible postmark date when it reaches the
creditor or creditor's service provider. Finally, the Board believes
there would be significant operational costs and burdens associated
with capturing and recording the postmark dates for payments.
Under the June 2007 Proposal, Sec. 226.10(b) contained a cross-
reference to Sec. 226.7(b)(11), regarding the disclosure of cut-off
hours on periodic statements. In the section-by-section analysis to
Sec. 226.7(b)(11), the Board solicits comment on whether disclosure of
cut-off hours near the due date for payment methods other than mail
(e.g., telephone or internet) should be retained. If the Board adopts
revisions to Sec. 226.7 that do not require disclosure of any cut-off
hour closely proximate to the due date, the proposed cross-reference
would be withdrawn.
June 2007 proposed revisions to comment 10(b)-2, regarding payments
made via a creditor's Web site, remain unchanged.
10(d) Crediting of Payments When Creditor Does Not Receive or Accept
Payments on Due Date
Holiday and weekend due dates. The Board's June 2007 Proposal did
not address the practice of setting due dates on dates on which a
creditor does not accept payments, such as weekends or holidays. A
weekend or holiday due date might occur, for example, if a creditor
sets its payment due date on the same day (the 25th, for example) of
each month. While in most months the 25th would fall on a business day,
in other months the 25th might be a weekend day or holiday, due to
fluctuations in the calendar. However, the Board received a number of
comments from consumer groups, individual consumers, and a United
States Senator criticizing weekend or holiday due dates. The comment
letters expressed concern that a consumer whose due date falls on a
date on which the creditor does not accept payments must pay one or
several days early in order to avoid the imposition of fees or other
penalties that are associated with a late payment. Comment letters from
consumers indicated that, for many consumers, weekend and holiday due
dates are a common occurrence. Some of these commenters suggested that
the Board mandate an automatic grace period until the next business day
for any such weekend or holiday due dates. Other commenters recommended
that the Board prohibit weekend or holiday due dates.
In response to these comments, the Board proposes a new Sec.
226.10(d) that
[[Page 28881]]
would require a creditor to treat a payment received by mail the next
business day as timely, if the due date for the payment is a day on
which the creditor does not receive or accept payment by mail, such a
day on which the U.S. Postal Service does not deliver mail. Thus, a
consumer whose due date falls on a Sunday on which a creditor does not
accept payment by mail would not be subject to late payment fees or
increases in the interest rate applicable to the account due to late
payment if the consumer's payment were received by mail on the next day
that the creditor does accept payment by mail. The Board proposes this
rule using its authority to regulate the prompt posting of payments
under TILA section 164, which states that ``[p]ayments received from an
obligor under an open end consumer credit plan by the creditor shall be
posted promptly to the obligor's account as specified in regulations of
the Board.'' 15 U.S.C. 1666c.
The Board acknowledges that this proposal may require creditors to
modify their systems to ensure that payment due dates do not fall on
dates when they do not receive mail or to backdate payments or waive
fees and interest, which would impose some degree of burden on
creditors. The Board solicits comment on the extent of the burden
associated with any system modification that would be required to
comply with the proposed rule.
The proposed rule in Sec. 226.10(d) would be limited to payments
made by mail. The Board is particularly concerned about payments by
mail because the consumer's time to pay, as a practical matter, is the
most limited for those payments, since a consumer paying by mail must
account for the time that it takes the payment to reach the creditor.
The Board solicits comment as to whether this rule also should address
payments made by other means, such as telephone payments or payments
made via the internet.
The Board notes that it also received a large number of comment
letters from consumers who expressed concern more generally that the
amount of time consumers are given to pay their bills is continually
decreasing. The Board believes that its proposal under Regulation Z
regarding weekend or holiday due dates will complement the Board's
proposal to require banks to provide a consumer with a reasonable
amount of time to make payments.
Section 226.12 Special Credit Card Provisions
12(a) Issuance of Credit Card
TILA Section 132, which is implemented by Sec. 226.12(a) of
Regulation Z, generally prohibits creditors from issuing credit cards
except in response to a request or application. Section 132 explicitly
exempts from this prohibition credit cards issued as renewals of or
substitutes for previously accepted credit cards. 15 U.S.C. 1642.
The Board has been asked over the years to provide guidance on
actions card issuers may take to ``substitute'' on an unsolicited basis
a new card for an accepted credit card. See Comment 12(a)(2)-2. For
example, the Board has provided guidance that card issuers may, on an
unsolicited basis, substitute a new card that reflects a change in the
card issuer's name, or that can be used to access new account features
such as when the card originally accepted could be used only for
purchases and the creditor substitutes a new card that can also be used
to obtain cash advances.
The Board has also provided guidance on limitations on an issuer's
ability to issue a new card as a substitute for an accepted card. For
example, if the originally accepted card is honored only at Merchant A,
the issuer cannot substitute a new card that is honored only at
Merchant B. To be a permissible substitution in this example, the new
card must continue to be honored by Merchant A, even though the card
may also be used at Merchant B or other merchants. Card issuers rely on
this interpretation to substitute on an unsolicited basis a general-
purpose bank card that is honored at many merchants for a card
originally honored by a single merchant.
Over the years, consumers have expressed their confusion, and in
some cases frustration, when they receive on an unsolicited basis a new
general-purpose card (which may be honored at multiple merchants) that
is sent in substitution for a card originally honored by a single
merchant. They express concern about potential identity theft when
cards are sent out without warning or notice, and frustration about the
issuer's unilateral decision to change fundamentally the potential uses
of the card from that originally requested.
The June 2007 Proposal did not propose changes to the Board's
current guidance on issuing credit cards in renewal of or substitution
for an accepted credit card. Consumer groups urged the Board to limit
the ability of card issuers to issue on an unsolicited basis a new card
for an accepted card, for example, if the credit features differ
greatly or if the accepted card has not been used for an extended
period of time. Industry commenters, on the other hand, generally
supported the Board's proposal to retain the existing guidance on
permissible renewals and substitutions.
The Board has become aware of issuances in which general-purpose
cards were sent on an unsolicited basis as a substitute for the
merchant card where the accounts for the originally accepted card had
not been active with the merchant for a long period of time. This
practice is permitted under current rules. Some consumers who responded
to the June 2007 Proposal urged the Board to limit issuers' ability to
send cards without consent or warning in these circumstances, due to
concerns of cardholder security and identity theft.
The Board proposes a narrow response to address concerns about the
unsolicited issuance of new cards for accepted cards on accounts that
have been inactive for a long period of time. Under the proposed
revision to comment 12(a)(2)-2.v., a card issuer that proposes to
change the merchant base that will honor the card, such as from a card
that is honored by a single merchant to a general-purpose card, may not
properly substitute the new card for the accepted card without a
specific request or application if the account has been inactive for a
24 month period preceding the issuance of the substitute card. Changing
the merchant base to enable the card holder to use an accepted card at
a new affiliate of the merchant is not affected by the proposal. Under
the proposal, an account is considered inactive if no credit has been
extended and the account has no outstanding balance. See proposed Sec.
226.11(b)(2), which implements TILA amendments in the Bankruptcy Act
affecting accounts that are ``inactive'' for three consecutive months.
72 FR 32948, 33058, June 14, 2007. The Board requests comment on
whether a longer time period, such as 36 months, would be more
appropriate.
The proposal would not affect the renewal or substitution of cards
by the original card issuer when, for example, a consumer opens a
credit card account with a merchant to take advantage of a discounted
purchase price or a low introductory rate, and does not use the card
for a number of years. In that case, the issuer could send a new card
on an unsolicited basis in renewal of or substitution for the
originally accepted card, even if the new card could be used to obtain
additional credit features with the retailer. Nor does the proposal
limit
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creditors' ability to send a general-purpose card in place of an
inactive retail card if the consumer specifically requests or applies
for the general-purpose card. The proposal would, however, address
consumers' confusion when a card issued by a creditor with whom the
consumer may have no previous relationship arrives in the mail on an
unsolicited basis, as a substitute for a retail card account the
consumer has not used in some time.
12(b) Liability of Cardholder for Unauthorized Use
TILA and Regulation Z provide protections to consumers against
losses due to unauthorized transactions on open-end plans. See TILA
Section 133; 15 U.S.C. 1643, Sec. 226.12(b); TILA Section 161(b)(1);
15 U.S.C. 1666(b)(1), Sec. 226.13(a)(1). Comment 12(b)-2 and -3
address a card issuer's rights and responsibilities in responding to a
claim of unauthorized use under Sec. 226.12. Comment 12(b)-2 clarifies
that a card issuer is not required to impose any liability. Comment
12(b)-3 clarifies that the card issuer wishing to impose liability must
investigate claims in a reasonable manner and provides guidance on
conducting an investigation of a claim. As discussed in the section-by-
section analysis to Sec. 226.13(f), which requires creditors to
conduct a reasonable investigation of an allegation of a billing error,
the Board proposes to include guidance currently provided in the
context of a claim of unauthorized transactions under Sec. 226.12(b)
in proposed comment 13(f)-3.
Comment 12(b)-3 provides that a card issuer may reasonably request
the consumer's cooperation. A card issuer may not, however,
automatically deny a claim based solely on the consumer's failure or
refusal to comply with a particular request. The Board proposes to add,
by way of example, that such requests would include any card issuer
requirement that the consumer submit a signed statement or affidavit or
file a police report. See 59 FR 64351, 64352, December 14, 1994; 60 FR
16771, 16774, April 3, 1995. The Board is concerned that such card
issuer requests could cause a chilling effect on a consumer's ability
to assert his or her right to avoid liability for an unauthorized
transaction. However, if the card issuer otherwise has no knowledge of
facts confirming the billing error, comment 12(b)-3 states that the
lack of information resulting from the consumer's failure or refusal to
comply with a particular request may lead the card issuer reasonably to
terminate the investigation.
Section 226.13 Billing Error Resolution
13(f) Procedures if Different Billing Error or No Billing Error
Occurred
Section 226.13(f) sets forth procedures for resolving billing error
claims if the creditor determines that no error or a different error
occurred. A creditor must first conduct a reasonable investigation
before the creditor may deny a consumer's claim or conclude that the
billing error occurred differently than as asserted by the consumer.
See TILA Section 161(a)(3)(B)(ii); 15 U.S.C. 1666(a)(3)(B)(ii).
Footnote 31 was proposed to be deleted as unnecessary, in light of the
general obligation under Sec. 226.13(f). The footnote provides that to
resolve allegations of nondelivery of property or services, creditors
must determine whether property or services were actually delivered,
mailed, or sent as agreed. To resolve allegations of incorrect
information on a periodic statement due to an incorrect report,
creditors must determine that the information was correct. See Sec.
226.13(f), footnote 31.
Consumer advocates urged the Board to retain the substance of
footnote 31. They noted that the current guidance in footnote 31
requires issuers to take concrete steps for resolving claims of
nondelivery such as obtaining delivery records or contacting merchants,
to consumers' detriment. Without this guidance, advocates expressed
concern that issuers would conduct more perfunctory investigations as,
in their view, has been the case by some creditors applying the same
``reasonable investigation'' standard for investigations into
allegations of errors on credit reports under the Fair Credit Reporting
Act. 15 U.S.C. 1681 et seq. In light of the commenters' concerns, the
Board proposes to reinstate the substance of footnote 31 in a new
comment 13(f)-3.
TILA and Regulation Z provide protections to consumers against
losses due to unauthorized transactions on open-end plans. See TILA
Section 133; 15 U.S.C. 1643, Sec. 226.12(b); TILA Section 161(b)(1);
15 U.S.C. 1666(b)(1), Sec. 226.13(a)(1). In reviewing its guidance on
conducting a reasonable investigation under Sec. 226.13(f), the Board
notes that card issuers have express guidance on conducting a
reasonable investigation of a claim of unauthorized transaction under
Sec. 226.12(b) but there is no similar guidance for creditors under
Sec. 226.13. See comment 12(b)-3. To harmonize the standards under the
two provisions and address inquiries Board staff has received over the
years on this issue, the Board proposes to include applicable guidance
currently provided in the context of a claim of unauthorized
transactions under Sec. 226.12(b) in proposed comment 13(f)-3.
In contrast to comment 12(b)-3, which applies to the unauthorized
use of a credit card, the corresponding guidance in comment 13(f)-3
would apply to all creditors offering