[Federal Register: May 19, 2008 (Volume 73, Number 97)]
[Proposed Rules]
[Page 28903-28964]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr19my08-21]
[[Page 28903]]
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Part III
Federal Reserve System
12 CFR Part 227
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Department of the Treasury
Office of Thrift Supervision
12 CFR Part 535
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National Credit Union Administration
12 CFR Part 706
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Unfair or Deceptive Acts or Practices; Proposed Rule
[[Page 28904]]
FEDERAL RESERVE SYSTEM
12 CFR Part 227
[Regulation AA; Docket No. R-1314]
DEPARTMENT OF THE TREASURY
Office of Thrift Supervision
12 CFR Part 535
[Docket ID. OTS-2008-0004]
RIN 1550-AC17
NATIONAL CREDIT UNION ADMINISTRATION
12 CFR Part 706
RIN 3133-AD47
Unfair or Deceptive Acts or Practices
AGENCIES: Board of Governors of the Federal Reserve System (Board);
Office of Thrift Supervision, Treasury (OTS); and National Credit Union
Administration (NCUA).
ACTION: Proposed rule; request for public comment.
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SUMMARY: The Board, OTS, and NCUA (collectively, the Agencies) are
proposing to exercise their authority under section 5(a) of the Federal
Trade Commission Act to prohibit unfair or deceptive acts or practices.
The proposed rule would prohibit institutions from engaging in certain
acts or practices in connection with consumer credit cards accounts and
overdraft services for deposit accounts. This proposal evolved from the
Board's June 2007 Notice of Proposed Rule under the Truth in Lending
Act and OTS's August 2007 Advance Notice of Proposed Rulemaking under
the Federal Trade Commission Act. The proposed rule relates to other
Board proposals under the Truth in Lending Act and the Truth in Savings
Act, which are published elsewhere in today's Federal Register.
DATES: Comments must be received on or before August 4, 2008.
ADDRESSES: Because paper mail in the Washington DC area and at the
Agencies is subject to delay, we encourage commenters to submit
comments by e-mail, if possible. We also encourage commenters to use
the title ``Unfair or Deceptive Acts or Practices'' to facilitate our
organization and distribution of the comments. Comments submitted to
one or more of the Agencies will be made available to all of the
Agencies. Interested parties are invited to submit comments as follows:
Board: You may submit comments, identified by Docket No. R-1314, 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.
Facsimile: (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 form 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.
OTS: You may submit comments, identified by OTS-2008-0004, by any
of the following methods:
Federal eRulemaking Portal- ``Regulations.gov'': Go to
http://www.regulations.gov, under the ``more Search Options'' tab click
next to the ``Advanced Docket Search'' option where indicated, select
``Office of Thrift Supervision'' from the agency drop-down menu, then
click ``Submit.'' In the ``Docket ID'' column, select ``OTS-2008-0004''
to submit or view public comments and to view supporting and related
materials for this proposed rulemaking. The ``How to Use This Site''
link on the Regulations.gov home page provides information on using
Regulations.gov, including instructions for submitting or viewing
public comments, viewing other supporting and related materials, and
viewing the docket after the close of the comment period.
Mail: Regulation Comments, Chief Counsel's Office, Office
of Thrift Supervision, 1700 G Street, NW., Washington, DC 20552,
Attention: OTS-2008-0004.
Facsimile: (202) 906-6518.
Hand Delivery/Courier: Guard's Desk, East Lobby Entrance,
1700 G Street, NW., from 9 a.m. to 4 p.m. on business days, Attention:
Regulation Comments, Chief Counsel's Office, Attention: OTS-2008-0004.
Instructions: All submissions received must include the
agency name and docket number for this rulemaking. All comments
received will be entered into the docket and posted on Regulations.gov
without change, including any personal information provided. Comments,
including attachments and other supporting materials received are part
of the public record and subject to public disclosure. Do not enclose
any information in your comment or supporting materials that you
consider confidential or inappropriate for public disclosure.
Viewing Comments Electronically: Go to http://
www.regulations.gov, select ``Office of Thrift Supervision'' from the
agency drop-down menu, then click ``Submit.'' Select Docket ID ``OTS-
2008-0004'' to view public comments for this notice of proposed
rulemaking.
Viewing Comments On-Site: You may inspect comments at the
Public Reading Room, 1700 G Street, NW., by appointment. To make an
appointment for access, call (202) 906-5922, send an e-mail to
public.info@ots.treas.gov, or send a facsimile transmission to (202)
906-6518. (Prior notice identifying the materials you will be
requesting will assist us in serving you.) We schedule appointments on
business days between 10 a.m. and 4 p.m. In most cases, appointments
will be available the next business day following the date we receive a
request.
NCUA: You may submit comments, identified by number RIN 3133-AD47,
by any of the following methods:
Federal eRulemaking Portal: http://www.regulations.gov.
Follow the instructions for submitting comments.
NCUA Web site: http://www.ncua.gov/news/proposed_regs/
proposed_regs.html. Follow the instructions for submitting comments.
E-mail: Address to regcomments@ncua.gov. Include ``[Your
name] Comments on Proposed Rule Part 706'' in the e-mail subject line.
Facsimile: (703) 518-6319. Use the subject line described
above for e-mail.
Mail: Address to Mary Rupp, Secretary of the Board,
National Credit Union Administration, 1775 Duke Street, Alexandria, VA
22314-3428.
Hand Delivery/Courier: Same as mail address.
FOR FURTHER INFORMATION CONTACT:
Board: Benjamin K. Olson, Attorney, or Ky Tran-Trong, Counsel,
Division of Consumer and Community Affairs, at (202) 452-2412 or (202)
452-3667, Board of Governors of the Federal Reserve System, 20th and C
Streets,
[[Page 28905]]
NW., Washington, DC 20551. For users of Telecommunications Device for
the Deaf (TDD) only, contact (202) 263-4869.
OTS: April Breslaw, Director, Consumer Regulations, (202) 906-6989;
Suzanne McQueen, Consumer Regulations Analyst, Compliance and Consumer
Protection Division, (202) 906-6459; Glenn Gimble, Senior Project
Manager, Compliance and Consumer Protection Division, (202) 906-7158;
or Richard Bennett, Senior Compliance Counsel, Regulations and
Legislation Division, (202) 906-7409, at Office of Thrift Supervision,
1700 G Street, NW., Washington, DC 20552.
NCUA: Matthew J. Biliouris, Program Officer, Office of Examination
and Insurance, (703) 518-6360; or Moisette I. Green or Ross P. Kendall,
Staff Attorneys, Office of General Counsel, (703) 518-6540, National
Credit Union Administration, 1775 Duke Street, Alexandria, VA 22314-
3428.
SUPPLEMENTARY INFORMATION: The Federal Reserve Board (Board), the
Office of Thrift Supervision (OTS), and the National Credit Union
Administration (NCUA) (collectively, the Agencies) are proposing
several new provisions intended to protect consumers against unfair or
deceptive acts or practices with respect to consumer credit card
accounts and overdraft services for deposit accounts. These proposals
are promulgated pursuant to section 18(f)(1) of the Federal Trade
Commission Act (FTC Act), which makes the Agencies responsible for
prescribing regulations that prevent unfair or deceptive acts or
practices in or affecting commerce within the meaning of section 5(a)
of the FTC Act. See 15 U.S.C. 57a(f)(1), 45(a).
I. Background
A. The Board's June 2007 Regulation Z Proposal on Open-End (Non-Home
Secured) Credit
On June 14, 2007, the Board requested public comment on proposed
amendments to the open-end credit (not home-secured) provisions of
Regulation Z, which implements the Truth in Lending Act (TILA), as well
as proposed amendments to the corresponding staff commentary to
Regulation Z. 72 FR 32948 (June 2007 Proposal). The purpose of TILA is
to promote the informed use of consumer credit by providing disclosures
about its costs and terms. See 15 U.S.C. 1601 et seq. TILA's
disclosures differ depending on whether the consumer credit is an open-
end (revolving) plan or a closed-end (installment) loan. The goal of
the proposed amendments was 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.
As part of this effort, the Board retained a research and
consulting firm (Macro International) to assist the Board in conducting
extensive consumer testing in order to develop improved disclosures
that consumers would be more likely to pay attention to, understand,
and use in their decisions, while at the same time not creating undue
burdens for creditors. While the testing assisted the Board in
developing improved disclosures, the testing also identified the
limitations of disclosure, in certain circumstances, as a means of
enabling consumers to make decisions effectively. See 72 FR at 32948-
52.
In response to the June 2007 Proposal, the Board received more than
2,500 comments, including approximately 2,100 comments from individual
consumers. Comments from consumers, consumer groups, a member of
Congress, other government agencies, and some creditors were generally
supportive of the proposed revisions to Regulation Z. A number of
comments, however, urged the Board to take additional action with
respect to a number of credit card practices, including late fees and
other penalties resulting from perceived reductions in the amount of
time consumers are given to make timely payments, allocation of
payments to balances with the lowest annual percentage rate,
application of increased annual percentage rates to pre-existing
balances, and the so-called two-cycle method of computing interest.
B. The OTS's August 2007 FTC Act Advance Notice of Proposed Rulemaking
On August 6, 2007, OTS issued an ANPR requesting comment on its
rules under section 5 of the FTC Act. See 72 FR 43570 (OTS ANPR). The
purpose of OTS's ANPR was to determine whether OTS should expand on its
current prohibitions against unfair and deceptive acts or practices in
its Credit Practices Rule (12 CFR part 535).
OTS's ANPR discussed a very broad array of issues including:
The legal background on OTS's authority under the FTC Act
and the Home Owners' Loan Act (HOLA);
OTS's existing Credit Practices Rule;
Possible principles OTS could use to define unfair and
deceptive acts or practices, including looking to standards the FTC and
states follow;
Practices that OTS, individually or on an interagency
basis, has addressed through guidance;
Practices that other federal agencies have addressed
through rulemaking;
Practices that states have addressed statutorily;
Acts or practices OTS might target involving products such
as credit cards, residential mortgages, gift cards, and deposit
accounts; and
OTS's existing Advertising Rule (12 CFR 563.27).
OTS recognized in its ANPR that the financial services industry and
consumers have benefited from consistency in rules and guidance as the
federal banking agencies and the NCUA have adopted uniform or very
similar rules in many areas. 72 FR at 43571. OTS emphasized in its ANPR
that it would be mindful of the goal of consistent interagency
standards as it considered issues relating to unfair and deceptive acts
or practices. Id.
OTS received 29 comment letters on its ANPR, including thirteen
from financial institutions and their trade associations, three from
consumer advocacy organizations, two from members of Congress, one from
the FTC, and ten from others. Generally speaking, the commenters agreed
on only one point . . . that OTS should adopt the same principles-based
standards for unfairness and deception used by the FTC, the other
federal banking agencies, and the NCUA.
Financial industry commenters opposed OTS taking any further action
beyond issuing guidance along those lines. They argued that OTS must
not create an unlevel playing field for OTS-regulated institutions and
that uniformity among the federal banking agencies and the NCUA is
essential. They questioned the need for any new OTS rules. They
challenged the list of practices OTS had indicated it could consider
targeting, arguing that the practices listed were neither unfair nor
deceptive under the FTC standards. They explained the reasons they use
the particular practices listed and how some benefit consumers. Some
commenters urged OTS to await the Board's rulemaking under the Home
Ownership and Equity Protection Act (HOEPA) on unfair or deceptive acts
or practices and then follow the Board's lead.\1\ They also opposed
using state laws as a model or converting guidance to rules. Further,
they opposed OTS expanding its advertising rules.
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\1\ The Board issued its HOEPA proposed in January 2008. See 73
FR 1672 (Jan. 9, 2008).
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In contrast, the consumer commenters urged OTS to move ahead with a
rule that would combine the FTC's principles-based standards with
prohibitions on specific practices. They
[[Page 28906]]
urged OTS to ban numerous practices, including but not limited to those
the ANPR indicated OTS might target. One emphasized that whatever OTS
does must not preempt state laws on unfair and deceptive acts or
practices.
A joint comment from House Financial Services Committee Chairman
Barney Frank and Subcommittee on Financial Institutions and Consumer
Credit Chairman Carolyn Maloney urged OTS to proceed promptly to adopt
comprehensive regulations on unfair and deceptive acts or practices. A
comment from Senator Carl Levin urged OTS to move ahead with
rulemaking; he focused his comment on unfair or deceptive credit card
practices.
A comment from the FTC summarized the FTC's interest and experience
with respect to financial services, described how the FTC has used its
unfairness and deception authority in rulemaking and law enforcement
actions, and recommended that OTS consider the FTC's experience in
determining whether to impose rules prohibiting or restricting
particular acts and practices.
OTS received comments on several practices relevant to the specific
credit card practices addressed in today's proposal:
OTS received comments on the practice of ``universal
default'' or ``adverse action pricing,'' which the OTS ANPR described
as imposing an interest rate increase that is triggered by adverse
information unrelated to the credit card account. The OTS ANPR
contrasted this practice to long-established risk based pricing.
Consumer groups supported prohibiting these practices as abusive and
unfair to consumers. They cited inaccuracies in the credit reporting
system and disparate racial impact as reasons to prohibit using credit
reports or credit scores to impose penalty rates. On the other hand,
several industry commenters defended these practices. They commented
that credit cards should be priced to reflect their current risk. They
argued that otherwise, credit card issuers would build a risk premium
into all rates to the detriment of other customers.
OTS received comments on the practice of applying payments
first to balances subject to a lower rate of interest before applying
payments to balances subject to higher rates of interest, as well as
the practice of applying payments first to fees, penalties, or other
charges before applying them to principal and interest. Consumer groups
supported prohibiting these practices as abusive and unfair to
consumers. On the other hand, several industry commenters defended
these practices. They commented that if these practices were prohibited
fewer products would be available to consumers such as zero or low-cost
balance transfers. Some commented that applying payments in this manner
was fundamental and would impose significant implementation costs to
change.
OTS received comments on the practice of imposing an over-
the-credit-limit fee that is triggered by the imposition of a penalty
fee (such as a late fee) and the practice of charging penalty fees in
consecutive months based on previous late or over-the-credit-limit
transactions, not on new actions. Consumer groups supported prohibiting
these practices and prohibiting any over-the-credit-limit fee where the
creditor approved the transaction or padded the credit limit, as
abusive and unfair to consumers. On the other hand, several industry
commenters defended these practices. They commented that the practices
deter future defaults and are a way to charge a little more to a
customer who has demonstrated higher risk without permanently raising
the customer's borrowing costs. They argued that otherwise, these costs
would be passed on to borrowers who do not go over their credit limit
or pay late.
Consumer groups also commented on additional credit card practices
of concern that are relevant to the practices addressed in today's
proposal. They urged that payment cut-off times be prohibited and that
payments be treated as timely if they are postmarked as of the due
date. They also urged that subprime credit cards be prohibited if less
than $300 of available credit is left after initial fees are subtracted
or initial fees total more than 10% of the overall credit line.
C. Related Action by the Agencies
In addition to receiving information via comments, the Agencies
have conducted outreach regarding credit card practices, including
meetings and discussions with consumer group representatives, industry
representatives, other federal and state banking agencies, and the FTC.
On April 8, 2008, the Board hosted a forum on credit cards in which
card issuers and payment network operators, consumer advocates,
counseling agencies, and other regulatory agencies met to discuss
relevant industry trends and identify areas that may warrant action or
further study. Among the topics discussed were the Board's previously
announced plan to issue a proposal under the FTC Act and the Board's
June 2007 Proposal. In addition, the Agencies have reviewed consumer
complaints received by each of the federal banking agencies and several
studies of the credit card industry.\2\ The Agencies' understanding of
credit card practices and consumer behavior has also been informed by
the results of consumer testing conducted on behalf of the Board in
connection with its June 2007 Proposal under Regulation Z. Based on
this and other information discussed below, the Agencies have developed
proposed rules under the FTC Act prohibiting specific unfair acts or
practices regarding consumer credit card accounts.
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\2\ See, e.g., Am. Bankers Assoc., Likely Impact of Proposed
Credit Card Legislation: Survey Results of Credit Card Issuers
(Spring 2008); Darryl E. Getter, Cong. Research Srvc., The Credit
Card Market: Recent Trends, Funding Cost Issues, and Repricing
Practices (Feb. 2008); Tim Westrich & Christian E. Weller, Ctr. for
Am. Progress, House of Cards: Consumers Turn to Credit Cards Amid
the Mortgage Crisis, Delaying Inevitable Defaults (Feb. 2008)
(available at http://www.americanprogress.org/issues/2008/02/pdf/
house_of_cards.pdf); Jose A. Garcia, Demos, Borrowing to Make Ends
Meet: The Rapid Growth of Credit Card Debt in America (Nov. 2007)
(available at http://www.demos.org/pubs/borrowing.pdf ); Nat'l
Consumer Law Ctr., Fee-Harvesters: Low-Credit, High-Cost Cards Bleed
Consumers (Nov. 2007) (available at http://www.consumerlaw.org/
issues/credit_cards/content/FEE-HarvesterFinal.pdf); Jonathan M.
Orszag & Susan H. Manning, Am. Bankers Assoc., An Economic
Assessment of Regulating Credit Card Fees and Interest Rates (Oct.
2007) (available at http://www.aba.com/aba/documents/press/
regulating_creditcard_fees_interest_rates92507.pdf); Cindy
Zeldin & Mark Rukavia, Demos, Borrowing to Stay Healthy: How Credit
Card Debt Is Related to Medical Expenses (Jan. 2007) (available at
http://www.demos.org/pubs/healthy_web.pdf); U.S. Gov't
Accountability Office, Credit Cards: Increased Complexity in Rates
and Fees Heightens Need for More Effective Disclosures to Consumers
(Sept. 2006) (``GAO Credit Card Report'') (available at http://
www.gao.gov/new.items/d06929.pdf ); Board of Governors of the
Federal Reserve System, Report to Congress on Practices of the
Consumer Credit Industry in Soliciting and Extending Credit and
their Effects on Consumer Debt and Insolvency (June 2006) (available
at http://www.federalreserve.gov/boarddocs/rptcongress/bankruptcy/
bankruptcybillstudy200606.pdf ); Demos & Ctr. for Responsible
Lending, The Plastic Safety Net: The Reality Behind Debt in America
(Oct. 2005) (available at http://www.demos.org/pubs/PSN_low.pdf).
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Finally, the Agencies have also gathered information from a number
of recent Congressional hearings on consumer protection issues
regarding credit cards.\3\ In these hearings, members of Congress heard
testimony from individual consumers,
[[Page 28907]]
representatives of consumer groups, representatives of financial and
credit card industry groups, and others. Consumer and community group
representatives generally testified that certain credit card practices
(including those discussed above) unfairly increase the cost of credit
after the consumer has committed to a particular transaction. These
witnesses further testified that these practices should be prohibited
because they lead consumers to underestimate the costs of using credit
cards and that disclosure of these practices under Regulation Z is
ineffective. Financial services and credit card industry
representatives agreed that consumers need better disclosures of credit
card terms but testified that substantive restrictions on specific
terms would lead to higher interest rates for all borrowers as well as
reduced access to credit for some. Members of Congress have proposed
several bills addressing consumer protection issues regarding credit
cards.\4\
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\3\ See, e.g., The Credit Cardholders' Bill of Rights: Providing
New Protections for Consumers: Hearing before the H. Subcomm. on
Fin. Instits. & Consumer Credit, 110th Cong. (2007); Credit Card
Practices: Unfair Interest Rate Increases: Hearing before the S.
Permanent Subcomm. on Investigations, 110th Cong. (2007); Credit
Card Practices: Current Consumer and Regulatory Issues: Hearing
before H. Comm. on Fin. Servs., 110th Cong. (2007); Credit Card
Practices: Fees, Interest Rates, and Grace Periods: Hearing before
the S. Permanent Subcomm. on Investigations, 110th Cong. (2007).
\4\ See, e.g., The Credit Card Reform Act of 2008, S. 2753,
110th Cong. (Mar. 12, 2008); The Credit Cardholders' Bill of Rights
Act of 2008, H.R. 5244, 110th Cong. (Feb. 7, 2008); The Stop Unfair
Practices in Credit Cards Act of 2007, H.R. 5280, 110th Cong. (Feb.
7, 2008); The Stop Unfair Practices in Credit Cards Act of 2007, S.
1395, 110th Cong. (May 15, 2007); The Universal Default Prohibition
Act of 2007, H.R. 2146, 110th Cong. (May 3, 2007); The Credit Card
Accountability Responsibility and Disclosure Act of 2007, H.R. 1461,
110th Cong. (Mar. 9, 2007).
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D. Agency Actions on Overdraft Services
Overdraft services are sometimes offered to transaction account
customers as an alternative to traditional ways of covering overdrafts
(e.g., overdraft lines of credit or linked accounts). Coverage is
generally ``automatically'' provided to consumers that meet a
depository institution's criteria, and the service may extend to check
as well as other transactions, such as automated teller machine (ATM)
withdrawals, debit card transactions and automated clearinghouse (ACH)
transactions. Most institutions state that payment of an overdraft is
at their discretion. If an overdraft is paid, the consumer will be
charged a flat fee for each item. A daily fee also may apply for each
day the account remains overdrawn.
In response to the increased availability and customer use of these
overdraft protection services, the FDIC, Board, OCC, OTS, and NCUA
published guidance on overdraft protection programs in February
2005.\5\ The Joint Guidance addresses three primary areas--safety and
soundness considerations, legal risks, and best practices--while the
OTS guidance focuses on safety and soundness considerations and best
practices. The best practices focus on the marketing and communications
that accompany the offering of overdraft services, as well as the
disclosure and operation of program features, including the provision
of a consumer election or opt-out of the overdraft service. The
Agencies have also published a consumer brochure on overdraft
services.\6\
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\5\ See Interagency Guidance on Overdraft Protection Programs
(Joint Guidance), 70 FR 9127 (Feb. 24, 2005) and OTS Guidance on
Overdraft Protection Programs, 70 FR 8428 (Feb. 18, 2005).
\6\ The brochure, entitled ``Protecting Yourself from Overdraft
and Bounced-Check Fees,'' can be found at: http://
www.federalreserve.gov/pubs/bounce/default.htm.
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In May 2005, the Board separately issued revisions to Regulation DD
and the staff commentary pursuant to its authority under the Truth in
Savings Act (TISA) to address concerns about the uniformity and
adequacy of institutions' disclosure of overdraft fees generally, and
to address concerns about advertised overdraft services in
particular.\7\ The goal of the final rule was to improve the uniformity
and adequacy of disclosures provided to consumers about overdraft and
returned-item fees to assist consumers in better understanding the
costs associated with the payment of overdrafts. In addition, the final
rule addressed some of the Board's concerns about institutions'
marketing practices with respect to overdraft services.
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\7\ 70 FR 29582 (May 24, 2005). A substantively similar rule
applying to credit unions was issued separately by the NCUA. 71 FR
24568 (Apr. 26, 2006). The NCUA issued an interim final rule in
2005. 70 FR 72895 (Dec. 8, 2005).
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In addition to regulatory actions, there has also been significant
Congressional interest in overdraft services, with legislation
introduced seeking to curb some of the perceived abusive practices
associated with these services. In June 2007, a hearing was held to
discuss the proposed legislation with testimony from consumer advocates
and industry representatives.\8\
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\8\ H.R. 946, ``The Consumer Overdraft Protection Fair Practices
Act.'' See also Overdraft Protection: Fair Practices for Consumers:
Hearing Before the House Subcomm. on Financial Institutions and
Consumer Credit, 110th Cong. (2007).
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II. Statutory Authority Under the Federal Trade Commission Act To
Address Unfair or Deceptive Acts or Practices
A. Rulemaking and Enforcement Authority Under the FTC Act
Section 18(f)(1) of the FTC Act provides that the Board (with
respect to banks), OTS (with respect to savings associations), and the
NCUA (with respect to federal credit unions) are responsible for
prescribing ``regulations defining with specificity * * * unfair or
deceptive acts or practices, and containing requirements prescribed for
the purpose of preventing such acts or practices.'' 15 U.S.C.
57a(f)(1).\9\
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\9\ The FTC Act refers to OTS's predecessor agency, the Federal
Home Loan Bank Board (FHLBB), rather than to OTS. However, in
section 3(e) of HOLA, Congress transferred this rulemaking power of
the FHLBB, among others, to the Director of OTS. 12 U.S.C. 1462a(e).
The FTC Act refers to ``savings and loan institutions'' in some
provisions and ``savings associations'' in other provisions.
Although ``savings associations'' is the term currently used in the
HOLA, see, e.g., 12 U.S.C. 1462(4), the terms ``savings and loan
institutions'' and ``savings associations'' can be and are used
interchangeably. OTS has determined that the outdated language does
not affect OTS's rulemaking authority under the FTC Act.
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The FTC Act allocates responsibility for enforcing compliance with
regulations prescribed under section 18 with respect to banks, savings
associations, and federal credit unions among the Board, OTS, and NCUA,
as well as the Office of the Comptroller of the Currency (OCC) and the
Federal Deposit Insurance Corporation (FDIC). See 15 U.S.C. 57a(f)(2)-
(4). The FTC Act grants the FTC rulemaking and enforcement authority
with respect to other persons and entities, subject to certain
exceptions and limitations. See 15 U.S.C. 45(a)(2); 15 U.S.C. 57a(a).
The FTC Act, however, sets forth specific rulemaking procedures for the
FTC that do not apply to the Agencies. See 15 U.S.C. 57a(b)-(e), (g)-
(j); 15 U.S.C. 57a-3.
B. Standards for Unfairness Under the FTC Act
Congress has codified standards developed by the Federal Trade
Commission (FTC) for the FTC to use in determining whether acts or
practices are unfair under section 5(a) of the FTC Act.\10\
Specifically, the FTC Act provides that the FTC has no authority to
declare an act or practice is unfair unless: (1) It causes or is likely
to cause substantial injury to consumers; (2) the injury is not
reasonably avoidable by consumers themselves; and (3) the injury is not
outweighed by countervailing benefits to consumers or to competition.
In addition, the FTC may consider established public policy, but public
policy may not serve as the primary basis for its determination that an
act or practice is unfair. See 15 U.S.C. 45(n).
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\10\ See 15 U.S.C. 45(n); FTC Policy Statement on Unfairness,
Letter from the FTC to the Hon. Wendell H. Ford and the Hon. John C.
Danforth, S. Comm. on Commerce, Science & Transp. (Dec. 17, 1980)
(FTC Policy Statement on Unfairness) (available at http://
www.ftc.gov/bcp/policystmt/ad-unfair.htm).
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[[Page 28908]]
In proposing rules under section 18(f)(1) of the FTC Act, the
Agencies have applied the statutory elements consistent with the
standards articulated by the FTC. The Board, FDIC, and OCC have issued
guidance generally adopting these standards for purposes of enforcing
the FTC Act's prohibition on unfair or deceptive acts or practices.\11\
Although the OTS has not taken similar action in generally applicable
guidance,\12\ the commenters on OTS's ANPR who addressed this issue
overwhelmingly urged OTS to be consistent with the FTC's standards for
unfairness.
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\11\ See Board and FDIC, Unfair or Deceptive Acts or Practices
by State-Chartered Banks (Mar. 11, 2004) (available at http://
www.federalreserve.gov/boarddocs/press/bcreg/2004/20040311/
attachment.pdf ); OCC Advisory Letter 2002-3, Guidance on Unfair or
Deceptive Acts or Practices (Mar. 22, 2002) (available at http://
www.occ.treas.gov/ftp/advisory/2002-3.doc).
\12\ See OTS ANPR, 72 FR at 43573.
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According to the FTC, an unfair act or practice will almost always
represent a market failure or imperfection that prevents the forces of
supply and demand from maximizing benefits and minimizing costs.\13\
Not all market failures or imperfections constitute unfair acts or
practices, however. Instead, the central focus of the FTC's unfairness
analysis is whether the act or practice causes substantial consumer
injury.\14\
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\13\ Statement of Basis and Purpose and Regulatory Analysis for
Federal Trade Commission Credit Practices Rule (Statement for FTC
Credit Practices Rule), 49 FR 7740, 7744 (Mar. 1, 1984).
\14\ Id. at 7743.
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First, the FTC has stated that a substantial consumer injury
generally consists of monetary, economic, or other tangible harm.\15\
Trivial or speculative harms do not constitute substantial consumer
injury.\16\ Consumer injury may be substantial, however, if it imposes
a small harm on a large number of consumers or if it raises a
significant risk of concrete harm.\17\
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\15\ See id.; FTC Policy Statement on Unfairness at 3.
\16\ See Statement for FTC Credit Practices Rule, 49 FR at 7743
(``[E]xcept in aggravated cases where tangible injury can be clearly
demonstrated, subjective types of harm--embarrassment, emotional
distress, etc.--will not be enough to warrant a finding of
unfairness.''); FTC Unfairness Policy Statement at 3 (``Emotional
impact and other more subjective types of harm * * * will not
ordinarily make a practice unfair.'').
\17\ See Statement for FTC Credit Practices Rules, 49 FR at
7743; FTC Policy Statement on Unfairness at 3 & n.12.
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Second, the FTC has stated that an injury is not reasonably
avoidable when consumers are prevented from effectively making their
own decisions about whether to incur that injury.\18\ The marketplace
is normally expected to be self-correcting because consumers are relied
upon to survey the available alternatives, choose those that are most
desirable, and avoid those that are inadequate or unsatisfactory.\19\
Accordingly, the test is not whether the consumer could have made a
wiser decision but whether an act or practice unreasonably creates or
takes advantage of an obstacle to the consumer's ability to make that
decision freely.\20\
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\18\ See FTC Policy Statement on Unfairness at 3.
\19\ See Statement for FTC Credit Practices Rule, 49 FR at 7744
(``Normally, we can rely on consumer choice to govern the
market.''); FTC Policy Statement on Unfairness at 3.
\20\ See Statement for FTC Credit Practices Rule, 49 FR at 7744
(``In considering whether an act or practice is unfair, we look to
whether free market decisions are unjustifiably hindered.''); FTC
Policy Statement on Unfairness at 3 & n.19 (``In some senses any
injury can be avoided--for example, by hiring independent experts to
test all products in advance, or by private legal actions for
damages--but these courses may be too expensive to be practicable
for individual consumers to pursue.'').
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Third, the FTC has stated that the act or practice causing the
injury must not also produce benefits to consumers or competition that
outweigh the injury.\21\ Generally, it is important to consider both
the costs of imposing a remedy and any benefits that consumers enjoy as
a result of the practice.\22\ The FTC has stated that both consumers
and competition benefit from prohibitions on unfair or deceptive acts
or practices because prices may better reflect actual transaction costs
and merchants who do not rely on unfair or deceptive acts or practices
are no longer required to compete with those who do.\23\
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\21\ See Statement for FTC Credit Practices Rule, 49 FR at 7744;
FTC Policy Statement on Unfairness at 3; see also S. Rep. 103-130,
at 13 (1994), reprinted in 1994 U.S.C.C.A.N. 1776, 1788 (``In
determining whether a substantial consumer injury is outweighed by
the countervailing benefits of a practice, the Committee does not
intend that the FTC quantify the detrimental and beneficial effects
of the practice in every case. In many instances, such a numerical
benefit-cost analysis would be unnecessary; in other cases, it may
be impossible. This section would require, however, that the FTC
carefully evaluate the benefits and costs of each exercise of its
unfairness authority, gathering and considering reasonably available
evidence.'').
\22\ See FTC Public Comment on OTS-2007-0015, at 6 (Dec. 12,
2007) (available at http://www.ots.treas.gov/docs/9/963034.pdf ).
\23\ See FTC Public Comment on OTS-2007-0015, at 8 (citing
Preservation of Consumers' Claims and Defenses, Statement of Basis
and Purpose, 40 FR 53506, 53523 (Nov. 18, 1975) (codified at 16 CFR
433)); see also FTC Policy Statement on Deception, Letter from the
FTC to the Hon. John H. Dingell, H. Comm. on Energy & Commerce (Oct.
14, 1983) (FTC Policy Statement on Deception) (available at http://
www.ftc.gov/bcp/policystmt/ad-decept.htm) (``Deceptive practices
injure both competitors and consumers because consumers who
preferred the competitor's product are wrongly diverted.'').
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C. Standards for Deception Under the FTC Act
The FTC has also adopted standards for determining whether an act
or practice is deceptive under the FTC Act.\24\ Under the FTC's
standards, an act or practice is deceptive where: (1) There is a
representation or omission of information that is likely to mislead
consumers acting reasonably under the circumstances; and (2) that
information is material to consumers.\25\ Although these standards have
not been codified, they have been applied by numerous courts.\26\
Accordingly, in proposing rules under section 18(f)(1) of the FTC Act,
the Agencies have applied the standards articulated by the FTC for
determining whether an act or practice is deceptive.\27\
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\24\ FTC Policy Statement on Deception.
\25\ Id. at 1-2. The FTC views deception as a subset of
unfairness but does not apply the full unfairness analysis because
deception is very unlikely to benefit consumers or competition and
consumers cannot reasonably avoid being harmed by deception. Id.
\26\ See, e.g., FTC v. Tashman, 318 F.3d 1273, 1277 (11th Cir.
2003); FTC v. Gill, 265 F.3d 944, 950 (9th Cir. 2001); FTC v. QT,
Inc., 448 F. Supp. 2d 908, 957 (N.D. Ill. 2006); FTC v. Think
Achievement, 144 F. Supp. 2d 993, 1009 (N.D. Ind. 2000); FTC v.
Minuteman Press, 53 F. Supp. 2d 248, 258 (E.D.N.Y. 1998).
\27\ As noted above, the Board, FDIC, and OCC have issued
guidance generally adopting these standards for purposes of
enforcing the FTC Act's prohibition on unfair or deceptive acts or
practices. As with the unfairness standard, comments on OTS's ANPR
addressing this issue overwhelmingly urged the OTS to adopt the same
deception standard as the FTC.
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A representation or omission is deceptive if the overall net
impression created is likely to mislead consumers.\28\ The FTC conducts
its own analysis to determine whether a representation or omission is
likely to mislead consumers acting reasonably under the
circumstances.\29\ When evaluating the reasonableness of an
interpretation, the FTC considers the sophistication and understanding
of consumers in the group to whom the act or practice is targeted.\30\
If a representation is susceptible to more than one reasonable
interpretation, and if one such interpretation is misleading, then the
representation is deceptive even if other, non-deceptive
interpretations are possible.\31\
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\28\ See, e.g., FTC v. Cyberspace.com, 453 F.3d 1196, 1200 (9th
Cir. 2006); Gill, 265 F.3d at 956; Removatron Int'l Corp. v. FTC,
884 F.2d 1489, 1497 (1st Cir. 1989).
\29\ See FTC v. Kraft, Inc., 970 F.2d 311, 319 (7th Cir. 1992);
QT, Inc., 448 F. Supp. 2d at 958.
\30\ FTC Policy Statement on Deception at 3.
\31\ Id.
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A representation or omission is material if it is likely to affect
the consumer's conduct or decision regarding a product or service.\32\
Certain types of claims are presumed to be material, including express
claims and
[[Page 28909]]
claims regarding the cost of a product or service.\33\
---------------------------------------------------------------------------
\32\ Id. at 2, 6-7.
\33\ See FTC Public Comment on OTS-2007-0015, at 21; FTC Policy
Statement on Deception at 6; see also FTC v. Pantron I Corp., 33
F.3d 1088, 1095-96 (9th Cir. 1994); In re Peacock Buick, 86 F.T.C.
1532, 1562 (1975), aff'd 553 F.2d 97 (4th Cir. 1977).
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D. Choice of Remedy
The Agencies have wide latitude to determine what remedy is
necessary to prevent an unfair or deceptive act or practice so long as
that remedy has a reasonable relation to the act or practice.\34\ Thus,
the Agencies are not required to adopt the most restrictive means of
preventing the act or practice, nor are they required to adopt the
least restrictive means.
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\34\ See Am. Fin. Servs. Assoc. v. FTC, 767 F.2d 957, 988-89 (DC
Cir. 1985) (citing Jacob Siegel Co. v. FTC, 327 U.S. 608, 612-13
(1946)).
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III. Summary of Proposed Revisions
In order to best ensure that all entities that offer the products
addressed in the proposed rule are treated in a like manner, the Board,
OTS, and NCUA have joined together to issue today's proposal. This
interagency approach is consistent with section 303 of the Riegle
Community Development and Regulatory Improvement Act of 1994. See 12
U.S.C. 4803. Section 303(a)(3), 12 U.S.C. 4803(a)(3), directs the
federal banking agencies to work jointly to make uniform all
regulations and guidelines implementing common statutory or supervisory
policies. In today's proposal, two federal banking agencies--the Board
and OTS--are primarily implementing the same statutory provision,
section 18(f) of the FTC Act, as is the NCUA. Accordingly, the Agencies
have endeavored to propose rules that are as uniform as possible. The
Agencies also consulted with the two other federal banking agencies,
OCC and FDIC, as well as with the FTC.
The effort to achieve an even playing field is also furthered by
the Agencies' focus on unfair and deceptive acts or practices involving
credit cards and overdraft services, which are generally provided only
by depository institutions such as banks, savings associations, and
credit unions. The Agencies recognize that state-chartered credit
unions and any entities providing consumer credit card accounts
independent of a depository institution fall within the FTC's
jurisdiction and therefore would not be subject to these rules. The
Agencies believe, however, that FTC-regulated entities represent a
small percentage of the market for consumer credit card accounts and
overdraft services. For OTS, addressing certain deceptive credit card
practices in today's proposal, rather than through an interpretation or
expansion of its Advertising Rule, also fosters consistency because the
other Agencies do not have comparable advertising regulations.
Credit Practices Rule
The Agencies are proposing to make non-substantive, organizational
changes to the Credit Practices Rule. Specifically, in order to avoid
repetition, the Agencies would move the statement of authority,
purpose, and scope out of the Credit Practices Rule and revise it to
apply not only to the Credit Practices Rule but also to the proposed
rules regarding consumer credit card accounts and overdraft services.
OTS and NCUA have made additional, non-substantive changes to the
organization of their versions of the Credit Practices Rule.
Consumer Credit Card Accounts
The Agencies are proposing seven provisions under the FTC Act
regarding consumer credit card accounts. These provisions are intended
to ensure that consumers have the ability to make informed decisions
about the use of credit card accounts without being subjected to unfair
or deceptive acts or practices.
First, institutions would be prohibited from treating a payment as
late for any purpose unless consumers have been provided a reasonable
amount of time to make that payment. The proposed rule would create a
safe harbor for institutions that adopt reasonable procedures designed
to ensure that periodic statements (which provide payment information)
are mailed or delivered at least 21 days before the payment due date.
Elsewhere in today's Federal Register, the Board has made two
additional proposals under Regulation Z that would further ensure that
consumers receive a reasonable amount of time to make payment.
Specifically, the Board is proposing to revise 12 CFR 226.10(b) to
prohibit creditors from setting a cut-off time for mailed payments that
is earlier than 5 p.m. at the location specified by the creditor for
receipt of such payments. The Board is also proposing to add 12 CFR
226.10(d), which would require that, if the due date for payment is a
day on which the U.S. Postal Service does not deliver mail or the
creditor does not accept payment by mail, the creditor may not treat a
payment received by mail the next business day as late for any purpose.
Second, when different annual percentage rates apply to different
balances, institutions would be required to allocate amounts paid in
excess of the minimum payment using one of three specified methods or a
method that is no less beneficial to consumers. The specified methods
are applying the entire amount first to the balance with the highest
annual percentage rate, splitting the amount equally among the
balances, or splitting the amount pro rata among the balances.
Furthermore, when an account has a discounted promotional rate balance
or a balance on which interest is deferred, institutions would be
required to give consumers the full benefit of that discounted rate or
deferred interest plan by allocating amounts in excess of the minimum
payment first to balances on which the rate is not discounted or
interest is not deferred (except, in the case of a deferred interest
plan, for the last two billing cycles during which interest is
deferred). Institutions would also be prohibited from denying consumers
a grace period on purchases (if one is offered) solely because they
have not paid off a balance at a promotional rate or a balance on which
interest is deferred.
Third, institutions would be prohibited from increasing the annual
percentage rate on an outstanding balance. This prohibition would not
apply, however, where a variable rate increases due to the operation of
an index, where a promotional rate has expired or is lost (provided the
rate is not increased to a penalty rate), or where the minimum payment
has not been received within 30 days after the due date.
Fourth, institutions would be prohibited from assessing a fee if a
consumer exceeds the credit limit on an account solely due to a hold
placed on the available credit. If, however, the actual amount of the
transaction would have exceeded the credit limit, then a fee may be
assessed.
Fifth, institutions would be prohibited from imposing finance
charges on balances based on balances for days in billing cycles that
precede the most recent billing cycle. The proposed rule would prohibit
institutions from reaching back to earlier billing cycles when
calculating the amount of interest charged in the current cycle, a
practice that is sometimes referred to as two-or double-cycle billing.
Sixth, institutions would be prohibited from financing security
deposits or fees for the issuance or availability of credit (such as
account-opening fees or membership fees) if those deposits or fees
utilize the majority of the available credit on the
[[Page 28910]]
account. The proposal would also require security deposits and fees
exceeding 25 percent of the credit limit to be spread over the first
year, rather than charged as a lump sum during the first billing cycle.
In addition, elsewhere in today's Federal Register, the Board is
proposing to revise Regulation Z to provide that a creditor that
collects or obtains a consumer's agreement to pay a fee before
providing account-opening disclosures must permit that consumer to
reject the plan after receiving the disclosures and, if the consumer
does so, must refund any fee collected or take any other action
necessary to ensure the consumer is not obligated to pay the fee.
Seventh, institutions making firm offers of credit advertising
multiple annual percentage rates or credit limits would be required to
disclose in the solicitation the factors that determine whether a
consumer will qualify for the lowest annual percentage rate and highest
credit limit advertised.
Overdraft Services
The Agencies are proposing two provisions prohibiting unfair acts
or practices related to overdraft services in connection with consumer
deposit accounts. The proposed provisions are intended to ensure that
consumers understand overdraft services and have the choice to avoid
the associated costs where such services do not meet their needs.
The first would provide that it is an unfair act or practice for an
institution to assess a fee or charge on a consumer's account for
paying an overdraft unless the institution provides the consumer with
the right to opt out of the institution's payment of overdrafts and a
reasonable opportunity to exercise the opt out, and the consumer does
not opt out. The proposed opt-out right would apply to all transactions
that overdraw an account regardless of whether the transaction is, for
example, a check, an ACH transaction, an ATM withdrawal, a recurring
payment, or a debit card purchase at a point of sale.
The second proposal would prohibit certain acts or practices
associated with assessing overdraft fees in connection with debit
holds. Specifically, the proposal would prohibit an institution from
assessing an overdraft fee if the overdraft is caused solely by a hold
placed on funds that exceeds the actual purchase amount of the
transaction, unless this purchase amount would have caused the
overdraft.
Elsewhere in today's Federal Register, the Board is also proposing
to address potentially misleading balance disclosures by generally
requiring depository institutions to provide only balances that reflect
the consumer's own funds (without funds added by the institution to
cover overdrafts) in response to consumer inquiries received through an
automated system such as a telephone response system, ATM, or an
institution's Web site.
IV. Section-by-Section Analysis of the Credit Practices Subpart
On March 1, 1984, the FTC adopted its Credit Practices Rule
pursuant to its authority under the FTC Act to promulgate rules that
define and prevent unfair or deceptive acts or practices in or
affecting commerce.\35\ The FTC Act provides that, whenever the FTC
promulgates a rule prohibiting specific unfair or deceptive practices,
the Board, OTS (as the successor to the Federal Home Loan Bank Board),
and NCUA must adopt substantially similar regulations imposing
substantially similar requirements with respect to banks, savings and
loan institutions, and federal credit unions within 60 days of the
effective date of the FTC's rule unless the agency finds that such acts
or practices by banks, savings associations, or federal credit unions
are not unfair or deceptive or the Board finds that the adoption of
similar regulations for banks, savings associations, or federal credit
unions would seriously conflict with essential monetary and payment-
systems policies of the Board. The Agencies have adopted rules
substantially similar to the FTC's Credit Practices Rule.\36\
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\35\ See 42 FR 7740 (Mar. 1, 1984) (codified at 16 CFR part
444); see also 15 U.S.C. 57a(a)(1)(B), 45(a)(1).
\36\ See 12 CFR part 227, subpart B (Board); 12 CFR 535 (OTS);
12 CFR 706 (NCUA).
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As part of this rulemaking, the Agencies are proposing to
reorganize aspects of their respective Credit Practices Rules. Although
the Agencies have approached these revisions differently in some
respects, the Agencies do not intend to create any substantive
difference among their respective rules.
Proposal
Subpart A--General Provisions
Subpart A contains general provisions that apply to the entire
part. As discussed below, there are some differences among the
Agencies' proposals.
----.1 Authority, Purpose, and Scope 37
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\37\ The Board, OTS, and NCUA would place the proposed rules in,
respectively, parts 227, 535, and 706 of title 12 of the Code of
Federal Regulations. For each of reference, the discussion in this
Supplementary Information uses the shared numerical suffix of each
agency's rule. For example, proposed Sec. ----.1 would be codified
at 12 CFR 227.1 by the Board, 12 CFR 535.1 by OTS, and 12 CFR 706.1
by NCUA.
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The provisions in proposed Sec. ----.1 are largely drawn from the
current authority, purpose, and scope provisions in the Agencies'
respective Credit Practices Rules.
----.1(a) Authority
Proposed Sec. ----.1(a) provides that the Agencies have issued
this part under section 18(f) of the FTC Act. In OTS's proposed rule,
this provision further provides that OTS is also exercising its
authority under various provisions of HOLA, although the FTC Act is the
primary authority for OTS's rule.
----.1(b) Purpose
Proposed Sec. ----.1(b) provides that the purpose of the part is
to prohibit unfair or deceptive acts or practices in violation of
section 5(a)(1) of the FTC Act, 15 U.S.C. 45(a)(1). It further provides
that the part contains provisions that define and set forth
requirements prescribed for the purpose of preventing specific unfair
or deceptive acts or practices. The Agencies note that these provisions
define and prohibit specific unfair or deceptive acts or practices
within a single provision, rather than setting forth the definitions
and remedies separately. Finally, it clarifies that the prohibitions in
subparts B, C, and D do not limit the Agencies' authority to enforce
the FTC Act with respect to other unfair or deceptive acts or
practices.
----.1(c) Scope
Proposed Sec. ----.1(c) describes the scope of each agency's
rules. The Agencies have each tailored this paragraph to describe those
entities to which their part applies. The Board's provision states that
its rules would apply to banks and their subsidiaries, except savings
associations as defined in 12 U.S.C. 1813(b). The Board's provision
further explains that enforcement of its rules is allocated among the
Board, OCC, and FDIC, depending on the type of institution. This
provision has been updated to reflect intervening changes in law. The
Board's Staff Guidelines to the Credit Practices Rule would be revised
to remove questions 11(c)-1 and 11(c)-2 and the substance of the
Board's answers would be updated and published as commentary under
proposed Sec. 227.1(c). See proposed Board comments 227.1(c)-1 and -2.
The remaining questions and answers in the
[[Page 28911]]
Board's Staff Guidelines would remain in place.
OTS's provision would state that its rules apply to savings
associations and subsidiaries owned in whole or in part by a savings
association. OTS also enforces compliance with respect to these
institutions. The entire OTS part would have the same scope. OTS notes
that this scope is somewhat different from the scope of its existing
Credit Practices Rule. OTS's Credit Practices Rule currently applies to
savings associations and service corporations that are wholly owned by
one or more savings associations, which engage in the business of
providing credit to consumers. Since the proposed rules would cover
more practices than consumer credit, the reference to engaging in the
business of providing credit to consumers would be deleted. The
reference to wholly owned service corporations would be updated to
refer instead to subsidiaries, to reflect the current terminology used
in OTS's Subordinate Organizations Rule.\38\
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\38\ 12 CFR part 559. OTS has substantially revised this rule
since promulgating its Credit Practices Rule. See, e.g.,
Subsidiaries and Equity Investments: Final Rule, 61 FR 66561 (Dec.
18, 1996).
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The NCUA's provision would state that its rules apply to federal
credit unions.
227.1(d) Definitions
Proposed Sec. ----.1(d) of the Board's rule would clarify that,
unless otherwise noted, the terms used in the Board's proposed Sec. --
--.1(c) that are not defined in the FTC Act or in section 3(s) of the
Federal Deposit Insurance Act (12 U.S.C. 1813(s)) have the meaning
given to them in section 1(b) of the International Banking Act of 1978
(12 U.S.C. 3101). OTS and NCUA do not have a need for a comparable
subsection so none is included in their proposed rules.
227.2 Consumer-Complaint Procedure
In order to accommodate the revisions discussed above, the Board
would consolidate the consumer complaint provisions currently located
in 12 CFR 227.1 and 227.2 in proposed Sec. 227.2. OTS and NCUA do not
currently have and do not propose to add comparable provisions.
Subpart B--Credit Practices
Each agency would place the substantive provisions of their current
Credit Practices Rule in Subpart B. In order to retain the current
numbering in its Credit Practices Rule, the Board would reserve 12 CFR
227.11, which currently contains the Board's statement of authority,
purpose, and scope. The other provisions of the Board's Credit
Practices Rule (Sec. Sec. 227.12 through 227.16) would not be revised.
OTS is proposing the following notable changes to its version of
Subpart B:
Section 535.11 Definitions (Existing Section 535.1)
OTS would delete the definitions of ``Act,'' ``creditor,'' and
``savings association'' as unnecessary. For the convenience of the
user, OTS would incorporate the definition of ``consumer credit'' into
this section, instead of using a cross-reference to a definition
contained in a different part of OTS's rules. OTS would move the
definition of ``cosigner'' to the section on unfair or deceptive
cosigner practices. OTS would merge the definition of ``debt'' into the
definition of ``collecting a debt'' contained in the section on late
charges. OTS would move the definition of ``household goods'' to the
section on unfair credit contract provisions.
Section 535.12 Unfair Credit Contract Provisions (Existing Section
535.2)
OTS would revise the title of this section to reflect its focus on
credit contract provisions. OTS would delete the obsolete reference to
extensions of credit after January 1, 1986.
Section 535.13 Unfair or Deceptive Cosigner Practices (Existing Section
535.3)
OTS would delete the obsolete reference to extensions of credit
after January 1, 1986. OTS would substitute the term ``substantially
similar'' for the term ``substantially equivalent'' in referencing a
document that equates to the cosigner notice for consistency with the
Board's rule and to avoid confusion with the term of art ``substantial
equivalency'' used in the section on state exemptions. OTS would also
clarify that the date that may be stated on the cosigner notice is the
date of the transaction. NCUA would make similar amendments to its rule
in Sec. 706.13 (existing Sec. 706.3).
Section 535.14 Unfair Late Charges (Existing Section 535.4)
OTS would revise the title of this section to reflect its focus on
unfair late charges. OTS would delete the obsolete reference to
extensions of credit after January 1, 1986. Similarly, NCUA would
propose revisions to Sec. 706.14 (existing Sec. 706.4).
Section 535.15 State Exemptions (Existing Section 535.5)
OTS would revise the subsection on delegated authority to update
the current title of the OTS official with delegated authority to make
determinations under this section.
Request for Comment
The FTC's Credit Practices Rule included a provision allowing
states to seek exemptions from the rule if state law affords a greater
or substantially similar level of protection. See 16 CFR 444.5. The
Agencies adopted similar provisions in their respective Credit
Practices Rules. See 12 CFR 227.16; 12 CFR 535.5; 12 CFR 706.5. In the
absence of any legal requirement, however, the Agencies do not propose
to extend this provision to the proposed rules for consumer credit card
accounts and overdraft services.\39\ The Agencies note that only three
states have been granted exemptions under the Credit Practices
Rule.\40\ Because the exemption is available when state law is
``substantially equivalent'' to the federal rule, an exemption may
provide little relief from regulatory burden while undermining the
uniform application of federal standards. Accordingly, the Agencies
request comment on whether states should be permitted to seek exemption
from the proposed rules on consumer credit card accounts and overdraft
services if state law affords greater or substantially similar level of
protection.
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\39\ The provision of the FTC Act addressing exemptions applies
only to the FTC. See 12 U.S.C. 57a(g).
\40\ The Board and the FTC have granted exemptions to Wisconsin,
New York, and California. 51 FR 24304 (July 3, 1986) (FTC exemption
for Wisconsin); 51 FR 28238 (Aug. 7, 1986) (FTC exemption for New
York); 51 FR 41763 (Nov. 19, 1986) (Board exemption for Wisconsin);
52 FR 2398 (Jan. 22, 1987) (Board exemption for New York); 53 FR
19893 (June 1, 1988) (FTC exemption for California); 53 FR 29233
(Aug. 3, 1988) (Board exemption for California). OTS has granted an
exemption to Wisconsin. 51 FR 45879 (Dec. 23, 1986). The NCUA has
not granted any exemptions.
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In addition, OTS also requests comment on whether the state
exemption provision in its Credit Practices Rule should be retained.
V. Section-by-Section Analysis of the Consumer Credit Card Practices
Subpart
Pursuant to their authority under 15 U.S.C. 57a(f)(1), the Agencies
are proposing to adopt rules prohibiting specific unfair acts or
practices with respect to consumer credit card accounts. The Agencies
would locate these rules in a new Subpart C to their
[[Page 28912]]
respective regulations under the FTC Act. These proposals should not be
construed as a definitive conclusion by the Agencies that a particular
act or practice is unfair or deceptive.
Section ----.21--Definitions
Proposed Sec. ----.21 would define certain terms used in new
Subpart C.
----.21(a) Annual Percentage Rate
Proposed Sec. ----.21(a) defines ``annual percentage rate'' as the
product of multiplying each periodic rate for a balance or transaction
on a consumer credit card account by the number of periods in a year.
This definition corresponds to the definition of ``annual percentage
rate'' in 12 CFR 226.14(b). As discussed in the Board's official staff
commentary to Sec. 226.14(b), this computation does not reflect any
particular finance charge or periodic balance. See comment 14(b)-1.
This definition also incorporates the definition of ``periodic rate''
from Regulation Z. See 12 CFR 226.2.
----.21(b) Consumer
Proposed Sec. ----.21(b) defines ``consumer'' as a natural person
to whom credit is extended under a consumer credit card account or a
natural person who is a co-obligor or guarantor of a consumer credit
card account.
----.21(c) Consumer Credit Card Account
Proposed Sec. ----.21(c) defines ``consumer credit card account''
as an account provided to a consumer primarily for personal, family, or
household purposes under an open-end credit plan that is accessed by a
credit or charge card. This definition incorporates the definitions of
``open-end credit,'' ``credit card,'' and ``charge card'' from
Regulation Z. See 12 CFR 226.2. Under this definition, a number of
accounts would be excluded consistent with exceptions to disclosure
requirements for credit and charge card applications and solicitations.
See proposed 12 CFR 226.5a(a)(5), 72 FR at 33045-46. For example, home-
equity plans accessible by a credit card and lines of credit accessible
by a debit card are not covered by proposed Sec. ----.21(c).
----.21(d) Promotional Rate
Proposed Sec. ----.21(d) is similar to the definition of
``promotional rate'' proposed by the Board in 12 CFR 226.16(e)(2)
elsewhere in today's Federal Register. The first type of ``promotional
rate'' covered by this definition is any annual percentage rate
applicable to one or more balances or transactions on a consumer credit
card account for a specified period of time that is lower than the
annual percentage rate that will be in effect at the end of that
period. Proposed comment 21(d)(1)-1 clarifies that, for purposes of
determining whether a rate is a ``promotional rate'' when the rate that
will apply at the end of the specified period is a variable rate, the
rate offered by the institution is compared to the variable rate that
would have been disclosed at the time of the offer if the promotional
rate had not been offered by the institution, subject to applicable
accuracy requirements. See, e.g., 12 CFR 226.5a(b)(1)(iii); proposed 12
CFR 226.5a(c)(2)(ii), 72 FR at 33047.
The second type of ``promotional rate'' encompassed by the
definition is any annual percentage rate applicable to one or more
transactions on a consumer credit card account that is lower than the
annual percentage rate that applies to other transactions of the same
type. This definition is meant to capture ``life of balance'' offers
where a special rate is offered on a particular balance for as long as
that balance exists. Proposed comment 21(d)(2)-1 provides an example of
a rate that meets this definition.
Section ----.22--Unfair Acts or Practices Regarding Time To Make
Payment
The Agencies are proposing to prohibit institutions from treating
payments on a consumer credit card account as late for any purpose
unless the institution has provided a reasonable amount of time for
consumers to make payment. Currently, section 163(a) of TILA requires
creditors to send periodic statements at least 14 days before
expiration of any period during which consumers can avoid finance
charges on purchases by paying the balance in full (i.e., the ``grace
period''). 15 U.S.C. 1666b(a). Federal law does not, however, mandate a
grace period, and grace periods generally do not apply when consumers
carry a balance from month to month. Regulation Z requires that
creditors mail or deliver periodic statements 14 days before the date
by which payment is due for purposes of avoiding additional finance
charges or other charges, such as late fees. See 12 CFR
226.5(b)(2)(ii); comment 5(b)(2)(ii)-1.
In its June 2007 Proposal, the Board noted anecdotal evidence of
consumers receiving statements relatively close to the payment due
date, with little time remaining to mail their payments in order to
avoid having those payments treated as late. The Board observed that it
may take several days for a consumer to receive a statement after the
close of a billing cycle. The Board also observed that consumers who
pay by mail may need to mail their payments several days before the due
date to ensure that the payment is received on or before that date.
Accordingly, the Board requested comment on whether it should recommend
to Congress that the 14-day requirement in section 163(a) of TILA be
increased. See 72 FR at 32973.
The Board received comments from individual consumers, consumer
groups, and a member of Congress indicating that consumers were not
being provided with a reasonable amount of time to pay their credit
card bills. Comments indicated that, because of the time required for
periodic statements to reach consumers by mail and for consumers'
payments to reach creditors by mail, consumers had little time in
between to review their statements for accuracy before making payment.
This situation can be exacerbated if the consumer is traveling or
otherwise unable to give the statement immediate attention when it is
delivered or if the consumer needs to compare the statement to receipts
or other records. In addition, some comments indicated that consumers
are unable to accurately predict when their payment will be received by
a creditor due to uncertainties in how quickly mail is delivered. Some
comments argued that, because of these difficulties, consumers'
payments were received after the due date, leading to finance charges
as a result of loss of the grace period, late fees, rate increases, and
other adverse consequences.
Comments from industry, however, generally stated that consumers
currently receive ample time to make payments, particularly in light of
the increasing number of consumers who receive periodic statements
electronically and make payments electronically or by telephone. These
comments also stated that providing additional time for consumers to
make payments would be operationally difficult and would reduce
interest revenue, which would have to be recovered by raising the cost
of credit elsewhere.
The Agencies understand that, although increasing numbers of
consumers are receiving periodic statements and making payments
electronically, a significant number still utilize mail. In addition,
the Agencies recognize that, while first class mail is often delivered
within three business days, in some cases it can take
[[Page 28913]]
significantly longer.\41\ Indeed, some large credit card issuers
recommend that consumers allow up to seven days for their payments to
be received by the issuer via mail. Accordingly, in some cases, a
statement sent 14 days before the payment due date may not provide
consumers with a reasonable amount of time to pay in order to avoid
interest charges, late fees, or other adverse consequences.
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\41\ See, e.g., Testimony of Jody Berenblatt, Senior Vice
President--Postal Strategy, Bank of America, before the S. Subcomm.
on Fed. Fin. Mgmt., Gov't Info., Fed. Srvs., and Int'l Security
(Aug. 2, 2007).
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The Agencies recognize that, in enacting Sec. 163(a) of TILA,
Congress set the minimum amount of time between sending the periodic
statement and expiration of any grace period offered by the creditor at
14 days. At the time of its June 2007 Proposal, the Board believed that
consumers might benefit from receiving additional time to make payment.
The Board understands that most creditors currently offer grace periods
and that they use a single due date, which is both the expiration of
the grace period and the date after which a payment will be considered
late for other purposes (such as the assessment of late fees). For that
reason, the Board sought comment on whether it should request that
Congress increase the 14-day minimum mailing requirement with respect
to grace periods. Based on the comments and other information discussed
herein, however, the Agencies are concerned that a separate rule may be
needed that specifically addresses harms other than loss of the grace
period when institutions do not provide a reasonable amount of time for
consumers to make payment. This harm includes late fees and rate
increases as a penalty for late payment. The Agencies' proposal does
not affect the requirements of TILA Sec. 163(a).
Legal Analysis
Treating a payment on a consumer credit card account as late for
any purpose (other than expiration of a grace period) unless the
consumer has been provided a reasonable amount of time to make that
payment appears to be an unfair act or practice under 15 U.S.C. 45(n)
and the standards articulated by the FTC.
Substantial consumer injury. An institution's failure to provide
consumers a reasonable amount of time to make payment appears to cause
substantial monetary and other injury. When a payment is received after
the due date, institutions may impose late fees, increase the annual
percentage rate on the account as a penalty, or report the consumer as
delinquent to a credit reporting agency.
Injury is not reasonably avoidable. It appears that consumers
cannot reasonably avoid this injury unless they have been provided a
reasonable amount of time to pay. Although what constitutes a
reasonable amount of time may vary based on the circumstances, it may
be unreasonable to expect consumers to make payment if they are not
given a reasonable amount of time to do so after receiving a periodic
statement. TILA and Regulation Z provide consumers with the right to
dispute transactions or other items that appear on their periodic
statements. In order to exercise certain of these rights, consumers
must have a reasonable opportunity to review their statements. See 15
U.S.C. 1666i; 12 CFR 226.12(c). Furthermore, in some cases, travel or
other circumstances may prevent the consumer from reviewing the
statement immediately upon receipt. Finally, as discussed above,
consumers cannot control when a mailed payment will be received by the
institution. Thus, a payment mailed well in advance of the due date may
nevertheless arrive after that date.
Injury is not outweighed by countervailing benefits. The injury
does not appear to be outweighed by any countervailing benefits to
consumers or competition. The Agencies are not aware of any direct
benefit to consumers from receiving too little time to make their
payments. Although a longer time to make payment could result in
additional finance charges for consumers who do not receive a grace
period, the consumer would have the choice whether to wait until the
due date to make payment. The Agencies are also aware that, as a result
of the proposed rule, some institutions may be required to incur costs
to alter their systems and will, directly or indirectly, pass those
costs on to consumers. It does not appear, however, that these costs
would outweigh the benefits to consumers of receiving a reasonable
amount of time to make payment.
Proposal
Proposed Sec. ----.22(a) prohibits institutions from treating a
payment as late for any purpose unless the consumer has been provided a
reasonable amount of time to make that payment. Proposed comment 22(a)-
1 clarifies that treating a payment as late for any purpose includes
increasing the annual percentage rate as a penalty, reporting the
consumer as delinquent to a credit reporting agency, or assessing a
late fee or any other fee based on the consumer's failure to make a
payment within the amount of time provided under this section. Although
the proposed rule does not mandate a specific amount of time, the
commentary to the proposal states that reasonableness would be
evaluated from the perspective of the consumer, not the institution.
See proposed comment 22(a)-2.
Proposed Sec. ----.22(b) provides a safe harbor for institutions
that have adopted reasonable procedures designed to ensure that
periodic statements specifying the payment due date are mailed or
delivered to consumers at least 21 days before the payment due date.
Compliance with this safe harbor would allow seven days for the
periodic statement to reach the consumer by mail, seven days for the
consumer to review the statement and make payment, and seven days for
that payment to reach the institution by mail. As noted above, some
institutions already recommend that consumers allow seven days for
receipt of mailed payments. The Agencies believe 21 days to be
reasonable because it allows sufficient time for even delayed mail to
be delivered while also allowing most consumers at least a week to
review their bill and make payment.
In order to minimize burden and facilitate compliance, proposed
comment 22(b)-1 clarifies that an institution with reasonable
procedures in place designed to ensure that statements are mailed or
delivered within a certain number of days from the closing date of the
billing cycle may utilize the safe harbor by adding that number to the
21-day safe harbor for purposes of determining the payment due date on
the periodic statement. For example, if an institution had reasonable
procedures in place designed to the ensure that statements are mailed
or delivered within three days of the closing date of the billing
cycle, the institution could comply with the safe harbor by stating a
payment due date on its periodic statements that is 24 days from the
close of the billing cycle (i.e., 21 days plus three days). Similarly,
if an institution's procedures reasonably ensured that payments would
be sent within five days of the close of the billing cycle, the
institution could comply with the safe harbor by setting the due date
26 days from the close of the billing cycle. Proposed comment 22(b)-2
further clarifies that the payment due date is the date by which the
institution requires the consumer to make payment in order to avoid
being treated as late for any purpose (except with respect to
expiration of a grace period).
[[Page 28914]]
Finally, in order to avoid any potential conflict with section
163(a) of TILA, proposed Sec. ----.22(c) provides that proposed Sec.
----.22(a) does not apply to any time period provided by the
institution within which the consumer may repay the new balance or any
portion of the new balance without incurring finance charges (i.e., a
grace period).
Request for Comment
The Agencies request comment on:
The percentages of consumers who receive periodic
statements by mail and electronically.
The percentages of consumers who make payment by mail,
electronically, by telephone, and through other methods.
The number of days after the closing date of the billing
cycle that institutions typically mail or deliver periodic statements.
Whether the proposed 21-day safe harbor period between
mailing or delivery of the periodic statement and the due date would
give consumers sufficient time to review their statements and make
payment and is otherwise a reasonable amount of time to make payment.
The cost to institutions of altering their systems to
comply with the proposed rule and to mail or deliver periodic
statements 21 days in advance of the payment due date.
Whether the Agencies should adopt a rule that prohibits
institutions from treating a payment as late if received within a
certain number of days after the due date and, if so, the number of
days that would be appropriate.
Whether the Agencies should adopt a rule that requires
institutions, upon the request of a consumer, to reverse a decision to
treat a payment mailed before the due date as late and, if so, what
evidence the institution could require the consumer to provide (e.g., a
receipt from the U.S. Postal Service or other common carrier) and what
time frame would be appropriate (e.g., payment mailed at least five
days before the due date, payment received no more than two business
days late).
The impact of the proposed rule on the availability of
credit.
Section --.23--Unfair Acts or Practices Regarding Allocation of
Payments
The Agencies are proposing to prohibit certain unfair acts or
practices regarding the allocation of payments on consumer credit card
accounts with multiple balances at different interest rates. In its
June 2007 Proposal, the Board discussed the practice among some
creditors of allocating payments first to balances that are subject to
the lowest interest rate. 72 FR at 32982-83. Because many creditors
offer different rates for purchases, cash advances, and balance
transfers, this practice can result in consumers who do not pay the
balance in full each month incurring higher finance charges than they
would under a different allocation method. The Board was particularly
concerned that, when the consumer has responded to a promotional rate
offer, the allocation of payments to balances with the lowest interest
rate often prevents the consumer from receiving the full benefit of the
promotional rate if the consumer uses the card for other transactions.
For example, assume that a consumer responds to an offer of 5% on
transferred balances for six months by opening an account and
transferring $3,000. Then, during the same billing cycle, the consumer
uses the account for a $300 cash advance (to which an interest rate of
20% applies) and a $500 purchase (to which an interest rate of 15%
applies). If the consumer makes an $800 payment, most creditors would
apply the entire payment to the promotional rate balance and the
consumer would incur interest on the more costly cash advance and
purchase balances. Under these circumstances, the consumer is
effectively denied the benefit of the 5% promotional rate for six
months if the card is used for transactions because the consumer must
pay off the entire transferred balance in order to avoid paying a
higher rate on the transactions. Indeed, the only way for the consumer
to receive the benefit of the 5% promotional rate is to not use the
card for purchases, which would effectively require the consumer to use
an open-end credit account as a closed-end installment loan.
Deferred interest plans raise the same basic concerns. Many
creditors offer deferred interest plans where consumers may avoid
paying interest on purchases if the balance is paid in full by the end
of the deferred interest period. If the balance is not paid in full
when the deferred interest period ends, these deferred interest plans
often require the consumer to pay interest that has accrued during the
deferred interest period. A consumer whose payments are applied to a
balance on which interest is deferred instead of a balance on which
interest is not deferred incurs additional finance charges and
therefore does not receive the benefit of the deferred interest plan.
In addition, creditors typically offer a grace period for purchases
if a consumer pays in full each month but do not typically offer a
grace period on balance transfers or cash advances. Because payments
will be allocated to the transferred balance first, a consumer cannot
take advantage of both a promotional rate on balance transfers or cash
advances and a grace period on purchases. Under these circumstances,
the only way for a consumer to avoid paying interest on purchases is to
pay off the entire balance, including the transferred balance or cash
advance balance subject to the promotional rate.
In preparing its June 2007 Proposal, the Board sought to address
issues regarding payment allocation by developing disclosures
explaining payment allocation methods on accounts with multiple
balances at different annual percentage rates so that consumers could
make informed decisions about card usage, particularly in regard to
promotional rates. For example, if consumers knew that they would not
receive the full benefit of a promotional rate on a particular credit
card account if they used that account for purchases during the
promotional period, they might use a different account for purchases
and pay that account in full every month to take advantage of the grace
period. The Board conducted extensive consumer testing in an effort to
develop disclosures that would enable consumers to understand typical
payment allocation practices and make informed decisions regarding the
use of credit cards. In this testing, 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 disclosures 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 could be improved to more effectively
communicate to consumers how payment allocation can affect their
interest charges. 72 FR at 33047, 33050.
In the June 2007 Proposal, the Board did, however, propose to add
Sec. 226.5a(b)(15) to require a creditor to explain payment allocation
to consumers. Specifically, the Board proposed that creditors 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 creditors must disclose to
[[Page 28915]]
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 purchase balance until the
entire balance is paid, including the transferred balance or cash
advance balance, as applicable. 72 FR at 32948, 33047.
In response to the June 2007 Proposal, several commenters
recommended the Board test a simplified payment allocation disclosure
that covers situations other than low rate balance transfers offered
with cards. One credit card issuer, however, stated that, because
creditors almost uniformly apply payments to the balance with the
lowest annual percentage rate, consumers could not shop for a better
payment allocation method even if an effective disclosure could be
developed. Furthermore, comments from consumers and consumer groups
urged the Board to go further and prohibit payment allocation methods
that applied payments to the lowest rate balance before other balances.
In consumer testing conducted for the Board in March 2008, the
Board tested a revised payment allocation disclosure.\42\ Some
participants understood from earlier experience that creditors
typically will apply payments to lower rate balances first and that
this method causes them to incur higher interest charges. For those
participants, however, that did not know about payment allocation
methods from earlier experience, the disclosure tested was still not
effective in communicating payment allocation methods.
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\42\ This disclosure stated: ``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).''
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Accordingly, the Agencies propose to address the foregoing concerns
regarding payment allocation by prohibiting specific unfair acts or
practices under the FTC Act. To the extent the Agencies' proposals are
ultimately adopted, the Board would withdraw its proposal under
Regulation Z to require a creditor to explain payment allocation to
consumers.
Legal Analysis
Proposed Sec. ----.23 would prohibit three unfair acts or
practices. First, when different annual percentage rates apply to
different balances on a consumer credit card account, the Agencies
would prohibit allocation among the balances of any amount paid by the
consumer in excess of the required minimum periodic payment in a manner
that is less beneficial to consumers than one of three listed methods.
Second, when a consumer credit card account has one or more promotional
rate balances or balances on which interest is deferred, the Agencies
would prohibit allocation of amounts paid by the consumer in excess of
the minimum payment to such balances before other balances. Third, the
Agencies would prohibit institutions from requiring consumers to repay
any portion of a promotional rate balance or deferred interest balance
in order to receive any grace period offered for purchases. As
discussed below, these acts or practices appear to meet the definition
of unfairness under 15 U.S.C. 45(n) and the standards articulated by
the FTC.
Substantial consumer injury. Each of the three practices described
above appear to cause substantial monetary injury to consumers in the
form of higher interest charges than would be incurred if institutions
did not engage in these practices. Specifically, as discussed above,
consumers who do not pay the balance in full and whose payments in
excess of the minimum payment are first applied to the balance with the
lowest annual percentage rate incur higher interest charges than they
would under other payment allocation methods, such as division of the
amount among the balances or application of the amount to the balance
with the highest rate first. Similarly, consumers who do not receive a
grace period offered on a purchase balance solely because they also
have a promotional rate balance or deferred interest balance incur
higher interest charges than they would if they received the grace
period.
Injury is not reasonably avoidable. Several factors appear to
prevent consumers from reasonably avoiding these additional interest
charges. First, consumers generally have no control over the
institution's allocation of payments or provision of grace periods.
Second, the Board's consumer testing indicates that disclosures may not
enable consumers to understand sufficiently the effects of payment
allocation or the loss of the grace period. Even if disclosures were
effective, it appears that consumers still could not avoid the injury
by selecting a credit card account with more favorable terms because
institutions almost uniformly apply payments to the balance with the
lowest rate and do not provide a grace period when a consumer has a
promotional rate balance or deferred interest balance.\43\ Third,
although a consumer could avoid the injury by paying the balance in
full each month, this may not be a reasonable expectation as many
consumers are unable to do so. Similarly, it may be unreasonable to
expect a consumer to avoid the injury by, for example, taking a cash
advance or transferring a balance in response to a promotional rate
offer and then using a different account for purchases because this
would effectively require the consumer to use an open-end credit
account as a closed-end installment loan.
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\43\ See Statement for FTC Credit Practices Rule, 48 FR at 7746
(``If 80 percent of creditors include a certain clause in their
contracts, for example, even the consumer who examines contract[s]
from three different sellers has a less than even chance of finding
a contract without the clause. In such circumstances relatively few
consumers are likely to find the effort worthwhile, particularly
given the difficulties of searching for contract terms * * *''
(footnotes omitted)).
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Injury is not outweighed by countervailing benefits. The prohibited
practices do not appear to create benefits for consumers and
competition that outweigh the injury. The Agencies understand that, if
implemented, the proposal may reduce the revenue that institutions
receive from interest charges, which may in turn lead institutions to
increase rates generally or to offer higher promotional rates or fewer
deferred interest plans. As a result, consumers who, for example, do
not use an account for purchases after transferring a balance would
lose the benefit of the lower promotional rate. This effect should be
muted, however, because the Agencies' proposal prohibits only the
practices that are most harmful to consumers and leaves institutions
with considerable flexibility in the allocation of payments,
particularly with regard to the minimum payment. Furthermore, the
Agencies believe that the proposal would enhance transparency and
enable consumers to better assess the costs associated with using their
credit card accounts at the time they engage in transactions. To the
extent that upfront costs have been artificially reduced because many
consumers cannot reasonably avoid paying higher interest charges later,
the reduction does not represent a true benefit to consumers as a
whole. Finally, it appears that the Agencies' proposal should enhance
rather than harm competition because institutions offering rates that
reflect the institution's costs (including the cost to the institution
of borrowing funds and
[[Page 28916]]
operational expenses) would no longer be forced to compete with
institutions that offer artificially reduced rates.
Proposal
Proposed Sec. ----.23(a) would establish a general rule governing
payment allocation on accounts that do not have a promotional rate
balance or a balance on which interest is deferred. Proposed Sec. --
--.23(b) would establish special rules for accounts that do have a
promotional rate balance or a deferred interest balance.
Proposed Sec. ----.23 does not limit or otherwise address the
institution's ability to determine the amount of the minimum payment or
how that payment is allocated. See proposed comment 23-1. Furthermore,
an institution may adjust amounts to the nearest dollar when
allocating. See proposed comment 23-2.
----.23(a) General Rule for Accounts Within Different Annual Percentage
Rates on Different Balances
Proposed Sec. ----.23(a) would require the institution to allocate
any amount paid by the consumer in excess of the required minimum
periodic payment among the balances in a manner that is no less
beneficial to consumers than one of three listed methods. Although the
proposed rule does not prohibit institutions from using allocation
methods other than those listed, the method used must be no less
beneficial to consumers than one of the listed methods. A method is no
less beneficial to consumers if the method results in the assessment of
the same or a lesser amount of interest charges than would be assessed
under the listed method. For example, an institution may not reasonably
allocate the entire amount paid by the consumer in excess of the
required minimum periodic payment to the balance with the lowest annual
percentage rate because this method would result in higher interest
charges than any of the methods listed in proposed Sec. ----.23(a).
See proposed comment 23(a)-1. An example of an allocation method that
is no less beneficial to consumers than a listed method is provided in
proposed comment 23(a)-2.
Proposed Sec. ----.23(a) lists three permissible payment
allocation methods. First, proposed Sec. ----.23(a) would allow an
institution to apply the entire amount paid in excess of the minimum
payment first to the balance with the highest annual percentage rate
and any remaining amount to the balance with the next highest annual
percentage rate and so forth. Although this method could result in none
of the amount being applied to some balances, the Agencies believe that
institutions should be able to use this approach because it will
generally minimize interest charges. An example of this allocation
method is provided in proposed comment 23(a)(1)-1.
Second, proposed Sec. ----.23(a) would allow an institution to
allocate equal portions of the amount paid in excess of the minimum
payment to each balance. Third, the proposal would allow an institution
to allocate the amount among the balances in the same proportion as
each balance bears to the total balance (i.e., pro rata). Examples of
these allocation methods are provided in proposed comments 23(a)(2)-1
and 23(a)(3)-1.
----.23(b) Special Rules for Accounts With Promotional Rate Balances or
Deferred Interest Balances
The Agencies believe that separate requirements may be warranted
for accounts with promotional rate balances or balances on which
interest is deferred because, in many cases, the consumer will have
engaged in transactions based on representations made by the
institution regarding a promotional rate or a deferred interest plan.
Proposed Sec. ----.23(b) seeks to ensure that consumers receive the
benefit of promotional rates and deferred interest plans.
----.23(b)(1)(i) Rule Regarding Payment Allocation
Proposed Sec. ----.23(b)(1)(i) would ensure that consumers receive
the benefit of a promotional rate or deferred interest plan by
requiring that amounts paid in excess of the minimum payment would be
allocated to the promotional rate balance or the deferred interest
balance only if other balances have been fully paid. Specifically, the
proposal would require that amounts paid by the consumer in excess of
the minimum payment be allocated first among balances that are not
promotional rate balances or deferred interest balances, consistent
with proposed Sec. ----.23(a). If there is any remaining amount,
proposed Sec. ----.23(b)(1)(i) would require the institution to
allocate the remaining amount to each promotional rate balance or
deferred interest balance, consistent with proposed Sec. ----.23(a).
Proposed comment 23(b)(1)(i)-1 would provide illustrative examples of
how payments must be allocated under proposed Sec. ----.23(b)(1)(i).
----.23(b)(1)(ii) Exception for Balances on Which Interest Is Deferred
Proposed Sec. ----.23(b)(1)(ii) would create an exception to the
payment allocation rule in proposed Sec. ----.23(b)(1)(i) during the
last two billing cycles of a deferred interest plan. The Agencies
understand that currently some institutions begin to apply consumers'
payments to the deferred interest balance during the last two billing
cycles of a deferred interest plan because doing so will reduce or
eliminate that balance and thereby reduce or eliminate the deferred
interest that may be charged when the deferred interest plan expires.
Because this practice appears to be beneficial to consumers, the
Agencies propose to permit institutions to utilize this practice, at
their option. Proposed comment 23(b)(1)(ii)-1 provides illustrative
examples of how payments may be allocated under this exception. As
noted below, the Agencies request comment on whether this exception is
appropriate and, if so, whether it should apply during the last two
billing cycles of the deferred interest plan or a different period of
time.
----.23(b)(2) Rule Regarding Grace Period
Proposed Sec. ----.23(b)(2) would prohibit institutions from
requiring consumers who are otherwise eligible for a grace period to
repay any portion of a promotional rate balance or deferred interest
balance in order to receive the benefit of any grace period on other
balances. Under the provision, a consumer would not be denied the
benefits of a grace period solely because the consumer carries a
balance covered by a promotional rate or deferred interest plan.
Proposed comment 23(b)(2)-1 provides an example of when this
prohibition would apply.
Request for Comment
The Agencies request comment on:
Whether other methods of allocation should be listed in
proposed Sec. ----.23(a).
Whether proposed Sec. ----.23(a) should permit
institutions to apply amounts in excess of the minimum payment first to
balances on which the institution is prohibited from increasing the
rate (pursuant to proposed Sec. ----.24).
Whether the requirement in proposed Sec. ----.23(b)(1)(i)
that amounts in excess of the minimum payment be applied to other
balances before deferred interest balances may prevent consumers from
paying the deferred interest balance in full by the end of the deferred
interest period.
The need for the exception regarding deferred interest
balances in proposed Sec. ----.23(b)(1)(ii).
[[Page 28917]]
Whether the exception regarding deferred interest balances
in proposed Sec. ----.23(b)(1)(ii) should apply during the last two
billing cycles of the deferred interest plan or during a different time
period.
Whether consumers should be permitted to instruct the
institution regarding allocation of amounts in excess of the required
minimum periodic payment.
The cost to institutions of the proposed rule and the
impact on the availability of credit.
Section ----.24--Unfair Acts and Practices Regarding Application of
Increased Rates to Outstanding Balances
The Agencies are proposing to prohibit the application of increased
rates to pre-existing balances, except in certain limited
circumstances. Currently, Sec. 226.9(c) of Regulation Z requires 15
days advance notice of certain changes to the terms of an open-end plan
as well as increases in the minimum payment. However, advance notice is
not required if an interest rate or other finance charge increases due
to a consumer's default or delinquency. See 12 CFR 226.9(c)(1); comment
9(c)(1)-3. Furthermore, no change-in-terms notice is required if the
creditor set forth the specific change in the account-opening
disclosures. See 12 CFR 226.9(c), comment 9(c)-1.
In its June 2007 Proposal, the Board expressed concern that the
imposition of penalty pricing can come as a costly surprise to
consumers who are not aware of, or do not understand, what behavior is
considered a ``default'' under their agreement. See 72 FR at 33009-13.
The Board noted that penalty rates can be more than twice as much as
the consumer's normal rate on purchases and may apply to all of the
balances on the consumer's account for several months or longer.\44\
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\44\ See also GAO Credit Card Report at 24 (noting that, for the
28 credit cards it reviewed, ``[t]he default rates were generally
much higher than rates that otherwise applied to purchases, cash
advances, or balance transfers. For example, the average default
rate across the 28 cards was 27.3 percent in 2005--up from the
average of 23.8 in 2003--with as many as 7 cards charging rates over
30 percent'').
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Consumer testing conducted for the Board indicated that some
consumers do not understand what factors can trigger penalty pricing,
such as the fact that one late payment may constitute a ``default.'' In
addition, some participants did not appear to understand that penalty
rates can apply to all of their balances, including existing balances.
Some participants also did not appear to understand how long a penalty
rate could remain in effect. The Board observed that account-opening
disclosures may be provided to the consumer too far in advance for the
consumer to recall the circumstances that may cause his or her rates to
increase. In addition, the consumer may not have retained a copy of the
account-opening disclosures and may not be able to effectively link the
information disclosed at account opening to the current repricing of
his or her account.
The Board's June 2007 Proposal included revisions to Regulation Z
and its commentary designed to improve consumers' awareness about
changes in their account terms and increased rates, including rate
increases imposed as a penalty for delinquency or other acts or
omissions constituting default under the account agreement. These
revisions were also intended to enhance consumers' ability to shop for
alternative financing before such changes in terms or increased rates
become effective. Specifically, the Board proposed to give consumers 45
days advance notice of a change in terms or an increased rate imposed
as a penalty and to make the disclosures about changes in terms and
increased rates more effective. See proposed 12 CFR 226.9(c), (g), 72
FR at 33056-58.\45\ The Board also proposed to require that periodic
statements for credit card accounts disclose the annual percentage rate
or rates that may be imposed as a result of late payment. See proposed
12 CFR 226.7(b)(11)(i)(C), 72 FR at 33053.
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\45\ The Board has proposed additional revisions to these
provisions elsewhere in today's Federal Register.
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When developing the June 2007 Proposal, the Board considered, but
did not propose, a prohibition on so-called ``universal default
clauses'' or similar practices under which a creditor raises a
consumer's interest rate to the penalty rate if, for example, the
consumer makes a late payment on an account with a different creditor.
The Board also considered but did not propose a requirement similar to
that in some state laws providing consumers with the right to reject a
change in terms.
In response to its June 2007 Proposal, the Board received comments
from individual consumers, consumer groups, another federal banking
agency, and a member of Congress stating that notice alone was not
sufficient to protect consumers from the harm caused by rate increases.
These comments argued that many consumers would not read or understand
the proposed disclosures and, even if they did, many would be unable to
transfer the balance to a new credit card account with comparable terms
before the increased rate went into effect. Some of these comments
argued that creditors should be prohibited from increasing the rate on
an existing balance in all instances. Others argued that consumers
should be given the right to reject application of an increased rate to
an existing balance by closing the account, but only if the increase
was not triggered by a late payment or other violation of the terms of
that account. This approach was also endorsed by some creditors. On the
other hand, comments from the majority of creditors stated that the 45-
day notice requirement would delay creditors from increasing rates to
reflect a consumer's increased risk of default, requiring creditors to
account for that risk by, for example, charging higher annual
percentage rates at the outset of the account relationship. These
comments also noted that, because creditors use rate increases to pass
on the costs of funds the creditors themselves pay, delays in the
imposition of increased rates could result in higher costs of credit or
less available credit.
The Agencies are concerned that disclosure alone may be
insufficient to protect consumers from the harm caused by the
application of increased rates to pre-existing balances. Accordingly,
the Agencies are proposing to prohibit this practice except in certain
limited circumstances.
Legal Analysis
The Agencies propose to prohibit institutions from increasing the
annual percentage rate applicable to the outstanding balance before the
effective date of the rate increase, except in certain circumstances.
As discussed below, this practice appears to meet the test for
unfairness under 15 U.S.C. 45(n) and the standards articulated by the
FTC.
Substantial consumer injury. Application of an increased annual
percentage rate to an outstanding balance appears to cause substantial
monetary injury by increasing the interest charges assessed to a
consumer's credit card account.
Injury is not reasonably avoidable. Although the injury resulting
from increases in the annual percentage rate may be avoidable by some
consumers under certain circumstances, this injury does not appear to
be reasonably avoidable by consumers as a general matter. As discussed
above, the Board's consumer testing indicates that many consumers are
not aware of the circumstances under which their rates
[[Page 28918]]
may increase.\46\ Thus, when deciding whether to use a credit card for
a particular transaction or whether to pay off a credit card balance
versus some other obligation, the consumer is likely to consider only
the annual percentage rate in effect at that time. Although the
disclosures proposed by the Board under Regulation Z should, if
implemented, improve consumers' understanding, disclosures alone may
not be sufficient to enable consumers to avoid injury. Consumers may
ignore the disclosures because they overestimate their ability to avoid
the penalty triggers.\47\ Furthermore, although the Board's proposed 45
days advance notice of a rate increase would enable some consumers to
transfer the balance to another account with a comparable annual
percentage rate and terms, consumers who are not able to do so cannot
avoid the resulting injury. For these reasons, disclosures alone may
not enable consumers to avoid the injury caused by an increase in rate
on an existing balance.
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\46\ See also GAO Credit Card Report at 6 (``[O]ur interviews
with 112 cardholders indicated that many failed to understand key
terms or conditions that could affect their costs, including when
they would be charged for late payments or what actions could cause
issuers to raise rates.'').
\47\ See Statement for FTC Credit Practices Rule, 49 FR at 7744
(``Because remedies are relevant only in the event of default, and
default is relatively infrequent, consumers reasonably concentrate
their search on such factors as interest rates and payment
terms.''). This behavior is commonly referred to as ``hyperbolic
discounting.'' See, e.g., Angela Littwin, Beyond Usury: A Study of
Credit-Card Use and Preference Among Low-Income Consumers, 80 Tex.
L. Rev. 451, 467-478 (2008) (discussing consumers' tendency to
underestimate their future credit card usage when they apply for a
card and thereby failing to adequately anticipate the costs of the
product); Shane Frederick, et al., Time Discounting and Time
Preference: A Critical Review, 40 J. Econ. Literature 351, 366-67
(2002) (reviewing the literature on hyperbolic discounting); Ted
O'Donoghue & Matthew Rabin, Doing It Now or Later, 89 Am. Econ. Rev.
103, 103, 111 (1999) (explaining people's preference for delaying
unpleasant activities and accepting immediate rewards despite their
knowledge that the delay may lessen potential future rewards or
increase potential adverse consequences).
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Consumers also lack control over many of the circumstances under
which an institution increases an annual percentage rate. First, an
institution may increase a rate for reasons that are completely
unrelated to any individual consumer. For instance, an institution may
increase rates to increase revenues or in response to changes in the
cost to the institution of borrowing funds. Consumers lack any control
over these increases and therefore cannot reasonably avoid the
resulting injury. Furthermore, consumers cannot be reasonably expected
to predict when such repricing will occur because many institutions
reserve the right to change the terms of the consumer's account at any
time for any reason.
Second, an institution may increase an annual percentage rate based
on consumer behavior that is unrelated to the consumer's performance on
the credit card account with that institution. For example, an
institution may increase a rate due to a drop in a consumer's credit
score or a default on an account with a different creditor even though
the consumer has paid the credit card account with the institution
according to the terms of the cardholder agreement.\48\ As noted above,
this type of increase is sometimes referred to as ``universal
default.'' The consumer may or may not have been aware of or able to
control the factor that caused the drop in the consumer's credit score,
and the consumer cannot control what factors are considered or how
those factors are weighted in creating the credit score. For example, a
consumer may be unaware that using a certain amount of the available
credit on open-end credit accounts can lead to a reduction in credit
score. Furthermore, as discussed below, a default may not be reasonably
avoidable in some instances. Nor can the consumer control how the
institution uses credit scores or other information to set interest
rates.
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\48\ See, e.g., Statement of Janet Hard before S. Perm. Subcomm.
on Investigations, Hearing on Credit Card Practices: Unfair Interest
Rate Increases (Dec. 4, 2007) (available at http://www.senate.gov/
~govt-aff/index.cfm?Fuseaction=Hearings.Detail&HearingID=509).
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Third, an institution may increase an annual percentage rate based
on consumer behavior that is related to the consumer's credit card
account with the institution but does not violate the account terms.
For example, an institution may increase the annual percentage rates of
consumers who are close to (but not over) the credit limit on the
account or who make the minimum payment set by the institution for
several consecutive months.\49\ Although this type of activity may be
within the consumer's control, the consumer may not be able to
reasonably avoid the resulting injury because the consumer is not aware
that this behavior may be used by the institution's internal risk
models as a basis for increasing the rate on the account. Indeed, the
institution's provision of a specific credit limit or minimum payment,
for example, may be reasonably interpreted by the consumer as an
implicit representation that the consumer will not be penalized if the
credit limit is not exceeded or the minimum payment is made.
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\49\ See, e.g., Statement of Bruce Hammonds, President, Bank of
America Card Services before S. Perm. Subcomm. on Investigations,
Hearing on Credit Card Practices: Unfair Interest Rate Increases at
5 (Dec. 4, 2007) (available at http://hsgac.senate.gov/public/--
files/STMTHammondsBOA.pdf).
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Fourth, an institution may increase an annual percentage rate based
on consumer behavior that violates the account terms. What violates the
account terms can vary from institution to institution and from account
to account. The Agencies understand that the most common violations of
the account terms that result in an increase in rate are exceeding the
credit limit, a payment that is returned for insufficient funds, and a
late payment.\50\ In some cases, it appears that individual consumers
may have been able to avoid these events by taking reasonable
precautions. In other cases, however, it appears that the event may not
be reasonably avoidable.
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\50\ See GAO Credit Card Report at 25.
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For example, consumers who carefully track their transactions may
still exceed the credit limit because of charges of which they were not
aware (such as the institution's imposition of interest or fees) or
because of the institution's delay in replenishing the credit limit
following payment. Similarly, although consumers can reduce the risk of
making a payment that will be returned for insufficient funds by
carefully tracking the credits and debits on their deposit account,
consumers still lack sufficient information about key aspects on their
accounts, including how holds will affect the availability of funds and
when funds from a deposit or a credit will be made available by the
depository institution.\51\ Finally, although the Agencies' proposed
Sec. ----.22 would, if implemented, ensure that consumers' payments
will not be treated as late for any reason (including for purposes of
triggering an increase in rate) unless they receive a reasonable amount
of time to make payment, there may be other reasons why consumers pay
late or miss a payment.\52\
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\51\ See discussion of overdrafts and debit holds in relation to
proposed Sec. ----.32 below.
\52\ See, e.g., Statement for FTC Credit Practices Rule, 49 FR
at 7747-48 (finding that ``the majority [of defaults] are not
reasonably avoidable by consumers'' because of factors such as loss
of income or illness); Testimony of Gregory Baer, Deputy General
Counsel, Bank of America before the H. Fin. Servs. Subcomm. on Fin.
Instit. & Consumer Credit at 4 (Mar. 13, 2008) (``If a customer
falls behind on an account, our experience tells us it is likely due
to circumstances outside his or her control.''); Sumit Agarwal &
Chunlin Liu, Determinants of Credit Card Delinquency and Bankruptcy:
Macroeconomic Factors, 27 J. of Econ. & Finance 75, 83 (2003)
(finding ``conclusive evidence that unemployment is critical in
determining delinquency''); Fitch: U.S. Credit Card & Auto ABS Would
Withstand Sizeable Unemployment Stress, Reuters (Mar. 24, 2008)
(``According to analysis performed by Fitch, increases in the
unemployment rate are expected to cause auto loan and credit card
loss rates to increase proportionally with subprime assets
experiencing the highest proportional rate.'') (available at http://
www.reuters.com/article/pressRelease/idUS94254+24-Mar-
2008+BW20080324).
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[[Page 28919]]
Accordingly, although the injury resulting from the application of
increased annual percentage rates to existing balances may be avoidable
in some individual cases, it appears that, as a general matter, this
injury is not reasonably avoidable. It does not appear, however, that
this reasoning extends to the application of increased rates to new
transactions. The Board's proposal under Regulation Z would, if
implemented, require creditors to provide notice 45 days in advance of
an increase in the annual percentage rate. See proposed 12 CFR
226.9(c), (g), 72 FR at 33056-58.\53\ In addition, as discussed below,
proposed ----.24 would not permit the institution to increase the rate
on purchases made up to 14 days after provision of the 45-day notice.
These proposals would enable consumers to reasonably avoid any injury
caused by application of an increased rate to new transactions by
providing consumers sufficient time to receive and review the 45-day
notice and to decide whether to continue using the card. Finally, as
also discussed below, it does not appear that, when a consumer has
violated the account terms, application of an increased rate to an
existing balance is an unfair practice in all circumstances.
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\53\ The Board has proposed additional revisions to these
provisions elsewhere in today's Federal Register.
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Injury is not outweighed by countervailing benefits. It appears
that the proposal will result in a net benefit to consumers because
some consumers are likely to benefit substantially while the adverse
effects on others are likely to be small. The Agencies are aware that
some institutions may offer lower annual percentage rates to consumers
at the outset of an account relationship knowing that the rate can be
subsequently adjusted to compensate for an increase in the cost of
funds or in the risk of default. The Agencies are also aware that, if
institutions are prohibited from increasing rates on existing balances,
they may charge higher rates or set lower credit limits initially or
curtail credit availability to higher risk consumers. As discussed