[Federal Register Volume 74, Number 18 (Thursday, January 29, 2009)]
[Rules and Regulations]
[Pages 5498-5584]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E8-31186]


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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-2008-0027]
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: Final rule.

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SUMMARY: The Board, OTS, and NCUA (collectively, the Agencies) are 
exercising their authority under section 5(a) of the Federal Trade 
Commission Act to prohibit unfair or deceptive acts or practices. The 
final rule prohibits institutions from engaging in certain acts or 
practices in connection with consumer credit card accounts. The final 
rule relates to other Board rules under the Truth in Lending Act, which 
are published elsewhere in today's Federal Register. Because the Board 
has proposed new rules regarding overdraft services for deposit 
accounts under the Electronic Fund Transfer Act elsewhere in today's 
Federal Register, the Agencies are not taking action on overdraft 
services at this time. A secondary basis for OTS's rule is the Home 
Owners' Loan Act.

[[Page 5499]]


DATES: Effective Date: The final rule is effective on July 1, 2010.

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, 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; 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 adopting several 
new provisions intended to protect consumers against unfair acts or 
practices with respect to consumer credit card accounts. These rules 
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). A secondary basis for 
OTS's rule is the Home Owners' Loan Act (HOLA), 12 U.S.C. 1461 et seq.

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 Regulation Z 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. Although 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-
32952.\1\
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    \1\ As discussed below, the Agencies have relied in part on the 
Board's consumer testing in determining that certain practices are 
unfair under the FTC Act. The results of this consumer testing are 
set forth in the reports prepared by the Board's testing consultant. 
The initial report was posted on the Board's public website along 
with the June 2007 Regulation Z Proposal. See Design and Testing of 
Effective Truth in Lending Disclosures (May 16, 2007) (available at 
http://www.federalreserve.gov/dcca/regulationz/20070523/Execsummary.pdf). Two supplemental reports have been posted on the 
Board's public website along with the final rules under Regulation 
Z, which are published elsewhere in today's Federal Register. See 
Design and Testing of Effective Truth in Lending Disclosures: 
Findings from Qualitative Consumer Research (Dec. 15, 2008); Design 
and Testing of Effective Truth in Lending Disclosures: Findings from 
Experimental Study (Dec. 15, 2008).
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    In response to the June 2007 Regulation Z 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 commenters, however, urged the Board to take 
additional action with respect to a variety 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 first 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 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 Federal 
Trade Commission (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 received 29 comment letters on its ANPR. These comments were 
summarized in the Agencies' May 2008 proposed rule. See 73 FR 28904, 
28905-28906 (May 19, 2008) (May 2008 Proposal). In brief, 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 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.
    In contrast, the consumer group commenters urged OTS to move ahead 
with a rule that would combine the FTC's principles-based standards 
with prohibitions on specific practices. They urged OTS to ban numerous 
practices, including several practices addressed in the final rule 
(such as ``universal default'' repricing, applying payments first to 
balances with the lowest interest rate, and credit cards marketed at 
subprime consumers that provide little available credit at account 
opening).

[[Page 5500]]

C. Related Action by the Agencies Preceding This Rulemaking

    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. In addition, the Agencies 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 was also informed by the results of 
consumer testing conducted on behalf of the Board in connection with 
its June 2007 Regulation Z Proposal.
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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/stillborrowing.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 gathered information from a number of 
Congressional hearings on consumer protection issues regarding credit 
cards.\3\ In these hearings, members of Congress heard testimony from 
individual consumers, 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.\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\ On September 23, 2008, the U.S. House of Representatives 
passed the Credit Cardholders' Bill of Rights Act of 2008 (H.R. 
5244), which addresses consumer protection issues regarding credit 
cards. See also The Credit Card Accountability, Responsibility and 
Disclosure Act, S. 3252, 110th Cong. (July 10, 2008); The Credit 
Card Reform Act of 2008, S. 2753, 110th Cong. (Mar. 12, 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. The Agencies' May 2008 Proposal

    In May 2008, the Agencies proposed rules under the FTC Act 
addressing unfair or deceptive acts or practices in connection with 
consumer credit card accounts and overdraft services for deposit 
accounts. See 73 FR 28904 (May 2008 Proposal). These proposals were 
accompanied by complementary proposals by the Board under Regulation Z 
with respect to consumer credit card accounts and Regulation DD with 
respect to deposit accounts. See 73 FR 28866 (May 19, 2008) (May 2008 
Regulation Z Proposal); 73 FR 28739 (May 19, 2008) (May 2008 Regulation 
DD Proposal).
    In order to best ensure that all entities that offer consumer 
credit card accounts and overdraft services on deposit accounts are 
treated in a like manner, the Board, OTS, and NCUA joined together to 
issue the May 2008 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. 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 (although HOLA serves as a 
secondary basis for OTS's rule). Accordingly, the Agencies endeavored 
to propose rules that are as uniform as possible. Prior to issuing the 
proposed rules, the Agencies also consulted with the two other federal 
banking agencies, the Office of the Comptroller of the Currency (OCC) 
and the Federal Deposit Insurance Corporation (FDIC), as well as with 
the FTC.
    In an effort to achieve a level playing field, the May 2008 
Proposal focused 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 recognized 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 the proposed rules. 
The Agencies noted, however, that FTC-regulated entities appear to 
represent a small percentage of the market for consumer credit card 
accounts and overdraft services.\5\ For OTS, addressing certain 
deceptive credit card practices in the May 2008 Proposal, rather than 
through an interpretation or expansion

[[Page 5501]]

of its Advertising Rule, also fosters consistency because the other 
Agencies do not have comparable advertising regulations.
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    \5\ Some commenters on the May 2008 Proposal expressed concern 
that the proposed rules would place institutions subject to the 
final rule at a competitive disadvantage in relation to FTC-
regulated entities. As discussed in detail below, the Board has 
published elsewhere in today's Federal Register a proposal regarding 
overdraft services using its authority under the Electronic Fund 
Transfer Act (EFTA) and Regulation E. These proposed rules would 
apply to state-chartered credit unions providing overdraft services. 
Furthermore, because FTC-regulated entities represent a small 
percentage of the market for consumer credit card accounts, the 
Agencies believe that any competitive disadvantage is unlikely to be 
significant. In addition, although the final rule does not apply to 
FTC-regulated entities, those entities are still subject to the FTC 
Act.
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Credit Practices Rule
    The Agencies proposed to make non-substantive, organizational 
changes to the Credit Practices Rule. Specifically, in order to avoid 
repetition, the Agencies proposed to 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 proposed additional, non-substantive changes to the 
organization of their versions of the Credit Practices Rule. OTS also 
solicited comment on whether to retain the state exemption provision in 
its Credit Practices Rule.
Consumer Credit Card Accounts
    The Agencies proposed seven provisions under the FTC Act regarding 
consumer credit card accounts. These provisions were 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 have been prohibited from treating a 
payment as late for any purpose unless consumers had been provided a 
reasonable amount of time to make that payment. The proposed rule would 
have created 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.
    Second, when different annual percentage rates apply to different 
balances, institutions would have been 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. 
Furthermore, when an account has a discounted promotional rate balance 
or a balance on which interest is deferred, institutions would have 
been required to allocate 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 have been 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 have been prohibited from increasing the 
annual percentage rate on an outstanding balance. This prohibition 
would not have applied, however, where a variable rate increases due to 
the operation of an index, where a promotional rate expired or was lost 
(provided the rate was not increased to a penalty rate), or where the 
minimum payment was not received within 30 days after the due date.
    Fourth, institutions would have been 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 
could have been assessed.
    Fifth, institutions would have been prohibited from imposing 
finance charges based on balances for days in billing cycles that 
precede the most recent billing cycle. The proposed rule would have 
prohibited 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 have been 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 utilized the majority of the available credit on the account. The 
proposal would also have required 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.
    Seventh, institutions making firm offers of credit advertising 
multiple annual percentage rates or credit limits would have been 
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 also proposed two provisions prohibiting unfair acts 
or practices related to overdraft services in connection with consumer 
deposit accounts. The proposed provisions were intended to ensure that 
consumers understand the terms of overdraft services and have the 
choice to avoid the associated costs where such services do not meet 
their needs.
    The first provision provided that it would be 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 provided 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 did not opt out. The proposed opt-out right would have 
applied 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 have prohibited certain acts or practices 
associated with assessing overdraft fees in connection with debit 
holds. Specifically, the proposal would have prohibited an institution 
from assessing an overdraft fee if the overdraft was caused solely by a 
hold placed on funds that exceeded the actual purchase amount of the 
transaction, unless this purchase amount would have caused the 
overdraft.
Comments on the May 2008 Proposal
    The comment period for this proposal closed on August 4, 2008. The 
Board received more than 60,000 comments on the May 2008 Proposal, more 
than for any other regulatory proposal in its history. OTS received 
approximately 5,200 comments. NCUA received approximately 1,000 
comments. The overwhelming majority of these comments came from 
individual consumers. A substantial majority of individual consumers 
expressed support for the proposed rules, and many urged the Agencies 
to go further in protecting consumers. The remaining comments came from 
credit card issuers, banks, savings associations, credit unions, trade 
associations, consumer groups, members of Congress, other federal 
banking agencies, state and local governments, and others. These 
commenters expressed varying views on the May 2008 Proposal. In 
preparing this final rule, the Agencies considered the comments and the 
accompanying information. To the extent that commenters addressed 
specific aspects of the proposal, those comments are discussed below.

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

[[Page 5502]]

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).\6\
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    \6\ 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 OCC and the 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.\7\
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    \7\ Some commenters suggested that the proposed rules were not 
supported by sufficient evidence and that the Agencies should follow 
the rulemaking procedures for the FTC under the FTC Act, which 
include the requirement to hold informal hearings at which 
interested parties may submit their positions and rebut the 
positions of others. 15 U.S.C. 57a(c). As the commenters 
acknowledge, this process applies only to the FTC. The Agencies 
believe that the comment process provides a robust opportunity for 
interested parties to express their views and provide relevant 
information. This is confirmed by the unprecedented number of 
comment letters received by the Agencies in response to the proposed 
rules. In many cases, the data and other information necessary to 
make informed judgments regarding the proposed rules is in the 
possession of the institutions to which the rules would apply. 
Although institutions generally consider this data proprietary, some 
have chosen to submit certain information to the Agencies for 
consideration as part of the public record. The Agencies have 
carefully considered all public information in issuing the final 
rule.
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    In response to the May 2008 Proposal, industry commenters and the 
OCC noted that the Board has stated in the past that enforcement of the 
FTC Act's prohibition on unfair and deceptive practices is best handled 
on a case-by-case basis because determinations of unfairness and 
deception depend heavily on individual facts and circumstances.\8\ 
These commenters urged that the Agencies withdraw the proposed rules 
and that the Board instead use its authority under TILA, the Electronic 
Fund Transfer Act (EFTA), 15 U.S.C. 1693 et seq., or other statutes to 
promulgate rules regarding consumer credit card accounts and overdraft 
services on deposit accounts, respectively. One commenter suggested 
that OTS instead use its authority under HOLA.
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    \8\ See, e.g., Testimony of Randall S. Kroszner, Governor, Board 
of Governors of the Federal Reserve System, before the H. Comm. on 
Financial Services (June 13, 2007); Testimony of Sandra F. 
Braunstein before the H. Subcomm. on Fin. Instits. & Consumer Credit 
(Mar. 27, 2007); Letter from Ben S. Bernanke, Chairman, Board of 
Governors of the Federal Reserve System, to the Hon. Barney Frank 
(Mar. 21, 2006); Letter from Alan Greenspan, Chairman, Board of 
Governors of the Federal Reserve System, to the Hon. John J. LaFalce 
(May 30, 2002).
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    As discussed in greater detail below in section VI of this 
SUPPLEMENTARY INFORMATION, the Agencies agree that concerns about 
overdraft services can be appropriately addressed using the Board's 
authority under the EFTA. With respect to consumer credit card 
accounts, however, the Agencies believe that use of their FTC Act 
authority is appropriate. Although the Agencies continue to believe 
that case-by-case enforcement is often the most effective means of 
addressing unfair and deceptive practices, the practices addressed by 
the final rule are or have been engaged in by a substantial number of 
the institutions offering credit cards without significant material 
variation in the facts and circumstances. As a result, case-by-case 
enforcement by the banking agencies would not only be an inefficient 
means of addressing these practices but could also lead to inconsistent 
outcomes. Accordingly, the Agencies have determined that, in this 
instance, promulgating regulations under the FTC Act is the most 
effective way to address the practices at issue.\9\
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    \9\ Industry commenters and the OCC raised concerns that, 
because many of the practices prohibited by the proposed rules are 
widely used, determinations by the Agencies that those practices are 
unfair or deceptive under the FTC Act could lead to litigation under 
similar state laws. As discussed below in Sec.  VII of this 
SUPPLEMENTARY INFORMATION, the Agencies do not intend these rules to 
apply to acts or practices preceding the effective date and have 
determined that, prior to the effective date, the prohibited 
practices are not unfair under the FTC Act.
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B. Standards for Unfairness Under the FTC Act

    Congress has codified standards developed by the FTC for its 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 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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    In proposing and finalizing 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 
previously 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 had not taken similar action in 
generally applicable guidance prior to the May 2008 Proposal,\12\ the 
commenters on OTS's ANPR who addressed this issue overwhelmingly urged 
that any OTS action be consistent with the FTC's standards for 
unfairness.
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    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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    Substantial consumer injury. 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

[[Page 5503]]

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\
---------------------------------------------------------------------------

    \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 Rule, 49 FR at 7743; 
FTC Policy Statement on Unfairness at 3 & n.12.
---------------------------------------------------------------------------

    In response to the May 2008 Proposal, several commenters expressed 
concern that the FTC's interpretation of substantial consumer injury is 
overbroad and requested that the Agencies introduce a variety of 
limitations. As noted above, the Agencies have adopted the FTC's 
standards for determining whether an act or practice is unfair. 
Accordingly, in the interest of uniform application of the FTC Act, the 
Agencies decline to read in such limitations where the FTC has not done 
so.\18\ Furthermore, the Agencies emphasize that a finding of consumer 
injury does not, by itself, establish an unfair practice. Instead, as 
discussed below and with respect to each of the prohibited practices, 
the injury also must not be reasonably avoidable and must not be 
outweighed by countervailing benefits to consumers or to competition. 
Thus, while many practices that result in imposition of a fee or 
assessment of interest may cause a substantial consumer injury, few may 
satisfy the other elements of unfairness.
---------------------------------------------------------------------------

    \18\ See Am. Fin. Servs. Assoc. v. FTC, 767 F.2d 957, 978-83 (DC 
Cir. 1985) (``In essence, petitioners ask the court to limit the 
FTC's exercise of its unfairness authority to situations involving 
deception, coercion, or withholding of material information. * * * 
[D]espite considerable controversy over the bounds of the FTC's 
authority, neither Congress nor the FTC has seen fit to delineate 
the specific `kinds' of practices which will be deemed unfair within 
the meaning of section 5.'').
---------------------------------------------------------------------------

    Injury is not reasonably avoidable. 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.\19\ 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.\20\ 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.\21\
---------------------------------------------------------------------------

    \19\ See FTC Policy Statement on Unfairness at 3.
    \20\ 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.
    \21\ 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.'').
---------------------------------------------------------------------------

    In response to the May 2008 Proposal, several industry commenters 
argued that an injury resulting from the operation of a contractual 
provision is always reasonably avoidable because the consumer could 
read the contract and decide not to enter into it. These commenters 
further argued that institutions could not be held responsible for 
consumers' failure to read or understand the contract or the 
disclosures provided by the institution. These arguments, however, are 
inconsistent with the FTC's application of the unfairness analysis in 
support of its Credit Practices Rule, where the FTC determined that 
consumers could not reasonably avoid injuries caused by otherwise valid 
contractual provisions.\22\ Furthermore, as discussed below, many of 
the practices at issue either create the complexity that acts as an 
obstacle to consumers' ability to make free and informed decisions or 
take advantage of that complexity by assessing interest or fees when a 
consumer fails to understand the practice.\23\
---------------------------------------------------------------------------

    \22\ See Statement for FTC Credit Practices Rule, 49 FR 7740 et 
seq.; see also Am. Fin. Servs. Assoc., 767 F.2d at 978-83 (upholding 
the FTC's analysis).
    \23\ One commenter stated that the following language from the 
FTC Policy Statement on Unfairness suggested that complexity alone 
is not sufficient to make injury unavoidable: ``A seller's failure 
to present complex technical data on his product may lessen a 
consumer's ability to choose * * * but may also reduce the initial 
price he must pay for the article.'' FTC Policy Statement on 
Unfairness at 3. The Agencies note that the FTC included this 
example in its discussion of whether injury is outweighed by 
countervailing benefits, not whether the injury is reasonably 
avoidable.
---------------------------------------------------------------------------

    Injury is not outweighed by countervailing benefits. 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.\24\ 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.\25\ 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.\26\
---------------------------------------------------------------------------

    \24\ 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.'').
    \25\ See FTC Public Comment on OTS-2007-0015, at 6 (Dec. 12, 
2007) (available at http://www.ots.treas.gov/docs/9/963034.pdf).
    \26\ 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.'').
---------------------------------------------------------------------------

    Public policy. As noted above, the FTC may consider established 
public policy in making an unfairness determination, but public policy 
may not serve as the primary basis for such a determination.\27\ For 
purposes of the unfairness analysis, public policy is generally 
embodied in a statute, regulation, or judicial decision.\28\ As 
discussed below, the Agencies have considered various authorities cited 
by commenters as evidence of public policy.\29\ At no point, however, 
have the Agencies used public policy as the primary basis for a 
determination that a practice was unfair.
---------------------------------------------------------------------------

    \27\ See 15 U.S.C. 45(n); Board and FDIC, Unfair or Deceptive 
Acts or Practices by State-Chartered Banks at 3-4 (``Public policy, 
as established by statute, regulation, or judicial decisions may be 
considered with all other evidence in determining whether an act or 
practice is unfair.'').
    \28\ See, e.g., FTC Policy Statement on Unfairness at 5 (stating 
that public policy ``should be clear and well-established'' and 
``should be declared or embodied in formal sources such as statutes, 
judicial decisions, or the Constitution as interpreted by the court 
* * *'').
    \29\ Several commenters urged the Agencies to consider the 
safety and soundness of financial institutions either under the 
countervailing benefits prong or as public policy. To the extent 
that these commenters raised specific safety and soundness concerns, 
those concerns are addressed below.
---------------------------------------------------------------------------

    Some commenters argued that section 18(f)(1) of the FTC Act 
prevents the Board from issuing final rules that would seriously 
conflict with the Board's essential monetary and payments systems 
policies. The language cited by the commenters, however, does not apply 
to this rulemaking. Instead, this language creates an exception to the 
general requirement that the Board promulgate

[[Page 5504]]

regulations substantially similar to those issued by the FTC if the 
Board ``finds that implementation of similar regulations with respect 
to banks, savings and loan institutions or Federal credit unions would 
seriously conflict with essential monetary and payments systems 
policies of such Board, and publishes any such finding, and the reasons 
therefore, in the Federal Register.'' \30\ Nevertheless, to the extent 
a commenter has cited a specific monetary or payments systems policy 
that may conflict with one of these rules, the Agencies have considered 
that potential conflict below.
---------------------------------------------------------------------------

    \30\ 15 U.S.C. 57a(f)(1) (third sentence).
---------------------------------------------------------------------------

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.\31\ 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.\32\ Although these standards have 
not been codified, they have been applied by numerous courts.\33\ 
Accordingly, in proposing rules under section 18(f)(1) of the FTC Act, 
the Agencies applied the standards articulated by the FTC for 
determining whether an act or practice is deceptive.\34\
---------------------------------------------------------------------------

    \31\ FTC Policy Statement on Deception.
    \32\ 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.
    \33\ 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).
    \34\ 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.
---------------------------------------------------------------------------

    A representation or omission is deceptive if the overall net 
impression created is likely to mislead consumers.\35\ The FTC conducts 
its own analysis to determine whether a representation or omission is 
likely to mislead consumers acting reasonably under the 
circumstances.\36\ 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.\37\ 
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.\38\
---------------------------------------------------------------------------

    \35\ 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).
    \36\ See FTC v. Kraft, Inc., 970 F.2d 311, 319 (7th Cir. 1992); 
QT, Inc., 448 F. Supp. 2d at 958.
    \37\ FTC Policy Statement on Deception at 3.
    \38\ Id.
---------------------------------------------------------------------------

    A representation or omission is material if it is likely to affect 
the consumer's conduct or decision regarding a product or service.\39\ 
Certain types of claims are presumed to be material, including express 
claims and claims regarding the cost of a product or service.\40\
---------------------------------------------------------------------------

    \39\ Id. at 2, 6-7.
    \40\ 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).
---------------------------------------------------------------------------

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.\41\ The 
Agencies have carefully considered the potential remedies for 
addressing each practice and have adopted the remedy that, in the 
Agencies' judgment, is effective in preventing that practice while 
minimizing the burden on institutions.
---------------------------------------------------------------------------

    \41\ See Am. Fin. Servs. Assoc., 767 F.2d at 988-89 (citing 
Jacob Siegel Co. v. FTC, 327 U.S. 608, 612-13 (1946)).
---------------------------------------------------------------------------

III. Summary of Final Rule

    Based on the comments and further analysis, the Agencies have 
revised the proposed rules substantially. As discussed in greater 
detail below, the Agencies are not taking action on some aspects of the 
proposed rule at this time. However, the Agencies note that this rule 
is not intended to identify all unfair or deceptive acts or practices, 
even with regard to consumer credit card accounts. Accordingly, the 
fact that a particular act or practice is not addressed by today's 
final rule does not limit the ability of any agency to make a 
determination that it is unfair or deceptive. As noted elsewhere, to 
the extent that specific practices raise concerns regarding unfairness 
or deception under the FTC Act, the Agencies plan to continue to 
address those practices on a case-by-case basis through supervisory and 
enforcement actions.
Credit Practices Rule
    The Agencies proposed to make certain non-substantive, 
organizational changes to their respective versions of the Credit 
Practices Rule. These changes are adopted as proposed except for one 
additional nonsubstantive clarification to the scope paragraph of OTS's 
rule.
    OTS also solicited comment on eliminating the section of its rule 
on state exemptions. 73 FR at 28911. OTS is eliminating that section as 
discussed in section IV of this SUPPLEMENTARY INFORMATION.
Consumer Credit Card Accounts
    In May 2008, the Agencies proposed several provisions under the FTC 
Act related to consumer credit card accounts. As discussed below, based 
on the comments and further analysis, the Agencies have adopted five 
provisions designed to protect consumers who use credit cards from 
unfair acts or practices.
    First, the Agencies have adopted the proposed rule prohibiting 
institutions from treating a payment as late for any purpose unless 
consumers have been provided a reasonable amount of time to make that 
payment. The Agencies have also adopted the proposed safe harbor 
providing that institutions may comply with this requirement by 
adopting reasonable procedures designed to ensure that periodic 
statements are mailed or delivered at least 21 days before the payment 
due date. Elsewhere in today's Federal Register, the Board has adopted 
two additional proposals under Regulation Z that further ensure that 
consumers receive a reasonable amount of time to make payment. 
Specifically, the Board has revised 12 CFR 226.10(b) to seek to ensure 
that creditors do not set cut-off times for mailed payments earlier 
than 5 p.m. at the location specified by the creditor for receipt of 
such payments. The Board has also adopted 12 CFR 226.10(d), which 
requires 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, the Agencies have adopted a revised version of the proposed 
rule regarding allocation of payments when different annual percentage 
rates apply to different balances on a consumer credit card account. 
The final rule requires institutions to allocate amounts paid in excess 
of the minimum payment either by applying the entire amount

[[Page 5505]]

first to the balance with the highest annual percentage rate or by 
splitting the amount pro rata among the balances.
    Third, the Agencies have revised the proposed rule regarding 
increases in annual percentage rates to require institutions to 
disclose at account opening the rates that will apply to the account 
and to prohibit institutions from increasing annual percentage rates 
unless expressly permitted. Institutions are permitted to increase a 
rate disclosed at account opening at the expiration of a specified 
period, provided that the increased rate was also disclosed at account 
opening. After the first year following opening of the account, 
institutions are also permitted to increase rates for new transactions 
so long as the institution complies with the 45-day advance notice 
requirement in Regulation Z (adopted by the Board elsewhere in today's 
Federal Register). In addition, institutions may increase a variable 
rate due to the operation of an index and increase a rate when the 
consumer is more than 30 days' delinquent.
    Fourth, the Agencies have adopted the proposed rule prohibiting 
institutions from imposing finance charges based on balances for days 
in billing cycles that precede the most recent billing cycle as a 
result of the loss of a grace period. This rule generally prohibits 
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.
    Fifth, the Agencies have adopted a revised version of the proposed 
rule regarding the financing of security deposits or fees for the 
issuance or availability of credit (such as account-opening fees or 
membership fees). The final rule prohibits institutions from financing 
security deposits or fees for the issuance or availability of credit 
if, during the first year after account opening, those deposits or fees 
consume the majority of the available credit on the account. In 
addition, the Agencies have adopted a requirement that security 
deposits and fees exceeding 25 percent of the credit limit to be spread 
over no less than the first six months, rather than charged as a lump 
sum during the first billing cycle. Furthermore, elsewhere in today's 
Federal Register, the Board has adopted revisions to Regulation Z 
requiring creditors that collect or obtain a consumer's agreement to 
pay a fee before providing account-opening disclosures to permit that 
consumer to reject the plan after receiving the disclosures and, if the 
consumer does so, to refund any fee collected or to take any other 
action necessary to ensure the consumer is not obligated to pay the 
fee.
    Finally, the Agencies are not taking action at this time on the 
proposed rule addressing holds placed on available credit. As discussed 
below, the Board is proposing to address holds placed on available 
funds in a deposit account using its authority under Regulation E. In 
addition, the Agencies are not taking action at this time on the 
proposed rule regarding firm offers of credit advertising multiple 
annual percentage rates or credit limits. Concerns about this practice 
are addressed by amendments to Regulation Z adopted by the Board 
elsewhere in today's Federal Register. The Agencies plan to rely on 
case-by-case supervisory and enforcement actions in appropriate 
circumstances where practices regarding credit holds or firm offers of 
credit raise unfairness or deception concerns.
Overdraft Services
    The Agencies are not taking action on overdraft services on deposit 
accounts or debit holds at this time. As discussed below, the Board has 
published a separate proposal addressing these issues under Regulation 
E elsewhere in today's Federal Register. The Agencies will review 
information obtained through that rulemaking to determine whether to 
take further action.

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.\42\ 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 
associations, 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 previously adopted rules 
substantially similar to the FTC's Credit Practices Rule.\43\
---------------------------------------------------------------------------

    \42\ 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).
    \43\ See 12 CFR part 227, subpart B (Board); 12 CFR 535 (OTS); 
12 CFR 706 (NCUA).
---------------------------------------------------------------------------

    As part of this rulemaking, the Agencies proposed 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 and believe that these rules remain 
substantially similar to the FTC's Credit Practices Rule. Except as 
otherwise stated below, the Agencies did not receive comments on this 
portion of the 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.
Section --.1 Authority, purpose, and scope \44\
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    \44\ The Board, OTS, and NCUA have placed these rules in, 
respectively, parts 227, 535, and 706 of title 12 of the Code of 
Federal Regulations. For each reference, the discussion in this 
SUPPLEMENTARY INFORMATION uses the shared numerical suffix of each 
agency's rule. For example, Sec.  --.1 will be codified at 12 CFR 
227.1 by the Board, 12 CFR 535.1 by OTS, and 12 CFR 706.1 by NCUA.
---------------------------------------------------------------------------

    The provisions in proposed Sec.  --.1 were largely drawn from the 
current authority, purpose, and scope provisions in the Agencies' 
respective Credit Practices Rules. As discussed below, Sec.  --.1 is 
generally adopted as proposed.
Section --.1(a) Authority
    Proposed Sec.  --.1(a) provided that the Agencies issued this part 
under section 18(f) of the FTC Act. Section --.1(a) is adopted largely 
as proposed.
    One commenter urged that OTS should use safety and soundness 
authority as the legal basis for this rule, including its authority 
under HOLA. While OTS disagrees with this commenter to the extent that 
it argued that OTS should use its safety and soundness authority 
instead of its FTC Act authority, OTS agrees that HOLA serves as an 
appropriate secondary basis for OTS's portion of the rule. Accordingly, 
OTS is inserting express references to HOLA in its rule (including 
Sec.  535.1(a)) to reflect that HOLA serves as an independent secondary 
basis for OTS's final rule.
    HOLA provides authority for both safety and soundness and consumer 
protection regulations. Consequently, HOLA serves as a secondary,

[[Page 5506]]

independent basis for OTS's rule. Using HOLA as a basis for this 
rulemaking was discussed in the SUPPLEMENTARY INFORMATION that 
accompanied the OTS's August 6, 2007 ANPR (72 FR at 43572-43573), was 
reflected in the preamble to the proposed rule and proposed rule text 
(73 FR at 28910 and 28948), and is also discussed further in the 
section-by-section analysis of Sec.  535.26 in this SUPPLEMENTARY 
INFORMATION.
    With regard to safety and soundness, HOLA section 4(a) (12 U.S.C. 
1463(a)) authorizes the Director of OTS to issue regulations governing 
savings associations that the Director determines to be appropriate to 
carry out his responsibilities, including providing for the 
examination, safe and sound operation, and regulation of savings 
associations. The Director of OTS has used HOLA authority to issue 
regulations requiring savings associations to operate safely and 
soundly.\45\ Existing OTS rules also allow the agency to impose limits 
on credit card lending, if a savings association's concentration in 
such lending presents a safety and soundness concern.\46\ All of the 
practices addressed in the rule will advance the safety and soundness 
of consumer credit card lending by savings associations such as by 
reducing reputation risk, as well as the risk of litigation under state 
contract laws and, where applicable, state laws prohibiting unfair or 
deceptive acts or practices.
---------------------------------------------------------------------------

    \45\ See, e.g., 12 CFR 563.161(a) (OTS management and financial 
policies rule).
    \46\ See 12 CFR 560.30 and Endnote 6.
---------------------------------------------------------------------------

    With regard to consumer protection, HOLA section 5(a) (12 U.S.C. 
1464(a)) authorizes the Director of OTS to regulate federal savings 
associations giving primary consideration to the best practices of 
thrift institution in the United States. As courts have consistently 
and repeatedly recognized for decades, HOLA empowered OTS and its 
predecessor agency, the Federal Home Loan Bank Board (FHLBB), to adopt 
comprehensive rules and regulations governing the operations of federal 
savings associations.\47\ Consequently, OTS has a history of using HOLA 
as the legal basis for consumer protection regulations. Examples 
include the OTS Advertising Rule,\48\ OTS rules that limit home loan 
late charges, prepayment penalties, and adjustments to the interest 
rate, payment, balance, or term to maturity,\49\ as well as the 
portions of the OTS Nondiscrimination Rule that exceed Equal Credit 
Opportunity Act and Fair Housing Act requirements.\50\ All of the 
practices addressed in the rule will help protect consumers.
---------------------------------------------------------------------------

    \47\ As stated in Fid. Fed. Sav. & Loan Ass'n v. de la Cuesta, 
458 U.S. 141, 144-45 (1982):
    The [FHLBB], an independent federal regulatory agency, was 
formed in 1932 and thereafter was vested with plenary authority to 
administer [HOLA] * * *. Section 5(a) of the HOLA * * * empowers the 
Board, ``under such rules and regulations as it may prescribe, to 
provide for the organization, incorporation, examination, operation, 
and regulation of associations to be known as `Federal Savings and 
Loan Associations.' '' Pursuant to this authorization, the [FHLBB] 
has promulgated regulations governing ``the powers and operations of 
every Federal savings and loan association from its cradle to its 
corporate grave.'' People v. Coast Federal Savings and Loan Ass'n, 
98 F. Supp. 311, 316 (S.D. Cal. 1951).
    Accord Conference of Federal Savings and Loan Associations v. 
Stein, 604 F.2d 1256, 1260 (9th Cir. 1979), aff'd mem., 445 U.S. 921 
(1980) (recognizing the ``pervasive'' and ``broad'' regulatory 
control of the FHLBB over federal savings associations granted by 
HOLA).
    \48\ 12 CFR 563.27.
    \49\ 12 CFR 560.33, 12 CFR 560.34, and 12 CFR 560.35.
    \50\ 12 CFR part 528.
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Section --.1(b) Purpose
    Proposed Sec.  --.1(b) provided 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 provided that 
the part contains provisions that define and set forth requirements 
prescribed for the purpose of preventing specific unfair or deceptive 
acts or practices. In May 2008, the Agencies noted 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, proposed Sec.  --.1(b) 
clarified 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.
    The Agencies have revised proposed Sec.  --.1(b) to reflect their 
decision not to take action on proposed subpart D at this time. Also, 
OTS has added an express reference to HOLA in Sec.  535.1(b). 
Otherwise, this provision is adopted as proposed.
Section --.1(c) Scope
    Proposed Sec.  --.1(c) described the scope of each agency's rules. 
The Agencies each tailored this paragraph to describe those entities to 
which their part applies.
    The Board's proposed provision stated that the Board's rules would 
apply to banks and their subsidiaries, except savings associations as 
defined in 12 U.S.C. 1813(b). It further explained that enforcement of 
the Board's rules is allocated among the Board, the OCC, and the FDIC, 
depending on the type of institution. This provision was updated to 
reflect intervening changes in law. The Board also proposed to revise 
its Staff Guidelines to the Credit Practices Rule to remove questions 
11(c)-1 and 11(c)-2, to update the substance of its answers to those 
questions, and to publish those answers as commentary to proposed Sec.  
227.1(c). See proposed Board comments 227.1(c)-1 and -2. As proposed, 
the remaining questions and answers in the Board's Staff Guidelines 
would remain in place. The Board has adopted these proposals without 
alteration.
    OTS's proposed provision stated 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. As proposed, the entire OTS part would have the same 
scope. In May 2008, OTS noted that this scope is somewhat different 
from the scope of its existing Credit Practices Rule. Prior to today's 
revisions, OTS's Credit Practices Rule applied to savings associations 
and service corporations that were wholly owned by one or more savings 
associations, which engaged in the business of providing credit to 
consumers. Since the proposed rules would cover more practices than 
consumer credit, the proposal deleted the reference to engaging in the 
business of providing credit to consumers. The proposal also updated 
the reference to wholly owned service corporations to refer instead to 
subsidiaries in order to reflect the current terminology used in OTS's 
Subordinate Organizations Rule.\51\
---------------------------------------------------------------------------

    \51\ 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).
---------------------------------------------------------------------------

    Only one commenter addressed the scope of OTS's proposed rule. It 
supported applying the rule to savings associations and subsidiaries as 
proposed. Another commenter requested clarification of which entities 
the rule refers to as ``you.'' OTS is finalizing the scope as proposed 
but clarifying through a parenthetical in Sec.  535.1(c) that the term 
``you'' refers to savings associations and subsidiaries owned in whole 
or in part by a savings association.
    The NCUA's proposed provision stated that its rules would apply to 
federal credit unions. This provision is adopted as proposed.
Section 227.1(d) Definitions
    Proposed Sec.  --.1(d) of the Board's rule would have clarified 
that, unless

[[Page 5507]]

otherwise noted, 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). This provision is adopted as proposed.
    OTS and NCUA did not have a need for a comparable subsection so 
none was included in their proposed rules.
Section 227.2 Consumer-Complaint Procedure
    In order to accommodate the revisions discussed above, the Board 
proposed to consolidate the consumer complaint provisions previously 
located in 12 CFR 227.1 and 227.2 in proposed Sec.  227.2. The Board 
has revised the proposal for clarity and to include an e-mail address 
and Web site where consumers can submit complaints. Otherwise, this 
provision is adopted as proposed.
    OTS and NCUA do not have and did not propose to add comparable 
provisions.\52\
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    \52\ Longstanding OTS and NCUA complaint procedures are 
available to consumers and the public at http://www.ots.treas.gov 
and http://www.ncua.gov.
---------------------------------------------------------------------------

Subpart B--Credit Practices

    Each agency has placed the substantive provisions of their Credit 
Practices Rule in Subpart B. In order to retain the current numbering 
in its Credit Practices Rule, the Board has reserved 12 CFR 227.11, 
which previously contained 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) have not been revised.
    As discussed below, OTS proposed several notable changes to its 
version of Subpart B. Except as otherwise stated, these sections have 
been adopted as proposed.
Section 535.11 Definitions (Previously Sec.  535.1)
    OTS received no comments on its proposed changes to this section 
and is finalizing it as proposed. OTS has deleted the definitions of 
``Act,'' ``creditor,'' and ``savings association'' as unnecessary. It 
has substituted the term ``you'' for ``savings association'' or 
``creditor'' in the definitions of ``consumer credit'' and 
``obligation'' as applicable. For the convenience of the user, OTS has 
also incorporated 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 has moved the definition of 
``cosigner'' to the section on unfair or deceptive cosigner practices. 
OTS has also merged the definition of ``debt'' into the definition of 
``collecting a debt'' contained in the section on late charges. 
Finally, OTS has moved the definition of ``household goods'' to the 
section on unfair credit contract provisions.
Section 535.12 Unfair Credit Contract Provisions (Previously Sec.  
535.2)
    OTS received no comments on its proposed changes to this section 
and is finalizing it as proposed. OTS has revised the title of this 
section to reflect its focus on credit contract provisions. OTS has 
also deleted the obsolete reference to extensions of credit after 
January 1, 1986.
Section 535.13 Unfair or Deceptive Cosigner Practices (Previously Sec.  
535.3)
    OTS received no comments on its proposed changes to this section 
and is finalizing it as proposed. OTS has deleted the obsolete 
reference to extensions of credit after January 1, 1986. OTS has 
substituted 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 
Board's section on state exemptions. OTS has also clarified that the 
date that may be stated on the cosigner notice is the date of the 
transaction. NCUA has made similar amendments to its rule in Sec.  
706.13 (previously Sec.  706.3).
Section 535.14 Unfair Late Charges (Previously Sec.  535.4)
    OTS received no comments on its proposed changes to this section 
and is finalizing it as proposed. OTS has revised the title of this 
section to reflect its focus on unfair late charges. OTS has deleted 
the obsolete reference to extensions of credit after January 1, 1986. 
Similarly, NCUA has made similar revisions to Sec.  706.14 (previously 
Sec.  706.4).
Section 535.15 State Exemptions (Previously Sec.  535.5)
    OTS proposed to revise the subsection on delegated authority to 
update the current title of the OTS official with delegated authority 
to make determinations under this section. As discussed below, however, 
OTS has removed Sec.  535.5 from codification and has not replaced it 
with proposed Sec.  535.15.
    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. The May 
2008 Proposal did not extend this provision to the proposed rules for 
consumer credit card accounts and overdraft services because there was 
no legal requirement to do so.\53\ The Agencies noted that only three 
states have been granted exemptions under the Credit Practices 
Rule.\54\ The Agencies stated that, 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 requested 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 a greater or substantially 
similar level of protection. In addition, OTS requested comment on 
whether the state exemption provision in its Credit Practices Rule 
should be retained.
---------------------------------------------------------------------------

    \53\ The provision requiring consideration of requests for 
exemption from rules promulgated under the FTC Act applies only to 
the FTC. See 12 U.S.C. 57a(g).
    \54\ 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). The Federal Home 
Loan Bank Board (``FHLBB''), OTS's predecessor agency, granted an 
exemption to Wisconsin. 51 FR 45879 (Dec. 23, 1986). The NCUA has 
not granted any exemptions.
---------------------------------------------------------------------------

    The Agencies received only a few comments on state exemptions. One 
consumer advocacy organization urged the Agencies to expand the 
opportunity for state exemptions to the final rule as a way to ensure a 
consumer private right of action under state law and to enable states 
to develop new protections. In contrast, several financial institutions 
opposed allowing states to seek exemption from practices addressed in 
the final rule. They argued that allowing such exemptions would provide 
no meaningful regulatory burden relief and would interfere with 
consistent implementation of the final rule.
    The Agencies have decided not to extend the opportunity for state 
exemptions to the final rule. First, as noted above, the FTC Act does 
not require the Agencies to provide such an opportunity. Second, 
requiring all

[[Page 5508]]

institutions under the Agencies' jurisdiction to comply with the final 
rule will enhance consumer protections nationwide and facilitate 
uniformity in examinations.
    OTS received a few comments on whether it should retain the 
existing state exemption provision in its Credit Practices Rule. The 
comments on this issue largely tracked those discussed above concerning 
whether to expand the availability of state exemptions to new practices 
addressed in the final rule. In addition, one organization representing 
state banking interests supported preserving state laws that afford 
more protection to consumers than the federal rule.
    A few comments reflect confusion about how the availability or 
unavailability of state exemptions would affect federal savings 
associations. Eliminating the availability of exemptions under the OTS 
Credit Practices Rule will have no direct effect on federal savings 
associations. Apparently, the only state exemption granted by OTS or 
its predecessor is to the State of Wisconsin for substantially 
equivalent provisions of the Wisconsin Consumer Act. That exemption 
only applied to state-chartered savings associations; it specifically 
did not extend to federal savings associations.\55\
---------------------------------------------------------------------------

    \55\ See Prohibited Consumer Credit Practices; Request for 
Exemption by State of Wisconsin, 51 FR 45879 (Dec. 23, 1986) (``It 
is well established that the [FHLBB] has exclusive authority to 
regulate all aspects of the operations of federally chartered 
associations under section 5 of [HOLA]. See, e.g., 12 CFR 545.2. 
Federally chartered associations will therefore continue to be 
subject to the rule rather than the Wisconsin Act, and the [FHLBB] 
will continue to examine them for compliance with the Rule.'').
---------------------------------------------------------------------------

    For the same reasons the Agencies are not extending the opportunity 
for state exemptions to apply to new practices addressed in the final 
rule, OTS is removing Sec.  535.5 and eliminating the existing state 
exemption authority under its rule. Accordingly, the exemption granted 
to Wisconsin and any other exemptions which may have been granted by 
OTS or its predecessor with respect to its Credit Practices Rule will 
cease to be in effect as of this rule's effective date.

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 
adopt rules prohibiting specific unfair acts or practices with respect 
to consumer credit card accounts. A secondary basis for OTS's rule is 
HOLA. These rules are located in a new Subpart C to the Agencies' 
respective regulations under the FTC Act.

Section --.21--Definitions

    Section --.21 defines certain terms used in Subpart C.
Section --.21(a) Annual Percentage Rate
    Proposed Sec.  --.21(a) defined ``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 corresponded to the definition of ``annual percentage 
rate'' in 12 CFR 226.14(b). As discussed in the Board's official staff 
commentary to 12 CFR 226.14(b), this computation does not reflect any 
particular finance charge or periodic balance. See 12 CFR 226.14 
comment 226.14(b)-1. This definition also incorporated the definition 
of ``periodic rate'' from Regulation Z. See 12 CFR 226.2.
    The Agencies did not receive any significant comments on this 
definition. Accordingly, it is adopted as proposed.
Section --.21(b) Consumer
    Proposed Sec.  --.21(b) defined ``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. The Agencies did not receive any significant comments on 
this definition. Accordingly, it is adopted as proposed.
Section --.21(c) Consumer Credit Card Account
    Proposed Sec.  --.21(c) defined ``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 incorporated the definitions of 
``open-end credit,'' ``credit card,'' and ``charge card'' from 
Regulation Z. See 12 CFR 226.2. Under the proposed definition, a number 
of accounts would have been excluded consistent with exceptions to 
disclosure requirements for credit and charge card applications and 
solicitations. See 12 CFR 226.5a(a)(5). 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).
    One consumer group requested that this definition be expanded to 
cover debit cards with a linked credit card feature. The Agencies do 
not believe any change is necessary because, to the extent such cards 
meet the definition of ``credit card'' under 12 CFR 226.2, they are 
covered. Accordingly, this definition is adopted as proposed.
Proposed Section --.21(d) Promotional Rate
    Proposed Sec.  --.21(d) defined ``promotional rate.'' This 
definition was similar to the definition of ``promotional rate'' 
proposed by the Board in 12 CFR 226.16(e)(2) in the May 2008 Regulation 
Z Proposal. See 73 FR at 28892. As discussed in greater detail below, 
the provisions in proposed Sec. Sec.  --.23 and --.24 utilizing this 
definition have been revised such that a definition of ``promotional 
rate'' is no longer necessary for purposes of this subpart. 
Accordingly, this definition and its accompanying commentary have not 
been included in the final rule.

Section --.22--Unfair Acts or Practices Regarding Time To Make Payment

    Summary. In May 2008, the Agencies proposed Sec.  --.22(a), which 
would have prohibited 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. See 
73 FR at 28912-28914. The Agencies also proposed a safe harbor in Sec.  
--.22(b) for institutions that adopt 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. Finally, to avoid any potential conflict with section 163(a) 
of TILA (15 U.S.C. 1666b(a)), the Agencies expressly stated in proposed 
Sec.  --.22(c) that the rule would not apply to any time period 
provided by an institution within which the consumer may repay any 
portion of the credit extended without incurring an additional finance 
charge. As discussed below, based on the comments and further analysis, 
the Agencies have adopted Sec.  --.22 as proposed except that proposed 
Sec.  --.22(b) has been revised to clarify that institutions must be 
able to establish that they have complied with Sec.  --.22(a).
    Background. 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 (in other words, the ``grace period''). 15 U.S.C. 
1666b(a). TILA 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

[[Page 5509]]

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); 12 CFR 226.5 comment 5(b)(2)(ii)-1.
    In its June 2007 Regulation Z 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.
    In response to the June 2007 Regulation Z Proposal, individual 
consumers, consumer groups, and a member of Congress stated that 
consumers were not being provided with a reasonable amount of time to 
pay their credit card bills. These commenters 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 unexpectedly 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 
commenters indicated that consumers are unable to accurately predict 
when their payment will be received by a creditor due to uncertainties 
about how quickly mail is delivered. Some commenters 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.
    Industry commenters, 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 
commenters 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 for all consumers.
    Comments on the Agencies' May 2008 Proposal were generally 
consistent with those on the Board's June 2007 Regulation Z Proposal. 
Individual consumers, consumer groups, members of Congress, the FDIC, 
and state attorneys general largely supported the proposed rule. Some 
of these commenters stated that institutions have reduced the amount of 
time for consumers to make payment while increasing the late payment 
fees, penalty rates, and other costs imposed on consumers as a result 
of late payment.\56\ In contrast, although some industry groups and 
credit card issuers supported the proposal, most industry commenters 
opposed the proposed rule, stating that consumers have more time to 
make payment than ever before because of alternative means for 
receiving statements and making payments. Some industry commenters also 
stated that complying with the proposed safe harbor would be impossible 
without making costly operational changes. To the extent that 
commenters addressed specific aspects of the proposal or its supporting 
legal analysis, those comments are discussed below.
---------------------------------------------------------------------------

    \56\ See Testimony of Adam J. Levitin, Assoc. Prof. of Law, 
Georgetown Univ. Law Ctr. before the H. Subcomm. on Fin. Instits. & 
Consumer Credit at 13-14 (Mar. 13, 2008) (cited by several 
commenters).
---------------------------------------------------------------------------

Legal Analysis

    The Agencies conclude that, based on the comments received and 
their own analysis, it is an unfair act or practice under 15 U.S.C. 
45(n) and the standards articulated by the FTC to treat 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.
    Substantial consumer injury. In the May 2008 Proposal, the Agencies 
stated that an institution's failure to provide consumers a reasonable 
amount of time to make payment appeared to cause substantial monetary 
and other injury. The Agencies noted that, 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.
    Several industry commenters stated that consumers are not harmed by 
the lack of a reasonable amount of time to pay because a significant 
majority of consumers pay on or before the due date, indicating that 
they currently receive sufficient time to make payment. Other 
commenters, however, noted that the GAO Report found that, in 2005, 35 
percent of active accounts were assessed at least one late fee and that 
the average late fee assessment per active account was $30.92.\57\ In 
addition, the Chairman of the Senate Permanent Subcommittee on 
Investigations cited case histories of consumers who received periodic 
statements shortly before the due date, making it difficult for them to 
avoid a late fee and, in some cases, a rate increase. This comment also 
cited instances in which consumers submitted payments 10 to 14 days in 
advance of the due date, only to have the payment treated as late. 
Individual consumers described similar experiences in their comments. 
Thus, the Agencies conclude that the failure to provide a reasonable 
amount of time to make payment causes or is likely to cause substantial 
monetary injury to a significant number of consumers.
---------------------------------------------------------------------------

    \57\ See GAO Report at 32-33.
---------------------------------------------------------------------------

    Injury is not reasonably avoidable. The Agencies stated in the May 
2008 Proposal that it appeared consumers could not reasonably avoid the 
injuries caused by late payment unless they were provided a reasonable 
amount of time to pay. The Agencies observed that it could be 
unreasonable to expect consumers to make a timely payment if they are 
not given a reasonable amount of time to do so after receiving a 
periodic statement, although what constitutes a reasonable amount of 
time may vary based on the circumstances. The Agencies noted that TILA 
and Regulation Z provide consumers with the right to dispute 
transactions or other items that appear on their periodic statements. 
Accordingly, the Agencies reasoned that, 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).
    The Agencies further stated that, in some cases, travel or other 
circumstances may prevent the consumer from reviewing the statement 
immediately upon receipt. Finally, as discussed above, the Agencies 
recognized that, because consumers cannot control when a mailed payment 
will be received by the institution, a payment mailed well in advance 
of the due date may nevertheless arrive after that date.
    Some industry commenters stated that consumers should know the due 
date

[[Page 5510]]

and minimum payment before receiving a periodic statement and should 
therefore be prepared to make payment immediately. As an initial 
matter, however, the consumer's due date and minimum payment may vary 
from month to month depending on the institution's practices. For 
example, some institutions use a 30-day billing cycle, which results in 
due dates that vary with the length of the month. Similarly, a consumer 
would not necessarily know how much to pay without the periodic 
statement because the amount of the required minimum payment may vary 
depending on the percentage of the total balance included and whether 
interest charges and fees are included. Furthermore, a consumer who 
pays the balance in full each month may not know how much to pay until 
receiving a periodic statement stating the total amount owed.
    Furthermore, this argument fails to recognize, as discussed above, 
that consumers must have a reasonable opportunity to review their 
statement in order to exercise their dispute rights under TILA and 
Regulation Z. Finally, travel or other circumstances may prevent the 
consumer from reviewing the statement immediately. Accordingly, the 
Agencies conclude the injuries caused by late payment are not 
reasonably avoidable unless the consumer is provided a reasonable 
amount of time to make payment.
    Injury is not outweighed by countervailing benefits. The May 2008 
Proposal stated that the injury does not appear to be outweighed by any 
countervailing benefits to consumers or competition. At the proposal 
stage, the Agencies were not aware of any direct benefit to consumers 
from receiving too little time to make their payments. The Agencies 
observed that, 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 also acknowledged that, as a 
result of the proposed rule, some institutions could be required to 
incur costs to alter their systems and would, directly or indirectly, 
pass those costs on to consumers. The Agencies stated, however, that it 
did not appear that these costs would outweigh the benefits to 
consumers of receiving a reasonable amount of time to make payment.
    Some industry commenters stated that, because their practices are 
already consistent with the proposed safe harbor in Sec.  --.22(b), the 
costs of complying with the proposed rule would be minimal. Other 
industry commenters indicated that complying with the proposed safe 
harbor would require significant changes to their processes for 
generating and delivering periodic statements. As discussed below, the 
Agencies have adopted the safe harbor as proposed. See Sec.  
--.22(b)(2). Assuming that the cost of altering practices to comply 
with a 21-day safe harbor will be passed on to consumers, this cost 
will be spread among thousands or hundreds of thousands of consumers 
and will not outweigh the benefits to consumers of avoiding late fees 
and increased annual percentage rates. Thus, the Agencies conclude that 
the injury to consumers is not outweighed by any countervailing 
benefits to consumers or competition.
    Public policy. Some industry commenters stated that the proposed 
21-day safe harbor was contrary to public policy and the Board's 
established payment systems policy as set forth in section 163(a) of 
TILA and section 226.5(b)(2)(ii) of Regulation Z, which, as discussed 
above, provide that periodic statements must be mailed at least 14 days 
in advance of the expiration of the grace period. The Agencies, 
however, have expressly provided that Sec.  --.22 does not apply to the 
mailing or delivery of periodic statements with respect to the 
expiration of grace periods. See Sec.  --.22(c). In the May 2008 
Proposal, the Agencies recognized that, in enacting section 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. Because most creditors currently offer grace 
periods and use a single due date for 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), the Board requested 
comment in its June 2007 Regulation Z Proposal on whether it should 
request that Congress increase the mailing requirement with respect to 
grace periods.
    Based on the comments received, the Agencies concluded in May 2008 
that, because many consumers carry a balance from month to month and 
therefore do not receive a grace period, a separate rule might be 
needed to specifically address harms other than loss of the grace 
period when institutions do not provide a reasonable amount of time for 
consumers to make payment (such as late fees and rate increases as a 
penalty for late payment). However, in order to avoid any conflict with 
the statutory requirement regarding grace periods, proposed Sec.  
--.22(c) specifically provided that the rule would not affect the 
requirements of section 163(a) of TILA. Accordingly, because Sec.  
--.22(c) has been adopted as proposed, the Agencies conclude that Sec.  
--.22 is not contrary to public policy generally or any established 
payment systems policy of the Board.

Final Rule

Section --.22(a) General Rule
    Proposed Sec.  --.22(a) would have prohibited 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. For the 
reasons discussed above, the Agencies have adopted Sec.  --.22(a) as 
proposed.
    Proposed comment 22(a)-1 clarified 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. One industry commenter stated that the failure to 
provide a reasonable amount of time to pay is unlikely to cause a 
consumer to be reported as delinquent to a credit reporting agency, 
citing the policy of credit reporting agencies to consider an account 
delinquent only when it is 30 days past due.\58\ Although the Agencies 
agree that the failure to provide a reasonable amount of time to pay is 
unlikely to cause injury in the form of a delinquency notation on a 
credit report, allowing institutions that fail to provide a reasonable 
amount of time to pay to treat payments as late for purposes of credit 
reporting but not for other purposes would be anomalous. Accordingly, 
comment 22(a)-1 is adopted as proposed.
---------------------------------------------------------------------------

    \58\ See Consumer Data Industry Ass'n, Credit Reporting Resource 
Guide 6-6 (2006).
---------------------------------------------------------------------------

    Proposed comment 22(a)-2 stated that whether an institution had 
provided a reasonable amount of time to pay would be evaluated from the 
perspective of the consumer, not the institution. Some industry 
commenters requested that the Agencies establish standards for 
determining whether a particular amount of time is reasonable. The 
Agencies, however, have adopted a flexible reasonableness analysis 
rather than a set of fixed standards because whether a particular 
amount of time is sufficient for consumers to make payment will depend 
on the facts and circumstances. In addition, in order to remove 
uncertainty and facilitate compliance, the Agencies have, as discussed 
below, provided a means for complying with Sec.  --.22(a) in Sec.  
--.22(b)

[[Page 5511]]

and its accompanying commentary. Accordingly, comment 22(a)-2 is 
adopted as proposed.
Section --.22(b) Compliance With General Rule
    As proposed, Sec.  --.22(b) provided 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. As 
explained in the May 2008 Proposal, the 21-day safe harbor was intended 
to ensure that consumers received at least a week to review their 
statement and make payment. 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. The Agencies noted that, although increasing numbers of consumers 
are receiving periodic statements and making payments electronically, a 
significant number still utilize mail. The Agencies further noted that, 
while first class mail is often delivered within three business days, 
in some cases it can take significantly longer.\59\ Furthermore, some 
large credit card issuers already recommend that consumers allow up to 
seven days for their payments to be received by the issuer via mail.
---------------------------------------------------------------------------

    \59\ 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).
---------------------------------------------------------------------------

    The Agencies requested comment on whether the proposed 21-day safe 
harbor provided a reasonable amount of time for consumers to review 
their periodic statements and make payment. Consumer groups and others 
stated that a longer period of 28 or 30 days was needed. Some industry 
commenters stated that they currently mail or deliver periodic 
statements 21 days in advance of the due date. Most industry 
commenters, however, raised the following objections to the proposed 
21-day safe harbor.
    First, many industry commenters stated that allowing seven days for 
receipt of mailed periodic statements was excessive because, in most 
cases, statements are generally delivered two to four days after 
mailing. These commenters, however, provided only the average delivery 
time or the delivery time for the great majority of consumers, not the 
outer range of delivery times. For example, as one consumer group 
noted, mailing times are often significantly longer for consumers in 
sparsely populated rural areas. Thus, while the Agencies agree that 
seven days may be more time than is needed for most consumers to 
receive a periodic statement by mail, a safe harbor based solely on 
average mailing times would not adequately protect the small but 
significant number of consumers whose delivery times are longer than 
average. Furthermore, because many institutions use practices that 
reduce delivery times for periodic statements (such as pre-sorting 
statements by ZIP code prior to delivery to the U.S. Postal Service), 
delivery times for periodic statements mailed by institutions to 
consumers likely are not representative of delivery times for payments 
mailed by consumers to institutions.
    Second, several industry commenters stated that allowing seven days 
for mailing time was excessive for the additional reason that many 
consumers receive their statements electronically and make payment 
electronically or by telephone. These commenters, however, also 
confirmed that a significant number of consumers receive statements and 
make payments by mail. While many consumers at larger institutions have 
the ability to review statements online, it is unclear how many 
actually do so since most also receive statements by mail. Furthermore, 
the percentage of consumers paying by mail varied significantly by the 
type of institution. For example, some larger institutions reported 
that less than half of their consumers use mail to submit payments, 
while an industry group reported that 70 to 80 percent of community 
bank consumers mail their payments. In addition, one consumer group 
cited a study indicating that internet usage is not evenly distributed 
among the population.\60\ Thus, a safe harbor based on the assumption 
that consumers use alternative means to receive statements or make 
payments would not protect a significant number of consumers.\61\
---------------------------------------------------------------------------

    \60\ See Public Policy Institute of Cal., California's Digital 
Divide (June 2008) (``Whites, blacks, and Asians currently have 
similarly high rates of computer and Internet use. Latinos have the 
lowest rates by far (computers 58%, Internet 48%).'') (available at 
http://www.ppic.org/content/pubs/jtf/JTF_DigitalDivideJTF.pdf).
    \61\ In addition, multiple safe harbors providing longer or 
shorter periods of time depending on how the consumer receives 
periodic statements or makes payments would not be operationally 
feasible because an institution will not know in advance what method 
a consumer will use. For example, a consumer might review their 
periodic statement online one month but wait for the statement to 
arrive by mail the next. Similarly, a consumer might pay 
electronically one month and by mail the next.
---------------------------------------------------------------------------

    Third, many industry commenters stated that complying with the 21-
day safe harbor would require significant and costly changes to 
institutions' practices for generating and mailing periodic statements. 
As discussed above, however, the Agencies have concluded that these 
costs are outweighed by the benefits to consumers of receiving a 
reasonable amount of time to pay.
    Finally, some commenters stated that adjusting to the 21-day safe 
harbor could lead to consumer confusion because the institution would 
not have sufficient time to reflect timely payments on the subsequent 
periodic statement. This concern, however, depends on a number of 
variables, including the number of days in the month, whether the 
institution uses billing cycles that vary with the length of the month 
(as opposed to a fixed 30-day billing cycle), and whether the 
institution processes payments on weekends or holidays. Although it is 
possible that, in some narrow set of circumstances, an institution may 
not be able to reflect a timely payment on the periodic statement, the 
Agencies conclude that any resulting confusion does not warrant a 
reduction in the proposed safe harbor. Accordingly, the 21-day safe 
harbor is adopted as proposed except that, for the reasons discussed 
below, this provision has been retitled and, for reasons discussed 
below, moved to Sec.  --.22(b)(2).
    In order to minimize burden and facilitate compliance, proposed 
comment 22(b)-1 clarified 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. Proposed comment 22(b)-1 is adopted as 
proposed. Accordingly, if, for example, an institution had reasonable 
procedures in place designed to 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 (in other words, 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 clarified that the payment due 
date is

[[Page 5512]]

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). Comment 22(b)-2 is adopted as 
proposed.
    The Agencies also received requests from industry for clarification 
that compliance with the safe harbor is not the only means of complying 
with the requirement that consumers be provided a reasonable amount of 
time to make the payment. Accordingly, the Agencies have restructured 
Sec.  .22(b) to provide additional clarity regarding compliance with 
Sec.  --.22(a). The Agencies have added a new Sec.  --.22(b)(1), which 
clarifies that institutions are responsible for establishing that they 
have complied with Sec.  --.22(a). The 21-day safe harbor, which the 
Agencies have moved to Sec.  --.22(b)(2), provides one method of 
compliance. Finally, the Agencies have added comment 22(b)-3, which 
provides an example of an alternative compliance method. In this 
example, because an institution only provides periodic statements and 
accepts payments electronically, the institution could deliver 
statements for those accounts less than 21 days before the payment due 
date and still satisfy the general rule in Sec.  --.22(a) because those 
consumers would need less time to receive their statements or make 
their payments by mail.
Section --.22(c) Exception for Grace Periods
    In order to avoid any potential conflict with section 163(a) of 
TILA, proposed Sec.  --.22(c) provided that proposed Sec.  --.22(a) 
would 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 (in other words, a grace 
period).
    Several industry commenters argued that, notwithstanding proposed 
Sec.  --.22(c), institutions would essentially be required to use a 
single date for the payment due date and for expiration of the grace 
period because consumers would be confused by different dates. Consumer 
groups also raised concerns about the potential for consumer confusion. 
One consumer group requested that the Board use its authority under 
section 1604(a) of TILA to require that the expiration of the grace 
period coincide with the payment due date. Because the mailing or 
delivery of periodic statements in relation to expiration of the grace 
period is specifically addressed by section 163(a) of TILA, the 
Agencies believe that deviating from the statutory requirement would be 
inappropriate and unnecessary in this case, particularly because 
Regulation Z would require an institution that elected to use separate 
dates to disclose both dates on the periodic statement. See 12 CFR 
226.6(b), adopted elsewhere in today's Federal Register. An institution 
that chooses to use separate dates, however, must ensure that consumers 
understand the implications if payment is not received on or before 
each date.

Other Issues

    Implementation. As discussed in section VII of this SUPPLEMENTARY 
INFORMATION, the effective date for Sec.  --.22 is July 1, 2010. As of 
that date, this provision applies to existing as well as new consumer 
credit card accounts. Thus, institutions must provide consumers with a 
reasonable amount of time to make any payment due on or after the 
effective date.
    Alternatives to proposed rule. The Agencies requested comment on 
two potential alternatives to the proposed rule. First, the Agencies 
asked for comment on whether to adopt a rule that would prohibit 
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. Consumer groups and some institutions 
that currently provide such a period of time were supportive, but most 
industry commenters stated that this requirement would be operationally 
burdensome. The Agencies have concluded that requiring institutions to 
provide a period of time after the due date during which payments must 
be treated as timely could create consumer confusion regarding when 
payment is actually due and undermine the Board's efforts elsewhere in 
today's Federal Register to ensure that consumers' due dates are 
meaningful.\62\
---------------------------------------------------------------------------

    \62\ See 12 CFR 226.10(b)(2)(ii) (providing that a reasonable 
cut-off time for payments received by mail would be 5 p.m. on the 
payment due date at the location specified by the creditor for the 
receipt of such payments); 12 CFR 226.10(d) (providing that, if the 
due date for payments is a day on which the creditor does not 
receive or accept payments by mail, the creditor may not treat a 
payment received by mail the next business day as late for any 
purpose).
---------------------------------------------------------------------------

    Second, the Agencies sought comment on whether to adopt a rule that 
would require 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 (for example, a receipt from the U.S. Postal Service or other 
common carrier) and what time frame would be appropriate (for example, 
payment mailed at least five days before the due date, payment received 
no more than two business days' late). Although some commenters 
supported such a requirement, the Agencies also received comments from 
both industry and a consumer group opposing the requirement on the 
grounds that it would be burdensome for consumers to obtain proof of 
mailing and for institutions to establish systems for accepting such 
proof. Furthermore, the Agencies note that some institutions stated 
that they will generally waive any late payment fee when a consumer 
produces proof that a payment was mailed sufficiently in advance of the 
due date.

Supplemental Legal Basis for This Section of the OTS Final Rule

    As discussed above, HOLA provides authority for both safety and 
soundness and consumer protection regulations. Section 535.22 supports 
safety and soundness by reducing reputational risk that would result 
from providing consumers an unreasonably short period of time to make 
payment. Section 535.22 also protects consumers by providing sufficient 
time to make payment. It is somewhat akin to OTS's late charge 
provision for home loans, which prohibits federal savings associations 
from imposing a late charge as to any payment received within 15 days 
of the due date.\63\ Section 535.22 is consistent with the best 
practices of thrift institutions nationwide. Most savings associations, 
including the ten largest, generally mail or deliver periodic 
statements to their customers at least 20 days before the due date. 
Consequently, HOLA serves as an independent basis for Sec.  535.22.
---------------------------------------------------------------------------

    \63\ 12 CFR 560.33.
---------------------------------------------------------------------------

Section --.23--Unfair Acts or Practices Regarding Allocation of 
Payments

    Summary. In May 2008, the Agencies proposed Sec.  --.23 in response 
to concerns that institutions were applying consumers' payments in a 
manner that inappropriately maximized interest charges on consumer 
credit card accounts with balances at different annual percentage 
rates. Specifically, most institutions allocate consumers' payments 
first to the balance with the lowest annual percentage rate, resulting 
in the accrual of interest at higher rates on other balances (unless 
all balances are paid in full). See 73 FR at 28914-28917. Proposed 
Sec.  --.23(a) would have addressed this practice by requiring 
institutions to allocate payments in excess of the required minimum 
periodic payment (``excess payments'')

[[Page 5513]]

using one of three permitted methods or a method equally beneficial to 
consumers. The permitted methods were allocating the excess payment 
first to the balance with the highest annual percentage rate, 
allocating equal portions of the excess payment to each balance, and 
allocating the excess payment pro rata among the balances.
    In addition, because the Agencies were concerned that existing 
payment allocation practices were especially harmful when an account 
had a balance at a discounted promotional rate or a balance on which 
interest was deferred, proposed Sec.  --.23(b) would have placed more 
stringent requirements on those accounts. Proposed Sec.  --.23(b)(1)(i) 
would have prohibited institutions from allocating excess payments to 
promotional rate and deferred interest balances unless all other 
balances had been paid in full. Proposed Sec.  --.23(b)(1)(ii), 
however, created an exception for the existing practice by some 
institutions of allocating excess payments first to a deferred interest 
balance during the last two billing cycles of the deferred interest 
period so that consumers could pay off that balance and avoid 
assessment of deferred interest. Finally, proposed Sec.  --.23(b)(2) 
would have prohibited institutions from denying consumers a grace 
period solely because an account had a promotional rate or deferred 
interest balance.
    Based on the comments received and further analysis, the Agencies 
have revised the general payment allocation rule in proposed Sec.  
--.23(a) to require institutions either to apply excess payments first 
to the balance with the highest annual percentage rate or to allocate 
excess payments pro rata among the balances. The final version of Sec.  
--.23 prohibits the current practice of applying payments to the lowest 
rate balance first while also responding to concerns raised by 
commenters that the number of allocation methods permitted by the 
proposed rule would have increased the complexity of payment 
allocation, making the practice and its effects on interest charges 
even less transparent for consumers.
    In addition, the Agencies have not included proposed Sec.  --.23(b) 
in the final rule. First, because current practices regarding 
assessment of deferred interest are not permitted under the final 
version of Sec.  --.24, the provisions regarding deferred interest 
plans are no longer necessary. Second, due to concerns that proposed 
Sec.  --.23(b) could significantly reduce or eliminate promotional rate 
offers that provide substantial benefits to consumers, the Agencies 
have not included the provisions regarding promotional rate balances. 
Instead, the Agencies believe that applying the general allocation rule 
in Sec.  --.23 in all circumstances strikes the appropriate balance by 
preserving promotional rate offers that provide substantial benefits to 
consumers while prohibiting the most harmful payment allocation 
practices.
    Background. In its June 2007 Regulation Z 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 32982-32983. 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 any other 
allocation method. The Agencies were also concerned that, when the 
consumer has responded to a promotional rate or deferred interest 
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 or deferred interest plan if the consumer uses the 
credit card account for other transactions.
    For example, assume that a consumer credit card account charges 
annual percentage rates of 12% on purchases and 20% on cash advances. 
Assume also that, in the same billing cycle, the consumer uses the 
account for purchases totaling $3,000 and cash advances totaling $300. 
If the consumer makes an $800 excess payment, most creditors would 
apply the entire payment to the purchase balance and the consumer would 
incur interest charges on the more costly cash advance balance. Under 
these circumstances, the consumer is effectively prevented from paying 
off the balance with the higher interest rate (cash advances) unless 
the consumer pays the total balance (purchases and cash advances) in 
full.
    This outcome is exacerbated if the consumer uses the card in 
reliance on a promotional rate or deferred interest offer. For example, 
assume the same facts as above but that, during the same billing cycle, 
the consumer also transfers to the account a balance of $3,000 in 
response to a promotional rate offer of 5% for six months. In this 
case, most creditors would apply the consumer's $800 excess payment to 
the promotional rate balance and the consumer would incur interest 
charges on the more costly purchase and cash advance balances. Under 
these circumstances, the consumer would effectively be denied the 
benefit of the 5% promotional rate for six months if the card is used 
for purchase or cash advance transactions because the consumer must pay 
off the entire transferred balance in order to avoid paying a higher 
rate on other transactions. Indeed, the only way for the consumer to 
receive the full benefit of the 5% promotional rate is not to 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 similar--but not identical--concerns. 
Currently, some creditors offer deferred interest plans under which 
interest accrues on purchases at a specified rate but is not charged to 
the account for a period of time. If the balance is paid in full by the 
end of the period, the consumer generally will not be charged any 
interest. If, however, the balance is not paid in full by the end of 
the period, all interest accrued during that period will be charged to 
the account. With respect to payment allocation, a consumer whose 
payments are applied to a deferred interest balance instead of balances 
on which interest is not deferred will incur additional finance charges 
during the deferred interest period.
    In addition, creditors typically provide consumers who pay their 
balance in full each month a grace period for purchases but not for 
balance transfers or cash advances. Because payments generally will be 
allocated to the transferred balance first, a consumer typically 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 would 
be to pay off the entire balance, including the transferred balance or 
cash advance balance subject to the promotional rate.
    In preparing its June 2007 Regulation Z 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 
with 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 second account in full every month to take 
advantage of the grace period. The Board conducted extensive consumer 
testing in an effort to develop

[[Page 5514]]

disclosures that would enable consumers to understand typical payment 
allocation practices and make informed decisions regarding the use of 
credit cards for different types of transactions. 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. Testing, 
however, showed that a significant percentage of participants still did 
not fully understand how payment allocation can affect their interest 
charges, even after reading the model disclosures.
    In the June 2007 Regulation Z Proposal, the Board acknowledged 
these results and stated that it would conduct further testing to 
determine whether the disclosure could be improved to communicate more 
effectively to consumers how payment allocation can affect their 
interest charges. The Board also solicited comment on a proposed 
amendment to Regulation Z that would have required creditors to explain 
payment allocation to consumers. Specifically, the Board proposed that 
creditors explain how payment allocation would affect consumers' 
interest charges if an initial discounted rate was offered on balance 
transfers or cash advances but not purchases. The Board proposed that 
creditors must disclose to consumers that: (1) The initial discounted 
rate applies only to balance transfers or cash advances, as applicable, 
and not to purchases; (2) that payments will be allocated to the 
balance transfer or cash advance balance, as applicable, before being 
allocated to any purchase balance during the time the initial 
discounted 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 33047-33050.
    In response to the June 2007 Regulation Z Proposal, several 
commenters recommended that the Board test a simplified payment 
allocation disclosure that covered situations other than low rate 
balance transfers. One credit card issuer, however, stated that, even 
if an effective disclosure could be developed, consumers could not shop 
for a better payment allocation method because creditors almost 
uniformly apply payments to the balance with the lowest annual 
percentage rate. Furthermore, consumer and consumer group commenters 
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 prior to the May 2008 
Proposal, the Board tested a revised payment allocation disclosure. 
This disclosure was not effective in improving consumers' 
understanding. The majority of 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. However, for those participants that did not know 
about payment allocation methods from earlier experience, the 
disclosure tested was not effective in communicating payment allocation 
methods.\64\
---------------------------------------------------------------------------

    \64\ The Board also tested whether, given the opportunity, 
consumers could select how amounts paid in excess of the minimum 
would be allocated using a payment coupon. Most participants, 
however, were not able to understand the effects of payment 
allocation sufficiently to apply payments in a manner that minimized 
interest charges.
---------------------------------------------------------------------------

    Accordingly, because the Board's testing indicated that disclosure 
was not effective in allowing consumers to avoid the common practice of 
allocating payments first to the balance with the lowest rate, the 
Agencies proposed in May 2008 to address concerns regarding payment 
allocation in proposed Sec.  --.23 by placing limitations on allocation 
of excess payments.\65\ The Agencies also solicited comment on whether 
the exception regarding deferred interest balances was needed. 73 FR 
28916.
---------------------------------------------------------------------------

    \65\ After the May 2008 Proposal, the Board conducted additional 
testing of consumers' ability to understand payment allocation 
disclosures and select how excess payments would be allocated. This 
testing, however, produced similar results to those discussed above.
---------------------------------------------------------------------------

    The Agencies received comments in support of proposed Sec.  .--23 
from individual consumers, consumer groups, members of Congress, the 
FDIC, state attorneys general, a state consumer protection agency, and 
others. Nevertheless, many of these commenters criticized the proposed 
rule as overly complex, arguing that--if consumers cannot understand 
the effects of the current low-to-high allocation method on interest 
charges--increasing the number and complexity of allocation methods 
would only make the cost of credit less transparent. These commenters 
urged the Agencies to revise the proposed rule to require that excess 
payments be applied first to the balance with the highest rate in all 
circumstances. Some consumer advocates urged the Agencies to ban 
deferred interest balances rather than create an exception for them.
    In contrast, credit card issuers and industry groups strongly 
opposed the proposal, particularly the special requirements regarding 
accounts with promotional rate and deferred interest balances. These 
commenters generally argued that disclosure would enable consumers to 
avoid any harm caused by payment allocation, that the proposed 
restrictions regarding promotional rate and deferred interest balances 
would ultimately harm consumers by reducing or eliminating promotional 
rate and deferred interest offers, and that complying with the proposed 
rule would require burdensome systems changes.
    To the extent that commenters addressed specific aspects of the 
proposal or its supporting legal analysis, those comments are discussed 
below.

Legal Analysis

    When different annual percentage rates apply to different balances 
on a consumer credit card account, the Agencies conclude that, based on 
the comments received and their own analysis, it is an unfair act or 
practice under 15 U.S.C. 45(n) and the standards articulated by the FTC 
to allocate amounts paid by the consumer in excess of the required 
minimum periodic payment in a manner that does not apply a significant 
portion of the amount to the balance with the highest annual percentage 
rate.\66\
---------------------------------------------------------------------------

    \66\ In the May 2008 Proposal, the Agencies considered whether 
other practices specifically related to promotional rate and 
deferred interest balances were unfair. As discussed below, based on 
the comments and further analysis, Sec.  --.23 does not include the 
provisions specifically addressing those practices. To the extent 
that specific practices raise concerns regarding unfairness or 
deception under the FTC Act, the Agencies plan to address those 
practices on a case-by-case basis through supervisory and 
enforcement actions.
---------------------------------------------------------------------------

    Substantial consumer injury. In the May 2008 Proposal, the Agencies 
stated that allocating excess payments first to the balance with the 
lowest rate appeared to cause substantial monetary injury to consumers 
in the form of higher interest charges than would be incurred if some 
or all of the excess payment were applied to balances with higher 
rates.
    In response, the Agencies received an analysis of credit card data 
purporting to represent approximately 70 percent of outstanding 
consumer credit card balances (the Argus Analysis). Although the 
Agencies are not able to verify the accuracy of the Argus Analysis or 
the data supporting it, the Agencies note that this analysis estimated 
that consumers are charged an additional

[[Page 5515]]

$930 million annually as a result of the practices addressed by 
proposed Sec.  --.23.\67\ In addition, a state consumer protection 
agency stated that the practice of allocating payments first to the 
balance with the lowest rate is particularly harmful to low-income 
consumers, citing its own study finding that a quarter of low-income 
cardholders surveyed used a credit card for a cash advance (which 
generally accrues interest at a higher rate than other transactions) 
every few months.\68\
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    \67\ See Exhibit 1, Table 1 to Comment from Oliver I. Ireland, 
Morrison Foerster LLP (Aug 7, 2008) (``Argus Analysis'') (presenting 
results of analysis by Argus Information & Advisory Services, LLC of 
historical data for consumer credit card accounts believed to 
represent approximately 70 percent of all outstanding consumer 
credit card balances).
    \68\ See N.Y. City Dept. of Consumer Affairs, Neighborhood 
Financial Services Study: An Analysis of Supply and Demand in Two 
N.Y. City Neighborhoods at 6 (June 2008) (available at http://www.nyc.gov/html/ofe/downloads/pdf/NFS_ExecSumm.pdf).
---------------------------------------------------------------------------

    One industry commenter asserted that allocating payments first to 
the balance with the lowest interest rate could not cause an injury for 
purposes of the FTC Act merely because other, less costly allocation 
methods exist. It is well established, however, that monetary harm 
constitutes an injury under the FTC Act.\69\ This comment did not 
provide any legal authority distinguishing interest charges assessed as 
a result of current payment allocation practices from other monetary 
harms, nor are the Agencies aware of any such authority.
---------------------------------------------------------------------------

    \69\ See Statement for FTC Credit Practices Rule, 49 FR at 7743; 
FTC Policy Statement on Unfairness at 3.
---------------------------------------------------------------------------

    Another industry commenter stated that assessing interest 
consistent with a contractual provision to which the consumer has 
agreed cannot constitute an injury under the FTC Act. This argument, 
however, is inconsistent with the FTC's application of the unfairness 
analysis in support of its Credit Practices Rule, where the FTC 
determined that otherwise valid contractual provisions injured 
consumers.\70\
---------------------------------------------------------------------------

    \70\ See Statement for FTC Credit Practices Rule, 49 FR at 7740 
et seq.; see also Am. Fin. Servs. Assoc., 767 F.2d at 978-83 
(upholding the FTC analysis).
---------------------------------------------------------------------------

    Accordingly, the Agencies conclude that the failure to allocate a 
significant portion of an excess payment to the balance with the 
highest rate causes or is likely to cause substantial monetary injury 
to consumers.
    Injury is not reasonably avoidable. In May 2008, the Agencies cited 
several factors that appeared to prevent consumers from reasonably 
avoiding the injury. First, consumers generally have no control over 
the institution's allocation of payments. Second, the Board's consumer 
testing indicated that disclosures do not enable consumers to 
understand sufficiently the effects of payment allocation. Furthermore, 
the Agencies stated that, even if disclosures were effective, it 
appeared consumers still could not avoid the injury by selecting a 
credit card account with more favorable terms because institutions 
almost uniformly apply payments first to the balance with the lowest 
rate.\71\ 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.
---------------------------------------------------------------------------

    \71\ 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)).
---------------------------------------------------------------------------

    The Agencies conclude that these factors support a determination 
that the injury caused by the failure to allocate a significant portion 
of an excess payment to the highest rate balance is not reasonably 
avoidable. In particular, the Agencies note that additional consumer 
testing has further confirmed that disclosure is not an effective 
alternative to the proposed rule.\72\
---------------------------------------------------------------------------

    \72\ For this reason, the Board has removed the proposed 
disclosure regarding payment allocation under Regulation Z, as 
discussed elsewhere in today's Federal Register.
---------------------------------------------------------------------------

    Furthermore, although one industry commenter argued that consumers 
could reasonably avoid the injury by paying their balance in full each 
month, one of the intended purposes of a credit card (as opposed to a 
charge card) is to finance purchases over multiple billing cycles. 
Thus, it is unreasonable to expect consumers to avoid the harm caused 
by current payment allocation practices by paying their balances in 
full each month.
    Injury is not outweighed by countervailing benefits. In the May 
2008 Proposal, the Agencies stated that the prohibited practices did 
not appear to create benefits for consumers or competition that 
outweighed the injury. The Agencies noted that, if implemented, the 
proposal could reduce the revenue that institutions receive from 
interest charges, which could in turn lead institutions to increase 
rates generally. The Agencies stated, however, that this effect should 
be muted because the proposal prohibited only the practices that are 
most harmful to consumers and leaves institutions with considerable 
flexibility. Specifically, the proposed rule permitted institutions to 
choose between three specified allocation methods or any other method 
that was no less beneficial to the consumer. In addition, the proposed 
rule did not apply to the allocation of minimum payments.
    Furthermore, the Agencies stated 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. The Agencies noted that, 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, the Agencies 
stated that it appeared the proposal would 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 operational expenses) would no longer be forced to compete 
with institutions offering rates that are artificially reduced based on 
the expectation that interest will accrue on higher rate balances until 
the promotional rate balance is paid in full.
    Based on the comments and further analysis, the Agencies conclude 
that these rationales support a determination that the injury to 
consumers when institutions do not allocate a significant portion of 
the excess payment to the balance with the highest annual percentage 
rate outweighs any benefits of this practice for consumers and 
competition. Industry commenters generally argued that the restrictions 
in proposed Sec.  --.23 would reduce interest revenue and force 
institutions to compensate by increasing the interest rates or fees 
charged to consumers, decreasing the amount of available credit, or 
using some combination of the two. For example, the Argus Analysis 
stated that, as a result of proposed Sec.  --.23, institutions could 
lose 0.125 percent of their annual interest revenue on revolving credit 
card accounts (in other words, accounts where interest is charged 
because the balance is not paid in full each billing cycle).\73\ Again, 
as noted above, the Agencies are unable to verify the accuracy of the 
conclusions reached by the Argus Analysis or its supporting data. 
Furthermore, the Argus Analysis did not estimate the potential

[[Page 5516]]

impact of proposed Sec.  --.23 on the cost and availability of 
credit.\74\ Nevertheless, assuming for the sake of discussion that the 
data and assumptions underlying the Argus Analysis are accurate, it 
appears that institutions might respond by increasing interest rates 
approximately 0.15 percentage points or by decreasing credit limits 
approximately $155.\75\ Accordingly, if, for example, an institution 
charges its consumers an interest rate of 15% on a credit line of 
$9,000, the Argus Analysis appears to indicate that the institution 
might respond to proposed Sec.  --.23 by increasing the rate to 15.15% 
or by decreasing the credit limit to $8,850.\76\
---------------------------------------------------------------------------

    \73\ See Exhibit 1, Table 1 to Argus Analysis (combining the 
predictions for ``Revolvers'' in the rows labeled ``Change in 
Payment Allocation'' and ``Grace Period Requirement for Retail 
Transactions'').
    \74\ As discussed in greater detail below, the Argus Analysis 
assumes that institutions will adjust to the restrictions in the 
proposed rules by increasing interest rates, decreasing credit 
limits, eliminating credit for consumers with low credit scores, or 
some combination of the three. This analysis ignores other potential 
adjustments, such as increasing fee revenue (including the 
assessment of annual fees) and developing improved underwriting 
techniques that will reduce losses and the need to engage in 
repricing when a consumer violates the account terms.
    \75\ The Argus Analysis estimated that proposed Sec.  --.23 will 
reduce interest revenue by 0.125 percent. Accordingly, for purposes 
of this discussion, the Agencies assumed that, consistent with the 
Argus Analysis, the increase in interest rates attributable to 
proposed Sec.  --.23 would be 120 percent of the reduction in 
interest revenue (0.125 x 1.2 = 0.15). The Agencies also assumed 
that the reduction in credit limits attributable to proposed Sec.  
--.23 would be proportionate to the overall reduction predicted by 
the Argus Analysis. Thus, because the estimated revenue loss 
attributable to proposed Sec.  --.23 (0.125) is 7.6% of the overall 
estimated revenue loss predicted by the Argus Analysis (1.637), the 
Agencies assumed that the reduction in credit limits attributable to 
proposed Sec.  --.23 would be 7.6% of the overall reduction of 
$2,029 predicted by the Argus Analysis ($2,029 x 0.076 = $155). The 
Agencies were not able to estimate the potential impact on credit 
availability for consumers with FICO scores below 620 but, given the 
limited estimated impact of proposed Sec.  --.23 on rates and credit 
limits, it appears this impact would not be substantial.
    \76\ As discussed in greater detail in section VII of this 
SUPPLEMENTARY INFORMATION, the Agencies anticipate that, prior to 
the effective date, some institutions may respond to the 
restrictions in Sec.  --.23 by, for example, adjusting interest 
rates on existing balances or reducing credit limits.
---------------------------------------------------------------------------

    The Argus Analysis also stated that more than three quarters of 
revolving accounts do not carry multiple balances, meaning that the 
estimated $930 million in interest revenue is currently generated from 
only one quarter of all revolving accounts.\77\ Thus, even if the 
Agencies were to accept the Argus Analysis and its underlying data at 
face value, it appears that the restrictions in proposed Sec.  --.23 
will result in significantly reduced interest charges for one quarter 
of consumer credit card accounts, while potentially resulting in a 
smaller increase in interest charges for all other accounts or a small 
reduction in available credit for all accounts. Furthermore, the Argus 
Analysis was based on the proposed rule. Although the final rule 
permits only two allocation methods, the Agencies' decision to omit 
from the final rule the more restrictive rules for accounts with 
promotional rate balances in proposed Sec.  --.23(b) should 
significantly reduce the estimated impact.\78\ The Agencies therefore 
conclude that, based on the available information, the injury to 
consumers as a result of the current practice of applying excess 
payments in a manner that maximizes interest charges outweighs the 
potential increase in interest rates or reduction in available credit 
as a result of prohibiting that practice. Even if the shifting of costs 
from one group of consumers to another, much larger group is viewed as 
neutral from a cost-benefit perspective, the less quantifiable benefits 
to consumers and competition of more transparent upfront pricing weigh 
in favor of the proposed rule.
---------------------------------------------------------------------------

    \77\ See Exhibit 4a, Table 3b to Argus Analysis.
    \78\ As noted above, the Argus Analysis stated that, as a result 
of proposed Sec.  --.23, institutions could lose 0.125 percent of 
their annual interest revenue on revolving credit card accounts. See 
Exhibit 1, Table 1 to Argus Analysis. This figure appears to be 
based on the equal share method, which--according to the Argus 
Analysis--would have the least impact of any of the proposed methods 
on interest revenue. See Exhibit 1, Table 3a to Argus Analysis 
(column labeled ``New Payment Allocation Method,'' row labeled 
``Equal''). Although the final rule does not permit use of the equal 
share method, the Argus Analysis estimates that the impact of the 
pro rata method (which is permitted) would only be two one-
hundredths of a percent (0.002) higher. See id. (column labeled 
``New Payment Allocation Method,'' row labeled ``Proportional''). 
Furthermore, the 0.125 figure also includes an estimated 0.014 loss 
in interest revenue attributable to proposed Sec.  --.23(b)(2), 
which the Agencies have not adopted. See Exhibit 1, Table 1 to Argus 
Analysis. Thus, assuming the Argus Analysis is accurate, the overall 
impact of the final rule on interest revenue should be less than the 
proposal.
---------------------------------------------------------------------------

    Some industry commenters also argued that compliance with proposed 
Sec.  --.23 would require extensive changes to payment allocation 
systems, the cost of which would be passed on to consumers. One systems 
provider estimated the cost of developing systems to allocate payments 
among different balances at tens of thousands of dollars per 
institution. Another systems provider, however, stated that these 
systems currently exist. Again, because the Agencies have simplified 
the payment allocation rule by permitting only two payment allocation 
methods and by omitting the special allocation requirements for 
promotional rate balances, the burden associated with systems changes 
should be reduced. Furthermore, if the cost of altering practices to 
comply with Sec.  --.23 is passed on to consumers, that cost will be 
spread among thousands, hundreds of thousands, or millions of consumers 
and will not outweigh the benefits to consumers of avoiding additional 
interest charges and more transparent upfront pricing.\79\
---------------------------------------------------------------------------

    \79\ As discussed below, the Agencies have revised the proposed 
remedy for this unfair practice by allowing only two allocation 
methods for excess payments: high-to-low and pro rata allocation. 
Unlike the proposal, the final rule would not permit institutions to 
split excess payments equally among the balances or to allocate 
using a method that is no less beneficial to consumers than one of 
the listed methods because the Agencies have determined that these 
methods would not provide benefits to consumers that outweigh the 
injury addressed by this final rule.
---------------------------------------------------------------------------

    Public policy. Some industry commenters argued that the proposed 
rule was contrary to public policy as set forth in statements by 
another federal banking agency. Specifically, these commenters pointed 
to statements in Congressional testimony and an advisory letter by the 
OCC suggesting that concerns regarding payment allocation should be 
addressed through disclosure rather than substantive regulation.\80\
---------------------------------------------------------------------------

    \80\ See Testimony of Julie L. Williams, Chief Counsel & First 
Senior Deputy Controller, OCC before H. Subcomm. on Fin. Instits. & 
Consumer Credit at 10-11 (Apr. 17, 2008) (available at http://www.house.gov/apps/list/hearing/financialsvcs_dem/williams041708.pdf); see also OCC Advisory Letter 2004-10 (Sept. 14, 
2004) (available at http://www.occ.treas.gov/ftp/advisory/2004-10.doc).
---------------------------------------------------------------------------

    While public policy may be considered as part of the unfairness 
analysis under the FTC Act, it is not a required element of that 
analysis and cannot serve as the primary basis for determining that an 
act or practice is unfair.\81\ For purposes of the unfairness analysis, 
public policy is generally embodied in a statute, regulation, or 
judicial decision.\82\ Nevertheless, to the extent that the OCC's 
statements constitute public policy, the Agencies find that those 
statements (which the Agencies have not adopted) do not preclude a 
determination that allocating excess payments in a manner that does not 
apply a significant portion to the balance with the highest rate is an 
unfair practice. The May 2008 Proposal explained that extensive 
consumer testing conducted by the Board indicated that disclosure was 
not effective in enabling consumers to avoid the harm caused by current 
payment allocation practices. The Agencies also note that the OCC 
statements cited by

[[Page 5517]]

the commenters were made prior to the May 2008 Proposal and were not 
repeated in the OCC's comment on that proposal.
---------------------------------------------------------------------------

    \81\ 15 U.S.C. 45(n).
    \82\ See, e.g., FTC Policy Statement on Unfairness at 5 (stating 
that public policy ``should be clear and well-established'' and 
``should be declared or embodied in formal sources such as statutes, 
judicial decisions, or the Constitution as interpreted by the court 
* * *'').
---------------------------------------------------------------------------

Final Rule

    As proposed, Sec.  --.23(a) would have established a general rule 
governing payment allocation on accounts that have balances with 
different annual percentage rates but do not have a promotional rate or 
deferred interest balance. Proposed Sec.  --.23(b) would have 
established special rules for accounts with balances at different rates 
that do have a promotional rate or deferred interest balance. As 
discussed below, however, the final rule eliminates the special rules 
in proposed Sec.  --.23(b) and applies a revised version of the general 
rule in proposed Sec.  --.23(a) to all types of balances.
    As an initial matter, industry commenters and a member of Congress 
criticized proposed Sec.  --.23 as overly complex. They stated that, 
rather than making payment allocation practices easier for consumers to 
understand, the proposed rule would make payment allocation harder to 
disclose and increase consumer confusion. The Agencies reemphasize that 
the Board's consumer testing indicates that, regardless of the 
complexity of the method, payment allocation methods cannot be 
effectively disclosed. The proposed restrictions on payment allocation 
were not intended to ease disclosure but instead to protect consumers 
from unfair practices that cannot be effectively addressed by 
disclosure. Nevertheless, as discussed below, the Agencies have greatly 
simplified the final rule.
Section --.23 Allocation of Excess Payments
    When an account has balances with different annual percentage 
rates, proposed Sec.  --.23(a) would have required institutions 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. First, 
proposed Sec.  --.23(a)(1) would have allowed an institution to apply 
the excess payment first to the balance with the highest annual 
percentage rate and any remaining portion to the balance with the next 
highest annual percentage rate and so forth. Second, proposed Sec.  
--.23(a)(2) would have allowed an institution to allocate equal 
portions of the excess payment to each balance. Third, proposed Sec.  
--.23(a)(3) would have allowed an institution to allocate the excess 
payment among the balances in the same proportion as each balance bears 
to the total balance (in other words, pro rata).
    As discussed above, some consumer group commenters argued that--
because the Board's consumer testing indicates that disclosure does not 
enable consumers to understand the effects of payment allocation on 
interest charges--providing institutions with the ability to choose 
between different allocation methods would only make payment allocation 
more complex and the associated costs less transparent. Because this 
result would be contrary to the intended purpose of proposed Sec.  
--.23, the final rule allows only two allocation methods for excess 
payments: Applying the excess payment first to the balance with the 
highest annual percentage rate and any remaining amount to the other 
balances in descending order based on the applicable annual percentage 
rate; and allocating the excess payment pro rata.
    Although consumer groups and others argued that the Agencies should 
require allocation to the highest rate balance first in all 
circumstances because this method would minimize interest charges, the 
Agencies believe that the final version of Sec.  --.23 strikes the 
appropriate balance between institutions and consumers. It prohibits 
institutions from using the allocation method that maximizes interest 
charges but does not require use of the method that minimizes interest 
charges. The Agencies expect that most institutions will use the pro 
rata method, which will standardize payment allocation practices and 
focus competition on more transparent costs of credit (such as interest 
rates). Although permitting a second allocation method creates the 
potential for increased complexity, the Agencies believe that the 
allocation of excess payments first to the highest rate balance should 
be permitted because, even if few institutions will do so, this method 
minimizes interest charges for consumers.
    The Agencies have not included the proposed methods allowing 
allocation of equal portions of the excess payment to each balance and 
allowing institutions to allocate excess payments in a manner that is 
no less beneficial to the consumer than one of the listed methods in 
order to reduce complexity and promote transparency. In addition, 
because information received during the comment period indicates that, 
as a general matter, consumers have approximately 25 percent of their 
total balance at a discounted promotional rate,\83\ it appears that the 
equal share method would generally be less beneficial to consumers than 
the pro rata method because--unless the account has four or more 
balances--the equal share method would apply more of the excess payment 
to the discounted promotional rate balance (and therefore less to 
balances with higher interest rates) than the pro rata method.\84\ 
Finally, because an allocation method would have been no less 
beneficial to a consumer than a listed method only if it resulted in 
the same or lesser interest charges,\85\ institutions were unlikely to 
take advantage of this option because it would require individualized 
determinations based on each consumer's balances and rates.
---------------------------------------------------------------------------

    \83\ See Exhibit 7, Table 1c to Argus Analysis (column labeled 
``Overall'').
    \84\ The Agencies note that, according to the Argus Analysis, 
the pro rata method will result in a greater loss in annual interest 
revenue than the equal share method. See Exhibit 1, Table 3a to 
Argus Analysis (column labeled ``New Payment Allocation Method,'' 
rows labeled ``Proportional'' and ``Equal''). Thus, assuming these 
data are accurate, the pro rata method will result in lower interest 
charges for consumers than the equal share method.
    \85\ See proposed comment 23(a)-1, 73 FR at 28944.
---------------------------------------------------------------------------

    The Agencies note that several industry commenters argued that 
institutions should be permitted to allocate payments first to the 
oldest transactions on the account, which would often be transactions 
on which the institution is prohibited from increasing the annual 
percentage rate pursuant to proposed Sec.  --.24. These commenters 
stated that this method (which is sometimes referred to as ``first in, 
first out'' or ``FIFO'') would pay down those transactions faster, 
thereby reducing the burden to institutions of carrying balances at 
rates that no longer reflect market rates or the consumer's risk. 
However, the Agencies believe that concerns related to proposed Sec.  
--.24 are better addressed through revisions to that proposal (as 
discussed below), rather than through payment allocation. In addition, 
permitting FIFO allocation would, in some circumstances, allow 
institutions to allocate excess payments first to the balance with the 
lowest rate. For example, if a consumer opened an account by 
transferring a balance in reliance on a discounted promotional rate, 
that balance would be the oldest balance on the account. Consequently, 
FIFO allocation could perpetuate the current practice of using payment 
allocation to maximize interest charges.
    Although some industry commenters stated that their payment 
allocation systems could allocate excess payments pro rata or in equal 
portions, others stated that their systems could not and

[[Page 5518]]

that they would be forced instead to allocate payments first to the 
balance with the highest interest rate. The Agencies note that neither 
the proposal nor the final rule require institutions to allocate first 
to the balance with the highest interest rate. Accordingly, if an 
institution's payment allocation system cannot currently allocate 
excess payments pro rata, the institution must make the determination 
whether to adjust that system or allocate to the highest rate balance 
first and forego the additional interest charges. As discussed below in 
section VII of this SUPPLEMENTARY INFORMATION, institutions will be 
provided with 18 months in which to adjust their systems.
    The Agencies proposed commentary to clarify how proposed Sec.  
--.23 would be applied. Proposed comment 23-1 clarified that Sec.  
--.23 would not limit or otherwise address the institution's ability to 
determine the amount of the required minimum periodic payment or how 
that payment is allocated. Consumer groups urged the Agencies to apply 
proposed Sec.  --.23 to the entire payment. In contrast, one industry 
commenter stated that excluding the minimum payment was not helpful 
because such payments are kept small for competitive reasons. Another 
industry commenter urged the Agencies to remove the distinction between 
minimum and excess payments in order to reduce the rule's complexity.
    The Agencies, however, believe that proposed Sec.  --.23 strikes 
the appropriate balance by providing institutions flexibility regarding 
the minimum amount consumers must pay while ensuring that, when 
consumers voluntarily pay more than the minimum, those payments are not 
allocated in a manner that maximizes interest charges.\86\ In response 
to comments from institutions whose systems cannot distinguish between 
minimum and excess payments when allocating and comments objecting to 
the complexity created by the distinction, the Agencies clarify in 
comment 23-1 that institutions may apply the entire payment consistent 
with Sec.  --.23 (unless doing so would be inconsistent with applicable 
law and regulatory guidance). The Agencies have also clarified that the 
amount and allocation of the required minimum periodic payment must be 
determined consistent with applicable law and regulatory guidance. 
Otherwise, proposed comment 23-1 is adopted as proposed.
---------------------------------------------------------------------------

    \86\ One commenter requested that proposed Sec.  --.23 be 
revised to permit excess payments to be allocated first to interest 
and fees. The Agencies do not believe such a change is necessary 
because, to the extent that an institution wishes to recover 
interest and fees, those amounts can (and often are) included in the 
required minimum periodic payment.
---------------------------------------------------------------------------

    In order to simplify the allocation process and reduce the 
operational burden on institutions, proposed comment 23-2 permitted 
institutions to make small adjustments of one dollar or less when 
allocating payments. One industry commenter requested that institutions 
also be permitted to make adjustments equal to or less than one percent 
of the total balance. This is not, however, the type of small 
adjustment envisioned by the Agencies. For example, one percent of a 
$5,000 balance would be $50. Accordingly, comment 23-2 is adopted as 
proposed.
    Because proposed Sec.  --.23 would have required institutions to 
allocate payments based on the balances and annual percentage rates on 
the account, some industry commenters requested guidance regarding the 
point in time at which the various determinations required by proposed 
Sec.  --.23 would be made. For example, because transactions are 
commonly made between the close of a billing cycle and the date on 
which payment for that billing cycle is received, the balances on the 
account on the day the payment is applied will often be different than 
the balances on the periodic statement for the billing cycle. 
Similarly, the annual percentage rates may have changed in the interim. 
One industry commenter stated that payment allocation should be based 
on the balances and rates on the preceding periodic statement, while 
two other industry commenters stated that the balances and rates at the 
time the payment is credited should be used. The Agencies believe that, 
because the benefit to consumers of one approach or the other will 
depend on the consumer's individual circumstances, there is no need to 
require a particular approach. Accordingly, the Agencies adopt comment 
23-3, which clarifies that an institution may allocate based on the 
balances and annual percentage rates on the date the preceding billing 
cycle ends (which will typically be the balances and rates reflected on 
the periodic statement), on the date the payment is credited to the 
account, or on any day in between those two dates.
    Some commenters requested that the Agencies prohibit institutions 
from varying the allocation method on an account from billing cycle to 
billing cycle or from account to account, while others requested that 
this be expressly permitted. The Agencies are not prohibiting 
institutions from moving from one permissible allocation method to 
another or from using one permissible method on some accounts and a 
different permissible method on other accounts. Because, under the 
final rule, the only alternative to allocating pro rata is allocating 
to the highest rate balance first, the Agencies do not believe there is 
a significant danger that institutions will be able to manipulate the 
payment allocation process to their advantage by switching from one 
method to another. Accordingly, the Agencies adopt comment 23-4, which 
acknowledges that Sec.  --.23 does not restrict an institution's 
ability to shift between permissible allocation methods or to use 
different permissible allocation methods for different accounts.
    One industry commenter noted that the commentary to Regulation Z, 
12 CFR 226.12(c) sets forth specific payment allocation requirements 
when a consumer asserts a claim or defense under that section that 
could be inconsistent with those in proposed Sec.  --.23. Because the 
payment allocation requirements in the commentary to Sec.  226.12(c) 
are intended to prevent extinguishment of claims or defenses, the 
Agencies adopt comment 23-5, which clarifies that, when a consumer has 
made a claim or defense pursuant to 12 CFR 226.12(c), an institution 
must allocate payments consistent with 12 CFR 226.12 comment 226.12(c)-
4, as adopted elsewhere in today's Federal Register.
    An industry commenter requested clarification regarding allocation 
of payments when an account has multiple balances with the same annual 
percentage rate. As an initial matter, because Sec.  --.23 applies only 
``when different annual percentage rates apply to different balances on 
a consumer credit card account,'' this section does not apply if all 
balances in the account have the same rate. If, however, an account has 
multiple balances with the same annual percentage rate and another 
balance with a different rate, the benefit to the consumer of 
allocating between the balances with the same rate in a particular 
manner will depend on the circumstances and the allocation method 
chosen by the institution. Accordingly, the Agencies have adopted 
comment 23-6, which clarifies that, in these circumstances, the 
institution may allocate between balances with the same rate in the 
manner that the institution determines is appropriate. This comment 
also clarifies that institutions may treat balances with the same 
annual percentage rate as separate balances or as a single balance.
    The Agencies have also revised the proposed commentary and adopted 
new commentary in response to comments

[[Page 5519]]

regarding specific allocation methods.\87\ Proposed comment 23(a)(1)-1 
provided examples of allocating excess payments to the highest rate 
balance first. In response to requests from commenters, the Agencies 
have added examples illustrating application of this method to accounts 
with balances on which the annual percentage rate cannot be increased 
pursuant to Sec.  --.24 and accounts with multiple balances at the same 
rate and at least one balance at a different rate. Otherwise, this 
comment is redesignated as comment 23(a)-1 and adopted as proposed.
---------------------------------------------------------------------------

    \87\ Because the final rule does not permit institutions to use 
a payment allocation method that is no less beneficial to consumers 
than one of the listed methods, the Agencies have omitted proposed 
comments 23(a)-1 and -2, which clarified the meaning of this aspect 
of the proposal. Similarly, because the final rule does not permit 
institutions to allocate equal portions of the excess payment to 
each balance, the Agencies have omitted proposed comment 23(a)(2)-1, 
which provided examples of that allocation method.
---------------------------------------------------------------------------

    With respect to pro rata allocation, some industry commenters 
requested guidance on how the total balance should be determined. They 
suggested that amounts paid by the required minimum periodic payment 
should be included in the total balance because excluding such amounts 
would be operationally burdensome insofar as it would require 
institutions to allocate the minimum payment and then recalculate each 
balance for purposes of allocating pro rata. The Agencies agree that 
the suggested clarification will reduce burden and assist institutions 
in allocating payments consistent with Sec.  --.23(b). Accordingly, the 
Agencies have adopted comment 23(b)-1 clarifying that an institution 
may, but is not required to, deduct amounts paid by the consumer's 
required minimum periodic payment when calculating the total balance 
for purposes of Sec.  --.23(b). An illustrative example is provided in 
comment 23(b)-2.iii.
    In the May 2008 Proposal, proposed comment 23(a)(3)-1 provided an 
example of allocating excess payments pro rata among the balances. This 
comment is redesignated as comment 23(b)-2 for organizational reasons 
and generally adopted as proposed. In response to requests from 
commenters, however, the Agencies have added examples illustrating 
application of this method to accounts with balances on which the 
annual percentage rate cannot be increased pursuant to Sec.  --.24 and, 
as noted above, the different methods of calculating the total balance 
consistent with comment 23(b)-1.
Proposed Section --.23(b) Special Rules for Accounts With Promotional 
Rate Balances or Deferred Interest Balances
    As proposed, Sec.  --.23(b) contained special rules for accounts 
with promotional rate and deferred interest balances that were intended 
to ensure that consumers received the full benefit of the promotional 
rate or deferred interest plan. Proposed Sec.  --.23(b)(1)(i) would 
have required that excess payments be allocated to promotional rate 
balances or deferred interest balances only after all other balances 
had been paid in full. Because, however, the Agencies were concerned 
that consumers may want to pay off deferred interest balances shortly 
before the deferred interest period expired, proposed Sec.  
--.23(b)(1)(ii) would have permitted the existing practice by some 
institutions of allocating the entire payment first to the deferred 
interest balance in the last two months of the deferred interest 
period. Finally, proposed Sec.  --.23(b)(2) would have prohibited 
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 a grace 
period on other balances (such as purchases).
    Proposed Sec.  --.23(b) was strongly opposed by industry commenters 
on the grounds that, if implemented, it would significantly diminish 
interest revenue, leading institutions to significantly reduce or 
eliminate promotional rate and deferred interest offers that provide 
substantial benefits to consumers. Many of these commenters requested 
that proposed Sec.  --.23(b) be withdrawn and that institutions instead 
be permitted to apply excess payments first to promotional rate and 
deferred interest balances. Some industry commenters, however, 
requested that the general rule in proposed Sec.  --.23(a) be applied 
to all balances. In contrast, some consumer advocates urged the 
Agencies to ban deferred interest balances rather than create an 
exception for them.
    As an initial matter, the Agencies have not included the special 
rules regarding deferred interest balances. As discussed below with 
respect to the Sec.  --.24, the final rule does not permit institutions 
to charge interest retroactively and thus does not permit deferred 
interest plans.
    With respect to promotional rates, the Argus Analysis indicates 
that 16-19 percent of active accounts have one or more promotional rate 
balances and that the average promotional rate on those balances is 
between two and three percent, which is approximately 13 percentage 
points lower than the average non-promotional rate.\88\ Furthermore, 
when the rates were weighted to account for the proportion of the total 
balance that was at a promotional rate, the effective annual percentage 
rate for these accounts was approximately 5.5 percent or roughly ten 
percentage points lower than the average rate for non-promotional 
balances.\89\ Assuming this information is accurate, it appears that 
discounted promotional rates offer significant benefits to many 
consumers.
---------------------------------------------------------------------------

    \88\ See Exhibit 7, Tables 1b and 2 to Argus Analysis.
    \89\ See id.
---------------------------------------------------------------------------

    Notwithstanding these benefits, the Agencies continue to believe 
that, as suggested by other commenters, allocating payments to 
promotional rate balances before other balances with higher interest 
rates significantly diminishes the value of promotional rate offers. 
Furthermore, although the Agencies believe that proposed Sec.  --.23 
would have had a negative impact on the availability of promotional 
rates, the commenters provided little data regarding the extent of that 
impact. Thus, the Agencies believe that application of the general 
payment allocation rule in Sec.  --.23 to promotional rate balances is 
appropriate. Application of this rule to all balances will limit the 
extent to which institutions may reduce promotional rate offers while 
ensuring that payment allocation is not used to significantly undercut 
the benefits to consumers who act in reliance on such offers. 
Accordingly, the Agencies have not included proposed Sec.  
--.23(b)(1)(i) in the final rule. To the extent that specific practices 
raise concerns regarding unfairness or deception under the FTC Act, the 
Agencies plan to address those practices on a case-by-case basis 
through supervisory and enforcement actions.
    The Agencies have also omitted proposed Sec.  --.23(b)(2), which 
would have prohibited institutions from denying a grace period solely 
because a consumer did not repay a promotional rate or deferred 
interest balance. This proposal was strongly criticized by industry as 
operationally burdensome and punitive for institutions that voluntarily 
provide a grace period on purchases. Proposed Sec.  --.23(b)(2) was 
intended to act in combination with proposed Sec.  --.23(b)(1)(i) to 
ensure that consumers receive the full benefit of promotional rate and 
deferred interest offers. Because the Agencies have concluded that a 
different approach is appropriate, the Agencies have not included 
proposed Sec.  --.23(b)(2) in the

[[Page 5520]]

final rule. To the extent that specific practices raise concerns 
regarding unfairness or deception under the FTC Act, the Agencies plan 
to address those practices on a case-by-case basis through supervisory 
and enforcement actions.

Other Issues

    Implementation. As discussed in section VII of this SUPPLEMENTARY 
INFORMATION, the effective date for Sec.  --.23 is July 1, 2010. As of 
that date, this provision applies to existing as well as new consumer 
credit card accounts and balances. Thus, institutions must apply 
amounts paid by the consumer in excess of the required minimum periodic 
payment that the institution receives after the effective date 
consistent with Sec.  --.23.
    Alternative to proposed rule. The Agencies requested comment on 
whether consumers should be permitted to instruct the institution 
regarding allocation of amounts in excess of the required minimum 
periodic payment. The response was mixed. Some consumer groups 
supported creating an exception to proposed Sec.  --.23 allowing 
consumers to select how their excess payments would be allocated, while 
others expressed concern that such an exception would be ineffective 
and subject to abuse because disclosures do not enable consumers to 
understand payment allocation. Similarly, institutions that currently 
allow consumers to select how their payments are allocated requested 
that they be permitted to continue doing so, while most industry 
commenters opposed any provision that would require them to allocate 
consistent with consumer choice as operationally burdensome.
    In consumer testing prior to the May 2008 Proposal, the Board 
tested whether, given the opportunity, consumers could select how 
amounts paid in excess of the minimum would be allocated using the 
payment coupon. Most participants, however, were not able to understand 
the effects of payment allocation sufficiently to apply payments in a 
manner that minimized interest charges. Additional testing conducted by 
the Board after the May 2008 Proposal produced similar results. 
Accordingly, because it does not appear that consumer choice would be 
effective, the Agencies have not included such an exception in the 
final rule.

Supplemental Legal Basis for This Section of the OTS Final Rule

    As discussed above, HOLA provides authority for both safety and 
soundness and consumer protection regulations. Section 535.23 supports 
safety and soundness by reducing reputational risk that would result 
from allocating consumers' payments in an unfair manner. Section 535.23 
also protects consumers by providing them with fair allocations of 
their payments. When a creditor treats a consumer credit card account 
as having separate balances with separate interest rates and terms, it 
is essentially treating the card as having separate debts even though 
the consumer makes only one payment. Were the separate balances 
actually separate debts being collected by a debt collector, the 
consumer would have the right under section 810 of the Fair Debt 
Collection Practices Act (15 U.S.C. 1692h) to have payments applied in 
accordance with the consumer's directions. As discussed above, that 
approach did not test well for consumer credit card accounts with 
multiple balances, and the Agencies are not imposing the same 
requirement under Sec.  --.23. However, ensuring that the consumer's 
payment will be applied to the highest rate balance first or pro rata 
will be an important protection for consumers. Consequently, HOLA 
serves as an independent basis for Sec.  535.23.

Section --.24--Unfair Acts or Practices Regarding Increases in Annual 
Percentage Rates

    Summary. In May 2008, the Agencies proposed to prohibit the 
application of increased rates to outstanding balances, except in 
certain limited circumstances. See 73 FR 28917-28921. Specifically, 
proposed Sec.  --.24(a)(1) would have prohibited the application of an 
increased annual percentage rate to an outstanding balance on a 
consumer credit card account, except as provided in proposed Sec.  
--.24(b). Proposed Sec.  --.24(a)(2) would have defined ``outstanding 
balance'' as the amount owed on an account at the end of the fourteenth 
day after the institution provides the notice required by Regulation Z, 
12 CFR 226.9(c) or (g). Proposed Sec.  --.24(b) would have permitted 
institutions to increase the rate on an outstanding balance due to an 
increase in an index, when a promotional rate expired or was lost, or 
when the account became more than 30 days' delinquent. Finally, 
proposed Sec.  --.24(c) would have prohibited institutions from 
engaging in certain practices that would undercut the protections in 
proposed Sec.  --.24(a). Under proposed Sec.  --.24(c)(1), institutions 
would have been prohibited from requiring consumers to repay the 
outstanding balance over a period of less than 5 years or from more 
than doubling the repayment rate on the outstanding balance. Proposed 
Sec.  --.24(c)(2) would also have prohibited institutions from 
assessing fees or charges based solely on the outstanding balance (for 
example, assessing a maintenance fee in lieu of increased interest 
charges).
    Based on the comments received and further analysis, the Agencies 
have revised proposed Sec.  --.24(a) to prohibit institutions from 
increasing the annual percentage rate for a category of transactions on 
any consumer credit card account unless specifically permitted by one 
of the exceptions in Sec.  --.24(b). The final rule also requires 
institutions to disclose at account opening all rates that will apply 
to each category of transactions on the account. Because consumers rely 
on the rates stated by the institution when deciding whether to open a 
credit card account and whether to use the account for transactions, 
these requirements are intended to ensure that consumers are protected 
from unfair surprise and to better enable them to comparison shop.
    The Agencies have also revised the exceptions in proposed Sec.  
--.24(b). First, the Agencies have adopted a new Sec.  --.24(b)(1), 
which permits an institution that has disclosed at account opening that 
an annual percentage rate will increase at a specified time to a 
specified amount to increase that rate accordingly. Second, the 
Agencies have adopted the proposed exception for variable rates as 
Sec.  --.24(b)(2). Third, the Agencies have adopted a new Sec.  
--.24(b)(3), which permits institutions to increase rates for new 
transactions pursuant to the 45-day advance notice requirement in 12 
CFR 226.9 (adopted by the Board elsewhere in today's Federal Register), 
although this exception does not apply during the first year after 
account opening. Fourth, to allow institutions to adjust rates in 
response to serious delinquencies, the Agencies have adopted the 
proposed exception allowing repricing when an account becomes more than 
30 days' delinquent as Sec.  --.24(b)(4). Fifth, to avoid discouraging 
workout arrangements that decrease rates for consumers in default if 
the consumer abides by certain conditions (for example, making payment 
on time each month), Sec.  --.24(b)(5) has been added allowing a 
decreased rate to be returned to the pre-existing rate if the consumer 
fails to abide by the conditions of the workout arrangement. Finally, 
the Agencies have adopted the repayment provisions in proposed Sec.  
--.24(c) with some stylistic changes.
    Background. Prior to the Regulation Z amendments published 
elsewhere in today's Federal Register, 12 CFR

[[Page 5521]]

226.9(c) required 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 was not required if an interest rate or other 
finance charge increased due to a consumer's default or 
delinquency.\90\ Furthermore, no change-in-terms notice was required if 
the creditor set forth the specific change in the account-opening 
disclosures.\91\
---------------------------------------------------------------------------

    \90\ See prior versions of 12 CFR 226.9(c)(1); 12 CFR 226.9 
comment 226.9(c)(1)-3.
    \91\ See prior version of 12 CFR 226.9 comment 226.9(c)-1.
---------------------------------------------------------------------------

    In its June 2007 Regulation Z 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-
33013. 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.\92\
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    \92\ 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'').
---------------------------------------------------------------------------

    Consumer testing conducted for the Board indicated that interest 
rates are a primary consideration for consumers when shopping for 
credit card accounts but that some consumers do not understand that 
events such as one late payment can cause them to lose the advertised 
rate and incur penalty pricing. In addition, some testing participants 
did not appear to understand that penalty rates can apply to all of 
their balances, including outstanding 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 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 the account.
    The Board's June 2007 Regulation Z Proposal included revisions to 
the regulation 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.\93\ 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.\94\
---------------------------------------------------------------------------

    \93\ See proposed 12 CFR 226.9(c), (g), 72 FR at 33056-33058, 73 
FR at 28891. Elsewhere in today's Federal Register, the Board has 
adopted a revised version of this proposal.
    \94\ See proposed 12 CFR 226.7(b)(11)(i)(C), 72 FR at 33053. 
Elsewhere in today's Federal Register, the Board has adopted a 
revised version of this proposal.
---------------------------------------------------------------------------

    When developing the June 2007 Regulation Z 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 if the consumer agrees to close the account.
    In response to its June 2007 Regulation Z Proposal, individual 
consumers, consumer groups, another federal banking agency, and a 
member of Congress stated that notice alone was not sufficient to 
protect consumers from the harm caused by rate increases. These 
commenters 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 commenters 
argued that creditors should be prohibited from increasing the rate on 
an outstanding balance in all instances. Others argued that consumers 
should be given the right to reject application of an increased rate to 
an outstanding 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 credit card 
issuers. On the other hand, most industry commenters stated that the 
45-day notice requirement would delay issuers from increasing rates to 
reflect a consumer's increased risk of default, requiring them to 
account for that risk by, for example, charging higher annual 
percentage rates at the outset of the account relationship. These 
commenters also noted that, because rate increases are also used to 
pass on the cost of funds issuers themselves pay, delays in the 
imposition of increased rates could result in higher costs of credit or 
less available credit.
    In the May 2008 Proposal, the Agencies expressed concern that 
disclosure alone may be insufficient to protect consumers from the harm 
caused by the application of increased rates to outstanding balances. 
Accordingly, the Agencies proposed Sec.  --.24, which would have 
prohibited this practice except in certain limited circumstances. This 
aspect of the proposal received strong support from individual 
consumers, consumer groups, members of Congress, the FDIC, two state 
attorneys general, and a state consumer protection agency. Many of 
these commenters urged the Agencies to go further, by eliminating all 
but the exception for variable rates and by applying the prohibition to 
rate increases on future transactions. In contrast, however, the 
proposal received strong opposition from credit card issuers, industry 
groups, and the OCC. These commenters generally argued that the 
proposed restrictions undermined institutions' ability to price 
according to current market conditions and the risk presented by the 
consumer and would therefore result in higher costs of credit or 
reduced credit availability for all consumers. They requested that the 
Agencies adopt additional exceptions to the proposed rule, take a 
different approach (such as requiring consumers to opt out of rate 
increases), or withdraw the proposal entirely. To the extent that 
commenters addressed specific aspects of the proposal or its supporting 
legal analysis, those comments are discussed below.

Legal Analysis

    The Agencies conclude that, except in certain limited 
circumstances, increasing the annual percentage rate applicable to an 
outstanding balance on a consumer credit card account is an unfair 
practice under 15 U.S.C. 45(n) and the standards articulated by the 
FTC. In addition, based on these standards, the Agencies conclude that 
it is also an unfair practice to increase an annual percentage rate 
that applies to a consumer credit card account during the first year 
after account opening (except in certain limited circumstances).

[[Page 5522]]

    Substantial consumer injury. In May 2008, the Agencies stated that 
application of an increased annual percentage rate to an outstanding 
balance appeared to cause substantial monetary injury by increasing the 
interest charges assessed to a consumer's credit card account. 
Commenters who opposed the proposed rule did not dispute that such 
increases result in additional interest charges. Indeed, the Argus 
Analysis indicated that consumers are charged more than $11 billion in 
interest annually as a result of the practices addressed by proposed 
Sec.  --.24.\95\
---------------------------------------------------------------------------

    \95\ See Exhibit 1, Table 1 to Argus Analysis (estimated 
annualized interest lost for rows labeled ``30+DPD Penalty 
Trigger,'' ``CIT Repricing,'' and ``Non 30+DPD Penalty Triggers''). 
The Argus Analysis indicates that some portion of this total is 
attributable to the requirement in Regulation Z, 12 CFR 226.9, that 
creditors provide 45 days' advance notice of most rate increases.
---------------------------------------------------------------------------

    Some industry commenters stated that only a minority of accounts 
are repriced each year and that even consumers who have violated the 
account terms by, for example, paying late are, as a general matter, 
not repriced. This does not, however, alter the fact that consumers who 
are repriced incur substantial monetary injury.
    Some industry commenters argued that, to the extent the increased 
rate reflects the prevailing market rate for consumers with the same 
risk profile and other relevant characteristics, it cannot constitute 
an injury under the FTC Act. These commenters did not provide--nor are 
the Agencies aware of--any legal authority supporting the proposition 
that increasing the cost of credit is not an injury under the FTC Act 
so long as the increased rate does not exceed the market rate.
    For all of these reasons, the Agencies conclude that applying an 
increased annual percentage rate to an outstanding balance causes 
substantial consumer injury. The Agencies further conclude that 
consumers who rely on advertised interest rates when deciding to open 
and use a credit card account experience substantial injury in the form 
of the increased cost of new transactions when rates are increased 
during the first year after account opening.\96\ In addition, the 
account loses some of its value because the cost of financing 
transactions is higher than anticipated when the consumer decided to 
open the account.
---------------------------------------------------------------------------

    \96\ For this reason, consumers must be informed at account 
opening of the rates that will apply to each category of 
transactions on the account.
---------------------------------------------------------------------------

    Injury is not reasonably avoidable. In May 2008, the Agencies 
stated that, although the injury resulting from increases in the annual 
percentage rate may be avoidable by some consumers under certain 
circumstances, this injury did not appear to be reasonably avoidable as 
a general matter because consumers appeared to lack control over many 
of the circumstances in which institutions increase rates. The Agencies 
grouped these circumstances into four categories: Circumstances that 
are completely unrelated to the consumer's behavior (for example, 
changes in market conditions); consumer behavior that is unrelated to 
the account on which the rate is increased (for example, so-called 
``universal defaults''); consumer behavior that is related to the 
account in question but does not violate the terms of that account (for 
example, using most but not all of the credit limit); and consumer 
behavior that violates the terms of the account (for example, late 
payment or exceeding the credit limit). As discussed below, based on 
the comments and further analysis, the Agencies conclude that consumers 
cannot, as a general matter, reasonably avoid rate increases on 
outstanding balances.
    First, an institution may increase a rate for reasons that are 
completely unrelated to the consumer's behavior. For instance, an 
institution may increase rates to increase revenues or to respond to 
changes in the cost to the institution of borrowing funds. In May 2008, 
the Agencies observed that consumers lack any control over these 
increases and cannot be reasonably expected to predict when such 
repricings will occur because many institutions reserve the right to 
change the terms of the consumer's account at any time and for any 
reason. Accordingly, the Agencies concluded that consumers appeared to 
be unable to reasonably avoid injury in these circumstances.
    Some industry commenters responded that consumers can reasonably 
avoid injury by transferring the balance to another credit card 
account, particularly if the consumer receives the 45 days' advance 
notice required by proposed 12 CFR 226.9. These commenters 
acknowledged, however, that many consumers will be unable to find 
another credit card account with a rate comparable to the pre-increase 
rate. Furthermore, even if a comparable rate could be found, the 
transfer may carry a cost because many institutions charge a flat fee 
for transferring a balance or a fee equal to a percentage of the 
transferred balance. Accordingly, the Agencies conclude that consumers 
cannot reasonably avoid the injury caused by rate increases on 
outstanding balances for reasons that are unrelated to their behavior.
    Second, an institution may increase an annual percentage rate on a 
consumer credit card account based on behavior that is unrelated to the 
consumer's performance on that account. This is sometimes referred to 
as ``off-account'' behavior or ``universal default.'' 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.\97\ The consumer 
may or may not have been aware of or able to control the factor that 
caused the drop in 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 is not likely to be aware 
that using a certain amount of the available credit on open-end credit 
accounts can lead to a reduction in credit score. Moreover, even if a 
consumer were aware that the utilization of available credit can affect 
a credit score, the consumer could not control how the institution uses 
credit scores or other information to set interest rates.\98\ 
Furthermore, as discussed below, a late payment or default on a 
different account (or the account in question) will not be reasonably 
avoidable in some instances.
---------------------------------------------------------------------------

    \97\ 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).
    \98\ Indeed, several credit card issuers stated in their 
comments that, rather than relying solely on credit scores to 
increase rates, they use proprietary underwriting systems that 
examine a wide range of criteria. Because those criteria are not 
available to the public, consumers cannot be reasonably expected to 
know what behavior will cause their issuer to increase the rate on 
their account.
---------------------------------------------------------------------------

    One industry commenter stated that a consumer has a right under the 
Fair Credit Reporting Act (FCRA) to dispute any inaccurate information 
that causes a drop in credit score.\99\ This right, however, does not 
assist consumers whose credit scores decrease due to information that 
accurately reflects events that were nevertheless unavoidable by the 
consumer. Furthermore, even when the drop in credit score was caused by 
inaccurate information, the right to dispute that information comes too 
late to enable the consumer to avoid the harm caused by an increase in 
rate on an outstanding balance. Accordingly, the Agencies conclude 
that, as a general matter, consumers cannot reasonably avoid the

[[Page 5523]]

injury caused by rate increases on outstanding balances that are based 
on a drop in credit score or on behavior that is unrelated to the 
consumer's performance on the account in question.
---------------------------------------------------------------------------

    \99\ See 15 U.S.C. 1681i.
---------------------------------------------------------------------------

    Third, some institutions increase annual percentage rates on 
consumer credit card accounts based on consumer behavior that is 
related to the account 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 only the required minimum periodic payment set by 
the institution for several consecutive months.\100\ Although in some 
cases this type of activity may be within the consumer's control, the 
consumer cannot 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, a consumer could reasonably interpret an 
institution's provision of a specific credit limit, minimum payment, or 
other account term as an implicit representation that the consumer will 
not be penalized if the credit limit is not exceeded, the minimum 
payment is made, or the consumer otherwise complies with the terms of 
the account. Accordingly, the Agencies conclude that consumers cannot 
reasonably avoid the injury caused rate increases based on behavior 
that does not violate the account terms.
---------------------------------------------------------------------------

    \100\ 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).
---------------------------------------------------------------------------

    Fourth, institutions increase annual percentage rates based on 
consumer behavior that violates the account terms. Although what 
violates the account terms can vary from institution to institution and 
from account to account, the most common violations that result in an 
increase in rate are exceeding the credit limit, a payment that is 
returned for insufficient funds, and a late payment.\101\ In the May 
2008 Proposal, the Agencies stated that, in some cases, it appeared 
that individual consumers could avoid these events by taking reasonable 
precautions. In other cases, however, it appeared that the event was 
not reasonably avoidable. For example, consumers who carefully track 
their transactions are less likely to exceed their credit limit than 
those who do not, but these consumers may still exceed the limit due to 
charges of which they were unaware (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 when funds from a 
deposit or a credit will be made available by the depository 
institution.\102\ Finally, the Agencies noted that, although proposed 
Sec.  --.22 would ensure that a consumer's payment would not be treated 
as late for any reason (including for purposes of triggering an 
increase in rate) unless the consumer received a reasonable amount of 
time to make that payment, consumers may nevertheless pay late for 
reasons that are not reasonably avoidable. As support, the Agencies 
cited the FTC's conclusion with respect to its Credit Practices Rule 
that the majority of defaults are not reasonably avoidable by consumers 
as well as studies, reports, and other evidence indicating that 
involuntary factors such as unemployment play a large role in 
delinquency.\103\
---------------------------------------------------------------------------

    \101\ See GAO Credit Card Report at 25.
    \102\ See also 73 FR at 28927-28933 (discussing unfairness 
concerns regarding overdraft services and debit holds).
    \103\ See 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).
---------------------------------------------------------------------------

    In response, some industry commenters asserted that, because most 
consumers pay on time and do not otherwise violate the account terms, 
these behaviors must be reasonably avoidable. As an initial matter, 
although the information available is limited, it appears that a 
significant number of consumers are penalized for violating the account 
terms.\104\ Furthermore, the fact that a particular behavior may be 
relatively infrequent does not necessarily make it reasonably 
avoidable.\105\
---------------------------------------------------------------------------

    \104\ See GAO Report at 32-33 (finding that, in 2005, 11% of 
active accounts were being assessed a penalty interest rate, 35% had 
been assessed a late fee, and 13% had been assessed a fee for 
exceeding the credit limit); Exhibit 6, Tables 1a to Argus Analysis 
(stating that a total of 15.6% of accounts were repriced as a 
penalty from March 2007 through February 2008). One credit card 
issuer cited data showing that its consumers tend to make payments 
close to the due date, which--it argued--indicates that consumers 
are able to reasonably avoid late payment. This same data, however, 
indicated that a significant number of payments are received after 
the due date.
    \105\ Some industry commenters noted that the Board's consumer 
testing indicated that consumers have a general understanding that 
their rate would change if they violated the account terms by, for 
example, paying late. This does not, however, mean that consumers 
can, as a general matter, reasonably avoid such violations.
---------------------------------------------------------------------------

    Another commenter cited as evidence that late payment is reasonably 
avoidable a study finding that a consumer is 44 percent less likely to 
pay a late fee in the current month if that consumer paid a late fee 
the prior month.\106\ While this study indicates that consecutive late 
payments are less likely to be accidental, it does not indicate that 
the initial late payment (which currently may trigger a rate increase) 
is reasonably avoidable.
---------------------------------------------------------------------------

    \106\ See Sumit Agarwal et al., Stimulus and Response: The Path 
from Naivete to Sophistication in the Credit Card Market (Aug. 20, 
2006) (available at http://www.iue.it/FinConsEU/ResearchActivities/BehavioralApproachesMay2007/Driscoll.pdf).
---------------------------------------------------------------------------

    Accordingly, the Agencies conclude that, as a general matter, the 
injury caused by rate increases on outstanding balances due to a 
violation of the account terms is not reasonably avoidable. For all of 
the reasons discussed above, the Agencies further conclude that, 
although the injury resulting from the application of increased annual 
percentage rates to outstanding balances is avoidable in some 
individual cases, this injury is not reasonably avoidable by consumers 
as a general matter.\107\
---------------------------------------------------------------------------

    \107\ Some commenters argued that the Board's existing or 
proposed Regulation Z disclosures or state laws allowing consumers 
to opt out of rate increases by closing the account enable consumers 
to reasonably avoid injury. These arguments are addressed below in 
the Agencies' discussion of public policy. In particular, the 
Agencies note that disclosure will not enable consumers to select a 
credit card that does not reprice because institutions almost 
uniformly reserve the right to increase rates at any time and for 
any reason. See Statement for FTC Credit Practices Rule, 48 FR at 
7746. In addition, some commenters criticized the May 2008 Proposal 
for failing to explain why injury was reasonably avoidable for each 
of the proposed exceptions in proposed Sec.  --.24(b). As discussed 
below, the exceptions in Sec.  --.24(b) are not based on a 
conclusion that the injury is reasonably avoidable as a general 
matter but instead on a determination that allowing repricing in 
those circumstances ensures that the costs of prohibiting rate 
increases on outstanding balances do not outweigh the benefits.
---------------------------------------------------------------------------

    For these same reasons, the Agencies also conclude that the injury 
caused by

[[Page 5524]]

rate increases during the first year after account opening is not, as a 
general matter, reasonably avoidable, particularly if consumers are not 
informed at account opening of the rates that will apply to the 
account. A consumer will receive 45 days' advance notice of such 
increases pursuant to the Board's revisions to 12 CFR 226.9 (adopted 
elsewhere in today's Federal Register) but, as discussed above, many 
consumers will be unable to find another credit card account with a 
rate comparable to the pre-increase rate. Thus, although some consumers 
may be able to avoid injury by using a different credit card account 
for transactions or ceasing to use credit cards entirely, consumers who 
open an account to finance important purchases (such as medical 
services or home or automotive repairs) and cannot obtain credit at the 
same or a better rate elsewhere cannot reasonably avoid injury. 
Furthermore, to the extent that consumers are injured because the rate 
increase caused the account to lose value as a means of financing 
transactions, this injury is not reasonably avoidable because, as 
discussed above, rate increases are not, as a general matter, 
reasonably avoidable.
    Injury is not outweighed by countervailing benefits. In May 2008, 
the Agencies stated that, although proposed Sec.  --.24 could result in 
increased costs or reduced credit availability for consumers generally, 
these costs did not appear to outweigh the substantial benefits to 
consumers of avoiding significant unanticipated increases in the cost 
of completed transactions. As discussed below, based on the comments 
received and further analysis, the Agencies have revised aspects of 
proposed Sec.  --.24 in order to ensure that the final rule creates 
benefits for consumers that exceed any associated costs. In light of 
these revisions, the Agencies conclude that, to the extent prohibited 
by Sec.  --.24, increases in the annual percentage rate do not produce 
benefits for consumers or competition that outweigh the injury.
    In response to the May 2008 Proposal, individual consumers, 
consumer groups, and some members of Congress argued that repricing is 
inherently unfair and should be prohibited in most if not all 
circumstances. In contrast, industry commenters generally argued that 
flexible pricing models that respond to changes in the consumer's risk 
of default have produced substantial benefits for consumers and 
competition that outweigh any injury. These commenters noted that, 
whereas institutions once charged a single rate of around 20 percent on 
all credit card accounts regardless of the risk presented by the 
consumer, institutions now vary the interest rate based on the 
consumer's risk profile with the result that the great majority of 
consumers receive rates below 20 percent.\108\
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    \108\ Many of these commenters relied on the GAO Credit Card 
Report, which states that data reported by six top issuers indicated 
that, in 2005, about 80% of active accounts were assessed rates of 
less than 20% (with more than 40% receiving rates of 15% or less). 
See GAO Credit Card Report at 5. However, as noted by consumer 
groups, this data also indicated that approximately 11% of active 
accounts were charged rates over 25%. See id. at 32.
---------------------------------------------------------------------------

    The exceptions in proposed Sec.  --.24(b) permitted three types of 
repricing that appeared to produce benefits for consumers and 
competition that outweighed the injury. These exceptions were designed 
to provide institutions with flexibility in the repricing of 
outstanding balances while protecting consumers from unfair surprise. 
Based on the comments and further analysis, the Agencies have modified 
these exceptions as well as the general rule. As discussed below, the 
Agencies believe that the final rule achieves the appropriate balance 
between providing consumers with increased certainty and transparency 
regarding the cost of credit and providing institutions with sufficient 
flexibility to adjust to market conditions and allocate risk 
efficiently.
1. Increases in the Rate That Applies to New Transactions
    Individual consumers, consumer groups, members of Congress, and the 
FDIC urged the Agencies to apply the proposed restrictions on the 
repricing of outstanding balances to increases in the rates that apply 
to future transactions. Some argued that consumers who have opened an 
account in reliance on the rates stated by the institution should be 
protected from unexpected increases in those rates for a specified 
period of time.
    As discussed above, the Agencies agree that rate increases during 
the first year after account opening can cause substantial injury that 
is not, as a general matter, reasonably avoidable by consumers. In 
addition, because the Board's consumer testing indicates that interest 
rates are a primary focus for consumers when reviewing credit card 
applications and solicitations, the Agencies believe that allowing 
unlimited rate increases during the first year would be contrary to the 
purpose of Sec.  --.24, which is to prevent surprise increases in the 
cost of credit. Indeed, as noted below with respect to promotional 
rates, allowing this type of repricing while restricting others would 
create an incentive for institutions to offer artificially low interest 
rates to attract new customers based on the expectation that future 
repricings will generate sufficient revenues, a practice which distorts 
competition and undermines consumers' ability to evaluate the true cost 
of using credit. Accordingly, because consumers who open an account 
should be able to rely on the interest rate (or rates) stated by the 
institution, the Agencies have revised Sec.  --.24 to prohibit, as a 
general matter, rate increases during the first year after account 
opening.
    This prohibition, however, is not absolute. The exception in Sec.  
--.24(b)(1) permits an institution to increase any annual percentage 
rate disclosed at account opening so long as the institution also 
disclosed a period of time after which the rate will increase and the 
increased rate that will apply. In addition, a variable rate may be 
increased due to an increase in the index pursuant to Sec.  
--.24(b)(2). Furthermore, after the first year, Sec.  --.24(b)(3) 
permits an institution to increase the rates that apply to new 
transactions, provided the institution complies with Regulation Z's 45-
day advance notice requirement. Finally, Sec.  --.24(b)(4) permits an 
institution to increase rates when the account becomes more than 30 
days delinquent.
    The Agencies acknowledge that these additional restrictions will 
reduce interest revenue and therefore have some effect on the cost and 
availability of credit. Industry commenters, however, generally stated 
that the amount of interest revenue generated from raising rates on 
future transactions was relatively small in comparison to the revenue 
generated from applying increased rates to outstanding balances. 
Therefore, the Agencies believe that the effect of restricting rate 
increases during the first year after account opening will be 
significantly less than that for restricting rate increases on 
outstanding balances. Accordingly, the Agencies conclude that repricing 
during the first year after account opening does not produce benefits 
for consumers or competition that outweigh the injury to consumers.
    By requiring institutions to commit in advance to the rates that 
will ultimately apply to transactions and to disclose those rates to 
consumers, the final rule will also prevent institutions from relying 
on the ability to reprice outstanding balances when setting upfront 
rates, thereby creating additional incentives for institutions to 
ensure that the rates offered to consumers at the outset fully reflect 
the risk presented by the consumer as well

[[Page 5525]]

as current and anticipated market conditions.
2. Variable Rates
    The proposed rule provided that the prohibition on applying an 
increased annual percentage rate to an outstanding balance would not 
extend to variable rates. This exception was intended to allow 
institutions to adjust to increases in the cost of funds by utilizing a 
variable rate that reflects market conditions because, if institutions 
were not permitted to do so, they would be less willing to extend open-
end credit. The Agencies reasoned that, although the injury caused by 
application of an increased variable rate to an outstanding balance is 
not reasonably avoidable insofar as the increase is due to market 
conditions that are beyond the consumer's ability to predict or 
control, the proposed exception would protect consumers from arbitrary 
rate increases by requiring that the index for the variable rate be 
outside the institution's control and available to the general public. 
This exception was supported by most commenters. Accordingly, because 
allowing institutions to utilize variable rates provides countervailing 
benefits sufficient to outweigh the increased interest charges, the 
Agencies have adopted the proposed exception for variable rates as 
Sec.  --.24(b)(2) with some stylistic changes.
3. Non-Variable Rates
    Industry commenters urged the Agencies to revise proposed Sec.  
--.24 to provide greater flexibility to offer rates that do not vary 
with an index. Without such an exception, they argued, concerns 
regarding increases in the cost of funds would force institutions to 
offer only variable rates, depriving consumers of the reliability of 
rates that do not fluctuate with the market. Some of these commenters 
requested that proposed Sec.  --.24 be revised to allow repricing of 
outstanding balances at the end of a specified period (such as six 
months, one year, or two years).
    The Agencies agree that non-variable rates can provide significant 
benefits to consumers but only if consumers are informed before opening 
an account or engaging in transactions how long the rate will apply and 
what rate will be applied thereafter. Accordingly, the final rule 
provides two ways for institutions to offer non-variable rates. First, 
at account opening, Sec.  --.24(b)(1) permits institutions to offer 
non-variable rates that apply for a specified period of time and to 
reprice at the end of that period so long as the institution discloses 
at account opening the increased rate that will apply. For example, an 
institution could offer a consumer credit card account with a non-
variable rate of 10% for six months after which a variable rate based 
on a disclosed index and margin will apply to outstanding balances and 
new transactions. Similarly, following the first year after account 
opening, Sec.  --.24(b)(3) permits institutions to provide non-variable 
rates that apply for a specified period of time, although these rates 
can only be applied to new transactions. For example, consistent with 
the notice requirements in 12 CFR 226.9(c), an institution could apply 
a non-variable rate of 15% to purchases for one year after which a 
variable rate will apply.
    In either case, a consumer who receives a non-variable rate would 
be subject to repricing. However, the consumer will know at the time of 
each purchase not only how long the current rate will apply to that 
purchase but also the specific rate that will apply thereafter. Thus, 
the final rule provides institutions with the ability to increase rates 
to reflect anticipated changes in market conditions while enabling 
consumers to make informed decisions about the cost of using credit. 
Accordingly, the Agencies conclude that the benefits of allowing 
repricing under these circumstances outweigh the injury.
4. Promotional Rates
    The proposed rule would have allowed institutions to apply an 
increased rate to an outstanding balance upon expiration or loss of a 
promotional rate, except that, when a promotional rate was lost, the 
increased rate could not exceed the rate that would have applied after 
expiration. Consumer groups opposed this exception, stating that, 
because it did not limit the circumstances in which a promotional rate 
could be lost, it would leave in place abusive repricing practices. 
These commenters argued that this exception would allow institutions to 
continue to engage in ``hair trigger'' repricing by, for example, 
increasing the rate on an outstanding balance from a 0% promotional 
rate to a 15% standard rate when the consumer's payment was received 
one day after the due date. They also stated that some institutions 
impose conditions on retention of a promotional rate that are unrelated 
to the consumer's risk of default and are instead intended to trap 
unwary consumers into losing the discounted rate (for example, 
requiring consumers to make a certain number or dollar amount of 
purchases each billing cycle). Accordingly, they argued that, because 
discounted promotional rate offers are used to encourage consumers to 
engage in transactions they would not otherwise make (such as large 
purchases or balance transfers), consumers who rely on promotional rate 
offers need the same protections as consumers who rely on non-
promotional rates.
    Based on the comments and further analysis, the Agencies agree that 
this aspect of the proposed rule could allow the very practices that 
the Agencies intended to prevent. For example, an institution seeking 
to attract new consumers by offering a promotional rate that is lower 
than its competitors' rates could offer a rate that would be 
unprofitable if the institution did not place conditions on retention 
of the rate that, based on past consumer behavior, it anticipates will 
result in a sufficient number of repricings to generate sufficient 
revenues. This type of practice distorts competition and undermines 
consumers' ability to evaluate the true cost of using credit.
    Although the Agencies understand that discounted promotional rates 
can provide substantial benefits to consumers \109\ and that 
institutions may reduce promotional rate offers if their ability to 
reprice is restricted, practices that cause consumers to lose a 
promotional rate before the previously-disclosed expiration date 
deprive those consumers of the benefit of a rate on which they have 
relied. Accordingly, because proposed Sec.  --.24 was intended to 
improve transparency and prevent surprise increases in the cost of 
completed transactions, the Agencies conclude that the injury caused by 
the repricing of promotional rate balances prior to expiration is not 
outweighed by the benefits of the promotional rate itself. Absent a 
serious default, a consumer should be able to rely on a rate for the 
period specified in advance by the institution. Therefore, the final 
rule does not permit repricing of outstanding balances prior to the end 
of the specified period (except in the case of a delinquency of more 
than 30 days as provided in Sec.  --.24(b)(4)). As discussed above, 
however, the final rule (like the proposal) permits repricing at the 
end of a specified period so long as the increased rate was disclosed 
in advance.
---------------------------------------------------------------------------

    \109\ See above discussion regarding the benefits of promotional 
rates in relation to Sec.  --.23 (payment allocation).
---------------------------------------------------------------------------

5. Violations of the Account Terms
    The proposed rule would have permitted institutions to increase the 
annual percentage rate on an outstanding balance if the consumer became 
more than 30 days delinquent.

[[Page 5526]]

The Agencies observed that, although this delinquency may not have been 
reasonably avoidable in certain individual cases, the consumer will 
have received notice of the delinquency (in the periodic statement and 
likely in other notices as well) and had an opportunity to cure before 
becoming more than 30 days delinquent. The Agencies noted that a 
consumer is unlikely, for example, to become more than 30 days 
delinquent due to a single returned item or the loss of a payment in 
the mail. Thus, the harm in individual cases where a delinquency of 
more than 30 days is not reasonably avoidable appeared to be outweighed 
by the benefits to all consumers (in the form of lower annual 
percentage rates and broader access to credit) of allowing institutions 
to reprice for risk once a consumer has become significantly 
delinquent. For these reasons and for the additional reasons discussed 
below, the Agencies conclude that the benefits of allowing repricing in 
these circumstances outweigh the costs. The Agencies further conclude, 
however, that the same is not true for repricing based on other 
violations of the account terms.
    In response to the May 2008 Proposal, consumer groups argued that 
repricing outstanding balances based on violations of the account terms 
is fundamentally unfair and should be prohibited entirely or, failing 
that, a delinquency of more than 30 days should be the only 
circumstance in which institutions are permitted to reprice based on a 
violation of the account terms. A consumer group explained that a 
delinquency of more than 30 days was the appropriate period because, 
under industry guidelines governing credit reporting, an account is not 
reported as delinquent until it is at least 30 days late, suggesting 
that paying less than 30 days late is not considered to affect 
creditworthiness significantly.\110\ In contrast, industry commenters 
and the OCC argued that the proposed rule provided insufficient 
flexibility because accounts that become more than 30 days delinquent 
have such a high rate of loss that repricing is ineffective. The Argus 
Analysis stated that 32.4 percent of accounts that are more than 30 
days past due and 49.8 percent of the balances on those accounts will 
become losses within the next twelve months.\111\ Industry commenters 
argued that, given these rates, institutions would be unable to 
compensate for the losses through rate increases on all accounts that 
become more than 30 days delinquent. Instead, they argued, these losses 
would have to be spread over a larger population of accounts, 
potentially raising rates and reducing credit availability for many or 
all consumers.
---------------------------------------------------------------------------

    \110\ See Consumer Data Industry Ass'n, Credit Reporting 
Resource Guide 6-6 (2006).
    \111\ See Exhibit 5, Tables 1a and 1b to Argus Analysis (row 
labeled ``Mar-07'' containing twelve-month outcome duration). The 
Argus Analysis categorized an account as a loss if it became 90 or 
more days delinquent, charged off, or bankrupt. Id.
---------------------------------------------------------------------------

    The Argus Analysis stated that--as a result of the restrictions in 
proposed Sec.  --.23 (payment allocation), proposed Sec.  --.24 
(repricing), and proposed 12 CFR 226.9 (45 days advance notice of most 
rate increases)--institutions could lose 1.639 percent of their annual 
interest revenue on revolving credit card accounts.\112\ This analysis 
estimated that, in order to offset this loss, institutions might 
increase interest rates by approximately 120 percent of the loss (1.937 
percentage points), decrease the average credit line of $9,561 by 
approximately 22 percent ($2,029), cease lending to consumers with Fair 
Isaac Corporation (``FICO'') scores below 620, or engage in some 
combination of these responses.\113\
---------------------------------------------------------------------------

    \112\ See Argus Analysis at 3; Exhibit 1, Table 1 to Argus 
Analysis.
    \113\ See Argus Analysis at 4; Exhibit 1, Tables 7-11 to Argus 
Analysis.
---------------------------------------------------------------------------

    Although the Argus Analysis did not estimate the potential impact 
on interest rates and credit availability specifically attributable to 
proposed Sec.  --.24, it did state that annual interest revenue on 
revolving accounts would be reduced by approximately 1.514 percent as a 
result of proposed Sec.  --.24 and proposed 12 CFR 226.9.\114\ 
Therefore, assuming for the sake of discussion that the data and 
assumptions underlying the Argus Analysis are accurate, that analysis 
predicts that institutions might respond by increasing interest rates 
approximately 1.817 percentage points, by decreasing credit limits 
approximately $1,874, or by substantially reducing lending to consumers 
with FICO scores below 620.\115\ Accordingly, if, for example, an 
institution currently charges a consumer an interest rate of 15% on a 
credit line of $9,000, the institution could respond to proposed Sec.  
--.24 and proposed 12 CFR 226.9 by increasing the rate to 16.82% or by 
decreasing the credit limit to $7,126.
---------------------------------------------------------------------------

    \114\ See Exhibit 1, Table 1 to Argus Analysis (combining the 
predictions for ``Revolvers'' in the rows labeled ``30+DPD Penalty 
Trigger,'' ``CIT Repricing,'' and ``Non 30+DPD Penalty Triggers'').
    \115\ As noted above, the Argus Analysis estimated that proposed 
Sec.  --.24 and proposed 12 CFR 226.9 would reduce interest revenue 
by 1.514 percent. Accordingly, the Agencies assumed that, consistent 
with the Argus Analysis, the increase in interest rates attributable 
to proposed Sec.  --.24 and proposed 12 CFR 226.9 would be 120 
percent of the reduction in interest revenue (1.514 x 1.2 = 1.817). 
The Agencies also assumed that the reduction in credit limits 
attributable to proposed Sec.  --.24 and proposed 12 CFR 226.9 would 
be proportionate to the overall reduction predicted by the Argus 
Analysis. Thus, because the estimated revenue loss attributable to 
proposed Sec.  --.24 and proposed 12 CFR 226.9 (1.514) is 92.4% of 
the overall estimated revenue loss (1.637), the Agencies assumed 
that the reduction in credit limits attributable to proposed Sec.  
--.24 and proposed 12 CFR 226.9 would be 92.4% of the overall 
reduction of $2,029 predicted by the Argus Analysis ($2,029 x 0.924 
= $1,874.26). The Agencies were not able to estimate the potential 
impact on credit availability for consumers with FICO scores below 
620 but, because proposed Sec.  --.24 and proposed 12 CFR 226.9 
accounted for 92.4% of the estimated revenue loss, the Agencies 
assumed the reduction in available credit for these consumers would 
be substantial.
---------------------------------------------------------------------------

    As noted above, however, the Agencies are unable to verify the 
accuracy of the conclusions reached by the Argus Analysis or its 
supporting data. Furthermore, this analysis assumed that institutions 
could only respond to the proposed rules by increasing rates, reducing 
credit limits, or eliminating credit to consumers with FICO scores 
below 620, ignoring other potential responses such as offsetting lost 
interest revenue by increasing revenue from fees (including annual 
fees) or developing improved underwriting techniques in order to reduce 
losses on accounts that eventually default.\116\
---------------------------------------------------------------------------

    \116\ As discussed above with respect to Sec.  --.23 and in 
greater detail below in section VII of this SUPPLEMENTARY 
INFORMATION, the Agencies anticipate that, prior to the effective 
date, some institutions may respond to the restrictions in proposed 
Sec.  --.24 and proposed 12 CFR 226.9 by, for example, adjusting 
interest rates on existing balances, increasing fees, or reducing 
credit limits.
---------------------------------------------------------------------------

    In addition, even if the Agencies were to accept the Argus Analysis 
and its underlying data at face value, that analysis also indicates 
that the typical rate increase is approximately eight percentage points 
and that approximately 22 percent of accounts are repriced over the 
course of a year.\117\ Thus, with respect to interest rates, the Argus 
Analysis indicates that the impact of the proposed rule would be 
relatively neutral because the rule would prevent a six percentage 
point net increase on roughly a quarter of accounts while the other 
three-quarters may experience an increase of less than two percentage 
points.\118\ Although the Argus Analysis

[[Page 5527]]

also predicted that--instead of increasing interest rates--institutions 
might reduce credit limits or lending to consumers with lower FICO 
scores, those responses would reduce or eliminate the need for a rate 
increase, thereby retaining roughly the same relationship between the 
costs and benefits of the rule.\119\
---------------------------------------------------------------------------

    \117\ See Argus Analysis at 7; Exhibit 6, Tables 1a and 3a to 
Argus Analysis (totaling the percentage of accounts repriced as a 
penalty and as a change-in-terms from March 2007 through February 
2008).
    \118\ In other words, if, according to the Argus Analysis, 
roughly 22% of consumers currently experience a rate increase 
averaging 8 percentage points each year and all consumers will 
experience a 1.817-point increase in interest rate as a result of 
the proposed rules, then the proposed rules will prevent 22% of 
consumers from incurring a net increase of 6.183 points (8 minus 
1.817) while the other 78% may experience an increase of 1.817. 
Although some portion of the 22 percent are presumably accounts that 
become 30 days delinquent and thus would still be repriced, the 
comments indicate that this portion is relatively small.
    \119\ The Agencies also note that, while the estimated impact on 
interest rates and credit availability is a prediction regarding 
potential future events, the average eight percentage point increase 
appears to reflect the harm that is currently imposed on consumers. 
Accordingly, the Agencies believe that the latter figure is entitled 
to greater weight.
---------------------------------------------------------------------------

    As with Sec.  --.23, even if the shifting of costs from one group 
of consumers to another, much larger group is viewed as neutral from a 
cost-benefit perspective, the less quantifiable benefits to consumers 
and competition of more transparent upfront pricing weigh in favor of 
Sec.  --.24. Upfront annual percentage rates that are artificially 
reduced based on the expectation of future increases do not represent a 
true benefit to consumers as a whole. In addition to protecting 
consumers from unexpected increases in the cost of transactions that 
have already been completed, Sec.  --.24 will enable consumers to more 
accurately assess the cost of using their credit card accounts at the 
time they engage in new transactions. Finally, competition will be 
enhanced because institutions that offer annual percentage rates that 
more accurately reflect risk and market conditions will no longer be 
forced to compete with institutions offering artificially reduced 
rates. Accordingly, the Agencies conclude that limiting rate increases 
on outstanding balances and during the first year to circumstances 
where the account is more than 30 days delinquent produces benefits 
that outweigh the associated costs.
    Industry commenters and the OCC urged the Agencies to adopt 
additional exceptions to proposed Sec.  --.24 based on violations of 
the account terms other than a single late payment (specifically, 
exceeding the credit limit, making payment with a check that is 
returned for insufficient funds, and paying late twice in a twelve 
month period). Many of these commenters provided data indicating that 
these behaviors are associated with loss rates that are significantly 
higher than those for consumers who do not violate the account terms 
(although all of these loss rates were significantly lower than the 
loss rates associated with delinquencies of more than 30 days). As an 
initial matter, the Agencies note that the impact on the cost and 
availability of credit of prohibiting repricing based on these 
behaviors is subsumed within the impact of prohibiting repricing based 
on any violation of the account terms other than a delinquency of more 
than 30 days. Accordingly, for the reasons already stated above, 
repricing outstanding balances based on these behaviors does not 
provide benefits to consumers or competition that outweigh the injury 
to consumers.
    Furthermore, with respect to repricing outstanding balances when 
the credit limit is exceeded or when a payment is returned for 
insufficient funds, the Agencies have already concluded that these 
violations of the account terms are not, as a general matter, 
reasonably avoidable by consumers. Accordingly, allowing repricing in 
those circumstances would undermine the purpose of Sec.  --.24, which 
is to protect consumers from being unfairly surprised by increases in 
the cost of completed transactions.
    Similarly, the Agencies conclude that allowing repricing based on 
two late payments in twelve months would not sufficiently protect 
consumers from unfair surprise. As discussed above, the Agencies have 
already concluded that consumers cannot, as a general matter, 
reasonably avoid repricing based on late payments. Furthermore, making 
a payment that is received one day after the due date twice in a period 
of twelve months is precisely the type of ``hair trigger'' repricing 
that Sec.  --.24 is intended to prevent. Even if repricing were allowed 
only when the late payments were received two, three, or even five days 
after the due date (as some commenters suggested), these periods would 
not provide consumers with sufficient time to learn of the delinquency 
and cure it (unlike a delinquency of 30 days or more).\120\ 
Furthermore, as discussed above with respect to Sec.  --.22, the 
Agencies have already concluded that providing a short period of time 
after the due date during which payments must be treated as timely 
could create consumer confusion regarding when payment is actually due 
and undermine the Board's efforts elsewhere in today's Federal Register 
to ensure that consumers' due dates are meaningful. Finally, the 
Agencies note that the exception in Sec.  --.24(b)(4) permitting 
repricing for delinquencies of more than 30 days is similar to an 
exception allowing repricing based on consecutive delinquencies because 
a consumer who is more than 30 days' delinquent will, in most cases, 
have missed two due dates.
---------------------------------------------------------------------------

    \120\ One commenter suggested that the second late payment would 
be reasonably avoidable if the first late payment was followed by a 
notice warning the consumer that a second delinquency would result 
in repricing. Because, however, this notice could precede the second 
late payment by as much as eleven months, the Agencies do not 
believe it would be effective to enable consumers to avoid 
repricing. See Agarwal, Stimulus and Response (finding that a 
consumer is 44 percent less likely to pay a late fee in the current 
month if that consumer paid a late fee the prior month but that this 
effect decreases with each additional month).
---------------------------------------------------------------------------

6. Assessment of Deferred Interest
    As noted above, consumer groups stated that the assessment of 
deferred interest raises many of the same concerns as the repricing of 
outstanding balances. Deferred interest plans are typically marketed as 
being ``interest free'' for a specified period (such as a year) and are 
often offered to promote large purchases such as furniture or 
appliances. However, although interest is not charged to the account 
during that period, interest accrues at a specified rate. If the 
consumer violates the account terms (which could include a ``hair 
trigger'' violation such as paying one day late) or fails to pay the 
purchase balance in full before expiration of the period, the 
institution retroactively charges all interest accrued from the date of 
purchase.
    Consumer groups stated that, like discounted promotional rates, 
deferred interest plans are used to encourage consumers to engage in 
transactions they would not otherwise make. They argued that, because 
of ``hair trigger'' repricing, many consumers lose the benefit of the 
deferred interest plan earlier than expected and that many other 
consumers incur deferred interest charges by failing to pay the balance 
in full prior to expiration either inadvertently or because they lack 
the resources to do so. In addition, they noted that the injury to the 
consumer in such cases may be far greater than when a promotional rate 
is lost because interest is charged retroactively on the outstanding 
balance. Finally, they stated that deferred interest plans cannot be 
adequately disclosed to consumers because of their complexity.
    Based on the comments and further analysis, the Agencies believe 
that the assessment of deferred interest under these circumstances is 
effectively a repricing of an outstanding balance. For example, assume 
that an institution offers a consumer credit card account that accrues 
interest on purchases at an annual percentage rate of 15% but interest 
will not be charged on purchases for one year unless the

[[Page 5528]]

consumer violates the account terms or the purchase balance is not paid 
in full by the end of the year. The account is marketed as ``no 
interest on purchases for one year.'' On January 1 of year one, a 
consumer opens an account in order to make a $3,000 purchase. Although 
interest technically accrues on the $3,000 purchase at 15% from January 
1 through December 31, this interest is not charged to the account, 
making the rate that applies to the purchase effectively zero during 
that period. If, however, the consumer violates the account terms 
during year one by paying late or fails to pay the $3,000 in full by 
January 1 of year two, all of the interest that has accrued at 15% 
since January 1 of year one will be charged retroactively to the 
account. In addition, the 15% rate (or a higher penalty rate) will 
apply to the $3,000 balance thereafter.
    The Agencies believe that this is precisely the type of surprise 
increase in the cost of completed transactions that Sec.  --.24 is 
intended to prevent. As noted by the commenters, the assessment of 
accrued interest causes substantial injury to consumers. In addition, 
for the same reasons that consumers cannot, as a general matter, 
reasonably avoid rate increases as a result of a violation of the 
account terms, consumers cannot, as a general matter, reasonably avoid 
assessment of deferred interest as a result of a violation of the 
account terms or the failure to pay the balance in full prior to 
expiration of the deferred interest period. For example, just as 
illness or unemployment may reasonably prevent some consumers from 
paying on time, these conditions may reasonably prevent some consumers 
from paying the deferred interest balance in full prior to expiration. 
In addition, as noted by the commenters, disclosure may not provide an 
effective means for consumers to avoid the harm caused by these plans.
    Finally, although deferred interest plans provide some consumers 
with substantial benefits in the form of an interest-free advance if 
the balance is paid in full prior to expiration, the Agencies conclude 
that these benefits do not outweigh the substantial injury to 
consumers. As discussed above, deferred interest plans are typically 
marketed as ``interest free'' products but many consumers fail to 
receive that benefit and are instead charged interest retroactively. 
Accordingly, as with the prohibitions on other repricing practices 
discussed above, prohibiting the assessment of deferred interest will 
improve transparency and enable consumers to make more informed 
decisions regarding the cost of using credit. Accordingly, the Agencies 
conclude that an exception to the general prohibition on rate increases 
is not warranted for the assessment of deferred interest.
    The Agencies note, however, that the final rule does not preclude 
institutions from offering consumers interest-free promotional plans. 
As discussed above, institutions can still offer 0% promotional rates 
for specified periods so long as they disclose the rate that will apply 
thereafter. Furthermore, an institution could offer a plan where 
interest is assessed on purchases at a disclosed rate for a period of 
time but the interest charges are waived or refunded if the principal 
is paid in full by the end of the period. For example, assume that an 
institution offers an account that charges interest on purchases at a 
15% non-variable rate but only requires the consumer to repay a portion 
of the outstanding principal balance each month during the first year 
after the account is opened. If the principal is paid in full by the 
end of that year, the institution waives all interest accrued during 
that year. At account opening on January 1 of year one, the institution 
discloses these terms (including the 15% rate at which interest will 
accrue). The consumer uses the account for a $3,000 purchase on January 
1. The consumer makes no other purchases and begins making payments. At 
the end of each billing cycle, the institution charges to the account 
interest accrued on the principal balance at the 15% rate. On December 
15 of year one, the consumer pays the remaining principal balance and 
the institution waives all accrued interest. This type of product would 
comply with the final rule.
    Public policy. Industry commenters and the OCC argued that proposed 
Sec.  --.24 conflicted with established public policy, citing a variety 
of sources. The Agencies note that public policy is not a required 
element of the unfairness analysis.\121\ Nevertheless, after carefully 
considering the materials cited by the comments, the Agencies conclude 
that any inconsistency is necessary to protect consumers from practices 
that satisfy the required statutory elements of unfairness.
---------------------------------------------------------------------------

    \121\ See 15 U.S.C. 45(n).
---------------------------------------------------------------------------

    First, industry commenters and the OCC cited testimony, guidance, 
reports, and advisory letters from federal banking regulators 
(including the Board and OTS) stating or suggesting that institutions 
should actively manage risk on credit card accounts, that one method of 
managing risk is adjusting interest rates on outstanding balances and 
new transactions to reflect the consumer's risk of default, and that 
doing so can be beneficial for consumers insofar as it reduces rates 
overall.\122\ The Agencies agree that, to the extent that these 
materials constitute public policy for purposes of the FTC Act 
unfairness analysis, many contain statements that could be deemed 
inconsistent with the restrictions in Sec.  --.24. As discussed above, 
however, the Agencies have already taken the benefits of adjusting 
rates to reflect changes in a consumer's risk of default into account 
and concluded that these benefits do not outweigh the injury to 
consumers caused by this practice. Accordingly, the Agencies find that 
the regulatory materials cited do not preclude a determination that, to 
the extent prohibited by Sec.  --.24, application of increased annual 
percentage rates is an unfair practice.
---------------------------------------------------------------------------

    \122\ See, e.g., Testimony of Julie L. Williams, Chief Counsel & 
First Senior Deputy Controller, OCC before H. Subcomm. on Fin. 
Instits. & Consumer Credit at 5 (Apr. 17, 2008); Board of Governors 
of the Federal Reserve System, Report to Congress on Credit Scoring 
and Its Effects on the Availability and Affordability of Credit at 
O5 (Aug. 2007) (available at http://www.federalreserve.gov/boarddocs/RptCongress/creditscore/creditscore.pdf); Testimony of 
John C. Dugan, Comptroller of the Currency, OCC, before the H. 
Subcomm. on Fin. Instits. & Consumer Credit at 21-24 (June 7, 2007) 
(available at http://www.house.gov/apps/list/hearing/financialsvcs_dem/htdugan060707.pdf); OTS Handbook on Credit Card Lending Sec.  
218 (2006) (available at http://files.ots.treas.gov/422064.pdf); OCC 
Advisory Letter 2004-10, at 3 (Sept. 14, 2004); OCC Handbook, Rating 
Credit Risk (Apr. 2001) (available at http://www.occ.treas.gov/handbook/RCR.pdf).
---------------------------------------------------------------------------

    Second, some industry commenters and the OCC stated that proposed 
Sec.  --.24 conflicts with previous Board policy regarding rate 
increases. Specifically, these commenters noted that, prior to the 
revisions to Regulation Z in today's Federal Register, 12 CFR 226.9 
placed no restrictions on rate increases resulting from a violation of 
the account terms and required only 15 days' advance notice of rate 
increases resulting from a change in the terms of the contract. These 
commenters further noted that, rather than proposing to prohibit 
repricing of outstanding balances in the June 2007 Regulation Z 
Proposal, the Board instead proposed to improve disclosures regarding 
the rate increases. According to these commenters, the improved 
Regulation Z disclosures are sufficient, by themselves, to address any 
concerns regarding application of increased rates to outstanding 
balances.
    These commenters first argued that disclosure in solicitations and 
at account opening of the circumstances in which a penalty rate will be 
applied to

[[Page 5529]]

a consumer credit card account will enable consumers to avoid those 
circumstances and therefore any injury. Although these disclosures are 
necessary and appropriate for the informed use of credit, the Agencies 
do not believe that, by themselves, they would be effective in 
preventing the harm caused by application of increased rates. 
Disclosure will not enable consumers to select a credit card that does 
not reprice outstanding balances because institutions almost uniformly 
reserve the right to increase rates at any time and for any reason and 
to apply those increased rates to prior transactions.\123\ Nor, as 
discussed above, would disclosure enable consumers to avoid rate 
increases resulting from circumstances outside their control, such as 
late payments due to delays in the delivery of mail. Furthermore, as 
noted in the May 2008 Proposal, there is evidence that disclosure at 
solicitation and account opening has limited effectiveness in 
preventing subsequent defaults because consumers do not focus on the 
consequences of default when deciding whether to open a credit card 
account and whether to use the account for a particular 
transaction.\124\
---------------------------------------------------------------------------

    \123\ The GAO's 2005 analysis of 28 popular credit cards, for 
example, identified only one that did not reprice outstanding 
balances to a default rate. See GAO Report at 24. Furthermore, the 
comments from industry on the May 2008 Proposal generally stated 
that all or almost all credit card issuers reprice outstanding 
balances. Thus, as the FTC concluded with respect to its Credit 
Practices Rule, the prevalence of a contractual provision indicates 
that harm caused by that provision is not reasonably avoidable. See 
Statement for FTC Credit Practices Rule, 48 FR at 7746.
    \124\ 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.''); 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, 494 (2008) (``Issuers currently compete on the 
basis of interest rates, but because this competition focuses on 
initial interest rates and not on the total amount that consumers 
will pay, it fails to give sufficient decision-making information 
either to consumers who literally do not understand the events that 
trigger higher interest rates and fees or to consumers who 
underestimate the likelihood that they will be faced with these 
rates and fees.''); Shane Frederick, et al., Time Discounting and 
Time Preference: A Critical Review, 40 J. Econ. Literature 351, 366-
67 (2002); Ted O'Donoghue & Matthew Rabin, Doing It Now or Later, 89 
Am. Econ. Rev. 103, 103, 111 (1999). Some industry commenters argued 
that, under the FTC Policy Statement on Unfairness, a finding of 
unfairness is not appropriate when the institutions did not create 
an obstacle to the free exercise of consumer decisionmaking. In 
fact, the FTC Policy Statement on Unfairness states (at 3) that the 
proper analysis is whether the institution ``unreasonably creates or 
takes advantage of an obstacle to the free exercise of consumer 
decisionmaking.'' (Emphasis added.)
---------------------------------------------------------------------------

    Industry commenters also argued that disclosure of the rate 
increase 45 days before that increase goes into effect allows consumers 
to avoid injury by paying the balance in full or transferring that 
balance to another credit card account.\125\ It would be unreasonable, 
however, to expect consumers who have chosen to use a credit card to 
finance purchases in reliance on the rate in effect at that time to pay 
those purchases in full in order to avoid injury. Furthermore, as 
discussed above, alternative financing (such as a balance transfer) 
only enables the consumer to avoid injury if the consumer can obtain a 
comparable annual percentage rate and terms elsewhere, which often will 
not be the case. Accordingly, because disclosure alone would not be 
effective in preventing the harm caused by application of increased 
rates to outstanding balances, the Agencies conclude that Sec.  --.24 
does not conflict with the Board's Regulation Z.
---------------------------------------------------------------------------

    \125\ See 12 CFR 226.9(c)(2) and (g).
---------------------------------------------------------------------------

    Third, industry commenters and the OCC argued that proposed Sec.  
--.24 conflicts with state laws that, rather than prohibiting repricing 
of outstanding balances, require consumers to affirmatively reject (or 
opt out of) such increases by closing the account.\126\ These 
commenters urged the Agencies to adopt this approach as a less 
restrictive alternative to proposed Sec.  --.24.
---------------------------------------------------------------------------

    \126\ See, e.g., Ala. Code Sec.  5-20-5; 5 Del. Code Sec.  952; 
Off. Code of Ga. Sec.  7-5-4; Nev. Rev. Stat. Sec.  97A.140; S.D. 
Codified Laws Sec.  54-11-10; Utah Code Sec.  70C-4-102.
---------------------------------------------------------------------------

    In the May 2008 Proposal, the Agencies considered a similar 
suggestion raised by some commenters in response to the Board's June 
2007 Regulation Z Proposal and concluded that this remedy would not 
effectively protect consumers.\127\ The Agencies noted that, in most 
cases, it would not be economically rational for a consumer to choose 
to pay more for credit that has already been extended, particularly 
when the increased rate is significantly higher than the prior rate. If 
consumers understand their right to reject a rate increase, most would 
rationally exercise that right.\128\ Thus, the Agencies conclude that 
providing consumers with a right to opt out of rate increases on 
outstanding balances would be less restrictive than prohibiting such 
increases only if a significant number of consumers inadvertently 
forfeited that right by failing to read, understand, or act on the 
notice.\129\ According to the GAO Report, however, although state laws 
applying to four of the six largest credit card issuers require an opt-
out, representatives of those issuers stated that few consumers 
exercise that right.\130\ Although several institutions asserted that 
providing an opt-out would allow consumers to reasonably avoid injury, 
none provided the percentage of consumers that currently opt out under 
applicable state statutes.\131\
---------------------------------------------------------------------------

    \127\ At that time, commenters urged that the opt-out right not 
apply when the rate increase was due to a violation of the account 
terms. As the Agencies noted in May 2008, such a right would not 
address the injury to consumers whose rates were increased due to a 
violation of the account terms that was not reasonably avoidable. 
The Agencies understand the commenters on this proposal to urge that 
the opt-out right be given in all circumstances. This suggestion, 
however, does not alter the Agencies' conclusion that an opt-out 
right would not effectively address the injury to consumers.
    \128\ As some commenters noted, a consumer who cannot obtain a 
lower rate elsewhere and wants continued access to a credit card 
account could rationally choose not to reject application of an 
increased rate to an outstanding balance if rejection meant closing 
the account. In the scenario, however, the consumer cannot 
reasonably avoid injury.
    \129\ The Agencies also noted in May 2008 that providing 
consumers with notice and a means to exercise an opt-out right 
(e.g., a toll-free telephone number) would create additional costs 
and burdens for institutions.
    \130\ GAO Credit Card Report at 26-27.
    \131\ One institution stated that half of the consumers who 
called its customer service with questions regarding an opt-out 
notice exercised that right, although it is unclear what percentage 
of all affected consumers this subset comprised.
---------------------------------------------------------------------------

    Finally, some industry commenters argued that the failure to 
provide an opt-out for rate increases was inconsistent with the 
provision of an opt-out for payment of overdrafts in proposed Sec.  
--.32(a). As discussed below, the Agencies are not taking action on 
proposed Sec.  --.32(a) at this time. The Board has proposed a revised 
opt-out right with respect to overdraft services under Regulation E 
elsewhere in today's Federal Register. The Board is also proposing an 
alternative approach that would require consumer opt-in to overdraft 
services. Furthermore, the Agencies' decision to propose an opt-out 
with respect to payment of overdrafts but not with respect rate 
increases was based on an evaluation of the consumers' incentives in 
each situation. A consumer could rationally prefer assessment of an 
overdraft fee to rejection of the transaction because of the costs 
associated with rejection (for example, a merchant fee for a check that 
is not honored), whereas--for the reasons discussed above--few if any 
consumers would willingly choose to pay more for credit already 
extended.
    Accordingly, although Sec.  --.24 is broader than the law in some 
states, the Agencies conclude that provision of a right to opt out of 
rate increases would not be effective in preventing the harm

[[Page 5530]]

caused by application of increased rates to outstanding balances.
    Applicability of unfairness analysis to other practices. Industry 
and consumer group commenters questioned why the Agencies' unfairness 
analysis with respect to rate increases as a result of a violation of 
the account terms could not be applied to other consequences of such 
violations, such as increases in the rate for new transactions or fees. 
As discussed above, the Agencies have concluded that the unfairness 
analysis does, in fact, preclude rate increases during the first year 
after account opening. After the first year, however, the Agencies 
believe that the consumer has less of a reasonable expectation that the 
rate promised at account opening will continue to apply to new 
transactions. At that point, even if the reason for the rate increase 
was not reasonably avoidable, other provisions should enable consumers 
to reasonably avoid the harm caused by an increase in the rate for new 
transactions. Specifically, consumers will receive notice of most rate 
increases 45 days before the increase goes into effect.\132\ 
Furthermore, as discussed below, Sec.  --.24(b)(3) prevents surprise by 
prohibiting application of the increased rate to transactions made up 
to seven days after provision of the 45-day notice. After the first 
year, these provisions will enable consumers to reasonably avoid any 
injury caused by application of an increased rate to new transactions 
by providing them sufficient time to receive the 45-day notice and to 
decide whether to continue using the card.
---------------------------------------------------------------------------

    \132\ See 12 CFR 226.9(c)(2) and (g).
---------------------------------------------------------------------------

    Similarly, although there will be circumstances in which some 
consumers cannot reasonably avoid fees for violating the account terms 
(for example, a late payment fee when a delay in mail delivery caused 
the late payment), this injury is not sufficient to outweigh the 
countervailing benefits to consumers and competition of discouraging 
violations of the account terms. The application of an increased rate 
to an outstanding balance increases consumers' costs until the rate is 
reduced or the balance is paid in full or transferred to an account 
with more favorable terms. Similarly, an increase in the rate 
applicable to new transactions increases the costs of using the account 
indefinitely. The assessment of a fee, however, is generally an 
isolated cost that will not be repeated unless the account terms are 
violated again.

Final Rule

    As discussed below, Sec.  --.24 imposes certain disclosure 
requirements on institutions. Comment 24-1 clarifies that an 
institution that complies with the applicable disclosure requirements 
in Regulation Z, 12 CFR part 226, has complied with the disclosure 
requirements in Sec.  227.24. This comment further clarifies that 
nothing in Sec.  --.24 alters the 45-day advance notice requirements in 
12 CFR 226.9(c) and (g). However, nothing in Sec.  --.24, its 
commentary, or this SUPPLEMENTARY INFORMATION should be construed to 
suggest that, by itself, a failure to comply with the notice 
requirements in 12 CFR 226.9 constitutes a violation of Sec.  --.24.
Section --.24(a) General Rule
    Proposed Sec.  --.24(a)(1) would have prohibited institutions from 
increasing the annual percentage rate applicable to any outstanding 
balance on a consumer credit card account, except in the circumstances 
set forth in proposed Sec.  --.24(b). Proposed Sec.  --.24(a)(2) 
defined ``outstanding balance.''
    As discussed above, the Agencies have adopted a new Sec.  --.24(a), 
which requires institutions to disclose at account opening the annual 
percentage rates that will apply to each category of transactions on 
the consumer credit card account. Section --.24(a) further provides 
that an institution must not increase the annual percentage rate for a 
category of transactions on any consumer credit card account except as 
provided in Sec.  --.24(b). As discussed below, the general prohibition 
on increasing rates in Sec.  --.24(b) applies to existing accounts and 
balances as of the July 1, 2010 effective date.
    Comment 24(a)-1 clarifies that an institution cannot satisfy the 
disclosure requirement in Sec.  --.24(a) by disclosing at account 
opening only a range of rates or that a rate will be ``up to'' a 
particular amount. Comment 24(a)-2 provides illustrative examples of 
the application of the prohibition on increasing rates.
Section --.24(b) Exceptions
    Proposed Sec.  --.24(b) set forth exceptions to the general 
prohibition in proposed Sec.  --.24(a) on applying increased rates to 
outstanding balances. As discussed above, the Agencies have revised 
Sec.  --.24(b) to reflect the changes to Sec.  --.24(a) and to ensure 
that consumers are protected from unfair surprise regarding the cost of 
credit.
Section --.24(b)(1) Account Opening Disclosure Exception
    Section --.24(b)(1) permits an increase in the annual percentage 
rate for a category of transactions to a rate that was disclosed at 
account opening upon expiration of a period of time that was also 
disclosed at account opening. For example, an institution could offer a 
consumer credit card account that applies a 5% non-variable rate during 
the first six months after account opening, a 15% non-variable rate for 
an additional six months, and a variable rate thereafter. So long as 
the institution discloses these terms to the consumer at account 
opening, Sec.  --.24(b)(1) permits the institution to apply the 15% 
rate to the purchase balance and to new purchases after six months and 
the variable rate to the purchase balance and new purchases after the 
first year. However, the institution could not subsequently increase 
that variable rate unless specifically permitted by one of the other 
exceptions in Sec.  --.24(b).
    Comment 24(b)(1)-1 clarifies that Sec.  --.24(b)(1) does not permit 
application of increased rates that are disclosed at account opening 
but are contingent on a particular event or occurrence or may be 
applied at the institution's discretion (unless one of the exceptions 
in Sec.  --.24(b) applies). The comment provides several examples, 
including the retroactive assessment of deferred interest. However, 
comment 24(b)(1)-2 clarifies that nothing in Sec.  --.24 prohibits an 
institution from assessing interest due to the loss of a grace period 
as provided in Sec.  --.25. In addition, comment 24(b)(1)-3 clarifies 
that nothing in Sec.  --.24 prohibits an institution from applying a 
rate that is lower than the disclosed rate upon expiration of the 
period. However, if the lower rate is applied to an existing balance, 
the institution cannot subsequently increase the rate with respect to 
that balance unless it has provided the consumer with advance notice 
pursuant to 12 CFR 226.9(c). An illustrative example is provided.
Section --.24(b)(2) Variable Rate Exception
    Proposed Sec.  --.24(b)(1) would have permitted an increase in the 
annual percentage rate due to an increase in an index that is not under 
the institution's control and is available to the general public. This 
exception was designed to be similar to the exception for variable 
rates in 12 CFR 226.5b(f)(1). This aspect of the proposal was supported 
by comments from both industry and consumer groups. Accordingly, 
proposed Sec.  --.24(b)(1) is adopted as Sec.  --.24(b)(2) with 
stylistic revisions. This provision cannot be used to increase the 
annual percentage rate based on an index except to the extent 
disclosed.

[[Page 5531]]

    The Agencies have adopted a new comment 24(b)(2)-1, which clarifies 
that Sec.  --.24(b)(2) does not permit an institution to increase an 
annual percentage rate by changing the method used to determine a 
variable (such as by increasing the margin), even if that change will 
not result in an immediate increase.
    Proposed comment 24(b)(1)-1 clarified that an institution may not 
increase a variable rate balance based on its own prime rate but may 
use a published prime rate, such as that in the Wall Street Journal, 
even if the institution's prime rate is one of several rates used to 
establish the published rate. This comment also clarified that an 
institution may not increase a variable rate by changing the method 
used to determine the indexed rate. Proposed comment 24(b)(1)-2 
clarified when a rate is considered ``publicly available.''
    One industry commenter requested clarification that institutions 
were not limited to basing variable rates on prime rates and could also 
use one or more other publicly available indices, such as the Consumer 
Price Index. Because the method for determining the variable rate must 
be disclosed consistent with 12 CFR 226.6, the Agencies believe that 
the use of multiple indices is appropriate so long as those indices are 
publicly available. The Agencies have revised proposed comments 
24(b)(1)-1 and -2 accordingly and adopted those comments as 24(b)(2)-2 
and -3.
    Some industry commenters requested that institutions be permitted 
to change a non-variable rate to a variable rate or to change the 
method used to determine a variable rate so long as, at the time of the 
change, the rate would not increase. Because such changes could lead to 
future increases in a rate during the first year or a rate applicable 
to an outstanding balance, comment 24(b)(2)-4 clarifies that a non-
variable rate may be converted to a variable rate only when 
specifically permitted by Sec.  --.24. For example, under Sec.  
--.24(b)(1), an institution may convert a non-variable rate to a 
variable rate if this change was disclosed at account opening.
    Because Sec.  --.24 applies only to increases in annual percentage 
rates, the Agencies have adopted comment 24(b)(2)-5, which clarifies 
that nothing in Sec.  --.24 prohibits an institution from changing a 
variable rate to an equal or lower non-variable rate. Whether the non-
variable rate is equal to or lower than the variable rate is determined 
at the time the institution provides the notice required by 12 CFR 
226.9(c). For example, assume that on March 1 a variable rate that is 
currently 15% applies to a balance of $2,000 and the institution sends 
a notice pursuant to 12 CFR 226.9(c) informing the consumer that the 
variable rate will be converted to a non-variable rate of 14% effective 
April 16. On April 16, the institution may apply the 15% non-variable 
rate to the $2,000 balance and to new transactions even if the variable 
rate on April 16 was less than 14%.
    Comment 24(b)(2)-6 clarifies that an institution may change the 
index and margin used to determine a variable rate if the original 
index becomes unavailable, so long as historical fluctuations in the 
original and replacement indices were substantially similar and the 
replacement index and margin will produce a rate similar to the rate 
that was in effect at the time the original index became unavailable. 
This comment further clarifies that, if the replacement index is newly 
established and therefore does not have any rate history, it may be 
used if it produces a rate substantially similar to the rate in effect 
when the original index became unavailable. This comment is modeled on 
comment 226.5b(f)(3)(ii)-1 to 12 CFR 226.5b.
Section --.24(b)(3) Advance Notice Exception
    The Agencies have adopted a new Sec.  --.24(b)(3), which provides 
that an annual percentage rate for a category of transactions may be 
increased pursuant to a notice under 12 CFR 226.9(c) or (g) for 
transactions that occur more than seven days after provision of the 
notice. An institution cannot, however, utilize this exception during 
the first year after account opening.
    The prohibition in Sec.  --.24(b)(3) on applying an increased rate 
to transactions that occur more than seven days after provision of the 
12 CFR 226.9 notice is modeled on the definition of ``outstanding 
balance'' in proposed Sec.  --.24(a)(2). Proposed Sec.  --.24(a)(2) 
defined ``outstanding balance'' as the amount owed on a consumer credit 
card account at the end of the fourteenth day after the institution 
provides the notice required by proposed 12 CFR 226.9(c) or (g). This 
definition was intended to prevent the requirement in proposed 12 CFR 
226.9 that creditors provide 45 days' advance notice of rate increases 
from creating an extended period following receipt of that notice 
during which new transactions could be made at the prior rate. Although 
institutions could address this concern by denying additional 
extensions of credit after sending the 45-day notice, the Agencies 
believe that this outcome would not be beneficial to consumers who have 
received the notice and wish to use the account for new transactions. 
The 14-day period was intended to be consistent with the 21-day safe 
harbor in proposed Sec.  --.22(b) insofar as it would allow seven days 
for the notice to reach the consumer and seven days for the consumer to 
review that notice and take appropriate action.
    Some industry commenters opposed proposed Sec.  --.24(a)(2) 
entirely, arguing that--because rates are often increased as a result 
of increases in the consumer's risk of default--delaying imposition of 
the new rate only increases the risk borne by the institution. Other 
industry commenters acknowledged that it is reasonable to provide some 
period of time for consumers to receive and review the notice but that 
fourteen days is excessive because average mail times are much less 
than seven days and because a consumer who does not wish to engage in 
transactions at the new rate need only cease to use the card.
    As discussed above with respect to Sec.  --.22, while the Agencies 
believe that seven days will be more than sufficient for the great 
majority of consumers to receive a periodic statement or notice by 
mail, relying on average mailing times would not adequately protect the 
significant number of consumers whose delivery times are longer than 
average. The Agencies agree, however, that consumers do not require 
seven days to review the notice and take appropriate action. Indeed, 
many consumers will not be required to take any action to reasonably 
avoid transactions to which the increased rate will apply. In addition, 
because in most cases the notice will be delivered in less than seven 
days, most consumers will have time to cancel recurring charges to 
their account (if necessary). The Agencies conclude that, in order to 
protect consumers from inadvertently engaging in transactions to which 
an increased rate will apply while minimizing the period during which 
credit extended by the institution must remain at the pre-increase 
rate, a rate that is increased pursuant to Sec.  --.24(b)(3) should 
apply only to transactions that occur after the seventh day following 
provision of the 12 CFR 226.9 notice.
    Comment 24(b)(3)-1 clarifies that the limitation in Sec.  
--.24(b)(3) regarding rate increases during the first year after an 
account is opened does not apply to accounts opened prior to July 1, 
2010.
    One industry commenter expressed concern that the ``outstanding 
balance'' under proposed Sec.  --.24(a)(2) could be construed to 
include transactions that were authorized before the end of the 
relevant date but were settled until after that date. The Agencies 
agree that an institution should not be required to

[[Page 5532]]

include such transactions in the balance to which the increased rate 
cannot be applied. Accordingly, comment 24(b)(3)-2 clarifies that an 
institution may apply a rate increased pursuant to Sec.  --.24(b)(3) to 
transactions that occur within seven days after provision of the notice 
but are settled more than seven days after that notice was provided. An 
illustrative example is provided in comment 24(b)(3)-3.
Section --.24(b)(4) Delinquency Exception
    Proposed Sec.  --.24(b)(3) provided that an institution could apply 
an increased rate if the consumer's minimum payment had not been 
received within 30 days after the due date. This exception was intended 
to ensure that consumers would generally have notice and an opportunity 
to cure the delinquency before becoming more than 30 days' past due. As 
discussed above, the Agencies have adopted proposed Sec.  --.24(b)(3) 
as Sec.  --.24(b)(4) with stylistic changes.\133\
---------------------------------------------------------------------------

    \133\ The example provided in proposed comment 24(b)(3)-1 has 
been removed. Instead, examples of the application of this exception 
are provided in comment 24(a)-1.
---------------------------------------------------------------------------

    Some commenters requested that, in addition to restricting the 
circumstances in which institutions could apply high penalty rates to 
existing balances based on a violation of the account terms, the 
Agencies also restrict the length of time a penalty rate can be applied 
to an account. They suggested that, for example, institutions be 
prohibited from applying a penalty rate to an account for more than six 
months if the consumer does not violate the account terms during that 
period. The Agencies, however, are not imposing a substantive 
prohibition at this time. As discussed above, the Agencies have placed 
significant limitations on institutions' ability to reprice outstanding 
balances based on violations of the account terms. Furthermore, because 
the amendments to Regulation Z adopted by the Board elsewhere in 
today's Federal Register require creditors to provide 45 days' advance 
notice of the imposition of a penalty rate, a consumer will have the 
opportunity to decide whether to engage in transactions at the penalty 
rate.\134\ Finally, the Board has also improved the disclosures under 
Regulation Z to require creditors to disclose how long a penalty rate 
will remain in effect or, if the creditor reserves the right to apply 
the penalty rate indefinitely, to affirmatively state that fact.\135\ 
Although the Agencies are not requiring such practices as part of 
today's final rule, they believe that limiting the duration of a 
penalty rate and periodically reevaluating a consumer's 
creditworthiness to determine eligibility to return to the non-penalty 
rate are policies that can be both beneficial for the consumer and safe 
and sound policy for the institution. Some industry commenters 
indicated that they already follow such a practice.
---------------------------------------------------------------------------

    \134\ See 12 CFR 226.9(g).
    \135\ See 12 CFR 226.5a(b)(1)(iv); comment 5a(b)(1)-5; App. G-
10(B) and G-10(C).
---------------------------------------------------------------------------

Section --.24(b)(5) Workout Arrangement Exception
    One commenter noted that, as proposed, Sec.  --.24 would prohibit 
institutions that reduced the annual percentage rate on an account 
pursuant to a workout arrangement from increasing the rate if the 
consumer failed to comply with the terms of the arrangement. Because 
workout arrangements can provide important benefits to consumers in 
serious default, the Agencies have adopted Sec.  --.24(b)(5), which 
provides that, when a consumer fails to comply with the terms of a 
workout arrangement, the institution may increase the annual percentage 
rate to a rate that does not exceed the rate that applied prior to the 
arrangement. For example, assume that, consistent with Sec.  
--.24(b)(4), the annual percentage rate on a $5,000 balance is 
increased from 15% to 25%. Assume also that the institution and the 
consumer subsequently agree to a workout arrangement that reduces the 
rate to 15% on the condition that the consumer pay a specified amount 
by the payment due date each month. If the consumer does not pay the 
agreed-upon amount by the payment due date, Sec.  --.24(b)(5) permits 
the institution to increase the rate on the $5,000 balance to no more 
than 25%. See comment 24(b)(5)-3.
    Comment 24(b)(5)-1 clarifies that, except as expressly provided, 
Sec.  --.24(b)(5) does not permit an institution to alter any of the 
requirements in Sec.  --.24 pursuant to a workout arrangement between a 
consumer and the institution. For example, an institution cannot 
increase a rate pursuant to a workout arrangement unless otherwise 
permitted by Sec.  --.24. In addition, an institution cannot require 
the consumer to make payments with respect to a protected balance that 
exceed the payments permitted under Sec.  --.24(c).
    Comment 24(b)(5)-2 clarifies that, if the rate that applied prior 
to the workout arrangement was a variable rate, the rate that can be 
applied if the consumer fails to comply with the terms of the 
arrangement must be calculated using the same formula as before the 
arrangement.
Section --.24(c) Treatment of Protected Balances
    Proposed Sec.  --.24(c) was intended to ensure that the protections 
in Sec.  --.24 were not undercut. Accordingly, it would have provided 
that, when an institution increases the annual percentage rate 
applicable to a category of transactions (for example, purchases), the 
institution was prohibited from requiring repayment of an outstanding 
balance in that category using a method that is less beneficial to the 
consumer than one of the methods listed in Sec.  --.24(c)(1) and from 
assessing fees or charges solely on an outstanding balance. In order to 
clarify the application of Sec.  --.24(c), the Agencies have revised 
this paragraph to state that it applies only to ``protected balances,'' 
which are defined as amounts owed for a category of transactions to 
which an increased annual percentage rate cannot be applied after the 
rate for that category of transactions has been increased pursuant to 
Sec.  --.24(b)(3). This definition is similar to the definition of 
``outstanding balance'' in proposed Sec.  --.24. In addition, proposed 
Sec.  .24(c) has been revised for consistency with the revisions to 
Sec.  --.24(b) and for stylistic reasons. Otherwise, it has been 
adopted as proposed.
    The Agencies have replaced proposed comments 23(c)-1 and -2 with a 
new comment 24(c)-1, which clarifies that, because rates cannot be 
increased pursuant to Sec.  --.24(b)(3) during the first year after 
account opening, the requirements of Sec.  --.24(c) do not apply to 
balances during the first year. Instead, Sec.  --.24(c) applies only to 
``protected balances.'' For example, assume that, on March 15 of year 
two, an account has a purchase balance of $1,000 at a non-variable rate 
of 12% and that, on March 16, the bank sends a notice pursuant to 12 
CFR 226.9(c) informing the consumer that the rate for new purchases 
will increase to a non-variable rate of 15% on May 2. On March 20, the 
consumer makes a $100 purchase. On March 24, the consumer makes a $150 
purchase. On May 2, Sec.  --.24(b)(3) permits the bank to start 
charging interest at 15% on the $150 purchase made on March 24 but does 
not permit the bank to apply that 15% rate to the $1,100 purchase 
balance as of March 23. Accordingly, Sec.  --.24(c) applies to the 
$1,100 purchase balance as of March 23 but not the $150 purchase made 
on March 24.
Section --.24(c)(1) Repayment
    In the May 2008 Proposal, the Agencies stated that, while there may 
be

[[Page 5533]]

circumstances in which institutions would accelerate repayment of the 
outstanding balance to manage risk, proposed Sec.  --.24 would provide 
little effective protection if consumers did not receive a reasonable 
amount of time to pay off the outstanding balance. Accordingly, 
proposed Sec.  --.24(c)(1) would have required institutions to provide 
consumers with a method of paying the outstanding balance that is no 
less beneficial to the consumer than one of the methods listed in 
proposed Sec.  --.24(c)(1)(i) and (ii).
    Proposed Sec.  --.24(c)(1)(i) would have allowed an institution to 
amortize the outstanding balance over a period of no less than five 
years, starting from the date on which the increased rate went into 
effect for new transactions. Although some industry commenters 
criticized the five-year period as excessive and requested that it be 
reduced or eliminated, the OCC and consumer groups generally supported 
this repayment period as reasonable. One consumer group argued that, if 
the amount owed is large, five years may be insufficient.
    In May 2008, the Agencies cited as support for the proposed five-
year amortization period guidance issued by the Board, OCC, FDIC, and 
OTS (under the auspices of the Federal Financial Institutions 
Examination Council) stating that credit card workout arrangements 
should generally strive to have borrowers repay debt within 60 
months.\136\ One commenter argued that the Agencies' reliance on this 
guidance was misplaced because it applies to workout arrangements and 
uses 60 months as a maximum repayment period, rather than a minimum. 
The Agencies note, however, that the guidance set 60 months as the 
repayment period preferred in most cases for consumers who had become 
sufficiently delinquent to be placed in workout arrangements. Section 
--.24(c), however, will generally apply to a less risky population of 
consumers because accounts that have paid more than 30 days late are 
excluded. See Sec.  --.24(b)(4). Accordingly, based on the comments and 
the Agencies' own analysis, the Agencies conclude that a five-year 
minimum amortization period is appropriate. Therefore, proposed Sec.  
--.24(c)(1)(i) has been revised for stylistic reasons and adopted as 
proposed.
---------------------------------------------------------------------------

    \136\ See, e.g., Board Supervisory Letter SR 03-1 on Account 
Management and Loss Allowance Methodology for Credit Card Lending 
(Jan. 8, 2003) (available at http://www.federalreserve.gov/boarddocs/srletters/2003/sr0301.htm).
---------------------------------------------------------------------------

    An industry commenter requested clarification regarding the 
relationship between Sec.  --.24(c)(1) and the payment allocation rules 
in proposed Sec.  --.23. Section .23 addresses only payments in excess 
of the required minimum periodic payment. Thus, nothing in Sec.  --.23 
limits an institution's ability to set a required minimum periodic 
payment consistent with Sec.  --.24(c). By the same token, nothing in 
Sec.  --.24(c)(1) alters the requirement regarding allocation of excess 
payments in Sec.  --.23. Thus, if an institution has elected to set a 
required minimum periodic payment on a protected balance that will 
amortize that balance over a five-year period consistent with Sec.  
--.24(c)(1)(i), the institution must apply excess payments consistent 
with Sec.  --.23 even if doing so will cause the protected balance to 
pay off in less than five years. In order to eliminate any ambiguity, 
the Agencies have added examples to the commentary to Sec.  --.23 
illustrating how an excess payment could be applied in this situation. 
See comment 23(a)-1.iii; comment 23(b)-2.ii. In addition, the Agencies 
have added comment 24(c)(1)(i)-1, which clarifies that an institution 
is not required to recalculate the amortization period even if, during 
the course of that period, allocation of excess payments to the 
protected balance means the balance will be paid off in less than 5 
years.
    An industry commenter requested clarification on whether an 
institution that chose to provide an amortization period of five years 
for the outstanding balance consistent with proposed Sec.  
--.24(c)(1)(i) was prohibited from applying some or all of the required 
minimum periodic payment to the outstanding balance before the 
effective date of the rate increase if doing so would result in a 
shorter amortization period. Section --.24(c)(1)(i) provides for ``[a]n 
amortization period for the outstanding balance of no less than five 
years, starting from the date on which the increased annual percentage 
rate becomes effective.'' (Emphasis added.) Accordingly, Sec.  
--.24(c)(1)(i) does not affect an institution's ability to apply some 
or all of the required minimum periodic payment to the protected 
balance prior to the effective date of the rate increase.
    An industry commenter requested clarification regarding how an 
amortization period would be calculated if the annual percentage rate 
was variable. Comment 24(c)(1)(i)-2 clarifies that, if the annual 
percentage rate that applies to the protected balance varies with an 
index as provided in Sec.  --.24(b)(2), the institution may vary the 
interest charges included in the required minimum periodic payment for 
that balance accordingly in order to ensure that the protected balance 
is amortized in five years.
    As an alternative to the five-year amortization period, proposed 
Sec.  --.24(c)(1)(ii) would have allowed the percentage of the total 
balance that was included in the required minimum periodic payment 
before the rate increase to be doubled with respect to the outstanding 
balance. For example, if the required minimum periodic payment prior to 
the rate increase was one percent of the total amount owed plus accrued 
interest and fees, an institution would be permitted to increase the 
minimum payment for the outstanding balance up to two percent of that 
balance plus accrued interest and fees. The Agencies did not receive 
any significant comment on this aspect of the proposal. Accordingly, 
Sec.  --.24(c)(1)(ii) has been revised for stylistic reasons and 
adopted as proposed.
    Proposed comment 24(c)(1)(ii)-1 clarified that proposed Sec.  
--.24(c)(1)(ii) did not limit or otherwise address an institution's 
ability to determine the amount of the minimum payment on other 
balances (in other words, balances that are not outstanding balances 
under Sec.  --.24(a)(2)). This comment has been revised for stylistic 
reasons and adopted as proposed.
    Proposed comment 24(c)(1)(ii)-2 provided an example of how an 
institution could adjust the minimum payment on the outstanding 
balance. This comment has been revised for clarity.
    Proposed comment 24(c)(1)-1 clarified that an institution may 
provide a method of paying the outstanding balance that is different 
from the methods listed in Sec.  --.24(c)(1) so long as the method used 
is no less beneficial to the consumer than one of the listed methods. 
It further stated that a method is no less beneficial to the consumer 
if the method amortizes the outstanding balance in five years or longer 
or if the method results in a required minimum periodic payment on the 
outstanding balance that is equal to or less than a minimum payment 
calculated consistent with Sec.  --.24(c)(1)(ii). As requested by the 
commenters, the Agencies have clarified and expanded the examples 
provided in the proposed comment. Otherwise, the comment has been 
revised for stylistic reasons and adopted as proposed.
    An industry commenter asked whether, if amortization of the 
outstanding balance over a five-year period would result in a required 
minimum periodic payment below the lower limit or ``floor'' used by the

[[Page 5534]]

institution for such payments,\137\ the institution could require the 
consumer to pay the floor minimum payment. The Agencies believe this 
should be permitted, so long as the lower limit for the required 
minimum periodic payment on the protected balance is the same limit 
used by the institution before the increased rate went into effect. 
Similarly, an institution is permitted to require the consumer to make 
a pre-existing floor minimum payment that exceeds the amount permitted 
under Sec.  --.24(c)(1)(ii). Accordingly, the Agencies have adopted 
comment 24(c)(1)-2.
---------------------------------------------------------------------------

    \137\ For example, an institution might require a minimum 
periodic payment that is the greater of $20 or the total of 1% of 
the amount owed plus interest and fees.
---------------------------------------------------------------------------

Section --.24(c)(2) Fees and Charges
    The protections of proposed Sec.  --.24(a) would also be undercut 
if institutions were permitted to assess fees or other charges as a 
substitute for an increase in the annual percentage rate. Accordingly, 
proposed Sec.  --.24(c)(2) would have prohibited institutions from 
assessing any fee or charge based solely on the outstanding balance. As 
explained in proposed comment 24(c)(2)-1, this proposal would have 
prohibited, for example, an institution from assessing a monthly 
maintenance fee on the outstanding balance. The proposal would not, 
however, have prohibited an institution from assessing fees such as 
late payment fees or fees for exceeding the credit limit that are based 
in part on the outstanding balance. Similarly, proposed Sec.  
--.24(c)(2) would not have prohibited assessment of fees that are 
unrelated to the outstanding balance, such as fees for providing 
account documents.
    The Agencies did not receive any significant comment on this aspect 
of the proposal. Accordingly, proposed Sec.  --.24(c)(2) and the 
accompanying commentary have been revised for stylistic reasons and 
adopted as proposed.

Other Issues

    Implementation. As discussed in section VII of this SUPPLEMENTARY 
INFORMATION, the effective date for Sec.  --.24 is July 1, 2010. As of 
that date, this provision applies to existing as well as new consumer 
credit card accounts and balances (except as expressly stated below). 
The Agencies provide the following guidance:
     Account opening disclosures. The disclosure requirements 
in Sec.  --.24(a) apply only to accounts opened on or after the 
effective date. Thus, if a consumer credit card account is opened on or 
after July 1, 2010, the institution must disclose the annual percentage 
rates that will apply to each category of transactions on that account.
     Rates that expire after a specified period of time. If a 
rate that will expire after a specified period of time applies to a 
balance on the effective date, the institution can apply an increased 
rate to that balance at expiration so long as the institution 
previously disclosed the increased rate. For example, if on January 1, 
2010 an account is opened with a non-variable promotional rate of 5% on 
purchases that applies for one year (after which a variable rate will 
apply) and, on July 1, 2010, the 5% rate applies to a balance of 
$2,000, the institution can apply the previously disclosed variable 
rate to any remaining portion of the $2,000 balance on January 1, 2011 
pursuant to Sec.  --.24(b)(1).
     Variable rates that do not expire. If a variable rate that 
does not expire applies to a balance on the effective date, the 
institution may continue to adjust that rate due to increases in an 
index consistent with Sec.  --.24(b)(2).
     Non-variable rates that do not expire. If a non-variable 
rate that does not expire applies to a balance on the effective date, 
the institution cannot increase the rate that applies to that balance 
unless the account becomes more than 30 days delinquent (in which case 
an increase is permitted by Sec.  --.24(b)(4)). For example, if an 
account has a $3,000 purchase balance at a non-variable rate of 15% on 
July 1, 2010, the institution cannot subsequently increase the rate 
that applies to the $3,000 (unless the account becomes more than 30 
days delinquent, in which case Sec.  --.24(b)(4) applies).
     Rate increases pursuant to advance notice under 12 CFR 
226.9(c) or (g). Section --.24(b)(3) applies to any rate increase for 
new transactions that will take effect on or after the July 1, 2010 
effective date. For example, assume that an account has a $3,000 
purchase balance at a non-variable rate of 15%. In order to increase 
the rate that applies to purchases made on or after July 1, 2010 to a 
non-variable rate of 18%, the institution must comply with 12 CFR 
226.9(c) by providing notice of the increase at least 45 days in 
advance (in this case, on or before May 17, 2010). Assuming the 
institution provides the notice on May 17, the requirements in Sec.  
--.24(c) will apply to the $3,000 balance beginning on May 24, 2010.
     First year after the account is opened. An institution may 
not increase an annual percentage rate pursuant to Sec.  --.24(b)(3) 
during the first year after the account is opened. However, this 
limitation does not apply to accounts opened prior to July 1, 2010. For 
example, if an account is opened on June 1, 2010, the institution may 
increase a rate for new transactions pursuant to Sec.  --.24(b)(3).
     Delinquencies of more than 30 days. An institution may 
increase a rate pursuant to Sec.  --.24(b)(4) when an account becomes 
more than 30 days delinquent even if the delinquency began prior to the 
effective date. For example, if the required minimum periodic payment 
due on June 15, 2010 is not received until July 20, Sec.  --.24(b)(4) 
permits the institution to increase the rates on that account.
     Workout arrangements. If a workout arrangement applies to 
an account on the effective date and the consumer fails to comply with 
the terms of arrangement after the effective date, Sec.  --.24(b)(5) 
only permits the institution to apply an increased rate that does not 
exceed the rate that applied prior to commencement of the workout 
arrangement. For example, assume that, on June 1, 2010, an institution 
decreases the rate that applies to a $5,000 balance from a non-variable 
penalty rate of 30% to a non-variable rate of 15% pursuant to a workout 
arrangement between the institution and the consumer. Under this 
arrangement, the consumer must pay by the fifteenth of each month in 
order to retain the 15% rate. The institution does not receive the 
payment due on July 15 until July 20. In these circumstances, Sec.  
--.24(b)(5) does not permit the institution to apply a rate to the 
$5,000 balance that exceeds the 30% penalty rate.
    Effect of Sec.  --.24 on securitization. In the May 2008 Proposal, 
the Agencies requested comment on what effect the restrictions in 
proposed Sec.  --.24 would have on outstanding securitizations and 
institutions' ability to securitize credit card assets in the future. 
In response, industry commenters raised general concerns that a 
reduction in interest revenue as a result of proposed Sec.  --.24 could 
require institutions to alter the structure of existing securities and 
could reduce investor interest in future offerings. As discussed below, 
however, the Agencies are providing institutions and the markets for 
credit card securities with 18 months in which to adjust interest rates 
and other account terms to compensate for the restrictions in the final 
rules. Accordingly, the Agencies do not believe that any additional 
revisions are necessary to accommodate securitization of credit card 
assets.

[[Page 5535]]

Supplemental Legal Basis for This Section of the OTS Final Rule

    As discussed above, HOLA provides authority for both safety and 
soundness and consumer protection regulations. For example, Sec.  
535.24 supports safety and soundness by reducing reputation risk that 
would occur from repricing consumer credit card accounts in an unfair 
manner. Section 535.24 also protects consumers by providing them with 
fair terms on which their accounts may be repriced. Consequently, HOLA 
serves as an independent basis for Sec.  535.24.

Section --.25--Unfair Balance Computation Method

    Summary. In the May 2008 Proposal, the Agencies proposed Sec.  
--.26, which would have prohibited institutions from imposing finance 
charges on consumer credit card accounts based on balances for days in 
billing cycles that precede the most recent billing cycle. 73 FR at 
28922-28923. This proposal was intended to prohibit the balance 
computation method sometimes referred to as ``two-cycle billing'' or 
``double-cycle billing.'' As discussed below, based on the comments and 
further analysis, the Agencies have revised the proposed rule and its 
commentary to clarify that the final rule prohibits the assessment of 
interest charges on balances for days in prior billing cycles when such 
charges are imposed as a result of the loss of a grace period. The 
Agencies have also removed the exception for assessment of deferred 
interest and added an exception permitting adjustments to finance 
charges following the return of a payment for insufficient funds. 
Finally, because the Agencies are not taking action on proposed Sec.  
--.25 at this time (as discussed below), proposed Sec.  --.26 has been 
designated in the final rule as Sec.  --.25.
    Background. TILA requires creditors to explain as part of the 
account-opening disclosures the method used to determine the balance to 
which interest rates are applied. 15 U.S.C. 1637(a)(2). In its June 
2007 Regulation Z Proposal, the Board proposed that the balance 
computation method be disclosed outside the account-opening table 
because explaining lengthy and complex methods may not benefit 
consumers. 72 FR at 32991-32992. That proposal was based on the Board's 
consumer testing, which indicated that consumers did not understand 
explanations of balance computation methods. Nevertheless, the Board 
observed that, because some balance computation methods are more 
favorable to consumers than others, it was appropriate to highlight the 
method used, if not the technical computation details.
    In response to the June 2007 Regulation Z Proposal, consumers, 
consumer groups, and a member of Congress urged the Board to prohibit 
two-cycle billing. The two-cycle balance computation method has several 
permutations but, generally speaking, an institution using the two-
cycle method assesses interest not only on the balance for the current 
billing cycle but also on balances on days in the preceding billing 
cycle. This method generally does not result in additional finance 
charges for a consumer who consistently carries a balance from month to 
month (and therefore does not receive a grace period) because interest 
is always accruing on the balance. Nor does the two-cycle method affect 
consumers who pay their balance in full within the grace period every 
month because interest is not imposed on their balances. The two-cycle 
method does, however, result in greater interest charges for consumers 
who pay their balance in full one month but not the next month (and 
therefore lose the grace period).
    The following example illustrates how the two-cycle method results 
in higher costs for these consumers than other balance computation 
methods: Assume that the billing cycle on a consumer credit card 
account starts on the first day of the month and ends on the last day 
of the month. The payment due date for the account is the twenty-fifth 
day of the month. Under the terms of the account, the consumer will not 
be charged interest on purchases if the balance at the end of a billing 
cycle is paid in full by the following payment due date (in other 
words, if the consumer receives a grace period). The consumer uses the 
credit card to make a $500 purchase on March 15. The consumer pays the 
balance for the February billing cycle in full on March 25. At the end 
of the March billing cycle (March 31), the consumer's balance consists 
only of the $500 purchase and the consumer will not be charged interest 
on that balance if it is paid in full by the following due date (April 
25). The consumer pays $400 on April 25, leaving a $100 balance. 
Because the consumer did not pay the balance for the March billing 
cycle in full on April 25, the consumer would lose the grace period and 
most institutions would charge interest on the $500 purchase from the 
start of the April billing cycle (April 1) through April 24 and 
interest on the remaining $100 from April 25 through the end of the 
April billing cycle (April 30). Institutions using the two-cycle 
method, however, would also charge interest on the $500 purchase from 
the date of purchase (March 15) to the end of the March billing cycle 
(March 31).
    The proposed ban on two-cycle billing was generally supported by 
individual consumers, consumer groups, members of Congress, other 
federal banking regulators, state consumer protection agencies, state 
attorneys general, and some industry groups and credit card issuers. On 
the other hand, some credit card issuers and one industry group opposed 
the proposal on the grounds that two-cycle billing was not sufficiently 
prevalent to warrant a ban. As discussed below, the Agencies are 
including a prohibition on the two-cycle method because that method 
continues to be used by a number of large credit card issuers. To the 
extent that the commenters addressed specific aspects of the proposal 
or the supporting legal analysis, those comments are discussed below.

Legal Analysis

    The Agencies conclude that, based on the comments received and 
their own analysis, it is an unfair act or practice under 15 U.S.C. 
45(n) and the standards articulated by the FTC to impose finance 
charges on consumer credit card accounts based on balances for days in 
billing cycles that precede the most recent billing cycle as a result 
of the loss of any time period provided by the institution within which 
the consumer may repay any portion of the credit extended without 
incurring a finance charge (in other words, a grace period).
    Substantial consumer injury. In the May 2008 Proposal, the Agencies 
stated that computing finance charges based on balances preceding the 
most recent billing cycle appeared to cause substantial consumer injury 
because consumers who lose the grace period incur higher interest 
charges than they would under a balance computation method that 
calculates interest based only on the most recent billing cycle.
    One industry commenter asserted that use of the two-cycle method 
could not cause an injury for purposes of the FTC Act simply because 
other, less costly methods exist. As discussed above, however, it is 
well established that monetary harm constitutes an injury under the FTC 
Act.\138\ As with similar arguments raised regarding Sec.  --.23, this 
commenter did not provide any legal

[[Page 5536]]

authority distinguishing interest charges assessed as a result of the 
two-cycle method from other monetary harms, nor are the Agencies aware 
of any such authority.
---------------------------------------------------------------------------

    \138\ See Statement for FTC Credit Practices Rule, 49 FR at 
7743; FTC Policy Statement on Unfairness at 3.
---------------------------------------------------------------------------

    Another industry commenter stated that assessing interest 
consistent with a contractual provision to which the consumer agreed 
cannot constitute an injury under the FTC Act. As discussed above, 
however, this argument is inconsistent with the FTC's application of 
the unfairness analysis in support of the Credit Practices Rule, where 
the FTC determined that otherwise valid contractual provisions injured 
consumers.\139\
---------------------------------------------------------------------------

    \139\ See Statement for FTC Credit Practices Rule, 49 FR 7740 et 
seq.; see also Am. Fin. Servs. Assoc. 767 F.2d at 978-83 (upholding 
the FTC's analysis).
---------------------------------------------------------------------------

    Finally, an industry commenter argued that the two-cycle method was 
not unfair because it only injures consumers who lose the grace period. 
A practice need not, however, injure all consumers in order to be 
unfair.
    Accordingly, the Agencies conclude that the two-cycle balance 
computation method causes substantial consumer injury.
    Injury is not reasonably avoidable. The Agencies' May 2008 Proposal 
stated that it did not appear that consumers can reasonably avoid 
injury because, once they use the card, they have no control over the 
methods used to calculate the finance charges on their accounts. The 
proposal further noted that, because the Board's consumer testing 
indicates that disclosures are not successful in helping consumers 
understand balance computation methods, a disclosure would not enable 
consumers to avoid the two-cycle method when comparing credit card 
accounts or to avoid the effects of the two-cycle method when using a 
credit card.\140\
---------------------------------------------------------------------------

    \140\ Although several industry commenters on the May 2008 
Proposal argued that disclosure would enable consumers to choose a 
credit card with a different balance computation method, those 
commenters did not provide any evidence that refutes the Board's 
consumer testing.
---------------------------------------------------------------------------

    One industry commenter argued that consumers could reasonably avoid 
the injury by paying their balance in full each month. As discussed 
above, however, because one of the intended purposes of a credit card 
(as opposed to a charge card) is to finance purchases over multiple 
billing cycles, it would not be reasonable to expect consumers to avoid 
the two-cycle method by paying their balance in full each month.
    Accordingly, the Agencies conclude that consumers cannot reasonably 
avoid the injury caused by the two-cycle balance computation method.
    Injury is not outweighed by countervailing benefits. The May 2008 
Proposal stated that there did not appear to be any significant 
benefits to consumers or competition from computing finance charges 
based on balances for days in billing cycles preceding the most recent 
billing cycle. The Agencies also noted that many institutions no longer 
use the two-cycle balance computation method. In addition, the Agencies 
noted that, although prohibition of the two-cycle method may reduce 
revenue for the institutions that currently use it and those 
institutions may replace that revenue by charging consumers higher 
annual percentage rates or fees, it appeared that this result would 
nevertheless benefit consumers because it will result in more 
transparent pricing.
    One industry commenter stated that, given a preference, consumers 
would choose lower prices and other purported benefits of the two-cycle 
method (such as the provision of a grace period) over transparency. As 
an initial matter, the commenter did not cite any evidence that 
institutions that use the two-cycle method are more likely to offer 
lower prices and grace periods than institutions that do not, nor are 
the Agencies aware of any such evidence. Furthermore, individual 
consumers overwhelmingly supported the proposed prohibition on the two-
cycle method. Finally, the Agencies believe that transparent pricing 
provides substantial benefits to consumer by enabling them to make 
informed decisions about the use of credit.
    Accordingly, the Agencies conclude that the two-cycle method does 
not produce benefits that outweigh the injury to consumers.
    Public policy. Several industry commenters stated that the proposed 
rule was contrary to established public policy because, as noted above, 
TILA requires creditors to disclose the balance computation method at 
account opening (15 U.S.C. 1637(a)(2)) and Regulation Z includes the 
two-cycle method in the list of methods that may be described by name 
(12 CFR 226.5a(g)).\141\ Regulation Z's acknowledgment that the two-
cycle method has been a commonly used balance computation method does 
not, however, constitute an endorsement of that method. Furthermore, 
nothing in TILA or Regulation Z requires use of the two-cycle method.
---------------------------------------------------------------------------

    \141\ As discussed elsewhere in today's Federal Register, the 
Board has not deleted the two-cycle method from the list in 12 CFR 
226.5a(g) because the prohibition in Sec.  --.25 does not apply to 
all credit card issuers.
---------------------------------------------------------------------------

    One industry commenter noted that, more than twenty years ago, a 
member of the Board expressed concern that the costs of regulating 
balance computation methods could outweigh the benefits for 
consumers.\142\ As discussed above, however, the Agencies have 
concluded that, in today's marketplace, the costs associated with 
prohibiting this particular balance computation method do not outweigh 
the benefits to consumers.
---------------------------------------------------------------------------

    \142\ See Statement of Emmett J. Rice, Member, Board of 
Governors of the Federal Reserve System before the S. Subcomm. on 
Fin. Instits. (May 21, 1986).
---------------------------------------------------------------------------

Final Rule

    As discussed below, the Agencies are not taking action on credit 
holds at this time. Accordingly, subject to the revisions discussed 
below, proposed Sec.  --.26 is adopted as Sec.  --.25. The proposed 
commentary has been redesignated to reflect this change.
Section --.25(a) General Rule
    The proposed rule prohibited institutions from imposing finance 
charges on balances on consumer credit card accounts based on balances 
for days in billing cycles preceding the most recent billing cycle. 
Proposed comment 26(a)-1 cited the two-cycle average daily balance 
computation method as an example of balance computation methods that 
would be prohibited by the proposed rule, tracking commentary under 
Regulation Z. See 12 CFR 226.5a(g)(2). Proposed comment 26(a)-2 
provided an example of the circumstances in which the proposed rule 
prohibited the assessment of interest.
    Industry commenters stated that, as drafted, the proposed rule went 
further than necessary to protect consumers from the injury caused by 
the two-cycle balance computation method. Specifically, because the 
proposed rule was not limited to circumstances in which the two-cycle 
method results in greater interest charges than other balance 
computation methods (that is, when a consumer who has been eligible for 
a grace period does not pay the balance in full on the due date), it 
would prohibit the assessment of interest from the date of the 
transaction even when the consumer was not eligible for a grace period. 
Because the Agencies did not intend this result, Sec.  --.25(a) and its 
commentary have been revised to clarify that an institution is 
prohibited from imposing finance charges based on balances for days in 
billing cycles that precede the most

[[Page 5537]]

recent billing cycle as a result of the loss of the grace period. 
Otherwise, the Agencies adopt the proposed rule and commentary.
Section --.25(b) Exceptions
    As proposed, Sec.  --.26(b) contained two exceptions to the general 
prohibition in Sec.  --.26(a). First, under proposed Sec.  --.26(b)(1), 
institutions would not be prohibited from charging consumers for 
deferred interest even though that interest may have accrued over 
multiple billing cycles. Thus, if a consumer did not pay a balance or 
transaction in full by the specified date under a deferred interest 
plan, the institution would have been permitted to charge the consumer 
for interest accrued during the period the plan was in effect. As 
discussed above, because current practices regarding the assessment of 
deferred interest are prohibited by Sec.  --.24, this exception has not 
been adopted.
    Second, under proposed Sec.  --.26(b)(2), institutions would not 
have been prohibited from adjusting finance charges following 
resolution of a billing error dispute. For example, if after complying 
with the requirements of 12 CFR 226.13 an institution determines that a 
consumer owes all or part of a disputed amount, the institution would 
be permitted to adjust the finance charge consistent with 12 CFR 
226.13, even if that requires computing finance charges based on 
balances in billing cycles preceding the most recent billing cycle. The 
Agencies did not receive any significant comment on this exception. 
Accordingly, the Agencies have revised this exception for clarity and 
adopted it as Sec.  --.25(b)(1).
    Industry commenters requested two additional exceptions to the 
proposed rule. First, they requested an exception when the date of a 
transaction for which the consumer does not receive a grace period is 
in a different billing cycle than the date on which that transaction is 
posted to the account--for example, if a consumer uses a convenience 
check for a cash advance transaction (which is not typically subject to 
a grace period) on the last day of a billing cycle, the check may not 
reach the institution for posting to the account until the first day of 
the next billing cycle or later. These commenters stated that the 
proposed rule should not apply in this situation because the 
institution is entitled to assess interest from the transaction date. 
Rather than creating an additional exception, the Agencies have 
addressed this concern by clarifying, as discussed above, that Sec.  
--.25(a) only applies to interest charges imposed as a result of the 
consumer losing the grace period. Accordingly, when a consumer is not 
eligible for a grace period at the time of a transaction, the final 
rule does not prohibit the institution from assessing interest from the 
date of the transaction.
    Second, industry commenters requested an exception allowing 
adjustments to finance charges when a consumer's payment is credited to 
the account in one billing cycle but is returned for insufficient funds 
in the subsequent billing cycle. This could occur, for example, when a 
consumer's check is received and credited by the institution near the 
end of a billing cycle but is returned to the institution for 
insufficient funds early in the next billing cycle. The Agencies view 
this situation as analogous to adjusting finance charges following 
resolution of a billing error or other dispute, which is permitted 
under Sec.  --.25(b)(1). Accordingly, the final rule adopts, in Sec.  
--.25(b)(2), an exception permitting adjustments to finance charges as 
a result of the return of a payment for insufficient funds.

Other Issues

    Implementation. As discussed in section VII of this SUPPLEMENTARY 
INFORMATION, the effective date for Sec.  --.25 is July 1, 2010. As of 
the effective date, this provision applies to existing as well as new 
consumer credit card accounts and balances.
    Additional prohibitions considered. Consumer groups and a member of 
Congress requested that the proposed rule be expanded to cover two 
additional practices. First, they urged that, when a consumer who is 
eligible for a grace period pays some but not all of the relevant 
balance by the due date, the institution be prohibited from assessing 
interest on the amount paid. For example, assume that the billing cycle 
on a consumer credit card account starts on the first day of the month 
and ends on the last day of the month and that the payment due date is 
the twenty-fifth day of the month. Under the terms of the account, the 
consumer will receive a grace period on purchases if the balance at the 
end of a billing cycle is paid in full by the following payment due 
date. The consumer is eligible for a grace period on a $500 purchase 
made on March 15. At the end of the March billing cycle (March 31), the 
consumer's balance consists only of the $500 purchase. The consumer 
pays $400 on the following due date (April 25), leaving a $100 balance. 
Because the consumer did not pay the balance for the March billing 
cycle in full on April 25, Sec.  --.25(a) prohibits the institution 
from charging interest on the $500 purchase from the date of purchase 
(March 15) to the end of the March billing cycle (March 31). The 
commenters would also prohibit the institution from assessing any 
interest on $400 of the $500 purchase during the April billing cycle 
because the consumer paid that amount by the due date.
    The Agencies, however, are not taking action on this issue at this 
time. As an initial matter, elsewhere in today's Federal Register, the 
Board has improved the disclosures under Regulation Z to assist 
consumers in understanding that they must pay the entire balance by the 
due date to receive the grace period.\143\ Furthermore, because TILA 
does not require institutions to provide a grace period, the requested 
prohibition could reduce the availability of such periods, which 
provide substantial benefits to consumers. To the extent that specific 
practices raise concerns regarding unfairness or deception under the 
FTC Act, the Agencies plan to address those practices on a case-by-case 
basis through supervisory and enforcement actions.
---------------------------------------------------------------------------

    \143\ See 12 CFR 226.5a(b)(5) comment 5a(b)(5)-1 (``The card 
issuer must state any conditions on the applicability of the grace 
period. An issuer that offers a grace period on all purchases and 
conditions the grace period on the consumer paying his or her 
outstanding balance in full by the due date each billing cycle, or 
on the consumer paying the outstanding balance in full by the due 
date in the previous and/or the current billing cycle(s) will be 
deemed to meet these requirements by providing the following 
disclosure, as applicable: `Your due date is [at least] --days after 
the close of each billing cycle. We will not charge you interest on 
purchases if you pay your entire balance by the due date each 
month.' '').
---------------------------------------------------------------------------

    Second, many of the same commenters requested that, when a consumer 
who has been carrying a balance from month to month--and therefore has 
not been receiving a grace period--pays the balance stated on the most 
recent periodic statement by the applicable due date, the institution 
be prohibited from assessing interest on that balance in the period 
between mailing or delivery of the statement and receipt of the 
consumer's payment. This type of interest is sometimes referred to as 
``trailing interest.'' For example, assume that a consumer who is not 
eligible for a grace period receives a periodic statement reflecting a 
balance of $1,000 as of March 31 and a due date of April 25. The 
consumer mails a payment of $1,000, which is credited by the 
institution on April 25. Ordinarily, because the consumer was not 
eligible for a grace period, this payment will not be sufficient to pay 
off the balance in full because interest will have accrued on the 
$1,000 balance from April 1 through April 24. The commenters, however, 
would prohibit the assessment

[[Page 5538]]

of interest on the $1,000 balance after March 31. The Agencies note 
that, because an institution will not know at the time it sends a 
periodic statement whether the consumer will pay the balance in full, 
the requested prohibition would essentially require institutions to 
waive subsequent interest charges for the subset of consumers who do 
so. To the extent that specific practices raise concerns regarding 
unfairness or deception under the FTC Act, the Agencies plan to address 
those practices on a case-by-case basis through supervisory and 
enforcement actions.

Supplemental Legal Basis for This Section of the OTS Final Rule

    As discussed above, HOLA provides authority for both safety and 
soundness and consumer protection regulations. Section 535.25 supports 
safety and soundness by reducing reputation risk that would occur from 
using unfair balance computation methods. Section 535.25 also protects 
consumers by providing them with fair balance computation methods on 
their account so that they do not pay additional interest due to the 
application of this balance computation method that testing shows few 
understand. Section 535.25 is consistent with the best practices of 
thrift institutions nationwide. Few institutions still use the two-
cycle balance computation method. Based on OTS supervisory observations 
and experience, no large savings associations are currently engaged in 
this practice. Consequently, HOLA serves as an independent basis for 
Sec.  535.25.

Section --.26--Unfair Charging of Security Deposits and Fees for the 
Issuance or Availability of Credit to Consumer Credit Card Accounts

    Summary. In the May 2008 Proposal, the Agencies proposed Sec.  
--.27(a), which would have prohibited institutions from charging to a 
consumer credit card account security deposits and fees for the 
issuance or availability of credit during the twelve months after the 
account is opened that, in the aggregate, constitute the majority of 
the credit limit for that account. The Agencies also proposed Sec.  
--.27(b), which would have prohibited institutions from charging to the 
account during the first billing cycle security deposits and fees for 
the issuance or availability of credit that total more than 25 percent 
of the credit limit and would have required that if security deposits 
and fees for the issuance or availability of credit total more than 25 
percent but less than the majority of the credit limit during the first 
year, the institution must spread that amount equally over the eleven 
billing cycles following the first billing cycle. Further, the Agencies 
proposed Sec.  --.27(c), which would have defined ``fees for the 
issuance or availability of credit.'' See 73 FR at 28925-28926.
    Based on the comments received and further analysis, the Agencies 
have revised proposed Sec.  --.27(a) for clarity and adopted that 
provision as Sec.  --.26(a).\144\ The Agencies have revised proposed 
Sec.  --.27(b) to permit security deposits and fees to be spread over 
no fewer than the first six months, rather than the first year (as 
proposed). This provision has been adopted as Sec.  --.26(b).\145\
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    \144\ As discussed above, the Agencies are not taking action on 
proposed Sec.  --.25 at this time. Accordingly, proposed Sec.  --.26 
and Sec.  --.27 have been adopted as Sec.  --.25 and Sec.  --.26, 
respectively.
    \145\ For purposes of this discussion, products that currently 
charge security deposits and fees for the issuance or availability 
of credit that exceed the amounts permitted by the final rule are 
referred to as ``high-fee subprime credit cards.''
---------------------------------------------------------------------------

    In Sec.  --.26(c), the Agencies have adopted a new provision 
prohibiting institutions from evading Sec. Sec.  --.26(a) and (b) by 
providing the consumer with additional credit to fund the payment of 
security deposits and fees for the issuance or availability of credit 
in excess of the amounts permitted by Sec. Sec.  --.26(a) and (b). The 
Agencies have also added definitions to proposed Sec.  --.27(c) and 
adopted that provision as Sec.  --.26(d).
    Background. Subprime credit cards often have substantial fees 
related to the issuance or availability of credit. For example, these 
cards may impose an annual fee and a monthly maintenance fee for the 
card. In other cases, a security deposit may be charged to the account. 
These cards may also impose multiple one-time fees when the consumer 
opens the card account, such as an application fee and a program fee. 
Those amounts are often billed to the consumer as part of the first 
periodic statement and substantially reduce the amount of credit that 
the consumer has available to make purchases or other transactions on 
the account. For example, some subprime credit card issuers assess $250 
in fees at account opening on accounts with credit limits of $300, 
leaving the consumer with only $50 of available credit with which to 
make purchases or other transactions. In addition, the consumer will 
pay interest on the $250 in fees until they are paid in full.
    The federal banking agencies have received many complaints from 
consumers with respect to subprime credit cards. Consumers often stated 
that they were not aware of how the high upfront fees would affect 
their ability to use the card for its intended purpose of engaging in 
transactions. In an effort to address these concerns, the Board's June 
2007 and May 2008 Regulation Z Proposals included several proposed 
amendments to the disclosure requirements for credit and charge cards 
(which have been adopted in a revised form elsewhere in today's Federal 
Register). Because, however, the Agencies were concerned that 
disclosure alone was insufficient to protect consumers from unfair 
practices regarding high-fee subprime credit cards, the May 2008 
Proposal contained additional, substantive protections.
    The Agencies received comments on the proposed rule from a wide 
range of interested parties. The proposal received strong support from 
consumer groups, several members of Congress, the FDIC, the OCC, two 
state attorneys general, and a state consumer protection agency. These 
commenters generally argued that high-fee subprime credit cards trap 
consumers with low incomes or poor credit histories, causing those 
consumers either to pay off the upfront fees by depleting their limited 
resources or to default and further damage their credit records. In 
particular, one consumer group stated that high-fee subprime credit 
cards are unfair because: (1) The upfront fees impose an overly high 
price for access to credit and significantly reduce available credit, 
leading consumers to exceed their credit limit and incur additional 
fees; (2) disclosures are insufficient because subprime consumers are 
particularly vulnerable to predatory marketing practices and may have 
limited educational or literacy skills; and (3) subprime consumers 
generally have limited incomes and therefore cannot pay the upfront 
fees within the grace period for the initial billing cycle, causing 
them to incur interest charges. Many of these commenters urged the 
Agencies to strengthen the proposed rule by, for example, lowering the 
thresholds for security deposits and fees, applying those thresholds to 
all security deposits and fees regardless of whether they are charged 
to the account, and prohibiting the marketing of subprime credit cards 
as credit repair products.
    Some industry commenters also expressed support for the proposed 
rule, stating that it was an appropriate use of the Agencies' 
rulemaking authority under the FTC Act. In contrast, other issuers who 
specialize in subprime credit cards strongly opposed the proposed rule. 
According to these commenters, the large upfront fees and

[[Page 5539]]

limited initial credit availability that characterize high-fee subprime 
credit cards are necessitated by the risk and expense of extending 
credit to consumers who pose a greater risk of default than prime 
consumers. They asserted that subprime credit card accounts have higher 
delinquencies, losses, reserve requirements, and servicing costs than 
prime credit card accounts.\146\ They further argued that, to the 
extent the proposal would prevent issuers from protecting themselves 
against the risk of loss, it would ultimately harm consumers because 
issuers would be forced to reduce credit access and increase the price 
of credit. They also asserted that high-fee subprime credit cards offer 
important benefits by providing credit cards to consumers who could not 
otherwise obtain them and by enabling consumers with limited or damaged 
credit records to build positive credit histories and qualify for prime 
credit. Finally, these commenters argued that any concerns regarding 
high-fee subprime credit cards should be addressed through improved 
disclosures, such as those proposed by the Board under Regulation Z.
---------------------------------------------------------------------------

    \146\ One subprime credit card issuer stated that approximately 
30% of its consumers charge off without paying all or part of the 
balance due. The same issuer stated that the delinquency rate for 
subprime credit card accounts is approximately 20% (versus 4-5% for 
prime accounts) and that reserve requirements for such accounts can 
be up to 56% of outstanding balances (versus as little as 8% for 
prime credit card issuers). Finally, this issuer stated that 
subprime consumers contact their issuers an average of once or twice 
a month (versus once per year for prime consumers).
---------------------------------------------------------------------------

    Subprime credit card issuers received support from some state and 
Congressional representatives. The Agencies also received comments from 
thousands of individual consumers, who explained that high-fee subprime 
credit cards were the only option available to them because of their 
credit problems. These consumers expressed concern that they might have 
fewer credit alternatives if the proposal were finalized. Finally, two 
advocacy organizations expressed concern that the proposed rule would 
result in reduced credit availability for low-income minority 
consumers.

Legal Analysis

    The Agencies conclude that, based on the comments received and 
their own analysis, it is an unfair act or practice under 15 U.S.C. 
45(n) and the standards articulated by the FTC to charge to a consumer 
credit card account security deposits or fees for the issuance or 
availability of credit that exceed the limits in the final rule.
    Substantial consumer injury. The Agencies conclude that consumers 
incur substantial monetary injury when security deposits and fees for 
the issuance or availability of credit are charged to a consumer credit 
card account, both in the form of the charges themselves and in the 
form of interest on those charges. Even in cases where the institution 
provides a grace period, many consumers will be unable to pay the 
charges in full during that grace period and will incur interest. 
Indeed, many consumers who use high fee subprime cards submitted 
comments explaining that they have very limited incomes. Moreover, a 
large issuer of subprime cards commented that, while it offers 
consumers the option of paying fees up front, most new cardholders do 
not do so. Thus, as consumer advocates noted in their comments, 
consumers who open a high-fee subprime credit card account are unlikely 
to be able to pay down the upfront charges quickly. In addition, when 
security deposits and fees for the issuance or availability of credit 
are charged to the consumer's account, they substantially diminish the 
value of that account by reducing the credit available to the consumer 
for purchases or other transactions.\147\
---------------------------------------------------------------------------

    \147\ See OCC Advisory Letter 2004-4, at 3 (Apr. 28, 2004) 
(stating that a finding of unfairness with respect to subprime cards 
with financed security deposits could be based on the fact that 
``because charges to the card by the issuer utilize all or 
substantially all of the nominal credit line assigned by the issuer, 
they eliminate the card utility and credit availability applied and 
paid for by the cardholder'') (available at http://www.occ.treas.gov/ftp/advisory/2004-4.txt).
---------------------------------------------------------------------------

    Injury is not reasonably avoidable. In May 2008, the Agencies 
stated that the Board's proposed disclosures under Regulation Z did not 
appear to be sufficient, by themselves, to allow consumers to 
reasonably avoid the injury caused by security deposits and fees that 
consume most of the available credit at account opening. Specifically, 
the Agencies expressed concern that high-fee subprime credit cards are 
typically marketed to financially vulnerable consumers with limited 
credit options and that these products have in the past been associated 
with deceptive sales practices. Although several industry commenters 
asserted that the disclosures in Regulation Z were sufficient to enable 
consumers to avoid any injury, the Agencies conclude, for the reasons 
discussed below, that consumers cannot, as a general matter, reasonably 
avoid the injury caused by high-fee subprime credit cards.
    In the May 2008 Proposal, the Agencies noted that high-fee subprime 
credit cards are typically marketed to vulnerable consumers whose 
credit histories or other characteristics prevent them from obtaining 
less expensive credit card products.\148\ In support of its Credit 
Practices Rule, the FTC suggested that, when most or all credit offers 
received by a consumer contain particular terms, those terms may not be 
reasonably avoidable.\149\ In addition, when evaluating whether a 
practice violates the FTC Act, the FTC has considered whether that 
practice targets consumers who are particularly vulnerable to unfair or 
deceptive practices.\150\ Similarly, states have used statutes and 
regulations prohibiting unfairness and deception to ensure that lenders 
do not ``exploit the lack of access of low-income individuals, the 
elderly, and communities of color to mainstream banking institutions.'' 
\151\
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    \148\ For a consumer who has sufficient funds, a secured credit 
card account is generally a more beneficial product than a high-fee 
subprime credit card. Secured credit cards generally require the 
consumer to provide a cash collateral deposit that is equal to the 
credit line for the account. For example, in order to obtain a 
credit line of $300, a consumer would be required to deposit $300 
with the lender. Generally, the consumer can receive the deposit 
back if the account is closed with no outstanding balance. In some 
cases, these deposits earn interest. See OTS Examination Handbook, 
Asset Quality, Section 218 Credit Card Lending at Sec.  218.3 (May 
2006). The final rule does not limit issuers' ability to offer 
secured credit cards. Indeed, by restricting the financing of 
security deposits and fees, the final rule may encourage issuers to 
expand secured credit card offerings.
    \149\ 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)).
    \150\ See FTC Trade Regulation Rule; Funeral Industry Practices, 
47 FR 42260, 42262 (Sept. 24, 1982) (stating finding by the FTC's 
Presiding Offer ``that the funeral transaction has several 
characteristics which place the consumer in a disadvantaged 
bargaining position * * *, leave the consumer vulnerable to unfair 
and deceptive practices, and cause consumers to have little 
knowledge of legal requirements [and] available alternatives. * * 
*''); In the Matter of Travel King, Inc., 86 F.T.C. 715 (Sept. 30, 
1975), paragraphs 7 and 8 (alleging that ``[p]eople who are 
seriously ill, and their families, are vulnerable to the influence 
of respondents' promotions [regarding `psychic surgery'] which held 
out tantalizing hope which the medical profession, by contrast, 
cannot offer'').
    \151\ United Companies Lending Corp. v. Sargeant, 20 F. Supp. 2d 
192, 203 (D. Mass. 1998) (upholding a state regulation that limited 
the rates and other terms of certain subprime mortgage loans in 
order to ``prevent[] lenders from exploiting the financial vacuum 
created by redlining'').
---------------------------------------------------------------------------

    In response to the proposed rule, the Agencies received thousands 
of comments from individual consumers who have used high-fee subprime 
credit cards. These consumers frequently stated that, due to their 
credit problems

[[Page 5540]]

and limited incomes, high-fee subprime credit cards were the only type 
of credit card that they could obtain. Many of these consumers 
described themselves as elderly, living on limited incomes, and/or 
having serious health problems. Accordingly, because high-fee subprime 
credit cards are marketed to financially vulnerable consumers who 
generally cannot obtain credit card products with less onerous terms, 
the Agencies conclude that--even with improved disclosures--those 
consumers cannot, as a general matter, reasonably avoid the injury 
caused by high upfront fees and low initial credit availability.
    As discussed in the May 2008 Proposal, this conclusion is further 
supported by the Agencies' concern that the Regulation Z disclosures 
could be undermined by deceptive sales practices. In addition to taking 
enforcement actions against issuers of high-fee subprime credit cards, 
the OCC has found as a general matter that ``solicitations and other 
marketing materials used for [high-fee subprime] credit card programs 
have not adequately informed consumers of the costs and other terms, 
risks, and limitations of the product being offered'' and that, ``[i]n 
a number of cases, disclosure problems associated with secured credit 
cards and related products have constituted deceptive practices under 
the applicable standards of the FTC Act.'' \152\ The Agencies believe 
that the amendments to Regulation Z published elsewhere in today's 
Federal Register will reduce the risk of deception in written 
solicitations. However, because of the vulnerable nature of subprime 
consumers and the history of deceptive practices by some subprime 
credit card issuers, the Agencies remain concerned that the required 
disclosures could be undermined by, for example, deceptive 
telemarketing practices.\153\
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    \152\ OCC Advisory Letter 2004-4, at 2-3 (emphasis in original); 
see also In re First Nat'l Bank in Brookings, No. 2003-1 (Dept. of 
the Treasury, OCC) (Jan. 17, 2003) (available at http://www.occ.treas.gov/ftp/eas/ea2003-1.pdf); In re First Nat'l Bank of 
Marin, No. 2001-97 (Dept. of the Treasury, OCC Dec. 3, 2001) 
(available at http://www.occ.treas.gov/ftp/eas/ea2001-97.pdf).
    \153\ See, e.g., People v. Applied Card Sys., Inc., 805 N.Y.S.2d 
175, 178 (App. Div. 2005) (finding that credit card marketing 
materials sent to consumers who were otherwise unable to qualify for 
credit ``did not represent an accurate estimation of a consumer's 
credit limit'' and that, ``at all times, it appeared that the 
confusion was purposely fostered by [the defendant's] 
telemarketers.'').
---------------------------------------------------------------------------

    Injury is not outweighed by countervailing benefits. In May 2008, 
the Agencies recognized that, in some cases, high-fee subprime credit 
cards can provide access to credit to consumers who are unable to 
obtain other credit card products. Nevertheless, the Agencies stated 
that, once security deposits and fees for the issuance or availability 
of credit consume a majority of the initial credit limit, the benefit 
to consumers from access to credit appeared to be outweighed by the 
high cost of paying for that credit. In order to minimize the impact on 
access to credit, the Agencies tailored the proposed rule to allow 
institutions to charge to the account security deposits and fees that 
total less than a majority of the credit limit during the first year 
and by allowing institutions to charge amounts totaling up to 25 
percent of the initial credit limit in the first billing cycle. In 
addition, the Agencies clarified that security deposits and fees paid 
from separate funds would not be affected by the proposal.
    In response, industry commenters who opposed the rule primarily 
relied on two arguments. First, they contended that, rather than 
increasing access to credit, the restrictions in the proposed rule 
would reduce or eliminate the availability of credit cards for subprime 
consumers. Specifically, they argued that the cost of extending credit 
to subprime consumers is substantially higher than the cost of 
extending credit to prime consumers and that the proposed rule would 
limit subprime issuers' ability to pass those higher costs on to 
consumers. In addition, they argued that the proposed restrictions on 
the amount of security deposits and fees that may be charged to the 
account in the first billing cycle will actually increase issuer costs 
because subprime issuers will be forced to make more credit available 
to consumers, which will increase their cost of funds, their reserve 
requirements, and their losses. As a result, they argued, subprime 
credit card issuers will be forced to reduce costs by substantially 
reducing the amount of credit extended to subprime consumers.
    The Agencies have carefully considered the arguments presented by 
these commenters but have concluded that, while the final rule may 
result in some subprime consumers who are currently eligible for high-
fee subprime credit cards not having access to a credit card, this 
outcome does not outweigh the benefits to subprime consumers generally 
of receiving credit cards that provide a meaningful amount of available 
credit. The Agencies recognize that credit cards enable consumers to 
engage in certain types of transactions, such as making purchases by 
telephone or online or renting a car or hotel room. As noted above, 
however, credit lines for subprime credit card accounts are typically 
very low, meaning that, once security deposits and fees have been 
charged to the account, consumers receive little available credit with 
which to make purchases until they pay off the deposits or fees. 
Currently, many subprime credit card issuers assess fees that consume 
75 percent or more of the credit line at account opening. Thus, on an 
account with a $400 credit limit, a consumer may pay $300 (plus 
interest charges) to obtain $100 of available credit. The benefit of 
receiving this relatively small amount of available credit does not 
outweigh its high cost.
    Some industry commenters suggested that, rather than focusing on 
the amount of available credit at account opening, the Agencies should 
consider the benefits to consumers who pay the upfront charges and then 
have access to the entire credit line. As an initial matter, these 
commenters did not provide information regarding how many consumers are 
able to obtain access to the entire credit line or how long it takes 
them to do so. Furthermore, as noted above, a large issuer of subprime 
cards indicated that few new cardholders choose not to finance the 
upfront fees, and many consumer commenters who use high fee subprime 
cards explained that they have limited incomes. Therefore, it is 
unlikely that consumers who open a high-fee subprime credit card 
account will be able to pay down the upfront charges quickly. Moreover, 
as noted above, consumers who have the resources to pay upfront charges 
may receive more economic benefit from using those resources to obtain 
secured credit card accounts instead of high-fee subprime credit cards.
    Accordingly, the Agencies conclude that, when security deposits and 
fees charged to a credit card account in the first year exceed the 
amount of credit extended at account opening, the injury caused by the 
charges outweighs the benefit to the consumer of receiving available 
credit. Similarly, the Agencies conclude that, in order to ensure that 
consumers receive a meaningful amount of available credit at account 
opening that outweighs the injury, security deposits and fees can 
consume no more than 25 percent of the available credit at account 
opening.\154\
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    \154\ Some issuers and members of Congress recommended that the 
Agencies endorse a ``Code of Fair Practices'' instead of finalizing 
the rule. These practices include enhanced disclosure, offering 
consumers the option to pay fees up front, not assessing interest on 
fees posted to the account, a commitment to report account payment 
experience to credit reporting agencies, and offering consumers the 
opportunity to cancel the card after receiving disclosures. Several 
of these ``best practices'' have essentially been codified by the 
Board's amendments to Regulation Z elsewhere in today's Federal 
Register. For example, creditors will be required to disclose the 
impact of security deposits and fees for the issuance or 
availability of credit on the amount of available credit the 
consumer will receive at account opening. See 12 CFR 226.5a(b)(14). 
In addition, the Board has clarified the circumstances under which a 
consumer who has received account-opening disclosures (but has not 
yet used the account or paid a fee) may reject the plan and not be 
obligated to pay upfront fees. See 12 CFR 226.5(b)(1)(iv). As 
discussed above, few consumers considering high fee subprime cards 
are likely to have the resources to pay the amount of fees currently 
assessed ``up front.'' Moreover, while the Agencies support accurate 
credit reporting, the rulemaking record discussed below indicates 
that the majority of high fee subprime cardholders do not improve 
their credit scores. Finally, while forbearance from charging 
interest on fees would provide some benefit to consumers, that 
benefit is outweighed by the harm that consumers experience from the 
high fees themselves.

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[[Page 5541]]

    Although these restrictions will require issuers of high-fee 
subprime credit cards to adjust their lending practices, the Agencies 
believe that the final rule provides sufficient flexibility for these 
issuers to continue offering credit cards to subprime consumers. 
Specifically, subprime issuers may charge to the account in the first 
year security deposits and fees totaling 50 percent of the initial 
credit limit and may charge half of that total at account opening.\155\ 
In addition, the Agencies have modified the proposal to permit issuers 
to spread deposits and fees that constitute more than 25 percent of the 
initial credit limit over the first six months rather than the first 
year. This change is intended to better enable issuers to limit the 
risk from the early default of new cardholders, but still ensure that 
consumers who obtain these cards have meaningful access to credit. 
Furthermore, although issuers are prohibited from evading the final 
rule by providing the consumer with additional credit to finance 
additional fees, the final rule does not limit issuers' ability to 
collect additional amounts if the consumer can obtain those funds 
independently.
---------------------------------------------------------------------------

    \155\ Notably, the final rule does not place any limit on the 
dollar amount of security deposits and fees that may be charged to 
the account. Instead, the amount of deposits and fees that an issuer 
may charge to the account is tied to the credit limit, which the 
issuer determines.
---------------------------------------------------------------------------

    The second argument raised by industry commenters was that high-fee 
subprime credit cards offer an opportunity for consumers with damaged 
or limited credit histories to build or repair their credit records and 
qualify for credit at prime rates. However, the data supplied by these 
commenters indicates that most users of high-fee subprime credit cards 
do not experience an increase in credit score. Specifically, a study of 
subprime accounts performed by TransUnion (one of the three nationwide 
consumer reporting agencies) indicates that, while approximately 37 
percent of consumers experienced an increase in credit score during the 
twelve months following the opening of a subprime credit card, the 
other 63 percent experienced a drop or no change in credit score.\156\ 
Similarly, a subprime credit card issuer stated that only 35 percent of 
consumers who receive its low limit credit cards improve their credit 
score within 24 months of account opening.\157\ The Agencies cannot 
verify the accuracy of this data, nor can the Agencies verify that the 
subset of consumers who did experience an increase in credit score did 
so as a result of the use of a subprime credit card and not due to 
other factors. Furthermore, even assuming for purposes of this 
discussion that the data are accurate, they indicate that most 
consumers who use subprime credit cards do not experience an increase 
in credit score. In fact, it appears that the majority of the consumers 
in the sample studied by TransUnion actually experienced a decrease in 
credit score within twelve months of opening a subprime credit card 
account.\158\
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    \156\ See TransUnion Summary of Results for CEAC Coalition 
(``TransUnion Summary'') at 4 (dated July 2008) (attached to comment 
letter from the Political and Economic Research Council (PERC) 
(dated Aug. 4, 2008)).
    \157\ This same issuer also stated that, on average, only 22.5% 
of these consumers receive a higher limit card within 24 months, 
which--it asserted--is higher than the industry average of 20%.
    \158\ See TransUnion Summary at 6.
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    Accordingly, for the reasons discussed above, the Agencies conclude 
that high-fee subprime credit cards do not produce benefits that 
outweigh the injury to consumers.
    Public policy. For purposes of the unfairness analysis, public 
policy is generally embodied in a statute, regulation, or judicial 
decision.\159\ In the May 2008 Proposal, however, the Agencies noted 
that the OCC has concluded in regulatory guidance that high-fee 
subprime credit card accounts increase the risk of default and 
therefore present concerns regarding the safety and soundness of 
financial institutions.\160\ To the extent that this guidance 
constitutes public policy, that policy weighs in favor of the 
restrictions in the final rule. The OCC's guidance does not, however, 
serve as a primary basis for the Agencies' unfairness determination.
---------------------------------------------------------------------------

    \159\ See, e.g., FTC Policy Statement on Unfairness at 5.
    \160\ See OCC Advisory Letter 2004-4, at 4 (``[P]roducts 
carrying fee structures that are significantly higher than the norm 
pose a greater risk of default. * * * This is particularly true when 
the security deposit and fees deplete the credit line so as to 
provide little or no card utility or credit availability upon 
issuance. In such circumstances, when the consumer has no separate 
funds at stake, and little or no consideration has been provided in 
exchange for the fees and other amounts charged to the consumer, the 
product may provide a disincentive for responsible credit behavior 
and adversely affect the consumer's credit standing.'')
---------------------------------------------------------------------------

Supplemental Legal Basis for This Section of the OTS Final Rule

    As discussed above, HOLA provides authority for both safety and 
soundness and consumer protection regulations. Section 535.26 supports 
safety and soundness. The commenters described very high credit risks 
associated with high-fee subprime credit cards. One estimated that at 
least one-third of new high fee cardholders default and over 75 percent 
of them default immediately, upon using 97 percent of their available 
credit, paying no fees, and repaying no principal. The TransUnion study 
also found that about 60 percent of subprime cardholders experience a 
drop in their VantageScore, which suggests a continuing inability to 
pay these obligations. Section 535.26 provides issuers with an 
incentive to employ better underwriting in order to target customers 
who are less likely to default. Consequently, it fosters the safe and 
sound operation of the institutions that offer these products.
    In this vein, it should be noted that the federal banking agencies 
have agreed that subprime lending that is appropriately underwritten, 
priced and administered can serve the goals of enhancing credit access 
for borrowers with blemished credit histories.\161\ However, OTS has 
made it clear that credit card issuers under its jurisdiction must have 
well-defined credit approval criteria to ensure that underwriting 
standards are appropriately and uniformly followed.\162\ OTS advises 
all of its institutions that whether they use a judgmental process, an 
automated scoring system, or a combination of both to make the credit 
decision, it is important to have well-defined credit approval criteria 
to ensure that underwriting standards are appropriately and uniformly 
followed.\163\ Appropriate underwriting should reduce the costs of 
default for issuers and consumers with subprime credit histories.
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    \161\ Interagency Expanded Guidance for Subprime Lending 
Programs (Feb. 2, 2001).
    \162\ OTS Examination Handbook, Asset Quality, Section 218 
Credit Card Lending, at Sec.  218.5 (May 2006).
    \163\ Id.
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    Moreover, as noted above, subprime cardholders now receive little 
usable credit due to the current market practice of charging fees for 
the issuance of credit in amounts that substantially

[[Page 5542]]

exhaust the line. Section 535.26 should alleviate some of the negative 
consequences associated with this practice, including the creation of 
unmanageable debt that consumers cannot repay. In particular, requiring 
issuers to spread the payment of a portion of account opening fees over 
a number of billing cycles should increase the likelihood that 
borrowers can repay them. It is therefore consistent with guidance 
issued by the federal banking agencies on the management of credit card 
lending.\164\ It is also consistent with guidance issued by the 
OTS.\165\
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    \164\ See Interagency Guidance, Credit Card Lending, Account 
Management and Loss Allowance Guidance, OTS, Examination Handbook, 
Asset Quality, Credit Card Lending, Appendix A.
    \165\ OTS Examination Handbook, Asset Quality, Section 218 
Credit Card Lending, p. 218.10 (May 2006). Notably, OTS has 
recognized the risks to safety and soundness of subprime lending by 
requiring more intensive risk management and capital for 
institutions that engage in subprime lending. Id. at Sec.  218.4. 
These risks are particularly pronounced in the current economic 
environment, in which credit card charge-offs have increased. See 
Federal Reserve Board Statistical Release, Charge-off and 
Delinquency Rates, 3rd Q 2008 (available at: http://www.federalreserve.gov/releases/chargeoff/chgallsa.htm).
---------------------------------------------------------------------------

    Given the high default rate and the unsecured nature of credit card 
lending, OTS concludes that it is not a safe and sound practice for 
savings associations to offer consumer credit cards that charge 
security deposits and fees that do not comply with Sec.  535.26.
    With regard to consumer protection, Sec.  535.26 is consistent with 
regulating savings associations in a manner that protects consumers and 
gives due consideration to best practices of thrift institutions 
nationwide. As a result of this provision, consumers will be protected 
from excessive security deposits and fees for the issuance or 
availability of credit that diminish the value of the account by 
reducing the credit available to the consumer for purchases or other 
transactions. They will also be protected from incurring excessive cost 
for credit cards that provide access to a very small amount of credit. 
Issuers will have less incentive to make unsubstantiated claims that 
these products facilitate credit repair. These benefits are 
particularly important when it is recognized that the consumers most 
likely to receive the protections provided by Sec.  535.26 are those 
who are the most vulnerable, including people who are elderly, live on 
limited incomes, have serious health problems, or live with a 
combination of these circumstances. Among OTS-supervised institutions, 
cards that do not comply with the restrictions in Sec.  535.26 are 
rare. In fact, based on OTS supervisory observations and experience, 
only two savings associations currently offer such cards and those 
products are a small part of their business.
    Consequently, HOLA serves as an independent basis for Sec.  535.26.

Final Rule

    As discussed above, the Agencies have redesignated proposed Sec.  
--.27 as Sec.  --.26. The proposed commentary has been revised 
accordingly. In addition, the title of this section has been revised 
for clarity.
Section --.26(a) Limitation for First Year
    Proposed Sec.  --.27(a) would have prohibited institutions from 
charging to the account security deposits and fees for the issuance or 
availability of credit during the twelve months following account 
opening if, in the aggregate, those fees constitute a majority of the 
initial credit limit. The Agencies have revised this paragraph of the 
proposed rule for clarity and adopted it as Sec.  --.26(a).
    Proposed comment 27(a)-1 clarified that the total amount of 
security deposits and fees for the issuance or availability of credit 
constitutes a majority of the initial credit limit if that total is 
greater than half of the limit and provided an example. The Agencies 
adopt this comment as comment 26(a)-1.
    Proposed Sec.  --.27(b) would have prohibited institutions from 
charging to the account during the first billing cycle security 
deposits and fees for the issuance or availability of credit that, in 
the aggregate, constitute more than 25 percent of the initial credit 
limit. It would have further required that any additional security 
deposits and fees be spread equally among the eleven billing cycles 
following the first billing cycle. Proposed comment 27(b)-1 clarified 
that, when dividing amounts pursuant to Sec.  --.27(b)(2), the 
institution may adjust amounts by one dollar or less. Proposed comment 
27(b)-2 provided an example of the application of the rule.
    As discussed above, the Agencies have adopted Sec.  --.27(b) as 
Sec.  --.26(b) with modifications. The final rule provides that 
security deposits and fees that constitute more than 25 percent of the 
initial credit limit be charged to the account in equal portions in no 
fewer than the five billing cycles immediately following the first 
billing cycle. Institutions that wish to spread these deposits and fees 
over a longer period may do so. This change is intended to better 
enable issuers to limit the risk of early default by new cardholders, 
but still ensure that consumers who obtain these cards have meaningful 
access to credit. The Agencies have revised proposed comments 27(b)-1 
and 27(b)-2 for consistency with the final rule and adopted those 
comments as 26(b)-1 and 26(b)-2, respectively.
Section --.26(c) Evasion Prohibited
    As discussed above, some consumer groups expressed concern that 
institutions could evade the proposed rule by requiring consumers to 
pay security deposits and fees for the issuance or availability of 
credit from separate funds. Although the Agencies generally do not 
intend the final rule to apply to amounts that are not charged to the 
account (such as deposits for secured credit cards), the Agencies 
conclude that Sec.  --.26 would provide little effective protection 
against the unfair assessment of security deposits and fees if 
institutions could evade its requirements by providing the consumer 
with additional credit to fund the payment of security deposits and 
fees for the issuance or availability of credit that exceed the total 
amounts permitted by Sec.  --.26(a) and (b). Accordingly, the Agencies 
have adopted Sec.  --.26(c), which prohibits this practice. The 
Agencies have also adopted comment 26(c)-1 (which provides an example 
of the application of the rule) and comment 26(c)-2 (which clarifies 
that an institution does not violate Sec.  --.26(c) if it requires the 
consumer to pay security deposits or fees for the issuance or 
availability of credit using funds that are not obtained, directly or 
indirectly, from the institution).
Section --.26(d) Definitions
    Proposed Sec.  --.27(c) would have defined ``fees for the issuance 
or availability of credit'' as including any annual or other periodic 
fee, any fee based on account activity or inactivity, and any non-
periodic fee that relates to opening an account. This definition is 
based on the definition of ``fees for the issuance or availability of 
credit'' in 12 CFR 226.5a(b)(2), published by the Board elsewhere in 
today's Federal Register. This definition does not include fees such as 
late fees or fees for exceeding the credit limit. In order to provide 
additional clarity, the Agencies have added definitions of other terms 
used in the rule and have adopted those definitions in Sec.  --.26(d). 
Specifically, the Agencies have moved the definition of ``initial 
credit limit'' in proposed comment 27-1 into the text of the regulation 
and added definitions clarifying the meaning of the terms ``first 
billing cycle'' and ``first year.''
    Proposed comments 27(c)-1, -2, and -3 clarified the meaning of 
``fees for the

[[Page 5543]]

issuance or availability of credit.'' These comments were based on 
similar commentary to 12 CFR 226.5a(b)(2), which was proposed by the 
Board with its June 2007 Regulation Z Proposal. The Agencies have 
revised the proposed commentary to Sec.  --.26(d) for consistency with 
the final Regulation Z commentary published by the Board elsewhere in 
today's Federal Register. Specifically, proposed comment 27(c)-2 has 
been revised to clarify that fees for providing additional cards to 
primary cardholders (as opposed to authorized users) are fees for the 
issuance or availability of credit. Otherwise, these comments are 
redesignated as comments 26(d)-1, -2, and -3 and adopted as proposed.

Other Issues

    Implementation. As discussed in section VII of this SUPPLEMENTARY 
INFORMATION, the effective date for Sec.  --.26 is July 1, 2010. 
Although the Agencies particularly encourage institutions to use their 
best efforts to conform their practices to this section of the final 
rule sooner, institutions are not prohibited from charging security 
deposits and fees for the issuance or availability that do not comply 
with Sec.  --.26 until the effective date. These provisions do not 
affect security deposits and fees charged to consumer credit card 
accounts prior to that date, even if some or all of the security 
deposits and fees have not been paid in full as of the effective date.
    Advertising. Based on the record in this rulemaking, the Agencies 
are not persuaded that, as a general matter, high-fee subprime credit 
cards provide meaningful benefits to consumers as credit repair tools. 
Notably, institutions that make marketing claims regarding the use of 
subprime credit cards as a means to improve credit scores risk 
violating the FTC Act's prohibition on deception if they cannot 
substantiate their claims.\166\ Savings associations that cannot do so 
are also at risk of violating the OTS rule against making inaccurate 
representations in advertising.\167\
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    \166\ See FTC Policy Statement Regarding Advertising 
Substantiation, 49 FR 30999 (Aug. 2, 1984); see also FTC v. QT, 
Inc., 448 F. Supp. 2d. 908, 959-960 (N.D. Ill. 2006) (substantiation 
policy used in federal litigation as guidance for the court), aff'd, 
512 F.3d 858 (7th Cir. 2008).
    \167\ See 12 CFR 563.27.
---------------------------------------------------------------------------

Other Proposals

Proposed Sec.  --.25--Unfair Acts or Practices Regarding Fees for 
Exceeding the Credit Limit Caused by Credit Holds
    Summary. In May 2008, the Agencies proposed Sec.  --.25, which 
would have prohibited institutions from assessing a fee or charge for 
exceeding the credit limit on a consumer credit card account if the 
credit limit would not have been exceeded but for a hold placed on any 
portion of the available credit on the account that is in excess of the 
actual purchase or transaction amount. See 73 FR 28921-28922. The 
Agencies intended this provision to parallel proposed Sec.  --.32(b), 
which would have imposed identical restrictions with respect to holds 
placed on available funds in a deposit account as a result of a debit 
card transaction. See id. at 28931-32892. As discussed below, the 
Agencies are not taking action on debit holds or credit holds at this 
time.
    Background. Although the Board's June 2007 Regulation Z Proposal 
did not directly address over-the-credit-limit (OCL) fees, the Board 
received comments from consumers, consumer groups, and members of 
Congress expressing concern about the penalties imposed by creditors 
for exceeding the credit limit. Specifically, commenters were concerned 
that consumers may unknowingly exceed their credit limit and incur 
significant rate increases and fees as a result.
    As discussed in the May 2008 Proposal, the Agencies believed these 
concerns were addressed by proposed Sec.  --.24 to the extent that it 
prohibited institutions from applying increased rates to outstanding 
balances as a penalty for exceeding the credit limit. The Agencies were 
concerned, however, about the imposition of OCL fees in connection with 
credit holds. As further discussed below in section VI of this 
SUPPLEMENTARY INFORMATION, some merchants place a temporary ``hold'' on 
an account when a consumer uses a credit or debit card for a 
transaction in which the actual purchase amount is not known at the 
time the transaction is authorized. For example, when a consumer uses a 
credit card to obtain a hotel room, the hotel often will not know the 
total amount of the transaction at the time because that amount may 
depend on, for example, the number of days the consumer stays at the 
hotel or the charges for incidental services the hotel may provide to 
the consumer during the stay (such as room service). Therefore, the 
hotel may place a hold on the available credit on the consumer's 
account in an amount sufficient to cover the expected length of the 
stay plus an additional amount for potential purchases of incidentals. 
In these circumstances, the institution may authorize the hold but the 
final amount of the transaction will not be known until the hotel 
submits the actual purchase amount for settlement.
    Typically, the hold is kept in place until the transaction amount 
is presented to the institution for payment and settled, which may take 
place a few days after the original authorization. During this time 
between authorization and settlement, the hold may remain in place on 
the consumer's account. As discussed in the May 2008 Proposal, the 
Agencies were concerned that consumers who were unfamiliar with credit 
hold practices might inadvertently exceed the credit limit and incur an 
OCL fee because they assumed that the available credit was reduced only 
by the actual amount of the purchase.
    Comments received. Industry commenters stated that credit holds do 
not typically reduce the amount of available credit on a consumer 
credit card account (in contrast to debit holds, which do reduce the 
amount of available funds in a deposit account). Some stated that, for 
this reason, they did not object to the proposed rule, while others 
argued that--to the extent the provision would require any changes to 
issuers' systems--it would be unnecessarily burdensome because credit 
holds are very unlikely to result in OCL fees.
    The proposed rule was supported by consumer groups, members of 
Congress, the FDIC, state attorneys general, and state consumer 
protection agencies, although these commenters generally argued that 
the final rule should go further in addressing the harm caused by OCL 
fees. Some of these commenters argued that exceeding the credit limit 
should not be a basis for loss of a promotional rate under proposed 
Sec.  --.24(b)(2). As discussed above with respect to Sec.  --.24, the 
Agencies agree and the final version of Sec.  --.24(b)(2) does not 
permit this practice.
    In addition, some of these commenters argued that institutions that 
reduce the credit limit on a consumer credit card account should be 
prohibited from penalizing consumers for exceeding that reduced limit. 
The Agencies believe that these concerns are addressed by the Board's 
revisions to Regulation Z, published elsewhere in today's Federal 
Register. Specifically, 12 CFR 226.9(c)(2)(v) provides that, if a 
creditor decreases the credit limit on an account, notice of the 
decrease must be provided at least 45 days before an OCL fee or a 
penalty rate can be imposed solely as a result of the consumer 
exceeding the newly-decreased limit.
    These commenters also urged the Agencies to take a variety of other 
actions with respect to OCL fees, including prohibiting OCL fees unless 
the account is over the credit limit at the

[[Page 5544]]

end of the billing cycle, prohibiting OCL fees when the institution 
approved the transaction that put the account over the credit limit (or 
allowing consumers to direct institutions not to honor such 
transactions), prohibiting OCL fees when interest charges or other fees 
placed the account over the credit limit, prohibiting multiple OCL fees 
based on a single transaction, and prohibiting OCL fees that are not 
reasonably related to the institution's cost. The Agencies, however, 
believe that the protections provided elsewhere in Regulation Z and in 
this final rule--particularly the prohibition on repricing existing 
balances as a penalty for exceeding the credit limit--provide 
substantial protections for consumers who exceed their credit limit.
    Conclusion. The Agencies are not taking action on credit holds or 
debit holds at this time. As discussed below in section VI of this 
SUPPLEMENTARY INFORMATION, the Board has published proposed amendments 
to Regulation E addressing debit holds elsewhere in today's Federal 
Register. The Agencies will review information obtained through that 
rulemaking to determine whether to take further action. In addition, to 
the extent that specific practices involving debit or credit holds 
raise concerns regarding unfairness or deception under the FTC Act, the 
Agencies plan to address those practices on a case-by-case basis 
through supervisory and enforcement actions.
Proposed Sec.  --.28--Deceptive Acts or Practices Regarding Firm Offers 
of Credit
    Summary. In May 2008, the Agencies proposed Sec.  --.28 to address 
circumstances in which institutions make firm offers of credit for 
consumer credit card accounts that contain a range of or multiple 
annual percentage rates or credit limits because such offers appeared 
to be deceptive. See 72 FR at 28925-28927. When the rate or credit 
limit that a consumer responding to such an offer will receive depends 
on specific criteria bearing on creditworthiness, proposed Sec.  --.28 
would have required that the institution disclose the types of 
eligibility criteria in the solicitation. An institution would have 
been permitted to use the following disclosure to meet these 
requirements: ``If you are approved for credit, your annual percentage 
rate and/or credit limit will depend on your credit history, income, 
and debts.'' Based on the comments and further analysis, the Agencies 
have concluded that concerns regarding firm offers of credit containing 
a range of or multiple annual percentage rates are adequately addressed 
by provisions of Regulation Z published by the Board elsewhere in 
today's Federal Register. Accordingly, as discussed below, the Agencies 
are not taking action on this issue at this time.
    Background. The Fair Credit Reporting Act (FCRA) limits the 
purposes for which consumer reports can be obtained. It permits 
consumer reporting agencies to furnish consumer reports only for one of 
the ``permissible purposes'' enumerated in the statute.\168\ One of the 
permissible purposes set forth in the FCRA relates to prescreened firm 
offers of credit or insurance.\169\ In a typical use of prescreening 
for firm offers of credit, a creditor submits a request to a consumer 
reporting agency for the contact information of consumers meeting 
certain pre-established criteria, such as credit scores or a lack of 
serious delinquencies. The creditor then sends offers of credit 
targeted to those consumers, which state certain terms under which 
credit may be provided. For example, a firm offer of credit may contain 
statements regarding the annual percentage rate or credit limit that 
may be provided.
---------------------------------------------------------------------------

    \168\ See 15 U.S.C. 1681b. Similarly, persons obtaining consumer 
reports may do so only with a permissible purpose. See 15 U.S.C. 
1681b(f).
    \169\ See 15 U.S.C. 1681b(c); see also 15 U.S.C. 1681a(l) 
(defining ``firm offer of credit or insurance'').
---------------------------------------------------------------------------

    The FCRA requires that a firm offer of credit state, among other 
things, that (1) information contained in the consumer's credit report 
was used in connection with the transaction; (2) the consumer received 
the firm offer because the consumer satisfied the criteria for 
creditworthiness under which the consumer was selected for the offer; 
and (3) if applicable, the credit may not be extended if, after the 
consumer responds to the offer, the consumer does not meet the criteria 
used to select the consumer for the offer or any other applicable 
criteria bearing on creditworthiness or does not furnish any required 
collateral.\170\ The creditor may apply certain additional criteria to 
evaluate applications from consumers that respond to the offer, such as 
the consumer's income.\171\
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    \170\ See 15 U.S.C. 1681m(d)(1); see also 16 CFR 642.1-642.4 
(Prescreen Opt-Out Notice Rule).
    \171\ See, e.g., 15 U.S.C. 1681a(l).
---------------------------------------------------------------------------

    As discussed in the May 2008 Proposal, the Agencies were concerned 
that, because firm offers of credit often state that consumers have 
been ``pre-selected'' for credit or make similar statements, consumers 
receiving such offers may not understand that they are not necessarily 
eligible for the lowest annual percentage rate and the highest credit 
limit stated in the offer. Thus, in the absence of an affirmative 
statement to the contrary, consumers could reasonably believe that they 
could receive the lowest annual percentage rate and highest credit 
limit stated in the offer even though that is not the case. 
Accordingly, the Agencies proposed Sec.  --.28.
    Comments received. Proposed Sec.  --.28 was supported by some 
industry commenters as well as some members of Congress, the FDIC, and 
state attorneys general. Other industry commenters argued that the 
Agencies' concerns regarding firm offers of credit were more 
appropriately addressed under Regulation Z or the FCRA. Consumer 
groups, some members of Congress, and a state consumer protection 
agency criticized the proposed disclosure as ineffective and requested 
that the Agencies take more substantive action, such as prohibiting 
institutions from making firm offers of credit that do not state a 
specific annual percentage rate or credit limit or making firm offers 
of credit to consumers who are not eligible for the best terms stated 
in the offer.
    Conclusion. The Agencies believe that the Board's final rules under 
Regulation Z (published elsewhere in today's Federal Register) 
adequately address their concerns regarding firm offers of credit that 
contain a range of or multiple annual percentage rates. Specifically, 
the Board has adopted 12 CFR 226.5a(b)(1)(v) to address circumstances 
in which a creditor is unable to state in a solicitation the exact rate 
all consumers who respond to the solicitation will receive because that 
rate depends on a subsequent evaluation of the consumer's 
creditworthiness. This provision generally requires the creditor to 
disclose in the Schumer Box provided with credit card solicitations 
(including firm offers of credit) the specific rates or the range of 
rates that could apply and to state that the rate for which the 
consumer may qualify at account opening will depend on the consumer's 
creditworthiness and other factors (if applicable).
    After conducting consumer testing, the Board has also provided 
model forms that can be used to disclose multiple rates or a range of 
rates. See App. G to 12 CFR 226, Samples G-10(B) and G-10(C). In this 
testing, almost all participants understood that, when multiple rates 
or a range of rates were provided in the Schumer Box, it meant that the 
consumer's initial annual percentage rate would be determined among 
those rates or within that range based on the consumer's credit history 
and credit score. Accordingly, the Agencies believe that 12 CFR

[[Page 5545]]

226.5a(b)(1)(v) adequately addresses concerns that consumers will be 
misled when firm offers state multiple or a range of annual percentage 
rates.
    Similarly, although Regulation Z does not require disclosure of the 
credit limit in the Schumer Box, the Board's consumer testing indicates 
that consumers are not misled by solicitations stating multiple credit 
limits or a range of credit limits. Specifically, when a solicitation 
did not state a specific credit limit, almost all participants 
understood that the credit limit for which they would qualify depended 
on their creditworthiness. In addition, when looking at statements that 
the initial credit limit would be ``up to $2,500,'' most participants 
understood that the limit they would receive might be lower than 
$2,500.\172\
---------------------------------------------------------------------------

    \172\ In the May 2008 Proposal, the Agencies noted that prior 
consumer testing by the Board indicated that consumers who read 
solicitations that did not state a specific credit limit generally 
understood that the limit they would receive depended on their 
creditworthiness. This testing did not, however, specifically focus 
on firm offers of credit that contain statements that the consumer 
has been selected for the offer. Accordingly, after the May 2008 
Proposal, the Board conducted additional testing using such an 
offer, which produced similar results.
---------------------------------------------------------------------------

    Accordingly, the Agencies are not taking action regarding firm 
offers of credit at this time. To the extent that specific practices 
regarding firm offers of credit raise concerns regarding unfairness or 
deception under the FTC Act, the Agencies plan to address those 
practices on a case-by-case basis through supervisory and enforcement 
actions. Further, to the extent that individual consumers do not wish 
to receive firm offers of credit, they can elect to be excluded from 
firm offer lists.\173\
---------------------------------------------------------------------------

    \173\ 12 U.S.C. 1681b(e).
---------------------------------------------------------------------------

VI. Proposed Subpart Regarding Overdraft Services

Background

    Historically, if a consumer attempted to engage in a transaction 
that would overdraw his or her deposit account, the consumer's 
depository institution used its discretion on an ad hoc basis to 
determine whether to pay the overdraft. If an overdraft was paid, the 
institution usually imposed a fee on the consumer's account. In recent 
years, many institutions have largely automated the overdraft payment 
process. Automation is used to apply specific criteria for determining 
whether to honor overdrafts and set limits on the amount of the 
coverage provided.
    Overdraft services vary among institutions but often share certain 
common characteristics. In general, consumers who meet the 
institution's criteria are automatically enrolled in overdraft 
services.\174\ While institutions generally do not underwrite on an 
individual account basis when enrolling the consumer in the service, 
most institutions will review individual accounts periodically to 
determine whether the consumer continues to qualify for the service, 
and the amounts that may be covered. Most institutions disclose to 
consumers that the payment of overdrafts is discretionary, and that the 
institution has no legal obligation to pay any overdraft.
---------------------------------------------------------------------------

    \174\ These criteria may include whether the account has been 
open a certain number of days, whether the account is in ``good 
standing,'' and whether deposits are regularly made to the account.
---------------------------------------------------------------------------

    In the past, institutions generally provided overdraft coverage 
only for check transactions. In recent years, however, the service has 
been extended to cover overdrafts resulting from non-check 
transactions, including withdrawals at ATMs, automated clearinghouse 
(ACH) transactions, debit card transactions at point-of-sale (POS), 
pre-authorized automatic debits from a consumer's account, telephone-
initiated funds transfers, and online banking transactions.\175\
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    \175\ According to the FDIC's Study of Bank Overdraft Programs 
(FDIC Study), nearly 70 percent of banks surveyed implemented their 
automated overdraft program after 2001. In addition, 81 percent of 
banks surveyed that operate automated programs allow overdrafts to 
be paid at ATMs and POS debit card terminals. See FDIC Study of Bank 
Overdraft Programs 8, 10 (Nov. 2008) (hereinafter, FDIC Study) 
(available at: http://www.fdic.gov/bank/analytical/overdraft/FDIC138_Report_FinalTOC.pdf). See also Overdraft Protection: Fair 
Practices for Consumers: Hearing before the House Subcomm. on 
Financial Institutions and Consumer Credit, House Comm. on Financial 
Services, 110th Cong., at 72 (2007) (hereinafter, Overdraft 
Protection Hearing) (available at http://www.house.gov/apps/list/hearing/financialsvcs_dem/hr0705072.shtml) (stating that as 
recently as 2004, 80 percent of banks still declined ATM and debit 
card transactions without charging a fee when account holders did 
not have sufficient funds in their account).
---------------------------------------------------------------------------

    Institutions charge a flat fee each time an overdraft is paid, 
regardless of the amount of the overdraft. Institutions commonly charge 
the same amount for paying the overdraft as they would if they returned 
the item unpaid.\176\ A daily fee also may apply for each day the 
account remains overdrawn.
---------------------------------------------------------------------------

    \176\ See Bank Fees: Federal Banking Regulators Could Better 
Ensure That Consumers Have Required Disclosure Documents Prior to 
Opening Checking or Savings Accounts, GAO Report 08-281, at 14 (Jan. 
2008) (reporting that the average cost of overdraft and insufficient 
funds fees was just over $26 per item in 2007). See also Bankrate 
2008 Checking Account Study, posted October 27, 2008 (available at: 
http://www.bankrate.com/brm/news/chk/chkstudy/20081027-bounced-check-fees-a1.asp?caret=2) (reporting an average overdraft fee of 
approximately $29 per item).
---------------------------------------------------------------------------

    In the May 2008 Proposal, the Agencies proposed to establish a new 
Subpart D to their respective FTC Act regulations which would adopt 
rules prohibiting specific unfair acts or practices with respect to 
overdraft services. One provision (discussed in more detail below) 
would have prohibited institutions from assessing any fees on a 
consumer's account in connection with an overdraft service, unless the 
consumer is given notice and a reasonable opportunity to opt out of the 
service, and the consumer does not opt out.\177\ The Agencies also 
proposed to prohibit institutions from assessing an overdraft fee where 
the overdraft would not have occurred but for a hold placed on funds 
that exceeds the actual purchase or transaction amount.
---------------------------------------------------------------------------

    \177\ As noted above, the Board also separately published a 
proposal under its authority under TISA and Regulation DD setting 
forth requirements regarding the form, content and timing for the 
opt-out notice. 73 FR 28739 (May 19, 2008).
---------------------------------------------------------------------------

    Based on the comments received and further analysis, the Agencies 
are not taking action regarding overdraft services or debit holds at 
this time. As noted above, the Board has proposed rules regarding 
overdraft services under Regulation E elsewhere in today's Federal 
Register.\178\ The Agencies will review information obtained during 
that rulemaking to determine whether to take further action.
---------------------------------------------------------------------------

    \178\ The proposed provisions under Regulation DD regarding the 
form, content and timing of delivery for the opt-out notice are not 
included in that final rule, but instead are included with certain 
revisions in the Regulation E proposal. Both rulemakings are 
published elsewhere in today's Federal Register.
---------------------------------------------------------------------------

A. Proposed Section --.32(a)--Consumer Right To Opt Out

    The Agencies proposed in Sec.  --.32(a) to prohibit institutions 
from assessing any fees on a consumer's account in connection with an 
overdraft service, unless the consumer is given notice and a reasonable 
opportunity to opt out of the service, and the consumer does not opt 
out. The proposed opt-out right would have applied to overdrafts 
resulting from all methods of payment, including check, ACH 
transactions, ATM withdrawals and debit card transactions (full opt-
out). In addition, the proposal would have required institutions to 
provide consumers with the option of opting out of only those 
overdrafts resulting from ATM withdrawals and debit card transactions 
at POS (partial opt-out). In a separate proposal under TISA and 
Regulation DD, the Board proposed additional amendments regarding the 
form, content, and timing requirements for the opt-out notice.

[[Page 5546]]

    Comments received. The Agencies received approximately 1,500 
comment letters on the overdraft services portion of the May 2008 
Proposal. Banks, savings associations, credit unions, and industry 
trade associations, generally, but not uniformly, opposed the proposed 
requirement to provide consumers with the right to opt out of an 
institution's payment of overdrafts. Industry commenters stated that 
the cost of complying with the rule would far exceed any consumer 
benefits. Rather than causing consumer harm, industry commenters 
asserted that overdraft services provide consumers substantial 
benefits, particularly with respect to check transactions. These 
industry commenters observed that the payment of overdrafts for checks 
enables consumers to avoid more significant injuries, such as merchant 
fees, negative credit reports, and violations of bad check laws. 
Industry commenters and the OCC stated that if the opt-out right 
applied to check transactions, more checks would be returned unpaid. 
Industry commenters and the OCC also noted a potential unintended 
consequence of the rule could be that institutions would lengthen their 
availability schedules to the extent permitted by the Board's 
Regulation CC, 12 CFR Part 229, to ensure that a deposited check was 
written on good funds. As a result, consumers would have to wait longer 
than they do today before gaining access to deposited funds.
    Industry commenters also raised a number of operational concerns 
regarding the proposed partial opt-out for ATM and POS transactions. 
These commenters noted that most systems may not be able to 
differentiate POS debit card transactions from other types of debit 
card transactions. Some industry commenters, however, argued that the 
opt-out should be limited to ATM withdrawals and debit card 
transactions. These commenters stated that the majority of consumer 
complaints about overdraft fees arise in connection with debit card 
purchases in which the amount of the overdraft fee is significantly 
higher than the amount of the overdraft.
    Finally, industry commenters believed that it was inappropriate to 
address overdraft practices under the Agencies' FTC Act authority. In 
particular, industry commenters disputed the suggestion that overdraft 
services were unfair in light of the consumer benefits when overdrafts 
are paid, such as the avoidance of merchant fees. Industry commenters 
also argued that consumers could reasonably avoid overdraft fees even 
without being given an opportunity to opt out by properly managing 
their accounts. Lastly, industry commenters noted that the federal 
banking agencies have not previously indicated that institutions' 
payment of overdrafts pursuant to non-promoted overdraft services raise 
significant supervisory concerns, and asserted that the Agencies' 
proposal would subject institutions to potential litigation risks. 
Accordingly, many industry commenters recommended that the Board 
address any concerns about overdraft services under other regulatory 
authority, such as Regulation E and Regulation DD.
    Consumer groups, members of Congress, the FDIC, individual 
consumers, and others supported the Agencies' proposal to prohibit 
institutions from assessing fees for overdraft services, unless the 
consumer is given notice and the opportunity to opt out. However, most 
of these commenters argued that the rule should instead require 
institutions to obtain the consumer's affirmative consent (that is, 
opt-in) before overdrafts could be paid and fees assessed. These 
commenters also stated that overdrafts are extensions of credit and 
should be subject to Regulation Z. Specifically, they asserted that 
institutions should be required to disclose the cost of an overdraft 
service as an annual percentage rate to allow consumers to compare 
those costs with other forms of credit.
    Consumer testing. The Agencies noted in the May 2008 Proposal that, 
as part of the rulemaking process, the Board would conduct consumer 
testing on a proposed opt-out form (set forth in the accompanying May 
2008 Regulation DD Proposal) to ensure that the notice can be easily 
understood by consumers. After considering the comments received in 
response to both proposals, Board staff worked with a testing 
consultant, Macro International (Macro), to revise the proposed model 
form and to create a short-form opt-out notice that would appear on the 
periodic statement. In September 2008, Macro conducted two rounds of 
one-on-one interviews with a diverse group of consumers.
    In general, after reviewing the model disclosures, testing 
participants generally understood the concept of overdraft coverage, 
and that they would be charged fees if their institution paid their 
overdrafts. Participants also appeared to understand that if they opted 
out of overdraft coverage, this meant their checks would not be paid 
and they could be charged fees by both their institution and by the 
merchant.\179\
---------------------------------------------------------------------------

    \179\ See Review and Testing of Overdraft Notices, Macro 
International (Dec. 8, 2008).
---------------------------------------------------------------------------

    During the first round of testing, Macro tested an opt-out form 
that allowed consumers to opt out of the payment of overdrafts for all 
transaction types, including checks and recurring debits. During both 
rounds, virtually all of the participants indicated that they would not 
opt out if their checks would be returned unpaid. However, when asked 
if they would opt out if the choice was limited to opting out of 
overdrafts in connection with ATM withdrawals and debit card purchases, 
half of the participants indicated that they would consider doing so.
    Conclusion. Based on the comments received and further analysis, 
the Board is publishing a proposal elsewhere in today's Federal 
Register under Regulation E that would require that an institution 
provide its consumers the right to opt out of the institution's payment 
of ATM withdrawals and one-time debit card transactions pursuant to the 
institution's overdraft service. The Board is also proposing an 
alternative approach that would require an institution to obtain a 
consumer's affirmative consent (that is, opt-in) before the institution 
could pay overdrafts for ATM withdrawals and one-time debit card 
transactions and assess a fee. Additional comments received in response 
to the Agencies' May 2008 Proposal and the Board's Regulation DD 
Proposal regarding the content, timing, and format of the opt-out 
notice are further discussed in the Board's Regulation E proposal. The 
Board also anticipates conducting further consumer testing following 
its review of the comments received on the Regulation E proposal.
    Accordingly, the Agencies are not taking action regarding overdraft 
services at this time. The Agencies will review information obtained 
from the Board's rulemaking to determine whether to take further 
action.

B. Proposed Section --.32(b)--Debit Holds

    When a consumer uses a debit card to make a purchase, a hold may be 
placed on funds in the consumer's account to ensure that the consumer 
has sufficient funds in the account when the transaction is presented 
for settlement. This is commonly referred to as a ``debit hold.'' 
During the time the debit hold remains in place, which may be up to 
three days after authorization, those funds may be unavailable for the 
consumer's use for other transactions.
    In some cases, the actual purchase amount is not known at the time 
the transaction is authorized, such as when a consumer uses a debit 
card to pay for gas at the pump or pay for a meal at a

[[Page 5547]]

restaurant. Consequently, a debit hold may be placed for an estimated 
amount which may exceed the actual transaction amount. The consumer may 
engage in subsequent transactions reasonably assuming that the account 
has only been debited for the actual transaction amount. Because of the 
excess hold, however, the consumer may incur overdraft fees for those 
subsequent transactions.
    In May 2008, the Agencies proposed in Sec.  --.32(b) to prohibit 
institutions from assessing an overdraft fee where the overdraft would 
not have occurred but for a hold placed on funds in the consumer's 
account that exceeds the actual purchase or transaction amount. The 
proposed prohibition was intended to enable consumers to avoid the 
assessment of fees when the consumer would not have overdrawn his or 
her account had the actual transaction amount been presented for 
payment in a timely manner.
    Consumer groups supported the proposed prohibition. However, they 
recommended that the Agencies also address check holds and prohibit the 
assessment of overdraft fees if a consumer has deposited funds that 
have not yet cleared, but where the deposit would have been sufficient 
to cover the overdraft. Alternatively, consumer groups urged the Board 
to use its authority under the Expedited Funds Availability Act (EFAA) 
to shorten the funds availability schedule for deposited items.
    Industry commenters, however, opposed the debit hold proposal, 
stating that it would present significant operational difficulties. For 
example, industry commenters noted that institutions authorize 
transactions in real time, taking into account transactions subject to 
a debit hold. Because the actual purchase amount for certain 
transactions subject to a debit hold will not be known until the 
transaction is presented for payment, some industry commenters 
expressed concern that the rule would require institutions to monitor 
accounts retroactively and manually adjust transactions and fees that 
have posted to the account to determine whether an overdraft was caused 
by an excess hold. Otherwise, institutions would have to stop placing 
holds altogether which, industry commenters argued, raised potential 
safety and soundness concerns. Nonetheless, a few financial institution 
commenters stated that for fuel purchases, they do not place holds 
beyond the $1 pre-authorization amount, and one large financial 
institution commenter stated that it does not currently place holds of 
any amount on authorizations coming from gas stations, hotels, or 
rental car companies.
    Rather than using their FTC Act authority, industry commenters 
urged the Agencies to use other existing regulatory authority. For 
example, industry commenters recommended that the Board exercise its 
authority under Regulation E to require merchants to disclose at the 
point-of-sale when holds may be placed on debit card transactions.
    As discussed above, the Board is proposing to address concerns 
about debit holds pursuant to the Board's authority under the EFTA and 
Regulation E in a separate proposal published elsewhere in today's 
Federal Register. Accordingly, the Agencies are not taking action 
regarding overdraft services at this time. The Agencies will review 
information obtained from the Board's rulemaking to determine whether 
to take further action.\180\
---------------------------------------------------------------------------

    \180\ Additional comments received on the proposed FTC Act debit 
hold provision are discussed in more detail in the Board's 
Regulation E proposal where relevant.
---------------------------------------------------------------------------

Other Overdraft Practices

    Balance disclosures. The Agencies also noted their concerns in the 
proposal regarding how consumer balances are disclosed. In particular, 
the Agencies observed that consumers could be misled by balance 
disclosures that include additional funds that the institution may 
provide to cover an overdraft. The Board is addressing this issue in 
the final rule under Regulation DD published contemporaneously in 
today's Federal Register.
    Transaction clearing practices. The May 2008 Proposal also noted 
the Agencies' concerns about the impact of transaction clearing 
practices on the amount of overdraft fees that may be incurred by the 
consumer. The February 2005 overdraft guidance recommends as a best 
practice that institutions explain the impact of transaction clearing 
policies to consumers. For example, institutions could disclose that 
transactions may not be processed in the order in which they occurred 
and that the order in which transactions are received by the 
institution and processed can affect the total amount of overdraft fees 
incurred by the consumer.\181\ In its Guidance on Overdraft Protection 
Programs, the OTS also recommended as best practices: (1) Clearly 
disclosing rules for processing and clearing transactions; and (2) 
having transaction clearing rules that are not administered unfairly or 
manipulated to inflate fees.\182\
---------------------------------------------------------------------------

    \181\ 70 FR at 8431; 70 FR at 9132.
    \182\ 70 FR at 8431.
---------------------------------------------------------------------------

    The May 2008 Proposal did not propose any rules addressing 
transaction clearing practices. Instead, the Agencies solicited comment 
on the impact of requiring institutions to pay smaller-dollar items 
before larger-dollar items when received on the same day for purposes 
of assessing overdraft fees on a consumer's account. The Agencies also 
solicited comment on how such a rule would impact an institution's 
ability to process transactions on a real-time basis.
    Industry commenters urged the Agencies not to engage in a 
rulemaking relating to transaction clearing practices. First, they 
argued that state law under the Uniform Commercial Code \183\ 
specifically provides institutions flexibility in determining posting 
order.\184\ Second, industry commenters stated that each transaction 
clearing method has inherent flaws, and that most customers prefer 
high-to-low posting order because it results in consumers' largest 
bills--typically their higher priority payments--being paid first. 
Third, these commenters argued that transaction clearing processes are 
more complex than high-to-low or low-to-high decisions. Industry 
commenters stated, for example, that institutions use a variety of 
other clearing methods based on different processing capabilities, such 
as real-time processing or processing in check number order. In 
addition, an institution may use a combination of posting order methods 
based on the capabilities of its processing system and the transaction 
type. For example, an institution may clear some items in real-time and 
others on a high-to-low basis during batch processing, depending on how 
the item is presented and depending on applicable funds availability 
and payment decision requirements. Industry commenters also expressed 
concern that requiring a particular processing order would create 
significant litigation risk given the complexity of items processing. 
Finally, industry commenters stated that it would be technologically 
impracticable to permit a small subset of consumers to opt in to a 
particular processing order and to treat their transactions differently 
than other consumers' transactions.
---------------------------------------------------------------------------

    \183\ U.C.C. Sec.  4-303. The commentary to Sec.  4-303 states 
that any posting order is permitted because (1) it is impossible to 
state a rule that would be fair in all circumstances, and (2) a 
drawer should have sufficient funds on deposit at all times, he or 
she should thus be indifferent as to posting order.
    \184\ See also OCC Interp. Letter No. 916 (May 22, 2001).
---------------------------------------------------------------------------

    Consumer groups and some members of Congress urged the Agencies to 
ban institutions from engaging in

[[Page 5548]]

manipulative clearing practices. In particular, they asserted that 
institutions use transaction processing order to maximize revenue from 
overdrafts because more overdraft fees can be levied if largest debits 
are processed first and cause other small debits to overdraw the 
account multiple times. They also argued that the justification 
favoring high-to-low payment order because higher-priority items are 
paid first is undermined by the fact that all items are paid via the 
institution's overdraft protection program.
    The Agencies are not addressing transaction processing order at 
this time. The Agencies believe that it would be difficult to set forth 
a bright-line rule that would clearly result in the best outcome for 
all or most consumers. For example, requiring institutions to pay 
smaller dollar items first may cause an institution to return unpaid a 
large dollar nondiscretionary item, such as a mortgage payment, if 
there is an insufficient amount of overdraft coverage remaining to 
cover the large dollar item after the smaller items have been paid. The 
Agencies also acknowledge the inherent complexity of payments 
processing and recognize that mandating a particular posting order 
could create complications for institutions seeking to move toward 
real-time transaction processing.

VII. Effective Date

    The May 2008 Proposal solicited comment on whether the rules should 
become effective one year after issuance or whether a different period 
was appropriate. Although some industry commenters agreed that a one-
year period was appropriate, most urged the Agencies to allow 18 or 24 
months due to the difficulty of redesigning systems and procedures to 
comply with the rules. In contrast, some consumer advocates requested a 
shorter period.
    The final rule is effective on July 1, 2010. Compliance with the 
provisions of the final rule is not required before the effective date. 
Accordingly, the final rule and the Agencies' accompanying analysis 
should have no bearing on whether or not acts or practices restricted 
or prohibited under this rule are unfair or deceptive before the 
effective date of this rule.
    Unfair acts or practices can be addressed through case-by-case 
enforcement actions against specific institutions, through regulations 
applying to all institutions, or both. An enforcement action concerns a 
specific institution's conduct and is based on all of the facts and 
circumstances surrounding that conduct. By contrast, a regulation is 
prospective and applies to the market as a whole, drawing bright lines 
that distinguish broad categories of conduct.
    Because broad regulations, such as those in the final rule, can 
require large numbers of institutions to make major adjustments to 
their practices, there could be more harm to consumers than benefit if 
the regulations were effective earlier than the effective date. If 
institutions were not provided a reasonable time to make changes to 
their operations and systems to comply with the final rule, they would 
either incur excessively large expenses, which would be passed on to 
consumers, or cease engaging in the regulated activity altogether, to 
the detriment of consumers. And because the Agencies find an act or 
practice unfair only when the harm outweighs the benefits to consumers 
or to competition, the implementation period preceding the effective 
date set forth in the final rule is integral to the Agencies' decision 
to restrict or prohibit certain acts or practices by regulation.
    For these reasons, acts or practices occurring before the effective 
date of the final rule will be judged on the totality of the 
circumstances under applicable laws or regulations. Similarly, acts or 
practices occurring after the rule's effective date that are not 
governed by these rules will continue to be judged on the totality of 
the circumstances under applicable laws or regulations.
    Some industry commenters requested that, because existing accounts 
were established with the expectation that institutions could engage in 
the practices prohibited by the final rule, those accounts (or existing 
balances on those accounts) be exempted from the final rule. The 
Agencies recognize that, as discussed above with respect to specific 
prohibitions, the final rule prohibits some long-standing practices 
that have been expressly or implicitly permitted under state or federal 
law or the guidance of the federal banking agencies. As noted above, 
the final rule is not intended to suggest that these practices are 
unfair or deceptive prior to the effective date. However, the Agencies 
do not believe the requested exemption is necessary because 
institutions will have sufficient time prior to the effective date to 
adjust their pricing and other practices with respect to existing 
accounts and balances. Indeed, prior to the effective date, 
institutions may change interest rates on existing balances and take 
other actions that will be prohibited once the final rule is effective. 
However, in light of the significant nature of the changes required by 
the final rule (including training staff), the Agencies anticipate that 
institutions will need to begin the compliance process long before the 
effective date. Although institutions are not required to comply with 
the final rule before the effective date, the Agencies strongly 
encourage institutions to use their best efforts to conform their 
practices to the final rule before July 1, 2010.

VIII. Regulatory Analysis

A. Regulatory Flexibility Act

    Board: The Regulatory Flexibility Act (5 U.S.C. 601 et seq.) (RFA) 
generally requires an agency to perform an assessment of the impact a 
rule is expected to have on small entities. Under section 605(b) of the 
RFA, 5 U.S.C. 605(b), the regulatory flexibility analysis otherwise 
required under section 604 of the RFA is not required if an agency 
certifies, along with a statement providing the factual basis for such 
certification, that the rule will not have a significant economic 
impact on a substantial number of small entities. The Board prepared an 
initial regulatory flexibility analysis in connection with the May 2008 
Proposal, which reached the preliminary conclusion that the proposed 
rule would not have a significant economic impact on a substantial 
number of small entities. See 73 FR 28933-28934 (May 19, 2008). The 
Board received no comments specifically addressing its initial 
regulatory flexibility analysis. However, industry commenters generally 
stated that the overall proposal would impose significant 
implementation costs and result in a loss of revenue from interest 
charges and overdraft fees.
    Based on the comments and further analysis, the Board has concluded 
that the final rule will have a significant economic impact on a 
substantial number of small entities. Accordingly, the Board has 
prepared the following final regulatory flexibility analysis pursuant 
to section 604 of the RFA.
    1. Succinct statement of the need for, and objectives of, the rule. 
The Federal Trade Commission Act (15 U.S.C. 41 et seq.) (FTC Act) 
prohibits unfair or deceptive acts or practices in or affecting 
commerce. 15 U.S.C. 45(a)(1). 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 prohibiting such acts or practices. 15 U.S.C. 
57a(f)(1). The Board, OTS, and NCUA are jointly issuing regulations 
under the FTC Act to protect consumers from specific unfair or 
deceptive acts or practices regarding consumer credit card accounts. 
The

[[Page 5549]]

Board's final rule will amend Regulation AA.
    The SUPPLEMENTARY INFORMATION above describes in detail the need 
for, and objectives of, the final rule.
    2. Summary of the significant issues raised by public comments in 
response to the Board's initial analysis, the Board's assessment of 
such issues, and a statement of any changes made as a result of such 
comments. As discussed above, the Board's initial regulatory 
flexibility analysis reached the preliminary conclusion that the 
proposed rule would not have a significant economic impact on a 
substantial number of small entities. See 73 FR 28933-28934 (May 19, 
2008). The Board received no comments specifically addressing this 
analysis.
    3. Description and estimate of the number of small entities to 
which the final rule applies. The Board's final rule applies to banks 
and their subsidiaries, except savings associations as defined in 12 
U.S.C. 1813(b). Based on 2008 call report data, there are approximately 
709 banks with assets of $175 million or less that offer credit cards 
and are therefore required to comply with the Board's final rule.
    4. Description of the recordkeeping, reporting, and other 
compliance requirements of the final rule. The final rule does not 
impose any new recordkeeping or reporting requirements. The final rule 
does, however, impose new compliance requirements.
    Section 227.22 will require some small entities to extend the 
period of time provided to consumers to make payments on consumer 
credit card accounts. One commenter estimated the cost of compliance at 
$30,000 per institution, although this cost will vary depending on the 
size of the institution. Based on the comments, however, many credit 
card issuers already send periodic statements 21 days in advance of the 
payment due date, which constitutes a reasonable amount of time under 
the rule. Indeed, a trade association representing community banks 
(many of which are small entities under the RFA) stated in its comment 
that 90 percent of its members currently mail or deliver periodic 
statements more than 21 days before the payment due date.
    Section 227.23 will require small entities that provide consumer 
credit card accounts with multiple balances at different rates to alter 
their payment allocation systems and, in some cases, develop new 
systems for allocating payments among different balances. The cost of 
such changes will depend on the size of the institution and the 
composition of its portfolio. Compliance with this provision will also 
reduce interest revenue for small entities that currently allocate 
payments first to balances with the lowest annual percentage rate. The 
economic impact, however, will be mitigated to the extent that small 
entities adjust other terms to compensate for the loss of revenue (such 
as by increasing the dollar amount of fees and the annual percentage 
rates offered to consumers when an account is opened).
    Section 227.24 generally prohibits small entities from increasing 
annual percentage rates, except in certain circumstances. This 
provision will reduce interest revenue, although--as noted above--small 
entities can mitigate the economic impact by increasing the dollar 
amount of fees, increasing the annual percentage rates offered to 
consumers when an account is opened, or otherwise adjusting account 
terms. In addition, Sec.  227.24 permits small entities to increase the 
rates applicable to new transactions after the first year and to 
increase the rates on outstanding balances pursuant to an increase in 
an index and when the consumer's payment has not been received within 
30 days after the due date.
    Section 227.25 may require some small entities to change the way 
finance charges are calculated. The Board understands, however, that 
few institutions still use the prohibited method.
    Section 227.26 will reduce the revenue that some small entities 
derive from security deposits and fees. These costs, however, will be 
borne only by those entities offering cards with security deposits and 
fees that currently consume a majority of the credit limit.
    Accordingly, the Board believes that, in the aggregate, the 
provisions in its final rule will have a significant economic impact on 
a substantial number of small entities.
    5. Description of the steps the Board has taken to minimize the 
significant economic impact on small entities consistent with the 
stated objectives of the FTC Act. As discussed above in this 
SUPPLEMENTARY INFORMATION, the Board has considered a wide variety of 
alternatives and has concluded that the restrictions in the final rule 
achieve the appropriate balance between providing effective protections 
for consumers against unfair or deceptive acts or practices (which are 
prohibited by the FTC Act) and minimizing the burden on institutions 
that offer credit cards (including small entities). In the May 2008 
Proposal, the Board considered whether small entities should be 
exempted from the proposed rules. The Board indicated, however, that 
such an exemption would not be appropriate because the FTC Act neither 
exempts small entities from the prohibition against engaging in unfair 
or deceptive acts or practices nor provides the Board with authority to 
create such an exemption. Furthermore, the Board noted that whether an 
act or practice is unfair or deceptive should not depend on the size of 
the institution. See 73 FR at 28934. The Board did not receive any 
comments regarding this preliminary conclusion. Accordingly, the Board 
has not exempted small entities from the final rule.
    The Board also believes that the final rule, where appropriate, 
provides sufficient flexibility and choice for institutions, including 
small entities. As such, any institution, regardless of size, may 
tailor its operations to its individual needs and thereby mitigate to 
some degree any burdens created by the final rule. For instance, 
although Sec.  227.23 prohibits institutions from applying payments in 
excess of the minimum payment first to the balance with the lowest 
interest rate, it allows institutions to choose between two permissible 
allocation methods and does not place any limitations on institutions' 
ability to allocate the minimum payment. In addition, although Sec.  
227.24 generally prohibits institutions from increasing the annual 
percentage rates on outstanding balances, it provides reasonable 
exceptions and does not restrict the ability of institutions to 
increase rates on future transactions after the first year.
    OTS: The Regulatory Flexibility Act (5 U.S.C. 601 et seq.) (RFA) 
generally requires an agency to perform an assessment of the impact a 
rule is expected to have on small entities. For purposes of the RFA and 
OTS-regulated entities, a ``small entity'' is a savings association 
with assets of $175 million or less. Under section 605(b) of the RFA, 5 
U.S.C. 605(b), the regulatory flexibility analysis otherwise required 
under section 604 of the RFA is not required if an agency certifies, 
along with a statement providing the factual basis for such 
certification, that the rule will not have a significant economic 
impact on a substantial number of small entities. OTS certified that 
the proposed rule would not have a significant economic impact on a 
substantial number of small entities but prepared an initial regulatory 
flexibility analysis in connection with the May 2008 Proposal anyway. 
See 73 FR 28934-28935 (May 19, 2008). OTS received no comments 
specifically addressing its initial regulatory flexibility analysis.

[[Page 5550]]

    OTS certifies that this final rule will not have a significant 
economic impact on a substantial number of small entities. OTS is the 
primary federal regulator for 817 federally- and state-chartered 
savings associations. Of these 817 savings associations, only 116 
report any credit card assets. Of these 116, only 22 have assets of 
$175 million or less.
    NCUA: The Regulatory Flexibility Act (5 U.S.C. 601 et seq.) (RFA) 
generally requires an agency to perform an assessment of the impact a 
rule is expected to have on small entities. For purposes of the RFA and 
NCUA, a ``small entity'' is a credit union with assets of $10 million 
or less. Under section 605(b) of the RFA, 5 U.S.C. 605(b), the 
regulatory flexibility analysis otherwise required under section 604 of 
the RFA is not required if an agency certifies, along with a statement 
providing the factual basis for such certification, that the rule will 
not have a significant economic impact on a substantial number of small 
entities. NCUA certified that the proposed rule would not have a 
significant economic impact on a substantial number of small entities, 
but prepared an initial regulatory flexibility analysis in connection 
with the May 2008 Proposal anyway. See 73 FR 28904, 28935 (May 19, 
2008). NCUA received no comments specifically addressing its initial 
regulatory flexibility analysis.
    Accordingly, NCUA certifies that this final rule will not have a 
significant economic impact on a substantial number of small entities. 
NCUA regulates approximately 5036 federal credit unions. Only 2427 
federal credit unions report credit card assets. Of those federal 
credit unions offering loan products, 2363 small federal credit unions 
offer loans, and 425 small federal credit unions offer credit cards to 
members.

B. Paperwork Reduction Act

    Board: In accordance with the Paperwork Reduction Act (PRA) of 1995 
(44 U.S.C. 3506; 5 CFR part 1320 Appendix A.1), the Board has reviewed 
the final rule under the authority delegated to the Board by the Office 
of Management and Budget (OMB). The collections of information that are 
required by this proposed rule are found in 12 CFR 227.14 and 
227.24(b)(2).
    This information collection is required to provide benefits for 
consumers and is mandatory (15 U.S.C. 4301 et seq.). The respondents/
recordkeepers are for-profit financial institutions, including small 
businesses. Regulation AA establishes consumer complaint procedures and 
defines unfair or deceptive acts or practices in extending credit to 
consumers. As discussed above, the final rule amends Regulation AA to 
prohibit institutions from engaging in certain acts or practices in 
connection with consumer credit card accounts. This proposal evolved 
from the Board's June 2007 Regulation Z Proposal. This final rule is 
coordinated with the Board's final rule under the Truth in Lending Act 
and Regulation Z, which is published elsewhere in today's Federal 
Register.
    Under Sec.  227.24(a) (Unfair acts or practices regarding increases 
in annual percentage rates), banks are generally required to disclose 
at account opening the annual percentage rates that will apply to the 
account. In addition, under Sec.  227.24(b)(3), banks must disclose in 
advance any increase in the rate that applies to new transactions 
pursuant to 12 CFR 226.9. The Board anticipates that banks will, with 
no additional burden, incorporate the disclosure requirements under 
Sec.  227.24(a) with the disclosure requirements regarding credit and 
charge cards in Regulation Z, 12 CFR 226.5a and 226.6. Thus, in order 
to avoid double-counting, the Board will account for the burden 
associated with proposed Regulation AA Sec.  227.24(a) under Regulation 
Z (OMB No. 7100-0199) Sec. Sec.  226.5a and 226.6. Similarly, because 
the Board anticipates that banks will, with no additional burden, 
incorporate the disclosure requirement under Sec.  227.24(b)(3) with 
the disclosure requirements in Regulation Z, 12 CFR 226.9, the Board 
will account for the burden associated with proposed Regulation AA 
Sec.  227.24(b)(2) under Regulation Z (OMB No. 7100-0199) Sec.  226.9.
    Under Regulation AA Sec.  227.14(b) (Unfair and deceptive practices 
involving cosigners), a clear and conspicuous disclosure statement 
shall be given in writing to the cosigner prior to being obligated. The 
disclosure statement must be substantively similar to the example 
provided in Sec.  227.14(b). The Board will also account for the burden 
associated with Regulation AA Sec.  227.14(b) under Regulation Z. The 
title of the Regulation Z information collection will be updated to 
account for this section of Regulation AA.
    In May 2008, the Board proposed Sec.  227.28, which would have 
prohibited banks from engaging in certain marketing practices in 
relation to prescreened firm offers of credit for consumer credit card 
accounts unless a disclaimer sufficiently explained the limitations of 
the offer. As discussed elsewhere in the SUPPLEMENTARY INFORMATION, the 
Board has not taken action on proposed Sec.  227.28 at this time 
because, among other reasons, the disclosures required by Regulation Z 
will address the Board's concerns. The burden increase of 1,808 hours 
associated with proposed Sec.  227.28 would have been accounted for 
under Regulation Z (OMB No. 7100-0199) Sec.  226.5a; however, it has 
been removed from the Regulation Z burden estimate.
    In May 2008, the Board proposed Sec.  227.32, which would have 
provided that a consumer could not be assessed a fee or charge for 
paying an overdraft unless the consumer was provided with the right to 
opt out of the payment of overdrafts and a reasonable opportunity to 
exercise that right but did not do so. The Board stated that the burden 
associated with proposed Sec.  227.32 would be accounted for under 
Regulation DD (OMB No. 7100-0271). However, as discussed elsewhere in 
the SUPPLEMENTARY INFORMATION, the Board is not taking action on 
proposed Sec.  227.32 at this time.
    OTS and NCUA: In accordance with section 3512 of the Paperwork 
Reduction Act of 1995, 44 U.S.C. 3501-3521 (``PRA''), the Agencies may 
not conduct or sponsor, and the respondent is not required to respond 
to, an information collection unless it displays a currently valid 
Office of Management and Budget (``OMB'') control number. The 
information requirements contained in this joint final rule have been 
submitted by the OTS and NCUA to OMB for review and approval under 
section 3507 of the PRA and section 1320.11 of OMB's implementing 
regulations (5 CFR part 1320). The review and authorization information 
for the Board is provided earlier in this section along with the 
Board's burden estimates. The collections of information that are 
required by this final rule are found in 12 CFR --.13 and --.24. 
Collections of information that were required by the proposed rule in 
Sec.  --.28 and Sec.  --.32 are not included in the final rule.
    OTS: Savings associations and their subsidiaries.
    NCUA: Federal credit unions.
    Abstract: Under section 18(f) of the FTC Act, the Agencies are 
responsible for prescribing rules to prevent unfair or deceptive acts 
or practices in or affecting commerce, including acts or practices that 
are unfair or deceptive to consumers. Under the final rule, the 
Agencies are incorporating their existing Credit Practices Rules, which 
govern unfair or deceptive acts or practices involving consumer credit, 
into new, more comprehensive rules that also address unfair or 
deceptive acts or practices involving credit cards.

[[Page 5551]]

    Under Sec.  --.24(a) (Unfair acts or practices regarding increases 
in annual percentage rates), institutions are generally required to 
disclose at account opening the annual percentage rates that will apply 
to the account. In addition, under Sec.  --.24(b)(3), institutions must 
disclose in advance any increase in the rate that applies to new 
transactions pursuant to 12 CFR 226.9 in Regulation Z. The OTS and NCUA 
anticipate that institutions would, with little additional burden, 
incorporate the proposed disclosure requirement under Sec.  --.24(a) 
with the existing disclosure requirements regarding credit and charge 
cards in Regulation Z, 12 CFR 226.5a, and 226.6. Similarly, the OTS and 
NCUA anticipate that institutions will, with little additional burden, 
incorporate the disclosure requirement under Sec.  --.24(b)(3) with the 
disclosure requirements in Regulation Z, 12 CFR 226.9.
    Under the existing Credit Practices Rule, 12 CFR 535.3 (to be 
recodified at 12 CFR 535.13) and 12 CFR 706.3, (to be recodified at 12 
CFR 706.13) both entitled ``Unfair or deceptive cosigner practices,'' a 
clear and conspicuous disclosure statement shall be given in writing to 
the cosigner prior to being obligated. The disclosure statement must be 
substantively similar to the example provided in the section of the 
rule. Since this is not a new requirement, the OTS and NCUA anticipate 
little additional burden associated with this section of the rule.
    In May 2008, the OTS, NCUA and the Board proposed Sec.  --.28, 
which would have prohibited financial institutions from engaging in 
certain marketing practices in relation to prescreened firm offers of 
credit for consumer credit card accounts unless a disclaimer 
sufficiently explained the limitations of the offer. As discussed 
elsewhere in this SUPPLEMENTARY INFORMATION, the Agencies are not 
taking action on proposed Sec.  --.28 at this time. The burden 
increases of 8,260 for OTS and 50,360 for NCUA have been removed from 
the burden estimate.
    In May 2008, the Agencies' proposed Sec.  --.32, which would have 
provided that a consumer could not be assessed a fee or charge for 
paying an overdraft unless the consumer was provided with the right to 
opt out of the payment of overdrafts and a reasonable opportunity to 
exercise that right but did not do so. The OTS stated that the burden 
associated with proposed Sec.  535.32 would be 8,260 hours. OTS's 
burden estimate was based on the effect of this rule on all of its 
institutions because they are all depository institutions, most of 
which offer overdraft services. By not including provisions on 
overdrafts, OTS's rule affects only the 116 OTS-supervised institutions 
that issue credit cards. The NCUA stated that the burden associated 
with proposed Sec.  706.32 would be 50,360 hours. As discussed 
elsewhere in this SUPPLEMENTARY INFORMATION, the Agencies are not 
taking action on proposed Sec.  --.32 at this time. Accordingly, the 
OTS and NCUA remove their respective burden increase.
    Estimated Burden: The burden associated with this collection of 
information may be summarized as follows.
    OTS:
    Estimated number of respondents: 116.
    Estimated time for developing disclosures: 4 hours.
    Estimated time for training: 4 hours.
    Total estimated time per respondent: 8 hours.
    Total estimated annual burden: 928 hours.
    NCUA:
    Estimated number of respondents: 2,427.
    Estimated time for developing disclosures: 4 hours.
    Estimated time for training: 4 hours.
    Total estimated time per respondent: 8 hours.
    Total estimated annual burden: 19,416 hours.

C. OTS Executive Order 12866 Determination

    Executive Order 12866 requires federal agencies to prepare a 
regulatory impact analysis for agency actions that are found to be 
``significant regulatory actions.'' ``Significant regulatory actions'' 
include, among other things, rulemakings that ``have an annual effect 
on the economy of $100 million or more or adversely affect in a 
material way the economy, a sector of the economy, productivity, 
competition, jobs, the environment, public health or safety, or State, 
local, or tribal governments or communities.'' \185\
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    \185\ See 58 FR 51735 (October 4, 1993), as amended.
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    Based on the prediction of industry commenters, OTS anticipates 
that the final rule will exceed the $100 million threshold. However, 
OTS believes that these estimates may overstate the actual costs borne 
by institutions under OTS jurisdiction for a number of reasons. First, 
OTS-supervised institutions account for only a small portion of the 
entire credit card market. Second, several provisions included in the 
proposed rulemaking are not being finalized at this time, which reduces 
the overall economic impact of the final rule. Third, OTS-supervised 
institutions already refrain from engaging in many of the practices 
prohibited by this final rule. Issuing a rule to prevent institutions 
from taking up these practices will help ensure that market conduct 
standards remain high, but it will not cause significant economic 
impact on these institutions.
    OTS acknowledges that several provisions of the rules may carry 
operational costs, although the general information provided by 
commenters on this point does not permit the OTS to quantify such costs 
with any precision. Moreover, commenter suggestions about the effect 
that two provisions of the rule may have on the fee and interest income 
may be overestimated. Notably, these suggestions blend the effects of 
this rulemaking with those of a related Board rulemaking on Regulation 
Z.
    Further, given the continuing contraction in the economy since the 
May 2008 proposal and the close of the August 2008 comment period, OTS 
anticipates that the economic effect on credit card issuers will be 
lower than projected by commenters as the industry itself shrinks.\186\
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    \186\ See National Bureau of Economic Research, Determination of 
the December 2007 Peak in Economic Activity (Dec. 1, 2008) 
(available at: http://www.dev.nber.org/dec2008.html).
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    OTS has provided the Administrator of the Office of Management and 
Budget's (OMB) Office of Information and Regulatory Affairs (OIRA) an 
economic analysis. As required by Executive Order 12866, it addresses: 
(1) The need for the regulatory action and how the rule meets that 
need, (2) the costs and benefits of the rule and its consistency with a 
statutory mandate that avoids interference with State, local and tribal 
governments, (3) the benefits anticipated from the regulation, (4) the 
costs anticipated from the regulation, and (5) alternatives to the 
regulation.
1. The Need for the Regulatory Action and How the Rule Meets That Need
    The OTS final rule, like the rules issued by the Board and NCUA, 
consists of five provisions intended to protect consumers from unfair 
acts or practices with respect to consumer credit card accounts. The 
identified unfair acts or practices inhibit or prevent a consumer from 
accurately assessing the costs and benefits of their actions and thus 
produce a market failure. The rule should permit cardholders to better 
predict how their actions will affect their costs and benefits. 
Presently, they cannot do so effectively.\187\ The final

[[Page 5552]]

rule should also promote the safe and sound operation of institutions 
that issue credit cards by better aligning the interests of the 
financial markets and consumers to ensure that credit card loans will 
be repaid.
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    \187\ ``Although they work well for many consumers, credit card 
plans have become more complex. The greater complexity has reduced 
transparency in credit card pricing and increased the risk that 
consumers will not understand key terms that affect the cost of 
using the account. The Federal Reserve has used consumer testing to 
make great strides in developing improved disclosures under the 
Truth in Lending Act. However, based on our review of consumers' 
response to the Board's recent regulatory initiative, it seems clear 
that improved disclosures alone cannot solve all of the problems 
consumers face in trying to manage their credit card accounts.'' 
Statement by Federal Reserve Board Chairman Ben S. Bernanke (May 2, 
2008) (available at: http://www.federalreserve.gov/newsevents/press/bcreg/bernankecredit20080502.htm).
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Regulatory Background
    OTS issued an Advance Notice of Proposed Rulemaking on August 6, 
2007, requesting comment on possible changes to its rules under section 
5 of the FTC Act. See 72 FR 43570 (OTS ANPR). OTS received comments 
from consumers, the industry and Congress. Industry commenters 
suggested that OTS should use guidance rather than rules, arguing OTS 
would create an unlevel playing field for OTS-regulated institutions 
and that uniformity among the federal banking agencies and the NCUA is 
essential, and that the possible practices listed in the ANPR were 
neither unfair nor deceptive under the FTC standards.
    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 urged OTS to ban numerous 
practices, including several practices addressed in the final rule, 
such as ``universal default'' repricing, applying payments first to 
balances with the lowest interest rate, and credit cards marketed at 
subprime consumers that provide little available credit at account 
opening.
The May 2008 Proposal
    To address the issue of lack of uniformity if only OTS issued a 
rule, and to best ensure that all entities that offer consumer credit 
card accounts and overdraft services on deposit accounts are treated in 
a like manner, the OTS, Board, and NCUA joined together to issue the 
May 2008 Proposal.\188\ This proposal was based on outreach conducted 
by the Agencies, consumer testing and Congressional hearings.\189\ It 
was accompanied by complementary proposals by the Board under 
Regulation Z with respect to consumer credit card accounts and 
Regulation DD with respect to deposit accounts.\190\
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    \188\ See 73 FR 28904 (May 19, 2008) (May 2008 Proposal).
    \189\ See 73 FR at 28905-07.
    \190\ See 73 FR 28866 (May 19, 2008) (May 2008 Regulation Z 
Proposal); 73 FR 28739 (May 19, 2008) (May 2008 Regulation DD 
Proposal).
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The Final Rule
    A description of the five provisions in this final rule follows. It 
includes observations about how each provision responds to a specific 
unfair practice.
    First, Sec.  535.22 prohibits savings associations from treating a 
payment as late for any purpose unless consumers have been provided a 
reasonable amount of time to make that payment. The rule provides that 
21 days is a safe harbor. Consumers have complained that they 
encountered situations where they did not have enough time to make 
payments and that this was an unfair practice. This provision will 
prevent card issuers from providing an insufficient time for consumers 
to make payments, and then charging fees or increasing interest rates 
because the payment was late. The largest issuers under OTS supervision 
already provide at least a 20 day period to pay.
    Second, when an account has balances with different annual 
percentage rates, Sec.  535.23 requires savings associations to 
allocate amounts paid in excess of the minimum payment using one of two 
specified methods: either allocating the excess payment to the highest 
interest balance or proportionately to all balances. This provision 
addresses the unfairness that consumers experience when they accept 
low-rate promotional offers, but do not appreciate that card issuers 
now allocate their payments to minimize the benefits of the offer and 
maximize interest charges.
    Third, Sec.  535.24 prohibits savings associations from increasing 
the APR during the first year unless the planned increase has been 
disclosed at account opening, the APR varies with an index, the card 
holder fails to pay within 30 days of the due date, or the card holder 
fails to comply with a workout arrangement. After the first year, the 
rule also allows savings associations to increase the annual percentage 
rate on transactions that occur more than seven days after the 
institution provides a notice of the APR increase under Regulation Z. 
This section addresses the unfairness consumers experience when a 
creditor increases interest rates at any time and for any reason, and 
where a creditor applies a new rate to purchases that have already been 
made. The rule will allow consumers to more accurately estimate their 
costs and to predict the consequences of their decisions and actions.
    Fourth, Sec.  535.25 prohibits savings associations from using the 
practice sometimes referred to as two-cycle billing, in which, as a 
result of the loss of a grace period, a savings association imposes 
finance charges based on balances associated with previous billing 
cycles. Research conducted by the Board showed that consumers do not 
understand disclosures that attempt to explain this billing practice. 
As a result, consumers could not avoid cards that feature this 
practice. However, this practice is now rare, especially for OTS-
supervised issuers.
    Fifth, to address concerns regarding subprime credit cards with 
high fees and low credit limits, Sec.  535.26 prohibits savings 
associations from charging to the account security deposits and fees 
for the issuance or availability of credit that constitute a majority 
of the initial credit limit in the first year or more than 25 percent 
of the initial credit limit in the first month. In addition the rule 
requires that if the fees and security deposit charges exceed 25% of 
the available credit, repayment would be spread over at least the first 
six months. These cards impose multiple fees when the consumer opens 
the card account and those amounts are billed to the consumer in the 
first statement. These large initial billings substantially reduce the 
amount of credit that the consumer has available on the card. For 
example, a card with a credit line of $250 may have only $100 available 
after security deposits or fees have been billed and consumers will pay 
interest on these billings until they are paid in full. Consumers have 
complained that they were not aware of how little available credit they 
would have after the assessment of security deposits and fees. This 
rule prevents this practice and provides that consumers will have a 
sizeable percentage of the initial credit on the card available for 
use.
2. The Costs and Benefits of the Rule, Consistency With Statutory 
Mandate and Non-Interference With State, Local and Tribal Governments
Costs and Benefits
    Both the costs and the benefits of the rule are difficult to 
measure with precision. As noted above, OTS has relied on cost 
projections submitted by industry commenters, but has reduced these 
estimates where they appear to be overstated. Benefits, such as 
protecting consumers from unfairness, are more intangible and more 
difficult to quantify. Moreover, the monetary costs

[[Page 5553]]

and benefits of this rule have a net effect in some important ways. The 
approach taken by the OTS with respect to these issues is explained in 
subsequent sections of this statement.
Consistency With Statutory Mandate and Non-Interference With State, 
Local and Tribal Governments
    Section 18(f)(1) of the FTC Act provides that OTS (with respect to 
savings associations), as well as the Board (with respect to banks) 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.'' \191\ The FTC Act 
allocates responsibility for enforcing compliance with regulations 
prescribed under section 18 with respect to savings associations, 
banks, and federal credit unions among OTS, the Board, and NCUA, as 
well as the OCC and FDIC.\192\ Consistent with the FTC Act, this final 
rule is intended to prevent the unfair practices discussed more fully 
elsewhere in the SUPPLEMENTARY INFORMATION.
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    \191\ 15 U.S.C. 57a(f)(1).
    \192\ 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 OTS, 
the Board, or the NCUA. See 15 U.S.C. 57a(b)-(e), (g)-(j); 15 U.S.C. 
57a-3.
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    Also, as discussed in the SUPPLEMENTARY INFORMATION that 
accompanied the OTS August 6, 2007 ANPR,\193\ reflected in the proposed 
rule,\194\ and explained in detail in the SUPPLEMENTARY INFORMATION to 
today's issuance, HOLA serves as an independent basis for the final OTS 
final rule. HOLA provides authority for both safety and soundness and 
consumer protection regulations. Consistent with HOLA, this final rule 
is intended to prevent unsafe and unsound practices and to protect 
consumers as discussed more fully elsewhere in the SUPPLEMENTARY 
INFORMATION.
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    \193\ 72 FR at 43572-73.
    \194\ See 73 FR at 28910 and 28948.
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    Issuing the rule on an interagency basis is consistent with section 
303 of the Riegle Community Development and Regulatory Improvement Act 
of 1994.\195\ Section 303(a)(3) \196\ directs the federal banking 
agencies to work jointly to make uniform all regulations and guidelines 
implementing common statutory or supervisory policies. 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 endeavored to finalize rules that are as 
uniform as possible. This rule will not interfere with State, local, or 
tribal governments in the exercise of their governmental functions.
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    \195\ See 12 U.S.C. 4803.
    \196\ 12 U.S.C. 4803(a)(3).
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3. Benefits of the Regulation
    The most important benefit of the rule is that it will protect 
consumers from certain practices that meet well established standards 
for unfairness. In so doing, the rule will increase consumer confidence 
in the financial system.
    Since the rule was proposed in May 2008, exigent market 
circumstances have arisen which necessitate immediate liquidity in 
consumer credit cards. These circumstances are reflected in the 
announcement on November 25, 2008 of the Treasury Department and 
Federal Reserve Board Term Asset-Backed Securities Loan Facility (TALF) 
program.\197\ This final rule furthers liquidity in the consumer credit 
card market by providing certainty to the industry, consumers, and 
other members of the public as to rules governing such transactions in 
the future. In addition, OTS anticipates that provisions of the final 
rule that are designed to ensure greater safety and soundness for 
financial institutions may also yield a beneficial economic result for 
the taxpayers who ultimately bear the cost of a program such as the 
TALF, which will make and insure loans backed by credit card 
securities.
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    \197\ See November 25, 2008 announcements by the Department of 
Treasury and Board of the TALF under the authority in the Emergency 
Economic Stabilization Act of 2008, Pub. L. 110-343 and section 
13(3) of the Federal Reserve Act (12 U.S.C. 343) (available at 
http://www.treas.gov/press/releases/hp1292.htm and http://www.federalreserve.gov/newsevents/press/monetary/monetary20081125a1.pdf).
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    However, because this rule provides more rationality and integrity 
to the credit card system, its broader benefits are more qualitative 
than quantitative. For example, the rule will promote more efficient 
functioning of the economy by creating more transparency for consumers 
as they make credit card agreements. Consumers currently are confused 
by the complexity of credit card agreements, and are surprised by 
unexpected terms. In several of the areas addressed by the rule, 
disclosures have been inadequate to make the terms understandable.\198\ 
Consequently, the clear standards set by this rule will promote more 
efficient credit decisions by consumers.
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    \198\ See ``Design and Testing of Effective Truth in Lending 
Disclosures'' (available at: http://www.federalreserve.gov/dcca/regulationz/20070523/Execsummary.pdf).
---------------------------------------------------------------------------

    The monetary costs and benefits of this rule have a net effect. 
Particularly as a result of the payment allocation and retroactive rate 
increase provisions, some card issuers will experience reduced revenues 
and additional expenses, but the cost of credit will be substantially 
reduced for many consumers. Moreover, the rule will create stability, 
predictability, and standardization in the credit card market and its 
receivables, and will help foster steady sources of funding that would 
otherwise avoid some risk and uncertainty.
    Another benefit of the rule is that it will create a uniform 
playing field for credit card issuers, not only because the federal 
financial regulators are issuing consistent rules, but also because of 
its clarity. As the Board and the NCUA are simultaneously issuing 
virtually identical rules governing credit card practices for other 
types of federally insured financial institutions, the OTS final rule 
will ensure that consistent rules apply among banks, federal credit 
unions, and savings associations.
    Significantly, issuers that have tried to provide better and 
clearer terms for consumers will no longer face a competitive 
disadvantage for doing so. Consumers will have more confidence in the 
credit card system because of the uniform protections.\199\
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    \199\ See Furletti, Mark, Payment System Regulation and How It 
Causes Consumer Confusion, Discussion Paper, Payment Cards Center, 
Philadelphia Federal Reserve, Nov 2004, at 7, quoting Professor Mark 
Budnitz of Georgia State University School of Law (available at: 
http://www.philadelphiafed.org/payment-cards-center/publications/discussion-papers/2004/PaymentSystemRegulation_112004.pdf).
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    By substantially limiting behavioral risk pricing, the rule will 
foster more efficient risk-based pricing by credit card issuers at the 
initial underwriting stage. Consequently, this rule will improve credit 
risk management. Issuer interest in assessing the cost of risk will be 
more closely aligned with the consumer interest in taking on more 
credit and being able to repay it.
    Finally, because the rule clearly defines several examples of 
unfair practices, the federal financial institution regulatory agencies 
will be able to monitor and supervise the credit card market more 
efficiently. Similarly, the reduced uncertainty will simplify issuer 
efforts to act in compliance with the law.

[[Page 5554]]

4. Anticipated Costs of the Regulation
    It is helpful to put the share of OTS supervised issuers in 
context. OTS is the primary federal regulator for 817 federally- and 
state-chartered savings associations. Of these 817 savings 
associations, only 116 report any credit card assets. Among the 116 
savings associations that offer credit cards, only 18 have more than 1% 
of their total assets in credit card receivables. Moreover, credit card 
assets comprise only 3% of all assets held by savings associations. 
With respect to the share of the overall credit card market held by OTS 
supervised institutions, it is notable that savings associations hold 
only 3.5% of credit card receivables.\200\ In part, this figure is 
attributable to the fact that two large savings associations, one with 
$10.6 billion in credit card receivables, have failed since OTS 
proposed these rules in May 2008 and do not currently operate under OTS 
supervision.\201\ In sum, most provisions of the rulemaking would have 
no economic effect on the vast majority of the institutions under OTS 
jurisdiction, since the vast majority simply does not issue credit 
cards.
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    \200\ Federal Reserve Board, Statistical Supplement to the 
November Federal Reserve Bulletin, Nov. 7, 2008, G.19, Consumer 
Credit (available at: http://www.federalreserve.gov/releases/g19/Current/).
    \201\ IndyMac Bank was closed on July 11, 2008. The Federal 
Deposit Insurance Corporation is running the successor institution 
that holds IndyMac's assets. See OTS Release OTS 08-029 (available 
at: http://www.ots.treas.gov/index.cfm?p=PressReleases&ContentRecord_id=37f10b00-1e0b-8562-ebdd-d5d38f67934c&ContentType_id=4c12f337-b5b6-4c87-b45c-838958422bf3&MonthDisplay=7&YearDisplay=2008).
    After Washington Mutual Bank was closed on Sept. 25, 2008, 
JPMorganChase, a national bank regulated by the Office of the 
Comptroller of the Currency, acquired its assets. OTS Release 08-046 
(available at: http://www.ots.treas.gov/index.cfm?p=PressReleases&ContentRecord_id=9c306c81-1e0b-8562-eb0c-fed5429a3a56&ContentType_id=4c12f337-b5b6-4c87-b45c-838958422bf3&MonthDisplay=9&YearDisplay=2008).
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Limited Economic Effect: Several Affected Practices Are Uncommon
    The majority of the practices covered by this rulemaking have been 
included as a prophylactic measure to ensure that institutions do not 
begin to use or expand the use of activities deemed unfair or 
deceptive. Since most OTS-supervised institutions do not currently 
engage in these practices, the costs of complying with the provisions 
of the final rules are likely to be minimal.
    Unfair time to make payments. This section prohibits treating a 
payment on a consumer credit card account as late for any purpose 
unless consumers have been provided a reasonable amount of time to make 
payment with 21 days serving as a safe harbor.
    Although some commenters indicated that implementing this provision 
would entail operational costs, OTS supervisory observations and 
experience indicates that most savings associations generally mail or 
deliver periodic statements to their customers at least 20 days before 
the due date, including the ten largest.\202\ Therefore, a rule that 
requires institutions to provide a reasonable amount of time to make 
payment, such as by complying with the safe harbor for mailing or 
delivering periodic statements to customers at least 21 days in advance 
of the payment due date, should have insignificant or no economic 
impact on institutions under OTS jurisdiction.
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    \202\ One commenter noted that some institutions could incur up 
to $30,000 in operational costs if procedural changes are needed to 
comply with the final rules. It is unclear whether this is an 
accurate estimate of the cost of those changes and whether the size 
of the bank would affect the actual cost. Furthermore, as a 
mitigating economic factor, consumers should incur fewer fees and 
interest charges as a result of receiving a reasonable amount of 
time to pay.
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    Unfair balance computation method. OTS has adopted this section 
substantially as proposed in May 2008. It prohibits institutions from 
imposing finance charges on consumer credit card accounts based on 
balances for days in billing cycles that precede the most recent 
billing cycle. This rule is intended to prohibit the balance 
computation method sometimes referred to as ``two-cycle billing'' or 
``double-cycle billing.'' The final rule contains an added exception 
permitting adjustments to finance charges following the return of a 
payment for insufficient funds.
    OTS notes that many institutions no longer use the two-cycle 
balance computation method and very few institutions compute balances 
using any method other than a single-cycle method and according to the 
Government Accountability Office, of the six largest card issuers, only 
two used the double-cycle billing method between 2003 and 2005.\203\ 
Because few other institutions still use this practice,\204\ the 
prohibition on two-cycle billing should not have a significant impact 
on institutions under OTS jurisdiction.
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    \203\ ``In our review of 28 popular cards from the six largest 
issuers, we found that two of the six issuers used the double-cycle 
billing method on one or more popular cards between 2003 and 2005. 
The other four issuers indicated they would only go back one cycle 
to impose finance charges.'' ``Credit Cards, Increased Complexity in 
Rates and Fees Heightens Need for More Effective Disclosures to 
Consumers,'' Government Accountability Office, Sept. 2006 at 28. 
Neither of the two issuers referred to is supervised by OTS.
    \204\ Based on OTS supervisory observations and experience, only 
one large savings association engaged in this practice at the time 
that this provision was proposed. That institution was closed in 
September 2008 and is no longer subject to rules issued by the OTS, 
as noted above.
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    Unfair charging to the account of security deposits and fees for 
the issuance or availability of credit. This section prohibits 
institutions from charging high security deposits and fees for issuing 
a credit card to the account's credit limit if those fees amounted to 
more than half of the credit available over the first year. Further, 
those fees cannot exceed 25% of the available credit in the first 
month; fees above that limit would have to be spread out over at least 
the first 6 months.
    This section does not apply to security deposits and fees for the 
issuance or availability of credit that are not charged to the account, 
i.e., not financed through the credit card, except to the extent such 
an arrangement is a mere evasion of the prohibition. Further, this 
provision does not set any ceiling on the amount of security deposits 
and fees that may be charged to the account. Rather, any limit is 
calculated as a percentage of the credit line (a majority or 25%) and 
changes with the credit line. Since the rule does not limit the credit 
line that a creditor may offer on high fee accounts, it necessarily 
does not set a ceiling on the security deposits or fees, either. The 
final rule contains a new paragraph (d) prohibiting evasions of the 
section. The paragraph is modeled after the anti-evasion provisions in 
Regulation Z.\205\
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    \205\ See 12 CFR 226.34(a)(3) and 226.35(b)(4).
---------------------------------------------------------------------------

    Credit cards to which security deposits and high account opening 
related fees are charged against the credit line are found 
predominately in the subprime credit card market, i.e., the market that 
targets borrowers with lower credit scores. Many of these consumers 
will incur significantly lower fees as a result of this provision.
    As noted above, savings associations have only a 3.5% share of the 
credit card market generally.\206\ Subprime credit cards represent just 
5% of all credit cards issued,\207\ and high fee cards represent only a 
portion of the subprime market. Among OTS-supervised institutions, 
cards of this type are rare. In fact, based on OTS supervisory 
observations and experience, only two savings

[[Page 5555]]

associations currently offer such cards and those product lines are a 
small part of their business.
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    \206\ See Federal Reserve Board, Statistical Supplement to the 
November Federal Reserve Bulletin, Nov. 7, 2008, G.19, Consumer 
Credit (available at: http://www.federalreserve.gov/releases/g19/Current/).
    \207\ Outstanding credit card balances as of February 2008 as 
reported by Fitch Ratings, Know Your Risk; Asset Backed Securities 
Prime Credit Card Index and Subprime Credit Card Index (available 
at: http://www.fitchresearch.com/creditdesk/sectors/surveilance/asset_backed/credit_card).
---------------------------------------------------------------------------

    Based on one commenter's estimate, this provision of the rule would 
mean these OTS-supervised subprime issuers would receive as much as 
$10,948,000 less revenue.\208\ This estimate is based on the rule as it 
was proposed, with a repayment schedule spread over 12 months. The 
final rule allows the repayment period to be shortened to six months. 
This shorter time would mitigate some of the estimated lost revenue. 
The commenter's estimate assumes that the issuers will experience 
higher losses from making more credit available to consumers with 
blemished credit histories, and it assumes that the issuers will make 
no changes in the way that they acquire new accounts as a result of the 
rule. However, with better underwriting, issuers should be able to 
target customers who are less likely to default and thereby limit their 
losses. Another strategy to limit loss would be to offer consumers 
smaller lines of credit. In sum, the limited economic impact noted 
above may be overstated.
---------------------------------------------------------------------------

    \208\ The commenter estimated that this provision of the rule 
could reduce revenue to subprime issuers by as much as $119 per 
account. OTS estimates that the institutions under its jurisdiction 
hold approximately 92,000 affected high fee accounts.
---------------------------------------------------------------------------

Economic Effect That Appears To Trigger the Requirements of Executive 
Order 12866
    This final rule contains two other sections with a greater economic 
impact. One affects the way in which an institution allocates customer 
payments among the customer's outstanding balances. The other specifies 
the conditions under which an institution can raise the APR on 
outstanding balances.
    Unfair payment allocations. A consumer may have multiple balances 
on a consumer credit card account, each with a different interest rate. 
Currently, most institutions allocate payments they receive from a 
consumer by first covering fees and finance charges, then allocating 
any remaining amount from the lowest APR balance to the highest. In May 
2008, OTS proposed this section in response to concerns that, by 
following this practice, institutions were applying consumers' payments 
in a way that inappropriately maximized interest charges on consumer 
credit card accounts by not allocating payments to balances that accrue 
interest at higher rates unless all balances are paid in full. 
Commenters noted that some institutions would have to alter their 
systems and in some cases develop new systems for allocating payments 
among different balances, although the cost of such changes is not 
known and will depend on the size of the institution and the 
composition of its portfolio. Commenters further noted that this 
provision would discourage promotional rate offers to consumers and 
would affect the institutions' interest revenue. Finally, commenters 
predicted that issuers would compensate by increasing costs or 
decreasing credit available to consumers.
    Based on the comments received and OTS's analysis, the final rule 
adopts the general payment allocation rule as proposed with a few 
important changes to reduce burden and cost to the industry. This 
section will prohibit institutions from allocating payments above the 
minimum required to the balance with the lowest rate first. It will 
allow institutions to split such payments pro rata among the balances 
or to allocate them to the balance with the highest rate first. The 
costs of this rule are mitigated somewhat by providing institutions 
with flexibility as to which of the allocation methods they choose. In 
addition, by allowing institutions to have a general rule for 
allocating payments to all balances, including promotional balances, 
the costs to institutions have been reduced.
    Due to concerns that this section as proposed could significantly 
reduce or eliminate promotional rate offers, OTS has modified this 
provision. For the most part, this is because commenters supplied data 
that indicates that promotional rates provide an overall benefit to 
consumers in addition to the marketing benefits that such rates provide 
to institutions. Consequently, OTS believes that applying the general 
allocation rule to promotional rate balances strikes the appropriate 
balance by preserving promotional rate offers that provide substantial 
benefits to consumers while prohibiting the most harmful payment 
allocation practices. Accordingly, the final rule, unlike the proposal, 
does not require payments above the minimum payment to be applied to 
promotional rate balances last, after other balances are paid.
    Commenters indicated that this provision may affect institutions' 
interest revenue. Based on a projection for the total industry by a 
group of credit card issuers representing 70% of outstanding balances, 
the Board has estimated that this rule could result in an annual loss 
in interest revenue of $415 million.\209\ Savings associations 
currently account for a 3.5 percent share of total credit card 
receivables.\210\ The estimated loss of revenue for savings 
associations under this provision could be as high as $14,525,000.\211\ 
However, neither the OTS nor the Board has the data necessary to 
quantify the economic impact of this provision with specificity. 
Notably, the commenter did not provide adequate information to validate 
its assertions.
---------------------------------------------------------------------------

    \209\ The commenter projected a loss of interest revenue of up 
to $930 million, based on a drop of 0.098 percent in income. Board 
and OTS staff estimate that the removal of requirements in the 
proposed rule regarding grace periods reduced the projected loss by 
$100 million, and the removal of requirements in the proposed rule 
regarding promotional rate balances further decreases the impact on 
interest revenue by at least 55 percent, to approximately $415 
million.
    \210\ Outstanding revolving credit for September 2008 was $970.5 
billion. Of this, savings institutions accounted for $34.4 billion, 
a 3.5% share. Federal Reserve Board, Statistical Supplement to 
November 2008 Federal Reserve Bulletin, G.19 (Nov. 7, 2008) 
(available at http://www.federalreserve.gov/releases/g19/Current/).
    \211\ This estimate may be excessive because the OTS estimate of 
overall credit card receivables may inappropriately include charge 
cards, which do not carry balances and do not have different 
interest rates. To the extent that outstanding balances on charge 
cards are included, the economic effect of the rule is overstated.
---------------------------------------------------------------------------

    It should also be noted that while this provision will 
significantly reduce interest charges that consumers will pay, removing 
requirements in the proposed rule regarding promotional rate balances 
will mitigate this effect by reducing the estimated impact on interest 
revenue. Moreover, to the extent that the payment allocation 
restrictions included in the rule impose costs, institutions are likely 
to adjust initial credit card terms to reflect those costs. If this 
occurs, consumers will likely have a clearer initial disclosure of 
potential costs with which to compare credit card offerings than they 
do now. Their actual cost of credit will not be increased by low-to-
high balance payment allocation strategies implemented by institutions 
after charges have been incurred.
    Unfair annual percentage rate increases. This section generally 
prohibits institutions from increasing the annual percentage rate on 
any balance the first year and on outstanding balances thereafter. For 
new accounts, institutions would be prohibited from increasing the APR 
during the first year unless the APR varies with an index, the card 
holder fails to pay within 30 days of the due date, or the card holder 
fails to comply with a workout arrangement. After the first year, the 
rule also allows savings associations to increase the annual percentage 
rate on transactions that occur more than seven days after the 
institution provides a notice of the APR

[[Page 5556]]

increase under Regulation Z. Nothing in the final rule prohibits 
issuers from imposing late charges or other sanctions short of 
increasing the APR.
    The rule will not permit the institution to increase the APR on the 
outstanding balances if the consumer defaults on other debt 
obligations. This practice is sometimes referred to as ``universal 
default.'' Based on OTS supervisory observations and experience, none 
of the larger savings associations practice universal default. The 
final rule will also require issuers to adjust the manner in which they 
offer deferred interest rate balances to ensure that consumers are not 
unfairly surprised by the assessment of deferred interest.
    A group of credit card issuers representing 70% of outstanding 
balances submitted a comment which projected that the overall cost to 
the industry of this provision of the rule as proposed would result in 
an annual loss in interest revenue of 0.872 percent, or $7.40 billion. 
This analysis stated that banks will compensate for a loss in interest 
revenue by increasing rates and/or decreasing available credit for 
consumers. Even assuming this analysis is accurate, the OTS, Board, and 
NCUA believe that the revisions to the proposed rule may decrease the 
estimated impact on interest revenue by more than 70 percent (to an 
annual loss of interest revenue of 0.242 percent, or approximately 
$2.05 billion) and, therefore, result in a proportionately lower impact 
on consumers.\212\ However, this lower projection may still be 
overstated because some of the impact asserted by the commenter is 
attributable to disclosure requirements of Regulation Z. These 
Regulation Z requirements, implemented by the Board, require advance 
notice to consumers of increased rates and delay implementation of 
increased rates for 45 days.
---------------------------------------------------------------------------

    \212\ The issuers' analysis does not consider the effect of 
prohibiting APR changes in the first year on new balances or the 
adjustments that they will likely make to the way deferred interest 
rate balances are offered.
---------------------------------------------------------------------------

    Applying these estimates to institutions under OTS jurisdiction, 
this provision of the final rule appears to have an economic impact on 
savings associations that ranges from $71.75 million (based on a 
potential $2.05 billion in loss of industry revenue) \213\ to $259 
million (based on loss of industry revenue of $7.4 billion).\214\
---------------------------------------------------------------------------

    \213\ Applying 3.5 percent to the $2.05 billion loss of revenue 
gives an estimated revenue loss of $71,750,000 for this provision. 
See Federal Reserve Board, Statistical Supplement to November 2008 
Federal Reserve Bulletin, G.19 (Nov. 7, 2008) (available at http://www.federalreserve.gov/releases/g19/Current/). As with the payment 
allocation estimate, this estimate may be excessive since it may 
inappropriately include charge cards, which do not carry balances 
and do not have different interest rates. To the extent that charge 
card outstanding balances are included, the effect of the rule has 
been overstated.
    \214\ Applying 3.5 percent to the $7.4 billion estimate gives an 
estimated revenue loss for OTS-supervised institutions of $259 
million for this provision.
---------------------------------------------------------------------------

    However, if such revenue is economically justified in a competitive 
environment for the allocation of credit, then a likely longer-term 
outcome will be that institutions will incorporate such economic 
factors in the initial terms of credit card contracts. If that occurs, 
then consumers will have clearer initial information than they 
currently have on the comparative costs of credit card offerings. 
Consequently, the short-term disruptions to institutions caused by this 
rulemaking will likely be addressed in the longer term by changes in 
disclosed credit card account interest rates and fees, thus making it 
easier for consumers to more easily compare and consider the costs and 
benefits of different credit cards.
Costs to Consumers
    Commenters have suggested that institutions will compensate for 
potential losses in interest revenue by increasing credit card rates 
and/or decreasing credit available to consumers. Even assuming this 
assertion is accurate, OTS believes that the differences between the 
proposed and final rules will lead to both a smaller loss of revenue 
for issuers and decreased incentives for raising rates or limiting 
credit offered to consumers. To the extent income to savings 
associations is affected, the corresponding offset is an equally sized 
consumer benefit of lower fees and interest payments. Although OTS is 
unable to estimate its precise impact, OTS believes that many consumers 
will incur significantly reduced interest charges as a result of the 
rule. As a result, the economic effects of this rulemaking may result 
in transfers from institutions to consumers, with an overall limited 
net effect.
Costs to the Government
    The costs to OTS from this rule are insignificant. OTS, like the 
other federal financial regulators, conducts examinations of 
institutions on a regular basis for safety, soundness and compliance 
with laws and regulations. This rule will not add to that supervisory 
burden. To the contrary, OTS anticipates that this rule, by clarifying 
some of the prohibitions against unfair acts and practices in credit 
card lending with bright line rules, will make the supervision of 
savings associations more efficient, less time consuming, and less 
burdensome.
Conclusion
    Some predict that because of this rule, issuers will raise credit 
card rates for consumers and lower credit limits. However, OTS believes 
that many consumers will incur significantly reduced interest charges 
as a result of the rule.
    The costs to OTS from this rule are insignificant. In fact, this 
rule will make supervision and enforcement more efficient, less time 
consuming, and less burdensome.
    The cost to savings associations is limited because of the small 
size of the credit card market held by savings associations, the 
reduced impact of this rule caused by the Agencies' decision not to 
finalize several provisions, and the small number of institutions that 
presently employ the practices prohibited in this rule. Although the 
revenue loss data submitted by commenters has not been verified, the 
OTS has used it to provide the most generous estimate of the costs of 
this rule. Based on that data, the costs of this rule range between 
$97,223,000 and $284,473,000.\215\
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    \215\ The range is based on $10,948,000 (high fee cards) + 
$14,525,000 (payment allocation) + $71,750,000 (restriction on rate 
increases--with reduced impact) = $97,223,000. The higher figure is 
based on $10,948,000 (high fee cards) + $14,525,000 (payment 
allocation) + $259,000,000 (restriction on rate increases--higher 
estimated impact) = $284,747,000.
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5. Why the Final Regulation Is Preferable to Alternatives
Alternative A: OTS Issues Rule Alone
    In proposing this rule, OTS considered different approaches. As 
suggested in the ANPR, one approach was for OTS to issue a rule under 
either the FTC Act or as an expansion of OTS's Advertising rule that 
would cover only OTS-supervised institutions.\216\ Industry commenters 
responded that such an approach would create an unlevel playing field, 
and put OTS-supervised institutions at a possible competitive 
disadvantage. They argued that uniformity among the federal banking 
agencies and the NCUA is essential for the efficient functioning of the 
market. Consequently, the OTS has joined with the Board and NCUA to 
issue rules applicable to all banks, federal credit unions, and savings 
associations.\217\
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    \216\ 72 FR 43573.
    \217\ The Agencies recognized 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 the proposed rules. However, FTC-
regulated entities appear to represent a small percentage of the 
market for consumer credit card accounts and overdraft services. 
See, Federal Reserve Board, Statistical Supplement to November 2008 
Federal Reserve Bulletin, G.19 (Nov. 7, 2008) (available at http://www.federalreserve.gov/releases/g19/Current/).

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[[Page 5557]]

Alternative B: Agencies Issue Rules That Address a Range of Issues in a 
Variety of Markets
    In its ANPR, the OTS sought comment on whether it should attempt to 
address a broad range of potentially unfair or deceptive practices 
including those relating credit cards, residential mortgage lending, 
gift cards, and deposit accounts.\218\ However, the May 2008 Proposal 
focused 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. Targeting such practices fosters a level playing field and the 
efficient functioning of the market.
---------------------------------------------------------------------------

    \218\ 72 FR 43575.
---------------------------------------------------------------------------

Alternative C: Agencies Issue Rules Addressing All Practices Covered in 
the May 2008 Proposal
    In the May 2008 Proposal, the Agencies proposed seven provisions 
under the FTC Act regarding consumer credit card accounts and two 
provisions regarding checking account overdraft services. These 
provisions were intended to ensure that consumers were protected from 
harmful practices that they could not reasonably avoid and have the 
ability to make informed decisions about the use of credit card 
accounts and checking accounts without being subjected to unfair or 
deceptive acts or practices.
    However, after considering the comments received, OTS has decided 
not to address the practices covered by four of the proposed provisions 
in a final rule at this time. These provisions concerned overdraft and 
overlimit fees caused by holds, deceptive firm offers of credit, and a 
provision that would have provided a mechanism for a consumer to opt 
out of overdraft protection services.
    The Board is issuing a proposal under Regulation E published 
elsewhere in today's Federal Register to address overdraft and 
overlimit fees caused by holds and a mechanism for a consumer to opt 
out of overdraft protection services. OTS will determine whether to 
address these matters in the future in light of further information 
that may be obtained through the Board's Regulation E rulemaking. The 
Board is also publishing a final rule under Regulation Z that will 
address firm offers of credit containing a range of or multiple annual 
percentage rates. OTS will also address unfair or deceptive acts or 
practices that are not specifically included in today's final rule on a 
case-by-case basis.
Alternative D: Agencies Issue Rules That Address Five Unfair Credit 
Card Practices
    There were more than 65,000 comments on the May 2008 Proposal, and 
the overwhelming majority of these were from consumers. There were also 
comments from the industry, members of Congress \219\ and other 
governmental organizations. Based on the comments, outreach and 
Congressional testimony, the Agencies concluded that the final rule 
should contain five provisions.
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    \219\ Members of Congress have proposed several bills addressing 
consumer protection issues regarding credit cards. See, e.g., H.R. 
5244 and S. 3255. See also 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).
---------------------------------------------------------------------------

    Time to make payments. Based on the comments of consumers and on 
Congressional testimony, there were many instances of consumers who 
received their statements just before the due date, and that the 
consequence of late fees and higher interest was not avoidable. The 
Agencies agreed that a consumer should have a reasonable time to pay. A 
reasonable amount of time to pay may vary depending on the 
circumstances, but if a consumer is to have the possibility of 
disputing errors on the statement, that amount of time needs to be 
approximately three weeks. That allows a week to receive the statement, 
a week to review it, and a week for the payment to travel by mail. 
Shorter amounts of time for mailing would cover the majority of 
consumers, but would not adequately protect the small but significant 
number of consumers whose delivery times are longer than average.
    Unfair payment allocation. This rule requires issuers to allocate a 
consumer's payment over the required minimum to balances with the 
highest interest first or proportionately to all balances. This 
provision was a response to concerns that institutions applied 
consumers' payments in a manner that inappropriately maximized interest 
charges on consumer credit card accounts with balances at different 
interest rates. Interest charges were maximized by applying payments to 
balances with the lowest interest rate. The Agencies considered an 
exception for promotional rate balances, so that they would not be paid 
down and thereby lose the benefit of the promotional rate. However, the 
Agencies decided not to pursue that alternative because it would 
discourage promotional balance offers, and such offers are a 
significant benefit to consumers. The Agencies also considered an 
exception for deferred interest balances, but the need for this 
exception is negated by the final rule's restriction on the manner in 
which deferred interest rate balances are offered. The Agencies also 
considered using consumer disclosures as an alternative to this rule. 
After extensive testing by the Board, it became clear that consumers 
did not understand payment allocation practices and could not make 
informed decisions on using credit cards for different types of 
transactions.
    Unfair annual percentage rate increases. The rule will prohibit 
credit card issuers from increasing interest rates during the first 
year unless the planned increase has been disclosed at account opening, 
the annual percentage rate varies with an index, the card holder fails 
to pay within 30 days of the due date, or the card holder fails to 
comply with a workout arrangement. After the first year, the rule also 
allows card issuers to increase the annual percentage rate on 
transactions that occur more than seven days after the institution 
provides a notice of the annual percentage rate increase under 
Regulation Z. This rule was a response to changes in credit card terms 
that consumers either did not expect or could not avoid. Some changes 
in terms were a response to a consumer's lowered credit score--caused 
by actions unrelated to the credit card account (universal default). 
Some changes were a response to a payment that was late by a day (hair 
trigger penalty repricing). Some changes in terms were based on a 
credit card issuer's changed business circumstances (any time any 
reason repricing). Consumer testing showed that many consumers did not 
understand what factors, such as one late payment, can trigger penalty 
pricing.
    Many consumer commenters, as well as consumer groups, members of 
Congress, the FDIC, two state attorneys general and a state consumer 
protection agency supported the proposal to limit repricing except in 
very limited situations. Some advocated providing

[[Page 5558]]

the consumer with a right to opt-out of interest rate increases.
    The injury to consumers of having their interest rate increased 
substantially is difficult for most consumers to avoid. There are 
several circumstances that give rise to interest rate changes: market 
conditions (unrelated to consumer behavior), consumer default on an 
unrelated account, using a large proportion of the available credit, or 
late payment or overlimit charges. It is only the last two that are 
violations of the card agreement. Most consumers would not avoid the 
rate increase because they would not expect it in the circumstances 
described.
    The Agencies considered, and rejected the alternative proposed by 
some commenters to allow a consumer to ``opt out'' of the card 
relationship by closing it and transferring the balance. This was not a 
good alternative because it may not be possible for a consumer to close 
the card and transfer the balance to a comparable rate card without 
paying a transfer fee. The Agencies considered the impact on credit 
card issuers by limiting this rule to apply to outstanding balances, 
not to new purchases, except for the first year an account is open.
    The Agencies considered requiring the use of disclosures to inform 
consumers about the triggers for repricing. However, it was clear, 
based on consumer testing, that consumers did not understand how the 
triggers work, and consumers do not focus on the possibility of default 
at the time they open accounts. More importantly, disclosures would not 
allow consumers to avoid credit cards with this feature, since 
institutions almost uniformly apply increased rates to prior 
transactions.
    Unfair balance computation method. The final rule prohibits 
``double-cycle'' billing--charging interest on credit card balances for 
the days preceding the most recent billing cycle. The effect on a 
consumer is to lose the grace period for paying the full balance when a 
consumer who normally pays in full pays less than the full balance one 
month. This rule prohibits this practice because it is so difficult for 
consumers to understand. The Agencies considered the alternative of 
disclosures. However, after extensive consumer testing by the Board, it 
became clear that it was not possible to disclose this practice so that 
consumers could understand it.
    Unfair charging to the account of security deposits and fees for 
the issuance or availability of credit. This rule prohibits a credit 
card issuer from charging fees or security deposits to an account that 
use up more than the majority of the available credit. If the fees 
amount to more than 25% of the initial available credit, their 
repayment must be spread out over at least six months. These cards are 
called high fee accounts, or derogatorily, ``fee-harvester cards.''
    The Agencies have received many complaints from consumers about 
these cards from consumers who say they were not aware of how little 
available credit they would have after the security deposit and fees 
were charged to the card. Over 70 members of Congress, several states, 
the Federal Deposit insurance Corporation and the Office of the 
Comptroller of the Currency supported this provision. Many commenters 
wanted to add more prohibitions to this rule, by lowering fee 
thresholds, prohibiting the charging of security deposits to the cards, 
enhancing disclosure and prohibiting the marketing of these cards and 
credit repair products. Many industry commenters supported this rule.
    However, some commenters who are in this business asserted that 
they provide credit to consumers who would otherwise be unable to 
obtain it. In an effort to balance the concerns of consumers and the 
subprime credit card industry, the Agencies have limited the percentage 
of the fees and security deposits that can be charged to the card. This 
limit is no more than the majority. In addition, the rule will require 
issuers to spread repayment over the first six months if the fees and 
security deposits amount to more than 25 percent of the available 
credit. OTS believes that its issuers will change their underwriting, 
or reduce initial credit available, in response to this rule.

D. OTS Executive Order 13132 Determination

    OTS has determined that its portion of the rulemaking does not have 
any federalism implications for purposes of Executive Order 13132. As 
discussed in section IV of this SUPPLEMENTARY INFORMATION, OTS is 
removing from codification 12 CFR 535.5. This section had allowed OTS 
to grant state exemptions from OTS's Credit Practices Rule if state law 
affords a greater or substantially similar level of protection. The 
FHLBB, OTS's predecessor agency, had granted an exemption to the State 
or Wisconsin for substantially equivalent provisions of the Wisconsin 
Consumer Act. By removing this section, the exemption will cease to 
exist on July 1, 2010, the rule's effective date. As a result, state 
chartered savings associations that had previously been exempt from 
complying with OTS's Credit Practices Rule with regard to their 
Wisconsin operations but were required to comply with equivalent 
provisions of the Wisconsin Consumer Act, will now be required to 
comply with both OTS's Credit Practices Rule and the equivalent 
provisions of the Wisconsin Consumer Act.

E. NCUA Executive Order 13132 Determination

    The NCUA has determined that its portion of the rulemaking does not 
have any federalism implications for purposes of Executive Order 13132.

F. OTS Unfunded Mandates Reform Act of 1995 Determinations

    Section 202 of the Unfunded Mandates Reform Act of 1995, Public Law 
104-4 (Unfunded Mandates Act) requires that an agency prepare a 
budgetary impact statement before promulgating a rule that includes a 
Federal mandate that may result in expenditure by State, local, and 
tribal governments, in the aggregate, or by the private sector, of $100 
million or more (adjusted annually for inflation) in any one year. (The 
inflation adjusted threshold is $133 million or more.) If a budgetary 
impact statement is required, section 205 of the Unfunded Mandates Act 
also requires an agency to identify and consider a reasonable number of 
regulatory alternatives before promulgating a rule.
    OTS has determined that this rule will not result in expenditures 
by State, local, and tribal governments in excess of the threshold but 
may result in expenditures by the private sector in excess of the 
threshold. Accordingly, OTS has prepared a budgetary impact statement 
and addressed the regulatory alternatives considered. This is discussed 
further in section VIII.C. of this SUPPLEMENTARY INFORMATION (``OTS 
Executive Order 12866 Analysis'').

G. NCUA: The Treasury and General Government Appropriations Act, 1999--
Assessment of Federal Regulations and Policies on Families

    NCUA has determined that this final rule will not affect family 
well-being within the meaning of section 654 of the Treasury and 
General Government Appropriations Act, 1999, Pub. L. 105-277, 112 Stat. 
2681 (1998).

IX. Comments on Use of Plain Language

    Section 722 of the Gramm-Leach-Bliley Act requires the Board and 
OTS to use plain language in all proposed and final rules published 
after January 1, 2000. Additionally, NCUA's goal is to promulgate clear 
and understandable regulations that impose minimal

[[Page 5559]]

regulatory burdens. Therefore, the Agencies invited comment on how to 
make the May 2008 Proposal easier to understand.
    The Agencies received only one comment in response. A credit card 
issuer suggested that the proposed rules prohibiting unfair or 
deceptive acts or practices with respect to consumer credit card 
accounts would be easier to understand if placed with the rules 
governing credit cards in the Board's Regulation Z. As discussed above, 
however, the Agencies have determined that the FTC Act is the 
appropriate authority for issuance of the final rule.

List of Subjects

12 CFR Part 227

    Banks, Banking, Credit, Intergovernmental relations, Trade 
practices.

12 CFR Part 535

    Consumer credit, Consumer protection, Credit, Credit cards, 
Deception, Intergovernmental relations, Savings associations, Trade 
practices, Unfairness.

12 CFR Part 706

    Credit, Credit unions, Deception, Intergovernmental relations, 
Trade practices, Unfairness.

Board of Governors of the Federal Reserve System

12 CFR Chapter II

Authority and Issuance

0
For the reasons discussed in the joint preamble, the Board amends 12 
CFR part 227 as set forth below:

PART 227--UNFAIR OR DECEPTIVE ACTS OR PRACTICES (REGULATION AA)

0
1. The separate authority citations for subparts A and B are removed 
and a new authority citation for part 227 is added to read as follows:

    Authority: 15 U.S.C. 57a(f).

Subpart A--General Provisions

0
2. The heading for subpart A is revised to read as set forth above.


Sec.  227.1  [Removed]

0
3. Section 227.1 is removed.


Sec.  227.11  [Redesignated as Sec.  227.1]

0
3a. Section 227.11 is redesignated as Sec.  227.1 and transferred to 
subpart A, and revised to read as follows:


Sec.  227.1  Authority, purpose, and scope.

    (a) Authority. This part is issued by the Board under section 18(f) 
of the Federal Trade Commission Act, 15 U.S.C. 57a(f) (section 202(a) 
of the Magnuson-Moss Warranty--Federal Trade Commission Improvement 
Act, Pub. L. 93-637).
    (b) Purpose. The purpose of this part is to prohibit unfair or 
deceptive acts or practices in violation of section 5(a)(1) of the 
Federal Trade Commission Act, 15 U.S.C. 45(a)(1). Subparts B and C 
define and contain requirements prescribed for the purpose of 
preventing specific unfair or deceptive acts or practices of banks. The 
prohibitions in subparts B and C do not limit the Board's or any other 
agency's authority to enforce the FTC Act with respect to any other 
unfair or deceptive acts or practices.
    (c) Scope. Subparts B and C apply to banks, including subsidiaries 
of banks and other entities listed in paragraph (c)(2) of this section. 
Subparts B and C do not apply to savings associations as defined in 12 
U.S.C. 1813(b). Compliance is to be enforced by:
    (1) The Comptroller of the Currency, in the case of national banks 
and federal branches and federal agencies of foreign banks;
    (2) The Board of Governors of the Federal Reserve System, in the 
case of banks that are members of the Federal Reserve System (other 
than banks referred to in paragraph (c)(1) of this section), branches 
and agencies of foreign banks (other than federal branches, federal 
agencies, and insured state branches of foreign banks), commercial 
lending companies owned or controlled by foreign banks, and 
organizations operating under section 25 or 25A of the Federal Reserve 
Act; and
    (3) The Federal Deposit Insurance Corporation, in the case of banks 
insured by the Federal Deposit Insurance Corporation (other than banks 
referred to in paragraphs (c)(1) and (c)(2) of this section), and 
insured state branches of foreign banks.
    (d) Definitions. Unless otherwise noted, the terms used in 
paragraph (c) of this section that are not defined in the Federal Trade 
Commission Act or in section 3(s) of the Federal Deposit Insurance Act 
(12 U.S.C. 1813(s)) shall have the meaning given to them in section 
1(b) of the International Banking Act of 1978 (12 U.S.C. 3101).

0
4. Section 227.2 is revised to read as follows:


Sec.  227.2  Consumer-complaint procedure.

    (a) Definitions. For purposes of this section, unless the context 
indicates otherwise, the following definitions apply:
    (1) ``Board'' means the Board of Governors of the Federal Reserve 
System.
    (2) ``Consumer complaint'' means an allegation by or on behalf of 
an individual, group of individuals, or other entity that a particular 
act or practice of a State member bank is unfair or deceptive, or in 
violation of a regulation issued by the Board pursuant to a Federal 
statute, or in violation of any other act or regulation under which the 
bank must operate. Unless the context indicates otherwise, 
``complaint'' shall be construed to mean a ``consumer complaint'' for 
purposes of this section.
    (3) ``State member bank'' means a bank that is chartered by a State 
and is a member of the Federal Reserve System.
    (b) Submission of complaints. (1) Any consumer having a complaint 
regarding a State member bank is invited to submit it to the Federal 
Reserve System. The complaint should be submitted in writing, if 
possible, and should include the following information:
    (i) A description of the act or practice that is thought to be 
unfair or deceptive, or in violation of existing law or regulation, 
including all relevant facts;
    (ii) The name and address of the State member bank that is the 
subject of the complaint; and
    (iii) The name and address of the complainant.
    (2) Consumer complaints should be made to--Federal Reserve Consumer 
Help Center, P.O. Box 1200, Minneapolis, MN 55480, Toll-free number: 
(888) 851-1920, Fax number: (877) 888-2520, TDD number: (877) 766-8533, 
E-mail address: [email protected], Web site address: 
www.federalreserveconsumerhelp.gov.
    (c) Response to complaints. Within 15 business days of receipt of a 
written complaint by the Board or a Federal Reserve Bank, a substantive 
response or an acknowledgment setting a reasonable time for a 
substantive response will be sent to the individual making the 
complaint.
    (d) Referrals to other agencies. Complaints received by the Board 
or a Federal Reserve Bank regarding an act or practice of an 
institution other than a State member bank will be forwarded to the 
Federal agency having jurisdiction over that institution.


Sec.  227.11  [Added and reserved]

0
5. In Subpart B, Sec.  227.11 is added and reserved.

0
6. A new Subpart C is added to part 227 to read as follows:

[[Page 5560]]

Subpart C--Consumer Credit Card Account Practices Rule
Sec.
227.21 Definitions.
227.22 Unfair acts or practices regarding time to make payment.
227.23 Unfair acts or practices regarding allocation of payments.
227.24 Unfair acts or practices regarding increases in annual 
percentage rates.
227.25 Unfair balance computation method.
227.26 Unfair charging of security deposits and fees for the 
issuance or availability of credit to consumer credit card accounts.

Subpart C--Consumer Credit Card Account Practices Rule


Sec.  227.21  Definitions.

    For purposes of this subpart, the following definitions apply:
    (a) ``Annual percentage rate'' means 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. The term ``periodic 
rate'' has the same meaning as in 12 CFR 226.2.
    (b) ``Consumer'' means 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.
    (c) ``Consumer credit card account'' means 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 card or charge card. 
The terms ``open-end credit,'' ``credit card,'' and ``charge card'' 
have the same meanings as in 12 CFR 226.2. The following are not 
consumer credit card accounts for purposes of this subpart:
    (1) Home equity plans subject to the requirements of 12 CFR 226.5b 
that are accessible by a credit or charge card;
    (2) Overdraft lines of credit tied to asset accounts accessed by 
check-guarantee cards or by debit cards;
    (3) Lines of credit accessed by check-guarantee cards or by debit 
cards that can be used only at automated teller machines; and
    (4) Lines of credit accessed solely by account numbers.


Sec.  227.22  Unfair acts or practices regarding time to make payment.

    (a) General rule. Except as provided in paragraph (c) of this 
section, a bank must not treat a payment on a consumer credit card 
account as late for any purpose unless the consumer has been provided a 
reasonable amount of time to make the payment.
    (b) Compliance with general rule--(1) Establishing compliance. A 
bank must be able to establish that it has complied with paragraph (a) 
of this section.
    (2) Safe harbor. A bank complies with paragraph (a) of this section 
if it has 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.
    (c) Exception for grace periods. Paragraph (a) of this section does 
not apply to any time period provided by the bank within which the 
consumer may repay any portion of the credit extended without incurring 
an additional finance charge.


Sec.  227.23  Unfair acts or practices regarding allocation of 
payments.

    When different annual percentage rates apply to different balances 
on a consumer credit card account, the bank must allocate any amount 
paid by the consumer in excess of the required minimum periodic payment 
among the balances using one of the following methods:
    (a) High-to-low method. The amount paid by the consumer in excess 
of the required minimum periodic payment is allocated first to the 
balance with the highest annual percentage rate and any remaining 
portion to the other balances in descending order based on the 
applicable annual percentage rate.
    (b) Pro rata method. The amount paid by the consumer in excess of 
the required minimum periodic payment is allocated among the balances 
in the same proportion as each balance bears to the total balance.


Sec.  227.24  Unfair acts or practices regarding increases in annual 
percentage rates.

    (a) General rule. At account opening, a bank must disclose the 
annual percentage rates that will apply to each category of 
transactions on the consumer credit card account. A bank must not 
increase the annual percentage rate for a category of transactions on 
any consumer credit card account except as provided in paragraph (b) of 
this section.
    (b) Exceptions. The prohibition in paragraph (a) of this section on 
increasing annual percentage rates does not apply where an annual 
percentage rate may be increased pursuant to one of the exceptions in 
this paragraph.
    (1) Account opening disclosure exception. An annual percentage rate 
for a category of transactions may be increased to a rate disclosed at 
account opening upon expiration of a period of time disclosed at 
account opening.
    (2) Variable rate exception. An annual percentage rate for a 
category of transactions that varies according to an index that is not 
under the bank's control and is available to the general public may be 
increased due to an increase in the index.
    (3) Advance notice exception. An annual percentage rate for a 
category of transactions may be increased pursuant to a notice under 12 
CFR 226.9(c) or (g) for transactions that occur more than seven days 
after provision of the notice. This exception does not permit an 
increase in any annual percentage rate during the first year after the 
account is opened.
    (4) Delinquency exception. An annual percentage rate may be 
increased due to the bank not receiving the consumer's required minimum 
periodic payment within 30 days after the due date for that payment.
    (5) Workout arrangement exception. An annual percentage rate may be 
increased due to the consumer's failure to comply with the terms of a 
workout arrangement between the bank and the consumer, provided that 
the annual percentage rate applicable to a category of transactions 
following any such increase does not exceed the rate that applied to 
that category of transactions prior to commencement of the workout 
arrangement.
    (c) Treatment of protected balances. For purposes of this 
paragraph, ``protected balance'' means the amount owed for a category 
of transactions to which an increased annual percentage rate cannot be 
applied after the rate for that category of transactions has been 
increased pursuant to paragraph (b)(3) of this section.
    (1) Repayment. The bank must provide the consumer with one of the 
following methods of repaying a protected balance or a method that is 
no less beneficial to the consumer than one of the following methods:
    (i) An amortization period of no less than five years, starting 
from the date on which the increased rate becomes effective for the 
category of transactions; or
    (ii) A required minimum periodic payment that includes a percentage 
of the protected balance that is no more than twice the percentage 
required before the date on which the increased rate became effective 
for the category of transactions.
    (2) Fees and charges. The bank must not assess any fee or charge 
based solely on a protected balance.


Sec.  227.25  Unfair balance computation method.

    (a) General rule. Except as provided in paragraph (b) of this 
section, a bank must not impose finance charges on

[[Page 5561]]

balances on a consumer credit card account based on balances for days 
in billing cycles that precede the most recent billing cycle as a 
result of the loss of any time period provided by the bank within which 
the consumer may repay any portion of the credit extended without 
incurring a finance charge.
    (b) Exceptions. Paragraph (a) of this section does not apply to:
    (1) Adjustments to finance charges as a result of the resolution of 
a dispute under 12 CFR 226.12 or 12 CFR 226.13; or
    (2) Adjustments to finance charges as a result of the return of a 
payment for insufficient funds.


Sec.  227.26  Unfair charging of security deposits and fees for the 
issuance or availability of credit to consumer credit card accounts.

    (a) Limitation for first year. During the first year, a bank must 
not charge to a consumer credit card account security deposits and fees 
for the issuance or availability of credit that in total constitute a 
majority of the initial credit limit for the account.
    (b) Limitations for first billing cycle and subsequent billing 
cycles. (1) First billing cycle. During the first billing cycle, the 
bank must not charge to a consumer credit card account security 
deposits and fees for the issuance or availability of credit that in 
total constitute more than 25 percent of the initial credit limit for 
the account.
    (2) Subsequent billing cycles. Any additional security deposits and 
fees for the issuance or availability of credit permitted by paragraph 
(a) of this section must be charged to the account in equal portions in 
no fewer than the five billing cycles immediately following the first 
billing cycle.
    (c) Evasion prohibited. A bank must not evade the requirements of 
this section by providing the consumer with additional credit to fund 
the payment of security deposits and fees for the issuance or 
availability of credit that exceed the total amounts permitted by 
paragraphs (a) and (b) of this section.
    (d) Definitions. For purposes of this section, the following 
definitions apply:
    (1) ``Fees for the issuance or availability of credit'' means:
    (i) Any annual or other periodic fee that may be imposed for the 
issuance or availability of a consumer credit card account, including 
any fee based on account activity or inactivity; and
    (ii) Any non-periodic fee that relates to opening an account.
    (2) ``First billing cycle'' means the first billing cycle after a 
consumer credit card account is opened.
    (3) ``First year'' means the period beginning with the date on 
which a consumer credit card account is opened and ending twelve months 
from that date.
    (4) ``Initial credit limit'' means the credit limit in effect when 
a consumer credit card account is opened.

0
7. A new Supplement I is added to part 227 as follows:

Supplement I to Part 227--Official Staff Commentary

Subpart A--General Provisions for Consumer Protection Rules

Section 227.1--Authority, Purpose, and Scope

1(c) Scope

    1. Penalties for noncompliance. Administrative enforcement of 
the rule for banks may involve actions under section 8 of the 
Federal Deposit Insurance Act (12 U.S.C. 1818), including cease-and-
desist orders requiring that actions be taken to remedy violations 
and civil money penalties.
    2. Industrial loan companies. Industrial loan companies that are 
insured by the Federal Deposit Insurance Corporation are covered by 
the Board's rule.

Subpart C--Consumer Credit Card Account Practices Rule

Section 227.22--Unfair Acts or Practices Regarding Time To Make 
Payment

22(a) General Rule

    1. Treating a payment as late for any purpose. 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 to make that payment under this section.
    2. Reasonable amount of time to make payment. Whether an amount 
of time is reasonable for purposes of making a payment is determined 
from the perspective of the consumer, not the bank. Under Sec.  
227.22(b)(2), a bank provides a reasonable amount of time to make a 
payment if it has 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.

22(b) Compliance with General Rule

    1. Reasonable procedures. A bank is not required to determine 
the specific date on which periodic statements are mailed or 
delivered to each individual consumer. A bank provides a reasonable 
amount of time to make a payment if it has adopted reasonable 
procedures designed to ensure that periodic statements are mailed or 
delivered to consumers no later than a certain number of days after 
the closing date of the billing cycle and adds that number of days 
to the 21-day period in Sec.  227.24(b)(2) when determining the 
payment due date. For example, if a bank has adopted reasonable 
procedures designed to ensure that periodic statements are mailed or 
delivered to consumers no later than three days after the closing 
date of the billing cycle, the payment due date on the periodic 
statement must be no less than 24 days after the closing date of the 
billing cycle.
    2. Payment due date. For purposes of Sec.  227.22(b)(2), 
``payment due date'' means the date by which the bank requires the 
consumer to make the required minimum periodic payment in order to 
avoid being treated as late for any purpose, except as provided in 
Sec.  227.22(c).
    3. Example of alternative method of compliance. Assume that, for 
a particular type of consumer credit card account, a bank only 
provides periodic statements electronically and only accepts 
payments electronically (consistent with applicable law and 
regulatory guidance). Under these circumstances, the bank could 
comply with Sec.  227.22(a) even if it does not provide periodic 
statements 21 days before the payment due date consistent with Sec.  
227.22(b)(2).

Section 227.23--Unfair Acts or Practices Regarding Allocation of 
Payments

    1. Minimum periodic payment. Section 227.23 addresses the 
allocation of amounts paid by the consumer in excess of the minimum 
periodic payment required by the bank. Section 227.23 does not limit 
or otherwise address the bank's ability to determine, consistent 
with applicable law and regulatory guidance, the amount of the 
required minimum periodic payment or how that payment is allocated. 
A bank may, but is not required to, allocate the required minimum 
periodic payment consistent with the requirements in Sec.  227.23 to 
the extent consistent with other applicable law or regulatory 
guidance.
    2. Adjustments of one dollar or less permitted. When allocating 
payments, the bank may adjust amounts by one dollar or less. For 
example, if a bank is allocating $100 pursuant to Sec.  227.23(b) 
among balances of $1,000, $2,000, and $4,000, the bank may apply $14 
to the $1,000 balance, $29 to the $2,000 balance, and $57 to the 
$4,000 balance.
    3. Applicable balances and annual percentage rates. Section 
227.23 permits a bank to allocate an amount paid by the consumer in 
excess of the required minimum periodic payment based on the 
balances and annual percentage rates on the date the preceding 
billing cycle ends, on the date the payment is credited to the 
account, or on any day in between those two dates. For example, 
assume that the billing cycles for a consumer credit card account 
start on the first day of the month and end on the last day of the 
month. On the date the March billing cycle ends (March 31), the 
account has a purchase balance of $500 at a variable annual 
percentage rate of 14% and a cash advance balance of $200 at a 
variable annual percentage rate of 18%. On April 1, the rate for 
purchases increases to 16% and the rate for cash advances increases 
to 20% consistent with Sec.  227.24(b)(2). On April 15, the purchase 
balance increases to $700. On April 25, the bank credits to the 
account $400 paid by the consumer in excess of the required minimum 
periodic payment. Under

[[Page 5562]]

Sec.  227.23, the bank may allocate the $400 based on the balances 
in existence and rates in effect on any day from March 31 through 
April 25.
    4. Use of permissible allocation methods. A bank is not 
prohibited from changing the allocation method for a consumer credit 
card account or from using different allocation methods for 
different consumer credit card accounts, so long as the methods used 
are consistent with Sec.  227.23. For example, a bank may change 
from allocating to the highest rate balance first pursuant to Sec.  
227.23(a) to allocating pro rata pursuant to Sec.  227.23(b) or vice 
versa. Similarly, a bank may allocate to the highest rate balance 
first pursuant to Sec.  227.23(a) on some of its accounts and 
allocate pro rata pursuant to Sec.  227.23(b) on other accounts.
    5. Claims or defenses under Regulation Z, 12 CFR 226.12(c). When 
a consumer has asserted a claim or defense against the card issuer 
pursuant to 12 CFR 226.12(c), the bank must allocate consistent with 
12 CFR 226.12 comment 226.12(c)-4.
    6. Balances with the same annual percentage rate. When the same 
annual percentage rate applies to more than one balance on an 
account and a different annual percentage rate applies to at least 
one other balance on that account, Sec.  227.23 does not require 
that any particular method be used when allocating among the 
balances with the same annual percentage rate. Under these 
circumstances, a bank may treat the balances with the same rate as a 
single balance or separate balances. See comments 23(a)-1.iv and 
23(b)-2.iv.

23(a) High-to-Low Method

    1. Examples. For purposes of the following examples, assume that 
none of the required minimum periodic payment is allocated to the 
balances discussed (unless otherwise stated).
    i. Assume that a consumer's account has a cash advance balance 
of $500 at an annual percentage rate of 20% and a purchase balance 
of $1,500 at an annual percentage rate of 15% and that the consumer 
pays $800 in excess of the required minimum periodic payment. A bank 
using this method would allocate $500 to pay off the cash advance 
balance and then allocate the remaining $300 to the purchase 
balance.
    ii. Assume that a consumer's account has a cash advance balance 
of $500 at an annual percentage rate of 20% and a purchase balance 
of $1,500 at an annual percentage rate of 15% and that the consumer 
pays $400 in excess of the required minimum periodic payment. A bank 
using this method would allocate the entire $400 to the cash advance 
balance.
    iii. Assume that a consumer's account has a cash advance balance 
of $100 at an annual percentage rate of 20%, a purchase balance of 
$300 at an annual percentage rate of 18%, and a $600 protected 
balance on which the 12% annual percentage rate cannot be increased 
pursuant to Sec.  227.24. If the consumer pays $500 in excess of the 
required minimum periodic payment, a bank using this method would 
allocate $100 to pay off the cash advance balance, $300 to pay off 
the purchase balance, and $100 to the protected balance.
    iv. Assume that a consumer's account has a cash advance balance 
of $500 at an annual percentage rate of 20%, a purchase balance of 
$1,000 at an annual percentage rate of 15%, and a transferred 
balance of $2,000 that was previously at a discounted annual 
percentage rate of 5% but is now at an annual percentage rate of 
15%. Assume also that the consumer pays $800 in excess of the 
required minimum periodic payment. A bank using this method would 
allocate $500 to pay off the cash advance balance and allocate the 
remaining $300 among the purchase balance and the transferred 
balance in the manner the bank deems appropriate.

23(b) Pro Rata Method

    1. Total balance. A bank may, but is not required to, deduct 
amounts paid by the consumer's required minimum periodic payment 
when calculating the total balance for purposes of Sec.  
227.23(b)(3). See comment 23(b)-2.iii.
    2. Examples. For purposes of the following examples, assume that 
none of the required minimum periodic payment is allocated to the 
balances discussed (unless otherwise stated) and that the amounts 
allocated to each balance are rounded to the nearest dollar.
    i. Assume that a consumer's account has a cash advance balance 
of $500 at an annual percentage rate of 20% and a purchase balance 
of $1,500 at an annual percentage rate of 15% and that the consumer 
pays $555 in excess of the required minimum periodic payment. A bank 
using this method would allocate 25% of the amount ($139) to the 
cash advance balance and 75% of the amount ($416) to the purchase 
balance.
    ii. Assume that a consumer's account has a cash advance balance 
of $100 at an annual percentage rate of 20%, a purchase balance of 
$300 at an annual percentage rate of 18%, and a $600 protected 
balance on which the 12% annual percentage rate cannot be increased 
pursuant to Sec.  227.24. If the consumer pays $130 in excess of the 
required minimum periodic payment, a bank using this method would 
allocate 10% of the amount ($13) to the cash advance balance, 30% of 
the amount ($39) to the purchase balance, and 60% of the amount 
($78) to the protected balance.
    iii. Assume that a consumer's account has a cash advance balance 
of $300 at an annual percentage rate of 20% and a purchase balance 
of $600 at an annual percentage rate of 15%. Assume also that the 
required minimum periodic payment is $50 and that the bank allocates 
this payment first to the balance with the lowest annual percentage 
rate (the $600 purchase balance). If the consumer pays $300 in 
excess of the $50 minimum payment, a bank using this method could 
allocate based on a total balance of $850 (consisting of the $300 
cash advance balance plus the $550 purchase balance after 
application of the $50 minimum payment). In this case, the bank 
would apply 35% of the $300 ($105) to the cash advance balance and 
65% of that amount ($195) to the purchase balance. In the 
alternative, the bank could allocate based on a total balance of 
$900 (which does not reflect the $50 minimum payment). In that case, 
the bank would apply one third of the $300 excess payment ($100) to 
the cash advance balance and two thirds ($200) to the purchase 
balance.
    iv. Assume that a consumer's account has a cash advance balance 
of $500 at an annual percentage rate of 20%, a purchase balance of 
$1,000 at an annual percentage rate of 15%, and a transferred 
balance of $2,000 that was previously at a discounted annual 
percentage rate of 5% but is now at an annual percentage rate of 
15%. Assume also that the consumer pays $800 in excess of the 
required minimum periodic payment. A bank using this method would 
allocate 14% of the excess payment ($112) to the cash advance 
balance and allocate the remaining 86% ($688) among the purchase 
balance and the transferred balance in the manner the bank deems 
appropriate.

Section 227.24--Unfair Acts or Practices Regarding Increases in 
Annual Percentage Rates

    1. Relationship to Regulation Z, 12 CFR part 226. A bank that 
complies with the applicable disclosure requirements in Regulation 
Z, 12 CFR part 226, has complied with the disclosure requirements in 
Sec.  227.24. See 12 CFR 226.5a, 226.6, 226.9. For example, a bank 
may comply with the requirement in Sec.  227.24(a) to disclose at 
account opening the annual percentage rates that will apply to each 
category of transactions by complying with the disclosure 
requirements in 12 CFR 226.5a regarding applications and 
solicitations and the requirements in 12 CFR 226.6 regarding 
account-opening disclosures. Similarly, in order to increase an 
annual percentage rate on new transactions pursuant to Sec.  
227.24(b)(3), a bank must comply with the disclosure requirements in 
12 CFR 226.9(c) or (g). However, nothing in Sec.  227.24 alters the 
requirements in 12 CFR 226.9(c) and (g) that creditors provide 
consumers with written notice at least 45 days prior to the 
effective date of certain increases in the annual percentage rates 
on open-end (not home-secured) credit plans.

24(a) General Rule

    1. Rates that will apply to each category of transactions. 
Section 227.24(a) requires banks to disclose, at account opening, 
the annual percentage rates that will apply to each category of 
transactions on the account. A bank cannot satisfy this requirement 
by disclosing at account opening only a range of rates or that a 
rate will be ``up to'' a particular amount.
    2. Application of prohibition on increasing rates. Section 
227.24(a) prohibits banks from increasing the annual percentage rate 
for a category of transactions on any consumer credit card account 
unless specifically permitted by one of the exceptions in Sec.  
227.24(b). The following examples illustrate the application of the 
rule:
    i. Assume that, at account opening on January 1 of year one, a 
bank discloses that the annual percentage rate for purchases is a 
non-variable rate of 15% and will apply for six months. The bank 
also discloses that, after six months, the annual percentage rate 
for purchases will be a variable rate that is currently 18% and will 
be adjusted quarterly by adding a margin of 8 percentage points to a 
publicly available index not under the

[[Page 5563]]

bank's control. Finally, the bank discloses that the annual 
percentage rate for cash advances is the same variable rate that 
will apply to purchases after six months. The payment due date for 
the account is the twenty-fifth day of the month and the required 
minimum periodic payments are applied to accrued interest and fees 
but do not reduce the purchase and cash advance balances.
    A. On January 15, the consumer uses the account to make a $2,000 
purchase and a $500 cash advance. No other transactions are made on 
the account. At the start of each quarter, the bank adjusts the 
variable rate that applies to the $500 cash advance consistent with 
changes in the index (pursuant to Sec.  227.24(b)(2)). All required 
minimum periodic payments are received on or before the payment due 
date until May of year one, when the payment due on May 25 is 
received by the bank on May 28. The bank is prohibited by Sec.  
227.24 from increasing the rates that apply to the $2,000 purchase, 
the $500 cash advance, or future purchases and cash advances. Six 
months after account opening (July 1), the bank begins accruing 
interest on the $2,000 purchase at the previously disclosed variable 
rate determined using an 8-point margin (pursuant to Sec.  
227.24(b)(1)). Because no other increases in rate were disclosed at 
account opening, the bank may not subsequently increase the variable 
rate that applies to the $2,000 purchase and the $500 cash advance 
(except due to increases in the index pursuant to Sec.  
227.24(b)(2)). On November 16, the bank provides a notice pursuant 
to 12 CFR 226.9(c) informing the consumer of a new variable rate 
that will apply on January 1 of year two (calculated using the same 
index and an increased margin of 12 percentage points). On January 1 
of year two, the bank increases the margin used to determine the 
variable rate that applies to new purchases to 12 percentage points 
(pursuant to Sec.  227.24(b)(3)). On January 15 of year two, the 
consumer makes a $300 purchase. The bank applies the variable rate 
determined using the 12-point margin to the $300 purchase but not 
the $2,000 purchase.
    B. Same facts as above except that the required minimum periodic 
payment due on May 25 of year one is not received by the bank until 
June 30 of year one. Because the bank received the required minimum 
periodic payment more than 30 days after the payment due date, Sec.  
227.24(b)(4) permits the bank to increase the annual percentage rate 
applicable to the $2,000 purchase, the $500 cash advance, and future 
purchases and cash advances. However, the bank must first comply 
with the notice requirements in 12 CFR 226.9(g). Thus, if the bank 
provided a 12 CFR 226.9(g) notice on June 25 stating that all rates 
on the account would be increased to a non-variable penalty rate of 
30%, the bank could apply that 30% rate beginning on August 9 to all 
balances and future transactions.
    ii. Assume that, at account opening on January 1 of year one, a 
bank discloses that the annual percentage rate for purchases will 
increase as follows: A non-variable rate of 5% for six months; a 
non-variable rate of 10% for an additional six months; and 
thereafter a variable rate that is currently 15% and will be 
adjusted monthly by adding a margin of 5 percentage points to a 
publicly available index not under the bank's control. The payment 
due date for the account is the fifteenth day of the month and the 
required minimum periodic payments are applied to accrued interest 
and fees but do not reduce the purchase balance. On January 15, the 
consumer uses the account to make a $1,500 purchase. Six months 
after account opening (July 1), the bank begins accruing interest on 
the $1,500 purchase at the previously disclosed 10% non-variable 
rate (pursuant to Sec.  227.24(b)(1)). On September 15, the consumer 
uses the account for a $700 purchase. On November 16, the bank 
provides a notice pursuant to 12 CFR 226.9(c) informing the consumer 
of a new variable rate that will apply on January 1 of year two 
(calculated using the same index and an increased margin of 8 
percentage points). One year after account opening (January 1 of 
year two), the bank begins accruing interest on the $2,200 purchase 
balance at the previously disclosed variable rate determined using a 
5-point margin (pursuant to Sec.  227.24(b)(1)). Because the 
variable rate determined using the 8-point margin was not disclosed 
at account opening, the bank may not apply that rate to the $2,200 
purchase balance. Furthermore, because no other increases in rate 
were disclosed at account opening, the bank may not subsequently 
increase the variable rate that applies to the $2,200 purchase 
balance (except due to increases in the index pursuant to Sec.  
227.24(b)(2)). The bank may, however, apply the variable rate 
determined using the 8-point margin to purchases made on or after 
January 1 of year two (pursuant to Sec.  227.24(b)(3)).
    iii. Assume that, at account opening on January 1 of year one, a 
bank discloses that the annual percentage rate for purchases is a 
variable rate determined by adding a margin of 6 percentage points 
to a publicly available index outside of the bank's control. The 
bank also discloses that, to the extent consistent with Sec.  227.24 
and other applicable law, a non-variable penalty rate of 28% may 
apply if the consumer makes a late payment. The due date for the 
account is the fifteenth of the month. On May 30 of year two, the 
account has a purchase balance of $1,000. On May 31, the creditor 
provides a notice pursuant to 12 CFR 226.9(c) informing the consumer 
of a new variable rate that will apply on July 16 for all purchases 
made on or after June 8 (calculated by using the same index and an 
increased margin of 8 percentage points). On June 7, the consumer 
makes a $500 purchase. On June 8, the consumer makes a $200 
purchase. On June 25, the bank has not received the payment due on 
June 15 and provides the consumer with a notice pursuant to 12 CFR 
226.9(g) stating that the penalty rate of 28% will apply as of 
August 9 to all transactions made on or after July 3. On July 4, the 
consumer makes a $300 purchase.
    A. The payment due on June 15 of year two is received on June 
26. On July 16, Sec.  227.24(b)(3) permits the bank to apply the 
variable rate determined using the 8-point margin to the $200 
purchase made on June 8 but does not permit the bank to apply this 
rate to the $1,500 purchase balance. On August 9, Sec.  227.24(b)(3) 
permits the bank to apply the 28% penalty rate to the $300 purchase 
made on July 4 but does not permit the bank to apply this rate to 
the $1,500 purchase balance (which remains at the variable rate 
determined using the 6-point margin) or the $200 purchase (which 
remains at the variable rate determined using the 8-point margin).
    B. Same facts as above except the payment due on September 15 of 
year two is received on October 20. Section 227.24(b)(4) permits the 
bank to apply the 28% penalty rate to all balances on the account 
and to future transactions because it has not received payment 
within 30 days after the due date. However, in order to apply the 
28% penalty rate to the entire $2,000 purchase balance, the bank 
must provide an additional notice pursuant to 12 CFR 226.9(g). This 
notice must be sent no earlier than October 16, which is the first 
day the account became more than 30 days' delinquent.
    C. Same facts as paragraph A. above except the payment due on 
June 15 of year two is received on July 20. Section 227.24(b)(4) 
permits the bank to apply the 28% penalty rate to all balances on 
the account and to future transactions because it has not received 
payment within 30 days after the due date. Because the bank provided 
a 12 CFR 226.9(g) notice on June 24 stating the 28% penalty rate, 
the bank may apply the 28% penalty rate to all balances on the 
account as well as any future transactions on August 9 without 
providing an additional notice pursuant to 12 CFR 226.9(g).

24(b) Exceptions

24(b)(1) Account Opening Disclosure Exception

    1. Prohibited increases in rate. Section 227.24(b)(1) permits an 
increase in the annual percentage rate for a category of 
transactions to a rate disclosed at account opening upon expiration 
of a period of time that was also disclosed at account opening. 
Section 227.24(b)(1) does not permit application of increased rates 
that are disclosed at account opening but are contingent on a 
particular event or occurrence or may be applied at the bank's 
discretion. The following examples illustrate rate increases that 
are not permitted by Sec.  227.24(a):
    i. Assume that a bank discloses at account opening on January 1 
of year one that a non-variable rate of 15% applies to purchases but 
that all rates on an account may be increased to a non-variable 
penalty rate of 30% if a consumer's required minimum periodic 
payment is received after the payment due date, which is the 
fifteenth of the month. On March 1, the account has a $2,000 
purchase balance. The payment due on March 15 is not received until 
March 20. Section 227.24 does not permit the bank to apply the 30% 
penalty rate to the $2,000 purchase balance. However, pursuant to 
Sec.  227.24(b)(3), the bank could provide a 12 CFR 226.9(c) or (g) 
notice on November 16 informing the consumer that, on January 1 of 
year two, the 30% rate (or a different rate) will apply to new 
transactions.

[[Page 5564]]

    ii. Assume that a bank discloses at account opening on January 1 
of year one that a non-variable rate of 5% applies to transferred 
balances but that this rate will increase to a non-variable rate of 
18% if the consumer does not use the account for at least $200 in 
purchases each billing cycle. On July 1, the consumer transfers a 
balance of $4,000 to the account. During the October billing cycle, 
the consumer uses the account for $150 in purchases. Section 227.24 
does not permit the bank to apply the 18% rate to the $4,000 
transferred balance. However, pursuant to Sec.  227.24(b)(3), the 
bank could provide a 12 CFR 226.9(c) or (g) notice on November 16 
informing the consumer that, on January 1 of year two, the 18% rate 
(or a different rate) will apply to new transactions.
    iii. Assume that a bank discloses at account opening on January 
1 of year one that interest on purchases will be deferred for one 
year, although interest will accrue on purchases during that year at 
a non-variable rate of 20%. The bank further discloses that, if all 
purchases made during year one are not paid in full by the end of 
that year, the bank will begin charging interest on the purchase 
balance and new purchases at 20% and will retroactively charge 
interest on the purchase balance at a rate of 20% starting on the 
date of each purchase made during year one. On January 1 of year 
one, the consumer makes a purchase of $1,500. No other transactions 
are made on the account. On January 1 of year two, $500 of the 
$1,500 purchase remains unpaid. Section 227.24 does not permit the 
bank to reach back to charge interest on the $1,500 purchase from 
January 1 through December 31 of year one. However, the bank may 
apply the previously disclosed 20% rate to the $500 purchase balance 
beginning on January 1 of year two (pursuant to Sec.  227.24(b)(1)).
    2. Loss of grace period. Nothing in Sec.  227.24 prohibits a 
bank from assessing interest due to the loss of a grace period to 
the extent consistent with Sec.  227.25.
    3. Application of rate that is lower than disclosed rate. 
Section 227.24(b)(1) permits an increase in the annual percentage 
rate for a category of transactions to a rate disclosed at account 
opening upon expiration of a period of time that was also disclosed 
at account opening. Nothing in Sec.  227.24 prohibits a bank from 
applying a rate that is lower than the disclosed rate upon 
expiration of the period. However, if a lower rate is applied to an 
existing balance, the bank cannot subsequently increase the rate on 
that balance unless it has provided the consumer with advance notice 
of the increase pursuant to 12 CFR 226.9(c). Furthermore, the bank 
cannot increase the rate on that existing balance to a rate that is 
higher than the increased rate disclosed at account opening. The 
following example illustrates the application of this rule:
    i. Assume that, at account opening on January 1 of year one, a 
bank discloses that a non-variable annual percentage rate of 15% 
will apply to purchases for one year and discloses that, after the 
first year, the bank will apply a variable rate that is currently 
20% and is determined by adding a margin of 10 percentage points to 
a publicly available index not under the bank's control. On December 
31 of year one, the account has a purchase balance of $3,000.
    A. On November 16 of year one, the bank provides a notice 
pursuant to 12 CFR 226.9(c) informing the consumer of a new variable 
rate that will apply on January 1 of year two (calculated using the 
same index and a reduced margin of 8 percentage points). The notice 
further states that, on July 1 of year two, the margin will increase 
to the margin disclosed at account opening (10 percentage points). 
On July 1 of year two, the bank increases the margin used to 
determine the variable rate that applies to new purchases to 10 
percentage points and applies that rate to any remaining portion of 
the $3,000 purchase balance (pursuant to Sec.  227.24(b)(1)).
    B. Same facts as above except that the bank does not send a 
notice on November 16 of year one. Instead, on January 1 of year 
two, the bank lowers the margin used to determine the variable rate 
to 8 percentage points and applies that rate to the $3,000 purchase 
balance and to new purchases. 12 CFR 226.9 does not require advance 
notice in these circumstances. However, unless the account becomes 
more than 30 days' delinquent, the bank may not subsequently 
increase the rate that applies to the $3,000 purchase balance except 
due to increases in the index (pursuant to Sec.  227.24(b)(2)).

24(b)(2) Variable Rate Exception

    1. Increases due to increase in index. Section 227.24(b)(2) 
provides that an annual percentage rate for a category of 
transactions that varies according to an index that is not under the 
bank's control and is available to the general public may be 
increased due to an increase in the index. This section does not 
permit a bank to increase the annual percentage rate by changing the 
method used to determine a rate that varies with an index (such as 
by increasing the margin), even if that change will not result in an 
immediate increase.
    2. External index. A bank may increase the annual percentage 
rate if the increase is based on an index or indices outside the 
bank's control. A bank may not increase the rate based on its own 
prime rate or cost of funds. A bank is permitted, however, to use a 
published prime rate, such as that in the Wall Street Journal, even 
if the bank's own prime rate is one of several rates used to 
establish the published rate.
    3. Publicly available. The index or indices must be available to 
the public. A publicly available index need not be published in a 
newspaper, but it must be one the consumer can independently obtain 
(by telephone, for example) and use to verify the rate applied to 
the outstanding balance.
    4. Changing a non-variable rate to a variable rate. Section 
227.24 generally prohibits a bank from changing a non-variable 
annual percentage rate to a variable rate because such a change can 
result in an increase in rate. However, Sec.  227.24(b)(1) permits a 
bank to change a non-variable rate to a variable rate if the change 
was disclosed at account opening. Furthermore, following the first 
year after the account is opened, Sec.  227.24(b)(3) permits a bank 
to change a non-variable rate to a variable rate with respect to new 
transactions (after complying with the notice requirements in 12 CFR 
226.9(c) or (g)). Finally, Sec.  227.24(b)(4) permits a bank to 
change a non-variable rate to a variable rate if the required 
minimum periodic payment is not received within 30 days of the 
payment due date (after complying with the notice requirements in 12 
CFR 226.9(g)).
    5. Changing a variable annual percentage rate to a non-variable 
annual percentage rate. Nothing in Sec.  227.24 prohibits a bank 
from changing a variable annual percentage rate to an equal or lower 
non-variable rate. Whether the non-variable rate is equal to or 
lower than the variable rate is determined at the time the bank 
provides the notice required by 12 CFR 226.9(c). For example, assume 
that on March 1 a variable rate that is currently 15% applies to a 
balance of $2,000 and the bank sends a notice pursuant to 12 CFR 
226.9(c) informing the consumer that the variable rate will be 
converted to a non-variable rate of 14% effective April 17. On April 
17, the bank may apply the 14% non-variable rate to the $2,000 
balance and to new transactions even if the variable rate on March 2 
or a later date was less than 14%.
    6. Substitution of index. A bank may change the index and margin 
used to determine the annual percentage rate under Sec.  
227.24(b)(2) if the original index becomes unavailable, as long as 
historical fluctuations in the original and replacement indices were 
substantially similar, and as long as the replacement index and 
margin will produce a rate similar to the rate that was in effect at 
the time the original index became unavailable. If the replacement 
index is newly established and therefore does not have any rate 
history, it may be used if it produces a rate substantially similar 
to the rate in effect when the original index became unavailable.

24(b)(3) Advance Notice Exception

    1. First year after the account is opened. A bank may not 
increase an annual percentage rate pursuant to Sec.  227.24(b)(3) 
during the first year after the account is opened. This limitation 
does not apply to accounts opened prior to July 1, 2010.
    2. Transactions that occur more than seven days after notice 
provided. Section 227.24(b)(3) generally prohibits a bank from 
applying an increased rate to transactions that occur within seven 
days after provision of the 12 CFR 226.9(c) or (g) notice. This 
prohibition does not, however, apply to transactions that are 
authorized within seven days after provision of the 12 CFR 226.9(c) 
or (g) notice but are settled more than seven days after the notice 
was provided.
    3. Examples.
    i. Assume that a consumer credit card account is opened on 
January 1 of year one. On March 14 of year two, the account has a 
purchase balance of $2,000 at a non-variable annual percentage rate 
of 15%. On March 15, the bank provides a notice pursuant to 12 CFR 
226.9(c) informing the consumer that the rate for new purchases will 
increase to a non-variable rate of 18% on May 1. The notice further 
states that the 18% rate will apply for six months (until November 
1) and states that thereafter the bank will apply a variable rate 
that is currently 22% and is determined by adding a margin of 12 
percentage points to a publicly-available index that is not under

[[Page 5565]]

the bank's control. The seventh day after provision of the notice is 
March 22 and, on that date, the consumer makes a $200 purchase. On 
March 24, the consumer makes a $1,000 purchase. On May 1, Sec.  
227.24(b)(3) permits the bank to begin accruing interest at 18% on 
the $1,000 purchase made on March 24. The bank is not permitted to 
apply the 18% rate to the $2,200 purchase balance as of March 22. 
After six months (November 2), the bank may begin accruing interest 
on any remaining portion of the $1,000 purchase at the previously-
disclosed variable rate determined using the 12-point margin.
    ii. Same facts as above except that the $200 purchase is 
authorized by the bank on March 22 but is not settled until March 
23. On May 1, Sec.  227.24(b)(3) permits the bank to start charging 
interest at 18% on both the $200 purchase and the $1,000 purchase. 
The bank is not permitted to apply the 18% rate to the $2,000 
purchase balance as of March 22.
    iii. Same facts as in paragraph i. above except that on 
September 17 of year two (which is 45 days before expiration of the 
18% non-variable rate), the bank provides a notice pursuant to 12 
CFR 226.9(c) informing the consumer that, on November 2, a new 
variable rate will apply to new purchases and any remaining portion 
of the $1,000 balance (calculated by using the same index and a 
reduced margin of 10 percentage points). The notice further states 
that, on May 1 of year three, the margin will increase to the margin 
disclosed at account opening (12 percentage points). On May 1 of 
year three, Sec.  227.24(b)(3) permits the bank to increase the 
margin used to determine the variable rate that applies to new 
purchases to 12 percentage points and to apply that rate to any 
remaining portion of the $1,000 purchase as well as to new 
purchases. See comment 24(b)(1)-3. The bank is not permitted to 
apply this rate to any remaining portion of the $2,200 purchase 
balance as of March 22.

24(b)(5) Workout Arrangement Exception

    1. Scope of exception. Nothing in Sec.  227.24(b)(5) permits a 
bank to alter the requirements of Sec.  227.24 pursuant to a workout 
arrangement between a consumer and the bank. For example, a bank 
cannot increase an annual percentage rate pursuant to a workout 
arrangement unless otherwise permitted by Sec.  227.24. In addition, 
a bank cannot require the consumer to make payments with respect to 
a protected balance that exceed the payments permitted under Sec.  
227.24(c).
    2. Variable annual percentage rates. If the annual percentage 
rate that applied to a category of transactions prior to 
commencement of the workout arrangement varied with an index 
consistent with Sec.  227.24(b)(2), the rate applied to that 
category of transactions following an increase pursuant to Sec.  
227.24(b)(5) must be determined using the same formula (index and 
margin).
    3. Example. Assume that, consistent with Sec.  227.24(b)(4), the 
margin used to determine a variable annual percentage rate that 
applies to a $5,000 balance is increased from 5 percentage points to 
15 percentage points. Assume also that the bank and the consumer 
subsequently agree to a workout arrangement that reduces the margin 
back to 5 points on the condition that the consumer pay a specified 
amount by the payment due date each month. If the consumer does not 
pay the agreed-upon amount by the payment due date, the bank may 
increase the margin for the variable rate that applies to the $5,000 
balance up to 15 percentage points. 12 CFR 226.9 does not require 
advance notice of this type of increase.

24(c) Treatment of Protected Balances

    1. Protected balances. Because rates cannot be increased 
pursuant to Sec.  227.24(b)(3) during the first year after account 
opening, Sec.  227.24(c) does not apply to balances during the first 
year. Instead, the requirements in Sec.  227.24(c) apply only to 
``protected balances,'' which are amounts owed for a category of 
transactions to which an increased annual percentage rate cannot be 
applied after the rate for that category of transactions has been 
increased pursuant to Sec.  227.24(b)(3). For example, assume that, 
on March 15 of year two, an account has a purchase balance of $1,000 
at a non-variable rate of 12% and that, on March 16, the bank sends 
a notice pursuant to 12 CFR 226.9(c) informing the consumer that the 
rate for new purchases will increase to a non-variable rate of 15% 
on May 2. On March 20, the consumer makes a $100 purchase. On March 
24, the consumer makes a $150 purchase. On May 2, Sec.  227.24(b)(3) 
permits the bank to start charging interest at 15% on the $150 
purchase made on March 24 but does not permit the bank to apply that 
15% rate to the $1,100 purchase balance as of March 23. Accordingly, 
Sec.  227.24(c) applies to the $1,100 purchase balance as of March 
23 but not the $150 purchase made on March 24.

24(c)(1) Repayment

    1. No less beneficial to the consumer. A bank may provide a 
method of repaying the protected balance that is different from the 
methods listed in Sec.  227.24(c)(1) so long as the method used is 
no less beneficial to the consumer than one of the listed methods. A 
method is no less beneficial to the consumer if the method amortizes 
the protected balance in five years or longer or if the method 
results in a required minimum periodic payment that is equal to or 
less than a minimum payment calculated consistent with Sec.  
227.24(c)(1)(ii). For example, a bank could increase the percentage 
of the protected balance included in the required minimum periodic 
payment from 2% to 5% so long as doing so would not result in 
amortization of the protected balance in less than five years. 
Alternatively, a bank could require a consumer to make a minimum 
payment that amortizes the protected balance in less than five years 
so long as the payment does not include a percentage of the balance 
that is more than twice the percentage included in the minimum 
payment before the effective date of the increased rate. For 
example, a bank could require the consumer to make a minimum payment 
that amortizes the protected balance in four years so long as doing 
so would not more than double the percentage of the balance included 
in the minimum payment prior to the effective date of the increased 
rate.
    2. Lower limit for required minimum periodic payment. If the 
required minimum periodic payment under Sec.  227.24(c)(1)(i) or 
(c)(1)(ii) is less than the lower dollar limit for minimum payments 
established in the cardholder agreement before the effective date of 
the rate increase, the bank may set the minimum payment consistent 
with that limit. For example, if at account opening the cardholder 
agreement stated that the required minimum periodic payment would be 
either the total of fees and interest charges plus 1% of the total 
amount owed or $20 (whichever is greater), the bank may require the 
consumer to make a minimum payment of $20 even if doing so would pay 
off the protected balance in less than five years or constitute more 
than 2% of the protected balance plus fees and interest charges.

Paragraph 24(c)(1)(i)

    1. Amortization period starting from date on which increased 
rate becomes effective. Section 227.24(c)(1)(i) provides for an 
amortization period for the protected balance of no less than five 
years, starting from the date on which the increased annual 
percentage rate becomes effective. A bank is not required to 
recalculate the required minimum periodic payment for the protected 
balance if, during the amortization period, that balance is reduced 
as a result of the allocation of amounts paid by the consumer in 
excess of the minimum payment consistent with Sec.  227.23 or any 
other practice permitted by these rules and other applicable law.
    2. Amortization when applicable annual percentage rate is 
variable. If the annual percentage rate that applies to the 
protected balance varies with an index consistent with Sec.  
227.24(b)(2), the bank may adjust the interest charges included in 
the required minimum periodic payment for that balance accordingly 
in order to ensure that the outstanding balance is amortized in five 
years. For example, assume that a variable rate that is currently 
15% applies to a protected balance and that, in order to amortize 
that balance in five years, the required minimum periodic payment 
must include a specific amount of principal plus all accrued 
interest charges. If the 15% variable rate increases due to an 
increase in the index, the bank may increase the required minimum 
periodic payment to include the additional interest charges.

Paragraph 24(c)(1)(ii)

    1. Required minimum periodic payment on other balances. Section 
227.24(c)(1)(ii) addresses the required minimum periodic payment on 
the protected balance. Section 227.24(c)(1)(ii) does not limit or 
otherwise address the bank's ability to determine the amount of the 
required minimum periodic payment for other balances.
    2. Example. Assume that the method used by a bank to calculate 
the required minimum periodic payment for a consumer credit card 
account requires the consumer to pay either the total of fees and 
interest charges plus 1% of the total amount owed or $20, whichever 
is greater. Assume also that the account has a purchase balance of 
$2,000 at an annual percentage rate of 15% and a cash advance 
balance of $500 at an annual percentage rate of 20% and that the 
bank increases the rate for purchases to 18% but does not increase

[[Page 5566]]

the rate for cash advances. Under Sec.  227.24(c)(1)(ii), the bank 
may require the consumer to pay fees and interest plus 2% of the 
$2,000 purchase balance. Section 227.24(c)(1)(ii) does not prohibit 
the bank from increasing the required minimum periodic payment for 
the cash advance balance.

24(c)(2) Fees and Charges

    1. Fee or charge based solely on the protected balance. A bank 
is prohibited from assessing a fee or charge based solely on 
balances to which Sec.  227.24(c) applies. For example, a bank is 
prohibited from assessing a monthly maintenance fee that would not 
be charged if the account did not have a protected balance. A bank 
is not, however, prohibited from assessing fees such as late payment 
fees or fees for exceeding the credit limit even if such fees are 
based in part on the protected balance.

Section 227.25--Unfair Balance Computation Method

25(a) General Rule

    1. Two-cycle method prohibited. When a consumer ceases to be 
eligible for a time period provided by the bank within which the 
consumer may repay any portion of the credit extended without 
incurring a finance charge (a grace period), the bank is prohibited 
from computing the finance charge using the so-called two-cycle 
average daily balance computation method. This method calculates the 
finance charge using a balance that is the sum of the average daily 
balances for two billing cycles. The first balance is for the 
current billing cycle, and is calculated by adding the total balance 
(including or excluding new purchases and deducting payments and 
credits) for each day in the billing cycle, and then dividing by the 
number of days in the billing cycle. The second balance is for the 
preceding billing cycle.
    2. Examples.
    i. Assume that the billing cycle on a consumer credit card 
account starts on the first day of the month and ends on the last 
day of the month. The payment due date for the account is the 
twenty-fifth day of the month. Under the terms of the account, the 
consumer will not be charged interest on purchases if the balance at 
the end of a billing cycle is paid in full by the following payment 
due date. The consumer uses the credit card to make a $500 purchase 
on March 15. The consumer pays the balance for the February billing 
cycle in full on March 25. At the end of the March billing cycle 
(March 31), the consumer's balance consists only of the $500 
purchase and the consumer will not be charged interest on that 
balance if it is paid in full by the following due date (April 25). 
The consumer pays $400 on April 25, leaving a $100 balance. The bank 
may charge interest on the $500 purchase from the start of the April 
billing cycle (April 1) through April 24 and interest on the 
remaining $100 from April 25 through the end of the April billing 
cycle (April 30). The bank is prohibited, however, from reaching 
back and charging interest on the $500 purchase from the date of 
purchase (March 15) to the end of the March billing cycle (March 
31).
    ii. Assume the same circumstances as in the previous example 
except that the consumer does not pay the balance for the February 
billing cycle in full on March 25 and therefore, under the terms of 
the account, is not eligible for a time period within which to repay 
the $500 purchase without incurring a finance charge. With respect 
to the $500 purchase, the bank may charge interest from the date of 
purchase (March 15) through April 24 and interest on the remaining 
$100 from April 25 through the end of the April billing cycle (April 
30).

Section 227.26--Unfair Charging of Security Deposits and Fees for 
the Issuance or Availability of Credit to Consumer Credit Card 
Accounts

26(a) Limitation for First Year

    1. Majority of the credit limit. The total amount of security 
deposits and fees for the issuance or availability of credit 
constitutes a majority of the initial credit limit if that total is 
greater than half of the limit. For example, assume that a consumer 
credit card account has an initial credit limit of $500. Under Sec.  
227.26(a), a bank may charge to the account security deposits and 
fees for the issuance or availability of credit totaling no more 
than $250 during the first year (consistent with Sec.  227.26(b)).

26(b) Limitations for First Billing Cycle and Subsequent Billing Cycles

    1. Adjustments of one dollar or less permitted. When dividing 
amounts pursuant to Sec.  227.26(b)(2), a bank may adjust amounts by 
one dollar or less. For example, if a bank is dividing $87 over five 
billing cycles, the bank may charge $18 for two months and $17 for 
the remaining three months.
    2. Examples.
    i. Assume that a consumer credit card account opened on January 
1 has an initial credit limit of $500. Assume also that the billing 
cycles for this account begin on the first day of the month and end 
on the last day of the month. Under Sec.  227.26(a), the bank may 
charge to the account no more than $250 in security deposits and 
fees for the issuance or availability of credit during the first 
year after the account is opened. If it charges $250, the bank may 
charge up to $125 during the first billing cycle. If it charges $125 
during the first billing cycle, it may then charge no more than $25 
in each of the next five billing cycles. If it chooses, the bank may 
spread the additional security deposits and fees over a longer 
period, such as by charging $12.50 in each of the ten billing cycles 
following the first billing cycle.
    ii. Same facts as above except that on July 1 the bank increases 
the credit limit on the account from $500 to $750. Because the 
prohibition in Sec.  227.26(a) is based on the initial credit limit 
of $500, the increase in credit limit does not permit the bank to 
charge to the account additional security deposits and fees for the 
issuance or availability of credit (such as a fee for increasing the 
credit limit).

26(c) Evasion Prohibited

    1. Evasion. Section 227.26(c) prohibits a bank from evading the 
requirements of this section by providing the consumer with 
additional credit to fund the consumer's payment of security 
deposits and fees that exceed the total amounts permitted by Sec.  
227.26(a) and (b). For example, assume that on January 1 a consumer 
opens a consumer credit card account with an initial credit limit of 
$400 and the bank charges to that account $100 in fees for the 
issuance or availability of credit. Assume also that the billing 
cycles for the account coincide with the days of the month and that 
the bank will charge $20 in fees for the issuance or availability of 
credit in the February, March, April, May, and June billing cycles. 
The bank violates Sec.  227.26(c) if it provides the consumer with a 
separate credit product to fund additional security deposits or fees 
for the issuance or availability of credit.
    2. Payment with funds not obtained from the bank. A bank does 
not violate Sec.  227.26(c) if it requires the consumer to pay 
security deposits or fees for the issuance or availability of credit 
using funds that are not obtained, directly or indirectly, from the 
bank. For example, a bank does not violate Sec.  227.26(c) if a $400 
security deposit paid by a consumer to obtain a consumer credit card 
account with a credit line of $400 is not charged to a credit 
account provided by the bank or its affiliate.

26(d) Definitions

    1. Membership fees. Membership fees for opening an account are 
fees for the issuance or availability of credit. A membership fee to 
join an organization that provides a credit or charge card as a 
privilege of membership is a fee for the issuance or availability of 
credit only if the card is issued automatically upon membership. If 
membership results merely in eligibility to apply for an account, 
then such a fee is not a fee for the issuance or availability of 
credit.
    2. Enhancements. Fees for optional services in addition to basic 
membership privileges in a credit or charge card account (for 
example, travel insurance or card-registration services) are not 
fees for the issuance or availability of credit if the basic account 
may be opened without paying such fees. Issuing a card to each 
primary cardholder (not authorized users) is considered a basic 
membership privilege and fees for additional cards, beyond the first 
card on the account, are fees for the issuance or availability of 
credit. Thus, a fee to obtain an additional card on the account 
beyond the first card (so that each cardholder would have his or her 
own card) is a fee for the issuance or availability of credit even 
if the fee is optional; that is, if the fee is charged only if the 
cardholder requests one or more additional cards.
    3. One-time fees. Non-periodic fees related to opening an 
account (such as application fees or one-time membership or 
participation fees) are fees for the issuance or availability of 
credit. Fees for reissuing a lost or stolen card, statement 
reproduction fees, and fees for late payment or other violations of 
the account terms are examples of fees that are not fees for the 
issuance or availability of credit.


0
8. The Federal Reserve System Board of Governors' Staff Guidelines on 
the Credit Practices Rule, published November 14, 1985 at 50 FR 47036, 
is

[[Page 5567]]

amended by revising paragraph 3 to read as follows:

Staff Guidelines on the Credit Practices Rule

    Effective January 1, 1986; as amended effective July 1, 2010.

Introduction

* * * * *
    3. Scope; enforcement. As stated in subpart A of Regulation AA, 
this rule applies to all banks and their subsidiaries, except savings 
associations as defined in 12 U.S.C. 1813(b). The Board has enforcement 
responsibility for state-chartered banks that are members of the 
Federal Reserve System. The Office of the Comptroller of the Currency 
has enforcement responsibility for national banks. The Federal Deposit 
Insurance Corporation has enforcement responsibility for insured state-
chartered banks that are not members of the Federal Reserve System.
* * * * *

0
9. The following portions of the Federal Reserve System Board of 
Governors' Staff Guidelines on the Credit Practices Rule, published 
November 14, 1985 at 50 FR 47036, are removed:
Section 227.11 Authority, Purpose, and Scope
    Q11(c)-1: Penalties for noncompliance. What are the penalties for 
noncompliance with the rule?
    A: Administrative enforcement of the rule for banks may involve 
actions under section 8 of the Federal Deposit Insurance Act (12 U.S.C. 
1818), including cease-and-desist orders requiring that actions be 
taken to remedy violations. If the terms of the order are violated, the 
federal supervisory agency may impose penalties of up to $1,000 per day 
for every day that the bank is in violation of the order.
    Q11(c)-2: Industrial loan companies. Are industrial loan companies 
subject to the Board's rule?
    A: Industrial loan companies that are insured by the Federal 
Deposit Insurance Corporation are covered by the Board's rule.
* * * * *

Department of the Treasury

Office of Thrift Supervision

12 CFR Chapter V

Authority and Issuance

0
For the reasons discussed in the joint preamble, OTS revises 12 CFR 
part 535 to read as follows:

PART 535--UNFAIR OR DECEPTIVE ACTS OR PRACTICES

Subpart A--General Provisions
Sec.
535.1 Authority, purpose, and scope.
Subpart B--Consumer Credit Practices
535.11 Definitions.
535.12 Unfair credit contract provisions.
535.13 Unfair or deceptive cosigner practices.
535.14 Unfair late charges.
Subpart C--Consumer Credit Card Account Practices
535.21 Definitions.
535.22 Unfair time to make payment.
535.23 Unfair allocation of payments.
535.24 Unfair increases in annual percentage rates.
535.25 Unfair balance computation method.
535.26 Unfair charging of security deposits and fees for the 
issuance or availability of credit to consumer credit card accounts.
Appendix A to Part 535--Official Staff Commentary

    Authority: 12 U.S.C. 1462a, 1463, 1464; 15 U.S.C. 57a.

Subpart A--General Provisions


Sec.  535.1  Authority, purpose and scope.

    (a) Authority. This part is issued by OTS under section 18(f) of 
the Federal Trade Commission Act, 15 U.S.C. 57a(f) (section 202(a) of 
the Magnuson-Moss Warranty--Federal Trade Commission Improvement Act, 
Pub. L. 93-637) and the Home Owners' Loan Act, 12 U.S.C. 1461 et seq.
    (b) Purpose. The purpose of this part is to prohibit unfair or 
deceptive acts or practices in violation of section 5(a)(1) of the 
Federal Trade Commission Act, 15 U.S.C. 45(a)(1). Subparts B and C 
define and contain requirements prescribed for the purpose of 
preventing specific unfair or deceptive acts or practices of savings 
associations. The prohibitions in subparts B and C do not limit OTS's 
authority to enforce the FTC Act with respect to any other unfair or 
deceptive acts or practices. The purpose of this part is also to 
prohibit unsafe and unsound practices and protect consumers under the 
Home Owners' Loan Act, 12 U.S.C. 1461 et seq.
    (c) Scope. This part applies to savings associations and 
subsidiaries owned in whole or in part by a savings association 
(``you'').

Subpart B--Consumer Credit Practices


Sec.  535.11  Definitions.

    For purposes of this subpart, the following definitions apply:
    (a) Consumer means a natural person who seeks or acquires goods, 
services, or money for personal, family, or household purposes, other 
than for the purchase of real property, and who applies for or is 
extended consumer credit.
    (b) Consumer credit means credit extended to a natural person for 
personal, family, or household purposes. It includes consumer loans; 
educational loans; unsecured loans for real property alteration, repair 
or improvement, or for the equipping of real property; overdraft loans; 
and credit cards. It also includes loans secured by liens on real 
estate and chattel liens secured by mobile homes and leases of personal 
property to consumers that may be considered the functional equivalent 
of loans on personal security but only if you rely substantially upon 
other factors, such as the general credit standing of the borrower, 
guaranties, or security other than the real estate or mobile home, as 
the primary security for the loan.
    (c) Earnings means compensation paid or payable to an individual or 
for the individual's account for personal services rendered or to be 
rendered by the individual, whether denominated as wages, salary, 
commission, bonus, or otherwise, including periodic payments pursuant 
to a pension, retirement, or disability program.
    (d) Obligation means an agreement between you and a consumer.
    (e) Person means an individual, corporation, or other business 
organization.


Sec.  535.12  Unfair credit contract provisions.

    It is an unfair act or practice for you, directly or indirectly, to 
enter into a consumer credit obligation that constitutes or contains, 
or to enforce in a consumer credit obligation you purchased, any of the 
following provisions:
    (a) Confession of judgment. A cognovit or confession of judgment 
(for purposes other than executory process in the State of Louisiana), 
warrant of attorney, or other waiver of the right to notice and the 
opportunity to be heard in the event of suit or process thereon.
    (b) Waiver of exemption. An executory waiver or a limitation of 
exemption from attachment, execution, or other process on real or 
personal property held, owned by, or due to the consumer, unless the 
waiver applies solely to property subject to a security interest 
executed in connection with the obligation.
    (c) Assignment of wages. An assignment of wages or other earnings 
unless:
    (1) The assignment by its terms is revocable at the will of the 
debtor;

[[Page 5568]]

    (2) The assignment is a payroll deduction plan or preauthorized 
payment plan, commencing at the time of the transaction, in which the 
consumer authorizes a series of wage deductions as a method of making 
each payment; or
    (3) The assignment applies only to wages or other earnings already 
earned at the time of the assignment.
    (d) Security interest in household goods. A nonpossessory security 
interest in household goods other than a purchase-money security 
interest. For purposes of this paragraph, household goods:
    (1) Means clothing, furniture, appliances, linens, china, crockery, 
kitchenware, and personal effects of the consumer and the consumer's 
dependents.
    (2) Does not include:
    (i) Works of art;
    (ii) Electronic entertainment equipment (except one television and 
one radio);
    (iii) Antiques (any item over one hundred years of age, including 
such items that have been repaired or renovated without changing their 
original form or character); or
    (iv) Jewelry (other than wedding rings).


Sec.  535.13  Unfair or deceptive cosigner practices.

    (a) Prohibited deception. It is a deceptive act or practice for 
you, directly or indirectly in connection with the extension of credit 
to consumers, to misrepresent the nature or extent of cosigner 
liability to any person.
    (b) Prohibited unfairness. It is an unfair act or practice for you, 
directly or indirectly in connection with the extension of credit to 
consumers, to obligate a cosigner unless the cosigner is informed, 
before becoming obligated, of the nature of the cosigner's liability.
    (c) Disclosure requirement--(1) Disclosure statement. A clear and 
conspicuous statement must be given in writing to the cosigner before 
becoming obligated. In the case of open-end credit, the disclosure 
statement must be given to the cosigner before the time that the 
cosigner becomes obligated for any fees or transactions on the account. 
The disclosure statement must contain the following statement or one 
that is substantially similar:

Notice of Cosigner

    You are being asked to guarantee this debt. Think carefully 
before you do. If the borrower doesn't pay the debt, you will have 
to. Be sure you can afford to pay if you have to, and that you want 
to accept this responsibility.
    You may have to pay up to the full amount of the debt if the 
borrower does not pay. You may also have to pay late fees or 
collection costs, which increase this amount.
    The creditor can collect this debt from you without first trying 
to collect from the borrower. The creditor can use the same 
collection methods against you that can be used against the 
borrower, such as suing you, garnishing your wages, etc. If this 
debt is ever in default, that fact may become a part of your credit 
record.

    (2) Compliance. Compliance with paragraph (d)(1) of this section 
constitutes compliance with the consumer disclosure requirement in 
paragraph (b) of this section.
    (3) Additional content limitations. If the notice is a separate 
document, nothing other than the following items may appear with the 
notice:
    (i) Your name and address;
    (ii) An identification of the debt to be cosigned (e.g., a loan 
identification number);
    (iii) The date (of the transaction); and
    (iv) The statement, ``This notice is not the contract that makes 
you liable for the debt.''
    (d) Cosigner defined--(1) Cosigner means a natural person who 
assumes liability for the obligation of a consumer without receiving 
goods, services, or money in return for the obligation, or, in the case 
of an open-end credit obligation, without receiving the contractual 
right to obtain extensions of credit under the account.
    (2) Cosigner includes any person whose signature is requested as a 
condition to granting credit to a consumer, or as a condition for 
forbearance on collection of a consumer's obligation that is in 
default. The term does not include a spouse or other person whose 
signature is required on a credit obligation to perfect a security 
interest pursuant to state law.
    (3) A person who meets the definition in this paragraph is a 
cosigner, whether or not the person is designated as such on a credit 
obligation.


Sec.  535.14  Unfair late charges.

    (a) Prohibition. In connection with collecting a debt arising out 
of an extension of credit to a consumer, it is an unfair act or 
practice for you, directly or indirectly, to levy or collect any 
delinquency charge on a payment, when the only delinquency is 
attributable to late fees or delinquency charges assessed on earlier 
installments and the payment is otherwise a full payment for the 
applicable period and is paid on its due date or within an applicable 
grace period.
    (b) Collecting a debt defined-- Collecting a debt means, for the 
purposes of this section, any activity, other than the use of judicial 
process, that is intended to bring about or does bring about repayment 
of all or part of money due (or alleged to be due) from a consumer.

Subpart C--Consumer Credit Card Account Practices


Sec.  535.21  Definitions.

    For purposes of this subpart, the following definitions apply:
    (a) Annual percentage rate means 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. The term ``periodic rate'' 
has the same meaning as in 12 CFR 226.2.
    (b) Consumer means 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.
    (c) Consumer credit card account means 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 card or charge card. 
The terms open-end credit, credit card, and charge card have the same 
meanings as in 12 CFR 226.2. The following are not consumer credit card 
accounts for purposes of this subpart:
    (1) Home equity plans subject to the requirements of 12 CFR 226.5b 
that are accessible by a credit or charge card;
    (2) Overdraft lines of credit tied to asset accounts accessed by 
check-guarantee cards or by debit cards;
    (3) Lines of credit accessed by check-guarantee cards or by debit 
cards that can be used only at automated teller machines; and
    (4) Lines of credit accessed solely by account numbers.


Sec.  535.22  Unfair time to make payment.

    (a) General rule. Except as provided in paragraph (c) of this 
section, you must not treat a payment on a consumer credit card account 
as late for any purpose unless you have provided the consumer a 
reasonable amount of time to make the payment.
    (b) Compliance with general rule-- (1) Establishing compliance. You 
must be able to establish that you have complied with paragraph (a) of 
this section.
    (2) Safe harbor. You comply with paragraph (a) of this section if 
you 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.

[[Page 5569]]

    (c) Exception for grace periods. Paragraph (a) of this section does 
not apply to any time period you provided within which the consumer may 
repay any portion of the credit extended without incurring an 
additional finance charge.


Sec.  535.23  Unfair allocation of payments.

    When different annual percentage rates apply to different balances 
on a consumer credit card account, you must allocate any amount paid by 
the consumer in excess of the required minimum periodic payment among 
the balances using one of the following methods:
    (a) High-to-low method. The amount paid by the consumer in excess 
of the required minimum periodic payment is allocated first to the 
balance with the highest annual percentage rate and any remaining 
portion to the other balances in descending order based on the 
applicable annual percentage rate.
    (b) Pro rata method. The amount paid by the consumer in excess of 
the required minimum periodic payment is allocated among the balances 
in the same proportion as each balance bears to the total balance.


Sec.  535.24  Unfair increases in annual percentage rates.

    (a) General rule. At account opening, you must disclose the annual 
percentage rates that will apply to each category of transactions on 
the consumer credit card account. You must not increase the annual 
percentage rate for a category of transactions on any consumer credit 
card account except as provided in paragraph (b) of this section.
    (b) Exceptions. The prohibition in paragraph (a) of this section on 
increasing annual percentage rates does not apply where an annual 
percentage rate may be increased pursuant to one of the exceptions in 
this paragraph.
    (1) Account opening disclosure exception. An annual percentage rate 
for a category of transactions may be increased to a rate disclosed at 
account opening upon expiration of a period of time disclosed at 
account opening.
    (2) Variable rate exception. An annual percentage rate for a 
category of transactions that varies according to an index that is not 
under your control and is available to the general public may be 
increased due to an increase in the index.
    (3) Advance notice exception. An annual percentage rate for a 
category of transactions may be increased pursuant to a notice under 12 
CFR 226.9(c) or (g) for transactions that occur more than seven days 
after provision of the notice. This exception does not permit an 
increase in any annual percentage rate during the first year after the 
account is opened.
    (4) Delinquency exception. An annual percentage rate may be 
increased due to your not receiving the consumer's required minimum 
periodic payment within 30 days after the due date for that payment.
    (5) Workout arrangement exception. An annual percentage rate may be 
increased due to the consumer's failure to comply with the terms of a 
workout arrangement between you and the consumer, provided that the 
annual percentage rate applicable to a category of transactions 
following any such increase does not exceed the rate that applied to 
that category of transactions prior to commencement of the workout 
arrangement.
    (c) Treatment of protected balances. For purposes of this 
paragraph, ``protected balance'' means the amount owed for a category 
of transactions to which an increased annual percentage rate cannot be 
applied after the rate for that category of transactions has been 
increased pursuant to paragraph (b)(3) of this section.
    (1) Repayment. You must provide the consumer with one of the 
following methods of repaying a protected balance or a method that is 
no less beneficial to the consumer than one of the following methods:
    (i) An amortization period of no less than five years, starting 
from the date on which the increased rate becomes effective for the 
category of transactions; or
    (ii) A required minimum periodic payment that includes a percentage 
of the protected balance that is no more than twice the percentage 
required before the date on which the increased rate became effective 
for the category of transactions.
    (2) Fees and charges. You must not assess any fee or charge based 
solely on a protected balance.


Sec.  535.25  Unfair balance computation method.

    (a) General rule. Except as provided in paragraph (b) of this 
section, you must not impose finance charges on balances on a consumer 
credit card account based on balances for days in billing cycles that 
precede the most recent billing cycle as a result of the loss of any 
time period you provided within which the consumer may repay any 
portion of the credit extended without incurring a finance charge.
    (b) Exceptions. Paragraph (a) of this section does not apply to:
    (1) Adjustments to finance charges as a result of the resolution of 
a dispute under 12 CFR 226.12 or 12 CFR 226.13; or
    (2) Adjustments to finance charges as a result of the return of a 
payment for insufficient funds.


Sec.  535.26  Unfair charging of security deposits and fees for the 
issuance or availability of credit to consumer credit card accounts.

    (a) Limitation for first year. During the first year, you must not 
charge to a consumer credit card account security deposits and fees for 
the issuance or availability of credit that in total constitute a 
majority of the initial credit limit for the account.
    (b) Limitations for first billing cycle and subsequent billing 
cycles--(1) First billing cycle. During the first billing cycle, you 
must not charge to a consumer credit card account security deposits and 
fees for the issuance or availability of credit that in total 
constitute more than 25 percent of the initial credit limit for the 
account.
    (2) Subsequent billing cycles. Any additional security deposits and 
fees for the issuance or availability of credit permitted by paragraph 
(a) of this section must be charged to the account in equal portions in 
no fewer than the five billing cycles immediately following the first 
billing cycle.
    (c) Evasion prohibited. You must not evade the requirements of this 
section by providing the consumer with additional credit to fund the 
payment of security deposits and fees for the issuance or availability 
of credit that exceed the total amounts permitted by paragraphs (a) and 
(b) of this section.
    (d) Definitions. For purposes of this section, the following 
definitions apply:
    (1) Fees for the issuance or availability of credit means:
    (i) Any annual or other periodic fee that may be imposed for the 
issuance or availability of a consumer credit card account, including 
any fee based on account activity or inactivity; and
    (ii) Any non-periodic fee that relates to opening an account.
    (2) First billing cycle means the first billing cycle after a 
consumer credit card account is opened.
    (3) First year means the period beginning with the date on which a 
consumer credit card account is opened and ending twelve months from 
that date.
    (4) Initial credit limit means the credit limit in effect when a 
consumer credit card account is opened.

[[Page 5570]]

Appendix A to Part 535--Official Staff Commentary

Subpart A--General Provisions for Consumer Protection Rules

Section 535.1--Authority, Purpose, and Scope

1(c) Scope

    1. Penalties for noncompliance. Administrative enforcement of 
the rule for savings associations may involve actions under section 
8 of the Federal Deposit Insurance Act (12 U.S.C. 1818), including 
cease-and-desist orders requiring that actions be taken to remedy 
violations and civil money penalties.
    2. Application to subsidiaries. The term ``savings association'' 
as used in this Appendix also includes subsidiaries owned in whole 
or in part by a savings association.

Subpart C--Consumer Credit Card Account Practices

Section 535.22--Unfair Time To Make Payment

22(a) General Rule

    1. Treating a payment as late for any purpose. 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 to make that payment under this section.
    2. Reasonable amount of time to make payment. Whether an amount 
of time is reasonable for purposes of making a payment is determined 
from the perspective of the consumer, not the savings association. 
Under Sec.  535.22(b)(2), a savings association provides a 
reasonable amount of time to make a payment if it has 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.

22(b) Compliance with General Rule

    1. Reasonable procedures. A savings association is not required 
to determine the specific date on which periodic statements are 
mailed or delivered to each individual consumer. A savings 
association provides a reasonable amount of time to make a payment 
if it has adopted reasonable procedures designed to ensure that 
periodic statements are mailed or delivered to consumers no later 
than a certain number of days after the closing date of the billing 
cycle and adds that number of days to the 21-day period in Sec.  
535.24(b)(2) when determining the payment due date. For example, if 
a savings association has adopted reasonable procedures designed to 
ensure that periodic statements are mailed or delivered to consumers 
no later than three days after the closing date of the billing 
cycle, the payment due date on the periodic statement must be no 
less than 24 days after the closing date of the billing cycle.
    2. Payment due date. For purposes of Sec.  535.22(b)(2), 
``payment due date'' means the date by which the savings association 
requires the consumer to make the required minimum periodic payment 
in order to avoid being treated as late for any purpose, except as 
provided in Sec.  535.22(c).
    3. Example of alternative method of compliance. Assume that, for 
a particular type of consumer credit card account, a savings 
association only provides periodic statements electronically and 
only accepts payments electronically (consistent with applicable law 
and regulatory guidance). Under these circumstances, the savings 
association could comply with Sec.  535.22(a) even if it does not 
provide periodic statements 21 days before the payment due date 
consistent with Sec.  535.22(b)(2).

Section 535.23--Unfair Allocation of Payments

    1. Minimum periodic payment. Section 535.23 addresses the 
allocation of amounts paid by the consumer in excess of the minimum 
periodic payment required by the savings association. Section 535.23 
does not limit or otherwise address the savings association's 
ability to determine, consistent with applicable law and regulatory 
guidance, the amount of the required minimum periodic payment or how 
that payment is allocated. A savings association may, but is not 
required to, allocate the required minimum periodic payment 
consistent with the requirements in Sec.  535.23 to the extent 
consistent with other applicable law or regulatory guidance.
    2. Adjustments of one dollar or less permitted. When allocating 
payments, the savings association may adjust amounts by one dollar 
or less. For example, if a savings association is allocating $100 
pursuant to Sec.  535.23(b) among balances of $1,000, $2,000, and 
$4,000, the savings association may apply $14 to the $1,000 balance, 
$29 to the $2,000 balance, and $57 to the $4,000 balance.
    3. Applicable balances and annual percentage rates. Section 
535.23 permits a savings association to allocate an amount paid by 
the consumer in excess of the required minimum periodic payment 
based on the balances and annual percentage rates on the date the 
preceding billing cycle ends, on the date the payment is credited to 
the account, or on any day in between those two dates. For example, 
assume that the billing cycles for a consumer credit card account 
start on the first day of the month and end on the last day of the 
month. On the date the March billing cycle ends (March 31), the 
account has a purchase balance of $500 at a variable annual 
percentage rate of 14% and a cash advance balance of $200 at a 
variable annual percentage rate of 18%. On April 1, the rate for 
purchases increases to 16% and the rate for cash advances increases 
to 20% consistent with Sec.  535.24(b)(2). On April 15, the purchase 
balance increases to $700. On April 25, the savings association 
credits to the account $400 paid by the consumer in excess of the 
required minimum periodic payment. Under Sec.  535.23, the savings 
association may allocate the $400 based on the balances in existence 
and rates in effect on any day from March 31 through April 25.
    4. Use of permissible allocation methods. A savings association 
is not prohibited from changing the allocation method for a consumer 
credit card account or from using different allocation methods for 
different consumer credit card accounts, so long as the methods used 
are consistent with Sec.  535.23. For example, a savings association 
may change from allocating to the highest rate balance first 
pursuant to Sec.  535.23(a) to allocating pro rata pursuant to Sec.  
535.23(b) or vice versa. Similarly, a savings association may 
allocate to the highest rate balance first pursuant to Sec.  
535.23(a) on some of its accounts and allocate pro rata pursuant to 
Sec.  535.23(b) on other accounts.
    5. Claims or defenses under Regulation Z, 12 CFR 226.12(c). When 
a consumer has asserted a claim or defense against the card issuer 
pursuant to 12 CFR 226.12(c), the savings association must allocate 
consistent with 12 CFR 226.12 comment 226.12(c)-4.
    6. Balances with the same annual percentage rate. When the same 
annual percentage rate applies to more than one balance on an 
account and a different annual percentage rate applies to at least 
one other balance on that account, Sec.  535.23 does not require 
that any particular method be used when allocating among the 
balances with the same annual percentage rate. Under these 
circumstances, a savings association may treat the balances with the 
same rate as a single balance or separate balances. See comments 
23(a)-1.iv and 23(b)-2.iv.

23(a) High-to-Low Method

    1. Examples. For purposes of the following examples, assume that 
none of the required minimum periodic payment is allocated to the 
balances discussed (unless otherwise stated).
    i. Assume that a consumer's account has a cash advance balance 
of $500 at an annual percentage rate of 20% and a purchase balance 
of $1,500 at an annual percentage rate of 15% and that the consumer 
pays $800 in excess of the required minimum periodic payment. A 
savings association using this method would allocate $500 to pay off 
the cash advance balance and then allocate the remaining $300 to the 
purchase balance.
    ii. Assume that a consumer's account has a cash advance balance 
of $500 at an annual percentage rate of 20% and a purchase balance 
of $1,500 at an annual percentage rate of 15% and that the consumer 
pays $400 in excess of the required minimum periodic payment. A 
savings association using this method would allocate the entire $400 
to the cash advance balance.
    iii. Assume that a consumer's account has a cash advance balance 
of $100 at an annual percentage rate of 20%, a purchase balance of 
$300 at an annual percentage rate of 18%, and a $600 protected 
balance on which the 12% annual percentage rate cannot be increased 
pursuant to Sec.  535.24. If the consumer pays $500 in excess of the 
required minimum periodic payment, a savings association using this 
method would allocate $100 to pay off the cash advance balance, $300 
to pay off the purchase balance, and $100 to the protected balance.
    iv. Assume that a consumer's account has a cash advance balance 
of $500 at an annual percentage rate of 20%, a purchase balance of 
$1,000 at an annual percentage rate of 15%, and a transferred 
balance of $2,000 that

[[Page 5571]]

was previously at a discounted annual percentage rate of 5% but is 
now at an annual percentage rate of 15%. Assume also that the 
consumer pays $800 in excess of the required minimum periodic 
payment. A savings association using this method would allocate $500 
to pay off the cash advance balance and allocate the remaining $300 
among the purchase balance and the transferred balance in the manner 
the savings association deems appropriate.

23(b) Pro Rata Method

    1. Total balance. A savings association may, but is not required 
to, deduct amounts paid by the consumer's required minimum periodic 
payment when calculating the total balance for purposes of Sec.  
535.23(b)(3). See comment 23(b)-2.iii.
    2. Examples. For purposes of the following examples, assume that 
none of the required minimum periodic payment is allocated to the 
balances discussed (unless otherwise stated) and that the amounts 
allocated to each balance are rounded to the nearest dollar.
    i. Assume that a consumer's account has a cash advance balance 
of $500 at an annual percentage rate of 20% and a purchase balance 
of $1,500 at an annual percentage rate of 15% and that the consumer 
pays $555 in excess of the required minimum periodic payment. A 
savings association using this method would allocate 25% of the 
amount ($139) to the cash advance balance and 75% of the amount 
($416) to the purchase balance.
    ii. Assume that a consumer's account has a cash advance balance 
of $100 at an annual percentage rate of 20%, a purchase balance of 
$300 at an annual percentage rate of 18%, and a $600 protected 
balance on which the 12% annual percentage rate cannot be increased 
pursuant to Sec.  535.24. If the consumer pays $130 in excess of the 
required minimum periodic payment, a savings association using this 
method would allocate 10% of the amount ($13) to the cash advance 
balance, 30% of the amount ($39) to the purchase balance, and 60% of 
the amount ($78) to the protected balance.
    iii. Assume that a consumer's account has a cash advance balance 
of $300 at an annual percentage rate of 20% and a purchase balance 
of $600 at an annual percentage rate of 15%. Assume also that the 
required minimum periodic payment is $50 and that the savings 
association allocates this payment first to the balance with the 
lowest annual percentage rate (the $600 purchase balance). If the 
consumer pays $300 in excess of the $50 minimum payment, a savings 
association using this method could allocate based on a total 
balance of $850 (consisting of the $300 cash advance balance plus 
the $550 purchase balance after application of the $50 minimum 
payment). In this case, the savings association would apply 35% of 
the $300 ($105) to the cash advance balance and 65% of that amount 
($195) to the purchase balance. In the alternative, the savings 
association could allocate based on a total balance of $900 (which 
does not reflect the $50 minimum payment). In that case, the savings 
association would apply one third of the $300 excess payment ($100) 
to the cash advance balance and two thirds ($200) to the purchase 
balance.
    iv. Assume that a consumer's account has a cash advance balance 
of $500 at an annual percentage rate of 20%, a purchase balance of 
$1,000 at an annual percentage rate of 15%, and a transferred 
balance of $2,000 that was previously at a discounted annual 
percentage rate of 5% but is now at an annual percentage rate of 
15%. Assume also that the consumer pays $800 in excess of the 
required minimum periodic payment. A savings association using this 
method would allocate 14% of the excess payment ($112) to the cash 
advance balance and allocate the remaining 86% ($688) among the 
purchase balance and the transferred balance in the manner the 
savings association deems appropriate.

Section 535.24--Unfair Increases in Annual Percentage Rates

    1. Relationship to Regulation Z, 12 CFR part 226. A savings 
association that complies with the applicable disclosure 
requirements in Regulation Z, 12 CFR part 226, has complied with the 
disclosure requirements in Sec.  535.24. See 12 CFR 226.5a, 226.6, 
226.9. For example, a savings association may comply with the 
requirement in Sec.  535.24(a) to disclose at account opening the 
annual percentage rates that will apply to each category of 
transactions by complying with the disclosure requirements in 12 CFR 
226.5a regarding applications and solicitations and the requirements 
in 12 CFR 226.6 regarding account-opening disclosures. Similarly, in 
order to increase an annual percentage rate on new transactions 
pursuant to Sec.  535.24(b)(3), a savings association must comply 
with the disclosure requirements in 12 CFR 226.9(c) or (g). However, 
nothing in Sec.  535.24 alters the requirements in 12 CFR 226.9(c) 
and (g) that creditors provide consumers with written notice at 
least 45 days prior to the effective date of certain increases in 
the annual percentage rates on open-end (not home-secured) credit 
plans.

24(a) General Rule

    1. Rates that will apply to each category of transactions. 
Section 535.24(a) requires savings associations to disclose, at 
account opening, the annual percentage rates that will apply to each 
category of transactions on the account. A savings association 
cannot satisfy this requirement by disclosing at account opening 
only a range of rates or that a rate will be ``up to'' a particular 
amount.
    2. Application of prohibition on increasing rates. Section 
535.24(a) prohibits savings associations from increasing the annual 
percentage rate for a category of transactions on any consumer 
credit card account unless specifically permitted by one of the 
exceptions in Sec.  535.24(b). The following examples illustrate the 
application of the rule:
    i. Assume that, at account opening on January 1 of year one, a 
savings association discloses that the annual percentage rate for 
purchases is a non-variable rate of 15% and will apply for six 
months. The savings association also discloses that, after six 
months, the annual percentage rate for purchases will be a variable 
rate that is currently 18% and will be adjusted quarterly by adding 
a margin of 8 percentage points to a publicly-available index not 
under the savings association's control. Finally, the savings 
association discloses that the annual percentage rate for cash 
advances is the same variable rate that will apply to purchases 
after six months. The payment due date for the account is the 
twenty-fifth day of the month and the required minimum periodic 
payments are applied to accrued interest and fees but do not reduce 
the purchase and cash advance balances.
    A. On January 15, the consumer uses the account to make a $2,000 
purchase and a $500 cash advance. No other transactions are made on 
the account. At the start of each quarter, the savings association 
adjusts the variable rate that applies to the $500 cash advance 
consistent with changes in the index (pursuant to Sec.  
535.24(b)(2)). All required minimum periodic payments are received 
on or before the payment due date until May of year one, when the 
payment due on May 25 is received by the savings association on May 
28. The savings association is prohibited by Sec.  535.24 from 
increasing the rates that apply to the $2,000 purchase, the $500 
cash advance, or future purchases and cash advances. Six months 
after account opening (July 1), the savings association begins 
accruing interest on the $2,000 purchase at the previously-disclosed 
variable rate determined using an 8-point margin (pursuant to Sec.  
535.24(b)(1)). Because no other increases in rate were disclosed at 
account opening, the savings association may not subsequently 
increase the variable rate that applies to the $2,000 purchase and 
the $500 cash advance (except due to increases in the index pursuant 
to Sec.  535.24(b)(2)). On November 16, the savings association 
provides a notice pursuant to 12 CFR 226.9(c) informing the consumer 
of a new variable rate that will apply on January 1 of year two 
(calculated using the same index and an increased margin of 12 
percentage points). On January 1 of year two, the savings 
association increases the margin used to determine the variable rate 
that applies to new purchases to 12 percentage points (pursuant to 
Sec.  535.24(b)(3)). On January 15 of year two, the consumer makes a 
$300 purchase. The savings association applies the variable rate 
determined using the 12-point margin to the $300 purchase but not 
the $2,000 purchase.
    B. Same facts as above except that the required minimum periodic 
payment due on May 25 of year one is not received by the savings 
association until June 30 of year one. Because the savings 
association received the required minimum periodic payment more than 
30 days after the payment due date, Sec.  535.24(b)(4) permits the 
savings association to increase the annual percentage rate 
applicable to the $2,000 purchase, the $500 cash advance, and future 
purchases and cash advances. However, the savings association must 
first comply with the notice requirements in 12 CFR 226.9(g). Thus, 
if the savings association provided a 12 CFR 226.9(g) notice on June 
25 stating that all rates on the account would be increased to a 
non-variable penalty rate of 30%, the savings association could 
apply that 30% rate beginning on August 9 to all balances and future 
transactions.
    ii. Assume that, at account opening on January 1 of year one, a 
savings association

[[Page 5572]]

discloses that the annual percentage rate for purchases will 
increase as follows: A non-variable rate of 5% for six months; a 
non-variable rate of 10% for an additional six months; and 
thereafter a variable rate that is currently 15% and will be 
adjusted monthly by adding a margin of 5 percentage points to a 
publicly available index not under the savings association's 
control. The payment due date for the account is the fifteenth day 
of the month and the required minimum periodic payments are applied 
to accrued interest and fees but do not reduce the purchase balance. 
On January 15, the consumer uses the account to make a $1,500 
purchase. Six months after account opening (July 1), the savings 
association begins accruing interest on the $1,500 purchase at the 
previously disclosed 10% non-variable rate (pursuant to Sec.  
535.24(b)(1)). On September 15, the consumer uses the account for a 
$700 purchase. On November 16, the savings association provides a 
notice pursuant to 12 CFR 226.9(c) informing the consumer of a new 
variable rate that will apply on January 1 of year two (calculated 
using the same index and an increased margin of 8 percentage 
points). One year after account opening (January 1 of year two), the 
savings association begins accruing interest on the $2,200 purchase 
balance at the previously disclosed variable rate determined using a 
5-point margin (pursuant to Sec.  535.24(b)(1)). Because the 
variable rate determined using the 8-point margin was not disclosed 
at account opening, the savings association may not apply that rate 
to the $2,200 purchase balance. Furthermore, because no other 
increases in rate were disclosed at account opening, the savings 
association may not subsequently increase the variable rate that 
applies to the $2,200 purchase balance (except due to increases in 
the index pursuant to Sec.  535.24(b)(2)). The savings association 
may, however, apply the variable rate determined using the 8-point 
margin to purchases made on or after January 1 of year two (pursuant 
to Sec.  535.24(b)(3)).
    iii. Assume that, at account opening on January 1 of year one, a 
savings association discloses that the annual percentage rate for 
purchases is a variable rate determined by adding a margin of 6 
percentage points to a publicly available index outside of the 
savings association's control. The savings association also 
discloses that, to the extent consistent with Sec.  535.24 and other 
applicable law, a non-variable penalty rate of 28% may apply if the 
consumer makes a late payment. The due date for the account is the 
fifteenth of the month. On May 30 of year two, the account has a 
purchase balance of $1,000. On May 31, the creditor provides a 
notice pursuant to 12 CFR 226.9(c) informing the consumer of a new 
variable rate that will apply on July 16 for all purchases made on 
or after June 8 (calculated by using the same index and an increased 
margin of 8 percentage points). On June 7, the consumer makes a $500 
purchase. On June 8, the consumer makes a $200 purchase. On June 25, 
the savings association has not received the payment due on June 15 
and provides the consumer with a notice pursuant to 12 CFR 226.9(g) 
stating that the penalty rate of 28% will apply as of August 9 to 
all transactions made on or after July 3. On July 4, the consumer 
makes a $300 purchase.
    A. The payment due on June 15 of year two is received on June 
26. On July 16, Sec.  535.24(b)(3) permits the savings association 
to apply the variable rate determined using the 8-point margin to 
the $200 purchase made on June 8 but does not permit the savings 
association to apply this rate to the $1,500 purchase balance. On 
August 9, Sec.  535.24(b)(3) permits the savings association to 
apply the 28% penalty rate to the $300 purchase made on July 4 but 
does not permit the savings association to apply this rate to the 
$1,500 purchase balance (which remains at the variable rate 
determined using the 6-point margin) or the $200 purchase (which 
remains at the variable rate determined using the 8-point margin).
    B. Same facts as above except the payment due on September 15 of 
year two is received on October 20. Section 535.24(b)(4) permits the 
savings association to apply the 28% penalty rate to all balances on 
the account and to future transactions because it has not received 
payment within 30 days after the due date. However, in order to 
apply the 28% penalty rate to the entire $2,000 purchase balance, 
the savings association must provide an additional notice pursuant 
to 12 CFR 226.9(g). This notice must be sent no earlier than October 
16, which is the first day the account became more than 30 days' 
delinquent.
    C. Same facts as paragraph A. above except the payment due on 
June 15 of year two is received on July 20. Section 535.24(b)(4) 
permits the savings association to apply the 28% penalty rate to all 
balances on the account and to future transactions because it has 
not received payment within 30 days after the due date. Because the 
savings association provided a 12 CFR 226.9(g) notice on June 24 
stating the 28% penalty rate, the savings association may apply the 
28% penalty rate to all balances on the account as well as any 
future transactions on August 9 without providing an additional 
notice pursuant to 12 CFR 226.9(g).

24(b) Exceptions

 24(b)(1) Account Opening Disclosure Exception

    1. Prohibited increases in rate. Section 535.24(b)(1) permits an 
increase in the annual percentage rate for a category of 
transactions to a rate disclosed at account opening upon expiration 
of a period of time that was also disclosed at account opening. 
Section 535.24(b)(1) does not permit application of increased rates 
that are disclosed at account opening but are contingent on a 
particular event or occurrence or may be applied at the savings 
association's discretion. The following examples illustrate rate 
increases that are not permitted by Sec.  535.24(a):
    i. Assume that a savings association discloses at account 
opening on January 1 of year one that a non-variable rate of 15% 
applies to purchases but that all rates on an account may be 
increased to a non-variable penalty rate of 30% if a consumer's 
required minimum periodic payment is received after the payment due 
date, which is the fifteenth of the month. On March 1, the account 
has a $2,000 purchase balance. The payment due on March 15 is not 
received until March 20. Section 535.24 does not permit the savings 
association to apply the 30% penalty rate to the $2,000 purchase 
balance. However, pursuant to Sec.  535.24(b)(3), the savings 
association could provide a 12 CFR 226.9(c) or (g) notice on 
November 16 informing the consumer that, on January 1 of year two, 
the 30% rate (or a different rate) will apply to new transactions.
    ii. Assume that a savings association discloses at account 
opening on January 1 of year one that a non-variable rate of 5% 
applies to transferred balances but that this rate will increase to 
a non-variable rate of 18% if the consumer does not use the account 
for at least $200 in purchases each billing cycle. On July 1, the 
consumer transfers a balance of $4,000 to the account. During the 
October billing cycle, the consumer uses the account for $150 in 
purchases. Section 535.24 does not permit the savings association to 
apply the 18% rate to the $4,000 transferred balance. However, 
pursuant to Sec.  535.24(b)(3), the savings association could 
provide a 12 CFR 226.9(c) or (g) notice on November 16 informing the 
consumer that, on January 1 of year two, the 18% rate (or a 
different rate) will apply to new transactions.
    iii. Assume that a savings association discloses at account 
opening on January 1 of year one that interest on purchases will be 
deferred for one year, although interest will accrue on purchases 
during that year at a non-variable rate of 20%. The savings 
association further discloses that, if all purchases made during 
year one are not paid in full by the end of that year, the savings 
association will begin charging interest on the purchase balance and 
new purchases at 20% and will retroactively charge interest on the 
purchase balance at a rate of 20% starting on the date of each 
purchase made during year one. On January 1 of year one, the 
consumer makes a purchase of $1,500. No other transactions are made 
on the account. On January 1 of year two, $500 of the $1,500 
purchase remains unpaid. Section 535.24 does not permit the savings 
association to reach back to charge interest on the $1,500 purchase 
from January 1 through December 31 of year one. However, the savings 
association may apply the previously disclosed 20% rate to the $500 
purchase balance beginning on January 1 of year two (pursuant to 
Sec.  535.24(b)(1)).
    2. Loss of grace period. Nothing in Sec.  535.24 prohibits a 
savings association from assessing interest due to the loss of a 
grace period to the extent consistent with Sec.  535.25.
    3. Application of rate that is lower than disclosed rate. 
Section Sec.  535.24(b)(1) permits an increase in the annual 
percentage rate for a category of transactions to a rate disclosed 
at account opening upon expiration of a period of time that was also 
disclosed at account opening. Nothing in Sec.  535.24 prohibits a 
savings association from applying a rate that is lower than the 
disclosed rate upon expiration of the period. However, if a lower 
rate is applied to an existing balance, the savings association 
cannot subsequently increase the rate on that balance unless it has 
provided the consumer with advance notice

[[Page 5573]]

of the increase pursuant to 12 CFR 226.9(c). Furthermore, the 
savings association cannot increase the rate on that existing 
balance to a rate that is higher than the increased rate disclosed 
at account opening. The following example illustrates the 
application of this rule:
    i. Assume that, at account opening on January 1 of year one, a 
savings association discloses that a non-variable annual percentage 
rate of 15% will apply to purchases for one year and discloses that, 
after the first year, the savings association will apply a variable 
rate that is currently 20% and is determined by adding a margin of 
10 percentage points to a publicly available index not under the 
savings association's control. On December 31 of year one, the 
account has a purchase balance of $3,000.
    A. On November 16 of year one, the savings association provides 
a notice pursuant to 12 CFR 226.9(c) informing the consumer of a new 
variable rate that will apply on January 1 of year two (calculated 
using the same index and a reduced margin of 8 percentage points). 
The notice further states that, on July 1 of year two, the margin 
will increase to the margin disclosed at account opening (10 
percentage points). On July 1 of year two, the savings association 
increases the margin used to determine the variable rate that 
applies to new purchases to 10 percentage points and applies that 
rate to any remaining portion of the $3,000 purchase balance 
(pursuant to Sec.  535.24(b)(1)).
    B. Same facts as above except that the savings association does 
not send a notice on November 16 of year one. Instead, on January 1 
of year two, the savings association lowers the margin used to 
determine the variable rate to 8 percentage points and applies that 
rate to the $3,000 purchase balance and to new purchases. 12 CFR 
226.9 does not require advance notice in these circumstances. 
However, unless the account becomes more than 30 days' delinquent, 
the savings association may not subsequently increase the rate that 
applies to the $3,000 purchase balance except due to increases in 
the index (pursuant to Sec.  535.24(b)(2)).

24(b)(2) Variable Rate Exception

    1. Increases due to increase in index. Section 535.24(b)(2) 
provides that an annual percentage rate for a category of 
transactions that varies according to an index that is not under the 
savings association's control and is available to the general public 
may be increased due to an increase in the index. This section does 
not permit a savings association to increase the annual percentage 
rate by changing the method used to determine a rate that varies 
with an index (such as by increasing the margin), even if that 
change will not result in an immediate increase.
    2. External index. A savings association may increase the annual 
percentage rate if the increase is based on an index or indices 
outside the savings association's control. A savings association may 
not increase the rate based on its own prime rate or cost of funds. 
A savings association is permitted, however, to use a published 
prime rate, such as that in the Wall Street Journal, even if the 
savings association's own prime rate is one of several rates used to 
establish the published rate.
    3. Publicly available. The index or indices must be available to 
the public. A publicly-available index need not be published in a 
newspaper, but it must be one the consumer can independently obtain 
(by telephone, for example) and use to verify the rate applied to 
the outstanding balance.
    4. Changing a non-variable rate to a variable rate. Section 
535.24 generally prohibits a savings association from changing a 
non-variable annual percentage rate to a variable rate because such 
a change can result in an increase in rate. However, Sec.  
535.24(b)(1) permits a savings association to change a non-variable 
rate to a variable rate if the change was disclosed at account 
opening. Furthermore, following the first year after the account is 
opened, Sec.  535.24(b)(3) permits a savings association to change a 
non-variable rate to a variable rate with respect to new 
transactions (after complying with the notice requirements in 12 CFR 
226.9(c) or (g)). Finally, Sec.  535.24(b)(4) permits a savings 
association to change a non-variable rate to a variable rate if the 
required minimum periodic payment is not received within 30 days of 
the payment due date (after complying with the notice requirements 
in 12 CFR 226.9(g)).
    5. Changing a variable annual percentage rate to a non-variable 
annual percentage rate. Nothing in Sec.  535.24 prohibits a savings 
association from changing a variable annual percentage rate to an 
equal or lower non-variable rate. Whether the non-variable rate is 
equal to or lower than the variable rate is determined at the time 
the savings association provides the notice required by 12 CFR 
226.9(c). For example, assume that on March 1 a variable rate that 
is currently 15% applies to a balance of $2,000 and the savings 
association sends a notice pursuant to 12 CFR 226.9(c) informing the 
consumer that the variable rate will be converted to a non-variable 
rate of 14% effective April 17. On April 17, the savings association 
may apply the 14% non-variable rate to the $2,000 balance and to new 
transactions even if the variable rate on March 2 or a later date 
was less than 14%.
    6. Substitution of index. A savings association may change the 
index and margin used to determine the annual percentage rate under 
Sec.  535.24(b)(2) if the original index becomes unavailable, as 
long as historical fluctuations in the original and replacement 
indices were substantially similar, and as long as the replacement 
index and margin will produce a rate similar to the rate that was in 
effect at the time the original index became unavailable. If the 
replacement index is newly established and therefore does not have 
any rate history, it may be used if it produces a rate substantially 
similar to the rate in effect when the original index became 
unavailable.

24(b)(3) Advance Notice Exception

    1. First year after the account is opened. A savings association 
may not increase an annual percentage rate pursuant to Sec.  
535.24(b)(3) during the first year after the account is opened. This 
limitation does not apply to accounts opened prior to July 1, 2010.
    2. Transactions that occur more than seven days after notice 
provided. Section 535.24(b)(3) generally prohibits a savings 
association from applying an increased rate to transactions that 
occur within seven days after provision of the 12 CFR 226.9(c) or 
(g) notice. This prohibition does not, however, apply to 
transactions that are authorized within seven days after provision 
of the 12 CFR 226.9(c) or (g) notice but are settled more than seven 
days after the notice was provided.
    3. Examples.
    i. Assume that a consumer credit card account is opened on 
January 1 of year one. On March 14 of year two, the account has a 
purchase balance of $2,000 at a non-variable annual percentage rate 
of 15%. On March 15, the savings association provides a notice 
pursuant to 12 CFR 226.9(c) informing the consumer that the rate for 
new purchases will increase to a non-variable rate of 18% on May 1. 
The notice further states that the 18% rate will apply for six 
months (until November 1) and states that thereafter the savings 
association will apply a variable rate that is currently 22% and is 
determined by adding a margin of 12 percentage points to a publicly-
available index that is not under the savings association's control. 
The seventh day after provision of the notice is March 22 and, on 
that date, the consumer makes a $200 purchase. On March 24, the 
consumer makes a $1,000 purchase. On May 1, Sec.  535.24(b)(3) 
permits the savings association to begin accruing interest at 18% on 
the $1,000 purchase made on March 24. The savings association is not 
permitted to apply the 18% rate to the $2,200 purchase balance as of 
March 22. After six months (November 2), the savings association may 
begin accruing interest on any remaining portion of the $1,000 
purchase at the previously-disclosed variable rate determined using 
the 12-point margin.
    ii. Same facts as above except that the $200 purchase is 
authorized by the savings association on March 22 but is not settled 
until March 23. On May 1, Sec.  535.24(b)(3) permits the savings 
association to start charging interest at 18% on both the $200 
purchase and the $1,000 purchase. The savings association is not 
permitted to apply the 18% rate to the $2,000 purchase balance as of 
March 22.
    iii. Same facts as in paragraph i. above except that on 
September 17 of year two (which is 45 days before expiration of the 
18% non-variable rate), the savings association provides a notice 
pursuant to 12 CFR 226.9(c) informing the consumer that, on November 
2, a new variable rate will apply to new purchases and any remaining 
portion of the $1,000 balance (calculated by using the same index 
and a reduced margin of 10 percentage points). The notice further 
states that, on May 1 of year three, the margin will increase to the 
margin disclosed at account opening (12 percentage points). On May 1 
of year three, Sec.  535.24(b)(3) permits the savings association to 
increase the margin used to determine the variable rate that applies 
to new purchases to 12 percentage points and to apply that rate to 
any remaining portion of the $1,000 purchase as well as to new 
purchases. See comment 24(b)(1)-3. The

[[Page 5574]]

savings association is not permitted to apply this rate to any 
remaining portion of the $2,200 purchase balance as of March 22.

24(b)(5) Workout Arrangement Exception

    1. Scope of exception. Nothing in Sec.  535.24(b)(5) permits a 
savings association to alter the requirements of Sec.  535.24 
pursuant to a workout arrangement between a consumer and the savings 
association. For example, a savings association cannot increase an 
annual percentage rate pursuant to a workout arrangement unless 
otherwise permitted by Sec.  535.24. In addition, a savings 
association cannot require the consumer to make payments with 
respect to a protected balance that exceed the payments permitted 
under Sec.  535.24(c).
    2. Variable annual percentage rates. If the annual percentage 
rate that applied to a category of transactions prior to 
commencement of the workout arrangement varied with an index 
consistent with Sec.  535.24(b)(2), the rate applied to that 
category of transactions following an increase pursuant to Sec.  
535.24(b)(5) must be determined using the same formula (index and 
margin).
    3. Example. Assume that, consistent with Sec.  535.24(b)(4), the 
margin used to determine a variable annual percentage rate that 
applies to a $5,000 balance is increased from 5 percentage points to 
15 percentage points. Assume also that the savings association and 
the consumer subsequently agree to a workout arrangement that 
reduces the margin back to 5 points on the condition that the 
consumer pay a specified amount by the payment due date each month. 
If the consumer does not pay the agreed-upon amount by the payment 
due date, the savings association may increase the margin for the 
variable rate that applies to the $5,000 balance up to 15 percentage 
points. 12 CFR 226.9 does not require advance notice of this type of 
increase.

24(c) Treatment of Protected Balances

    1. Protected balances. Because rates cannot be increased 
pursuant to Sec.  535.24(b)(3) during the first year after account 
opening, Sec.  535.24(c) does not apply to balances during the first 
year. Instead, the requirements in Sec.  535.24(c) apply only to 
``protected balances,'' which are amounts owed for a category of 
transactions to which an increased annual percentage rate cannot be 
applied after the rate for that category of transactions has been 
increased pursuant to Sec.  535.24(b)(3). For example, assume that, 
on March 15 of year two, an account has a purchase balance of $1,000 
at a non-variable rate of 12% and that, on March 16, the savings 
association sends a notice pursuant to 12 CFR 226.9(c) informing the 
consumer that the rate for new purchases will increase to a non-
variable rate of 15% on May 2. On March 20, the consumer makes a 
$100 purchase. On March 24, the consumer makes a $150 purchase. On 
May 2, Sec.  535.24(b)(3) permits the savings association to start 
charging interest at 15% on the $150 purchase made on March 24 but 
does not permit the savings association to apply that 15% rate to 
the $1,100 purchase balance as of March 23. Accordingly, Sec.  
535.24(c) applies to the $1,100 purchase balance as of March 23 but 
not the $150 purchase made on March 24.

24(c)(1) Repayment

    1. No less beneficial to the consumer. A savings association may 
provide a method of repaying the protected balance that is different 
from the methods listed in Sec.  535.24(c)(1) so long as the method 
used is no less beneficial to the consumer than one of the listed 
methods. A method is no less beneficial to the consumer if the 
method amortizes the protected balance in five years or longer or if 
the method results in a required minimum periodic payment that is 
equal to or less than a minimum payment calculated consistent with 
Sec.  535.24(c)(1)(ii). For example, a savings association could 
increase the percentage of the protected balance included in the 
required minimum periodic payment from 2% to 5% so long as doing so 
would not result in amortization of the protected balance in less 
than five years. Alternatively, a savings association could require 
a consumer to make a minimum payment that amortizes the protected 
balance in less than five years so long as the payment does not 
include a percentage of the balance that is more than twice the 
percentage included in the minimum payment before the effective date 
of the increased rate. For example, a savings association could 
require the consumer to make a minimum payment that amortizes the 
protected balance in four years so long as doing so would not more 
than double the percentage of the balance included in the minimum 
payment prior to the effective date of the increased rate.
    2. Lower limit for required minimum periodic payment. If the 
required minimum periodic payment under Sec.  535.24(c)(1)(i) or 
(c)(1)(ii) is less than the lower dollar limit for minimum payments 
established in the cardholder agreement before the effective date of 
the rate increase, the savings association may set the minimum 
payment consistent with that limit. For example, if at account 
opening the cardholder agreement stated that the required minimum 
periodic payment would be either the total of fees and interest 
charges plus 1% of the total amount owed or $20 (whichever is 
greater), the savings association may require the consumer to make a 
minimum payment of $20 even if doing so would pay off the protected 
balance in less than five years or constitute more than 2% of the 
protected balance plus fees and interest charges.

Paragraph 24(c)(1)(i)

    1. Amortization period starting from date on which increased 
rate becomes effective. Section 535.24(c)(1)(i) provides for an 
amortization period for the protected balance of no less than five 
years, starting from the date on which the increased annual 
percentage rate becomes effective. A savings association is not 
required to recalculate the required minimum periodic payment for 
the protected balance if, during the amortization period, that 
balance is reduced as a result of the allocation of amounts paid by 
the consumer in excess of the minimum payment consistent with Sec.  
535.23 or any other practice permitted by these rules and other 
applicable law.
    2. Amortization when applicable annual percentage rate is 
variable. If the annual percentage rate that applies to the 
protected balance varies with an index consistent with Sec.  
535.24(b)(2), the savings association may adjust the interest 
charges included in the required minimum periodic payment for that 
balance accordingly in order to ensure that the outstanding balance 
is amortized in five years. For example, assume that a variable rate 
that is currently 15% applies to a protected balance and that, in 
order to amortize that balance in five years, the required minimum 
periodic payment must include a specific amount of principal plus 
all accrued interest charges. If the 15% variable rate increases due 
to an increase in the index, the savings association may increase 
the required minimum periodic payment to include the additional 
interest charges.

Paragraph 24(c)(1)(ii)

    1. Required minimum periodic payment on other balances. Section 
535.24(c)(1)(ii) addresses the required minimum periodic payment on 
the protected balance. Section 535.24(c)(1)(ii) does not limit or 
otherwise address the savings association's ability to determine the 
amount of the required minimum periodic payment for other balances.
    2. Example. Assume that the method used by a savings association 
to calculate the required minimum periodic payment for a consumer 
credit card account requires the consumer to pay either the total of 
fees and interest charges plus 1% of the total amount owed or $20, 
whichever is greater. Assume also that the account has a purchase 
balance of $2,000 at an annual percentage rate of 15% and a cash 
advance balance of $500 at an annual percentage rate of 20% and that 
the savings association increases the rate for purchases to 18% but 
does not increase the rate for cash advances. Under Sec.  
535.24(c)(1)(ii), the savings association may require the consumer 
to pay fees and interest plus 2% of the $2,000 purchase balance. 
Section 535.24(c)(1)(ii) does not prohibit the savings association 
from increasing the required minimum periodic payment for the cash 
advance balance.

24(c)(2) Fees and Charges

    1. Fee or charge based solely on the protected balance. A 
savings association is prohibited from assessing a fee or charge 
based solely on balances to which Sec.  535.24(c) applies. For 
example, a savings association is prohibited from assessing a 
monthly maintenance fee that would not be charged if the account did 
not have a protected balance. A savings association is not, however, 
prohibited from assessing fees such as late payment fees or fees for 
exceeding the credit limit even if such fees are based in part on 
the protected balance.

Section 535.25--Unfair Balance Computation Method

25(a) General Rule

    1. Two-cycle method prohibited. When a consumer ceases to be 
eligible for a time period provided by the savings association 
within which the consumer may repay any portion of the credit 
extended without incurring a finance charge (a grace period), the 
savings association is prohibited from

[[Page 5575]]

computing the finance charge using the so-called two-cycle average 
daily balance computation method. This method calculates the finance 
charge using a balance that is the sum of the average daily balances 
for two billing cycles. The first balance is for the current billing 
cycle, and is calculated by adding the total balance (including or 
excluding new purchases and deducting payments and credits) for each 
day in the billing cycle, and then dividing by the number of days in 
the billing cycle. The second balance is for the preceding billing 
cycle.
    2. Examples.
    i. Assume that the billing cycle on a consumer credit card 
account starts on the first day of the month and ends on the last 
day of the month. The payment due date for the account is the 
twenty-fifth day of the month. Under the terms of the account, the 
consumer will not be charged interest on purchases if the balance at 
the end of a billing cycle is paid in full by the following payment 
due date. The consumer uses the credit card to make a $500 purchase 
on March 15. The consumer pays the balance for the February billing 
cycle in full on March 25. At the end of the March billing cycle 
(March 31), the consumer's balance consists only of the $500 
purchase and the consumer will not be charged interest on that 
balance if it is paid in full by the following due date (April 25). 
The consumer pays $400 on April 25, leaving a $100 balance. The 
savings association may charge interest on the $500 purchase from 
the start of the April billing cycle (April 1) through April 24 and 
interest on the remaining $100 from April 25 through the end of the 
April billing cycle (April 30). The savings association is 
prohibited, however, from reaching back and charging interest on the 
$500 purchase from the date of purchase (March 15) to the end of the 
March billing cycle (March 31).
    ii. Assume the same circumstances as in the previous example 
except that the consumer does not pay the balance for the February 
billing cycle in full on March 25 and therefore, under the terms of 
the account, is not eligible for a time period within which to repay 
the $500 purchase without incurring a finance charge. With respect 
to the $500 purchase, the savings association may charge interest 
from the date of purchase (March 15) through April 24 and interest 
on the remaining $100 from April 25 through the end of the April 
billing cycle (April 30).

Section 535.26--Unfair Charging of Security Deposits and Fees for 
the Issuance or Availability of Credit to Consumer Credit Card 
Accounts

26(a) Limitation for First Year

    1. Majority of the credit limit. The total amount of security 
deposits and fees for the issuance or availability of credit 
constitutes a majority of the initial credit limit if that total is 
greater than half of the limit. For example, assume that a consumer 
credit card account has an initial credit limit of $500. Under Sec.  
535.26(a), a savings association may charge to the account security 
deposits and fees for the issuance or availability of credit 
totaling no more than $250 during the first year (consistent with 
Sec.  535.26(b)).

26(b) Limitations for First Billing Cycle and Subsequent Billing Cycles

    1. Adjustments of one dollar or less permitted. When dividing 
amounts pursuant to Sec.  535.26(b)(2), a savings association may 
adjust amounts by one dollar or less. For example, if a savings 
association is dividing $87 over five billing cycles, the savings 
association may charge $18 for two months and $17 for the remaining 
three months.
    2. Examples.
    i. Assume that a consumer credit card account opened on January 
1 has an initial credit limit of $500. Assume also that the billing 
cycles for this account begin on the first day of the month and end 
on the last day of the month. Under Sec.  535.26(a), the savings 
association may charge to the account no more than $250 in security 
deposits and fees for the issuance or availability of credit during 
the first year after the account is opened. If it charges $250, the 
savings association may charge up to $125 during the first billing 
cycle. If it charges $125 during the first billing cycle, it may 
then charge no more than $25 in each of the next five billing 
cycles. If it chooses, the savings association may spread the 
additional security deposits and fees over a longer period, such as 
by charging $12.50 in each of the ten billing cycles following the 
first billing cycle.
    ii. Same facts as above except that on July 1 the savings 
association increases the credit limit on the account from $500 to 
$750. Because the prohibition in Sec.  535.26(a) is based on the 
initial credit limit of $500, the increase in credit limit does not 
permit the savings association to charge to the account additional 
security deposits and fees for the issuance or availability of 
credit (such as a fee for increasing the credit limit).

26(c) Evasion Prohibited

    1. Evasion. Section 535.26(c) prohibits a savings association 
from evading the requirements of this section by providing the 
consumer with additional credit to fund the consumer's payment of 
security deposits and fees that exceed the total amounts permitted 
by Sec.  535.26(a) and (b). For example, assume that on January 1 a 
consumer opens a consumer credit card account with an initial credit 
limit of $400 and the savings association charges to that account 
$100 in fees for the issuance or availability of credit. Assume also 
that the billing cycles for the account coincide with the days of 
the month and that the savings association will charge $20 in fees 
for the issuance or availability of credit in the February, March, 
April, May, and June billing cycles. The savings association 
violates Sec.  535.26(c) if it provides the consumer with a separate 
credit product to fund additional security deposits or fees for the 
issuance or availability of credit.
    2. Payment with funds not obtained from the savings association. 
A savings association does not violate Sec.  535.26(c) if it 
requires the consumer to pay security deposits or fees for the 
issuance or availability of credit using funds that are not 
obtained, directly or indirectly, from the savings association. For 
example, a savings association does not violate Sec.  535.26(c) if a 
$400 security deposit paid by a consumer to obtain a consumer credit 
card account with a credit line of $400 is not charged to a credit 
account provided by the savings association or its affiliate.

26(d) Definitions

    1. Membership fees. Membership fees for opening an account are 
fees for the issuance or availability of credit. A membership fee to 
join an organization that provides a credit or charge card as a 
privilege of membership is a fee for the issuance or availability of 
credit only if the card is issued automatically upon membership. If 
membership results merely in eligibility to apply for an account, 
then such a fee is not a fee for the issuance or availability of 
credit.
    2. Enhancements. Fees for optional services in addition to basic 
membership privileges in a credit or charge card account (for 
example, travel insurance or card-registration services) are not 
fees for the issuance or availability of credit if the basic account 
may be opened without paying such fees. Issuing a card to each 
primary cardholder (not authorized users) is considered a basic 
membership privilege and fees for additional cards, beyond the first 
card on the account, are fees for the issuance or availability of 
credit. Thus, a fee to obtain an additional card on the account 
beyond the first card (so that each cardholder would have his or her 
own card) is a fee for the issuance or availability of credit even 
if the fee is optional; that is, if the fee is charged only if the 
cardholder requests one or more additional cards.
    3. One-time fees. Non-periodic fees related to opening an 
account (such as application fees or one-time membership or 
participation fees) are fees for the issuance or availability of 
credit. Fees for reissuing a lost or stolen card, statement 
reproduction fees, and fees for late payment or other violations of 
the account terms are examples of fees that are not fees for the 
issuance or availability of credit.

National Credit Union Administration

12 CFR Chapter VII

Authority and Issuance

0
For the reasons discussed in the joint preamble, NCUA revises part 706 
of Title 12 of the Code of Federal Regulations to read as follows:

PART 706--UNFAIR OR DECEPTIVE ACTS OR PRACTICES

Subpart A--General Provisions
Sec.
706.1 Authority, purpose, and scope.
706.2-706.10 [Reserved]
Subpart B--Consumer Credit Practices
706.11 Definitions.
706.12 Unfair credit contract provisions.
706.13 Unfair or deceptive cosigner practices.
706.14 Unfair late charges.
706.15-706.20 [Reserved]
Subpart C--Consumer Credit Card Account Practices Rule
706.21 Definitions.
706.22 Unfair time to make payment.
706.23 Unfair allocation of payments.

[[Page 5576]]

706.24 Unfair increases in annual percentage rates.
706.25 Unfair balance computation method.
706.26 Unfair charging of security deposits and fees for the 
issuance or availability of credit to consumer credit card accounts.
Appendix A to Part 706--Official Staff Commentary

    Authority: 15 U.S.C. 57a.

Subpart A--General Provisions


Sec.  706.1  Authority, purpose, and scope.

    (a) Authority. This part is issued by NCUA under section 18(f) of 
the Federal Trade Commission Act, 15 U.S.C. 57a(f) (section 202(a) of 
the Magnuson-Moss Warranty--Federal Trade Commission Improvement Act, 
Pub. L. 93-637).
    (b) Purpose. The purpose of this part is to prohibit unfair or 
deceptive acts or practices in violation of section 5(a)(1) of the 
Federal Trade Commission Act, 15 U.S.C. 45(a)(1). Subparts B and C 
define and contain requirements prescribed for the purpose of 
preventing specific unfair or deceptive acts or practices of federal 
credit unions. The prohibitions in subparts B and C do not limit NCUA's 
authority to enforce the FTC Act with respect to any other unfair or 
deceptive acts or practices.
    (c) Scope. This part applies to federal credit unions.


Sec. Sec.  706.2-706.10  [Reserved]

Subpart B--Consumer Credit Practices


Sec.  706.11  Definitions.

    For purposes of this subpart, the following definitions apply:
    Consumer means a natural person member who seeks or acquires goods, 
services, or money for personal, family, or household purposes, other 
than for the purchase of real property, and who applies for or is 
extended consumer credit.
    Consumer credit means credit extended to a natural person member 
for personal, family, or household purposes. It includes consumer 
loans; educational loans; unsecured loans for real property alteration, 
repair or improvement, or for the equipping of real property; overdraft 
loans; and credit cards. It also includes loans secured by liens on 
real estate and chattel liens secured by mobile homes and leases of 
personal property to consumers that may be considered the functional 
equivalent of loans on personal security but only if the federal credit 
union relies substantially upon other factors, such as the general 
credit standing of the borrower, guaranties, or security other than the 
real estate or mobile home, as the primary security for the loan.
    Earnings means compensation paid or payable to an individual or for 
the individual's account for personal services rendered or to be 
rendered by the individual, whether denominated as wages, salary, 
commission, bonus, or otherwise, including periodic payments pursuant 
to a pension, retirement, or disability program.
    Obligation means an agreement between a consumer and a federal 
credit union.
    Person means an individual, corporation, or other business 
organization.


Sec.  706.12  Unfair credit contract provisions.

    It is an unfair act or practice for a federal credit union, 
directly or indirectly, to enter into a consumer credit obligation that 
constitutes or contains, or to enforce in a consumer credit obligation 
the federal credit union purchased, any of the following provisions:
    (a) Confession of judgment. A cognovit or confession of judgment 
(for purposes other than executory process in the State of Louisiana), 
warrant of attorney, or other waiver of the right to notice and the 
opportunity to be heard in the event of suit or process thereon.
    (b) Waiver of exemption. An executory waiver or a limitation of 
exemption from attachment, execution, or other process on real or 
personal property held, owned by, or due to the consumer, unless the 
waiver applies solely to property subject to a security interest 
executed in connection with the obligation.
    (c) Assignment of wages. An assignment of wages or other earnings 
unless:
    (1) The assignment by its terms is revocable at the will of the 
debtor;
    (2) The assignment is a payroll deduction plan or preauthorized 
payment plan, commencing at the time of the transaction, in which the 
consumer authorizes a series of wage deductions as a method of making 
each payment; or
    (3) The assignment applies only to wages or other earnings already 
earned at the time of the assignment.
    (d) Security interest in household goods. A nonpossessory security 
interest in household goods other than a purchase-money security 
interest. For purposes of this paragraph, household goods:
    (1) Means clothing, furniture, appliances, linens, china, crockery, 
kitchenware, and personal effects of the consumer and the consumer's 
dependents.
    (2) Does not include:
    (i) Works of art;
    (ii) Electronic entertainment equipment (except one television and 
one radio);
    (iii) Antiques (any item over one hundred years of age, including 
such items that have been repaired or renovated without changing their 
original form or character); or
    (iv) Jewelry (other than wedding rings).


Sec.  706.13  Unfair or deceptive cosigner practices.

    (a) Prohibited deception. It is a deceptive act or practice for a 
federal credit union, directly or indirectly in connection with the 
extension of credit to consumers, to misrepresent the nature or extent 
of cosigner liability to any person.
    (b) Prohibited unfairness. It is an unfair act or practice for a 
federal credit union, directly or indirectly in connection with the 
extension of credit to consumers, to obligate a cosigner unless the 
cosigner is informed, before becoming obligated, of the nature of the 
cosigner's liability.
    (c) Disclosure requirement--(1) Disclosure statement. A clear and 
conspicuous statement must be given in writing to the cosigner before 
becoming obligated. In the case of open-end credit, the disclosure 
statement must be given to the cosigner before the time that the 
cosigner becomes obligated for any fees or transactions on the account. 
The disclosure statement must contain the following statement or one 
that is substantially similar:

Notice of Cosigner

    You are being asked to guarantee this debt. Think carefully 
before you do. If the borrower doesn't pay the debt, you will have 
to. Be sure you can afford to pay if you have to, and that you want 
to accept this responsibility.
    You may have to pay up to the full amount of the debt if the 
borrower does not pay. You may also have to pay late fees or 
collection costs, which increase this amount.
    The creditor can collect this debt from you without first trying 
to collect from the borrower. The creditor can use the same 
collection methods against you that can be used against the 
borrower, such as suing you, garnishing your wages, etc. If this 
debt is ever in default, that fact may become a part of your credit 
record.

    (2) Compliance. Compliance with paragraph (c)(1) of this section 
constitutes compliance with the consumer disclosure requirement in 
paragraph (b) of this section.
    (3) Additional content limitations. If the notice is a separate 
document, nothing other than the following items may appear with the 
notice:
    (i) The federal credit union's name and address;

[[Page 5577]]

    (ii) An identification of the debt to be cosigned (e.g., a loan 
identification number);
    (iii) The date (of the transaction); and
    (iv) The statement, ``This notice is not the contract that makes 
you liable for the debt.''
    (d) Cosigner defined--(1) Cosigner means a natural person who 
assumes liability for the obligation of a consumer without receiving 
goods, services, or money in return for the obligation, or, in the case 
of an open-end credit obligation, without receiving the contractual 
right to obtain extensions of credit under the account.
    (2) Cosigner includes any person whose signature is requested as a 
condition to granting credit to a consumer, or as a condition for 
forbearance on collection of a consumer's obligation that is in 
default. The term does not include a spouse or other person whose 
signature is required on a credit obligation to perfect a security 
interest pursuant to state law.
    (3) A person who meets the definition in this paragraph is a 
cosigner, whether or not the person is designated as such on a credit 
obligation.


Sec.  706.14  Unfair late charges.

    (a) Prohibition. In connection with collecting a debt arising out 
of an extension of credit to a consumer, it is an unfair act or 
practice for a federal credit union, directly or indirectly, to levy or 
collect any delinquency charge on a payment, when the only delinquency 
is attributable to late fees or delinquency charges assessed on earlier 
installments and the payment is otherwise a full payment for the 
applicable period and is paid on its due date or within an applicable 
grace period.
    (b) Collecting a debt defined. Collecting a debt means, for the 
purposes of this section, any activity, other than the use of judicial 
process, that is intended to bring about or does bring about repayment 
of all or part of money due (or alleged to be due) from a consumer.


Sec. Sec.  706.15-706.20  [Reserved]

Subpart C--Consumer Credit Card Account Practices Rule


Sec.  706.21  Definitions.

    For purposes of this subpart, the following definitions apply:
    Annual percentage rate means 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. The term ``periodic rate'' 
has the same meaning as in 12 CFR 226.2.
    Consumer means a natural person member 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.
    Consumer credit card account means 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 card or charge card. 
The terms ``open-end credit,'' ``credit card,'' and ``charge card'' 
have the same meanings as in 12 CFR 226.2. The following are not 
consumer credit card accounts for purposes of this subpart:
    (1) Home equity plans subject to the requirements of 12 CFR 226.5b 
that are accessible by a credit or charge card;
    (2) Overdraft lines of credit tied to asset accounts accessed by 
check-guarantee cards or by debit cards;
    (3) Lines of credit accessed by check-guarantee cards or by debit 
cards that can be used only at automated teller machines; and
    (4) Lines of credit accessed solely by account numbers.


Sec.  706.22  Unfair time to make payment.

    (a) General rule. Except as provided in paragraph (c) of this 
section, a federal credit union must not treat a payment on a consumer 
credit card account as late for any purpose unless the consumer has 
been provided a reasonable amount of time to make the payment.
    (b) Compliance with general rule--(1) Establishing compliance. A 
federal credit union must be able to establish that it has complied 
with paragraph (a) of this section.
    (2) Safe harbor. A federal credit union complies with paragraph (a) 
of this section if it has 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.
    (c) Exception for grace periods. Paragraph (a) of this section does 
not apply to any time period a federal credit union provides within 
which the consumer may repay any portion of the credit extended without 
incurring an additional finance charge.


Sec.  706.23  Unfair allocation of payments.

    When different annual percentage rates apply to different balances 
on a consumer credit card account, a federal credit union must allocate 
any amount paid by the consumer in excess of the required minimum 
periodic payment among the balances using one of the following methods:
    (a) High-to-low method. The amount paid by the consumer in excess 
of the required minimum periodic payment is allocated first to the 
balance with the highest annual percentage rate and any remaining 
portion to the other balances in descending order based on the 
applicable annual percentage rate.
    (b) Pro rata method. The amount paid by the consumer in excess of 
the required minimum periodic payment is allocated among the balances 
in the same proportion as each balance bears to the total balance.


Sec.  706.24  Unfair increases in annual percentage rates.

    (a) General rule. At account opening, a federal credit union must 
disclose the annual percentage rates that will apply to each category 
of transactions on the consumer credit card account. A federal credit 
union must not increase the annual percentage rate for a category of 
transactions on any consumer credit card account except as provided in 
paragraph (b) of this section.
    (b) Exceptions. The prohibition in paragraph (a) of this section on 
increasing annual percentage rates does not apply where an annual 
percentage rate may be increased pursuant to one of the exceptions in 
this paragraph.
    (1) Account opening disclosure exception. An annual percentage rate 
for a category of transactions may be increased to a rate disclosed at 
account opening upon expiration of a period of time disclosed at 
account opening.
    (2) Variable rate exception. An annual percentage rate for a 
category of transactions that varies according to an index that is not 
under the federal credit union's control and is available to the 
general public may be increased due to an increase in the index.
    (3) Advance notice exception. An annual percentage rate for a 
category of transactions may be increased pursuant to a notice under 12 
CFR 226.9(c) or (g) for transactions that occur more than seven days 
after provision of the notice. This exception does not permit an 
increase in any annual percentage rate during the first year after the 
account is opened.
    (4) Delinquency exception. An annual percentage rate may be 
increased due to the federal credit union not receiving the consumer's 
required minimum periodic payment within 30 days after the due date for 
that payment.
    (5) Workout arrangement exception. An annual percentage rate may be 
increased due to the consumer's failure to comply with the terms of a 
workout arrangement between the federal credit union and the consumer, 
provided that the annual percentage rate applicable to

[[Page 5578]]

a category of transactions following any such increase does not exceed 
the rate that applied to that category of transactions prior to 
commencement of the workout arrangement.
    (c) Treatment of protected balances. For purposes of this 
paragraph, ``protected balance'' means the amount owed for a category 
of transactions to which an increased annual percentage rate cannot be 
applied after the rate for that category of transactions has been 
increased pursuant to paragraph (b)(3) of this section.
    (1) Repayment. A federal credit union must provide the consumer 
with one of the following methods of repaying a protected balance or a 
method that is no less beneficial to the consumer than one of the 
following methods:
    (i) An amortization period of no less than five years, starting 
from the date on which the increased rate becomes effective for the 
category of transactions; or
    (ii) A required minimum periodic payment that includes a percentage 
of the protected balance that is no more than twice the percentage 
required before the date on which the increased rate became effective 
for the category of transactions.
    (2) Fees and charges. A federal credit union must not assess any 
fee or charge based solely on a protected balance.


Sec.  706.25  Unfair balance computation method.

    (a) General rule. Except as provided in paragraph (b) of this 
section, a federal credit union must not impose finance charges on 
balances on a consumer credit card account based on balances for days 
in billing cycles that precede the most recent billing cycle as a 
result of the loss of any time period provided by the federal credit 
union within which the consumer may repay any portion of the credit 
extended without incurring a finance charge.
    (b) Exceptions. Paragraph (a) of this section does not apply to:
    (1) Adjustments to finance charges as a result of the resolution of 
a dispute under 12 CFR 226.12 or 12 CFR 226.13; or
    (2) Adjustments to finance charges as a result of the return of a 
payment for insufficient funds.


Sec.  706.26  Unfair charging of security deposits and fees for the 
issuance or availability of credit to consumer credit card accounts.

    (a) Limitation for first year. During the first year, a federal 
credit union must not charge to a consumer credit card account security 
deposits and fees for the issuance or availability of credit that in 
total constitute a majority of the initial credit limit for the 
account.
    (b) Limitations for first billing cycle and subsequent billing 
cycles--(1) First billing cycle. During the first billing cycle, the 
federal credit union must not charge to a consumer credit card account 
security deposits and fees for the issuance or availability of credit 
that in total constitute more than 25 percent of the initial credit 
limit for the account.
    (2) Subsequent billing cycles. Any additional security deposits and 
fees for the issuance or availability of credit permitted by paragraph 
(a) of this section must be charged to the account in equal portions in 
no fewer than the five billing cycles immediately following the first 
billing cycle.
    (c) Evasion prohibited. A federal credit union must not evade the 
requirements of this section by providing the consumer additional 
credit to fund the payment of security deposits and fees for the 
issuance or availability of credit that exceed the total amounts 
permitted by paragraphs (a) and (b) of this section.
    (d) Definitions. For purposes of this section, the following 
definitions apply:
    (1) Fees for the issuance or availability of credit means:
    (i) Any annual or other periodic fee that may be imposed for the 
issuance or availability of a consumer credit card account, including 
any fee based on account activity or inactivity; and
    (ii) Any non-periodic fee that relates to opening an account.
    (2) First billing cycle means the first billing cycle after a 
consumer credit card account is opened.
    (3) First year means the period beginning with the date on which a 
consumer credit card account is opened and ending twelve months from 
that date.
    (4) Initial credit limit means the credit limit in effect when a 
consumer credit card account is opened.

Appendix A to Part 706--Official Staff Commentary

Subpart A--General Provisions for Consumer Protection Rules

Section 706.1--Authority, Purpose, and Scope

1(c) Scope

    1. Penalties for noncompliance. Administrative enforcement of 
the rule for federal credit unions may involve actions under section 
206 of the Federal Credit Union Act (12 U.S.C. 1786), including 
cease-and-desist orders requiring that actions be taken to remedy 
violations and civil money penalties.

Subpart C--Consumer Credit Card Account Practices Rule

Section 706.22--Unfair Time To Make Payment

22(a) General Rule

    1. Treating a payment as late for any purpose. 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 to make that payment under this section.
    2. Reasonable amount of time to make payment. Whether an amount 
of time is reasonable for purposes of making a payment is determined 
from the perspective of the consumer, not the federal credit union. 
Under Sec.  706.22(b)(2), a federal credit union provides a 
reasonable amount of time to make a payment if it has 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.

22(b) Compliance With General Rule

    1. Reasonable procedures. A federal credit union is not required 
to determine the specific date on which periodic statements are 
mailed or delivered to each consumer. A federal credit union 
provides a reasonable amount of time to make a payment if it has 
adopted reasonable procedures designed to ensure that periodic 
statements are mailed or delivered to consumers no later than a 
certain number of days after the closing date of the billing cycle 
and adds that number of days to the 21-day period in Sec.  
706.24(b)(2) when determining the payment due date. For example, if 
a federal credit union has adopted reasonable procedures designed to 
ensure that periodic statements are mailed or delivered to consumers 
no later than three days after the closing date of the billing 
cycle, the payment due date on the periodic statement must be no 
less than 24 days after the closing date of the billing cycle.
    2. Payment due date. For purposes of Sec.  706.22(b)(2), 
``payment due date'' means the date by which a federal credit union 
requires the consumer to make the required minimum periodic payment 
in order to avoid being treated as late for any purpose, except as 
provided in Sec.  706.22(c).
    3. Example of alternative method of compliance. Assume that, for 
a particular type of consumer credit card account, a federal credit 
union only provides periodic statements electronically and only 
accepts payments electronically, consistent with applicable law and 
regulatory guidance. Under these circumstances, the federal credit 
union could comply with Sec.  706.22(a) even if it does not provide 
periodic statements 21 days before the payment due date consistent 
with Sec.  706.22(b)(2).

Section 706.23--Unfair Allocation of Payments

    1. Minimum periodic payment. Section 706.23 addresses the 
allocation of amounts paid by a consumer in excess of the minimum 
periodic payment required by a

[[Page 5579]]

federal credit union. Section 706.23 does not limit or otherwise 
address a federal credit union's ability to determine, consistent 
with applicable law and regulatory guidance, the amount of the 
required minimum periodic payment or how that payment is allocated. 
A federal credit union may, but is not required to, allocate the 
required minimum periodic payment consistent with the requirements 
in Sec.  706.23 to the extent consistent with other applicable law 
or regulatory guidance.
    2. Adjustments of one dollar or less permitted. When allocating 
payments, a federal credit union may adjust amounts by one dollar or 
less. For example, if a federal credit union is allocating $100 
pursuant to Sec.  706.23(b) among balances of $1,000, $2,000, and 
$4,000, the federal credit union may apply $14 to the $1,000 
balance, $29 to the $2,000 balance, and $57 to the $4,000 balance.
    3. Applicable balances and annual percentage rates. Section 
706.23 permits a federal credit union to allocate an amount paid by 
the consumer in excess of the required minimum periodic payment 
based on the balances and annual percentage rates on the date the 
preceding billing cycle ends, on the date the payment is credited to 
the account, or on any day between those two dates. For example, 
assume that the billing cycles for a consumer credit card account 
start on the first day of the month and end on the last day of the 
month. On the date the March billing cycle ends, March 31, the 
account has a purchase balance of $500 at a variable annual 
percentage rate of 10% and a cash advance balance of $200 at a 
variable annual percentage rate of 13%. On April 1, the rate for 
purchases increases to 13% and the rate for cash advances increases 
to 15% consistent with Sec.  706.24(b)(2). On April 15, the purchase 
balance increases to $700. On April 25, the federal credit union 
credits to the account $400 paid by the consumer in excess of the 
required minimum periodic payment. Under Sec.  706.23, the federal 
credit union may allocate the $400 based on the balances in 
existence and rates in effect on any day from March 31 through April 
25.
    4. Use of permissible allocation methods. A federal credit union 
is not prohibited from changing the allocation method for a consumer 
credit card account or from using different allocation methods for 
different consumer credit card accounts, so long as the methods used 
are consistent with Sec.  706.23. For example, a federal credit 
union may change from allocating to the highest rate balance first 
pursuant to Sec.  706.23(a) to allocating pro rata pursuant to Sec.  
706.23(b) or vice versa. Similarly, a federal credit union may 
allocate to the highest rate balance first pursuant to Sec.  
706.23(a) on some of its accounts and allocate pro rata pursuant to 
Sec.  706.23(b) on other accounts.
    5. Claims or defenses under Regulation Z, 12 CFR 226.12(c). When 
a consumer has asserted a claim or defense against the card issuer 
pursuant to 12 CFR 226.12(c), a federal credit union must allocate 
consistent with 12 CFR 226.12 comment 226.12(c)-4.
    6. Balances with the same annual percentage rate. When the same 
annual percentage rate applies to more than one balance on an 
account and a different annual percentage rate applies to at least 
one other balance on that account, Sec.  706.23 does not require 
that a federal credit union use any particular method when 
allocating among the balances with the same annual percentage rate. 
Under these circumstances, a federal credit union may treat the 
balances with the same rate as a single balance or separate 
balances. See comments 23(a)-1.iv and 23(b)-2.iv.

23(a) High-to-Low Method

    1. Examples. For purposes of the following examples, assume that 
none of the required minimum periodic payment is allocated to the 
balances discussed, unless otherwise stated.
    i. Assume that a consumer's account has a cash advance balance 
of $500 at an annual percentage rate of 15% and a purchase balance 
of $1,500 at an annual percentage rate of 10% and that the consumer 
pays $800 in excess of the required minimum periodic payment. A 
federal credit union using this method would allocate $500 to pay 
off the cash advance balance and then allocate the remaining $300 to 
the purchase balance.
    ii. Assume that a consumer's account has a cash advance balance 
of $500 at an annual percentage rate of 15% and a purchase balance 
of $1,500 at an annual percentage rate of 10% and that the consumer 
pays $400 in excess of the required minimum periodic payment. A 
federal credit union using this method would allocate the entire 
$400 to the cash advance balance.
    iii. Assume that a consumer's account has a cash advance balance 
of $100 at an annual percentage rate of 15%, a purchase balance of 
$300 at an annual percentage rate of 13%, and a $600 protected 
balance on which the 10% annual percentage rate cannot be increased 
pursuant to Sec.  706.24. If the consumer pays $500 in excess of the 
required minimum periodic payment, a federal credit union using this 
method would allocate $100 to pay off the cash advance balance, $300 
to pay off the purchase balance, and $100 to the protected balance.
    iv. Assume that a consumer's account has a cash advance balance 
of $500 at an annual percentage rate of 15%, a purchase balance of 
$1,000 at an annual percentage rate of 12%, and a transferred 
balance of $2,000 that was previously at a discounted annual 
percentage rate of 5% but is now at an annual percentage rate of 
12%. Assume also that the consumer pays $800 in excess of the 
required minimum periodic payment. A federal credit union using this 
method would allocate $500 to pay off the cash advance balance and 
allocate the remaining $300 among the purchase balance and the 
transferred balance in the manner the federal credit union deems 
appropriate.

23(b) Pro Rata Method

    1. Total balance. A federal credit union may, but is not 
required to, deduct amounts paid by the consumer's required minimum 
periodic payment when calculating the total balance for purposes of 
Sec.  706.23(b)(3). See comment 23(b)-2.iii.
    2. Examples. For purposes of the following examples, assume that 
none of the required minimum periodic payment is allocated to the 
balances discussed, unless otherwise stated, and that the amounts 
allocated to each balance are rounded to the nearest dollar.
    i. Assume that a consumer's account has a cash advance balance 
of $500 at an annual percentage rate of 15% and a purchase balance 
of $1,500 at an annual percentage rate of 12% and that the consumer 
pays $555 in excess of the required minimum periodic payment. A 
federal credit union using this method would allocate 25% of the 
amount ($139) to the cash advance balance and 75% of the amount 
($416) to the purchase balance.
    ii. Assume that a consumer's account has a cash advance balance 
of $100 at an annual percentage rate of 15%, a purchase balance of 
$300 at an annual percentage rate of 13%, and a $600 protected 
balance on which the 10% annual percentage rate cannot be increased 
pursuant to Sec.  706.24. If the consumer pays $130 in excess of the 
required minimum periodic payment, a federal credit union using this 
method would allocate 10% of the amount ($13) to the cash advance 
balance, 30% of the amount ($39) to the purchase balance, and 60% of 
the amount ($78) to the protected balance.
    iii. Assume that a consumer's account has a cash advance balance 
of $300 at an annual percentage rate of 15% and a purchase balance 
of $600 at an annual percentage rate of 13%. Assume also that the 
required minimum periodic payment is $50 and that the federal credit 
union allocates this payment first to the balance with the lowest 
annual percentage rate, the $600 purchase balance. If the consumer 
pays $300 in excess of the $50 minimum payment, a federal credit 
union using this method could allocate based on a total balance of 
$850, consisting of the $300 cash advance balance plus the $550 
purchase balance after application of the $50 minimum payment. In 
this case, the federal credit union would apply 35% of the $300 
($105) to the cash advance balance and 65% of that amount ($195) to 
the purchase balance. In the alternative, the federal credit union 
could allocate based on a total balance of $900, which does not 
reflect the $50 minimum payment. In that case, the federal credit 
union would apply one-third of the $300 excess payment ($100) to the 
cash advance balance and two-thirds ($200) to the purchase balance.
    iv. Assume that a consumer's account has a cash advance balance 
of $500 at an annual percentage rate of 15%, a purchase balance of 
$1,000 at an annual percentage rate of 12%, and a transferred 
balance of $2,000 that was previously at a discounted annual 
percentage rate of 5%, but is now at an annual percentage rate of 
12%. Assume also that the consumer pays $800 in excess of the 
required minimum periodic payment. A federal credit union using this 
method would allocate 14% of the excess payment ($112) to the cash 
advance balance and allocate the remaining 86% ($688) among the 
purchase balance and the transferred balance in the manner the 
federal credit union deems appropriate.

Section 706.24--Unfair Increases in Annual Percentage Rates

    1. Relationship to Regulation Z, 12 CFR part 226. A federal 
credit union that complies with the applicable disclosure

[[Page 5580]]

requirements in Regulation Z, 12 CFR part 226, has complied with the 
disclosure requirements in Sec.  706.24. See 12 CFR 226.5a, 226.6, 
226.9. For example, a federal credit union may comply with the 
requirement in Sec.  706.24(a) to disclose at account opening the 
annual percentage rates that will apply to each category of 
transactions by complying with the disclosure requirements in 12 CFR 
226.5a regarding applications and solicitations and the requirements 
in 12 CFR 226.6 regarding account-opening disclosures. Similarly, in 
order to increase an annual percentage rate on new transactions 
pursuant to Sec.  706.24(b)(3), a federal credit union must comply 
with the disclosure requirements in 12 CFR 226.9(c) or (g). However, 
nothing in Sec.  706.24 alters the requirements in 12 CFR 226.9(c) 
and (g) that creditors provide consumers with written notice at 
least 45 days prior to the effective date of certain increases in 
the annual percentage rates on open-end (not home-secured) credit 
plans.

24(a) General Rule

    1. Rates that will apply to each category of transactions. 
Section 706.24(a) requires federal credit unions to disclose, at 
account opening, the annual percentage rates that will apply to each 
category of transactions on the account. A federal credit union 
cannot satisfy this requirement by disclosing at account opening 
only a range of rates or that a rate will be ``up to'' a particular 
amount.
    2. Application of prohibition on increasing rates. Section 
706.24(a) prohibits federal credit unions from increasing the annual 
percentage rate for a category of transactions on any consumer 
credit card account unless specifically permitted by one of the 
exceptions in Sec.  706.24(b). The following examples illustrate the 
application of the rule:
    i. Assume that, at account opening on January 1 of year one, a 
federal credit union discloses that the annual percentage rate for 
purchases is a non-variable rate of 1% and will apply for six 
months. The federal credit union also discloses that, after six 
months, the annual percentage rate for purchases will be a variable 
rate that is currently 9% and will be adjusted quarterly by adding a 
margin of 8 percentage points to a publicly-available index not 
under the federal credit union's control. Finally, the federal 
credit union discloses that the annual percentage rate for cash 
advances is the same variable rate that will apply to purchases 
after six months. The payment due date for the account is the 
twenty-fifth day of the month and the required minimum periodic 
payments are applied to accrued interest and fees but do not reduce 
the purchase and cash advance balances.
    A. On January 15, the consumer uses the account to make a $2,000 
purchase and a $500 cash advance. No other transactions are made on 
the account. At the start of each quarter, the federal credit union 
adjusts the variable rate that applies to the $500 cash advance 
consistent with changes in the index, pursuant to Sec.  
706.24(b)(2). All required minimum periodic payments are received on 
or before the payment due date until May of year one, when the 
payment due on May 25 is received by the federal credit union on May 
28. The federal credit union is prohibited by Sec.  706.24 from 
increasing the rates that apply to the $2,000 purchase, the $500 
cash advance, or future purchases and cash advances. Six months 
after account opening, July 1, the federal credit union applies the 
previously-disclosed variable rate determined using an 8-point 
margin pursuant to Sec.  706.24(b)(1). Because no other increases in 
rate were disclosed at account opening, the federal credit union may 
not subsequently increase the variable rate that applies to the 
$2,000 purchase and the $500 cash advance, except due to increases 
in the index pursuant to Sec.  706.24(b)(2). On November 16, the 
federal credit union provides a notice pursuant to 12 CFR 226.9(c) 
informing the consumer of a new variable rate that will apply on 
January 1 of year two, calculated using the same index and an 
increased margin of 12 percentage points. On January 1 of year two, 
the federal credit union increases the margin used to determine the 
variable rate that applies to new purchases to 12 percentage points 
pursuant to Sec.  706.24(b)(3). On January 15 of year two, the 
consumer makes a $300 purchase. The federal credit union applies the 
variable rate determined using the 12-point margin to the $300 
purchase but not the $2,000 purchase.
    B. Same facts as above, except that the required minimum 
periodic payment due on May 25 of year one is not received by the 
federal credit union until June 30 of year one. Because the federal 
credit union received the required minimum periodic payment more 
than 30 days after the payment due date, Sec.  706.24(b)(4) permits 
the federal credit union to increase the annual percentage rate 
applicable to the $2,000 purchase, the $500 cash advance, and future 
purchases and cash advances. However, the federal credit union must 
first comply with the notice requirements in 12 CFR 226.9(g). Thus, 
if the federal credit union provided a 12 CFR 226.9(g) notice on 
June 25 stating that all rates on the account would be increased to 
a non-variable penalty rate of 15%, the federal credit union could 
apply that 15% rate beginning on August 9, to all balances and 
future transactions.
    ii. Assume that, at account opening on January 1 of year one, a 
federal credit union discloses that the annual percentage rate for 
purchases will increase as follows: A non-variable rate of 3% for 
six months; a non-variable rate of 8% for an additional six months; 
and thereafter a variable rate that is currently 13% and will be 
adjusted monthly by adding a margin of 5 percentage points to a 
publicly available index not under the federal credit union's 
control. The payment due date for the account is the fifteenth day 
of the month and the required minimum periodic payments are applied 
to accrued interest and fees but do not reduce the purchase balance. 
On January 15, the consumer uses the account to make a $1,500 
purchase. Six months after account opening, July 1, the federal 
credit union begins accruing interest on the $1,500 purchase at the 
previously disclosed 8% non-variable rate pursuant to Sec.  
706.24(b)(1). On September 15, the consumer uses the account for a 
$700 purchase. On November 16, the federal credit union provides a 
notice pursuant to 12 CFR 226.9(c) informing the consumer of a new 
variable rate that will apply on January 1 of year two, calculated 
using the same index and an increased margin of 8 percentage points. 
One year after account opening, January 1 of year two, the federal 
credit union begins accruing interest on the $2,200 purchase balance 
at the previously disclosed variable rate determined using a 5-point 
margin pursuant to Sec.  706.24(b)(1). Because the variable rate 
determined using the 8-point margin was not disclosed at account 
opening, the federal credit union may not apply that rate to the 
$2,200 purchase balance. Furthermore, because no other increases in 
rate were disclosed at account opening, the federal credit union may 
not subsequently increase the variable rate that applies to the 
$2,200 purchase balance (except due to increases in the index 
pursuant to Sec.  706.24(b)(2)). The federal credit union may, 
however, apply the variable rate determined using the 8-point margin 
to purchases made on or after January 1 of year two pursuant to 
Sec.  706.24(b)(3).
    iii. Assume that, at account opening on January 1 of year one, a 
federal credit union discloses that the annual percentage rate for 
purchases is a variable rate determined by adding a margin of 6 
percentage points to a publicly available index outside of the 
federal credit union's control. The federal credit union also 
discloses that, to the extent consistent with Sec.  706.24 and other 
applicable law, a non-variable penalty rate of 15% may apply if the 
consumer makes a late payment. The due date for the account is the 
fifteenth of the month. On May 30 of year two, the account has a 
purchase balance of $1,000. On May 31, the creditor provides a 
notice pursuant to 12 CFR 226.9(c) informing the consumer of a new 
variable rate that will apply on July 16 for all purchases made on 
or after June 8, calculated by using the same index and an increased 
margin of 8 percentage points. On June 7, the consumer makes a $500 
purchase. On June 8, the consumer makes a $200 purchase. On June 25, 
the federal credit union has not received the payment due on June 
15, and provides the consumer with a notice pursuant to 12 CFR 
226.9(g) stating that the penalty rate of 15% will apply as of 
August 9, to all transactions made on or after July 2. On July 4, 
the consumer makes a $300 purchase.
    A. The payment due on June 15 of year two is received on June 
25. On July 17, Sec.  706.24(b)(3) permits the federal credit union 
to apply the variable rate determined using the 8-point margin to 
the $200 purchase made on June 8 but does not permit the federal 
credit union to apply this rate to the $1,500 purchase balance. On 
August 9, Sec.  706.24(b)(3) permits the federal credit union to 
apply the 15% penalty rate to the $300 purchase made on July 4, but 
does not permit the federal credit union to apply this rate to the 
$1,500 purchase balance, which remains at the variable rate 
determined using the 6-point margin, or the $200 purchase, which 
remains at the variable rate determined using the 8-point margin.
    B. Same facts as above, except the payment due on September 15 
of year two is received on October 20. Section 706.24(b)(4) permits 
the federal credit union to apply the 15% penalty rate to all 
balances on the account

[[Page 5581]]

and to future transactions because it has not received payment 
within 30 days after the due date. However, in order to apply the 
15% penalty rate to the entire $2,000 purchase balance, the federal 
credit union must provide an additional notice pursuant to 12 CFR 
226.9(g). This notice must be sent no earlier than October 16, which 
is the first day the account became more than 30 days delinquent.
    C. Same facts as paragraph A above, except the payment due on 
June 15 of year two is received on July 20. Section 706.24(b)(4) 
permits the federal credit union to apply the 15% penalty rate to 
all balances on the account and to future transactions because it 
has not received payment within 30 days after the due date. Because 
the federal credit union provided a 12 CFR 226.9(g) notice on June 
24 stating the 15% penalty rate, the federal credit union may apply 
the 15% penalty rate to all balances on the account as well as any 
future transactions on August 9, without providing an additional 
notice pursuant to 12 CFR 226.9(g).

24(b) Exceptions

24(b)(1) Account Opening Disclosure Exception

    1. Prohibited increases in rate. Section Sec.  706.24(b)(1) 
permits an increase in the annual percentage rate for a category of 
transactions to a rate disclosed at account opening upon expiration 
of a period of time that was also disclosed at account opening. 
Section 706.24(b)(1) does not permit application of increased rates 
that are disclosed at account opening but are contingent on a 
particular event or occurrence or may be applied at the federal 
credit union's discretion. The following examples illustrate rate 
increases that are not permitted by Sec.  706.24(a):
    i. Assume that a federal credit union discloses at account 
opening on January 1 of year one that a non-variable rate of 8% 
applies to purchases, but that all rates on an account may be 
increased to a non-variable penalty rate of 15% if a consumer's 
required minimum periodic payment is received after the payment due 
date, which is the fifteenth of the month. On March 1, the account 
has a $2,000 purchase balance. The payment due on March 15 is not 
received until March 20. Section 706.24 does not permit the federal 
credit union to apply the 15% penalty rate to the $2,000 purchase 
balance. However, pursuant to Sec.  706.24(b)(3), the federal credit 
union could provide a 12 CFR 226.9(c) or (g) notice on November 16, 
informing the consumer that, on January 1 of year two, the 15% rate 
(or a different rate) will apply to new transactions.
    ii. Assume that a federal credit union discloses at account 
opening on January 1 of year one that a non-variable rate of 5% 
applies to transferred balances but that this rate will increase to 
a non-variable rate of 15% if the consumer does not use the account 
for at least $200 in purchases each billing cycle. On July 1, the 
consumer transfers a balance of $4,000 to the account. During the 
October billing cycle, the consumer uses the account for $150 in 
purchases. Section 706.24 does not permit the federal credit union 
to apply the 15% rate to the $4,000 transferred balance. However, 
pursuant to Sec.  706.24(b)(3), the federal credit union could 
provide a 12 CFR 226.9(c) or (g) notice on November 16 informing the 
consumer that, on January 1 of year two, the 15% rate, or a 
different rate, will apply to new transactions.
    iii. Assume that a federal credit union discloses at account 
opening on January 1 of year one that interest on purchases will be 
deferred for one year, although interest will accrue on purchases 
during that year at a non-variable rate of 15%. The federal credit 
union further discloses that, if all purchases made during year one 
are not paid in full by the end of that year, the federal credit 
union will begin charging interest on the purchase balance and new 
purchases at 15% and will retroactively charge interest on the 
purchase balance at a rate of 15% starting on the date of each 
purchase made during year one. On January 1 of year one, the 
consumer makes a purchase of $1,500. No other transactions are made 
on the account. On January 1 of year two, $500 of the $1,500 
purchase remains unpaid. Section 706.24 does not permit the federal 
credit union to reach back to charge interest on the $1,500 purchase 
from January 1 through December 31 of year one. However, the federal 
credit union may apply the previously disclosed 15% rate to the $500 
purchase balance beginning on January 1 of year two pursuant to 
Sec.  706.24(b)(1).
    2. Loss of grace period. Nothing in Sec.  706.24 prohibits a 
federal credit union from assessing interest due to the loss of a 
grace period to the extent consistent with Sec.  706.25.
    3. Application of rate that is lower than disclosed rate. 
Section 706.24(b)(1) permits an increase in the annual percentage 
rate for a category of transactions to a rate disclosed at account 
opening upon expiration of a period of time that was also disclosed 
at account opening. Nothing in Sec.  706.24 prohibits a federal 
credit union from applying a rate that is lower than the disclosed 
rate upon expiration of the period. However, if a lower rate is 
applied to an existing balance, the federal credit union cannot 
subsequently increase the rate on that balance unless it has 
provided the consumer with advance notice of the increase pursuant 
to 12 CFR 226.9(c). Furthermore, the federal credit union cannot 
increase the rate on that existing balance to a rate that is higher 
than the increased rate disclosed at account opening. The following 
example illustrates the application of this rule:
    i. Assume that, at account opening on January 1 of year one, a 
federal credit union discloses that a non-variable annual percentage 
rate of 5% will apply to purchases for one year and discloses that, 
after the first year, the federal credit union will apply a variable 
rate that is currently 15% and is determined by adding a margin of 
10 percentage points to a publicly available index not under the 
federal credit union's control. On December 31 of year one, the 
account has a purchase balance of $3,000.
    A. On November 16 of year one, the federal credit union provides 
a notice pursuant to 12 CFR 226.9(c) informing the consumer of a new 
variable rate that will apply on January 1 of year two, calculated 
using the same index and a reduced margin of 8 percentage points. 
The notice further states that, on July 1 of year two, the margin 
will increase to the margin disclosed at account opening, 5 
percentage points. On July 1 of year two, the federal credit union 
increases the margin used to determine the variable rate that 
applies to new purchases to 10 percentage points and applies that 
rate to any remaining portion of the $3,000 purchase balance 
pursuant to Sec.  706.24(b)(1).
    B. Same facts as above, except that the federal credit union 
does not send a notice on November 16 of year one. Instead, on 
January 1 of year two, the federal credit union lowers the margin 
used to determine the variable rate to 8 percentage points and 
applies that rate to the $3,000 purchase balance and to new 
purchases. 12 CFR 226.9 does not require advance notice in these 
circumstances. However, unless the account becomes more than 30 days 
delinquent, the federal credit union may not subsequently increase 
the rate that applies to the $3,000 purchase balance except due to 
increases in the index pursuant to Sec.  706.24(b)(2).

24(b)(2) Variable Rate Exception

    1. Increases due to increase in index. Section 706.24(b)(2) 
provides that an annual percentage rate for a category of 
transactions that varies according to an index that is not under the 
federal credit union's control and is available to the general 
public may be increased due to an increase in the index. This 
section does not permit a federal credit union to increase the 
annual percentage rate by changing the method used to determine a 
rate that varies with an index, such as by increasing the margin, 
even if that change will not result in an immediate increase.
    2. External index. A federal credit union may increase the 
annual percentage rate if the increase is based on an index or 
indices outside the federal credit union's control. A federal credit 
union may not increase the rate based on its own prime rate or cost 
of funds. A federal credit union is permitted, however, to use a 
published prime rate, such as that in the Wall Street Journal, even 
if the federal credit union's own prime rate is one of several rates 
used to establish the published rate.
    3. Publicly available. The index or indices must be available to 
the public. A publicly available index need not be published in a 
newspaper, but it must be one the consumer can independently obtain, 
by telephone, for example, and use to verify the rate applied to the 
outstanding balance.
    4. Changing a non-variable rate to a variable rate. Section 
706.24 generally prohibits a federal credit union from changing a 
non-variable annual percentage rate to a variable rate because such 
a change can result in an increase in rate. However, Sec.  
706.24(b)(1) permits a federal credit union to change a non-variable 
rate to a variable rate if the change was disclosed at account 
opening. Furthermore, following the first year after the account is 
opened, Sec.  706.24(b)(3) permits a federal credit union to change 
a non-variable rate to a variable rate with respect to new 
transactions, after complying with the notice requirements in 12 CFR 
226.9(c) or (g). Finally, Sec.  706.24(b)(4) permits a federal 
credit union to change a

[[Page 5582]]

non-variable rate to a variable rate if the required minimum 
periodic payment is not received within 30 days of the payment due 
date, after complying with the notice requirements in 12 CFR 
226.9(g).
    5. Changing a variable annual percentage rate to a non-variable 
annual percentage rate. Nothing in Sec.  706.24 prohibits a federal 
credit union from changing a variable annual percentage rate to an 
equal or lower non-variable rate. Whether the non-variable rate is 
equal to or lower than the variable rate is determined at the time 
the federal credit union provides the notice required by 12 CFR 
226.9(c). For example, assume that on March 1 a variable rate that 
is currently 15% applies to a balance of $2,000 and the federal 
credit union sends a notice pursuant to 12 CFR 226.9(c) informing 
the consumer that the variable rate will be converted to a non-
variable rate of 14% effective April 17. On April 17, the federal 
credit union may apply the 14% non-variable rate to the $2,000 
balance and to new transactions even if the variable rate on March 2 
or a later date was less than 14%.
    6. Substitution of index. A federal credit union may change the 
index and margin used to determine the annual percentage rate under 
Sec.  706.24(b)(2) if the original index becomes unavailable, as 
long as historical fluctuations in the original and replacement 
indices were substantially similar, and as long as the replacement 
index and margin will produce a rate similar to the rate that was in 
effect at the time the original index became unavailable. If the 
replacement index is newly established and therefore does not have 
any rate history, it may be used if it produces a rate substantially 
similar to the rate in effect when the original index became 
unavailable.

24(b)(3) Advance Notice Exception

    1. First year after the account is opened. A federal credit 
union may not increase an annual percentage rate pursuant to Sec.  
706.24(b)(3) during the first year after the account is opened. This 
limitation does not apply to accounts opened prior to July 1, 2010.
    2. Transactions that occur more than seven days after notice 
provided. Section 706.24(b)(3) generally prohibits a federal credit 
union from applying an increased rate to transactions that occur 
within seven days after provision of the 12 CFR 226.9(c) or (g) 
notice. This prohibition does not, however, apply to transactions 
that are authorized within seven days after provision of the 12 CFR 
226.9(c) or (g) notice but are settled more than seven days after 
the notice was provided.
    3. Examples.
    i. Assume that a consumer credit card account is opened on 
January 1 of year one. On March 14 of year two, the account has a 
purchase balance of $2,000 at a non-variable annual percentage rate 
of 5%. On March 15, the federal credit union provides a notice 
pursuant to 12 CFR 226.9(c) informing the consumer that the rate for 
new purchases will increase to a non-variable rate of 15% on May 1. 
The notice further states that the 5% rate will apply for six months 
until November 1, and states that thereafter the federal credit 
union will apply a variable rate that is currently 15% and is 
determined by adding a margin of 10 percentage points to a publicly-
available index that is not under the federal credit union's 
control. The seventh day after provision of the notice is March 22 
and, on that date, the consumer makes a $200 purchase. On March 24, 
the consumer makes a $1,000 purchase. On May 1, Sec.  706.24(b)(3) 
permits the federal credit union to begin accruing interest at 15% 
on the $1,000 purchase made on March 24. The federal credit union is 
not permitted to apply the 15% rate to the $2,200 purchase balance 
as of March 22. After six months, November 2, the federal credit 
union may begin accruing interest on any remaining portion of the 
$1,000 purchase at the previously-disclosed variable rate determined 
using the 10-point margin.
    ii. Same facts as above except that the $200 purchase is 
authorized by the federal credit union on March 22 but is not 
settled until March 23. On May 1, Sec.  706.24(b)(3) permits the 
federal credit union to start charging interest at 15% on both the 
$200 purchase and the $1,000 purchase. The federal credit union is 
not permitted to apply the 15% rate to the $2,000 purchase balance 
as of March 22.
    iii. Same facts as in paragraph i above, except that on 
September 17 of year two, which is 45 days before expiration of the 
18% non-variable rate, the federal credit union provides a notice 
pursuant to 12 CFR 226.9(c) informing the consumer that, on November 
2, a new variable rate will apply to new purchases and any remaining 
portion of the $1,000 balance, calculated by using the same index 
and a reduced margin of 10 percentage points. The notice further 
states that, on May 1 of year three, the margin will increase to the 
margin disclosed at account opening, 12 percentage points. On May 1 
of year three, Sec.  706.24(b)(3) permits the federal credit union 
to increase the margin used to determine the variable rate that 
applies to new purchases to 12 percentage points and to apply that 
rate to any remaining portion of the $1,000 purchase as well as to 
new purchases. See comment 24(b)(1)-3. The federal credit union is 
not permitted to apply this rate to any remaining portion of the 
$2,200 purchase balance as of March 22.

24(b)(5) Workout Arrangement Exception

    1. Scope of exception. Nothing in Sec.  706.24(b)(5) permits a 
federal credit union to alter the requirements of Sec.  706.24 
pursuant to a workout arrangement between a consumer and the federal 
credit union. For example, a federal credit union cannot increase an 
annual percentage rate pursuant to a workout arrangement unless 
otherwise permitted by Sec.  706.24. In addition, a federal credit 
union cannot require the consumer to make payments with respect to a 
protected balance that exceed the payments permitted under Sec.  
706.24(c).
    2. Variable annual percentage rates. If the annual percentage 
rate that applied to a category of transactions prior to 
commencement of the workout arrangement varied with an index 
consistent with Sec.  706.24(b)(2), the rate applied to that 
category of transactions following an increase pursuant to Sec.  
706.24(b)(5) must be determined using the same formula, index and 
margin.
    3. Example. Assume that, consistent with Sec.  706.24(b)(4), the 
margin used to determine a variable annual percentage rate that 
applies to a $5,000 balance is increased from 5 percentage points to 
15 percentage points. Assume also that the federal credit union and 
the consumer subsequently agree to a workout arrangement that 
reduces the margin back to 5 points on the condition that the 
consumer pay a specified amount by the payment due date each month. 
If the consumer does not pay the agreed-upon amount by the payment 
due date, the federal credit union may increase the margin for the 
variable rate that applies to the $5,000 balance up to 15 percentage 
points. 12 CFR 226.9 does not require advance notice of this type of 
increase.

24(c) Treatment of Protected Balances

    1. Protected balances. Because rates cannot be increased 
pursuant to Sec.  706.24(b)(3) during the first year after account 
opening, Sec.  706.24(c) does not apply to balances during the first 
year. Instead, the requirements in Sec.  706.24(c) apply only to 
``protected balances,'' which are amounts owed for a category of 
transactions to which an increased annual percentage rate cannot be 
applied after the rate for that category of transactions has been 
increased pursuant to Sec.  706.24(b)(3). For example, assume that, 
on March 15 of year two, an account has a purchase balance of $1,000 
at a non-variable rate of 12% and that, on March 16, the federal 
credit union sends a notice pursuant to 12 CFR 226.9(c) informing 
the consumer that the rate for new purchases will increase to a non-
variable rate of 15% on May 2. On March 20, the consumer makes a 
$100 purchase. On March 24, the consumer makes a $150 purchase. On 
May 2, Sec.  706.24(b)(3) permits the federal credit union to start 
charging interest at 15% on the $150 purchase made on March 24 but 
does not permit the federal credit union to apply that 15% rate to 
the $1,100 purchase balance as of March 23. Accordingly, Sec.  
706.24(c) applies to the $1,100 purchase balance as of March 23 but 
not the $150 purchase made on March 24.

24(c)(1) Repayment

    1. No less beneficial to the consumer. A federal credit union 
may provide a method of repaying the protected balance that is 
different from the methods listed in Sec.  706.24(c)(1) so long as 
the method used is no less beneficial to the consumer than one of 
the listed methods. A method is no less beneficial to the consumer 
if the method amortizes the protected balance in five years or 
longer or if the method results in a required minimum periodic 
payment that is equal to or less than a minimum payment calculated 
consistent with Sec.  706.24(c)(1)(ii). For example, a federal 
credit union could increase the percentage of the protected balance 
included in the required minimum periodic payment from 2% to 5% so 
long as doing so would not result in amortization of the protected 
balance in less than five years. Alternatively, a federal credit 
union could require a consumer to make a minimum payment that 
amortizes the protected balance

[[Page 5583]]

in less than five years so long as the payment does not include a 
percentage of the balance that is more than twice the percentage 
included in the minimum payment before the effective date of the 
increased rate. For example, a federal credit union could require 
the consumer to make a minimum payment that amortizes the protected 
balance in four years so long as doing so would not more than double 
the percentage of the balance included in the minimum payment prior 
to the effective date of the increased rate.
    2. Lower limit for required minimum periodic payment. If the 
required minimum periodic payment under Sec.  706.24(c)(1)(i) or 
(c)(1)(ii) is less than the lower dollar limit for minimum payments 
established in the cardholder agreement before the effective date of 
the rate increase, the federal credit union may set the minimum 
payment consistent with that limit. For example, if at account 
opening the cardholder agreement stated that the required minimum 
periodic payment would be either the total of fees and interest 
charges plus 1% of the total amount owed or $20, whichever is 
greater, the federal credit union may require the consumer to make a 
minimum payment of $20 even if doing so would pay off the protected 
balance in less than five years or constitute more than 2% of the 
protected balance plus fees and interest charges.

Paragraph 24(c)(1)(i)

    1. Amortization period starting from date on which increased 
rate becomes effective. Section 706.24(c)(1)(i) provides for an 
amortization period for the protected balance of no less than five 
years, starting from the date on which the increased annual 
percentage rate becomes effective. A federal credit union is not 
required to recalculate the required minimum periodic payment for 
the protected balance if, during the amortization period, that 
balance is reduced as a result of the allocation of amounts paid by 
the consumer in excess of the minimum payment consistent with Sec.  
706.23 or any other practice permitted by these rules and other 
applicable law.
    2. Amortization when applicable annual percentage rate is 
variable. If the annual percentage rate that applies to the 
protected balance varies with an index consistent with Sec.  
706.24(b)(2), the federal credit union may adjust the interest 
charges included in the required minimum periodic payment for that 
balance accordingly in order to ensure that the outstanding balance 
is amortized in five years. For example, assume that a variable rate 
that is currently 10% applies to a protected balance and that, in 
order to amortize that balance in five years, the required minimum 
periodic payment must include a specific amount of principal plus 
all accrued interest charges. If the 10% variable rate increases due 
to an increase in the index, the federal credit union may increase 
the required minimum periodic payment to include the additional 
interest charges.

Paragraph 24(c)(1)(ii)

    1. Required minimum periodic payment on other balances. Section 
706.24(c)(1)(ii) addresses the required minimum periodic payment on 
the protected balance. Section 706.24(c)(1)(ii) does not limit or 
otherwise address the federal credit union's ability to determine 
the amount of the required minimum periodic payment for other 
balances.
    2. Example. Assume that the method used by a federal credit 
union to calculate the required minimum periodic payment for a 
consumer credit card account requires the consumer to pay either the 
total of fees and interest charges plus 1% of the total amount owed 
or $20, whichever is greater. Assume also that the account has a 
purchase balance of $2,000 at an annual percentage rate of 10% and a 
cash advance balance of $500 at an annual percentage rate of 15% and 
that the federal credit union increases the rate for purchases to 
15%, but does not increase the rate for cash advances. Under Sec.  
706.24(c)(1)(ii), the federal credit union may require the consumer 
to pay fees and interest plus 2% of the $2,000 purchase balance. 
Section 706.24(c)(1)(ii) does not prohibit the federal credit union 
from increasing the required minimum periodic payment for the cash 
advance balance.

24(c)(2) Fees and Charges

    1. Fee or charge based solely on the protected balance. A 
federal credit union is prohibited from assessing a fee or charge 
based solely on balances to which Sec.  706.24(c) applies. For 
example, a federal credit union is prohibited from assessing a 
monthly maintenance fee that would not be charged if the account did 
not have a protected balance. A federal credit union is not, 
however, prohibited from assessing fees such as late payment fees or 
fees for exceeding the credit limit even if such fees are based in 
part on the protected balance.

Section 706.25--Unfair Balance Computation Method

25(a) General Rule

    1. Two-cycle method prohibited. When a consumer ceases to be 
eligible for a time period provided by the federal credit union 
within which the consumer may repay any portion of the credit 
extended without incurring a finance charge, a grace period, the 
federal credit union is prohibited from computing the finance charge 
using the so-called two-cycle average daily balance computation 
method. This method calculates the finance charge using a balance 
that is the sum of the average daily balances for two billing 
cycles. The first balance is for the current billing cycle, and is 
calculated by adding the total balance, including or excluding new 
purchases and deducting payments and credits, for each day in the 
billing cycle, and then dividing by the number of days in the 
billing cycle. The second balance is for the preceding billing 
cycle.
    2. Examples.
    i. Assume that the billing cycle on a consumer credit card 
account starts on the first day of the month and ends on the last 
day of the month. The payment due date for the account is the 
twenty-fifth day of the month. Under the terms of the account, the 
consumer will not be charged interest on purchases if the balance at 
the end of a billing cycle is paid in full by the following payment 
due date. The consumer uses the credit card to make a $500 purchase 
on March 15. The consumer pays the balance for the February billing 
cycle in full on March 25. At the end of the March billing cycle, 
March 31, the consumer's balance consists only of the $500 purchase 
and the consumer will not be charged interest on that balance if it 
is paid in full by the following due date, April 25. The consumer 
pays $400 on April 25, leaving a $100 balance. The federal credit 
union may charge interest on the $500 purchase from the start of the 
April billing cycle, April 1, through April 24 and interest on the 
remaining $100 from April 25 through the end of the April billing 
cycle, April 30. The federal credit union is prohibited, however, 
from reaching back and charging interest on the $500 purchase from 
the date of purchase, March 15 to the end of the March billing 
cycle, March 31.
    ii. Assume the same circumstances as in the previous example 
except that the consumer does not pay the balance for the February 
billing cycle in full on March 25 and therefore, under the terms of 
the account, is not eligible for a time period within which to repay 
the $500 purchase without incurring a finance charge. With respect 
to the $500 purchase, the federal credit union may charge interest 
from the date of purchase, March 15, through April 24 and interest 
on the remaining $100 from April 25 through the end of the April 
billing cycle, April 30.

Section 706.26--Unfair Charging of Security Deposits and Fees for 
the Issuance or Availability of Credit to Consumer Credit Card 
Accounts

26(a) Limitation for First Year

    1. Majority of the credit limit. The total amount of security 
deposits and fees for the issuance or availability of credit 
constitutes a majority of the initial credit limit if that total is 
greater than half of the limit. For example, assume that a consumer 
credit card account has an initial credit limit of $500. Under Sec.  
706.26(a), a federal credit union may charge to the account security 
deposits and fees for the issuance or availability of credit 
totaling no more than $250 during the first year (consistent with 
Sec.  706.26(b)).

26(b) Limitations for First Billing Cycle and Subsequent Billing Cycles

    1. Adjustments of one dollar or less permitted. When dividing 
amounts pursuant to Sec.  706.26(b)(2), a federal credit union may 
adjust amounts by one dollar or less. For example, if a federal 
credit union is dividing $87 over five billing cycles, the federal 
credit union may charge $18 for two months and $17 for the remaining 
three months.
    2. Examples.
    i. Assume that a consumer credit card account opened on January 
1 has an initial credit limit of $500. Assume also that the billing 
cycles for this account begin on the first day of the month and end 
on the last day of the month. Under Sec.  706.26(a), the federal 
credit union may charge to the account no more than $250 in security 
deposits and fees for the issuance or availability of credit during 
the first year after the account is opened. If it charges $250, the 
federal credit union may charge up to $125 during the first

[[Page 5584]]

billing cycle. If it charges $125 during the first billing cycle, it 
may then charge no more than $25 in each of the next five billing 
cycles. If it chooses, the federal credit union may spread the 
additional security deposits and fees over a longer period, such as 
by charging $12.50 in each of the ten billing cycles following the 
first billing cycle.
    ii. Same facts as above except that on July 1 the federal credit 
union increases the credit limit on the account from $500 to $750. 
Because the prohibition in Sec.  706.26(a) is based on the initial 
credit limit of $500, the increase in credit limit does not permit 
the federal credit union to charge to the account additional 
security deposits and fees for the issuance or availability of 
credit, such as a fee for increasing the credit limit.

26(c) Evasion Prohibited

    1. Evasion. Section 706.26(c) prohibits a federal credit union 
from evading the requirements of this section by providing the 
consumer with additional credit to fund the consumer's payment of 
security deposits and fees that exceed the total amounts permitted 
by Sec.  706.26(a) and (b). For example, assume that on January 1 a 
consumer opens a consumer credit card account with an initial credit 
limit of $400 and the federal credit union charges to that account 
$100 in fees for the issuance or availability of credit. Assume also 
that the billing cycles for the account coincide with the days of 
the month and that the federal credit union will charge $20 in fees 
for the issuance or availability of credit in the February, March, 
April, May, and June billing cycles. The federal credit union 
violates Sec.  706.26(c) if it provides the consumer with a separate 
credit product to fund additional security deposits or fees for the 
issuance or availability of credit.
    2. Payment with funds not obtained from the federal credit 
union. A federal credit union does not violate Sec.  706.26(c) if it 
requires the consumer to pay security deposits or fees for the 
issuance or availability of credit using funds that are not 
obtained, directly or indirectly, from the federal credit union. For 
example, a federal credit union does not violate Sec.  706.26(c) if 
a $400 security deposit paid by a consumer to obtain a consumer 
credit card account with a credit line of $400 is not charged to a 
credit account provided by the federal credit union or its 
affiliate.

26(d) Definitions

    1. Membership fees. Membership fees for opening an account are 
fees for the issuance or availability of credit. A membership fee to 
join an organization that provides a credit or charge card as a 
privilege of membership is a fee for the issuance or availability of 
credit only if the card is issued automatically upon membership. If 
membership results merely in eligibility to apply for an account, 
then such a fee is not a fee for the issuance or availability of 
credit.
    2. Enhancements. Fees for optional services in addition to basic 
membership privileges in a credit or charge card account, for 
example, travel insurance or card-registration services, are not 
fees for the issuance or availability of credit if the basic account 
may be opened without paying such fees. Issuing a card to each 
primary cardholder, not authorized users, is considered a basic 
membership privilege and fees for additional cards, beyond the first 
card on the account, are fees for the issuance or availability of 
credit. Thus, a fee to obtain an additional card on the account 
beyond the first card, so that each cardholder would have his or her 
own card, is a fee for the issuance or availability of credit even 
if the fee is optional; that is, if the fee is charged only if the 
cardholder requests one or more additional cards.
    3. One-time fees. Non-periodic fees related to opening an 
account, such as application fees or one-time membership or 
participation fees, are fees for the issuance or availability of 
credit. Fees for reissuing a lost or stolen card, statement 
reproduction fees, and fees for late payment or other violations of 
the account terms are examples of fees that are not fees for the 
issuance or availability of credit.


    By order of the Board of Governors of the Federal Reserve 
System, December 18, 2008.
Jennifer J. Johnson,
Secretary of the Board.
    Dated: December 16, 2008.

    By the Office of Thrift Supervision,
John M. Reich,
Director.
    By the National Credit Union Administration Board, on December 
18, 2008.

Mary F. Rupp,
Secretary of the Board.
 [FR Doc. E8-31186 Filed 1-28-09; 8:45 am]
BILLING CODE 6720-01-P; 6720-01-P; 7535-01-P