[Federal Register: October 21, 2009 (Volume 74, Number 202)]
[Proposed Rules]
[Page 54123-54332]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr21oc09-20]
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Part II
Federal Reserve System
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12 CFR Part 226
Truth in Lending; Proposed Rule
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FEDERAL RESERVE SYSTEM
12 CFR Part 226
[Regulation Z; Docket No. R-1370]
Truth in Lending
AGENCY: Board of Governors of the Federal Reserve System.
ACTION: Proposed rule; request for public comment.
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SUMMARY: The Board proposes to amend Regulation Z, which implements the
Truth in Lending Act, and the staff commentary to the regulation in
order to implement provisions of the Credit Card Accountability
Responsibility and Disclosure Act of 2009 that are effective on
February 22, 2010. This proposal would establish a number of new
substantive and disclosure requirements to establish fair and
transparent practices pertaining to open-end consumer credit plans,
including credit card accounts. In particular, the proposed rule would
limit the application of increased rates to existing credit card
balances, require credit card issuers to consider a consumer's ability
to make the required payments, establish special requirements for
extensions of credit to consumers who are under the age of 21, and
limit the assessment of fees for exceeding the credit limit on a credit
card account.
DATES: Comments must be received on or before November 20, 2009.
ADDRESSES: You may submit comments, identified by Docket No. R-1370, by
any of the following methods:
Agency Web Site: http://www.federalreserve.gov. Follow the
instructions for submitting comments at http://www.federalreserve.gov/
generalinfo/foia/ProposedRegs.cfm.
Federal eRulemaking Portal: http://www.regulations.gov.
Follow the instructions for submitting comments.
E-mail: regs.comments@federalreserve.gov. Include the
docket number in the subject line of the message.
Facsimile: (202) 452-3819 or (202) 452-3102.
Mail: Jennifer J. Johnson, Secretary, Board of Governors
of the Federal Reserve System, 20th Street and Constitution Avenue,
NW., Washington, DC 20551.
All public comments are available from the Board's Web site at
http://www.federalreserve.gov/generalinfo/foia/ProposedRegs.cfm as
submitted, unless modified for technical reasons. Accordingly, your
comments will not be edited to remove any identifying or contact
information. Public comments may also be viewed electronically or in
paper form in Room MP-500 of the Board's Martin Building (20th and C
Streets, NW.) between 9 a.m. and 5 p.m. on weekdays.
FOR FURTHER INFORMATION CONTACT: Jennifer S. Benson or Stephen Shin,
Attorneys, Amy Burke, Benjamin K. Olson, or Vivian Wong, Senior
Attorneys, or Krista Ayoub or Ky Tran-Trong, Counsels, Division of
Consumer and Community Affairs, Board of Governors of the Federal
Reserve System, at (202) 452-3667 or 452-2412; for users of
Telecommunications Device for the Deaf (TDD) only, contact (202) 263-
4869.
SUPPLEMENTARY INFORMATION:
I. Background and Implementation of the Credit Card Act
January 2009 Regulation Z and FTC Act Rules
On December 18, 2008, the Board adopted two final rules pertaining
to open-end (not home-secured) credit. These rules were published in
the Federal Register on January 29, 2009. The first rule makes
comprehensive changes to Regulation Z's provisions applicable to open-
end (not home-secured) credit, including amendments that affect all of
the five major types of required disclosures: credit card applications
and solicitations, account-opening disclosures, periodic statements,
notices of changes in terms, and advertisements. See 74 FR 5244
(January 2009 Regulation Z Rule). The second is a joint rule published
with the Office of Thrift Supervision (OTS) and the National Credit
Union Administration (NCUA) under the Federal Trade Commission Act (FTC
Act) to protect consumers from unfair acts or practices with respect to
consumer credit card accounts. See 74 FR 5498 (January 2009 FTC Act
Rule). The effective date for both rules is July 1, 2010.
On May 5, 2009, the Board published proposed clarifications and
technical amendments to the January 2009 Regulation Z Rule (May 2009
Regulation Z Proposed Clarifications) in the Federal Register. See 74
FR 20784. The Board, the OTS, and the NCUA (collectively, the Agencies)
concurrently published proposed clarifications and technical amendments
to the January 2009 FTC Act Rule. See 74 FR 20804 (May 2009 FTC Act
Rule Proposed Clarifications). In both cases, as stated in the Federal
Register, these proposals were intended to clarify and facilitate
compliance with the consumer protections contained in the January 2009
final rules and not to reconsider the need for--or the extent of--those
protections. The comment period on both of these proposed sets of
amendments ended on June 4, 2009. Where relevant, the Board has
considered the comments submitted in preparing this proposed rule and
is republishing the proposed amendments with several revisions as
discussed in V. Section-by-Section Analysis. The Board intends to
finalize the amendments, with revisions as appropriate, in connection
with this rulemaking.
The Credit Card Act
On May 22, 2009, the Credit Card Accountability Responsibility and
Disclosure Act of 2009 (Credit Card Act) was signed into law. Public
Law 111-24, 123 Stat. 1734 (2009). The Credit Card Act primarily amends
the Truth in Lending Act (TILA) and establishes a number of new
substantive and disclosure requirements to establish fair and
transparent practices pertaining to open-end consumer credit plans.
Several of the provisions of the Credit Card Act are similar to
provisions in the Board's January 2009 Regulation Z and FTC Act Rules,
while other portions of the Credit Card Act address practices or
mandate disclosures that were not addressed in the Board's rules.
The requirements of the Credit Card Act that pertain to credit
cards or other open-end credit for which the Board has rulemaking
authority become effective in three stages. First, provisions generally
requiring that consumers receive 45 days' advance notice of interest
rate increases and significant changes in terms (new TILA Section
127(i)) and provisions regarding the amount of time that consumers have
to make payments (revised TILA Section 163) became effective on August
20, 2009 (90 days after enactment of the Credit Card Act). A majority
of the requirements under the Credit Card Act for which the Board has
rulemaking authority, including, among other things, provisions
regarding interest rate increases (revised TILA Section 171), over-the-
limit transactions (new TILA Section 127(k)), and student cards (new
TILA Sections 127(c)(8), 127(p), and 140(f)) become effective on
February 22, 2010 (9 months after enactment). Finally, two provisions
of the Credit Card Act addressing the reasonableness and
proportionality of penalty fees and charges (new TILA Section 149) and
re-evaluation by creditors of rate increases (new TILA Section 148) are
effective on August 22, 2010 (15 months after enactment). The Credit
Card Act also requires the Board to conduct several studies and to make
several reports to Congress, and sets forth differing time
[[Page 54125]]
periods in which these studies and reports must be completed.
Implementation Plan
On July 22, 2009, the Board published an interim final rule to
implement those provisions of the Credit Card Act that became effective
on August 20, 2009 (July 2009 Regulation Z Interim Final Rule). See 74
FR 36077. As discussed in the supplementary information to the July
2009 Regulation Z Interim Final Rule, the Board is implementing the
provisions of the Credit Card Act in stages, consistent with the
statutory timeline established by Congress. Accordingly, the interim
final rule implemented those provisions of the statute that became
effective August 20, 2009, primarily addressing change-in-terms notice
requirements and the amount of time that consumers have to make
payments. The Board issued rules in interim final form based on its
determination that, given the short implementation period established
by the Credit Card Act and the fact that similar rules were already the
subject of notice-and-comment rulemaking, it would be impracticable and
unnecessary to issue a proposal for public comment followed by a final
rule. The Board solicited comment on the interim final rule; the
comment period ended on September 21, 2009. The Board intends to
consider comments on the interim final rule when finalizing this
rulemaking implementing those provisions of the Credit Card Act that
become effective February 22, 2010.\1\
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\1\ The Board has already begun consideration of the comment
letters received on the July 2009 Regulation Z Interim Final Rule.
However, the review of the comment letters is ongoing, and
accordingly the supplementary information to this proposal does not
discuss the comments received. The Board anticipates addressing the
comments in their entirety when it issues a final rule based on this
proposal.
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The Board intends to separately consider the two remaining
provisions under the Credit Card Act regarding reasonable and
proportional penalty fees and charges and the re-evaluation of rate
increases, and to finalize implementing regulations in accordance with
the timeline established by Congress, upon notice and after giving the
public an opportunity to comment.
To the extent appropriate, the Board has used its January 2009
rules and the underlying rationale as the basis for its rulemakings
under the Credit Card Act. The Board also intends to retain those
portions of its January 2009 Regulation Z Rule that are unaffected by
the Credit Card Act. The Board is not withdrawing any provisions of the
January 2009 Regulation Z Rule or its January 2009 FTC Act Rule at this
time. The Board anticipates that in connection with finalizing this
proposed rule for those provisions of the Credit Card Act that are
effective February 22, 2010, it will amend or withdraw those portions
of the January 2009 Regulation Z Rule that are inconsistent with the
requirements of the Credit Card Act. In addition, as discussed further
in V. Section-by-Section Analysis, the Board is proposing to move the
requirements in its January 2009 FTC Act Rule into Regulation Z and
intends to withdraw the requirements adopted under Regulation AA,
consistent with Congress's approach of amending the Truth in Lending
Act.\2\ Finally, except as otherwise noted, the Board is considering
comments received on the May 2009 Regulation Z Proposed Clarifications
and plans to incorporate those final clarifications, to the extent
appropriate, when it promulgates final rules pursuant to this proposal.
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\2\ See also OTS Memorandum for Chief Executive Officers: Credit
CARD Act: Interest Rate Increases and Rules on Unfair Practices
(issued July 13, 2009) (available at http://files.ots.treas.gov/
25312.pdf); NCUA Press Release: Working with Other Regulators on
Credit CARD Act and UDAP Rule (issued July 1, 2009) (available at
http://www.ncua.gov/news/press_releases/2009/MR09-0701.htm).
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Republication of Provisions of January 2009 Regulation Z Rule
The Board has published four proposed or final rules in 2009 that
amend or propose to amend Regulation Z's provisions applicable to open-
end (not home-secured) credit: the January 2009 Regulation Z Rule, the
May 2009 Regulation Z Proposed Clarifications, the July 2009 Regulation
Z Interim Final Rule, and the present proposal. The Board is aware that
the existence of multiple concurrent Regulation Z rulemakings
pertaining to open-end (not home-secured) credit has the potential to
cause confusion. In particular, the Board understands that it may be
difficult for interested parties to ascertain how the four proposed or
final rules will read as an integrated whole once all final rules are
adopted and effective.
In order to more clearly illustrate the cumulative changes in the
four proposed or final rules, the Board is republishing in this
proposal all sections of Regulation Z from the four proposed or final
rules that pertain to open-end (not home-secured) credit. As discussed
further in this supplementary information, the requirements of the
Board's January 2009 FTC Act Rule are also being incorporated into this
proposal under Regulation Z, with proposed amendments as necessary to
conform to the requirements of the Credit Card Act. The Board believes
that this is the clearest way to present the proposed and final
revisions to Regulation Z in an integrated format. The Board thinks
that it is important that commenters be able to consider the changes
included in this proposal in light of the complete package of changes
effected by the Board's recent rulemakings pertaining to open-end (not
home-secured) credit.
The Board is not reconsidering the need for or the extent of the
January 2009 Regulation Z Rule, except to the extent that it is
inconsistent with the requirements of the Credit Card Act. Accordingly,
although the Board is republishing the provisions of Regulation Z that
pertain to open-end (not home-secured) credit in their entirety, the
Board is requesting that interested parties limit the scope of their
comments to the proposed changes, which are discussed in the
supplementary information. As necessary, the Board has made technical
and conforming changes to the regulatory text from the January 2009
Regulation Z Rule in order to conform with the proposed regulations
implementing the Credit Card Act. These changes are not substantive in
nature and are therefore not discussed in detail in V. Section-by-
Section Analysis.
The Board is not republishing in connection with this proposal
several sections of the January 2009 Regulation Z Rule that are
applicable only to home-equity lines of credit subject to the
requirements of Sec. 226.5b (HELOCs). In particular, the Board is not
republishing Sec. Sec. 226.6(a), 226.7(a) and 226.9(c)(1). These
sections, as discussed in the supplementary information to the January
2009 Regulation Z Rule, are intended to preserve the existing
requirements of Regulation Z for home-equity lines of credit until the
Board's ongoing review of the rules that apply to HELOCs is completed.
On August 26, 2009, the Board published proposed revisions to those
portions of Regulation Z affecting HELOCs in the Federal Register. See
74 FR 43428 (August 2009 Regulation Z HELOC Proposal). In order to
clarify that this proposed rule is not intended to amend or otherwise
affect the August 2009 Regulation Z HELOC Proposal, the Board is not
republishing several sections of the January 2009 Regulation Z Rule
that apply only to HELOCs in this Federal Register notice.
The Board anticipates, however, that a final rule will be issued
with regard to this proposal prior to completion of
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final rules regarding HELOCs. Therefore, the Board anticipates that it
will include Sec. Sec. 226.6(a), 226.7(a), and 226.9(c)(1), as adopted
in the January 2009 Regulation Z Rule, in its final rulemaking based on
this proposal, to give HELOC creditors clear guidance as to the
applicable Regulation Z requirements between the effective date of this
rule and the effective date of the forthcoming HELOC final rules.
The Board is, however, republishing several provisions of general
applicability to all credit subject to Regulation Z that were included
in the January 2009 Regulation Z Rule, such as the definitions in Sec.
226.2 and the rules regarding finance charges in Sec. 226.4. The Board
notes that these provisions, and any other provisions applicable to
HELOCs, could be subject to revision in connection with finalizing the
August 2009 Regulation Z HELOC Proposal. In addition, on August 26,
2009, the Board also published in the Federal Register proposed
revisions to Regulation Z's provisions addressing closed-end credit
secured by real property or a consumer's dwelling. 74 FR 43232 (August
2009 Regulation Z Closed-End Credit Proposal). Among other things, the
August 2009 Regulation Z Closed-End Credit Proposal includes several
proposed revisions to Sec. 226.4, which addresses finance charges.
This proposal is not intended to affect or withdraw any proposed
changes to such provisions of general applicability included in either
the August 2009 Regulation Z HELOC Proposal or the August 2009
Regulation Z Closed-End Credit Proposal.
Finally, the Board has incorporated in the regulatory text and
commentary for Sec. Sec. 226.1, 226.2, and 226.3 several changes that
were adopted in the Board's recent rulemaking pertaining to private
education loans. See 74 FR 41194 (August 14, 2009) for further
discussion of these changes. The Board is not soliciting comment on
these amendments.
When publishing a proposed rule for comment under Regulation Z, the
Board generally denotes regulatory and commentary text proposed to be
deleted by use of bolded brackets. Similarly, the Board generally
denotes the proposed insertion of text with bolded arrows. For this
proposal, the Board is not displaying proposed insertions and deletions
of text using brackets and arrows. As noted above, the Board has
published four proposed or final rules pertaining to open-end (not
home-secured) credit under Regulation Z in 2009, many of which impact
the same provisions, and therefore the Board believes that the use of
brackets and arrows for just those changes introduced in this proposal
could cause confusion.
Effective Date
As noted above, the effective date of the Board's January 2009
Regulation Z Rule is July 1, 2010. However, the effective date of the
provisions of the Credit Card Act implemented by this proposal is
February 22, 2010. Many of the provisions of the Credit Card Act as
implemented by this proposal are closely related to provisions of the
January 2009 Regulation Z Rule. For example, proposed Sec.
226.9(c)(2)(ii), which describes ``significant changes in terms'' for
which 45 days' advance notice is required, cross-references Sec.
226.6(b)(1) and (b)(2) as adopted in the January 2009 Regulation Z
Rule. In order to implement the Credit Card Act in a manner consistent
with the January 2009 Regulation Z Rule, the Board intends to make the
effective date for the final rule pursuant to this proposal February
22, 2010. The Board is considering whether this effective date should
apply to both the provisions of the January 2009 Regulation Z Rule that
are not directly affected by the Credit Card Act that are included in
the proposed rule as well as new and amended requirements proposed
pursuant to the Credit Card Act.
The Board recognizes that there are certain provisions of the
January 2009 Regulation Z Rule that impose substantial operational
burdens on creditors that are not directly required by the Credit Card
Act. For such provisions, the Board is considering retaining the
original mandatory compliance date of July 1, 2010, consistent with the
effective date it adopted when the January 2009 Regulation Z Rule was
issued. In particular, the Board is considering whether the original
mandatory compliance date of July 1, 2010 would be appropriate for
certain tabular or other formatting requirements applicable to account-
opening disclosures under Sec. 226.6(b), portions of the periodic
statement under Sec. 226.7(b),\3\ disclosures provided with checks
that access a credit card account under Sec. 226.9(b)(3), change-in-
terms notices provided pursuant to Sec. 226.9(c)(2), and notices of a
rate increase due to a consumer's default, delinquency, or as a penalty
pursuant to Sec. 226.9(g). The Board understands that creditors are
already in the process of updating their systems in order to provide
these disclosures in the appropriate tabular format by the July 1, 2010
effective date of the January 2009 Regulation Z Rule, and that
retaining a July 1, 2010 effective date for the formatting requirements
associated with such disclosures may be appropriate. The Board solicits
comment on this approach, as well as whether there are other provisions
of this proposed rule that are not directly required by the Credit Card
Act for which a mandatory compliance date of July 1, 2010 would also be
appropriate. The Board also seeks comment on appropriate transition
rules for the proposed amendments to Regulation Z.
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\3\ The Board notes that the Credit Card Act does, however,
require a tabular format for the repayment disclosures under
proposed Sec. 226.7(b)(12), and accordingly does not intend to
provide a July 1, 2010 mandatory compliance date for such formatting
requirements.
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II. Summary of Major Proposed Revisions
A. Increases in Annual Percentage Rates
Existing balances. Consistent with the Credit Card Act, the
proposed rule would prohibit creditors from applying increased annual
percentage rates and certain fees and charges to existing credit card
balances, except in the following circumstances: (1) When a temporary
rate lasting at least six months expires; (2) when the rate is
increased due to the operation of an index (i.e., when the rate is a
variable rate); (3) when the minimum payment has not been received
within 60 days after the due date; and (4) when the consumer
successfully completes or fails to comply with the terms of a workout
arrangement. In addition, when the annual percentage rate on an
existing balance has been reduced pursuant to the Servicemembers Civil
Relief Act (SCRA), the proposed rule would permit the creditor to
increase that rate once the SCRA ceases to apply.
New transactions. The proposed rule would implement the Credit Card
Act's prohibition on increasing an annual percentage rate during the
first year after an account is opened. After the first year, the
proposed rule would provide that creditors are permitted to increase
the annual percentage rates that apply to new transactions so long as
the creditor complies with the Credit Card Act's 45-day advance notice
requirement, which was implemented in the July 2009 Regulation Z
Interim Final Rule.
B. Evaluation of Consumer's Ability To Pay
General requirements. The Credit Card Act prohibits creditors from
opening a new credit card account or increasing the credit limit for an
existing credit card account unless the creditor considers the
consumer's ability to make the required payments
[[Page 54127]]
under the terms of the account. Because credit card accounts typically
require consumers to make a minimum monthly payment that is a
percentage of the total balance (plus, in some cases, accrued interest
and fees), the proposed rule would require creditors to consider the
consumer's ability to make the required minimum payments.
However, because a creditor will not know the exact amount of a
consumer's minimum payments at the time it is evaluating the consumer's
ability to make those payments, the proposal would require creditors to
use a reasonable method for estimating a consumer's minimum payments
and would provide a safe harbor that creditors could use to satisfy
this requirement. For example, with respect to the opening of a new
credit card account, the safe harbor would provide that it would be
reasonable for a creditor to estimate minimum payments based on a
consumer's utilization of the full credit line using the minimum
payment formula employed by the creditor with respect to the credit
card product for which the consumer is being considered.
The proposed rule would also clarify the types of factors creditors
should review in considering a consumer's ability to make the required
minimum payments. Specifically, an evaluation of a consumer's ability
to pay must include a review of the consumer's income or assets as well
as the consumer's current obligations, and a creditor must establish
reasonable policies and procedures for considering that information.
When considering a consumer's income or assets and current obligations,
a creditor would be permitted to rely on information provided by the
consumer or information in a consumer's credit report.
Specific requirements for underage consumers. Consistent with the
Credit Card Act, the proposed rule prohibits a creditor from issuing a
credit card to a consumer who has not attained the age of 21 unless the
consumer has submitted a written application that meets certain
requirements. Specifically, the application must include either: (1)
The signature of a cosigner who has attained the age of 21, who has the
means to repay debts incurred by the underage consumer in connection
with the account, and who assumes joint liability for such debts; or
(2) information indicating that the underage consumer has the ability
to make the required payments for the account.
C. Marketing to Students
Prohibited inducements. The Credit Card Act limits a creditor's
ability to offer a student at an institution of higher education any
tangible item to induce the student to apply for or open an open-end
consumer credit plan offered by the creditor. Specifically, the Credit
Card Act prohibits such offers: (1) On the campus of an institution of
higher education; (2) near the campus of an institution of higher
education; or (3) at an event sponsored by or related to an institution
of higher education.
The proposed commentary would provide guidance to assist creditors
in complying with the rule. For example, the proposed commentary would
clarify that ``tangible item'' means a physical item (such as a gift
card, t-shirt, or magazine subscription) and does not include non-
physical items (such as discounts, rewards points, or promotional
credit terms). The proposed commentary would also clarify that a
location that is within 1,000 feet of the border of the campus of an
institution of higher education (as defined by the institution) is
considered near the campus of that institution. Finally, consistent
with guidance recently adopted by the Board with respect to certain
private education loans, the proposed commentary would state that an
event is related to an institution of higher education if the marketing
of such event uses words, pictures, or symbols identified with the
institution in a way that implies that the institution endorses or
otherwise sponsors the event.
Disclosure and reporting requirements. The proposed rule would also
implement the provisions of the Credit Card Act requiring institutions
of higher education to publicly disclose agreements with credit card
issuers regarding the marketing of credit cards. The proposal would
state that an institution may comply with this requirement by, for
example, posting the agreement on its Web site or by making the
agreement available upon request.
D. Fees or Charges for Transactions That Exceed the Credit Limit
Consumer consent requirement. Consistent with the Credit Card Act,
the proposed rule would require that a creditor obtain a consumer's
express consent (or opt-in) before imposing any fees on a consumer's
credit card account for making an extension of credit that exceeds the
account's credit limit. Prior to obtaining this consent, the creditor
must disclose, among other things, the dollar amount of any fees or
charges that will be assessed for an over-the-limit transaction as well
as any increased rate that may apply if the consumer exceeds the credit
limit. In addition, if the consumer consents, the creditor is also
required to provide a notice of the consumer's right to revoke that
consent on any periodic statement that reflects the imposition of an
over-the-limit fee or charge.
The proposed rule would apply these requirements to all consumers
(including existing account holders) if the creditor imposes a fee or
charge for paying an over-the-limit transaction. Thus, after the
February 22, 2010 effective date, creditors would be prohibited from
assessing any over-the-limit fees or charges on an account until the
consumer consents to the payment of transactions that exceed the credit
limit.
Prohibited practices. Even if the consumer has affirmatively
consented to the creditor's payment of over-the-limit transactions, the
Credit Card Act prohibits certain practices in connection with the
assessment of over-the-limit fees or charges. Consistent with these
statutory prohibitions, the proposed rule would prohibit a creditor
from imposing more than one over-the-limit fee or charge per billing
cycle. In addition, a creditor could not impose an over-the-limit fee
or charge on the account for the same over-the-limit transaction in
more than three billing cycles.
The Credit Card Act also directs the Board to prescribe regulations
that prevent unfair or deceptive acts or practices in connection with
the manipulation of credit limits designed to increase over-the-limit
fees or other penalty fees. Pursuant to this authority, the proposed
rule would prohibit a creditor from assessing an over-the-limit fee or
charge that is caused by the creditor's failure to promptly replenish
the consumer's available credit. The proposed rule would also prohibit
creditors from conditioning the amount of available credit on the
consumer's consent to the payment of over-the-limit transactions.
Finally, the proposed rule would prohibit the imposition of any over-
the-limit fees or charges if the credit limit is exceeded solely
because of the creditor's assessment of fees or charges (including
accrued interest charges) on the consumer's account.
E. Timely Settlement of Estates
The Credit Card Act directs the Board to prescribe regulations
requiring creditors to establish procedures ensuring that any
administrator of an estate can resolve the outstanding credit card
balance of a deceased accountholder in a timely manner. The proposed
rule would impose two
[[Page 54128]]
specific requirements designed to enable administrators to determine
the amount of and pay a deceased consumer's balance in a timely manner.
First, upon request by the administrator, the creditor would be
required to disclose the amount of the balance in a timely manner.
Second, once an administrator has made such a request, the creditor
would be required to cease the imposition of fees and charges on the
account (including the accrual of interest) so that the amount of the
balance does not increase while the administrator is arranging for
payment.
F. On-line Disclosure of Credit Card Agreements
The Credit Card Act requires creditors to post credit card
agreements on their Web sites and to submit those agreements to the
Board for posting on its Web site. The Credit Card Act further provides
that the Board may establish exceptions to these requirements in any
case where the administrative burden outweighs the benefit of increased
transparency, such as where a credit card plan has a de minimis number
of accountholders.
The proposed rule would require a creditor to post on its Web site
or otherwise make available its credit card agreements with its current
cardholders. However, the proposed rule would establish two limitations
with respect to the submission of agreements to the Board. First, the
proposed rule would establish a de minimis exception for creditors with
fewer than 10,000 open credit card accounts. Because the overwhelming
majority of credit card accounts are held by creditors that have more
than 10,000 open accounts, the information provided through the Board's
Web site would still reflect virtually all of the terms available to
consumers.
Second, creditors would not be required to submit agreements that
are not currently offered to the public. The Board believes that the
primary purpose of the information provided through the Board's Web
site is to assist consumers in comparing credit card agreements offered
by different issuers when shopping for a new credit card. Including
agreements that are no longer offered to the public would not
facilitate comparison shopping by consumers. In addition, including
such agreements could create confusion regarding which terms are
currently available.
G. Additional Provisions
The proposed rule also implements the following provisions of the
Credit Card Act, all of which go into effect on February 22, 2010.
Limitations on fees. The Board's January 2009 FTC Act Rule
prohibited banks from charging to a credit card account during the
first year after account opening certain account-opening and other fees
that, in total, constituted the majority of the initial credit limit.
The Credit Card Act contains a similar provision, except that it
applies to all fees (other than fees for late payments, returned
payments, and exceeding the credit limit) and limits the total fees to
25% of the initial credit limit.
Payment allocation. When different rates apply to different
balances on a credit card account, the Board's January 2009 FTC Act
Rule required banks to allocate payments in excess of the minimum first
to the balance with the highest rate or pro rata among the balances.
The Credit Card Act contains a similar provision, except that excess
payments must always be allocated first to the balance with the highest
rate.
Double-cycle billing. The Board's January 2009 FTC Act Rule
prohibited banks from imposing finance charges on balances for days in
previous billing cycles as a result of the loss of a grace period (a
practice sometimes referred to as ``double-cycle billing''). The Credit
Card Act contains a similar prohibition. In addition, when a consumer
pays some but not all of a balance prior to expiration of a grace
period, the Credit Card Act prohibits the creditor from imposing
finance charges on the portion of the balance that has been repaid.
Fees for making payment. The Credit Card Act prohibits creditors
from charging a fee for making a payment, except for payments involving
an expedited service by a service representative of the creditor.
Minimum payments. The Board's January 2009 Regulation Z Rule
implemented provisions of the Bankruptcy Abuse Prevention and Consumer
Protection Act of 2005 requiring creditors to provide a toll-free
telephone number where consumers could receive an estimate of the time
to repay their account balances if they made only the required minimum
payment each month. The Credit Card Act substantially revised the
statutory requirements for these disclosures. In particular, the Credit
Card Act requires the following new disclosures on the periodic
statement: (1) The amount of time and the total cost (interest and
principal) involved in paying the balance in full making only minimum
payments; and (2) the monthly payment amount required to pay off the
balance in 36 months and the total cost (interest and principal) of
repaying the balance in 36 months.
III. Statutory Authority
Section 2 of the Credit Card Act states that the Board ``may issue
such rules and publish such model forms as it considers necessary to
carry out this Act and the amendments made by this Act.'' This proposed
rule implements several sections of the Credit Card Act, which amend
TILA. TILA mandates that the Board prescribe regulations to carry out
its purposes and specifically authorizes the Board, among other things,
to do the following:
Issue regulations that contain such classifications,
differentiations, or other provisions, or that provide for such
adjustments and exceptions for any class of transactions, that in the
Board's judgment are necessary or proper to effectuate the purposes of
TILA, facilitate compliance with the act, or prevent circumvention or
evasion. 15 U.S.C. 1604(a).
Exempt from all or part of TILA any class of transactions
if the Board determines that TILA coverage does not provide a
meaningful benefit to consumers in the form of useful information or
protection. The Board must consider factors identified in the act and
publish its rationale at the time it proposes an exemption for comment.
15 U.S.C. 1604(f).
Add or modify information required to be disclosed with
credit and charge card applications or solicitations if the Board
determines the action is necessary to carry out the purposes of, or
prevent evasions of, the application and solicitation disclosure rules.
15 U.S.C. 1637(c)(5).
Require disclosures in advertisements of open-end plans.
15 U.S.C. 1663.
For the reasons discussed in this notice, the Board is using its
specific authority under TILA and the Credit Card Act, in concurrence
with other TILA provisions, to effectuate the purposes of TILA, to
prevent the circumvention or evasion of TILA, and to facilitate
compliance with the act.
IV. Applicability of Proposed Provisions
While several provisions under the Credit Card Act apply to all
open-end credit, others apply only to certain types of open-end credit,
such as credit card accounts under open-end consumer credit plans. As a
result, the Board understands that some additional clarification may be
helpful as to which provisions of the Credit Card Act as proposed to be
implemented in Regulation Z are applicable to which types of open-end
credit products. In order to clarify the scope of the
[[Page 54129]]
proposed revisions to Regulation Z, the Board is providing the below
table, which summarizes the applicability of each of the major
revisions to Regulation Z.\4\
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\4\ This table summarizes the applicability only of those new
paragraphs or provisions added to Regulation Z in order to implement
the Credit Card Act, as well as the applicability of proposed
provisions addressing deferred interest or similar offers. The Board
notes that it is not proposing to change the applicability of
provisions of Regulation Z amended by the January 2009 Regulation Z
Rule or May 2009 Regulation Z Proposed Clarifications.
----------------------------------------------------------------------------------------------------------------
Provision Applicability
----------------------------------------------------------------------------------------------------------------
Sec. 226.5(a)(2)(iii)............................................. All open-end (not home-secured) consumer
credit plans.
Sec. 226.5(b)(2)(ii).............................................. All open-end consumer credit plans.
Sec. 226.7(b)(11)................................................. Credit card accounts under an open-end
(not home-secured) consumer credit plan.
Sec. 226.7(b)(12)................................................. Credit card accounts under an open-end
(not home-secured) consumer credit plan.
Sec. 226.7(b)(14)................................................. All open-end (not home-secured) consumer
credit plans.
Sec. 226.9(c)(2).................................................. All open-end (not home-secured) consumer
credit plans.
Sec. 226.9(e)..................................................... Credit or charge card accounts subject to
Sec. 226.5a.
Sec. 226.9(g)..................................................... All open-end (not home-secured) consumer
credit plans.
Sec. 226.9(h)..................................................... Credit card accounts under an open-end
(not home-secured) consumer credit plan.
Sec. 226.10(b)(2)(ii)............................................. All open-end consumer credit plans.
Sec. 226.10(b)(3)................................................. Credit card accounts under an open-end
(not home-secured) consumer credit plan.
Sec. 226.10(d).................................................... All open-end consumer credit plans.
Sec. 226.10(e).................................................... Credit card accounts under an open-end
(not home-secured) consumer credit plan.
Sec. 226.10(f).................................................... Credit card accounts under an open-end
(not home-secured) consumer credit plan.
Sec. 226.11(c).................................................... Credit card accounts under an open-end
(not home-secured) consumer credit plan.
Sec. 226.16(f).................................................... All open-end consumer credit plans.
Sec. 226.16(h).................................................... All open-end (not home-secured) consumer
credit plans.
Sec. 226.51....................................................... Credit card accounts under an open-end
(not home-secured) consumer credit plan.
Sec. 226.52....................................................... Credit card accounts under an open-end
(not home-secured) consumer credit plan.
Sec. 226.53....................................................... Credit card accounts under an open-end
(not home-secured) consumer credit plan.
Sec. 226.54....................................................... Credit card accounts under an open-end
(not home-secured) consumer credit plan.
Sec. 226.55....................................................... Credit card accounts under an open-end
(not home-secured) consumer credit plan.
Sec. 226.56....................................................... Credit card accounts under an open-end
(not home-secured) consumer credit plan.
Sec. 226.57....................................................... Credit card accounts under an open-end
(not home-secured) consumer credit plan,
except that Sec. 226.57(c) applies to
all open-end consumer credit plans.
Sec. 226.58....................................................... Credit card accounts under an open-end
(not home-secured) consumer credit plan.
----------------------------------------------------------------------------------------------------------------
V. Section-by-Section Analysis
Section 226.2 Definitions and Rules of Construction
2(a) Definitions
2(a)(15) Credit Card
In the January 2009 Regulation Z Rule, the Board revised Sec.
226.2(a)(15) to read as follows: ``Credit card means any card, plate,
or other single credit device that may be used from time to time to
obtain credit. Charge card means a credit card on an account for which
no periodic rate is used to compute a finance charge.'' 74 FR 5257. In
order to clarify the application of certain provisions of the Credit
Card Act that apply to ``credit card account[s] under an open end
consumer credit plan,'' the Board proposes to further revise Sec.
226.2(a)(15) by adding a definition of ``credit card account under an
open-end (not home-secured) consumer credit plan.'' Specifically,
proposed Sec. 226.2(a)(15)(ii) would define this term to mean any
credit account accessed by a credit card except a credit card that
accesses a home-equity plan subject to the requirements of Sec. 226.5b
or an overdraft line of credit accessed by a debit card. The
definitions of ``credit card'' and ``charge card'' in the January 2009
Regulation Z Rule would be moved to proposed Sec. 226.2(a)(15)(i) and
(iii), respectively.
The exclusion of credit cards that access a home-equity plan
subject to Sec. 226.5b is consistent with the approach adopted by the
Board in the July 2009 Regulation Z Interim Final Rule. See 74 FR
36083. Specifically, the Board used its authority under TILA Section
105(a) and Sec. 2 of the Credit Card Act to interpret the term
``credit card account under an open-end consumer credit plan'' in new
TILA Section 127(i) to exclude home-equity lines of credit subject to
Sec. 226.5b, even if those lines could be accessed by a credit card.
Instead, the Board applied the disclosure requirements in current Sec.
226.9(c)(2)(i) and (g)(1) to ``credit card accounts under an open-end
(not home-secured) consumer credit plan.'' See 74 FR 36094-36095. For
consistency with the interim final rule, the Board would generally use
its authority under TILA Section 105(a) and Sec. 2 of the Credit Card
Act to apply the same interpretation to other provisions of the Credit
Card Act that apply to a ``credit card account under an open end
consumer credit plan.'' See, e.g., revised TILA Sec. 127(j), (k), (l),
(n); revised TILA Sec. 171; new TILA Sec. Sec. 140A, 148, 149,
172.\5\ This interpretation is also consistent with the Board's
historical treatment of HELOC accounts accessible by a credit card
under TILA; for example, the credit and charge card application and
solicitation disclosure requirements under Sec. 226.5a expressly do
not apply to home-equity plans accessible by a credit card that are
subject to Sec. 226.5b. See current Sec. 226.5a(a)(3); revised Sec.
226.5a(a)(5)(i), 74 FR 5403. The Board has issued the August 2009
Regulation Z HELOC Proposal to address changes to Regulation Z that it
believes are necessary and appropriate for HELOCs and will consider any
appropriate revisions to the requirements for HELOCs in connection with
that review.
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\5\ In certain cases, the Board has applied a statutory
provision that refers to ``credit card accounts under an open end
consumer credit plan'' to a wider range of products. Specifically,
see the discussion below regarding the implementation of new TILA
Section 127(i) in proposed Sec. 226.9(c)(2), the implementation of
new TILA Section 127(m) in proposed Sec. Sec. 226.5(a)(2)(iii) and
226.16(f), and the implementation of new TILA Section 127(o) in
proposed Sec. 226.10(d).
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The Board also proposes to interpret the term ``credit card account
under an open end consumer credit plan'' to exclude a debit card that
accesses an overdraft line of credit. Although such cards are ``credit
cards'' under current
[[Page 54130]]
Sec. 226.2(a)(15), the Board has generally excluded them from the
provisions of Regulation Z that specifically apply to credit cards. For
example, as with credit cards that access HELOCs, the provisions in
Sec. 226.5a regarding credit and charge card applications and
solicitations do not apply to overdraft lines of credit tied to asset
accounts accessed by debit cards. See current Sec. 226.5a(a)(3);
revised Sec. 226.5a(a)(5)(ii), 74 FR 5403.
Instead, Regulation E (Electronic Fund Transfers) generally governs
debit cards that access overdraft lines of credit. See 12 CFR part 205.
For example, Regulation E generally governs the issuance of debit cards
that access an overdraft line of credit, although Regulation Z's
issuance provisions apply to the addition of a credit feature (such as
an overdraft line) to a debit card. See 12 CFR 205.12(a)(1)(ii) and
(a)(2)(i). Similarly, when a transaction that debits a checking or
other asset account also draws on an overdraft line of credit,
Regulation Z treats the extension of credit as incident to an
electronic fund transfer and the error resolution provisions in
Regulation E generally govern the transaction. See 12 CFR 205.12
comment 12(a)-1.i.\6\
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\6\ However, the error resolution provisions in Sec. 226.13(d)
and (g) do apply to such transactions. See 12 CFR 205.12 comment
12(a)-1.ii.D; see also current Sec. Sec. 226.12(g) and 13(i);
current comments 12(c)(1)-1 and 13(i)-3; new comment 12(c)-3, 74 FR
5488; revised comment 12(c)(1)-1.iv., 74 FR 5488. In addition, if
the transaction solely involves an extension of credit and does not
include a debit to a checking or other asset account, the liability
limitations and error resolution requirements in Regulation Z apply.
See 12 CFR 205.12(a)-1.i.
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Consistent with this approach, the Board believes that debit cards
that access overdraft lines of credit should not be subject to the
regulations implementing the provisions of the Credit Card Act that
apply to ``credit card accounts under an open end consumer credit
plan.'' As discussed in the January 2009 Regulation Z Rule, the Board
understands that overdraft lines of credit are not in wide use.\7\
Furthermore, as a general matter, the Board understands that creditors
do not generally engage in the practices addressed in the relevant
provisions of the Credit Card Act with respect to overdraft lines of
credit. For example, as discussed in the January 2009 Regulation Z
Rule, overdraft lines of credit are not typically promoted as--or used
for--long-term extensions of credit. See 74 FR 5331. Therefore, because
proposed Sec. 226.9(c)(2) would require a creditor to provide 45 days'
notice before increasing an annual percentage rate for an overdraft
line of credit, a creditor is unlikely to engage in the practices
prohibited by revised TILA Section 171 with respect to the application
of increased rates to existing balances. Similarly, because creditors
generally do not apply different rates to different balances or provide
grace periods with respect to overdraft lines of credit, the provisions
in proposed Sec. Sec. 226.53 and 226.54 would not provide any
meaningful protection. Accordingly, the Board proposes to use its
authority under TILA Section 105(a) and Sec. 2 of the Credit Card Act
to create an exception for debit cards that access an overdraft line of
credit. The Board notes this proposed definition is not intended to
alter the scope or coverage of provisions of Regulation Z that refer
generally to credit cards or open-end credit rather than the new
defined term ``credit card account under an open-end (not home-secured
consumer credit plan.''
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\7\ The 2007 Survey of Consumer Finances data indicates that few
families (1.7 percent) had a balance on lines of credit other than a
home-equity line or credit card at the time of the interview. In
comparison, 73 percent of families had a credit card, and 60.3
percent of these families had a credit card balance at the time of
the interview. See Brian Bucks, et al., Changes in U.S. Family
Finances from 2004 to 2007: Evidence from the Survey of Consumer
Finances, Federal Reserve Bulletin (February 2009).
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Section 226.5 General Disclosure Requirements
5(a) Form of Disclosures
5(a)(2) Terminology
Section 103 of the Credit Card Act creates a new TILA Section
127(m) (15 U.S.C. 1637(m)), which states that with respect to the terms
of any credit card account under an open-end consumer credit plan, the
term ``fixed,'' when appearing in conjunction with a reference to the
APR or interest rate applicable to such account, may only be used to
refer to an APR or interest rate that will not change or vary for any
reason over the period specified clearly and conspicuously in the terms
of the account. 15 U.S.C. 1637(m). In the January 2009 Regulation Z
Rule, the Board had adopted Sec. Sec. 226.5(a)(2)(iii) and 226.16(f)
to restrict the use of the term ``fixed,'' or any similar term, to
describe a rate disclosed in certain required disclosures and in
advertisements only to instances when that rate would not increase
until the expiration of a specified time period. If no time period is
specified, then the term ``fixed,'' or any similar term, may not be
used to describe the rate unless the rate will not increase while the
plan is open.
The Board believes that Sec. Sec. 226.5(a)(2)(iii) and 226.16(f),
as adopted in the January 2009 Regulation Z Rule, would be consistent
with new TILA Section 127(m). Therefore, the Board is not proposing any
changes to these rules.
While TILA Section 127(m) applies only to credit card accounts
under an open-end consumer credit plan, Sec. 226.5(a)(2)(iii) applies
to all open-end (not home-secured) plans and Sec. 226.16(f) applies to
all open-end plans. The Board continues to believe this scope is
appropriate, so consumers of non-credit card products that are open-end
(not home-secured) plans will still benefit from the protections of
this requirement. The Board accordingly proposes to use its TILA
Section 105(a) authority to apply the requirements of Sec.
226.5(a)(2)(iii) to all open-end (not home-secured) plans and Sec.
226.16(f) to all open-end plans. Furthermore, although TILA Section
127(m) only references the term ``fixed,'' Sec. Sec. 226.5(a)(2)(iii)
and 226.16(f) restrict use of the word ``fixed'' as well as other
similar terms. The Board believes this interpretation is necessary to
prevent creditors from circumventing the rule by using different
terminology that would essentially have the same meaning as ``fixed''
in the minds of consumers. As a result, the Board proposes to use its
authority under TILA Section 105(a) to apply the provision to other
terms similar to the term ``fixed.''
Also, TILA Section 127(m) implies that a time period for which the
rate is fixed must be specified in the account terms. While most
creditors will likely state a term for the which the rate is fixed, the
Board believes the rule should address instances when a rate is
described as ``fixed'' but no time period is provided. The Board,
therefore, proposes to use its authority under TILA Section 105(a) to
provide that if a creditor describes a rate as ``fixed,'' but does not
disclose a time period for which the rate will be fixed, the rate must
not increase while the plan is open. Finally, TILA Section 127(m)
states that a rate described as ``fixed'' may not change or vary for
any reason. The Board believes, however, that it would be beneficial to
consumers to permit a creditor to decrease a rate described as
``fixed.'' Accordingly, the Board proposes to use its authority under
TILA Section 105(a) to provide that a rate described as ``fixed'' may
not be increased.
5(b) Time of Disclosures
5(b)(1) Account-Opening Disclosures
5(b)(1)(i) General Rule
In certain circumstances, a creditor may substitute or replace one
credit card account with another credit card account. For example, if
an existing
[[Page 54131]]
cardholder requests additional features or benefits (such as rewards on
purchases), the creditor may substitute or replace the existing credit
card account with a new credit card account that provides those
features or benefits. The Board also understands that creditors often
charge higher annual percentage rates or annual fees to compensate for
additional features and benefits. As discussed below, proposed Sec.
226.55 and its commentary address the application of the general
prohibitions on increasing annual percentage rates, fees, and charges
during the first year after account opening and on applying increased
rates to existing balances in these circumstances. See proposed Sec.
226.55(d); proposed comments 55(b)(3)-3 and 55(d)-1 through -3.
In order to clarify the application of the disclosure requirements
in Sec. Sec. 226.6(b) and 226.9(c)(2) when one credit card account is
substituted or replaced with another, the Board proposes to adopt
comment 5(b)(1)(i)-6, which states that, when a card issuer substitutes
or replaces an existing credit card account with another credit card
account, the card issuer must either provide notice of the terms of the
new account consistent with Sec. 226.6(b) or provide notice of the
changes in the terms of the existing account consistent with Sec.
226.9(c)(2). The Board understands that, when an existing cardholder
requests new features or benefits, disclosure of the new terms pursuant
to Sec. 226.6(b) may be preferable because the cardholder generally
will not want to wait 45 days for the new terms to take effect (as
would be the case if notice were provided pursuant to Sec.
226.9(c)(2)). Thus, this comment is intended to provide card issuers
with some flexibility regarding whether to treat the substitution or
replacement as the opening of a new account (subject to Sec. 226.6(b))
or a change in the terms of an existing account (subject to Sec.
226.9(c)(2)).
However, the Board does not intend to permit card issuers to
circumvent the disclosure requirements in Sec. 226.9(c)(2) by treating
a change in terms as the opening of a new account. Accordingly, the
comment would further state that whether a substitution or replacement
results in the opening of a new account or a change in the terms of an
existing account for purposes of the disclosure requirements in
Sec. Sec. 226.6(b) and 226.9(c)(2) is determined in light of all the
relevant facts and circumstances.
The comment provides the following list of relevant facts and
circumstances: (1) Whether the card issuer provides the consumer with a
new credit card; (2) whether the card issuer provides the consumer with
a new account number; (3) whether the account provides new features or
benefits after the substitution or replacement (such as rewards on
purchases); (4) whether the account can be used to conduct transactions
at a greater or lesser number of merchants after the substitution or
replacement; (5) whether the card issuer implemented the substitution
or replacement on an individualized basis; and (6) whether the account
becomes a different type of open-end plan after the substitution or
replacement (such as when a charge card is replaced by a credit card).
The comment states that, when most of these facts and circumstances are
present, the substitution or replacement likely constitutes the opening
of a new account for which Sec. 226.6(b) disclosures are appropriate.
However, the comment also states that, when few of these facts and
circumstances are present, the substitution or replacement likely
constitutes a change in the terms of an existing account for which
Sec. 226.9(c)(2) disclosures are appropriate.\8\
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\8\ The comment also provides cross-references to other
provisions in Regulation Z and its commentary that address the
substitution or replacement of credit card accounts.
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The Board solicits comment on whether additional facts and
circumstances are relevant. The Board also solicits comment on
alternative approaches to determining whether a substitution or
replacement results in the opening of a new account or a change in the
terms of an existing account for purposes of the disclosure
requirements in Sec. Sec. 226.6(b) and 226.9(c)(2).
5(b)(2) Periodic Statements
The Board is proposing to amend comment 5(b)(2)(ii)-2 in several
respects in order to clarify the consequences of a failure to comply
with the requirement in Sec. 226.5(b)(2)(ii) that creditors adopt
reasonable procedures designed to ensure that periodic statements for
open-end credit plans are mailed or delivered at least 21 days before
the payment due date and the date on which any grace period expires.
First, the title of the comment would be amended to cover both treating
a payment as late for any purpose and collecting any finance or other
charge. Second, because Sec. 226.5(b)(2)(ii) only prohibits the
creditor from treating a payment as late for any purpose or collecting
any finance or other charge as a result of a failure to comply with the
general 21-day requirement, the comment would be amended to clarify
that the prohibition in Sec. 226.5(b)(2)(ii) on treating a payment as
late for any purpose or collecting finance or other charges applies
only during the 21-day period following mailing or delivery of the
periodic statement. Thus, if a creditor does not receive a payment
within 21 days of mailing or delivery of the periodic statement, the
prohibition does not apply and the creditor may, for example, impose a
late payment fee.
Third, for similar reasons, the amended comment would clarify that,
when an account is not eligible for a grace period, a creditor may
impose a finance charge due to a periodic interest rate without
treating a payment as late or collecting finance or other charges as a
result of a failure to comply with Sec. 226.5(b)(2)(ii).
The Board is also proposing to amend the cross-reference in comment
5(b)(2)(ii)-6 to reflect the restructuring of the commentary to Sec.
226.7.
Section 226.5a Credit and Charge Card Applications and Solicitations
5a(b) Required Disclosures
5a(b)(1) Annual Percentage Rate
To complement the proposed disclosure requirements for deferred
interest or similar plans proposed in Sec. Sec. 226.7(b) and 226.16(h)
in the May 2009 Regulation Z Proposed Clarifications, the Board also
proposed a new comment 5a(b)(1)-9 to clarify that an issuer offering a
deferred interest or similar plan may not disclose a rate as 0% due to
the possibility that the consumer may not be obligated for interest
regarding the deferred interest or similar transaction. 74 FR 20797.
The Board is republishing proposed comment 5a(b)(1)-9 in this Federal
Register notice.
Section 226.7 Periodic Statement
7(b) Rules Affecting Open-End (Not Home-Secured) Plans
7(b)(11) Due Date; Late Payment Costs
In 2005, the Bankruptcy Act amended TILA to add Section 127(b)(12),
which required creditors that charge a late payment fee to disclose on
the periodic statement (1) the payment due date or, if the due date
differs from when a late payment fee would be charged, the earliest
date on which the late payment fee may be charged, and (2) the amount
of the late payment fee. See 15 U.S.C. 1637(b)(12). In the January 2009
Regulation Z Rule, the Board implemented this section of TILA for open-
end (not home-secured) credit plans. Specifically, the final rule added
Sec. 226.7(b)(11) to require creditors offering open-end (not home-
secured) credit plans that charge a fee or impose
[[Page 54132]]
a penalty rate for paying late to disclose on the periodic statement:
the payment due date, and the amount of any late payment fee and any
penalty APR that could be triggered by a late payment. For ease of
reference, this supplementary information will refer to the disclosure
of any late payment fee and any penalty APR that could be triggered by
a late payment as ``the late payment disclosures.''
Section 226.7(b)(13), as adopted in the January 2009 Regulation Z
Rule, sets forth formatting requirements for the due date and the late
payment disclosures. Specifically, Sec. 226.7(b)(13) requires that the
due date be disclosed on the front side of the first page of the
periodic statement. Further, the amount of any late payment fee and any
penalty APR that could be triggered by a late payment must be disclosed
in close proximity to the due date.
Section 202 of the Credit Card Act amends TILA Section 127(b)(12)
to provide that for a ``credit card account under an open-end consumer
credit plan,'' a creditor that charges a late payment fee must disclose
in a conspicuous location on the periodic statement (1) the payment due
date, or, if the due date differs from when a late payment fee would be
charged, the earliest date on which the late payment fee may be
charged, and (2) the amount of the late payment fee. In addition, if a
late payment may result in an increase in the APR applicable to the
credit card account, a creditor also must provide on the periodic
statement a disclosure of this fact, along with the applicable penalty
APR. The disclosure related to the penalty APR must be placed in close
proximity to the due-date disclosure discussed above.
In addition, Section 106 of the Credit Card Act adds new TILA
Section 127(o), which requires that the payment due date for a credit
card account under an open-end (not home-secured) consumer credit plan
be the same day each month. 15 U.S.C. 1637(o).
As discussed in more detail below, the Board proposes to retain the
due date and the late payment disclosure provisions adopted in Sec.
226.7(b)(11) as part of the January 2009 Regulation Z Rule, with
several revisions. Format requirements relating to the due date and the
late payment disclosure provisions are discussed in more detail in the
section-by-section analysis to proposed Sec. 226.7(b)(13).
Applicability of the due date and the late payment disclosure
requirements. The due date and the late payment disclosures added to
TILA Section 127(b)(12) by the Bankruptcy Act applied to all open-end
credit plans. Consistent with TILA Section 127(b)(12), as added by the
Bankruptcy Act, the due date and the late payment disclosures in Sec.
226.7(b)(11) (as adopted in the January 2009 Regulation Z Rule) apply
to all open-end (not home-secured) credit plans, including credit card
accounts, overdraft lines of credit and other general purpose lines of
credit that are not home secured.
The Credit Card Act amended TILA Section 127(b)(12) to apply the
due date and the late payment disclosures only to creditors offering a
credit card account under an open-end consumer credit plan. Consistent
with newly-revised TILA Section 127(b)(12), the Board proposes to amend
Sec. 226.7(b)(11) to require the due date and the late payment
disclosures only for a ``credit card account under an open-end (not
home-secured) consumer credit plan,'' as that term is defined under
proposed Sec. 226.2(a)(15)(ii). As discussed in more detail in the
section-by-section analysis to proposed Sec. 226.2(a)(15)(ii), the
term ``credit card account under an open-end (not home-secured)
consumer credit plan'' means any account accessed by a credit card,
except this term does not include HELOC accounts subject to Sec.
226.5b that are accessed by a credit card device or overdraft lines of
credit that are accessed by a debit card. Thus, based on the proposed
definition of ``credit card account under an open-end (not home-
secured) consumer credit plan,'' the due date and the late payment
disclosures would not apply to (1) open-end credit plans that are not
credit card accounts such as general purpose lines of credit that are
not accessed by a credit card; (2) HELOC accounts subject to Sec.
226.5b even if they are accessed by a credit card device; and (3)
overdraft lines of credit even if they are accessed by a debit card. In
addition, as discussed in more detail below, under proposed Sec.
226.7(b)(11)(ii), the Board also proposes to exempt charge card
accounts from the late payment disclosure requirements.
Charge card accounts. As discussed above, the late payment
disclosures in TILA Section 127(b)(12), as amended by the Credit Card
Act, apply to ``creditors'' offering credit card accounts under an
open-end consumer credit plan. Issuers of ``charge cards'' (which are
typically products where outstanding balances cannot be carried over
from one billing period to the next and are payable when a periodic
statement is received) are ``creditors'' for purposes of specifically
enumerated TILA disclosure requirements. 15 U.S.C. 1602(f); Sec.
226.2(a)(17). The late payment disclosure requirement in TILA Section
127(b)(12), as amended by the Credit Card Act, is not among those
specifically enumerated.
For the reasons discussed in more detail below, a charge card
issuer would be required to disclose the due date on the periodic
statement, and this payment due date must be the same day each month.
Nonetheless, under proposed Sec. 226.7(b)(11)(ii), a charge card
issuer would not be required to disclose on the periodic statement the
late payment disclosures, namely any late payment fee or penalty APR
that could be triggered by a late payment. As discussed above, the late
payment disclosure requirements are not specifically enumerated in TILA
Section 103(f) to apply to charge card issuers. In addition, the Board
notes that for some charge card issuers, payments are not considered
``late'' for purposes of imposing a fee until a consumer fails to make
payments in two consecutive billing cycles. It would be undesirable to
encourage consumers who in January receive a statement with the balance
due upon receipt, for example, to avoid paying the balance when due
because a late payment fee may not be assessed until mid-February; if
consumers routinely avoided paying a charge card balance by the due
date, it could cause issuers to change their practice with respect to
charge cards.
Section 226.7(b)(11)(ii) makes clear the exemption is for periodic
statements provided solely for charge card accounts; periodic
statements provided for card accounts with a charge card feature and
revolving feature must comply with the late payment disclosure
provisions as to the revolving feature. The Board also proposes to
retain comment app. G-9 (which was adopted in the January 2009
Regulation Z Rule). Comment app. G-9 explains that creditors offering
card accounts with a charge card feature and a revolving feature may
revise disclosures, such as the late payment disclosures and the
repayment disclosures discussed in the section-by-section analysis to
proposed Sec. 226.7(b)(12) below, to make clear the feature to which
the disclosures apply.
Payment due date. As adopted in the January 2009 Regulation Z Rule,
Sec. 226.7(b)(11) requires creditors offering open-end (not home-
secured) credit to disclose the due date for a payment if a late
payment fee or penalty rate could be imposed under the credit
agreement, as discussed in more detail as follows. As adopted in the
January 2009 Regulation Z Rule, Sec. 226.7(b)(11) applies to all open-
end (not home-secured) credit plans, even those plans that are not
accessed by a credit card device. The Board proposes generally to
retain
[[Page 54133]]
the due date disclosure, except that this disclosure would be required
only for a card issuer offering a ``credit card account under an open-
end (not home-secured) consumer credit plan,'' as that term is defined
in proposed Sec. 226.2(a)(15)(ii).
In addition, as discussed below, the Board is proposing several
other revisions to Sec. 226.7(b)(11) in order to implement new TILA
Section 127(o), which requires that the payment due date for a credit
card account under an open-end (not home-secured) consumer credit plan
be the same day each month. In addition to requiring that the due date
disclosed be the same day each month, in order to implement new TILA
Section 127(o), the Board proposes to require that the due date
disclosure be provided regardless of whether a late payment fee or
penalty rate could be imposed. Second, the Board proposes to amend
Sec. 226.7(b)(11)(ii) to require that the due date be disclosed for
charge card accounts, although charge card issuers would not be
required to provide the late payment disclosures set forth in proposed
Sec. 226.7(b)(11)(i)(B).
1. Courtesy periods. In the January 2009 Regulation Z Rule, Sec.
226.7(b)(11) interpreted the due date to be a date that is required by
the legal obligation. Comment 7(b)(11)-1 clarified that creditors need
not disclose informal ``courtesy periods'' not part of the legal
obligation that creditors may observe for a short period after the
stated due date before a late payment fee is imposed, to account for
minor delays in payments such as mail delays. The Board proposes to
retain comment 7(b)(11)-1 with technical revisions to refer to card
issuers, rather than creditors, consistent with the proposal to limit
the due date and late payment disclosures to a ``credit card account
under an open-end (not home-secured) consumer credit plan,'' as that
term is defined in proposed Sec. 226.2(a)(15)(ii).
2. Assessment of late fees. Under TILA Section 127(b)(12), as
revised by the Credit Card Act, a card issuer must disclose on periodic
statements the payment due date or, if different, the earliest date on
which the late payment fee may be charged. Some State laws require that
a certain number of days must elapse following a due date before a late
payment fee may be imposed. Under such a State law, the later date
arguably would be required to be disclosed on periodic statements.
In the January 2009 Regulation Z Rule, the Board required creditors
to disclose the due date under the terms of the legal obligation, and
not a later date, such as when creditors are restricted by State or
other law from imposing a late payment fee unless a payment is late for
a certain number of days following the due date. Specifically, comment
7(b)(12)-2 (as adopted as part of the January 2009 Regulation Z Rule)
notes that some State or other laws require that a certain number of
days must elapse following a due date before a late payment fee may be
imposed. For example, assume a payment is due on March 10 and State law
provides that a late payment fee cannot be assessed before March 21.
Comment 7(b)(11)-2 clarifies that creditors must disclose the due date
under the terms of the legal obligation (March 10 in this example), and
not a date different than the due date, such as when creditors are
restricted by State or other law to delay from imposing a late payment
fee unless a payment is late for a certain number of days following the
due date (March 21 in this example). Consumers' rights under State law
to avoid the imposition of late payment fees during a specified period
following a due date are unaffected by the disclosure requirement. In
this example, the creditor would disclose March 10 as the due date for
purposes of Sec. 226.7(b)(11), even if under State law the creditor
could not assess a late payment fee before March 21.
The Board was concerned that disclosure of the later date would not
provide a meaningful benefit to consumers in the form of useful
information or protection and would result in consumer confusion. In
the example above, highlighting March 20 as the last date to avoid a
late payment fee may mislead consumers into thinking that a payment
made any time on or before March 20 would have no adverse financial
consequences. However, failure to make a payment when due is considered
an act of default under most credit contracts, and can trigger higher
costs due to loss of a grace period, interest accrual, and perhaps
penalty APRs. The Board considered additional disclosures on the
periodic statement that would more fully explain the consequences of
paying after the due date and before the date triggering the late
payment fee, but such an approach appeared cumbersome and overly
complicated.
For these reasons, notwithstanding TILA Section 127(b)(12), as
revised by the Credit Card Act, the Board proposes to continue to
require card issuers to disclose the due date under the terms of the
legal obligation, and not a later date, such as when creditors are
restricted by State or other law from imposing a late payment fee
unless a payment is late for a certain number of days following the due
date. The Board proposes this exception to the TILA requirement to
disclose the later date pursuant to the Board's authority under TILA
Section 105(a) to make adjustments that are necessary to effectuate the
purposes of TILA. 15 U.S.C. 1604(a).
The Board proposes to retain comment 7(b)(11)-2 with several
revisions. First, the comment would be revised to refer to card
issuers, rather than creditors, consistent with the proposal to limit
the due date and late payment disclosures to a ``credit card account
under an open-end (not home-secured) consumer credit plan,'' as that
term is defined in proposed Sec. 226.2(a)(15)(ii). Second, the comment
would be revised to address the situation where the terms of the
account agreement (rather than State law) limit a card issuer from
imposing a late payment fee unless a payment is late a certain number
of days following a due date. The Board proposes to revise comment
7(b)(11)-2 to provide that in this situation a card issuer must
disclose the date the payment is due under the terms of the legal
obligation, and not the later date when a late payment fee may be
imposed under the contract.
3. Same due date each month. The Credit Card Act created a new TILA
Section 127(o), which states in part that the payment due date for a
credit card account under an open end consumer credit plan shall be the
same day each month. The Board is proposing to implement this
requirement by revising Sec. 226.7(b)(11)(i). The text the Board is
proposing to insert into amended Sec. 226.7(b)(11)(i) would generally
track the statutory language in new TILA Section 127(o) and would state
that for credit card accounts under open-end (not home-secured)
consumer credit plans, the due date disclosed pursuant to Sec.
226.7(b)(11)(i) must be the same day of the month for each billing
cycle.
The Board is proposing several new comments to clarify the
requirement that the due date be the same day of the month for each
billing cycle. Proposed comment 7(b)(11)(i)-6 would clarify that the
same day of the month means the same numerical day of the month. The
comment notes that one example of a compliant practice would be to have
a due date that is the 25th of every month. In contrast, it would not
be permissible for the payment due date to be the same relative date,
but not numerical date, of each month, such as the third Tuesday of the
month. The Board believes that the intent of new TILA Section 127(o) is
to promote predictability and to enhance consumer awareness of due
dates each month to make it easier to make timely payments. The Board
believes that requiring the
[[Page 54134]]
due date to be the same numerical day each month effectuates the
statute, and that permitting the due date to be the same relative day
each month would not as effectively promote predictability for
consumers.
The Board notes that in practice the requirement that the due date
be the same numerical date each month would preclude creditors from
setting due dates that are the 29th, 30th, or 31st of the month. The
Board is aware that some credit card issuers currently set due dates
for a portion of their accounts on every day of the month, in order to
distribute the burden associated with processing payments more evenly
throughout the month. The Board solicits comment on any operational
burden associated with processing additional payments received on the
1st through 28th of the month in those months with more than 28 days.
Proposed comment 7(b)(11)(i)-7 would clarify that a creditor may
adjust a consumer's due date from time to time, for example in response
to a consumer-initiated request, provided that the new due date will be
the same numerical date each month on an ongoing basis. The proposed
comment would cross-reference existing comment 2(a)(4)-3 for guidance
on transitional billing cycles that might result when the consumer's
due date is changed. The Board believes that it is appropriate to
permit creditors to change the consumer's due date from time to time,
for example, if the creditor wishes to honor a consumer request for a
new due date that better coincides with the time of the month when the
consumer is paid by his or her employer. The Board notes that while the
proposed comment refers to consumer-initiated requests as one example
of when a change in due date might occur, proposed Sec.
226.7(b)(11)(i) and comment 7(b)(11)(i)-7 would not prohibit changes in
the consumer's due date from time to time that are not consumer-
initiated, for example, if a creditor acquires a portfolio and changes
the consumer's due date as it migrates acquired accounts onto its own
systems.
Regulation Z's definition of ``billing cycle'' in Sec. 226.2(a)(4)
contemplates that the interval between the days or dates of regular
periodic statements must be equal and no longer than a quarter of a
year. Therefore, some creditors may have billing cycles that are two or
three months in duration. The Board is proposing comment 7(b)(11)(i)-8
to clarify that new Sec. 226.7(b)(11)(i) does not prohibit billing
cycles that are two or three months, provided that the due date for
each billing cycle is on the same numerical date of each month. The
Board believes that it was not the intent of new TILA Section 127(o) to
require that each billing cycle be exactly one month, so long as the
due date is always the same day of the month for each billing cycle.
For example, the comment notes that a creditor that establishes two-
month billing cycles could send a consumer periodic statements
disclosing due dates of January 25, March 25, and May 25.
Finally, the Board is proposing comment 7(b)(11)(i)-9 to clarify
the relationship between Sec. Sec. 226.7(b)(11)(i) and 226.10(d). As
discussed elsewhere in this supplementary information, proposed Sec.
226.10(d) provides that if the payment due date is a day on which the
creditor does not receive or accept payments by mail, the creditor is
generally required to treat a payment received the next business day as
timely. It is likely that, from time to time, a due date that is the
same numerical date each month as required by Sec. 226.7(b)(11)(i) may
fall on a date on which the creditor does not accept or receive mailed
payments, such as a holiday or weekend. However, proposed comment
7(b)(11)(i)-9 clarifies that in such circumstances the creditor must
disclose the due date according to the legal obligation between the
parties, not the date as of which the creditor is permitted to treat
the payment as late. For example, assume that the consumer's due date
is the 4th of every month and the creditor does not accept or receive
payments by mail on Thursday, July 4. Pursuant to Sec. 226.10(d), the
creditor may not treat a mailed payment received on the following
business day, Friday, July 5, as late for any purpose. The creditor
must nonetheless, however, disclose July 4 as the due date on the
periodic statement and may not disclose a July 5 due date. This is
consistent with the approach that the Board has taken with regard to
payment due dates in comment 5(b)(2)(ii)-3 of the July 2009 Regulation
Z Interim Final Rule, where the due date disclosed is required to
reflect the legal obligation between the parties, not any courtesy
period offered by the creditor or required by State or other law.
Late payment fee and penalty APR. In the January 2009 Regulation Z
Rule, the Board adopted Sec. 226.7(b)(11) to require creditors
offering open-end (not home-secured) credit plans that charge a fee or
impose a penalty rate for paying late to disclose on the periodic
statement the amount of any late payment fee and any penalty APR that
could be triggered by a late payment (in addition to the payment due
date discussed above). Consistent with TILA Section 127(b)(12), as
revised by the Credit Card Act, proposed Sec. 226.7(b)(11) would
continue to require that a card issuer disclose any late payment fee
and any penalty APR that may be imposed on the account as a result of a
late payment, in addition to the payment due date discussed above.
Fee or rate triggered by multiple events. In the January 2009
Regulation Z Rule, the Board added comment 7(b)(11)-3 to provide
guidance on complying with the late payment disclosure if a late fee or
penalty APR is triggered after multiple events, such as two late
payments in six months. Comment 7(b)(11)-3 provides that in such cases,
the creditor may, but is not required to, disclose the late payment and
penalty APR disclosure each month. The disclosures must be included on
any periodic statement for which a late payment could trigger the late
payment fee or penalty APR, such as after the consumer made one late
payment in this example. The Board proposes to retain this comment with
technical revisions to refer to card issuers, rather than creditors,
consistent with the proposal to limit the late payment disclosures to a
``credit card account under an open-end (not home-secured) consumer
credit plan,'' as that term is defined in proposed Sec.
226.2(a)(15)(ii).
Range of fees and rates. In the January 2009 Regulation Z Rule,
Sec. 226.7(b)(11)(i)(B) provides that if a range of late payment fees
or penalty APRs could be imposed on the consumer's account, creditors
may disclose the highest late payment fee and rate and at creditors'
option, an indication (such as using the phrase ``up to'') that lower
fees or rates may be imposed. Comment 7(b)(11)-4 was added to
illustrate the requirement. The final rule also permits creditors to
disclose a range of fees or rates. The Board proposes to retain Sec.
226.7(b)(11)(i)(B) and comment 7(b)(11)-4 with technical revisions to
refer to card issuers, rather than creditors, consistent with the
proposal to limit the late payment disclosures to a ``credit card
account under an open-end (not home-secured) consumer credit plan,'' as
that term is defined in proposed Sec. 226.2(a)(15)(ii). This approach
recognizes the space constraints on periodic statements and provides
card issuers flexibility in disclosing possible late payment fees and
penalty rates.
Penalty APR in effect. In the January 2009 Regulation Z Rule,
comment 7(b)(11)-5 was added to provide that if the highest penalty APR
has previously been triggered on an account, the
[[Page 54135]]
creditor may, but is not required to, delete as part of the late
payment disclosure the amount of the penalty APR and the warning that
the rate may be imposed for an untimely payment, as not applicable.
Alternatively, the creditor may, but is not required to, modify the
language to indicate that the penalty APR has been increased due to
previous late payments, if applicable. The Board proposes to retain
this comment with technical revisions to refer to card issuers, rather
than creditors, consistent with the proposal to limit the late payment
disclosures to a ``credit card account under an open-end (not home-
secured) consumer credit plan,'' as that term is defined in proposed
Sec. 226.2(a)(15)(ii).
7(b)(12) Repayment Disclosures
The Bankruptcy Act added TILA Section 127(b)(11) to require
creditors that extend open-end credit to provide a disclosure on the
front of each periodic statement in a prominent location about the
effects of making only minimum payments. 15 U.S.C. 1637(b)(11). This
disclosure included: (1) a ``warning'' statement indicating that making
only the minimum payment will increase the interest the consumer pays
and the time it takes to repay the consumer's balance; (2) a
hypothetical example of how long it would take to pay off a specified
balance if only minimum payments are made; and (3) a toll-free
telephone number that the consumer may call to obtain an estimate of
the time it would take to repay his or her actual account balance
(``generic repayment estimate''). In order to standardize the
information provided to consumers through the toll-free telephone
numbers, the Bankruptcy Act directed the Board to prepare a ``table''
illustrating the approximate number of months it would take to repay an
outstanding balance if the consumer pays only the required minimum
monthly payments and if no other advances are made. The Board was
directed to create the table by assuming a significant number of
different APRs, account balances, and minimum payment amounts; the
Board was required to provide instructional guidance on how the
information contained in the table should be used to respond to
consumers' requests.
Alternatively, the Bankruptcy Act provided that a creditor may use
a toll-free telephone number to provide the actual number of months
that it will take consumers to repay their outstanding balances
(``actual repayment disclosure'') instead of providing an estimate
based on the Board-created table. A creditor that does so would not
need to include a hypothetical example on its periodic statements, but
must disclose the warning statement and the toll-free telephone number
on its periodic statements. 15 U.S.C. 1637(b)(11)(J)-(K).
For ease of reference, this supplementary information will refer to
the above disclosures in the Bankruptcy Act about the effects of making
only the minimum payment as ``the minimum payment disclosures.''
In the January 2009 Regulation Z Rule, the Board implemented this
section of TILA. In that rulemaking, the Board limited the minimum
payment disclosures required by the Bankruptcy Act to credit card
accounts, pursuant to the Board's authority under TILA Section 105(a)
to make adjustments that are necessary to effectuate the purposes of
TILA. 15 U.S.C. 1604(a). In addition, the final rule in Sec.
226.7(b)(12) provided that credit card issuers could choose one of
three ways to comply with the minimum payment disclosure requirements
set forth in the Bankruptcy Act: (1) Provide on the periodic statement
a warning about making only minimum payments, a hypothetical example,
and a toll-free telephone number where consumers may obtain generic
repayment estimates; (2) provide on the periodic statement a warning
about making only minimum payments, and a toll-free telephone number
where consumers may obtain actual repayment disclosures; or (3) provide
on the periodic statement the actual repayment disclosure. The Board
issued guidance in Appendix M1 to part 226 for how to calculate the
generic repayment estimates, and guidance in Appendix M2 to part 226
for how to calculate the actual repayment disclosures. Appendix M3 to
part 226 provided sample calculations for the generic repayment
estimates and the actual repayment disclosures discussed in Appendices
M1 and M2 to part 226.
The Credit Card Act substantially revised Section 127(b)(11) of
TILA. Specifically, Section 201 of the Credit Card Act amends TILA
Section 127(b)(11) to provide that creditors that extend open-end
credit must provide the following disclosures on each periodic
statement: (1) A ``warning'' statement indicating that making only the
minimum payment will increase the interest the consumer pays and the
time it takes to repay the consumer's balance; (2) the number of months
that it would take to repay the outstanding balance if the consumer
pays only the required minimum monthly payments and if no further
advances are made; (3) the total cost to the consumer, including
interest and principal payments, of paying that balance in full, if the
consumer pays only the required minimum monthly payments and if no
further advances are made; (4) the monthly payment amount that would be
required for the consumer to pay off the outstanding balance in 36
months, if no further advances are made, and the total cost to the
consumer, including interest and principal payments, of paying that
balance in full if the consumer pays the balance over 36 months; and
(5) a toll-free telephone number at which the consumer may receive
information about credit counseling and debt management services. For
ease of reference, this supplementary information will refer to the
above disclosures in the Credit Card Act as ``the repayment
disclosures.''
The Credit Card Act provides that the repayment disclosures
discussed above (except for the warning statement) must be disclosed in
the form and manner which the Board prescribes by regulation and in a
manner that avoids duplication; and be placed in a conspicuous and
prominent location on the billing statement. By regulation, the Board
must require that the disclosure of the repayment information (except
for the warning statement) be in the form of a table that contains
clear and concise headings for each item of information and provides a
clear and concise form stating each item of information required to be
disclosed under each such heading. In prescribing the table, the Board
must require that all the information in the table, and not just a
reference to the table, be placed on the billing statement and the
items required to be included in the table must be listed in the order
in which such items are set forth above. In prescribing the table, the
statute states that the Board shall use terminology different from that
used in the statute, if such terminology is more easily understood and
conveys substantially the same meaning. With respect to the toll-free
telephone number for providing information about credit counseling and
debt management services, the Credit Card Act provides that the Board
must issue guidelines by rule, in consultation with the Secretary of
the Treasury, for the establishment and maintenance by creditors of a
toll-free telephone number for purposes of providing information about
a accessing credit counseling and debt management services. These
guidelines must ensure that referrals provided by the toll-free
telephone number include only those nonprofit budget and credit
counseling agencies approved by a U.S. bankruptcy trustee pursuant to
11 U.S.C. 111(a).
As discussed in more detail below, the Board proposes to revise
[[Page 54136]]
Sec. 226.7(b)(12) to implement Section 201 of the Credit Card Act.
Proposal to limit the repayment disclosure requirements to credit
card accounts. Under the Credit Card Act, the repayment disclosure
requirements apply to all open-end accounts (such as credit card
accounts, HELOCs, and general purpose credit lines). As discussed
above, in the January 2009 Regulation Z Rule, the Board limited the
minimum payment disclosures required by the Bankruptcy Act to credit
card accounts. For similar reasons, the Board proposes to limit the
repayment disclosures in the Credit Card Act to credit card accounts
under open-end (not home-secured) consumer credit plans, as that term
is defined in proposed Sec. 226.2(a)(15)(ii).
As discussed in more detail in the section-by-section analysis to
proposed Sec. 226.2(a)(15)(ii), the term ``credit card account under
an open-end (not home-secured) consumer credit plan'' means any account
accessed by a credit card, except this term does not include HELOC
accounts subject to Sec. 226.5b that are accessed by a credit card
device or overdraft lines of credit that are accessed by a debit card.
Thus, based on the proposed exemption to limit the repayment
disclosures to credit card accounts under open-end (not home-secured)
consumer credit plans, the following products would be exempt from the
repayment disclosures in TILA Section 127(b)(11), as set forth in the
Credit Card Act: (1) HELOC accounts subject to Sec. 226.5b even if
they are accessed by a credit card device; (2) overdraft lines of
credit even if they are accessed by a debit card; and (3) open-end
credit plans that are not credit card accounts, such as general purpose
lines of credit that are not accessed by a credit card.
The Board proposes this rule pursuant to its exception and
exemption authorities under TILA Section 105. Section 105(a) authorizes
the Board to make exceptions to TILA to effectuate the statute's
purposes, which include facilitating consumers' ability to compare
credit terms and helping consumers avoid the uninformed use of credit.
See 15 U.S.C. 1601(a), 1604(a). Section 105(f) authorizes the Board to
exempt any class of transactions from coverage under any part of TILA
if the Board determines that coverage under that part does not provide
a meaningful benefit to consumers in the form of useful information or
protection. See 15 U.S.C. 1604(f)(1). The Board must make this
determination in light of specific factors. See 15 U.S.C. 1604(f)(2).
These factors are (1) the amount of the loan and whether the disclosure
provides a benefit to consumers who are parties to the transaction
involving a loan of such amount; (2) the extent to which the
requirement complicates, hinders, or makes more expensive the credit
process; (3) the status of the borrower, including any related
financial arrangements of the borrower, the financial sophistication of
the borrower relative to the type of transaction, and the importance to
the borrower of the credit, related supporting property, and coverage
under TILA; (4) whether the loan is secured by the principal residence
of the borrower; and (5) whether the exemption would undermine the goal
of consumer protection.
As discussed in more detail below, the Board has considered each of
these factors carefully, and based on that review, believes that the
proposed exemption is appropriate.
1. HELOC accounts. In the August 2009 Regulation Z HELOC Proposal,
the Board proposed that the repayment disclosures required by TILA
Section 127(b)(11), as amended by the Credit Card Act, not apply to
HELOC accounts, including HELOC accounts that can be accessed by a
credit card device. See 74 FR 43428. The Board proposed this rule
pursuant to its exception and exemption authorities under TILA Section
105(a) and 105(f), as discussed above. In the supplementary information
to the August 2009 Regulation Z HELOC Proposal, the Board stated its
belief that the minimum payment disclosures in the Credit Card Act
would be of limited benefit to consumers for HELOC accounts and are not
necessary to effectuate the purposes of TILA. First, the Board
understands that most HELOCs have a fixed repayment period. Under the
August 2009 Regulation Z HELOC Proposal, in proposed Sec.
226.5b(c)(9)(i), creditors offering HELOCs subject to Sec. 226.5b
would be required to disclose the length of the plan, the length of the
draw period and the length of any repayment period in the disclosures
that must be given within three business days after application (but
not later than account opening). In addition, this information also
must be disclosed at account opening under proposed Sec.
226.6(a)(2)(v)(A), as set forth in the August 2009 Regulation Z HELOC
Proposal. Thus, for a HELOC account with a fixed repayment period, a
consumer could learn from those disclosures the amount of time it would
take to repay the HELOC account if the consumer only makes required
minimum payments. The cost to creditors of providing this information a
second time, including the costs to reprogram periodic statement
systems, appears not to be justified by the limited benefit to
consumers.
In addition, in the supplementary information to the August 2009
Regulation Z HELOC Proposal, the Board stated its belief that the
disclosure about total cost to the consumer of paying the outstanding
balance in full (if the consumer pays only the required minimum monthly
payments and if no further advances are made) would not be useful to
consumers for HELOC accounts because of the nature of consumers' use of
HELOC accounts. The Board understands that HELOC consumers tend to use
HELOC accounts for larger transactions that they can finance at a lower
interest rate than is offered on unsecured credit cards, and intend to
repay these transactions over the life of the HELOC account. By
contrast, consumers tend to use unsecured credit cards to engage in a
significant number of small dollar transactions per billing cycle, and
may not intend to finance these transactions for many years. The Board
also understands that HELOC consumers often will not have the ability
to repay the balances on the HELOC account at the end of each billing
cycle, or even within a few years. To illustrate, the Board's 2007
Survey of Consumer Finances data indicates that the median balance on
HELOCs (for families that had a balance at the time of the interview)
was $24,000, while the median balance on credit cards (for families
that had a balance at the time of the interview) was $3,000.\9\
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\9\ Brian Bucks, et al., Changes in U.S. Family Finances from
2004 to 2007: Evidence from the Survey of Consumer Finances, Federal
Reserve Bulletin (February 2009).
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As discussed in the supplementary information to the August 2009
Regulation Z HELOC Proposal, the nature of consumers' use of HELOCs
also underlies the Board's belief that periodic disclosure of the
monthly payment amount required for the consumer to pay off the
outstanding balance in 36 months, and the total cost to the consumer of
paying that balance in full if the consumer pays the balance over 36
months, would not provide useful information to consumers for HELOC
accounts.
For all these reasons, in the August 2009 Regulation Z HELOC
Proposal, the Board proposed to exempt HELOC accounts (even when they
are accessed by a credit card account) from the repayment disclosure
requirements set forth in TILA Section 127(b)(11), as revised by the
Credit Card Act.
[[Page 54137]]
2. Overdraft lines of credit and other general purpose credit
lines. The Board also proposes to exempt overdraft lines of credit
(even if they are accessed by a debit card) and general purpose credit
lines that are not accessed by a credit card from the repayment
disclosure requirements set forth in TILA Section 127(b)(11), as
revised by the Credit Card Act, for several reasons. 15 U.S.C.
1637(b)(11). First, these lines of credit are not in wide use. The 2007
Survey of Consumer Finances data indicates that few families--1.7
percent--had a balance on lines of credit other than a home-equity line
or credit card at the time of the interview. (By comparison, 73 percent
of families had a credit card, and 60.3 percent of these families had a
credit card balance at the time of the interview.) \10\ Second, these
lines of credit typically are neither promoted, nor used, as long-term
credit options of the kind for which the repayment disclosures are
intended. Third, the Board is concerned that the operational costs of
requiring creditors to comply with the repayment disclosure
requirements for overdraft lines of credit and other general purpose
lines of credit may cause some institutions to no longer provide these
products as accommodations to consumers, to the detriment of consumers
who currently use these products. For these reasons, the Board proposes
to use its TILA Section 105(a) and 105(f) authority (as discussed
above) to exempt overdraft lines of credit and other general purpose
credit lines from the repayment disclosure requirements, because in
this context the Board believes the repayment disclosures are not
necessary to effectuate the purposes of TILA. 15 U.S.C. 1604(a) and
(f).
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\10\ Brian Bucks, et al., Changes in U.S. Family Finances from
2004 to 2007: Evidence from the Survey of Consumer Finances, Federal
Reserve Bulletin (February 2009).
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7(b)(12)(i) In General
TILA Section 127(b)(11)(A), as amended by the Credit Card Act,
requires that a creditor that extends open-end credit must provide the
following disclosures on each periodic statement: (1) A ``warning''
statement indicating that making only the minimum payment will increase
the interest the consumer pays and the time it takes to repay the
consumer's balance; (2) the number of months that it would take to
repay the outstanding balance if the consumer pays only the required
minimum monthly payments and if no further advances are made; (3) the
total cost to the consumer, including interest and principal payments,
of paying that balance in full, if the consumer pays only the required
minimum monthly payments and if no further advances are made; (4) the
monthly payment amount that would be required for the consumer to pay
off the outstanding balance in 36 months, if no further advances are
made, and the total cost to the consumer, including interest and
principal payments, of paying that balance in full if the consumer pays
the balance over 36 months; and (5) a toll-free telephone number at
which the consumer may receive information about accessing credit
counseling and debt management services.
In implementing these statutory disclosures, proposed Sec.
226.7(b)(12)(i) sets forth the repayment disclosures that a credit card
issuer generally must provide on the periodic statement. As discussed
in more detail below, proposed Sec. 226.7(b)(12)(ii) sets forth the
repayment disclosures that a credit card issuer must provide on the
periodic statement when negative or no amortization occurs on the
account.
Warning statement. TILA Section 127(b)(11)(A), as amended by the
Credit Card Act, requires that a creditor include the following
statement on each periodic statement: ``Minimum Payment Warning: Making
only the minimum payment will increase the amount of interest you pay
and the time it takes to repay your balance,'' or a similar statement
that is required by the Board pursuant to consumer testing. 15 U.S.C.
1637(b)(11)(A). Under proposed Sec. 226.7(b)(12)(i)(A), if
amortization occurs on the account, a credit card issuer generally
would be required to disclose the following statement with a bold
heading on each periodic statement: ``Minimum Payment Warning: If you
make only the minimum payment each period, you will pay more in
interest and it will take you longer to pay off your balance.'' The
proposed warning statement contains several stylistic revisions to the
statutory language, based on plain language principles, in an attempt
to make the language of the warning more understandable to consumers.
The Board tested the proposed warning statement as part of the consumer
testing conducted by the Board on credit card disclosures in relation
to the January 2009 Regulation Z Rule. Participants in that consumer
testing reviewed periodic statement disclosures with the proposed
warning statement, and they indicated they understood from this
statement that paying only the minimum payment would increase both
interest charges and the length of time it would take to pay off a
balance.
Minimum payment disclosures. TILA Section 127(b)(11)(B)(i) and
(ii), as amended by the Credit Card Act, requires that a creditor
provide on each periodic statement: (1) The number of months that it
would take to pay the entire amount of the outstanding balance, if the
consumer pays only the required minimum monthly payments and if no
further advances are made; and (2) the total cost to the consumer,
including interest and principal payments, of paying that balance in
full, if the consumer pays only the required minimum monthly payments
and if no further advances are made. 15 U.S.C. 1637(b)(11)(B)(i) and
(ii). The Board proposes new Sec. 226.7(b)(12)(i)(B) and (C) to
implement these statutory provisions.
1. Minimum payment repayment estimate. Under proposed Sec.
226.7(b)(12)(i)(B), if amortization occurs on the account, a credit
card issuer generally would be required to disclose on each periodic
statement the minimum payment repayment estimate, as described in
proposed Appendix M1 to part 226. As described in more detail in the
section-by-section analysis to proposed Appendix M1 to part 226, the
minimum payment repayment estimate would be an estimate of the number
of months that it would take to pay the entire amount of the
outstanding balance shown on the periodic statement, if the consumer
pays only the required minimum monthly payments and if no further
advances are made. Under proposed Appendix M1 to part 226, a credit
card issuer generally would calculate the minimum payment repayment
estimate based on the minimum payment formula(s), the APRs and the
outstanding balance currently applicable to a consumer's account. For
other terms that may impact the calculation of the minimum payment
repayment estimate, the Board proposes to allow issuers to make certain
assumption about these terms.
Proposed Sec. 226.7(b)(12)(i)(B) provides that if the minimum
payment repayment estimate is less than 2 years, a credit card issuer
must disclose the estimate in months. Otherwise, the estimate would be
disclosed in years. If the estimate is 2 years or more, the estimate
would be rounded to the nearest whole year, meaning that if the
estimate contains a fractional year less than 0.5, the estimate would
be rounded down to the nearest whole year. The estimate would be
rounded up to the nearest whole year if the estimate contains a
fractional year equal to or greater than 0.5. The Board proposes that
the minimum payment repayment estimate be disclosed in years (if the
[[Page 54138]]
estimated payoff period is 2 years or more), pursuant to the Board's
authority to make adjustments to TILA's requirements to effectuate the
statute's purposes, which include facilitating consumers' ability to
compare credit terms and helping consumers avoid the uninformed use of
credit. See 15 U.S.C. 1601(a), 1604(a).
The Board believes that disclosing the estimated minimum payment
repayment period in years (if the estimated payoff period is 2 years or
more) allows consumers to better comprehend longer repayment periods
without having to convert the repayment periods themselves from months
to years. In consumer testing conducted by the Board on credit card
disclosures in relation to the January 2009 Regulation Z Rule,
participants reviewed disclosures with estimated minimum payment
repayment periods in years, and they indicated they understood the
length of time it would take to repay the balance if only minimum
payments were made.
2. Minimum payment total cost estimate. Consistent with TILA
Section 127(b)(11)(B)(ii), as revised by the Credit Card Act, proposed
Sec. 226.7(b)(12)(i)(C) provides that if amortization occurs on the
account, a credit card issuer generally must disclose on each periodic
statement the minimum payment total cost estimate, as described in
proposed Appendix M1 to part 226. As described in more detail in the
section-by-section analysis to proposed Appendix M1 to part 226, the
minimum payment total cost estimate would be an estimate of the total
dollar amount of the interest and principal that the consumer would pay
if he or she made minimum payments for the length of time calculated as
the minimum payment repayment estimate, as described in proposed
Appendix M1 to part 226. Under the proposal, the minimum payment total
cost estimate must be rounded to the nearest whole dollar.
3. Disclosure of assumptions used to calculate the minimum payment
repayment estimate and the minimum payment total cost estimate. Under
the proposal, a creditor would be required to provide on the periodic
statement the following statements: (1) A statement that the minimum
payment repayment estimate and the minimum payment total cost estimate
are based on the current outstanding balance shown on the periodic
statement; and (2) a statement that the minimum payment repayment
estimate and the minimum payment total cost estimate are based on the
assumption that only minimum payments are made and no other amounts are
added to the balance. The Board believes that this information is
needed to help consumers understand the minimum payment repayment
estimate and the minimum payment total cost estimate. The Board does
not propose to require issuers to disclose other assumptions used to
calculate these estimates. The many assumptions that are necessary to
calculate the minimum payment repayment estimate and the minimum
payment total cost estimate are complex and unlikely to be meaningful
or useful to most consumers.
Repayment disclosures based on repayment in 36 months. TILA Section
127(b)(11)(B)(iii), as revised by the Credit Card Act, requires that a
creditor disclose on each periodic statement: (1) The monthly payment
amount that would be required for the consumer to pay off the
outstanding balance in 36 months, if no further advances are made; and
(2) the total costs to the consumer, including interest and principal
payments, of paying that balance in full if the consumer pays the
balance over 36 months. 15 U.S.C. 1637(b)(11)(B)(iii).
1. Estimated monthly payment for repayment in 36 months and total
cost estimate for repayment in 36 months. In implementing TILA Section
127(b)(11)(B)(iii), as revised by the Credit Card Act, proposed Sec.
226.7(b)(12)(i)(F) provides that except when the minimum payment
repayment estimate disclosed under proposed Sec. 226.7(b)(12)(i)(B) is
3 years or less, a credit card issuer must disclose on each periodic
statement the estimated monthly payment for repayment in 36 months and
the total cost estimate for repayment in 36 months, as described in
proposed Appendix M1 to part 226. As described in more detail in the
section-by-section analysis to proposed Appendix M1 to part 226, the
estimated monthly payment for repayment in 36 months would be an
estimate of the monthly payment amount that would be required to pay
off the outstanding balance shown on the statement within 36 months,
assuming the consumer paid the same amount each month for 36 months.
Also, as described in proposed Appendix M1 to part 226, the total cost
estimate for repayment in 36 months would be the total dollar amount of
the interest and principal that the consumer would pay if he or she
made the estimated monthly payment each month for 36 months. Under the
proposal, the estimated monthly payment for repayment in 36 months and
the total cost estimate for repayment in 36 months must be rounded to
the nearest whole dollar. Proposed Sec. 226.7(b)(12)(i)(F)(2) provides
that a credit card issuer generally must disclose on each periodic
statement a statement that the card issuer estimates that the consumer
will repay the outstanding balance shown on the periodic statement in 3
years if the consumer pays the estimated monthly payment each month for
3 years. The Board believes that this information is needed to help
consumers understand the estimated monthly payment for repayment in 36
months. The Board does not propose to require issuers to disclose
assumptions used to calculate this estimated monthly payment. The many
assumptions that are necessary to calculate the estimated monthly
payment for repayment in 36 months are complex and unlikely to be
meaningful or useful to most consumers.
2. Savings estimate for repayment in 36 months. In addition to the
disclosure of the estimated monthly payment for repayment in 36 months
and the total cost estimate for repayment in 36 months, proposed Sec.
226.7(b)(12)(i)(F) also requires that a credit card issuer generally
must disclose on each periodic statement the savings estimate for
repayment in 36 months, as described in proposed Appendix M1 to part
226. As described in proposed Appendix M1 to part 226, the savings
estimate for repayment in 36 months would be calculated as the
difference between the minimum payment total cost estimate and the
total cost estimate for repayment in 36 months. Thus, the savings
estimate for repayment in 36 months would represent an estimate of the
amount of interest that a consumer would ``save'' if the consumer
repaid the balance shown on the statement in 3 years by making the
estimated monthly payment for repayment in 36 months each month, rather
than making minimum payments each month. The Board proposes to require
that credit card issuers disclose the savings estimate for repayment in
36 months on the periodic statement pursuant to the Board's authority
to make adjustments to TILA's requirements to effectuate the statute's
purposes, which include facilitating consumers' ability to compare
credit terms and helping consumers avoid the uninformed use of credit.
See 15 U.S.C. 1601(a), 1604(a).
The Board believes that the savings estimate for repayment in 36
months will allow consumers more easily to understand the potential
savings of paying the balance shown on the periodic statement in 3
years rather than making minimum payments each month. This potential
savings appears to be Congress' purpose in requiring that
[[Page 54139]]
the total cost for making minimum payments and the total cost for
repayment in 36 months be disclosed on the periodic statement. The
Board believes that including the savings estimate on the periodic
statement allows consumers to comprehend better the potential savings
without having to compute this amount themselves from the total cost
estimates disclosed on the periodic statement. In consumer testing
conducted by the Board on closed-end mortgage disclosures in relation
to the August 2009 Regulation Z Closed-End Credit Proposal, some
participants were shown two offers for mortgage loans with different
APRs and different totals of payments. In that consumer testing, in
comparing the two mortgage loans, participants tended not to calculate
for themselves the difference between the total of payments for the two
loans (i.e., the potential savings in choosing one loan over another),
and use that amount to compare the two loans. Instead, participants
tended to disregard the total of payments for both loans, because both
totals were large numbers. Given the results of that consumer testing,
the Board believes it is important to disclose the savings estimate on
the periodic statement to focus consumers' attention explicitly on the
potential savings of repaying the balance in 36 months.
3. Minimum payment repayment estimate disclosed on the periodic
statement is three years or less. Under proposed Sec.
226.7(b)(12)(i)(F), a credit card issuer would not be required to
provide the disclosures related to repayment in 36 months if the
minimum payment repayment estimate disclosed under proposed Sec.
226.7(b)(12)(i)(B) is 3 years or less. The Board proposes this
exemption pursuant to the Board's authority exception and exemption
authorities under TILA Section 105(a) and (f). The Board has considered
the statutory factors carefully, and based on that review, believes
that the proposed exemption is appropriate. The Board believes that the
estimated monthly payment for repayment in 36 months, and the total
cost estimate for repayment in 36 months would not be useful and may be
misleading to consumers where based on the minimum payments that would
be due on the account, a consumer would be required to repay the
outstanding balance in three years or less. For example, assume that
based on the minimum payments due on an account, a consumer would repay
his or her outstanding balance in two years if the consumer only makes
minimum payments and take no additional advances. The consumer under
the account terms would not have the option to repay the outstanding
balance in 36 months (i.e., 3 years). In this example, disclosure of
the estimated monthly payment for repayment in 36 months and the total
cost estimate for repayment in 36 months would be misleading, because
under the account terms the consumer does not have the option to make
the estimated monthly payment each month for 36 months. Requiring that
this information be disclosed on the periodic statement where it might
be misleading to consumers would undermine TILA's goal of consumer
protection, and could make the credit process more expensive by
requiring card issuers to incur costs to address customer confusion
about these disclosures.
Toll-free telephone number. TILA Section 127(b)(11)(B)(iii), as
revised by the Credit Card Act, requires that a creditor disclose on
each periodic statement a toll-free telephone number at which the
consumer may receive information about credit counseling and debt
management services. 15 U.S.C. 1637(b)(11)(B)(iii). Proposed Sec.
226.7(b)(12)(i)(E) provides that a credit card issuer generally must
disclose on each periodic statement a toll-free telephone number where
the consumer may obtain information about credit counseling services
consistent with the requirements set forth in proposed Sec.
226.7(b)(12)(iv). As discussed in more detail below, proposed Sec.
226.7(b)(12)(iv) sets forth the information that a credit card issuer
must provide through the toll-free telephone number.
7(b)(12)(ii) Negative or No Amortization
Negative or no amortization can occur if the required minimum
payment is the same as or less than the total finance charges and other
fees imposed during the billing cycle. Several major credit card
issuers have established minimum payment requirements that prevent
prolonged negative or no amortization. But some creditors may use a
minimum payment formula that allows negative or no amortization (such
as by requiring a payment of 2 percent of the outstanding balance,
regardless of the finance charges or fees incurred).
The Credit Card Act appears to require the following disclosures
even when negative or no amortization occurs: (1) A ``warning''
statement indicating that making only the minimum payment will increase
the interest the consumer pays and the time it takes to repay the
consumer's balance; (2) the number of months that it would take to
repay the outstanding balance if the consumer pays only the required
minimum monthly payments and if no further advances are made; (3) the
total cost to the consumer, including interest and principal payments,
of paying that balance in full, if the consumer pays only the required
minimum monthly payments and if no further advances are made; (4) the
monthly payment amount that would be required for the consumer to pay
off the outstanding balance in 36 months, if no further advances are
made, and the total cost to the consumer, including interest and
principal payments, of paying that balance in full if the consumer pays
the balance over 36 months; and (5) a toll-free telephone number at
which the consumer may receive information about credit counseling and
debt management services.
Nonetheless, for the reasons discussed in more detail below, the
Board proposes to make adjustments to the above statutory requirements
when negative or no amortization occurs, pursuant to the Board's
authority under TILA Section 105(a) to make adjustments or exceptions
to effectuate the purposes of TILA. 15 U.S.C. 1604(a). Specifically,
when negative or no amortization occurs, the Board proposes in new
Sec. 226.7(b)(12)(ii) to require a credit card issuer to disclose to
the consumer on the periodic statement the following information: (1)
The following statement: ``Minimum Payment Warning: Even if you make no
more charges using this card, if you make only the minimum payment each
month we estimate you will never pay off the balance shown on this
statement because your payment will be less than the interest charged
each month''; (2) the following statement: ``If you make more than the
minimum payment each period, you will pay less in interest and pay off
your balance sooner''; (3) the estimated monthly payment for repayment
in 36 months; (4) the fact that the card issuer estimates that the
consumer will repay the outstanding balance shown on the periodic
statement in 3 years if the consumer pays the estimated monthly payment
each month for 3 years; and (5) the toll-free telephone number for
obtaining information about credit counseling services.
When negative or no amortization occurs, the number of months to
repay the balance shown on the statement if minimum payments are made
and the total cost in interest and principal if the balance is repaid
making only minimum payments cannot be calculated because the balance
will never be repaid if only minimum payments are made. The Board
proposes to replace these statutory disclosures with a warning
[[Page 54140]]
that the consumer will never repay the balance if making minimum
payments each month.
In addition, if negative or no amortization occurs, card issuers
would be required to disclose the following statement: ``If you make
more than the minimum payment each period, you will pay less in
interest and pay off your balance sooner.'' This sentence is similar
to, and accomplishes the goals of, the statutory warning statement, by
informing consumers that they can pay less interest and pay off the
balance sooner if the consumer pays more than the minimum payment each
month.
In addition, consistent with TILA Section 127(b)(11) as revised by
the Credit Card Act, if negative or no amortization occurs, the Board
proposes that the credit card issuer disclose to the consumer the
estimated monthly payment for repayment in 36 months and a statement of
the fact the card issuer estimates that the consumer will repay the
outstanding balance shown on the periodic statement in 3 years if the
consumer pays the estimated monthly payment each month for 3 years.
If negative or no amortization occurs, a card issuer, however,
would not disclose the total cost estimate for repayment in 36 months,
as described in proposed Appendix M1 to part 226. The Board proposes an
exception to TILA's requirement to disclose the total cost estimate for
repayment in 36 months pursuant to the Board's exception and exemption
authorities under TILA Section 105(f).
The Board has considered each of the statutory factors carefully,
and based on that review, believes that the proposed exemption is
appropriate. As discussed above, when negative or no amortization
occurs, a minimum payment cost estimate cannot be calculated because
the balance shown on the statement will never be repaid if only minimum
payments are made. Thus, under the proposal, a credit card issuer would
not be required to disclose a minimum payment cost estimate as
described in proposed Appendix M1 to part 226. Because the minimum
payment cost estimate will not be disclosed when negative or no
amortization occurs, the Board does not believe that the total cost
estimate for repayment in 36 months would be useful to consumers. The
Board believes that the total cost estimate for repayment in 36 months
is useful when it can be compared to the minimum payment total cost
estimate. Requiring that this information be disclosed on the periodic
statement when it is not useful to consumers could distract consumers
from more important information on the periodic statement, which could
undermine TILA's goal of consumer protection.
7(b)(12)(iii) Format Requirements
As discussed above, TILA Section 127(b)(11)(D), as revised by the
Credit Card Act, provides that the repayment disclosures (except for
the warning statement) must be disclosed in the form and manner which
the Board prescribes by regulation and in a manner that avoids
duplication; and must be placed in a conspicuous and prominent location
on the billing statement. 15 U.S.C. 1637(b)(11)(D). By regulation, the
Board must require that the disclosure of the repayment information
(except for the warning statement) be in the form of a table that
contains clear and concise headings for each item of information and
provides a clear and concise form stating each item of information
required to be disclosed under each such heading. In prescribing the
table, the Board must require that all the information in the table,
and not just a reference to the table, be placed on the billing
statement. In addition, the items required to be included in the table
must be listed in the following order: (1) The minimum payment
repayment estimate; (2) the minimum payment total cost estimate; (3)
the estimated monthly payment for repayment in 36 months; (4) the total
cost estimate for repayment in 36 months; and (5) the toll-free
telephone number. In prescribing the table, the Board must use
terminology different from that used in the statute, if such
terminology is more easily understood and conveys substantially the
same meaning.
Samples G-18(C)(1), G-18(C)(2) and G-18(C)(3). Proposed Sec.
226.7(b)(12)(iii) provides that a credit card issuer must provide the
repayment disclosures in a format substantially similar to proposed
Samples G-18(C)(1), G-18(C)(2) and G-18(C)(3) in Appendix G to part
226, as applicable.
Proposed Sample G-18(C)(1) applies when amortization occurs and the
minimum payment repayment estimate disclosed on the periodic statement
is more than 3 years. In this case, as discussed above, a credit card
issuer would be required under proposed Sec. 226.7(b)(12) to disclose
on the periodic statement: (1) The warning statement; (2) the minimum
payment repayment estimate; (3) the minimum payment total cost
estimate; (4) the fact that the minimum payment repayment estimate and
the minimum payment total cost estimate are based on the current
outstanding balance shown on the periodic statement, and the fact that
the minimum payment repayment estimate and the minimum payment total
cost estimate are based on the assumption that only minimum payments
are made and no other amounts are added to the balance; (5) the
estimated monthly payment for repayment in 36 months; (6) the total
cost estimate for repayment in 36 months; (7) the savings estimate for
repayment in 36 months; (8) the fact that the card issuer estimates
that the consumer will repay the outstanding balance shown on the
periodic statement in 3 years if the consumer pays the estimated
monthly payment each month for 3 years; and (9) the toll-free telephone
number for obtaining information about credit counseling services.
As shown in proposed Sample G-18(C)(1), a card issuer would be
required to provide the following disclosures in the form of a table
with headings, content and format substantially similar to proposed
Sample G-18(C)(1): (1) The fact that the minimum payment repayment
estimate and the minimum payment total cost estimate are based on the
assumption that only minimum payments are made; (2) the minimum payment
repayment estimate; (3) the minimum payment total cost estimate; (4)
the estimated monthly payment for repayment in 36 months; (5) the fact
the card issuer estimates that the consumer will repay the outstanding
balance shown on the periodic statement in 3 years if the consumer pays
the estimated monthly payment each month for 3 years; (6) total cost
estimate for repayment in 36 months; and (7) the savings estimate for
repayment in 36 months. The following information would be incorporated
into the headings for the proposed table: (1) The fact that the minimum
payment repayment estimate and the minimum payment total cost estimate
are based on the current outstanding balance shown on the periodic
statement; and (2) the fact that the minimum payment repayment estimate
and the minimum payment total cost estimate are based on the assumption
that no other amounts are added to the balance. The warning statement
would be disclosed above the proposed table and the toll-free telephone
number would be disclosed below the proposed table.
Proposed Sample G-18(C)(2) applies when amortization occurs and the
minimum payment repayment estimate disclosed on the periodic statement
is equal to or less than 3 years. In this case, as discussed above, a
credit card issuer would be required under proposed Sec. 226.7(b)(12)
to disclose on the periodic statement: (1) The warning statement; (2)
the minimum payment repayment estimate; (3) the minimum payment total
cost estimate; (4) the fact
[[Page 54141]]
that the minimum payment repayment estimate and the minimum payment
total cost estimate are based on the current outstanding balance shown
on the periodic statement, and the fact that the minimum payment
repayment estimate and the minimum payment total cost estimate are
based on the assumption that only minimum payments are made and no
other amounts are added to the balance; and (5) the toll-free telephone
number for obtaining information about credit counseling services.
As shown in proposed Sample G-18(C)(2), disclosure of the above
information would be similar in format to how this information is
disclosed in proposed Sample G-18(C)(1). Specifically, as shown in
proposed Sample G-18(C)(2), a card issuer would be required to disclose
the following disclosures in the form of a table with headings, content
and format substantially similar to proposed Sample G-18(C)(2): (1) The
fact that the minimum payment repayment estimate and the minimum
payment total cost estimate are based on the assumption that only
minimum payments are made; (2) the minimum payment repayment estimate;
and (3) the minimum payment total cost estimate. The following
information would be incorporated into the headings for the proposed
table: (1) The fact that the minimum payment repayment estimate and the
minimum payment total cost estimate are based on the current
outstanding balance shown on the periodic statement; and (2) the fact
that the minimum payment repayment estimate and the minimum payment
total cost estimate are based on the assumption that no other amounts
are added to the balance. The warning statement would be disclosed
above the proposed table and the toll-free telephone number would be
disclosed below the proposed table.
Proposed Sample G-18(C)(3) applies when negative or no amortization
occurs. In this case, as discussed above, a credit card issuer would be
required under proposed Sec. 226.7(b)(12) to disclose on the periodic
statement: (1) The following statement: Minimum Payment Warning: Even
if you make no more charges using this card, if you make only the
minimum payment each month we estimate you will never pay off the
balance shown on this statement because your payment will be less than
the interest charged each month;'' (2) the following statement: ``If
you make more than the minimum payment each period, you will pay less
in interest and pay off your balance sooner;'' (3) the estimated
monthly payment for repayment in 36 months; (4) the fact the card
issuer estimates that the consumer will repay the outstanding balance
shown on the periodic statement in 3 years if the consumer pays the
estimated monthly payment each month for 3 years; and (5) the toll-free
telephone number for obtaining information about credit counseling
services.
As shown in proposed Sample G-18(C)(3), none of the above
information would be required to be in the form of a table,
notwithstanding TILA's requirement that the repayment information
(except the warning statement) be in the form of a table. The Board
proposes an exemption to this TILA requirement pursuant to the Board's
authority exception and exemption authorities under TILA Section
105(a). The Board does not believe that the tabular format is a useful
format for disclosing that negative or no amortization is occurring.
The Board believes that a narrative format is better than a tabular
format for communicating to consumers that making only minimum payments
will not repay the balance shown on the periodic statement. For
consistency, proposed Sample G-18(C)(3) also provides the disclosures
about repayment in 36 months in a narrative form as well. To help
ensure that consumers notice the disclosures about negative or no
amortization and the disclosures about repayment in 36 months, the
Board would require that card issuers disclose certain key information
in bold text, as shown in proposed Sample G-18(C)(3).
As discussed above, TILA Section 127(b)(11)(D), as revised by the
Credit Card Act, provides that the toll-free telephone number for
obtaining credit counseling information must be disclosed in the table
with: (1) The minimum payment repayment estimate; (2) the minimum
payment total cost estimate; (3) the estimated monthly payment for
repayment in 36 months; and (4) the total cost estimate for repayment
in 36 months. As discussed above, the Board does not propose that the
toll-free telephone number be in a tabular format. See proposed Samples
G-18(C)(1), G-18(C)(2) and G-18(C)(3). The Board proposes this
exemption pursuant to the Board's exception and exemption authorities
under TILA Section 105(a), as discussed above. The Board believes that
it might be confusing to consumers to include the toll-free telephone
number in the table because it does not logically flow from the other
information included in the table. To help ensure that the toll-free
telephone number is noticeable to consumer, the Board proposes to
require that the toll-free telephone number be grouped with the other
repayment information.
Format requirements set forth in proposed Sec. 226.7(b)(13).
Proposed Sec. 226.7(b)(12)(iii) also provides that a credit card
issuer must provide the repayment disclosures in accordance with the
format requirements of proposed Sec. 226.7(b)(13). As discussed in
more detail in the section-by-section analysis to proposed Sec.
226.7(b)(13), the Board proposes in Sec. 226.7(b)(13) to require that
the repayment disclosures required to be disclosed under proposed Sec.
226.7(b)(12) must be disclosed closely proximate to the minimum payment
due. In addition, under the proposal, the repayment disclosures must be
grouped together with the due date, late payment fee and annual
percentage rate, ending balance, and minimum payment due, and this
information must be disclosed on the front of the first page of the
periodic statement.
7(b)(12)(iv) Provision of Information About Credit Counseling Services
Section 201(c) of the Credit Card Act requires the Board to issue
guidelines by rule, in consultation with the Secretary of the Treasury,
for the establishment and maintenance by creditors of the toll-free
number disclosed on the periodic statement from which consumers can
obtain information about accessing credit counseling and debt
management services. The Credit Card Act requires that these guidelines
ensure that consumers are referred ``only [to] those nonprofit and
credit counseling agencies approved by a United States bankruptcy
trustee pursuant to [11 U.S.C. 111(a)].'' The Board proposes to
implement Section 201(c) of the Credit Card Act in Sec.
226.7(b)(12)(iv). In developing this proposal, the Board consulted with
the Treasury Department as well as the Executive Office for United
States Trustees.
Prior to filing a bankruptcy petition, a consumer generally must
have received ``an individual or group briefing (including a briefing
conducted by telephone or on the Internet) that outlined the
opportunities for available credit counseling and assisted [the
consumer] in performing a related budget analysis.'' 11 U.S.C. 109(h).
This briefing can only be provided by ``nonprofit budget and credit
counseling agencies that provide 1 or more [of these] services * * *
[and are] currently approved by the United States trustee (or the
bankruptcy administrator, if any).'' 11 U.S.C. 111(a)(1); see also 11
U.S.C. 109(h). In order to be approved to provide credit counseling
services, an agency must, among other things: Be a nonprofit entity;
demonstrate that it will
[[Page 54142]]
provide qualified counselors, maintain adequate provision for
safekeeping and payment of client funds, and provide adequate
counseling with respect to client credit problems; charge only a
reasonable fee for counseling services and make such services available
without regard to ability to pay the fee; and provide trained
counselors who receive no commissions or bonuses based on the outcome
of the counseling services. See 11 U.S.C. 111(c).
Proposed Sec. 226.7(b)(12)(iv)(A) provides that a card issuer must
provide through the toll-free telephone number disclosed pursuant to
proposed Sec. 226.7(b)(12)(i)(E) or (ii)(E) the name, street address,
telephone number, and Web site address for at least three organizations
that have been approved by the United States Trustee or a bankruptcy
administrator pursuant to 11 U.S.C. 111(a)(1) to provide credit
counseling services in the State in which the billing address for the
account is located or the State specified by the consumer. In addition,
proposed Sec. 226.7(b)(12)(iv)(B) requires that, upon the request of
the consumer and to the extent available from the United States Trustee
or a bankruptcy administrator, the card issuer must provide the
consumer with the name, street address, telephone number, and Web site
address for at least one organization meeting the above requirements
that provides credit counseling services in a language other than
English that is specified by the consumer.
The United States Trustee collects the name, street address,
telephone number, and Web site address for approved organizations and
provides that information to the public through its Web site.\11\ The
United States Trustee's Web site organizes this information by State as
well as by the language in which the organization can provide credit
counseling services. For jurisdictions where credit counseling
organizations are approved by a bankruptcy administrator pursuant to 11
U.S.C. 111(a)(1), a card issuer can obtain this information from the
relevant administrator. Accordingly, the information that a card issuer
is required to provide by proposed Sec. 226.7(b)(12)(iv) is readily
available.
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\11\ See U.S Trustee Program, List of Credit Counseling Agencies
Approved Pursuant to 11 U.S.C. 111 (available at http://
www.usdoj.gov/ust/eo/bapcpa/ccde/cc_approved.htm).
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Because different credit counseling organizations may provide
different services and charge different fees, the Board believes that
providing information regarding at least three approved organizations
will enable consumers to make a choice about the organization that best
suits their needs. However, the Board solicits comment on whether card
issuers should provide information regarding a different number of
approved organizations.
As proposed, Sec. 226.7(b)(12)(iv) relies in two respects on the
Board's authority under TILA Section 105(a) to make adjustments or
exceptions to effectuate the purposes of TILA or to facilitate
compliance therewith. See 15 U.S.C. 1604(a). First, although revised
TILA Section 127(b)(11)(B)(iv) and Section 201(c)(1) of the Credit Card
Act refer to the creditors' obligation to provide information about
accessing ``credit counseling and debt management services,'' proposed
Sec. 226.7(b)(12)(iv) only requires the creditor to provide
information about obtaining credit counseling services.\12\ Although
credit counseling may include information that assists the consumer in
managing his or her debts, 11 U.S.C. 109(h) and 111(a)(1) do not
require the United States Trustee or a bankruptcy administrator to
approve organizations to provide debt management services. Because
Section 201(c) of the Credit Card Act requires that creditors only
provide information about organizations approved pursuant to 11 U.S.C.
111(a), the Board does not believe that Congress intended to require
creditors to provide information about services that are not subject to
that approval process. Accordingly, proposed Sec. 226.7(b)(12)(iv)
would not require card issuers to disclose information about debt
management services.
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\12\ Similarly, proposed Sec. 226.7(b)(12)(i)(E) and (ii)(E)
only require a card issuer to disclose on the periodic statement a
toll-free telephone number where the consumer may acquire from the
card issuer information about obtaining credit counseling services.
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Second, although Section 201(c)(2) of the Credit Card Act refers to
credit counseling organizations approved pursuant to 11 U.S.C. 111(a),
proposed Sec. 226.7(b)(12)(iv) clarifies that creditors may provide
information only regarding organizations approved pursuant to 11 U.S.C.
111(a)(1), which addresses the approval process for credit counseling
organizations. In contrast, 11 U.S.C. 111(a)(2) addresses a different
approval process for instructional courses concerning personal
financial management.
Proposed comment 7(b)(12)(iv)-1 would clarify that, when providing
the information required by Sec. 226.7(b)(12)(iv)(A), the card issuer
may use the billing address for the account or, at its option, allow
the consumer to specify a State. The comment would also clarify that a
card issuer does not satisfy the requirement to provide information
regarding credit counseling agencies approved pursuant to 11 U.S.C.
111(a)(1) by providing information regarding providers that have been
approved to offer personal financial management courses pursuant to 11
U.S.C. 111(a)(2).
Proposed comment 7(b)(12)(iv)-2 would clarify that a card issuer
complies with the requirements of Sec. 226.7(b)(12)(iv) if it provides
the consumer with the information provided by the United States Trustee
or a bankruptcy administrator, including information provided on the
Web site operated by the United States Trustee. If, for example, the
Web site address for an organization approved by the United States
Trustee is not available from the Web site operated by the United
States Trustee, a card issuer is not required to provide a Web site
address for that organization. However, at least annually, the card
issuer must verify and update the information it provides for
consistency with the information provided by the United States Trustee
or a bankruptcy administrator. The Board solicits comment on whether
card issuers should be required to verify and update the credit
counseling information they provide to consumers more or less
frequently.
Proposed comment 7(b)(12)(iv)-3 would clarify that, at their
option, card issuers may use toll-free telephone numbers that connect
consumers to automated systems, such as an interactive voice response
system, through which consumers may obtain the information required by
Sec. 226.7(b)(12)(iv) by inputting information using a touch-tone
telephone or similar device.
Proposed comment 7(b)(12)(iv)-4 would clarify that a card issuer
may provide a toll-free telephone number that is designed to handle
customer service calls generally, so long as the option to receive the
information required by Sec. 226.7(b)(12)(iv) is prominently disclosed
to the consumer. For automated systems, the option to receive the
information required by Sec. 226.7(b)(12)(iv) is prominently disclosed
to the consumer if it is listed as one of the options in the first menu
of options given to the consumer, such as ``Press or say `3' if you
would like information about credit counseling services.'' If the
automated system permits callers to select the language in which the
call is conducted and in which information is provided, the menu to
select the language may precede the menu with the option to receive
information about accessing credit counseling services.
[[Page 54143]]
Proposed comment 7(b)(12)(iv)-5 would clarify that, at their
option, card issuers may use a third party to establish and maintain a
toll-free telephone number for use by the issuer to provide the
information required by Sec. 226.7(b)(12)(iv).
Proposed comment 7(b)(12)(iv)-6 would clarify that, when providing
the toll-free telephone number on the periodic statement pursuant to
Sec. 226.7(b)(12)(iv), a card issuer at its option may also include a
reference to a Web site address (in addition to the toll-free telephone
number) where its customers may obtain the information required by
Sec. 226.7(b)(12)(iv), so long as the information provided on the Web
site complies with Sec. 226.7(b)(12)(iv). The Web site address
disclosed must take consumers directly to the Web page where
information about accessing credit counseling may be obtained. In the
alternative, the card issuer may disclose the Web site address for the
Web page operated by the United States Trustee where consumers may
obtain information about approved credit counseling organizations.
Finally, proposed comment 7(b)(12)(iv)-7 would clarify that, if a
consumer requests information about credit counseling services, the
card issuer may not provide advertisements or marketing materials to
the consumer (except for providing the name of the issuer) prior to
providing the information required by Sec. 226.7(b)(12)(iv). However,
educational materials that do not solicit business are not considered
advertisements or marketing materials for this purpose. The comment
would also provide examples of how the restriction on the provision of
advertisements and marketing materials applies in the context of the
toll-free number and a Web page.
7(b)(12)(v) Exemptions
As explained above, the Board proposes that the repayment
disclosures required under proposed Sec. 226.7(b)(12) be provided only
for a ``credit card account under an open-end (not home-secured)
consumer credit plan,'' as that term is defined in proposed Sec.
226.2(a)(15)(ii).
In addition, as discussed below, the Board proposes several
additional exemptions from the repayment disclosure requirements
pursuant to the Board's exception and exemption authorities under TILA
Section 105(a) and (f).
As discussed in more detail below, the Board has considered the
statutory factors carefully, and based on that review, believes that
the following proposed exemptions are appropriate.
Exemption for charge cards. The Board proposes to exempt charge
cards from the repayment disclosure requirements because the Board
believes that the repayment disclosures would not be useful for
consumers with charge card accounts. See proposed Sec.
226.7(b)(12)(vii)(A). Charge cards are used in connection with an
account on which outstanding balances cannot be carried from one
billing cycle to another and are payable when a periodic statement is
received.
Exemption where cardholders have paid their accounts in full for
two consecutive billing cycles. In proposed Sec. 226.7(b)(vii)(B), the
Board proposes to provide that a card issuer is not required to include
the repayment disclosures on the periodic statement for a particular
billing cycle immediately following two consecutive billing cycles in
which the consumer paid the entire balance in full, had a zero balance
or had a credit balance. The Board believes this approach strikes an
appropriate balance between benefits to consumers of the repayment
disclosures, and compliance burdens on issuers in providing the
disclosures. Consumers who might benefit from the repayment disclosures
would receive them. Consumers who carry a balance each month would
always receive the repayment disclosures, and consumers who pay in full
each month would not. Consumers who sometimes pay their bill in full
and sometimes do not would receive the repayment disclosures if they do
not pay in full two consecutive months (cycles). Also, if a consumer's
typical payment behavior changes from paying in full to revolving, the
consumer would begin receiving the repayment disclosures after not
paying in full one billing cycle, when the disclosures would appear to
be useful to the consumer. In addition, credit card issuers typically
provide a grace period on new purchases to consumers (that is,
creditors do not charge interest to consumers on new purchases) if
consumers paid both the current balance and the previous balance in
full. Thus, card issuers already currently capture payment history for
consumers for two consecutive months (or cycles).
The Board notes that card issuers would not be required to use this
proposed exemption. A card issuer would be allowed to provide the
repayment disclosures to all of its cardholders, even to those
cardholders that fall within this proposed exemption. If issuers choose
to provide voluntarily the repayment disclosures to those cardholders
that fall within this exemption, the Board would expect issuers to
follow the disclosure rules set forth in proposed Sec. 226.7(b)(12),
the accompanying commentary, and proposed Appendix M1 to part 226 for
those cardholders.
Exemption where minimum payment would pay off the entire balance
for a particular billing cycle. In proposed Sec. 226.7(b)(12)(v)(C),
the Board proposes to exempt a card issuer from providing the repayment
disclosure requirements for a particular billing cycle where paying the
minimum payment due for that billing cycle will pay the outstanding
balance on the account for that billing cycle. For example, if the
entire outstanding balance on an account for a particular billing cycle
is $20 and the minimum payment is $20, an issuer would not need to
comply with the repayment disclosure requirements for that particular
billing cycle. The Board believes that the repayment disclosures would
not be helpful to consumers in this context.
Other exemptions. In the January 2009 Regulation Z Rule, the Board
in Sec. 226.7(b)(12)(v)(E) exempted a credit card account from the
minimum payment disclosure requirements where a fixed repayment period
for the account is specified in the account agreement and the required
minimum payments will amortize the outstanding balance within the fixed
repayment period. This exemption would be applicable to, for example,
accounts that have been closed due to delinquency and the required
monthly payment has been reduced or the balance decreased to
accommodate a fixed payment for a fixed period of time designed to pay
off the outstanding balance. See comment 7(b)(12)(v)-1.
In addition, in the January 2009 Regulation Z Rule, the Board in
Sec. 226.7(b)(12)(v)(F) exempted credit card issuers from providing
the minimum payment disclosures on periodic statements in a billing
cycle where the entire outstanding balance held by consumers in that
billing cycle is subject to a fixed repayment period specified in the
account agreement and the required minimum payments applicable to that
balance will amortize the outstanding balance within the fixed
repayment period. Some retail credit cards have several credit features
associated with the account. One of the features may be a general
revolving feature, where the required minimum payment for this feature
does not pay off the balance in a specific period of time. The card
also may have another feature that allows consumers to make specific
types of purchases (such as furniture purchases, or other large
purchases), and the required minimum payments for that feature will pay
off the purchase
[[Page 54144]]
within a fixed period of time, such as one year. This exemption was
meant to cover retail cards where the entire outstanding balance held
by a consumer in a particular billing cycle is subject to a fixed
repayment period specified in the account agreement. On the other hand,
this exemption would not have applied in those cases where all or part
of the consumer's balance for a particular billing cycle is held in a
general revolving feature, where the required minimum payment for this
feature does not pay off the balance in a specific period of time set
forth in the account agreement. See comment 7(b)(12)(v)-2.
In adopting these two exemptions to the minimum payment disclosure
requirements in the January 2009 Regulation Z Rule, the Board stated
that in these two situations, the minimum payment disclosure does not
appear to provide additional information to consumers that they do not
already have in their account agreements.
The Board proposes not to include these two exemptions in proposed
Sec. 226.7(b)(12)(v). In implementing Section 201 of the Credit Card
Act, proposed Sec. 226.7(b)(12) would require additional repayment
information beyond the disclosure of the estimated length of time it
would take to repay the outstanding balance if only minimum payments
are made, which was the main type of information that was required to
be disclosed under the January 2009 Regulation Z Rule. As discussed
above, under proposed Sec. 226.7(b)(12)(i), a card issuer would be
required to disclose on the periodic statement information about the
total costs in interest and principal to repay the outstanding balance
if only minimum payments are made, and information about repayment of
the outstanding balance in 36 months. Consumers would not know from the
account agreements this additional information about the total cost in
interest and principal of making minimum payments, and information
about repayment of the outstanding balance in 36 months. Thus, these
two exemptions may no longer be appropriate given the additional
repayment information that must be provided on the periodic statement
pursuant to proposed Sec. 226.7(b)(12). Nonetheless, the Board
solicits comment on whether these exemptions should be retained. For
example, the Board solicits comment on whether the repayment
disclosures relating to repayment in 36 months would be helpful where a
fixed repayment period longer than 3 years is specified in the account
agreement and the required minimum payments will amortize the
outstanding balance within the fixed repayment period. For these types
of accounts, the Board solicits comment on whether consumers tend to
enter into the agreement with the intent (and the ability) to repay the
account balance over the life of the account, such that the disclosures
for repayment of the account in 36 months would not be useful to
consumers.
7(b)(13) Format Requirements
Under the January 2009 Regulation Z Rule, creditors offering open-
end (not home-secured) plans are required to disclose the payment due
date (if a late payment fee or penalty rate may be imposed) on the
front side of the first page of the periodic statement. The amount of
any late payment fee and penalty APR that could be triggered by a late
payment is required to be disclosed in close proximity to the due date.
In addition, the ending balance and the minimum payment disclosures
must be disclosed closely proximate to the minimum payment due. Also,
the due date, late payment fee, penalty APR, ending balance, minimum
payment due, and the minimum payment disclosures must be grouped
together. See Sec. 226.7(b)(13). In the supplementary information to
the January 2009 Regulation Z Rule, the Board stated that these
formatting requirements were intended to fulfill Congress' intent to
have the due date, late payment and minimum payment disclosures enhance
consumers' understanding of the consequences of paying late or making
only minimum payments, and were based on consumer testing conducted for
the Board in relation to the January 2009 Regulation Z Rule that
indicated improved understanding when related information is grouped
together. For the reasons described below, the Board proposes to retain
these format requirements, with several revisions. Proposed Sample G-
18(D) in Appendix G to part 226 illustrates the proposed requirements.
Due date and late payment disclosures. As discussed above under the
section-by-section analysis to proposed Sec. 226.7(b)(11), Section 202
of the Credit Card Act amends TILA Section 127(b)(12) to provide that
for a ``credit card account under an open-end consumer credit plan,'' a
creditor that charges a late payment fee must disclose in a conspicuous
location on the periodic statement (1) the payment due date, or, if the
due date differs from when a late payment fee would be charged, the
earliest date on which the late payment fee may be charged, and (2) the
amount of the late payment fee. In addition, if a late payment may
result in an increase in the APR applicable to the credit card account,
a creditor also must provide on the periodic statement a disclosure of
this fact, along with the applicable penalty APR. The disclosure
related to the penalty APR must be placed in close proximity to the
due-date disclosure discussed above.
Consistent with TILA Section 127(b)(12), as revised by the Credit
Card Act, the Board proposes to retain the requirement in Sec.
226.7(b)(13) that credit card issuers disclose the payment due date on
the front side of the first page of the periodic statement. In
addition, credit card issuers would be required to disclose the amount
of any late payment fee and penalty APR that could be triggered by a
late payment in close proximity to the due date. Also, the due date,
late payment fee, penalty APR, ending balance, minimum payment due, and
the repayment disclosures required by proposed Sec. 226.7(b)(12) must
be grouped together. See Sec. 226.7(b)(13). The Board believes that
these format requirements fulfill Congress' intent that the due date
and late payment disclosures be grouped together and be disclosed in a
conspicuous location on the periodic statement.
Repayment disclosures. As discussed above under the section-by-
section analysis to proposed Sec. 226.7(b)(12), TILA Section
127(b)(11)(D), as revised by the Credit Card Act, provides that the
repayment disclosures (except for the warning statement) must be
disclosed in the form and manner which the Board prescribes by
regulation and in a manner that avoids duplication; and must be placed
in a conspicuous and prominent location on the billing statement. 15
U.S.C. 1637(b)(11)(D).
Under proposed Sec. 226.7(b)(13), the ending balance and the
repayment disclosures required under proposed Sec. 226.7(b)(12) must
be disclosed closely proximate to the minimum payment due. In addition,
proposed Sec. 226.7(b)(13) provides that the repayment disclosures
must be grouped together with the due date, late payment fee, penalty
APR, ending balance, and minimum payment due, and this information must
appear on the front of the first page of the periodic statement. The
Board believes that these proposed format requirements fulfill
Congress' intent that the repayment disclosures be placed in a
conspicuous and prominent location on the billing statement.
Samples G-18(D), 18(E), 18(F) and 18(G). As adopted in the January
2009 Regulation Z Rule, Samples G-18(D) and G-18(E) in Appendix G to
part 226 illustrate the requirement to group together the due date,
late payment fee,
[[Page 54145]]
penalty APR, ending balance, minimum payment due, and the repayment
disclosures required by Sec. 226.7(b)(12). Sample G-18(D) applies to
credit cards and includes all of the above disclosures grouped
together. Sample G-18(E) applies to non-credit card accounts, and
includes all of the above disclosures except for the repayment
disclosures because the repayment disclosures only apply to credit card
accounts. Samples G-18(F) and G-18(G) illustrate the front side of
sample periodic statements and show the disclosures listed above.
The Board proposes to revise Sample G-18(D), G-18(F) and G-18(G) to
incorporate the new format requirements for the repayment disclosures,
as shown in proposed Sample G-18(C)(1) and G-18(C)(2). See section-by-
section analysis to proposed Sec. 226.7(b)(12) for a discussion of
these new format requirements. In addition, the Board proposes to
delete Sample G-18(E) (which applies to non-credit card accounts) as
unnecessary. Under the proposal, the formatting requirements in
proposed Sec. 226.7(b)(13) generally are applicable only to credit
card issuers because the due date, late payment fee, penalty APR, and
repayment disclosures would apply only to a ``credit card account under
an open-end (not home-secured) consumer credit plan,'' as that term is
defined in proposed Sec. 226.2(a)(15)(ii).
7(b)(14) Deferred Interest or Similar Transactions
In the May 2009 Regulation Z Proposed Clarifications, the Board
proposed revisions to comment 7(b)-1 to require creditors to provide
consumers with information regarding deferred interest or similar
balances on which interest may be imposed under a deferred interest or
similar program, as well as the interest charges accruing during the
term of a deferred interest or similar program. 74 FR 20797-20798. The
Board also proposed to add a new Sec. 226.7(b)(14) to require
creditors to include on a consumer's periodic statement, for two
billing cycles immediately preceding the date on which deferred
interest or similar transactions must be paid in full in order to avoid
the imposition of interest charges, a disclosure that the consumer must
pay such transactions in full by that date in order to avoid being
obligated for the accrued interest. 74 FR 20793. Furthermore, to
provide additional guidance on compliance with the disclosure
requirement set forth in proposed Sec. 226.7(b)(14), the Board
proposed several complementary changes to comment 7(b)-1.
Moreover, proposed Sample G-18(H) provided model language for
making the disclosure required by proposed Sec. 226.7(b)(14), and the
Board proposed that the language used to make the disclosure under
Sec. 226.7(b)(14) would be required to be substantially similar to
Sample G-18(H). 74 FR 20797. Finally, the Board proposed conforming
technical changes to comment 5(b)(2)(ii)-1, which cross-references
comment 7(b)-1. 74 FR 20797. The Board is republishing these same
revisions for additional comment in this Federal Register notice, with
some technical changes to account for the fact that related provisions
previously set forth in the January 2009 FTC Act Final Rule, and
proposed in the May 2009 FTC Act Rule Proposed Clarifications, have
been modified and proposed in this Federal Register notice under
Regulation Z.
Section 226.9 Subsequent Disclosure Requirements
9(c) Change in Terms
Section 226.9(c) sets forth the advance notice requirements when a
creditor changes the terms applicable to a consumer's account. As
discussed below, the Board is proposing several changes to Sec.
226.9(c)(2) as adopted in the January 2009 Regulation Z Rule and the
associated staff commentary in order to conform to the new requirements
of the Credit Card Act.
9(c)(1) Rules Affecting Home-Equity Plans
In the January 2009 Regulation Z Rule, the Board preserved the
existing rules for changes in terms for home-equity lines of credit in
a new Sec. 226.9(c)(1), in order to clearly delineate the requirements
for HELOCs from those applicable to other open-end credit. The Board
noted that possible revisions to rules affecting HELOCs would be
considered in the Board's review of home-secured credit, which was
underway at the time that the January 2009 Regulation Z rule was
published. On August 26, 2009, the Board published proposed revisions
to those portions of Regulation Z affecting HELOCs in the Federal
Register. As discussed in I. Background and Implementation of the
Credit Card Act, in order to clarify that this proposed rule is not
intended to amend or otherwise affect the August 2009 Regulation Z
HELOC Proposal, the Board is not republishing Sec. 226.9(c)(1) in this
Federal Register notice.
The Board anticipates, however, that a final rule will be issued
with regard to this proposal prior to completion of final rules
regarding HELOCs. Therefore, the Board anticipates that it will include
Sec. 226.9(c)(1), as adopted in the January 2009 Regulation Z Rule, in
its final rulemaking based on this proposal, to give HELOC creditors
guidance on how to comply with change-in-terms requirements between the
effective date of this rule and the effective date of the forthcoming
HELOC rules.
9(c)(2) Rules Affecting Open-End (Not Home-Secured) Plans
Credit Card Act \13\
New TILA Section 127(i)(1) generally requires creditors to provide
consumers with a written notice of an annual percentage rate increase
at least 45 days prior to the effective date of the increase, for
credit card accounts under an open-end consumer credit plan. 15 U.S.C.
1637(i)(1). The statute establishes several exceptions to this general
requirement. 15 U.S.C. 1637(i)(1) and (i)(2). The first exception
applies when the change is an increase in an annual percentage rate
upon expiration of a specified period of time, provided that prior to
commencement of that period, the creditor clearly and conspicuously
disclosed to the consumer the length of the period and the rate that
would apply after expiration of the period. The second exception
applies to increases in variable annual percentage rates that change
according to operation of a publicly available index that is not under
the control of the creditor. Finally, a third exception applies to rate
increases due to the completion of, or failure of a consumer to comply
with, the terms of a workout or temporary hardship arrangement,
provided that prior to the commencement of such arrangement the
creditor clearly and conspicuously disclosed to the consumer the terms
of the arrangement, including any increases due to completion or
failure.
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\13\ For convenience, this section summarizes the provisions of
the Credit Card Act that apply both to advance notices of changes in
terms and rate increases. Consistent with the approach it took in
the January 2009 Regulation Z Rule and the July 2009 Regulation Z
Interim Final Rule, the Board is implementing the advance notice
requirements applicable to contingent rate increases set forth in
the cardholder agreement in a separate section (Sec. 226.9(g)) from
those advance notice requirements applicable to changes in the
cardholder agreement (Sec. 226.9(c)). The distinction between these
types of changes is that Sec. 226.9(g) addresses changes in a rate
being applied to a consumer's account consistent with the existing
terms of the cardholder agreement, while Sec. 226.9(c) addresses
changes in the underlying terms of the agreement.
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In addition to the rules in new TILA Section 127(i)(1) regarding
rate increases, new TILA Section 127(i)(2) establishes a 45-day advance
notice
[[Page 54146]]
requirement for significant changes, as determined by rule of the
Board, in the terms (including an increase in any fee or finance
charge) of the cardholder agreement between the creditor and the
consumer. 15 U.S.C. 1637(i)(2).
New TILA Section 127(i)(3) also establishes an additional content
requirement for notices of interest rate increases or significant
changes in terms provided pursuant to new TILA Section 127(i). 15
U.S.C. 1637(i)(3). Such notices are required to contain a brief
statement of the consumer's right to cancel the account, pursuant to
rules established by the Board, before the effective date of the rate
increase or other change disclosed in the notice. In addition, new TILA
Section 127(i)(4) states that closure or cancellation of an account
pursuant to the consumer's right to cancel does not constitute a
default under the existing cardholder agreement, and does not trigger
an obligation to immediately repay the obligation in full or through a
method less beneficial than those listed in revised TILA Section
171(c)(2). 15 U.S.C. 1637(i)(4). The disclosure associated with the
right to cancel is discussed in the section-by-section analysis to
Sec. 226.9(c) and (g), while the substantive rules regarding this new
right are discussed in the section-by-section analysis to Sec.
226.9(h).
The Board implemented TILA Section 127(i), which was effective
August 20, 2009, in the July 2009 Regulation Z Interim Final Rule.
However, the Board is now proposing to implement additional provisions
of the Credit Card Act that are effective on February 22, 2010 that
have an impact on the content of change-in-terms notices and the types
of changes that are permissible upon provision of a change-in-terms
notice pursuant to Sec. 226.9(c) or (g). For example, revised TILA
Section 171(a), which the Board proposes to implement in a new Sec.
226.55, as discussed elsewhere in this Federal Register notice
generally prohibits increases in annual percentage rates, fees, and
finance charges applicable to outstanding balances, subject to several
exceptions. In addition, revised TILA Section 171(b) requires, for
certain types of penalty rate increases, that the advance notice state
the reason for a rate increase. Finally, for penalty rate increases
applied to outstanding balances when the consumer fails to make a
minimum payment within 60 days after the due date, as permitted by
revised TILA Section 171(b)(4), a creditor will be required to disclose
in the notice of the increase that the increase will be terminated if
the consumer makes the subsequent six minimum payments on time.
January 2009 Regulation Z Rule and July 2009 Regulation Z Interim Final
Rule
As discussed in I. Background and Implementation of the Credit Card
Act, the Board is proposing to implement the changes contained in the
Credit Card Act in a manner consistent with the January 2009 Regulation
Z Rule, to the extent permitted under the statute. Accordingly, the
Board is proposing to retain those requirements of the January 2009
Regulation Z Rule that are not directly affected by the Credit Card Act
in this rulemaking, concurrently with the promulgation of regulations
implementing the provisions of the Credit Card Act effective February
22, 2010.\14\ Consistent with this approach, the Board is proposing to
use Sec. 226.9(c)(2) of the January 2009 Regulation Z Rule as the
basis for its regulations to implement the change-in-terms requirements
of the Credit Card Act. Proposed Sec. 226.9(c)(2) also is intended,
except where noted, to contain requirements that are substantively
equivalent to the requirements of the July 2009 Regulation Z Interim
Final Rule. Accordingly, the Board is proposing to adopt a revised
version of Sec. 226.9(c)(2) of the January 2009 Regulation Z Rule,
with several amendments necessary to conform to the new Credit Card
Act. While the Board is republishing revised Sec. 226.9(c)(2) and the
associated commentary in its entirety, this supplementary information
will focus on highlighting those aspects in which proposed Sec.
226.9(c)(2) differs from Sec. 226.9(c)(2) of the January 2009
Regulation Z Rule.
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\14\ However, as discussed in I. Background and Implementation
of the Credit Card Act, the Board intends to leave in place the
mandatory compliance date for certain aspects of proposed Sec.
226.9(c)(2) that are not directly required by the Credit Card Act.
These provisions would have a mandatory compliance date of July 1,
2010, consistent with the effective date that the Board adopted in
the January 2009 Regulation Z Rule. For example, the Board is not
proposing to require a tabular format for certain change-in-terms
notice requirements before the July 1, 2010 effective date.
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May 2009 Regulation Z Proposed Clarifications
On May 5, 2009, the Board published for comment in the Federal
Register proposed clarifications to the January 2009 Regulation Z Rule.
See 74 FR 20784. Several of these proposed clarifications pertain to
the advance notice requirements in Sec. 226.9(c). The Board is
republishing the May 2009 Regulation Z Proposed Clarifications that
affect proposed Sec. 226.9(c)(2), with revisions to the extent
appropriate, as discussed further in this supplementary information.
9(c)(2)(i) Changes Where Written Advance Notice Is Required
Section Sec. 226.9(c)(2) sets forth the change-in-terms notice
requirements for open-end consumer credit plans that are not home-
secured. Proposed paragraph (c)(2)(i) states that a creditor must
generally provide a written notice at least 45 days prior to the
change, when any term required to be disclosed under Sec. 226.6(b)(3),
(b)(4), or (b)(5) is changed or the required minimum periodic payment
is increased, unless an exception applies. This rule is intended to be
substantively equivalent to Sec. 226.9(c)(2) of the January 2009
Regulation Z Rule. The exceptions, as discussed below, are set forth in
proposed paragraph (c)(2)(v). In addition, paragraph (c)(2)(iii)
provides that 45 days' advance notice is not required for those changes
that the Board is not designating as ``significant changes'' in terms
using its authority under new TILA Section 127(i). Proposed Sec.
226.9(c)(2)(iii), which is discussed in more detail in this
supplementary information, also is intended to be equivalent in
substance to the Board's January 2009 Regulation Z Rule.
Proposed Sec. 226.9(c)(2)(i) sets forth two additional
clarifications of the scope of the change-in-terms notice requirements,
consistent with Sec. 226.9(c)(2) of the January 2009 Regulation Z Rule
and the July 2009 Regulation Z Interim Final Rule. First, the 45-day
advance notice requirement does not apply if the consumer has agreed to
the particular change; in that case, the notice need only be given
before the effective date of the change. Second, proposed Sec.
226.9(c)(2) also notes that increases in the rate applicable to a
consumer's account due to delinquency, default, or as a penalty
described in Sec. 226.9(g) that are not made by means of a change in
the contractual terms of a consumer's account must be disclosed
pursuant to that section.
The Board notes that proposed Sec. 226.9(c)(2) would apply to all
open-end (not home-secured) credit, consistent with the January 2009
Regulation Z Rule. TILA Section 127(i), as adopted by the Credit Card
Act and as implemented in the July 2009 Regulation Z Interim Final Rule
for the period between August 20, 2009 and February 22, 2010, applies
only to credit card accounts. However, the advance notice requirements
adopted by the Board in January 2009 apply to all open-end (not home-
secured) credit. For
[[Page 54147]]
consistency with the January 2009 Regulation Z Rule, the proposal
accordingly would apply Sec. 226.9(c)(2) to all open-end (not home-
secured) credit. The Board notes that while the general notice
requirements are consistent for credit card accounts and other open-end
credit that is not home-secured, there are certain content and other
requirements, such as a consumer's right to reject certain changes in
terms, that apply only to credit card accounts. As discussed in more
detail in the supplementary information to Sec. 226.9(c)(2)(iv), the
regulation would apply such requirements only to credit card accounts.
9(c)(2)(ii) Significant Changes in Account Terms
Pursuant to new TILA Section 127(i), the Board has the authority to
determine by rule what are significant changes in the terms of the
cardholder agreement between a creditor and a consumer. The Board is
proposing Sec. 226.9(c)(2)(ii) to identify which changes are
significant changes in terms. Similar to the January 2009 Regulation Z
Rule, Sec. 226.9(c)(2)(ii) would state that for the purposes of Sec.
226.9(c), a significant change in account terms means changes to terms
required to be disclosed in the table provided at account opening
pursuant to Sec. 226.6(b)(1) and (b)(2). The terms included in the
account-opening table are those that the Board determined, based on its
consumer testing, to be the most important to consumers. In the July
2009 Regulation Z Interim Final Rule, the Board had expressly listed
these terms in Sec. 226.9(c)(2)(ii). Because Sec. 226.6(b) was not in
effect as of August 20, 2009, the Board could not identify these terms
by a cross-reference to Sec. 226.6(b). However, proposed Sec.
226.9(c)(2)(ii) is intended to be substantively equivalent to the list
of terms included in Sec. 226.9(c)(2)(ii) of the July 2009 Regulation
Z Interim Final Rule. However, for clarity, the Board is proposing to
amend the text of Sec. 226.9(c)(2)(ii) to cross-reference the
requirements of Sec. 226.6(b)(1) and (b)(2).
9(c)(2)(iii) Charges Not Covered by Sec. 226.6(b)(1) and (b)(2)
Proposed Sec. 226.9(c)(2)(iii) sets forth the disclosure
requirements for changes in terms required to be disclosed under Sec.
226.6(b)(3) that are not significant changes in account terms as
described in Sec. 226.9(c)(2)(ii). Consistent with TILA Section
127(i), the Board is only proposing a 45-day notice period for changes
in the terms that are required to be disclosed as a part of the
account-opening table under proposed Sec. 226.6(b)(1) and (b)(2) or
for increases in the required minimum periodic payment. A different
disclosure requirement would apply when a creditor increases any
component of a charge, or introduces a new charge, that is imposed as
part of the plan under proposed Sec. 226.6(b)(3) but is not required
to be disclosed as part of the account-opening summary table under
proposed Sec. 226.6(b)(1) and (b)(2). Under those circumstances, the
proposal would require the creditor to either, at its option (1)
provide at least 45 days' written advance notice before the change
becomes effective, or (2) provide notice orally or in writing of the
amount of the charge to an affected consumer at a relevant time before
the consumer agrees to or becomes obligated to pay the charge. This is
consistent with the requirements of both the January 2009 Regulation Z
Rule and the July 2009 Regulation Z Interim Final Rule.
9(c)(2)(iv) Disclosure Requirements
Proposed Sec. 226.9(c)(2)(iv) contains the content and formatting
requirements for change-in-terms notices required to be given for
significant changes in account terms pursuant to proposed Sec.
226.9(c)(2)(i). Proposed Sec. 226.9(c)(2)(iv)(A) sets forth the
content that would be required in notices under Sec. 226.9(c)(2)(i)
for all open-end (not home-secured) credit and mirrors the content
required to be disclosed in change-in-terms notices pursuant to the
Board's January 2009 Regulation Z Rule. Notices provided pursuant to
Sec. 226.9(c)(2)(i) would be required to include (1) a summary of the
changes made to terms required by Sec. 226.6(b)(1) and (b)(2) or of
any increase in the required minimum periodic payment, (2) a statement
that changes are being made to the account, (3) for accounts other than
credit card accounts under an open-end consumer credit plan subject to
Sec. 226.9(c)(2)(iv)(B), a statement indicating that the consumer has
the right to opt out of these changes, if applicable, and a reference
to additional information describing the opt-out right provided in the
notice, if applicable, (4) the date the changes will become effective,
(5) if applicable, a statement that the consumer may find additional
information about the summarized changes, and other changes to the
account, in the notice, (6) if the creditor is changing a rate on the
account other than a penalty rate, a statement that if a penalty rate
currently applies to the consumer's account, the new rate referenced in
the notice does not apply to the consumer's account until the
consumer's account balances are no longer subject to the penalty rate,
and (7) if the change in terms being disclosed is an increase in an
annual percentage rate, the balances to which the increased rate will
be applied and, if applicable, a statement identifying the balances to
which the current rate will continue to apply as of the effective date
of the change in terms.
The content required by proposed Sec. 226.9(c)(2)(iv)(A) generally
mirrors the content required under Sec. 226.9(c)(2)(iii) of the
January 2009 Regulation Z Rule. Creditors would be required to disclose
information regarding the balances to which the increased rate will
apply as well as a statement, if applicable, identifying balances to
which the current rate will continue to apply as of the effective date
of the increase. This content was not included in the July 2009
Regulation Z Interim Final Rule because at that time there were no
substantive limitations regarding rate increases equivalent to those in
proposed Sec. 226.55. However, consistent with the January 2009
Regulation Z Rule, the Board believes that a statement identifying to
which balances an increased rate will apply to is an important
disclosure in light of Sec. 226.55, in order to permit consumers to
make informed decisions about their account usage.
In addition, the Board is proposing to require a disclosure
regarding any applicable right to opt out of changes under proposed
Sec. 226.9(c)(2)(iv)(A)(3) only if the change is being made to an
open-end (not home-secured) credit plan that is not a credit card
account subject to Sec. 226.9(c)(2)(iv)(B). For credit card accounts,
as discussed below and in the supplementary information to Sec. Sec.
226.9(h) and 226.55, the Credit Card Act imposes independent
substantive limitations on rate increases, and generally provides the
consumer with a right to reject other significant changes being made to
their accounts. A disclosure of this right to reject, when applicable,
is required for credit card accounts under proposed Sec.
226.9(c)(2)(iv)(B). Therefore, the Board believes a separate reference
to other applicable opt-out rights is unnecessary and may be confusing
to consumers, when the notice is given in connection with a change in
terms applicable to a credit card account.
Proposed Sec. 226.9(c)(2)(iv)(B) sets forth additional content
requirements that are applicable only to credit card accounts under an
open-end (not home-secured) consumer credit plan. In addition to the
information required to be disclosed pursuant to Sec.
226.9(c)(2)(iv)(A), credit card issuers making significant changes to
terms must also disclose certain information regarding the consumer's
right to reject the change pursuant to
[[Page 54148]]
Sec. 226.9(h). The substantive rule regarding the right to reject is
discussed in connection with proposed Sec. 226.9(h); however, the
associated disclosure requirements are set forth in Sec. 226.9(c)(2).
In particular, a card issuer must generally include in the notice (1) a
statement that the consumer has the right to reject the change or
changes prior to the effective date, unless the consumer fails to make
a required minimum periodic payment within 60 days after the due date
for that payment, (2) instructions for rejecting the change or changes,
and a toll-free telephone number that the consumer may use to notify
the creditor of the rejection, and (3) if applicable, a statement that
if the consumer rejects the change or changes, the consumer's ability
to use the account for further advances will be terminated or
suspended. Section 226.9(c)(2)(iv)(B) mirrors requirements made
applicable to credit card issuers in the July 2009 Regulation Z Interim
Final Rule, with several amendments discussed below.
As discussed in the supplementary information to Sec. 226.9(h),
the Board is proposing that a consumer's right to reject would not
extend to increases in the required minimum payment, an increase in an
annual percentage rate applicable to a consumer's account, a change in
the balance computation method applicable to a consumer's account
necessary to comply with the new prohibition on use of ``two-cycle''
balance computation methods in proposed Sec. 226.54, or changes due to
the creditor not receiving the consumer's required minimum periodic
payment within 60 days after the due date for that payment. The July
2009 Regulation Z Interim Final Rule similarly excluded increases in a
consumer's minimum payment from being subject to the right to reject.
The Board also is proposing that the right to reject not apply to rate
increases, because consumers will automatically receive the protections
against rate increases applicable to their balances under proposed
Sec. 226.55 without being required to take any action to reject the
change. The Board recognizes that it would be an anomalous result for
consumers to be able to reject a change in balance computation that is
expressly required under the Credit Card Act and implementing rules.
Finally, the Board would clarify that, as stated in proposed Sec.
226.9(h)(3), the right to reject does not apply when the account is
more than 60 days delinquent. Accordingly, for these types of changes
creditors would not be required to give the disclosures associated with
the right to reject in Sec. 226.9(c)(2)(iv)(B).
Proposed Sec. 226.9(c)(2)(iv)(C) sets forth the formatting
requirements that would apply to notices required to be given pursuant
to Sec. 226.9(c)(2)(i). The proposed formatting requirements are
generally the same as those that the Board adopted in Sec.
226.9(c)(2)(iii) of the January 2009 Regulation Z Rule, except that the
reference to the content of the notice would include, when applicable,
the information about the right to reject that credit card issuers must
disclose pursuant to Sec. 226.9(c)(2)(iv)(B). These formatting
requirements are not affected by the Credit Card Act, and therefore the
Board proposes to adopt them generally as adopted in January 2009.
Accordingly, as discussed in I. Background and Implementation of the
Credit Card Act, the Board is considering making these formatting
requirements mandatory beginning on July 1, 2010, consistent with the
effective date adopted for the January 2009 Regulation Z Rule. In
addition, the Board is proposing to publish revised model forms that
would reflect the new disclosure of the right to reject, when
applicable.
The Board is proposing to amend Sample G-20 and to add a new sample
G-21 to illustrate how a card issuer may comply with the requirements
of proposed Sec. 226.9(c)(2)(iv). The Board would amend references to
these samples in Sec. 226.9(c)(2)(iv) and comment 9(c)(2)(iv)-8
accordingly. Proposed Sample G-20 is a disclosure of a rate increase
applicable to a consumer's credit card account. The sample explains
when the new rate will apply to new transactions and to which balances
the current rate will continue to apply. Sample G-21 illustrates an
increase in the consumer's late payment and returned payment fees, and
sets forth the content required in order to disclose the consumer's
right to reject those changes.
9(c)(2)(v) Notice Not Required
The Board is proposing Sec. 226.9(c)(2)(v) to set forth the
exceptions to the general change-in-terms notice requirements for open-
end (not home-secured) credit. With several exceptions noted below,
proposed Sec. 226.9(c)(2)(v) is intended to be substantively
equivalent to Sec. 226.9(c)(2)(v) of the July 2009 Regulation Z
Interim Final Rule. Proposed Sec. 226.9(c)(2)(v)(A) would retain
several exceptions that are in current Sec. 226.9(c), including
charges for documentary evidence, reductions of finance charges,
suspension of future credit privileges (except as provided in Sec.
226.9(c)(vi), discussed below), termination of an account or plan, or
when the change results from an agreement involving a court proceeding.
The Board is not including these changes in the set of ``significant
changes'' giving rise to notice requirements pursuant to new TILA
Section 127(i)(2). The Board believes that 45 days' advance notice is
not necessary for these changes, which are not of the type that
generally result in the imposition of a fee or other charge on a
consumer's account that could come as a costly surprise. In addition,
the Board believes that for safety and soundness reasons, issuers
generally have a legitimate interest in suspending credit privileges or
terminating an account or plan when a consumer's creditworthiness
deteriorates, and that 45 days' advance notice of these types of
changes therefore would not be appropriate.
Proposed Sec. 226.9(c)(2)(v)(B) sets forth an exception contained
in the Credit Card Act for increases in annual percentage rates upon
the expiration of a specified period of time, provided that prior to
the commencement of that period, the creditor disclosed to the consumer
clearly and conspicuously in writing the length of the period and the
annual percentage rate that would apply after that period. As discussed
below, this disclosure would be required to be provided in close
proximity and equal prominence to any disclosure of the rate that
applies during that period, ensuring that it would be provided at the
same time the consumer is informed of the temporary rate. In addition,
in order to fall within this exception, the annual percentage rate that
applies after the period ends may not exceed the rate previously
disclosed.
The exception generally mirrors the statutory language, except for
two additional requirements. First, the Board's proposal expressly
provides, consistent with July 2009 Regulation Z Interim Final Rule and
the standard for Regulation Z disclosures under Subpart B that the
disclosure of the period and annual percentage rate that will apply
after the period is generally required to be in writing. See Sec.
226.5(a)(1). Second, pursuant to its authority under TILA Section
105(a) to prescribe regulations to effectuate the purposes of TILA, the
Board is proposing to require that the disclosure of the length of the
period and the annual percentage rate that would apply upon expiration
of the period be set forth in close proximity and equal prominence to
any disclosure of the rate that applies during the specified period of
time. 15 U.S.C. 1604(a). The Board believes that both of
[[Page 54149]]
these requirements are appropriate in order to ensure that consumers
receive, comprehend, and are able to retain the disclosures regarding
the rates that will apply to their transactions.
Proposed comment 9(c)(2)(v)-5 clarifies the timing of the
disclosure requirements for telephone purchases financed by a merchant
or private label credit card issuer. The Board is aware that the
general requirement in the July 2009 Regulation Z Interim Final Rule
that written disclosures be provided prior to commencement of the
period during which a temporary rate will be in effect has caused some
confusion for merchants who offer a promotional rate on the telephone
to finance the purchase of goods. In order to clarify the application
of the rule to such merchants, proposed comment 9(c)(2)(v)-5 would
state that the timing requirements of Sec. 226.9(c)(2)(v)(B) are
deemed to have been met, and written disclosures required by Sec.
226.9(c)(2)(v)(B) may be provided as soon as reasonably practicable
after the first transaction subject to a temporary rate if: (1) The
first transaction subject to the temporary rate occurs when a consumer
contacts a merchant by telephone to purchase goods and at the same time
the consumer accepts an offer to finance the purchase at the temporary
rate; (2) the merchant or third-party creditor permits consumers to
return any goods financed subject to the temporary rate and return the
goods free of cost after the merchant or third-party creditor has
provided the written disclosures required by Sec. 226.9(c)(2)(v)(B);
and (3) the disclosures required by Sec. 226.9(c)(2)(v)(B) and the
consumer's right to reject the temporary rate offer and return the
goods are disclosed to the consumer as part of the offer to finance the
purchase. This clarification mirrors a timing rule for account-opening
disclosures provided by merchants financing the purchase of goods by
telephone under Sec. 226.5(b)(1)(iii) of the January 2009 Regulation Z
Rule.
The Board is also aware of operational issues arising from
application of Sec. 226.9(c)(2)(v)(B) of the July 2009 Regulation Z
Interim Final Rule to deferred interest or other promotional rate
offers made at the time that a consumer is financing a purchase made at
point of sale. At the present time, the systems available to provide
disclosures to consumers at point of sale may not have access to the
rate currently applicable to purchases made on the consumer's account.
This could occur, for example, if the issuer offers a promotion to
consumers with existing credit card accounts, and not all consumers in
the portfolio have the same rate applicable to purchases. In addition,
some consumers' accounts may currently be at a penalty rate that
differs from the standard rates on accounts in the portfolio. The Board
is aware that such issuers are encountering difficulty, at the present
time, providing the disclosure required by Sec. 226.9(c)(2)(v)(B),
which requires that the rate that will apply after the expiration of
the promotional period be disclosed.
This proposal, consistent with section 226.9(c)(2)(v)(B) of the
July 2009 Regulation Z Interim Final Rule, requires disclosure of the
specific rate that will apply to a given consumer's account after the
expiration of a deferred interest or other promotional rate offer. The
Board believes that, in general, the statutory requirement is best
implemented by a rule stating that a single rate must be disclosed.
However, the Board is supplementing its transition guidance to the July
2009 Regulation Z Interim Final Rule to state, that for a brief period
necessary to update their systems to disclose a single rate, issuers
offering a deferred interest or other promotional rate program at point
of sale may disclose a range of rates or an ``up to'' rate rather than
a single rate. The Board notes that stating a range of rates or ``up
to'' rate is only permissible for a brief transition period and expects
that merchants and creditors will disclose a single rate that will
apply when a deferred interest or other promotional rate expires in
accordance with Sec. 226.9(c)(2)(v)(B) as soon as possible.
The Board is retaining in the proposal comment 9(c)(2)(v)-6 from
the July 2009 Regulation Z Interim Final Rule (redesignated as comment
9(c)(2)(v)-7) to clarify that an issuer offering a deferred interest or
similar program may utilize the exception in Sec. 226.9(c)(2)(v)(B).
The comment also provides examples of how the required disclosures can
be made for deferred interest or similar programs. The Board continues
to believe that the application of Sec. 226.9(c)(2)(v)(B) to deferred
interest arrangements is consistent with the Credit Card Act and that
this clarification remains necessary in order to ensure that the
proposed rule does not have unintended adverse consequences for
deferred interest promotions.
The Board is proposing to retain generally as adopted in the July
2009 Regulation Z Interim Final Rule Sec. 226.9(c)(2)(v)(C), which
also implements an exception contained in the Credit Card Act, for
increases in variable annual percentage rates in accordance with a
credit card or other account agreement that provides for a change in
the rate according to operation of an index that is not under the
control of the creditor and is available to the general public. The
Board is proposing a minor amendment to the text of Sec.
226.9(c)(2)(v)(C) to reflect the fact that this exception would apply
to all open-end (not home-secured) credit. The Board believes that even
absent this express exception, such a rate increase would not generally
be a change in the terms of the cardholder or other account agreement
that gives rise to the requirement to provide 45 days' advance notice,
because the index, margin, and frequency with which the annual
percentage rate will vary will all be specified in the cardholder or
other account agreement in advance. However, in order to clarify that
45 days' advance notice is not required for a rate increase that occurs
due to adjustments in a variable rate tied to an index beyond the
creditor's control, the Board is proposing to retain Sec.
226.9(c)(2)(v)(C) of the July 2009 Regulation Z Interim Final Rule.
Finally, the proposal retains Sec. 226.9(c)(2)(v)(D) from the July
2009 Regulation Z Interim Final Rule, with several changes. Section
226.9(c)(2)(v)(D) implements a statutory exception for increases in
rates or fees or charges due to the completion of, or a consumer's
failure to comply with the terms of, a workout or temporary hardship
arrangement provided that the annual percentage rate or fee or charge
applicable to a category of transactions following the increase does
not exceed the rate that applied prior to the commencement of the
workout or temporary hardship arrangement.
The Board notes that the exception in proposed Sec.
226.9(c)(2)(v)(D) applies both to completion of or failure to comply
with a workout arrangement. In the July 2009 Regulation Z Interim Final
Rule, the Board had implemented the exception that applies to
completion of an arrangement is implemented in Sec. 226.9(c)(2)(v)(D),
while the exception applicable to failure to comply with a workout or
temporary hardship arrangement was implemented in Sec. 226.9(g). For
clarity, the Board is proposing to implement both of these exceptions
in a single Sec. 226.9(c)(2)(v)(D). The exception is conditioned on
the creditor's having clearly and conspicuously disclosed, prior to the
commencement of the arrangement, the terms of the arrangement
(including any such increases due to such completion). The Board notes
that the statutory exception applies in the event of either completion
[[Page 54150]]
of, or failure to comply with, the terms of such a workout or temporary
hardship arrangement. This exception also generally mirrors the
statutory language, except that the Board has expressly provided that
the disclosures regarding the workout or temporary hardship arrangement
are required to be in writing.
The Board proposes to retain comment 9(c)(2)(v)-5 from the July
2009 Regulation Z Interim Final Rule (redesignated as comment
9(c)(2)(v)-6), which is applicable to the exceptions in both Sec.
226.9(c)(2)(v)(B) and (c)(2)(v)(D), and provides additional
clarification regarding the disclosure of variable annual percentage
rates. The comment provides that if the creditor is disclosing a
variable rate, the notice must also state that the rate may vary and
how the rate is determined. The comment sets forth an example of how a
creditor may make this disclosure. The Board believes that the fact
that a rate is variable is an important piece of information of which
consumers should be aware prior to commencement of a deferred interest
promotion, a promotional rate, or a stepped rate program.
Finally, the Board also proposes to retain comment 9(c)(2)(v)-7 of
the July 2009 Regulation Z Interim Final Rule (redesignated as comment
9(c)(2)(v)-8), which provides clarification as to what terms must be
disclosed in connection with a workout or temporary hardship
arrangement. The comment states that in order for the exception to
apply, the creditor must disclose to the consumer the rate that will
apply to balances subject to the workout or temporary hardship
arrangement, as well as the rate that will apply if the consumer
completes or fails to comply with the terms of, the workout or
temporary hardship arrangement. For consistency with proposed Sec.
226.55(b)(5)(i), the Board proposes to revise the comment to also state
that the creditor must disclose the amount of any reduced fee or charge
of a type required to be disclosed under Sec. 226.6(b)(2)(ii),
(b)(2)(iii), or (b)(2)(xii) that will apply to balances subject to the
arrangement, as well as the fee or charge that will apply if the
consumer completes or fails to comply with the terms of the
arrangement. The notice also must state, if applicable, that the
consumer must make timely minimum payments in order to remain eligible
for the workout or temporary hardship arrangement. The Board believes
that it is important for a consumer to be notified of his or her
payment obligations pursuant to a workout or similar arrangement, and
that the rate, fee or charge may be increased if he or she fails to
make timely payments.
9(c)(2)(vi) Reduction of the Credit Limit
Consistent with the January 2009 Regulation Z Rule and the July
2009 Regulation Z Interim Final Rule, the Board is proposing to retain
Sec. 226.9(c)(2)(vi) to address notices of changes in a consumer's
credit limit. Section 226.9(c)(2)(vi) requires an issuer to provide a
consumer with 45 days' advance notice that a credit limit is being
decreased or will be decreased prior to the imposition of any over-the-
limit fee or penalty rate imposed solely as the result of the balance
exceeding the newly decreased credit limit. The Board is not including
a decrease in a consumer's credit limit itself as a significant change
in a term that requires 45 days' advance notice, for several reasons.
First, the Board recognizes that creditors have a legitimate interest
in mitigating the risk of a loss when a consumer's creditworthiness
deteriorates, and believes there would be safety and soundness concerns
with requiring creditors to wait 45 days to reduce a credit limit.
Second, the consumer's credit limit is not a term generally required to
be disclosed under Regulation Z or TILA. Finally, the Board believes
that Sec. 226.9(c)(2)(vi) adequately protects consumers against the
two most costly surprises potentially associated with a reduction in
the credit limit, namely, fees and rate increases, while giving a
consumer adequate time to mitigate the effect of the credit line
reduction.
Furthermore, proposed Sec. 226.55 would prohibit a creditor from
applying an increased rate, fee, or charge to an existing balance as a
result of transactions that exceeded the credit limit. In addition,
proposed Sec. 226.56 would allow a creditor to charge a fee for
transactions that exceed the credit limit only when the consumer has
consented to such transactions.
Proposed Changes to Commentary to Sec. 226.9(c)(2)
The commentary to Sec. 226.9(c)(2) generally is consistent with
the commentary to Sec. 226.9(c)(2) of the January 2009 Regulation Z
Rule, except for technical changes or changes discussed below. In
addition, as discussed above, the Board is proposing to adopt new
comment 9(c)(2)(v)-5 (and to renumber comments 9(c)(2)(v)-5 through
9(c)(2)(v)-7 of the July 2009 Regulation Z Interim Final Rule
accordingly as comments 9(c)(2)(v)-6 through 9(c)(2)(v)-8).
The Board is proposing to amend comment 9(c)(2)(i)-6 to reference
examples in Sec. 226.55 that illustrate how the advance notice
requirements in Sec. 226.9(c) relate to the substantive rule regarding
rate increases in proposed Sec. 226.55. In the January 2009 Regulation
Z Rule, comment 9(c)(2)(i)-6 referred to the commentary to Sec.
226.9(g). Because, as discussed in the supplementary information to
Sec. 226.55, the Credit Card Act moved the substantive rule regarding
rate increases into Regulation Z, the Board believes that it is not
necessary to repeat the examples under Sec. 226.9.
The Board also proposes to amend comment 9(c)(2)(v)-2 (adopted in
the January 2009 Regulation Z Rule as comment 9(c)(2)(iv)-2) in order
to conform with the new substantive and notice requirements of the
Credit Card Act. This comment addresses the disclosures that must be
given when a credit program allows consumers to skip or reduce one or
more payments during the year or involves temporary reductions in
finance charges. However, new Sec. 226.9(c)(2)(v)(B) requires a
creditor to provide a notice of the period for which a temporarily
reduced rate will be in effect, as well as a disclosure of the rate
that will apply after that period, in order for a creditor to be
permitted to increase the rate at the end of the period without
providing 45 days' advance notice. Similarly, Sec. 226.55, discussed
elsewhere in this supplementary information, requires a creditor to
provide advance notice of a temporarily reduced rate if a creditor
wants to preserve the ability to raise the rate on balances subject to
that temporarily reduced rate. Accordingly, the Board is proposing
amendments to clarify that if a credit program involves temporary
reductions in an interest rate, no notice of the change in terms is
required either prior to the reduction or upon resumption of the higher
rates if these features are disclosed in advance in accordance with the
requirements of Sec. 226.9(c)(2)(v)(B). See proposed comment 55(b)-3.
The proposed comment further clarifies that if a creditor does not
provide advance notice in accordance with Sec. 226.9(c)(2)(v)(B), that
it must provide a notice that complies with the timing requirements of
Sec. 226.9(c)(2)(i) and the content and format requirements of Sec.
226.9(c)(2)(iv)(A), (B) (if applicable), and (C). The proposed comment
notes that creditors should refer to Sec. 226.55 for additional
restrictions on resuming the original rate that is applicable to credit
card accounts under an open-end (not home-secured) plan.
[[Page 54151]]
May 2009 Regulation Z Proposed Clarifications
As discussed in I. Background and Implementation of the Credit Card
Act, the Board is generally republishing the May 2009 Regulation Z
Proposed Clarifications in connection with this proposed rule.
Accordingly, the Board is republishing proposed amendments to Sec.
226.9(c)(2)(v) (proposed as Sec. 226.9(c)(2)(iv) of the May 2009
Regulation Z Proposed Clarifications) and comments 9(c)(2)-4 and
9(c)(2)(i)-3.
The Board is republishing revisions to Sec. 226.9(c)(2)(v)
(proposed in May 2009 as Sec. 226.9(c)(2)(iv)) and proposed comment
9(c)(2)-4, which clarifies the relationship between the change-in-terms
requirements of Sec. 226.9(c) and the notice provisions of Sec.
226.9(b) that apply when a creditor adds a credit feature or delivers a
credit access device for an existing open-end plan. See 74 FR 20787 for
further discussion of these proposed amendments.
Section 226.9(c)(2)(i), as proposed and under the January 2009
Regulation Z Rule, provides that the 45-day advance notice timing
requirement does not apply if the consumer has agreed to a particular
change. In this case, notice must be given before the effective date of
the change. Comment 9(c)(2)(i)-3 states that the provision is intended
for use in ``unusual instances,'' such as when a consumer substitutes
collateral or when the creditor may advance additional credit only if a
change relatively unique to that consumer is made. In May 2009, the
Board proposed to amend the comment to emphasize the limited scope of
the exception and provide that the exception applies ``solely'' to the
unique circumstances specifically identified in the comment. See 74 FR
20788. The proposed comment would also add an example of an occurrence
that would not be considered an ``agreement'' for purposes of relieving
the creditor of its responsibility to provide an advance change-in-
terms notice. This example would state that an ``agreement'' does not
include a consumer's request to reopen a closed account or to upgrade
an existing account to another account offered by the creditor with
different credit or other features. Thus, a creditor that treats an
upgrade of a consumer's account as a change in terms would be required
to provide the consumer 45 days' advance notice before increasing the
rate for new transactions or increasing the amount of any applicable
fees to the account in those circumstances.
The Board is aware that some creditors have raised concerns about
the 45-day notice requirement causing an undue delay when a consumer
requests that his or her account be changed to a different product
offered by the creditor, for example to take advantage of a rewards or
other program. The Board has sought, in part, to address these concerns
in proposed comment 5(b)(1)(i)-6, discussed above. The Board also
continues to believe that the proposed clarification to comment
9(c)(2)(i)-3 is appropriate for those circumstances in which a creditor
treats an upgrade of an account as a change-in-terms in accordance with
proposed comment 5(b)(1)(i)-6. In addition, it would be difficult to
define by regulation the circumstances under which a consumer is deemed
to have requested the account upgrade, versus circumstances in which
the upgrade is suggested by the creditor. The Board seeks further
comment on the operational and other burdens that would be associated
with the proposed revision to comment 9(c)(2)(i)-3.
9(e) Disclosures Upon Renewal of Credit or Charge Card
The Credit Card Act amended TILA Section 127(d), which sets forth
the disclosures that card issuers must provide in connection with
renewal of a consumer's credit or charge card account. 15 U.S.C.
1637(d). TILA Section 127(d) is implemented in Sec. 226.9(e), which
currently requires card issuers that assess an annual or other fee
based on inactivity or activity, on a credit card account of the type
subject to Sec. 226.5a, to provide a renewal notice before the fee is
imposed. The creditor must provide disclosures required for credit card
applications and solicitations (although not in a tabular format) and
must inform the consumer that the renewal fee can be avoided by
terminating the account by a certain date. The notice must generally be
provided at least 30 days or one billing cycle, whichever is less,
before the renewal fee is assessed on the account. Under current Sec.
226.9(e), there is an alternative delayed notice procedure where the
fee can be assessed provided the fee is reversed if the consumer is
given notice and chooses to terminate the account.
The Credit Card Act amended TILA Section 127(d) to eliminate the
provision permitting creditors to provide an alternative delayed
notice. Thus, all creditors will be required to provide the renewal
notice described in Sec. 226.9(e)(1) prior to imposition of any annual
or other periodic fee to renew a credit or charge card account of the
type subject to Sec. 226.5a, including any fee based on account
activity or inactivity. Creditors may no longer assess the fee and
provide a delayed notice offering the consumer the opportunity to
terminate the account and have the fee reversed. Accordingly, the Board
is proposing to delete Sec. 226.9(e)(2) and to renumber Sec.
226.9(e)(3) as Sec. 226.9(e)(2). The Board also proposes technical
conforming changes to comments 9(e)-7, 9(e)(2)-1 (currently comment
9(e)(3)-1), and 9(e)(2)-2 (currently comment 9(e)(3)-2).
In addition, amended TILA Section 127(d) provides that a card
issuer that has changed or amended any term of the account since the
last renewal that has not been previously disclosed must provide the
renewal disclosure, even if that card issuer does not charge a periodic
or other fee for renewal of the credit or charge card account. The
Board proposes to amend Sec. 226.9(e)(1) to provide that the renewal
notice must be provided in those circumstances. The amended language in
proposed Sec. 226.9(e)(1) would state, in part, that any card issuer
that has changed or amended any term of a cardholder's account required
to be disclosed under Sec. 226.6(b)(1) and (b)(2) that has not
previously been disclosed to the consumer, shall mail or deliver
written notice of the renewal to the cardholder. The Board proposes to
use its authority pursuant to TILA Section 105(a) to clarify that the
requirement to provide the renewal disclosures due to a change in
account terms applies only if the change has not been previously
disclosed and is a change of the type required to be disclosed in the
table provided at account opening.
The Board notes that in most cases, changes to terms required to be
disclosed pursuant to Sec. 226.6(b)(1) and (b)(2) will be required to
be disclosed 45 days in advance in accordance with Sec. 226.9(c)(2).
However, there are several types of changes to terms required to be
disclosed under Sec. 226.6(b)(1) and (b)(2) for which advance notice
is not required under Sec. 226.9(c)(2)(v)(1), including reductions in
finance and other charges and the extension of a grace period. The
Board believes that such changes are generally beneficial to the
consumer, and therefore a 45-day advance notice requirement is not
appropriate for these changes. However, the Board believes that
requiring creditors to send consumers subject to such changes a notice
prior to renewal disclosing key terms of their accounts will promote
the informed use of credit by consumers. The notice will remind
consumers of the key terms of their accounts, including any reduced
rates or extended
[[Page 54152]]
grace periods that apply, when consumers are making a decision as to
whether to renew their account and how to use the account in the
future.
The Board considered an alternative interpretation of amended TILA
Section 127(d) that would have required that the renewal disclosures be
provided for all changes in account terms that have not been previously
disclosed, even changes that are not required to be disclosed pursuant
to Sec. 226.6(b)(1) and (b)(2). Such an interpretation of the statute
would require that the renewal disclosures be given even when creditors
have made relatively minor changes to the account terms, such as by
increasing the amount of a fee to expedite delivery of a credit card.
However, the Board believes that providing a renewal notice in these
circumstances would not provide a meaningful benefit to consumers.
Amended TILA Section 127(d) requires only that the renewal disclosure
contain the information set forth in TILA Sections 127(c)(1)(A) and
(c)(4)(A), which are implemented in Sec. 226.5a(b)(1) through (b)(7).
These sections require disclosure of key terms of a credit card account
including the annual percentage rates applicable to the account, annual
or other periodic membership fees, minimum finance charges, transaction
charges on purchases, the grace period, balance computation method, and
disclosure of similar terms for charge card accounts. The Board notes
that the required disclosures all address terms required to be
disclosed pursuant to Sec. 226.6(b)(1) and (b)(2). Therefore, if the
rule required that the renewal disclosures be provided for any change
in terms, such as a change in a fee for expediting delivery of a credit
card, the renewal disclosures would not disclose the amount of the
changed fee. The Board also notes that charges imposed as part of an
open-end (not home-secured) plan that are not required to be disclosed
pursuant to Sec. 226.6(b)(1) and (b)(2) are required to be disclosed
to consumers prior to their imposition pursuant to Sec.
226.5(b)(1)(ii).
Proposed Sec. 226.9(e)(1) would further clarify the timing of the
notice requirement when a card issuer has changed a term on the account
but does not impose an annual or other periodic fee for renewal, by
stating that if the card issuer has changed or amended any term
required to be disclosed under Sec. 226.6(b)(1) and (b)(2) and such
changed or amended term has not previously been disclosed to the
consumer, the notice shall be provided at least 30 days prior to the
scheduled renewal date of the consumer's credit or charge card.
Accordingly, card issuers that do not charge periodic or other fees for
renewal of the credit or charge card account, and who have previously
disclosed any changed terms pursuant to Sec. 226.9(c)(2) are not
required to provide renewal disclosures pursuant to proposed Sec.
226.9(e).
9(g) Increase in Rates Due to Delinquency or Default or as a Penalty
9(g)(1) Increases Subject to This Section
The Board is proposing to adopt Sec. 226.9(g) substantially as
adopted in the January 2009 Regulation Z Rule, except as required to be
amended for conformity with the Credit Card Act. Proposed Sec.
226.9(g), in combination with amendments to Sec. 226.9(c), implements
the 45-day advance notice requirements for rate increases in new TILA
Section 127(i). This approach is consistent with the Board's January
2009 Regulation Z Rule and the July 2009 Regulation Z Interim Final
Rule, each of which included change-in-terms notice requirements in
Sec. 226.9(c) and increases in rates due to the consumer's default or
delinquency or as a penalty for events specified in the account
agreement in Sec. 226.9(g). The general rule is set forth in proposed
Sec. 226.9(g)(1) and provides that for open-end plans other than home-
equity plans subject to the requirements of Sec. 226.5b, a creditor
must provide a written notice to each consumer who may be affected when
a rate is increased due to a delinquency or default or as a penalty for
one or more events specified in the account agreement.
9(g)(2) Timing of Written Notice
Proposed paragraph (g)(2) sets forth the timing requirements for
the notice described in paragraph (g)(1), and states that the notice
must be provided at least 45 days prior to the effective date of the
increase. The notice must, however, be provided after the occurrence of
the event that gave rise to the rate increase. That is, a creditor must
provide the notice after the occurrence of the event or events that
trigger a specific impending rate increase and may not send a general
notice reminding the consumer of the conditions that may give rise to
penalty pricing. For example, a creditor may send a consumer a notice
pursuant to Sec. 226.9(g) if the consumer makes a payment that is one
day late disclosing a rate increase applicable to new transactions, in
accordance with Sec. 226.55. However, a more general notice reminding
a consumer who makes timely payments that paying late may trigger
imposition of a penalty rate would not be sufficient to meet the
requirements of Sec. 226.9(g) if the consumer subsequently makes a
late payment.
9(g)(3) Disclosure Requirements for Rate Increases
Proposed paragraph (g)(3) sets forth the content and formatting
requirements for notices provided pursuant to Sec. 226.9(g). Proposed
Sec. 226.9(g)(3)(i)(A) sets forth the content requirements applicable
to all open-end (not home-secured) credit plans. Similar to the
approach discussed above with regard to Sec. 226.9(c)(2)(iv), the
Board is proposing a separate Sec. 226.9(g)(3)(i)(B) that would
contain additional content requirements required under the Credit Card
Act that are applicable only to credit card accounts under an open-end
(not home-secured) consumer credit plan.
Proposed Sec. 226.9(g)(3)(i)(A) provides that the notice must
state that the delinquency, default, or penalty rate has been
triggered, and the date on which the increased rate will apply. The
notice also must state the circumstances under which the increased rate
will cease to apply to the consumer's account or, if applicable, that
the increased rate will remain in effect for a potentially indefinite
time period. In addition, the notice must include a statement
indicating to which balances the delinquency or default rate or penalty
rate will be applied, and, if applicable, a description of any balances
to which the current rate will continue to apply as of the effective
date of the rate increase, unless a consumer fails to make a minimum
periodic payment within 60 days from the due date for that payment.
Proposed Sec. 226.9(g)(3)(i)(B) sets forth additional content that
credit card issuers must disclose if the rate increase is due to the
consumer's failure to make a minimum periodic payment within 60 days
from the due date for that payment. In those circumstances, the notice
must state the reason for the increase and disclose that the increase
will cease to apply if the creditor receives six consecutive required
minimum periodic payments on or before the payment due date, beginning
with the first payment due following the effective date of the
increase. Proposed Sec. 226.9(g)(3)(i)(B) implements notice
requirements contained in amended TILA Section 171(b)(4), as adopted by
the Credit Card Act, and implemented in proposed Sec. 226.55(b)(4), as
discussed below.
Unlike Sec. 226.9(g)(3) of the July 2009 Regulation Z Interim
Final Rule, the notice proposed under Sec. 226.9(g)(3) need not
disclose the consumer's right to reject the application of the penalty
rate. For the reasons discussed in the
[[Page 54153]]
supplementary information to Sec. 226.9(h), the Board believes that a
right to reject penalty rate increases is unnecessary in light of the
new substantive rule on rate increases in proposed Sec. 226.55.
Accordingly, for penalty rate increases no disclosure of a right to
reject need be provided.
Proposed paragraph (g)(3)(ii) sets forth the formatting
requirements for a rate increase due to default, delinquency, or as a
penalty. These requirements are substantively equivalent to the
formatting rule adopted in Sec. 226.9(g)(3)(ii) of the January 2009
Regulation Z Rule and would require the disclosures required under
Sec. 226.9(g)(3)(i) to be set forth in the form of a table. As
discussed elsewhere in this Federal Register, the formatting
requirements are not directly compelled by the Credit Card Act, and
consequently the Board is considering retaining the original July 1,
2010 effective date of the January 2009 Regulation Z Rule for the
tabular formatting requirements.
The Board is proposing to amend Sample G-21 from the January 2009
Regulation Z Rule (redesignated as Sample G-22) and to add a new sample
G-23 to illustrate how a card issuer may comply with the requirements
of proposed Sec. 226.9(g)(3)(i). The Board would amend references to
these samples in comment 9(g)-8 accordingly. Proposed Sample G-22 is a
disclosure of a rate increase applicable to a consumer's credit card
account based on a late payment that is fewer than 60 days late. The
sample explains when the new rate will apply to new transactions and to
which balances the current rate will continue to apply. Sample G-23
discloses a rate increase based on a delinquency of more than 60 days,
and includes the required content regarding the consumer's ability to
cure the penalty pricing by making the next six consecutive minimum
payments on time.
9(g)(4) Exceptions
Proposed Sec. 226.9(g)(4) sets forth an exception to the advance
notice requirements of Sec. 226.9(g), which is consistent with an
analogous exception contained in the January 2009 Regulation Z Rule and
July 2009 Regulation Z Interim Final Rule. Proposed Sec. 226.9(g)(4)
clarifies the relationship between the notice requirements in Sec.
226.9(c)(vi) and (g)(1) when the creditor decreases a consumer's credit
limit and under the terms of the credit agreement a penalty rate may be
imposed for extensions of credit that exceed the newly decreased credit
limit. This exception is substantively equivalent to Sec.
226.9(g)(4)(ii) of the January 2009 Regulation Z Rule. In addition, it
is generally equivalent to Sec. 226.9(g)(4)(ii) of the July 2009
Regulation Z Interim Final Rule, except that the proposal implements
content requirements analogous to those in proposed Sec.
226.9(g)(3)(i) that pertain to whether the rate applies to outstanding
balances or only to new transactions. See 74 FR 5355 for additional
discussion of this exception.
As discussed in the supplementary information to Sec.
226.9(c)(2)(v), a second exception for an increase in an annual
percentage rate due to the failure of a consumer to comply with a
workout or temporary hardship arrangement contained in the July 2009
Regulation Z Interim Final Rule has been moved to Sec.
226.9(c)(2)(v)(D).
The Board notes that one respect in which proposed Sec.
226.9(g)(4) differs from the January 2009 Regulation Z Rule is that it
does not contain an exception to the 45-day advance notice requirement
for penalty rate increases if the consumer's account becomes more than
60 days delinquent prior to the effective date of a rate increase
applicable to new transactions, for which a notice pursuant to Sec.
226.9(g) has already been provided. As discussed in the supplementary
information to proposed Sec. 226.9(g)(3)(i), amended TILA Section
171(b)(4)(A) requires that specific content be disclosed when a
consumer's rate is increased based on a failure to make a minimum
payment within 60 days of the due date for that payment. Specifically,
TILA Section 171(b)(4)(A) requires the notice to state the reasons for
the increase and that the increase will terminate no later than six
months from the effective date of the change, provided that the
consumer makes the minimum payments on time during that period. The
Board believes that the intent of this provision is to create a right
for consumers whose rate is increased based on a payment that is more
than 60 days late to cure that penalty pricing in order to return to a
lower interest rate.
The Board believes that the disclosures associated with this
ability to cure will be the most useful to consumers if they receive
them after they have already triggered such penalty pricing based on a
delinquency of more than 60 days. Under the Board's proposed rule,
creditors will be required to provide consumers with a notice
specifically disclosing a rate increase based on a delinquency of more
than 60 days, at least 45 days prior to the effective date of that
increase. The notice will state the effective date of the rate
increase, which will give consumers certainty as to the applicable 6-
month period during which they must make timely payments in order to
return to the lower rate. If creditors were permitted to raise the rate
applicable to all of a consumer's balances without providing an
additional notice, consumers may be unsure exactly when their account
became more than 60 days delinquent and therefore may not know the
period in which they need to make timely payments in order to return to
a lower rate.
In addition, the Board notes that the Credit Card Act, as
implemented in proposed Sec. 226.55(b)(4), does not permit a creditor
to raise the interest rate applicable to a consumer's existing balances
unless that consumer fails to make a minimum payment within 60 days
from the due date. This differs from the Board's January 2009 FTC Act
Rule, which permitted such a rate increase based on a failure to make a
minimum payment within 30 days from the due date. The exception in
Sec. 226.9(g)(4)(iii) of the January 2009 Regulation Z Rule reflected
the Board's understanding that some creditors might impose penalty
pricing on new transactions based on a payment that is one or several
days late, and therefore it might be a relatively common occurrence for
consumers' accounts to become 30 days delinquent within the 45-day
notice period provided for a rate increase applicable to new
transactions. The Board believes that, given the 60-day period imposed
by the Credit Card Act and Sec. 226.55(b)(4), it will be less common
for consumers' accounts to become delinquent within the original 45-day
notice period provided for new transactions.
Proposed Changes to Commentary to Sec. 226.9(g)
The commentary to Sec. 226.9(g) generally is consistent with the
commentary to Sec. 226.9(g) of the January 2009 Regulation Z Rule,
except for technical changes. In addition, the Board is proposing to
amend comment 9(g)-1 to reference examples in Sec. 226.55 that
illustrate how the advance notice requirements in Sec. 226.9(g) relate
to the substantive rule regarding rate increases applicable to existing
balances. Because, as discussed in the supplementary information to
Sec. 226.55, the Credit Card Act placed the substantive rule regarding
rate increases into TILA and Regulation Z, the Board believes that it
is not necessary to repeat the examples under Sec. 226.9.
[[Page 54154]]
9(h) Consumer Rejection of Certain Significant Changes in Terms
In the July 2009 Regulation Z Interim Final Rule, the Board adopted
Sec. 226.9(h), which provides that, in certain circumstances, a
consumer may reject significant changes to account terms and increases
in annual percentage rates. See 74 FR 36087-36091, 36096, 36099-36101.
Section 226.9(h) implemented new TILA Section 127(i)(3) and (4),
which--like the other provisions of the Credit Card Act implemented in
the July 2009 Regulation Z Interim Final Rule--went into effect on
August 20, 2009. See Credit Card Act Sec. 101(a) (new TILA Section
127(i)(3)-(4)). However, several aspects of Sec. 226.9(h) were based
on revised TILA Section 171, which--like the other statutory provisions
addressed in this proposed rule--goes into effect on February 22, 2010.
Accordingly, because the Board is now implementing revised TILA Section
171 in proposed Sec. 226.55, the Board proposes to modify Sec.
226.9(h) for clarity and consistency.
Application of Right To Reject to Increases in Annual Percentage Rate
Because revised TILA Section 171 renders the right to reject
redundant in the context of rate increases, the Board proposes to amend
Sec. 226.9(h) to apply that right only to other significant changes to
an account term. Currently, Sec. 226.9(h) provides that, if a consumer
rejects an increase in an annual percentage rate prior to the effective
date stated in the Sec. 226.9(c) or (g) notice, the creditor cannot
apply the increased rate to transactions that occurred within fourteen
days after provision of the notice. See Sec. 226.9(h)(2)(i),
(h)(3)(ii). However, under revised TILA Section 171 (as implemented in
proposed Sec. 226.55), a creditor is generally prohibited from
applying an increased rate to transactions that occurred within
fourteen days after provision of a Sec. 226.9(c) or (g) notice
regardless of whether the consumer rejects that increase. Similarly,
although the exceptions in Sec. 226.9(h)(3)(i) and revised TILA
Section 171(b)(4) permit a creditor to apply an increased rate to an
existing balance when an account becomes more than 60 days delinquent,
revised TILA Section 171(b)(4)(B) (as implemented in proposed Sec.
226.55(b)(4)(ii)) provides that the creditor must terminate the
increase if the consumer makes the next six payments on or before the
payment due date. Thus, with respect to rate increases, the right to
reject does not provide consumers with any meaningful protections
beyond those provided by revised TILA Section 171. Accordingly, the
Board believes that, on or after February 22, 2010, the right to reject
will be unnecessary for rate increases. Indeed, once revised TILA
Section 171 becomes effective, notifying consumers that they have a
right to reject a rate increase could be misleading insofar as it could
imply that a consumer who does so will receive some additional degree
of protection (such as protection against increases in the rate that
applies to future transactions).
Accordingly, the Board proposes to remove references to rate
increases from Sec. 226.9(h) and its commentary. Similarly, because
the exception in Sec. 226.9(h)(3)(ii) for transactions that occurred
more than fourteen days after provision of the notice is based on
revised TILA Section 171(d),\15\ the Board proposes to remove that
exception from Sec. 226.9(h) and incorporate it into proposed Sec.
226.55. Finally, the Board proposes to redesignate comment 9(h)(3)-1 as
comment 9(h)-1 and amend it to clarify that Sec. 226.9(h) does not
apply to increases in an annual percentage rate.
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\15\ See 74 FR 36089-36090.
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Repayment Restrictions
Because the repayment restrictions in Sec. 226.9(h)(2)(iii) are
based on revised TILA Section 171(c), the Board believes that those
restrictions should be implemented with the rest of revised Section 171
in proposed Sec. 226.55. Section 226.9(h)(2)(iii) implemented new TILA
Section 127(i)(4), which expressly incorporated the repayment methods
in revised TILA Section 171(c)(2). Because the rest of revised Section
171 would not be effective until February 22, 2010, the July 2009
Regulation Z Interim Final Rule implemented new TILA Section 127(i)(4)
by incorporating the repayment restrictions in Section 171(c)(2) into
Sec. 226.9(h)(2)(iii). See 74 FR 36089. However, the Board believes
that--once revised TILA Section 171 becomes effective on February 22,
2010--these repayment restrictions should be moved to Sec. 226.55(c).
In addition to being duplicative, implementing revised TILA Section
171(c)'s repayment methods in both Sec. 228.9(h) and Sec. 226.55(c)
would create the risk of inconsistency. Furthermore, because these
restrictions will generally be of greater importance in the context of
rate increases than other significant changes in terms, the Board
believes they should be located in proposed Sec. 226.55. Accordingly,
the Board proposes to move the provisions and commentary regarding
repayment to proposed Sec. 226.55(c)(2) and to amend Sec.
226.9(h)(2)(iii) to include a cross-reference to Sec. 226.55(c)(2).
The Board also proposes to amend comment 9(h)(2)(iii)-1 to clarify
the application of the repayment methods listed in proposed Sec.
226.55(c)(2) in the context of a rejection of a significant change in
terms. As revised, this comment would clarify that, when applying the
methods listed in Sec. 226.55(c)(2) pursuant to Sec.
226.9(h)(2)(iii), a creditor may utilize the date on which the creditor
was notified of the rejection or a later date (such as the date on
which the change would have gone into effect but for the rejection).
For example, when a creditor increases an annual percentage rate
pursuant to Sec. 226.55(b)(3), Sec. 226.55(c)(2)(ii) permits the
creditor to establish an amortization period for a protected balance of
not less than five years, beginning no earlier than the effective date
of the increase. Accordingly, when a consumer rejects a significant
change in terms pursuant to Sec. 226.9(h)(1), Sec. 226.9(h)(2)(iii)
permits the creditor to establish an amortization period for the
balance on the account of not less than five years, beginning no
earlier than the date on which the creditor was notified of the
rejection. The comment provides an illustrative example.
In addition, comment 9(h)(2)(iii)-2 would be revised to clarify the
meaning of ``the balance on the account'' that is subject to the
repayment restrictions in proposed Sec. 226.55(c)(2). The revised
comment would clarify that, when applying the methods listed in Sec.
226.55(c)(2) pursuant to Sec. 226.9(h)(2)(iii), the provisions in
Sec. 226.55(c)(2) and the guidance in the commentary to Sec.
226.55(c)(2) regarding protected balances also apply to a balance on
the account subject to Sec. 226.9(h)(2)(iii). Furthermore, the revised
comment would clarify that, if a creditor terminates or suspends credit
availability based on a consumer's rejection of a significant change in
terms, the balance on the account for purposes of Sec.
226.9(h)(2)(iii) is the balance at the end of the day on which credit
availability was terminated or suspended. However, if a creditor does
not terminate or suspend credit availability, the balance on the
account for purposes of Sec. 226.9(h)(2)(iii) is the balance on a date
that is not earlier than the date on which the creditor was notified of
the rejection. An example is provided.
Additional Revisions to Commentary
Consistent with the proposed revisions discussed above, the Board
proposes to make non-substantive,
[[Page 54155]]
technical amendments to the commentary to Sec. 226.9(h). In addition,
for organizational reasons, the Board proposes to renumber comments
9(h)(2)(ii)-1 and -2. Finally, the Board proposes to amend comment
9(h)(2)(ii)-2 to clarify the application of the prohibition in Sec.
226.9(h)(2)(ii) on imposing a fee or charge solely as a result of the
consumer's rejection of a significant change in terms. In particular,
the revised comment would clarify that, if credit availability is
terminated or suspended as a result of the consumer's rejection, a
creditor is prohibited from imposing a periodic fee that was not
charged before the consumer rejected the change (such as a closed
account fee).
Section 226.10 Payments
Section 226.10, which implements TILA Section 164, currently
contains rules regarding the prompt crediting of payments and is
entitled ``Prompt crediting of payments.'' 15 U.S.C. 1666c. As is
discussed further in the section-by-section analysis, the Board is
proposing to implement several new provisions of the Credit Card Act
regarding payments in Sec. 226.10, such as requirements regarding the
permissibility of certain fees to make expedited payments. Several of
these rules do not pertain directly to the prompt crediting of
payments, but more generally to the conditions that may be imposed upon
payments. Accordingly, the Board is proposing to amend the title of
Sec. 226.10 to ``Payments'' to more accurately reflect the content of
amended Sec. 226.10.
226.10(b) Specific Requirements for Payments
Cut-Off Times for Payments
TILA Section 164 states that payments received by the creditor from
a consumer for an open-end consumer credit plan shall be posted
promptly to the account as specified in regulations of the Board. The
Credit Card Act amended TILA Section 164 to state that the Board's
regulations shall prevent a finance charge from being imposed on any
consumer if the creditor has received the consumer's payment in readily
identifiable form, by 5 p.m. on the date on which such payment is due,
in the amount, manner, and location indicated by the creditor to avoid
the imposition of such a finance charge. While amended TILA Section 164
generally mirrors current TILA Section 164, the Credit Card Act added
the reference to a 5 p.m. cut-off time for payments received on the due
date.
TILA Section 164 is implemented in Sec. 226.10. The Board's
January 2009 Regulation Z Rule addressed cut-off times by providing
that a creditor may specify reasonable requirements for payments that
enable most consumers to make conforming payments. Section
226.10(b)(2)(ii) of the January 2009 Regulation Z Rule stated that a
creditor may set reasonable cut-off times for payments to be received
by mail, by electronic means, by telephone, and in person. Amended
Sec. 226.10(b)(2)(ii) provided a safe harbor for the reasonable cut-
off time requirement, stating that it would be reasonable for a
creditor to set a cut-off time for payments by mail of 5 p.m. on the
payment due date at the location specified by the creditor for the
receipt of such payments. While this safe harbor referred only to
payments received by mail, the Board noted in the supplementary
information to the January 2009 Regulation Z Rule that it would
continue to monitor other methods of payment in order to determine
whether similar guidance was necessary. See 74 FR 5357.
As amended by the Credit Card Act, TILA Section 164 differs from
Sec. 226.10 of the January 2009 Regulation Z Rule in several respects.
First, amended TILA Section 164 applies the requirement that a creditor
treat a payment received by 5 p.m. on the due date as timely to all
forms of payment, not only payments received by mail. In contrast, the
safe harbor regarding cut-off times that the Board provided in Sec.
226.10(b)(2)(ii) of the January 2009 Regulation Z Rule directly
addressed only mailed payments. Second, while the Board's January 2009
Regulation Z Rule left open the possibility that in some circumstances,
cut-off times earlier than 5 p.m. might be considered reasonable,
amended TILA Section 164 prohibits cut-off times earlier than 5 p.m. on
the due date in all circumstances.
The Board proposes to implement amended TILA Section 164 in a
revised Sec. 226.10(b)(2)(ii). Proposed Sec. 226.10(b)(2)(ii) would
state that a creditor may set reasonable cut-off times for payments to
be received by mail, by electronic means, by telephone, and in person,
provided that such cut-off times must be no earlier than 5 p.m. on the
payment due date at the location specified by the creditor for the
receipt of such payments. Creditors would be free to set later cut-off
times; however, no cut-off time would be permitted to be earlier than 5
p.m. This paragraph, in accordance with amended TILA Section 164, would
apply to payments received by mail, electronic means, telephone, or in
person, not only payments received by mail.
Consistent with the January 2009 Regulation Z Rule, proposed Sec.
226.10(b)(2)(ii) refers to the time zone of the location specified by
the creditor for the receipt of payments. The Board believes that this
clarification is necessary to provide creditors with certainty
regarding how to comply with the proposed rule, given that consumers
may reside in different time zones from the creditor. The Board
believes that a rule requiring a creditor to process payments
differently based on the time zone at each consumer's billing address
could impose significant operational burdens on creditors. The Board
solicits comment on whether this clarification continues to be
appropriate for payments made by methods other than mail.
The Board notes that proposed Sec. 226.10(b)(2)(ii) would
generally apply to payments made in person. However, as discussed
below, the Credit Card Act amends TILA Section 127(b)(12) to establish
a special rule for payments on credit card accounts made in person at
branches of financial institutions, which the Board proposes to
implement in new Sec. 226.10(b)(3). Notwithstanding the general rule
in proposed Sec. 226.10(b)(2)(ii), card issuers that are financial
institutions that accept payments in person at a branch or office may
not impose a cut-off time earlier than the close of business of that
office or branch, even if the office or branch closes later than 5 p.m.
Accordingly, a financial institution that accepts payments at a branch
or office that closes at 6 p.m. would be required to treat all payments
received in person at the branch or office prior to 6 p.m. on the due
date as timely. The Board notes that this rule refers only to payments
made in person at the branch or office. Payments made by other means
such as by telephone, electronically, or by mail would be subject to
the general rule prohibiting cut-off times prior to 5 p.m., regardless
of when a financial institution's branches or offices close. The Board
notes that there may be creditors that are not financial institutions
that accept payments in person, such as at a retail location, and
believes that it is necessary for proposed Sec. 226.10(b)(2)(ii) to
refer to payments made in person in order to address cut-off times for
such creditors that are not also subject to proposed Sec.
226.10(b)(3).
The Board notes that the Credit Card Act applies the 5 p.m. cut-off
time requirement to all open-end credit plans, including open-end
(home-secured) credit. Accordingly, proposed Sec. 226.10(b)(2)(ii)
would apply to all
[[Page 54156]]
open-end credit. This is consistent with current Sec. 226.10, which
applies to all open-end credit.
Payments Made at Financial Institution Branches
The Credit Card Act amends TILA Section 127(b)(12) to provide that,
for creditors that are financial institutions which maintain branches
or offices at which payments on credit card accounts are accepted in
person, the date on which a consumer makes a payment on the account at
the branch or office is the date on which the payment is considered to
have been made for purposes of determining whether a late fee or charge
may be imposed. 15 U.S.C. 1637(b)(12). The Board is proposing to
implement the requirements of amended TILA Section 127(b)(12) that
pertain to payments made at branches or offices of a financial
institution in new Sec. 226.10(b)(3). Section 226.10(b)(3), as adopted
in the January 2009 Regulation Z Rule, would accordingly be renumbered
as Sec. 226.10(b)(4).
Proposed Sec. 226.10(b)(3)(i) states that a card issuer that is a
financial institution shall not impose a cut-off time earlier than the
close of business for payments made in person on a credit card account
under an open-end (not home-secured) consumer credit plan at any branch
or office of the card issuer at which such payments are accepted. The
proposed regulation further states that payments made in person at a
branch or office of the financial institution during the business hours
of that branch or office shall be considered received on the date on
which the consumer makes the payment. Proposed Sec. 226.10(b)(3)
interprets amended TILA Section 127(b)(12) as requiring card issuers
that are financial institutions to treat in-person payments they
receive at branches or offices during business hours as conforming
payments that must be credited as of the day the consumer makes the in-
person payment. The Board believes that this is the appropriate reading
of amended TILA Section 127(b)(12) because it is consistent with
consumer expectations that in-person payments made at a branch of the
financial institution will be credited on the same day that they are
made.
The Board notes that neither the Credit Card Act nor TILA defines
``financial institution.'' In order to give clarity to card issuers,
the Board proposes to adopt a definition of ``financial institution,''
for purposes of Sec. 226.10(b)(3), in a new Sec. 226.10(b)(3)(ii).
Proposed Sec. 226.10(b)(3)(ii) would state that ``financial
institution'' has the same meaning as ``depository institution'' as
defined in the Federal Deposit Insurance Act (12 U.S.C. 1813(c)). The
Board believes that this definition effectuates the purposes of amended
TILA Section 127(b)(12) by including all banks and savings
associations, while excluding entities such as retailers that should
not be considered ``financial institutions'' for purposes of proposed
Sec. 226.10(b)(3). The Board solicits comment on whether an
alternative definition would be appropriate. In particular, the Board
solicits comment on whether there are other credit card issuers that
should be considered ``financial institutions'' for purposes of the
rule.
The Board also is proposing a new comment 10(b)-5 to clarify the
application of proposed Sec. 226.10(b)(3) for payments made at point
of sale. Proposed comment 10(b)-5 would state that if a creditor that
is a financial institution issues a credit card that can be used only
for transactions with a particular merchant or merchants, and a
consumer is able to make a payment on that credit card account at a
retail location maintained by such a merchant, that retail location is
not considered to be a branch or office of the creditor for purposes of
Sec. 226.10(b)(3). The Board believes that the intent of TILA Section
127(b)(12) is to apply only to payments made at a branch or office of
the creditor, not to payments made at a location maintained by a third
party that is not the creditor. This comment is intended to clarify
that this rule does not apply when a retailer accepts payments at its
stores for a co-branded or private label credit card that is issued by
a separate financial institution.
Finally, the Board also is proposing a new comment 10(b)-6 to
clarify what constitutes a payment made ``in person'' at a branch or
office of a financial institution. Proposed comment 10(b)-6 would state
that for purposes of Sec. 226.10(b)(3), payments made in person at a
branch or office of a financial institution include payments made with
the direct assistance of, or to, a branch or office employee, for
example a teller at a bank branch. In contrast, the comment would
provide that a payment made at the bank branch without the direct
assistance of a branch or office employee, for example a payment placed
in a branch or office mail slot, is not a payment made in person for
purposes of Sec. 226.10(b)(3). The Board believes that this is
consistent with consumer expectations that payments made with the
assistance of a financial institution employee will be credited
immediately, while payments that are placed in a mail slot or other
receptacle at the branch or office may require additional processing
time.
10(d) Crediting of Payments When Creditor Does Not Receive or Accept
Payments on Due Date
The Credit Card Act adopted a new TILA Section 127(o) that
provides, in part, that if the payment due date for a credit card
account under an open-end consumer credit plan is a day on which the
creditor does not receive or accept payments by mail (including
weekends and holidays), the creditor may not treat a payment received
on the next business day as late for any purpose. 15 U.S.C. 1637(o).
New TILA Section 127(o) is similar to Sec. 226.10(d) of the Board's
January 2009 Regulation Z Rule, with two notable differences. Amended
Sec. 226.10(d) of the January 2009 Regulation Z Rule stated 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.
In contrast, new TILA Section 127(o) provides that if the due date is a
day on which the creditor does not receive or accept payments by mail,
the creditor may not treat a payment received the next business day as
late for any purpose. TILA Section 127(o) applies to payments made by
any method on a due date which is a day on which the creditor does not
receive or accept mailed payments, and is not limited to payments
received the next business day by mail. Second, new TILA Section 127(o)
applies only to credit card accounts under an open-end consumer plan,
while Sec. 226.10(d) of the January 2009 rule applies to all open-end
consumer credit.
The Board is proposing to implement new TILA Section 127(o) in an
amended Sec. 226.10(d). The general rule in proposed Sec. 226.10(d)
would track the statutory language of new TILA Section 127(o) to state
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 generally not
treat a payment received by any method the next business day as late
for any purpose. The Board is proposing, however, to provide that if
the creditor accepts or receives payments made by a method other than
mail, such as electronic or telephone payments, a due date on which the
creditor does not receive or accept payments by mail, it is not
required to treat a payment made by that method on the next business
day as timely. The Board is proposing this clarification using its
authority under TILA Section 105(a) to make
[[Page 54157]]
adjustments necessary to effectuate the purposes of TILA. 15 U.S.C.
1604(a).
The Board believes that it is not the intent of new TILA Section
127(o) to permit consumers who can make timely payments by methods
other than mail, such as payments by phone, to have an extra day after
the due date to make payments using those methods without those
payments being treated as late. Rather, the Board believes that new
TILA Section 127(o) was intended to address those limited circumstances
in which a consumer cannot make a timely payment on the due date, for
example if it falls on a weekend or holiday and the creditor does not
accept or receive payments on that date. In those circumstances,
without the protections of new TILA Section 127(o), the consumer would
have to make a payment one or more days in advance of the due date in
order to have that payment treated as timely. The Credit Card Act
provides other protections designed to ensure that consumers have
adequate time to make payments, such as amended TILA Section 163, which
was implemented in Sec. 226.5(b) in the July 2009 Regulation Z Interim
Final Rule, which generally requires that creditors mail or deliver
periodic statements to consumers at least 21 days in advance of the due
date. Therefore, proposed Sec. 226.10(d) would provide that if a
creditor receives or accepts payments by a method other than mail on
the due date, the creditor need not treat payments made by that method
on the next business day as timely, even if the creditor does not
receive or accept mailed payments on the due date. For example, if a
creditor receives or accepts electronic payments on a Sunday due date,
that creditor need not treat as timely an electronic payment made on
the following Monday, even if it does not receive or accept payments by
mail on that Sunday due date.
Finally, the Board is proposing to apply amended Sec. 226.10(d) to
all open-end consumer credit plans, not just credit card accounts, even
though new TILA Section 127(o) applies only to credit card accounts.
The Board believes that it is appropriate to have one consistent rule
regarding the treatment of payments when the due date falls on a date
on which the creditor does not receive or accept payments by mail. The
Board believes that that Regulation Z should treat payments on an open-
end plan that is not a credit card account the same as payments on a
credit card account. Regardless of the type of open-end plan, if the
payment due date is a day on which the creditor does not accept or
receive payments by mail, a consumer should not be required to make
payments prior to the due date in order for them to be treated as
timely. This is consistent with Sec. 226.10(d) of the January 2009
Regulation Z Rule, which set forth one consistent rule for all open-end
credit.
10(e) Limitations on Fees Related to Method of Payment
The Credit Card Act adopted new TILA Section 127(l) which generally
prohibits creditors, in connection with a credit card account under an
open-end consumer credit plan, from imposing a separate fee to allow a
consumer to repay an extension of credit or pay a finance charge,
unless the payment involves an expedited service by a customer service
representative. 15 U.S.C. 1637(l). The Board is proposing to implement
TILA Section 127(l) in Sec. 226.10(e). Proposed Sec. 226.10(e) would
generally track the statutory language of new TILA Section 127(l) and
would state that, for credit card accounts under an open-end (not home-
secured) consumer credit plan, a creditor may not impose a separate fee
to allow consumers to make a payment by any method, such as mail,
electronic, or telephone payments, unless such payment method involves
an expedited service by a customer service representative of the
creditor. The text of proposed Sec. 226.10(e) differs from the text of
TILA Section 127(l), in order to clarify that a separate fee for any
payment made to an account is prohibited, with the exception of a
payment involving expedited service by a customer service
representative. See 15 U.S.C. 1604(a).
The Board believes that the intent of new TILA Section 127(l) is to
prohibit the imposition of a separate fee for making any payment,
unless the payment transaction involves expedited service by a customer
service representative. Accordingly, the Board notes that proposed
Sec. 226.10(e) would cover all methods of payment, such as mail,
electronic, and telephone payments. Under proposed Sec. 226.10(e),
consistent with TILA Section 127(i), creditors would be permitted to
charge a separate fee only for those payment transactions that involve
expedited service by a customer service representative. A creditor,
however, would not be permitted to charge a separate fee for payment
transactions that do not involve a customer service representative,
such as payments sent by mail.
The Board is proposing several comments to provide guidance to
creditors in complying with Sec. 226.10(e). Proposed comment 10(e)-1
would clarify that the term ``separate fee'' means any fee imposed on a
consumer for making a single payment to the consumer's account.
Proposed comment 10(e)-1 would clarify, however, that a fees or charge
imposed if payment is made after the due date, such as a late fee or
finance charge, is not a ``separate fee to allow consumers to make a
payment'' for purposes of Sec. 226.10(e).
The Board also proposes to adopt comment 10(e)-2, which clarifies
that the term ``expedited'' means crediting a payment to the account
the same day or, if the payment is received after the creditor's cut-
off time, the next business day.\16\ For example, if a creditor accepts
a nonconforming payment (such as a payment mailed to a branch office
when it had specified the payment be sent to a different location) and
a customer service representative credits the payment to the consumer's
account the same day, the creditor may impose a separate fee. The Board
believes that this standard for determining whether service is
expedited will promote consistent practices among different creditors
and will provide certainty as to how to comply with proposed Sec.
226.10(e). In contrast, it would be difficult to apply a standard
defining expedited service in relation to the time required for a
payment to post using standard mail service because the length of time
for delivery by mail for a given consumer or creditor may vary. In
addition, a standard for determining whether service is expedited based
on proximity to the due date would not address those circumstances in
which consumers may want to make an expedited payment to the account in
advance of the due date, such as in order to increase the amount of
available credit.
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\16\ The Board notes that any cut-off time specified by the
creditor must comply with proposed Sec. 226.10(b)(2)(ii), discussed
earlier in the supplementary information. Furthermore, the Board
notes that the creditor must also comply with Sec. 226.10(a), which
generally requires a creditor to credit payments to the consumer's
account as of the date of receipt, except when a delay in crediting
does not result in a finance or other charge.
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Proposed comment 10(e)-3 would clarify that expedited service by a
live customer service representative of the creditor would be required
in order for a creditor to charge a separate fee to allow consumers to
make a payment. Payments made on the account with the assistance of a
live representative or agent may include payments made in person, on
the telephone, or by electronic means. The Board understands that
automated systems, such as a voice response unit or an interactive
voice response system, are widely used to permit customers to
[[Page 54158]]
make a payment by telephone or other electronic means. The proposed
comment clarifies that a customer service representative does not
include automated payment systems because these transactions do not
involve a live customer service representative.
Section 226.10(f) Changes by Card Issuer
The Credit Card Act adopted new TILA Section 164(c), which provides
that a card issuer may not impose any late fee or finance charge for a
late payment on a credit card account if a card issuer makes ``a
material change in the mailing address, office, or procedures for
handling cardholder payments, and such change causes a material delay
in the crediting of a cardholder payment made during the 60-day period
following the date on which the change took effect.'' 15 U.S.C.
1666c(c). The Board proposes to implement new TILA Section 164(c) in
proposed Sec. 226.10(f).
The text of proposed Sec. 226.10(f) generally follows the language
provided in new TILA Section 164(c) with a modification to clarify the
meaning of ``office.'' With respect to a change in office, the Board
believes the intent of Section 164(c) is to apply only to changes in
the address of a branch or office at which payments on a credit card
account are accepted. See 15 U.S.C. 1604(a). Accordingly, proposed
Sec. 226.10(f) would prohibit a credit card issuer from imposing any
late fee or finance charge for a late payment on a credit card account
if a card issuer makes a material change in the address for receiving
cardholder payments or procedures for handling cardholder payments, and
such change causes a material delay in the crediting of a payment made
during the 60-day period following the date on which the change took
effect. As an initial matter, the Board notes that proposed Sec.
226.10(f) would apply only to credit card accounts under an open-end
(not home-secured) consumer credit plan, consistent with the approach
the Board has taken with regard to other provisions of the Credit Card
Act applicable to credit card accounts.
The Board proposes to adopt comment 10(f)-1 to clarify that
``address for receiving payment'' means a mailing address for receiving
payment, such as a post office box, or the address of a branch or
office at which payments on credit card accounts are accepted.
The Board is also proposing comment 10(f)-2 to provide guidance to
creditors in determining whether a change or delay is material.
Proposed comment 10(f)-2 would clarify that ``material change'' means
any change in address for receiving payment or procedures for handling
cardholder payments which causes a material delay in the crediting of a
payment. Proposed comment 10(f)-2 would further clarify that a
``material delay'' means any delay in crediting a payment to a
consumer's account which would result in a late payment and the
imposition of a late fee or finance charge. The Board understands that
it may be difficult for a card issuer to ascertain, for any given
change in the address for receiving payment or procedures for handling
payments, whether that change did in fact cause a material delay in the
crediting of a consumer's payment.
Proposed comment 10(f)-3 would provide card issuers with a safe
harbor, which the Board believes will give card issuers certainty in
how to comply with the proposed rule. The Board requests comment on
other reasonable methods that card issuers may use in complying with
proposed Sec. 226.10(f). In order to provide additional guidance to
creditors in complying with this rule, proposed comment 10(f)-4
provides illustrative examples consistent with proposed Sec.
226.10(f). For example, assume that a card issuer changes the mailing
address for receiving payments by mail from one post office box number
to another post office box number. The card issuer continues to use
both post office box numbers for the collection of payments received by
mail. The change in mailing address would not cause a material delay in
crediting a payment because payments would be received and credited at
both addresses. Therefore, a card issuer may impose a late fee or
finance charge for a late payment on the account. Furthermore, for
example, assume the same facts as above except the prior post office
box number is no longer valid and mail sent to that address would be
returned to sender. The change in mailing address is material and the
change could cause a material delay in the crediting of a payment
because a payment sent to the old address could be delayed past the due
date. If, as a result, a consumer makes a late payment on the account
during the 60-day period following the date on which the change took
effect, a card issuer may not impose any late fee or finance charge for
the late payment.
Proposed comment 10(f)-5 would clarify that when an account is not
eligible for a grace period, imposing a finance charge due to a
periodic interest rate does not constitute imposition of a finance
charge for a late payment for the purposes of Sec. 226.10(f).
Notwithstanding the proposed rule, a card issuer may impose a finance
charge due to a periodic interest rate in those circumstances.
Section 226.11 Treatment of Credit Balances; Account Termination
11(c) Timely Settlement of Estate Debts
New TILA Section 140A requires that the Board, in consultation with
the Federal Trade Commission and each other agency referred to in Sec.
108(a) of TILA, prescribe regulations requiring creditors, with respect
to credit card accounts under an open-end consumer credit plan, to
establish procedures to ensure that any administrator of an estate can
resolve the outstanding credit balance of a deceased accountholder in a
timely manner. 15 U.S.C. 1651. The Board proposes to implement TILA
Section 140A in new Sec. 226.11(c). In developing this proposal, the
Board consulted with the Federal Trade Commission and the agencies
referred to in Sec. 108(a) of TILA. Proposed Sec. 226.11(c)(1)
requires creditors to adopt reasonable procedures designed to ensure
that any administrator or executor of an estate of a deceased
accountholder can determine the amount of and pay any balance on the
decedent's credit card account in a timely manner. Proposed Sec.
226.11(c) would apply only to credit card accounts under an open-end
(not home-secured) consumer credit plan, consistent with the approach
the Board has taken with regard to other provisions of the Credit Card
Act applicable to credit card accounts.
Proposed Sec. 226.11(c) generally follows the language in TILA
Section 140A with some modification. For clarity, the Board proposes to
interpret the term ``resolve'' for purposes of Sec. 226.11(c) to mean
determine the amount of and pay any balance on a deceased consumer's
account. In addition, in order to ensure that the rule applies
consistently to any personal representative of an estate who has the
duty to settle any estate debt, the Board proposes to include
``executor'' in proposed Sec. 226.11(c). The Board notes that the
duties and responsibilities of administrators and executors are
generally the same; however, it is the Board's understanding that
administrators are distinct from executors in the manner in which they
are appointed. Specifically, an executor is designated by the
decedent's will while an administrator is typically appointed by a
court in accordance with State law. The Board believes that TILA
Section 140A is intended to apply to any deceased accountholder's
estate, regardless of whether an administrator or executor is
responsible for the estate.
[[Page 54159]]
In addition, the Board is proposing to require creditors to adopt
``reasonable procedures designed to ensure'' that administrators or
executors can determine the amount of and pay any balance in a timely
manner. The Board recognizes that some creditors may already have
established procedures for the resolution of a deceased accountholder's
balance. Thus, a ``reasonable procedures'' standard would permit
creditors to retain, to the extent appropriate, procedures which may
already be in place, in complying with proposed Sec. 226.11(c), as
well as applicable State and Federal laws governing probate. Proposed
comment 11(c)-1 provides examples of reasonable procedures consistent
with proposed Sec. 226.11(c).
In addition to the general rule, the Board is proposing Sec.
226.11(c)(2)(i), which would prohibit creditors from imposing fees and
charges on a deceased consumer's account upon receiving a request for
the amount of any balance from an administrator or executor of an
estate. The intent of new TILA Section 140A is to ensure the timely
settlement of a deceased accountholder's credit card balance. The Board
understands that establishing and administering an estate may be a
complex, time-consuming process, which is subject to various State law
requirements and can involve a probate court. Furthermore, the Board
understands that some administrators and executors currently may be
unable to obtain the amount of a deceased accountholder's balance in a
timely manner, which in turn, delays the settlement of estate debts. If
balances cannot be obtained and settled in a timely manner, fees and
other charges, such as a late fee or finance charge, may continue to
accrue on the account balance. Under these circumstances, the Board
believes that the estate and its assets may be disadvantaged if fees
and charges continue to accrue on the account. Accordingly, proposed
Sec. 226.11(c)(2)(i) would prohibit a creditor from imposing fees and
charges on the deceased consumer's account upon receiving a request for
the amount of the balance on the account from an administrator or
executor of an estate. The Board believes that this prohibition is
necessary to provide certainty for all parties as to the balance amount
and to ensure the timely settlement of estate debts. Proposed comment
11(c)-2 would clarify that a creditor may impose finance charges based
on balances for days that precede the date on which the creditor
receives a request pursuant to proposed Sec. 226.11(c)(3). The Board
solicits comment on whether a creditor should be permitted to resume
the imposition of fees and charges if the administrator or executor of
an estate has not paid the account balance within a specified period of
time.
Proposed Sec. 226.11(c)(2)(ii) would provide that a creditor may
impose fees and charges on a deceased consumer's account if a joint
accountholder remains on the account. For joint accounts, a joint
accountholder remains liable for the account. In contrast, because an
authorized user is not liable for the account, proposed Sec.
226.11(c)(2)(ii) would not extend to such users. Accordingly, a
creditor may not impose fees and charges on the account if only an
authorized user remains on the account. Proposed comment 11(c)-3 would
clarify that a creditor may impose fees and charges on a deceased
consumer's account if a joint accountholder remains on the account. The
proposed comment would further clarify that a creditor may not impose
fees and charges on a deceased consumer's account if an authorized user
remains on the account.
The Board is also proposing comment 11(c)-4 to clarify that a
creditor may receive a request for the amount of the balance on the
account in writing or by telephone call from the administrator or
executor of an estate. If a request is made in writing, such as by
mail, the request is received when the creditor receives the
correspondence.
Under proposed Sec. 226.11(c)(3)(i), a creditor would be required
to disclose the amount of the balance on the account in a timely
manner, upon request by the administrator or executor of the estate.
The Board believes a timely statement reflecting the deceased
accountholder's balance is necessary to assist administrators and
executors with the settlement of estate debts. Proposed comment 11(c)-5
provides guidance to creditors in complying with Sec. 226.11(c)(3).
Creditors may provide the amount of the balance, if any, by a written
statement or by telephone. Proposed comment 11(c)-5 also clarifies that
proposed Sec. 226.11(c)(3) would not preclude a creditor from
providing the balance amount to appropriate persons, other than the
administrator or executor of an estate. For example, the Board notes
that the proposed rule would not preclude creditors, subject to
applicable Federal and State laws, from providing a spouse or family
members who indicate that they will pay the decedent's debts from
obtaining a balance amount for that purpose.
Proposed Sec. 226.11(c)(3)(ii) provides creditors with a safe
harbor for disclosing the balance amount in a timely manner, stating
that it would be reasonable for a creditor to provide the balance on
the account within 30 days of receiving a request by the administrator
or executor of an estate. The Board believes that 30 days is reasonable
to ensure that transactions and charges have been accounted for and
calculated and to provide a written statement or confirmation. The
Board seeks comment as to whether 30 days provides creditors with
sufficient time to provide a statement of the balance on the deceased
consumer's account.
Section 226.16 Advertising
16(f) Misleading Terms
See the supplementary information to Sec. 226.5(a)(2)(iii) for a
discussion of the Board's proposals regarding use of the term ``fixed''
in advertisements for open-end plans set forth in proposed Sec.
226.16(f).
16(h) Deferred Interest or Similar Offers
In May 2009, the Board proposed to use its authority under TILA
Section 143(3) to implement new advertising requirements related to
deferred interest or similar offers for open-end (not home-secured)
credit plans. 15 U.S.C. 1663(3). These requirements, which the Board
proposed to implement in a new Sec. 226.16(h), were similar to those
originally proposed by the Board in May 2009. See 73 FR 28866, 28884-
28886. The Board continues to believe that these requirements would
better inform consumers of the terms of deferred interest or similar
offers and that these advertising requirements will complement the
proposed periodic statement disclosures for such programs that are
discussed in the supplementary information to Sec. 226.7(b).
Therefore, the Board is republishing these same requirements for
additional comment in this Federal Register notice.
Specifically, these disclosure requirements would apply to
advertisements that use terms such as ``no interest,'' ``no payments,''
``deferred interest,'' ``same as cash,'' or similar terms in describing
these offers.\17\ Proposed Sec. 226.16(h)(1) would limit these
requirements to advertisements of open-end (not home-secured) credit,
and proposed Sec. 226.16(h)(2) would define terms applicable to the
section. 74 FR 20793-20794. Proposed Sec. 226.16(h)(3) would require
that the deferred interest period be disclosed in immediate proximity
to each deferred interest triggering term. Also, under
[[Page 54160]]
proposed Sec. 226.16(h)(3), for advertisements stating ``no interest''
or a similar term, the fact that the balance must be paid in full by
the end of the deferred interest period also would need to be disclosed
in immediate proximity to that term. 74 FR 20794. Proposed Sec.
226.16(h)(4) also would require that certain additional information
about the terms of the deferred interest or similar offer be disclosed
in close proximity to the first statement of a deferred interest
triggering term. 74 FR 20794. To facilitate compliance with this
provision, the Board proposed model language in Sample G-22 in Appendix
G. 74 FR 20797. Sample G-22 from the May 2009 Regulation Z Proposed
Clarifications has been renumbered as Sample G-24 in this proposal.
Proposed Sec. 226.16(h)(4) would require that advertisements of
deferred interest or similar offers use language similar to Sample G-
24. Finally, under proposed Sec. 226.16(h)(5), most of these
requirements would not apply to envelopes or other enclosures in which
an application or solicitation is mailed, or banner advertisements or
pop-up advertisements linked to an electronic application or
solicitation, bearing the triggering terms. 74 FR 20794.
---------------------------------------------------------------------------
\17\ For ease of reference, the supplementary information to
proposed Sec. 226.16(h) refers generically to these terms as
``deferred interest triggering terms.''
---------------------------------------------------------------------------
In addition, the Board proposed new commentary to provide further
guidance on the requirements under proposed Sec. 226.16(h), and also
proposed to amend comments 16-1 and 16-2 to clarify the clear and
conspicuous requirements for these disclosures. 74 FR 20800. Proposed
comment 16(h)-1 provided further clarification on what types of offers
were included as deferred interest or similar offers, while proposed
comment 16(h)-2 further clarified the meaning of ``deferred or waived
interest period.'' \18\ 74 FR 20800. Similar to guidance adopted in the
January 2009 Regulation Z Rule for advertisements of promotional rates
under Sec. 226.16(g), the Board proposed comment 16(h)-3 to further
clarify the meaning of ``immediate proximity,'' comment 16(h)-4 to
further clarify the meaning of ``prominent location closely
proximate,'' and comment 16(h)-5 to further clarify the meaning of
``first listing.'' 74 FR 20800. The Board also proposed comment 16(h)-6
to clarify that the information required under proposed Sec.
226.16(h)(4) need not be segregated from other information the
advertisement discloses about the deferred interest or similar offer.
74 FR 20800. Finally, proposed comment 16(h)-7 provided examples of
phrases that could be used to comply with proposed 226.16(h)(3). 74 FR
20801.
---------------------------------------------------------------------------
\18\ While the May 2009 Regulation Z Proposed Clarifications
referred to a ``deferred or waived interest'' offer, this proposal
refers to such promotional programs more generally as deferred
interest or similar offers.
---------------------------------------------------------------------------
Section 226.51 Ability To Pay
51(a) General Ability To Pay
Section 109 of the Credit Card Act adds new TILA Section 150
prohibiting a card issuer from opening a credit card account for a
consumer, or increasing the credit limit applicable to a credit card
account, unless the card issuer considers the consumer's ability to
make the required payments under the terms of such account. 15 U.S.C.
1665e. The Board proposes to implement TILA Section 150 in Sec.
226.51(a).
Proposed Sec. 226.51(a)(1) generally follows the language provided
in TILA Section 150 with two modifications. First, because the minimum
payment is the amount that a consumer is required to pay each billing
cycle under the terms of the contract with the card issuer, the Board
proposes to interpret the term ``required payments'' to mean the
required minimum periodic payment.
Second, the Board believes an evaluation of a consumer's current
ability to pay must include a review of the consumer's income or assets
as well as the consumer's current obligations. Therefore, proposed
Sec. 226.51(a)(1) would provide that the card issuer's consideration
of the ability of the consumer to make the required minimum periodic
payments must be based on the consumer's income or assets and the
consumer's current obligations. Proposed Sec. 226.51(a)(1) would also
require that card issuers have reasonable policies and procedures in
place to consider this information. A card issuer has not complied with
this provision if, for example, a card issuer does not review any
information about a consumer's income, assets, or current obligations,
or issues a credit card to a consumer who does not have any income or
assets. In addition, the Board believes that other factors may be
useful for card issuers to evaluate a consumer's ability to pay.
Accordingly, proposed comment 51(a)-1 would clarify that card issuers
may also consider credit reports or credit scores, and any other
factors that are consistent with the Board's Regulation B (12 CFR Part
202).
Because the minimum payments a consumer is required to pay each
billing cycle may vary depending on the amount of the balance as well
as the finance and other charges a consumer incurs during the billing
cycle, card issuers would be required to estimate the minimum payments
a consumer might be obligated to pay before the account is opened or
the credit line is increased. Proposed Sec. 226.51(a)(2)(i) would
require card issuers to use a reasonable method for estimating the
required minimum periodic payments, and proposed Sec. 226.51(a)(2)(ii)
would provide a safe harbor that card issuers could use to comply with
this requirement. Specifically, the safe harbor requires the card
issuer to assume utilization of the full credit line that the issuer is
considering offering to the consumer from the first day of the billing
cycle. The safe harbor also requires the issuer to use a minimum
payment formula employed by the issuer for the product the issuer is
considering offering to the consumer or, in the case of an existing
account, the minimum payment formula that currently applies to that
account. For example, in evaluating an application to open a new
account, if the minimum payment formula used by the card issuer for the
product is 2% of the outstanding balance, the estimated required
minimum periodic payment for a $10,000 credit line would be $200 under
the safe harbor.
However, if the applicable minimum payment formula includes
interest charges, the safe harbor requires the card issuer to estimate
those charges using an interest rate that the issuer is considering
offering to the consumer for purchases or, in the case of an existing
account, the interest rate that currently applies to purchases. For
example, if the minimum payment formula that applies to an existing
consumer's account is 3% plus interest and fees, the current purchase
rate for the account is 10%, and the card issuer is considering
increasing the consumer's credit line to $10,000, the estimated
required minimum periodic payment would be approximately $380 under the
safe harbor. Finally, if the applicable minimum payment formula
includes fees, the card issuer may assume that no fees have been
charged to the account.
In developing the proposed safe harbor, the Board considered a
number of different approaches. The Board recognizes that consumers
generally do not use the full credit line, and consequently, the
Board's proposed safe harbor approach could have the effect of
overstating the consumer's likely required payments. The Board,
however, believes that since card issuers are qualifying consumers for
a certain credit line, of which consumers presumably have full use,
card issuers should be expected to underwrite based on required
payments on the full amount under the safe harbor. Furthermore,
although estimating a
[[Page 54161]]
consumer's required minimum periodic payments may be more accurate with
the addition of some estimated fees when using a minimum payment
formula that includes the interest and fees, the Board believes that
estimating the amount of fees that a typical consumer might incur could
be speculative. As a result the Board's proposed safe harbor does not
require issuers to estimate fees. The Board seeks comment on other
reasonable methods that card issuers may use in estimating minimum
payments.
Proposed comment 51(a)-2 would clarify that in considering a
consumer's ability to pay, a card issuer must base the consideration on
facts and circumstances known to the card issuer at the time the
consumer applies to open the credit card account or when the card
issuer considers increasing the credit line on an existing account.
This guidance is similar to comment 34(a)(4)-5 addressing a creditor's
requirement to consider a consumer's repayment ability for certain
closed-end mortgage loans based on facts and circumstances known to the
creditor at loan consummation. Furthermore, since credit line increases
can occur at the request of a consumer or through a unilateral decision
by the card issuer, proposed comment 51(a)-3 would clarify that Sec.
226.51(a) applies in both situations.
Proposed comment 51(a)-4 would provide examples of assets and
income the card issuer may consider in evaluating a consumer's ability
to pay. The comment would provide similar guidance to comment 34(a)(4)-
6 regarding the requirement for creditors to consider a consumer's
repayment ability with respect to certain closed-end mortgage loans.
The Board also proposes comment 51(a)-5 to clarify that in considering
a consumer's current obligations, a card issuer may rely on information
provided by the consumer or in a consumer's credit report.
Finally, for several reasons, the proposal does not require that
card issuers verify information before the account is opened or the
credit line is increased. First, TILA Section 150 does not require
verification of a consumer's ability to make required payments. Second,
verification can be burdensome for both consumers and card issuers,
especially when accounts are opened at point of sale or by telephone.
For example, because consumers generally do not have documentation
readily available to verify their income, assets, or obligations at
point of sale, a verification requirement would restrict consumers'
ability to open a new credit card account at point of sale. As a
result, the Board believes that card issuers need flexibility to
determine instances when they need to verify information. Furthermore,
since these accounts are generally unsecured, the Board believes that
card issuers have reasons to verify the information when either the
information supplied by the applicant is inconsistent with the data the
card issuers already have or are able to gather on the consumer or when
the risk in the amount of the credit line warrants such verification.
While the Board has required creditors to verify information before
credit is extended for certain mortgage loans, the Board's decision
with respect to such loans was based on evidence that borrower income
was inflated for these types of mortgage loans and that lending
decisions based on overstated incomes contributed to the recent
substantial increase in mortgage delinquencies. In contrast, the Board
does not have evidence that this is the case in the credit card market.
As a result, the Board believes a verification requirement before a
credit card account is opened or credit line increased would not be
necessary and could burden consumers. The Board, however, seeks comment
on whether there is evidence that warrants a requirement to verify
information before a credit card account is opened or a credit line is
increased.
51(b) Rules Affecting Young Consumers
Currently, card issuers may grant credit to young consumers on the
assumption that a parent or guardian of the consumer will pay the debt,
even if the issuer does not obtain the express agreement of such parent
or guardian to assume liability. Sections 301 and 303 of the Credit
Card Act are meant to address this situation. Under new Section
127(c)(8)(A) of TILA, as adopted by Section 301 of the Credit Card Act,
no credit card may be issued to, or open-end consumer credit plan
established by, or on behalf of a consumer, who has not attained the
age of 21 unless the consumer has submitted a written application to
the card issuer that meets certain requirements. 15 U.S.C.
1637(c)(8)(A). New TILA Section 127(c)(8)(B) further provides that an
application to open a credit card account by a consumer who has not
attained the age of 21 as of the date of submission of the application
shall require either: (1) The signature of a cosigner who has attained
the age of 21 having a means to repay debts incurred by the consumer in
connection with the account, indicating joint liability for debts
incurred by the consumer in connection with the account before the
consumer has attained the age of 21; or (2) the submission by the
consumer of financial information, including through an application,
indicating an independent means of repaying any obligation arising from
the proposed extension of credit in connection with the account. 15
U.S.C. 1637(c)(8)(B).
Section 303 of the Credit Card Act adds new TILA Section 127(p). 15
U.S.C. 1637(p). TILA Section 127(p) states that no increase may be made
in the amount of credit authorized to be extended under a credit card
account for which an individual has assumed joint liability for debts
incurred by the consumer in connection with the account before the
consumer attains the age of 21, unless that individual approves in
writing, and assumes joint liability for, such increase.
The Board proposes to implement these provisions in proposed Sec.
226.51(b) and associated commentary. Proposed Sec. 226.51(b)(1) would
provide that a card issuer may not open a credit card account under an
open-end (not home-secured) consumer credit plan for a consumer less
than 21 years old, unless the consumer submits a written application
and provides either a signed agreement of a cosigner, guarantor, or
joint applicant pursuant to Sec. 226.51(b)(1)(i) or financial
information consistent with Sec. 226.51(b)(1)(ii), as further
discussed below. The language in Sec. 226.51(b)(1) has been modified
from the statutory language in TILA Section 127(c)(8)(A) for
consistency with Sec. 226.51(a) and to clarify that the provision
applies only to credit card accounts and only in connection with the
opening of the account. Furthermore, the language has been modified to
improve readability.
Although the text of TILA Section 127(c)(8)(A) references open-end
consumer credit plans other than credit cards, the Board believes that
the intent of the provision, read as a whole, is to apply only to
credit card accounts. While the provision references other open-end
consumer credit plans, the requirements under the provision apply only
to ``card issuers.'' Based on the fact that the requirements of the
provision are limited to card issuers as well as language in other
related sections of the Credit Card Act and the location of the
provision in TILA, the Board believes that the restrictions in TILA
Section 127(c)(8)(A) are meant to apply only to credit card accounts.
First, TILA Section 127(c)(8)(B), which discusses the requirements
for an application submitted by a consumer who has not attained the age
of 21, refers solely to an application to open a credit card account.
Second, TILA
[[Page 54162]]
Section 127(p), which restricts credit line increases for accounts in
which an individual assumes joint liability for debts incurred by the
consumer in connection with the account before the consumer attains the
age of 21, refers only to a credit card account. Third, these
provisions have been placed in TILA Section 127(c), a section that
deals exclusively with credit card accounts. Therefore, the Board
believes it is appropriate to apply proposed Sec. 226.51(b)(1) only to
credit card accounts.
Furthermore, proposed Sec. 226.51(b)(1) refers to the opening of a
credit card account, which differs from the statute's reference to the
issuance of a credit card. The ``issuance'' of a credit card can refer
to a card sent to the consumer as a replacement card or upon renewal of
the card. See Sec. 226.12(a). As a result, the Board believes that
limiting the scope of Sec. 226.51(b) to the opening of a credit card
account is appropriate. Otherwise, the provision could be construed to
require card issuers to evaluate a cardholder's ability or obtain the
signature of a cosigner even when a card is being sent to an existing
cardholder to replace an expired card. The Board notes that the renewal
of an existing account or change in the terms of an existing account
generally does not constitute the opening of an account for purposes of
Regulation Z.
The Board proposes to implement the specific application
requirements detailed in TILA Section 127(c)(8)(B) in Sec.
226.51(b)(1)(i) and (ii). Proposed Sec. 226.51(b)(1)(i) and (ii)
generally follow the language in TILA Section 127(c)(8)(B) with some
changes. While most of these modifications are minor and are meant to
improve the readability of the regulation without any substantive
change in meaning, the Board also proposes to clarify the meaning of
cosigner and joint liability.
The terms cosigner and joint liability can have several meanings.
For example, a cosigner can refer to a guarantor who has no credit
privileges on the account but is secondarily liable for a consumer's
debt if the consumer defaults. A cosigner can also mean a joint
accountholder who shares credit privileges with the consumer on the
account and is jointly liable on the debt incurred by either the
consumer or the joint accountholder. The Board believes it is
appropriate to modify the language used in the regulation from the
statutory language to make clear that all types of cosigners and joint
liability arrangements would be included. Accordingly, proposed Sec.
226.51(b)(1)(i) states that a consumer who is less than 21 years old
can provide the signed agreement of a cosigner, guarantor, or joint
applicant who is at least 21 years old to be either secondarily liable
for any debt on the account incurred by the consumer before the
consumer has attained the age of 21 in the event the consumer defaults
on the account or jointly liable with the consumer for any debt on the
account incurred by either party.
Furthermore, to maintain consistency, the Board proposes to
interpret the phrase ``means to repay'' or ``means of repaying'' as
equivalent to evaluating a consumer's ability to make the required
payments under TILA Section 150, which the Board proposes to implement
in Sec. 226.51(a), as discussed above. Therefore, Sec.
226.51(b)(1)(i) and (ii) both reference Sec. 226.51(a) in discussing
the ability of a cosigner, guarantor, or joint applicant to make the
minimum payments on the consumer's debts and the consumer's independent
ability to make the minimum payments on any obligations arising under
the account.
Proposed Sec. 226.51(b)(2) generally follows the language in TILA
Section 127(p), though the Board has modified some of the wording used
in the statute. These changes are meant to improve readability without
any substantive change in meaning. For example, TILA Section 127(p)
states that a parent, guardian, or spouse must approve the credit line
increase in writing; however, the statute also concedes that an
individual who is not a parent, guardian, or spouse may have assumed
liability for debts incurred by the consumer. In those cases, that
individual should be the one to approve the credit line increase, and
assume liability for that increased amount. Therefore, proposed Sec.
226.51(b)(2) eliminates the reference to parent, guardian, or spouse to
apply the provision more generally to cosigners, guarantors, or joint
accountholders.
The Board also proposes several comments to provide guidance to
card issuers in complying with Sec. 226.51(b). Proposed comment 51(b)-
1 would clarify that Sec. 226.51(b)(1) and (b)(2) apply only to a
consumer who has not attained the age of 21 as of the date of
submission of the application under Sec. 226.51(b)(1) or the date the
credit line increase is requested by the consumer under Sec.
226.51(b)(2). If no request has been made (for example, for unilateral
credit line increases by the card issuer), the provision would apply
only to a consumer who has not attained the age of 21 as of the date
the credit line increase is considered by the card issuer.
Proposed comment 51(b)-2 would address the ability of a card issuer
to require a cosigner, guarantor, or joint accountholder to assume
liability for debts incurred after the consumer has attained the age of
21. While Sec. 226.51(b)(1)(i) and (b)(2) require, at a minimum, that
a cosigner, guarantor, or joint accountholder assume liability for any
debt on the account incurred by the consumer before the consumer has
attained the age of 21, proposed comment 51(b)-2 would clarify that
Sec. 226.51(b)(1)(i) and (b)(2) do not restrict a card issuer from
extending this liability to debt incurred by the consumer after the
consumer has attained the age of 21, at the card issuer's option,
consistent with any agreement made between the parties.
The Board proposes comment 51(b)-3 to clarify that Sec.
226.51(b)(1) and (b)(2) do not apply to a consumer under the age of 21
who is being added to another person's account as an authorized user
and has no liability for debts incurred on the account. The Board
believes that the protections under TILA Sections 127(c)(8) and 127(p)
would not be necessary if the consumer under the age of 21 is not
assuming any liability, and would therefore not be legally obligated to
make any payments on the account.
Proposed comment 51(b)-4 would provide card issuers with guidance
concerning electronic applications and explain how the Electronic
Signatures in Global and National Commerce Act (E-Sign Act) (15 U.S.C.
7001 et seq.) would govern the submission of such an application. TILA
Section 127(c)(8) requires a consumer who has not attained the age of
21 to submit a written application. In addition, under TILA Section
127(p), a cosigner, guarantor, or joint accountholder must approve a
credit line increase in writing. However, in accordance with the
purposes of the E-Sign Act, contracts and other records cannot be
denied legal effect, validity or enforceability solely because they are
in electronic form. See 15 U.S.C. 7001(a). Therefore, the Board
believes that, consistent with the purposes of the E-Sign Act,
applications submitted under TILA Section 127(c)(8) and approvals under
TILA Section 127(p), which must be provided in writing, may also be
submitted electronically. Moreover, the E-Sign Act requires that before
any disclosure that is required to be in writing is provided to a
consumer electronically, the consumer must affirmatively consent to the
provision of the information electronically, among other things. Since
the submission of an application or approval by a consumer, cosigner,
guarantor, or joint accountholder is not a disclosure to a consumer,
the consumer consent and other
[[Page 54163]]
requirements necessary to provide consumer disclosures electronically
pursuant to the E-Sign Act would not apply. Furthermore, Sec.
226.5(a)(1)(iii), which was adopted in the January 2009 Regulation Z
Rule, provides that an application may be provided to a consumer in
electronic form without regard to the consumer consent or other
provisions of the E-Sign Act in the circumstances set forth in Sec.
226.5a.
Proposed comment 51(b)(1)-1 explains that when evaluating an
application to open a credit card account or credit line increase for a
consumer under the age of 21, creditors must comply with applicable
rules in Regulation B (12 CFR Part 202). Given that age is generally a
prohibited basis for any creditor to take into account in any system
evaluating the creditworthiness of applicants under Regulation B, the
Board believes that Regulation B prohibits card issuers from refusing
to consider the application of a consumer solely because the applicant
has not attained the age of 21 (assuming the consumer has the legal
ability to enter into a contract). Furthermore, because TILA Section
127(c)(8) permits card issuers to open a credit card account for a
consumer who has not attained the age of 21 if either of the conditions
under TILA Section 127(c)(8)(B) are met, the Board believes that a card
issuer may choose to evaluate an application of a consumer who is less
than 21 years old solely on the basis of the information provided under
Sec. 226.51(b)(1)(ii). Therefore, the Board believes, a card issuer is
not required to accept an application from a consumer less than 21
years old with the signature of a cosigner, guarantor, or joint
applicant pursuant to Sec. 226.51(b)(1)(i), unless refusing such
applications would violate Regulation B. For example, if the card
issuer permits other applicants of non-business credit card accounts
who have attained the age of 21 to provide the signature of a cosigner,
guarantor, or joint applicant, the card issuer must provide this option
to applicants of non-business credit card accounts who have not
attained the age of 21 (assuming the consumer has the legal ability to
enter into a contract).
Proposed comment 51(b)(2)-1 would provide that the requirement
under Sec. 226.51(b)(2) that a cosigner, guarantor, or joint
accountholder for a credit card account opened pursuant to Sec.
226.51(b)(1)(ii) must agree in writing to assume liability for a credit
line increase does not apply if the cosigner, guarantor or joint
accountholder who is at least 21 years old requests the increase.
Because the party that must approve the increase is the one that is
requesting the increase in this situation, the Board believes that
Sec. 226.51(b)(2) would be redundant.
Section 226.52 Limitations on Fees
52(a) Limitations During First Year After Account Opening
New TILA Section 127(n)(1) applies ``[i]f the terms of a credit
card account under an open end consumer credit plan require the payment
of any fees (other than any late fee, over-the-limit fee, or fee for a
payment returned for insufficient funds) by the consumer in the first
year during which the account is opened in an aggregate amount in
excess of 25 percent of the total amount of credit authorized under the
account when the account is opened.'' 15 U.S.C. 1637(n)(1). If the 25
percent threshold is met, then ``no payment of any fees (other than any
late fee, over-the-limit fee, or fee for a payment returned for
insufficient funds) may be made from the credit made available under
the terms of the account.'' However, new TILA Section 127(n)(2)
provides that Section 127(n) may not be construed as authorizing any
imposition or payment of advance fees prohibited by any other provision
of law. The Board is proposing to implement new TILA Section 127(n) in
Sec. 226.52(a).\19\
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\19\ In a subsequent rulemaking, the Board intends to implement
new TILA Section 149 in Sec. 226.52(b). New TILA Section 149, which
is effective August 22, 2010, requires that credit card penalty fees
and charges be reasonable and proportional to the consumer's
violation of the cardholder agreement.
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Subprime credit cards often charge substantial fees at account
opening and during the first year after the account is opened. For
example, these cards may impose multiple one-time fees when the
consumer opens the account (such as an application fee, a program fee,
and an annual fee) as well as a monthly maintenance fee, fees for using
the account for certain types of transactions, and fees for increasing
the credit limit. The account-opening fees are often billed to the
consumer on the first periodic statement, substantially reducing from
the outset 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 may pay interest on the fees until they are
paid in full.
Because of concerns that some consumers were not aware of how fees
would affect their ability to use the card for its intended purpose of
engaging in transactions, the Board's January 2009 Regulation Z Rule
enhanced the disclosure requirements for these types of fees and
clarified the circumstances under which a consumer who has been
notified of the fees in the account-opening disclosures (but has not
yet used the account or paid a fee) may reject the plan and not be
obligated to pay the fees. See Sec. 226.5(b)(1)(iv), 74 FR 5402; Sec.
226.5a(b)(14), 74 FR 5404; Sec. 226.6(b)(1)(xiii), 74 FR 5408. In
addition, because the Board and the other Agencies were concerned that
disclosure alone was insufficient to protect consumers from unfair
practices regarding high-fee subprime credit cards, the January 2009
FTC Act Rule prohibited institutions from charging certain types of
fees during the first year after account opening that, in the
aggregate, constituted the majority of the credit limit. In addition,
these fees were limited to 25 percent of the initial credit limit in
the first billing cycle with any additional amount (up to 50 percent)
spread equally over the next five billing cycles. Finally, institutions
were prohibited from circumventing these restrictions by providing the
consumer with a separate credit account for the payment of additional
fees. See 12 CFR 227.26, 74 FR 5561, 5566; see also 74 FR 5538-
5543.\20\
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\20\ Although the Board, OTS, and NCUA adopted substantively
identical rules under the FTC Act, each agency placed its rules in
its respective part of Title 12 of the Code of Federal Regulations.
Specifically, the Board placed its rules in part 227, the OTS in
part 535, and the NCUA in part 706. For simplicity, this
supplementary information cites to the Board's rules and official
staff commentary.
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52(a)(1) General Rule
As noted above, new TILA Section 127(n)(1) applies when ``the terms
of a credit card account * * * require the payment of any fees (other
than any late fee, over-the-limit fee, or fee for a payment returned
for insufficient funds) by the consumer in the first year during which
the account is opened in an aggregate amount in excess of 25 percent of
the total amount of credit authorized under the account when the
account is opened.'' Congress's use of ``require'' could be construed
to mean that Section 127(n)(1) applies only to fees that are
unconditional requirements of the account--in other words, fees that
all consumers are required to pay regardless of how the account is used
(such as account-opening fees, annual fees, and monthly maintenance
fees). However, such a narrow reading would be inconsistent with the
words ``any
[[Page 54164]]
fees,'' which indicate that Congress intended the provision to apply to
a broader range of fees. Furthermore, categorically excluding fees that
are conditional (in other words, fees that consumers are only required
to pay in certain circumstances) would enable card issuers to
circumvent the 25 percent limit by, for example, requiring consumers to
pay fees in order to receive a particular credit limit or to use the
account for purchases or other transactions. Finally, new TILA Section
127(n)(1) specifically excludes three fees that are conditional (late
payment fees, over-the-limit fees, and fees for a payment returned for
insufficient funds), which suggests that Congress otherwise intended
Section 127(n)(1) to apply to fees that a consumer is required to pay
only in certain circumstances (such as fees for other violations of the
account terms or fees for using the account for transactions).
New TILA Section 127(n)(1) further provides that, if the 25 percent
threshold is met, ``no payment of any fees (other than any late fee,
over-the-limit fee, or fee for a payment returned for insufficient
funds) may be made from the credit made available under the terms of
the account.'' Although this language could be read to require card
issuers to determine at account opening the total amount of fees that
will be charged during the first year, the Board does not believe this
was Congress's intent because the total amount of fees charged during
the first year will depend on how the account is used. For example,
most card issuers currently require consumers who use a credit card
account for cash advances, balance transfers, or foreign transactions
to pay a fee that is equal to a percentage of the transaction. Thus,
the total amount of fees charged during the first year will depend on,
among other things, the number and amount of cash advances, balance
transfers, or foreign transactions. Although card issuers could address
this uncertainty by ceasing to charge such fees, card issuers that did
so would also likely reduce consumers' ability to use their credit
cards for these types of transactions, which could be detrimental for
some consumers. Accordingly, the Board believes Section 127(n)(1)
should be interpreted to limit the fees charged to a credit card
account during the first year to 25 percent of the initial credit limit
and to prevent card issuers from collecting additional fees by other
means (such as directly from the consumer or by providing a separate
credit account). In order to effectuate this purpose and to facilitate
compliance, the Board proposes to use its authority under TILA Section
105(a) to implement new TILA Section 127(n) as set forth below.
Proposed Sec. 226.52(a)(1)(i) provides that, if a card issuer
charges any fees to a credit card account under an open-end (not home-
secured) consumer credit plan during the first year after account
opening, those fees must not in total constitute more than 25 percent
of the credit limit in effect when the account is opened. Proposed
comment 52(a)(1)(i)-1 provides an illustrative example of the
application of the rule.
Proposed comment 52(a)(1)(i)-2 clarifies that a card issuer that
charges a fee to a credit card account that exceeds the 25 percent
limit complies with Sec. 226.52(a)(1)(i) if the card issuer waives or
removes the fee and any associated interest charges or credits the
account for an amount equal to the fee and any associated interest
charges at the end of the billing cycle during which the fee was
charged. Thus, if a card issuer's systems automatically assess a fee
based on certain account activity (such as automatically assessing a
cash advance fee when the account is used for a cash advance) and, as a
result, the total amount of fees subject to Sec. 226.52(a) that have
been charged to the account during the first year exceeds the 25
percent limit, the card issuer can comply with Sec. 226.52(a)(1)(i) by
removing the fee and any interest charged on that fee at the end of the
billing cycle.
Proposed comment 52(a)(1)(i)-3 clarifies that, because the
limitation in Sec. 226.52(a)(1)(i) is based on the credit limit in
effect when the account is opened, a subsequent increase in the credit
limit during the first year does not permit the card issuer to charge
to the account additional fees that would otherwise be prohibited (such
as a fee for increasing the credit limit). An illustrative example is
provided.
Proposed Sec. 226.52(a)(1)(ii) would prevent card issuers from
circumventing proposed Sec. 226.52(a)(1)(i) by providing that a card
issuer that charges fees to the account during the first year after
account opening must not require the consumer to pay any fees in excess
of the 25 percent limit with respect to the account during the first
year. Proposed comment 52(a)(1)(ii)-1 clarifies that Sec.
226.52(a)(1)(ii) prohibits a card issuer that charges to a credit card
account fees during the first year that total 25 percent of the initial
credit limit from requiring the consumer to pay any additional fees
through other means during the first year (such as through a payment
from the consumer to the card issuer or from another credit account
provided by the card issuer). An illustrative example is provided.
52(a)(2) Fees Not Subject to Limitations
Proposed Sec. 226.52(a)(2)(i) implements the exception in new TILA
Section 127(n)(1) for late payment fees, over-the-limit fees, and fees
for payments returned for insufficient funds. However, pursuant to the
Board's authority under TILA Section 105(a), proposed Sec.
226.52(a)(2)(i) applies to all fees for returned payments because a
payment may be returned for reasons other than insufficient funds (such
as because the account on which the payment is drawn has been closed or
because the consumer has instructed the institution holding that
account not to honor the payment).
As discussed above, new TILA Section 127(n)(1) applies to fees that
a consumer is required to pay with respect to a credit card account.
Accordingly, proposed Sec. 226.52(a)(2)(ii) would create an exception
to Sec. 226.52(a) for fees that a consumer is not required to pay with
respect to the account. The proposed commentary to Sec. 226.52(a)
illustrates the distinction between fees the consumer is required to
pay and those the consumer is not required to pay. Proposed comment
52(a)(2)-1 clarifies that, except as provided in Sec. 226.52(a)(2),
the limitations in Sec. 226.52(a)(1) apply to any fees that a card
issuer will or may require the consumer to pay with respect to a credit
card account during the first year after account opening. The comment
lists several types of fees as examples of fees covered by Sec.
226.52(a). First, fees that the consumer is required to pay for the
issuance or availability of credit described in Sec. 226.5a(b)(2),
including any fee based on account activity or inactivity and any fee
that a consumer is required to pay in order to receive a particular
credit limit. Second, fees for insurance described in Sec. 226.4(b)(7)
or debt cancellation or debt suspension coverage described in Sec.
226.4(b)(10) written in connection with a credit transaction, if the
insurance or debt cancellation or debt suspension coverage is required
by the terms of the account. Third, fees that the consumer is required
to pay in order to engage in transactions using the account (such as
cash advance fees, balance transfer fees, foreign transaction fees, and
other fees for using the account for purchases). And fourth, fees that
the consumer is required to pay for violating the terms of the account
(except to the extent specifically excluded by Sec. 226.52(a)(2)(i)).
Proposed comment 52(a)(2)-2 provides as examples of fees that
[[Page 54165]]
generally fall within the exception in Sec. 226.52(a)(2)(ii) fees for
making an expedited payment (to the extent permitted by Sec.
226.10(e)), fees for optional services (such as travel insurance), fees
for reissuing a lost or stolen card, and statement reproduction fees.
Finally, proposed comment 52(a)(2)-3 clarifies that a security
deposit that is charged to a credit card account is a fee for purposes
of Sec. 226.52(a). However, the comment also clarifies that Sec.
226.52(a) would not prohibit a creditor from providing a secured credit
card that requires a consumer to provide a cash collateral deposit that
is equal to the credit line for the account.
52(a)(3) Rule of Construction
New TILA Section 127(n)(2) states that ``[n]o provision of this
subsection may be construed as authorizing any imposition or payment of
advance fees otherwise prohibited by any provision of law.'' 15 U.S.C.
1637(n)(2). The Board proposes to implement this provision in Sec.
226.52(a)(3). As an example of a provision of law limiting the payment
of advance fees, proposed comment 52(a)(3)-1 cites 16 CFR 310.4(a)(4),
which prohibits any telemarketer or seller from ``[r]equesting or
receiving payment of any fee or consideration in advance of obtaining a
loan or other extension of credit when the seller or telemarketer has
guaranteed or represented a high likelihood of success in obtaining or
arranging a loan or other extension of credit for a person.''
Section 226.53 Allocation of Payments
As amended by the Credit Card Act, TILA Section 164(b)(1) provides
that, ``[u]pon receipt of a payment from a cardholder, the card issuer
shall apply amounts in excess of the minimum payment amount first to
the card balance bearing the highest rate of interest, and then to each
successive balance bearing the next highest rate of interest, until the
payment is exhausted.'' 15 U.S.C. 1666c(b)(1). However, amended Section
164(b)(2) provides the following exception to this general rule: ``A
creditor shall allocate the entire amount paid by the consumer in
excess of the minimum payment amount to a balance on which interest is
deferred during the last 2 billing cycles immediately preceding
expiration of the period during which interest is deferred.'' As
discussed in detail below, the Board proposes to implement amended TILA
Section 164(b) in a new Sec. 226.53.
As an initial matter, however, the Board proposes to interpret
amended TILA Section 164(b) to apply to credit card accounts under an
open-end (not home-secured) consumer credit plan rather than to all
open-end consumer credit plans. Although the requirements in amended
TILA Section 164(a) regarding the prompt crediting of payments apply to
``[p]ayments received from [a consumer] under an open end consumer
credit plan,'' the general payment allocation rule in amended TILA
Section 164(b)(1) applies ``[u]pon receipt of a payment from a
cardholder.'' Furthermore, the exception for deferred interest plans in
amended Section 164(b)(1) requires ``the card issuer [to] apply amounts
in excess of the minimum payment amount first to the card balance
bearing the highest rate of interest. * * *'' Based on this language,
it appears that Congress intended to apply the payment allocation
requirements in amended Section 164(b) only to credit card accounts.
This is consistent with the approach taken by the Board and the other
Agencies in the January 2009 FTC Act Rule. See 74 FR 5560. Furthermore,
the Board is not aware of concerns regarding payment allocation with
respect to other open-end credit products, likely because such products
generally do not apply different annual percentage rates to different
balances.
53(a) General Rule
The Board proposes to implement amended TILA Section 164(b)(1) in
Sec. 226.53(a), which would state that, except as provided in Sec.
226.53(b), when a consumer makes a payment in excess of the required
minimum periodic payment for a credit card account under an open-end
(not home-secured) consumer credit plan, the card issuer must allocate
the excess amount 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. The
Board and the other Agencies adopted a similar provision in the January
2009 FTC Act Rule in response to concerns that card issuers were
applying consumers' payments in a manner that inappropriately maximized
interest charges on credit card accounts with balances at different
annual percentage rates. See 12 CFR 227.23, 74 FR 5512-5520, 5560.
Specifically, most card issuers currently 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). Because many card issuers 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.\21\
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\21\ For example, assume that a 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 payment, most card
issuers would apply the entire excess 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.
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The Board is also proposing comment 53-1, which would clarify that
proposed Sec. 226.53 does not limit or otherwise address the card
issuer'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. It would further clarify that
a card issuer may, but is not required to, allocate the required
minimum periodic payment consistent with the requirements in proposed
Sec. 226.53 to the extent consistent with other applicable law or
regulatory guidance.
Comment 53-2 would clarify that proposed Sec. 226.53 permits a
card issuer to allocate an excess payment based on the annual
percentage rates and balances 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. Because the rates and balances on an
account affect how excess payments will be applied, this comment is
intended to provide flexibility regarding the point in time at which
payment allocation determinations required by proposed Sec. 226.53 can
be made. For example, it is possible that, in certain circumstances,
the annual percentage rates may have changed between the close of a
billing cycle and the date on which payment for that billing cycle is
received.
Comment 53-3 addresses the relationship between the dispute rights
in Sec. 226.12(c) and the payment allocation requirements in proposed
Sec. 226.53. This comment would clarify that, when a consumer has
asserted a claim or defense against the card issuer pursuant to Sec.
226.12(c), the card issuer must apply the consumer's payment in a
manner that avoids or minimizes any reduction in the amount of that
claim or defense. See footnote 25 to current Sec. 226.12(c)
(redesignated in January 2009 Regulation Z Rule as comment 12(c)-4, 74
FR 5488).
[[Page 54166]]
Comment 53-4 addresses circumstances in which the same annual
percentage rate applies to more than one balance on a credit card
account but a different rate applies to at least one other balance on
that account. For example, an account could have a $500 cash advance
balance at 20%, a $1,000 purchase balance at 15%, and a $2,000 balance
also at 15% that was previously at a 5% promotional rate. The comment
would clarify that, in these circumstances, proposed Sec. 226.53
generally does not require that any particular method be used when
allocating among the balances with the same rate and that the card
issuer may treat the balances with the same rate as a single balance or
separate balances.\22\
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\22\ An example of how excess payments could be applied in these
circumstances is provided in proposed comment 53(a)-1.iv.
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However, this comment would further clarify that, when a balance on
a credit card account is subject to a deferred interest or similar
program that provides that a consumer will not be obligated to pay
interest that accrues on the balance if the balance is paid in full
prior to the expiration of a specified period of time, that balance
must be treated as a balance with an annual percentage rate of zero for
purposes of proposed Sec. 226.53 during that period of time rather
than a balance with the rate at which interest accrues (the accrual
rate).\23\ As an initial matter, treating the rate as zero is
consistent with the nature of deferred interest and similar programs
insofar as the consumer will not be obligated to pay any accrued
interest if the balance is paid in full prior to expiration. In
addition, treating the rate on a balance subject to a deferred interest
or similar program as zero until the program expires ensures that
excess payments will generally be applied first to balances on which
interest is being charged, which will generally result in lower
interest charges if the consumer pays the balance in full prior to
expiration. Although treating the rate on this type of balance as zero
could prevent consumers who wish to pay off that balance in
installments over the course of the program from doing so, the Board
believes that this treatment produces the best overall outcome for
consumers and is consistent with amended TILA Section 164(b)(2) (as
discussed below).
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\23\ For example, if an account has a $1,000 purchase balance
and a $2,000 balance that is subject to a deferred interest program
that expires on July 1 and a 15% annual percentage rate applies to
both, the balances must be treated as balances with different rates
for purposes of proposed Sec. 226.53 until July 1. In addition, for
purposes of allocating pursuant to proposed Sec. 226.53, any amount
paid by the consumer in excess of the required minimum periodic
payment must be applied first to the $1,000 purchase balance except
during the last two billing cycles of the deferred interest period
(when it must be applied first to any remaining portion of the
$2,000 balance). See proposed comment 53(a)-1.v.
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Finally, proposed comment 53(a)-1 provides examples of allocating
excess payments consistent with proposed Sec. 226.53. The proposed
commentary discussed above is similar to commentary adopted by the
Board and the other Agencies in the January 2009 FTC Act Rule as well
as to amendments to that commentary proposed in May 2009. See 74 FR
5561-5562; 74 FR 20815-20816.
53(b) Special Rule for Balances Subject to Deferred Interest or Similar
Programs
The Board proposes to implement amended TILA Section 164(b)(2) in
Sec. 226.53(b), which would provide that, when a balance on a credit
card account under an open-end (not home-secured) consumer credit plan
is subject to a deferred interest or similar program, the card issuer
must allocate any amount paid by the consumer in excess of the required
minimum periodic payment first to that balance during the two billing
cycles immediately preceding expiration of the deferred interest period
and any remaining portion to any other balances consistent with
proposed Sec. 226.53(a). See 15 U.S.C. 1666c(b)(2).
The Board and the other Agencies proposed a similar exception to
the January 2009 FTC Act Rule's payment allocation provision in the May
2009 proposed clarifications and amendments. See proposed 12 CFR
227.23(b), 74 FR 20814. This exception was based on the Agencies'
concern that, if the deferred interest balance was not the only balance
on the account, the general payment allocation rule could prevent
consumers from paying off the deferred interest balance prior to
expiration of the deferred interest period unless they also paid off
all other balances on the account.\24\ If the consumer is unaware of
the need to pay off the entire balance, the consumer would be charged
interest on the deferred interest balance and thus would not obtain the
benefits of the deferred interest program. See 74 FR 20807-20808.
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\24\ For example, assume that a credit card account has a $2,000
purchase balance with a 20% annual percentage rate and a $1,000
balance on which interest accrues at a 15% annual percentage rate,
but the consumer will not be obligated to pay that interest if that
balance is paid in full by a specified date. If the general rule in
proposed Sec. 226.53(a) applied, the consumer would be required to
pay $3,000 in order to avoid interest charges on the $1,000 balance.
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The Board is also proposing comment 53(b)-1, which clarifies the
application of proposed Sec. 226.53(b) in circumstances where the
deferred interest or similar program expires during a billing cycle
(rather than at the end of a billing cycle). The comment would clarify
that, for purposes of Sec. 226.53(b), a billing cycle does not
constitute one of the two billing cycles immediately preceding
expiration of a deferred interest or similar program if the expiration
date for the program precedes the payment due date in that billing
cycle. An example is provided. The Board believes that this
interpretation is consistent with the purpose of amended TILA Section
164(b)(2) insofar as it ensures that, at a minimum, the consumer will
receive two complete billing cycles to avoid accrued interest charges
by paying off a balance subject to a deferred interest or similar
program.
In addition, the Board is proposing comment 53(b)-2, which
clarifies that a grace period during which any credit extended may be
repaid without incurring a finance charge due to a periodic interest
rate is not a deferred interest or similar program for purposes of
Sec. 226.53(b). The Board and the other Agencies proposed a similar
comment in May 2009. See 12 CFR 227.23 proposed comment 23(b)-1, 74 FR
20816.
Section 226.54 Limitations on the Imposition of Finance Charges
The Credit Card Act creates a new TILA Section 127(j), which
applies when a consumer loses any time period provided by the creditor
with respect to a credit card account within which the consumer may
repay any portion of the credit extended without incurring a finance
charge (i.e., a grace period). 15 U.S.C. 1637(j). In these
circumstances, new TILA Section 127(j)(1)(A) prohibits the creditor
from imposing a finance charge with respect to any balances for days in
billing cycles that precede the most recent billing cycle (a practice
that is sometimes referred to as ``two-cycle'' or ``double-cycle''
billing). Furthermore, in these circumstances, Section 127(j)(1)(B)
prohibits the creditor from imposing a finance charge with respect to
any balances or portions thereof in the current billing cycle that were
repaid within the grace period. However, Section 127(j)(2) provides
that these prohibitions do not apply to any adjustment to a finance
charge as a result of the resolution of a dispute or the return of a
payment for insufficient funds. As discussed below, the Board proposes
to implement new TILA Section 127(j) in Sec. 226.54.
[[Page 54167]]
54(a) Limitations on Imposing Finance Charges as a Result of the Loss
of a Grace Period
54(a)(1) General Rule
Prohibition on Two-Cycle Billing
As noted above, new TILA Section 127(j)(1)(A) prohibits the balance
computation method sometimes referred to as ``two-cycle billing'' or
``double-cycle billing.'' The January 2009 FTC Act Rule contained a
similar prohibition. See 12 CFR 227.25, 74 FR 5560-5561; see also 74 FR
5535-5538. The two-cycle balance computation method has several
permutations but, generally speaking, a card issuer 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 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 card
issuers 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). Card issuers 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 Board proposes to implement new TILA Section 127(j)(1)(A)'s
prohibition on two-cycle billing in proposed Sec. 226.54(a)(1)(i),
which states that, except as provided in proposed Sec. 226.54(b), a
card issuer must not impose finance charges as a result of the loss of
a grace period on a credit card account if those finance charges are
based on balances for days in billing cycles that precede the most
recent billing cycle. The Board also proposes to adopt Sec.
226.54(a)(2), which would define ``grace period'' for purposes of Sec.
226.54(a)(1) as having the same meaning as in Sec. 226.5(b)(2)(ii).
Section 226.5(b)(2)(ii) was amended by the July 2009 Regulation Z
Interim Final Rule to define ``grace period'' as a period within which
any credit extended may be repaid without incurring a finance charge
due to a periodic interest rate. 74 FR 36094. Finally, proposed comment
54(a)(1)-4 explains that Sec. 226.54(a)(1)(i) prohibits use of the
two-cycle average daily balance computation method.
Partial Grace Period Requirement
As discussed above, many credit card issuers that provide a grace
period currently require the consumer to pay off the entire balance on
the account or the entire balance subject to the grace period before
the period expires. However, new TILA Section 127(j)(1)(B) limits this
practice. Specifically, Section 127(j)(1)(B) provides that a creditor
may not impose any finance charge on a credit card account as a result
of the loss of any time period provided by the creditor within which
the consumer may repay any portion of the credit extended without
incurring a finance charge with respect to any balances or portions
thereof in the current billing cycle that were repaid within such time
period. The Board proposes to implement this prohibition in proposed
Sec. 226.54(a)(1)(ii), which states that, except as provided in
proposed Sec. 226.54(b), a card issuer must not impose finance charges
as a result of the loss of a grace period on a credit card account if
those finance charges are based on any portion of a balance subject to
a grace period that was repaid prior to the expiration of the grace
period.
The Board also proposes to adopt comment 54(a)(1)-5, which would
clarify that card issuers are not required to use a particular method
to comply with Sec. 226.54(a)(1)(ii) but provides an example of a
method that is consistent with the requirements of Sec.
226.54(a)(1)(ii). Specifically, it states that a card issuer can comply
with the requirements of Sec. 226.54(a)(1)(ii) by applying the
consumer's payment to the balance subject to the grace period at the
end of the prior billing cycle (in a manner consistent with the payment
allocation requirements in Sec. 226.53) and then calculating interest
charges based on the amount of that balance that remains unpaid. An
example of the application of this method is provided in proposed
comment 54(a)(1)-6 along with other examples of the application of
Sec. 226.54(a)(1)(i) and (ii).
In addition to the commentary clarifying the specific prohibitions
in Sec. 226.54(a)(1)(i) and (ii), the Board is proposing to adopt
three comments clarifying the general scope and applicability of Sec.
226.54. First, proposed comment 54(a)(1)-1 would clarify that Sec.
226.54 does not require the card issuer to provide a grace period or
prohibit a card issuer from placing limitations and conditions on a
grace period to the extent consistent with Sec. 226.54. Currently,
neither TILA nor Regulation Z requires a card issuer to provide a grace
period. Nevertheless, for competitive and other reasons, many credit
card issuers choose to do so, subject to certain limitations and
conditions. For example, credit card grace periods generally apply to
purchases but not to other types of transactions (such as cash
advances). In addition, as noted above, card issuers that provide a
grace period generally require the consumer to pay off all balances on
the account or the entire balance subject to the grace period before
the period expires.
Although new TILA Section 127(j) prohibits the imposition of
finance charges as a result of the loss of a grace period in certain
circumstances, the Board does not interpret this provision to mandate
that card issuers provide such a period or to limit card issuers'
ability to place limitations and conditions on a grace period to the
extent consistent with the statute. Instead, Section 127(j)(1) refers
to ``any time provided by the creditor within which the [consumer] may
repay any portion of the credit extended without incurring a finance
charge.'' This language indicates that card issuers retain the ability
to determine when and
[[Page 54168]]
under what conditions to provide a grace period on a credit card
account so long as card issuers that choose to provide a grace period
do so consistent with the requirements of new TILA Section 127(j).
The Board also proposes to adopt comment 54(a)(1)-2, which would
clarify that proposed Sec. 226.54 does not prohibit the card issuer
from charging accrued interest at the expiration of a deferred interest
or similar promotional program. Specifically, the comment would state
that, when a card issuer offers a deferred interest or similar
promotional program, Sec. 226.54 does not prohibit the card issuer
from charging that accrued interest to the account if the balance is
not paid in full prior to expiration of the period (consistent with
Sec. 226.55 and other applicable law and regulatory guidance). A
contrary interpretation of proposed Sec. 226.54 (and new TILA Section
127(j)) would effectively eliminate deferred interest and similar
programs by prohibiting the card issuer from charging interest based on
the deferred interest balance during the deferred interest period if
that balance was not paid in full at expiration. However, as discussed
above with respect to proposed Sec. 226.53, the Credit Card Act's
revisions to TILA Section 164 specifically create an exception to the
general rule governing payment allocation for deferred interest
programs, which indicates that Congress did not intend to ban such
programs. See Credit Card Act Sec. 104(1) (revised TILA Section
164(b)(2)).
Finally, proposed comment 54(a)(1)-3 would clarify that card
issuers must comply with the payment allocation requirements in Sec.
226.53 even if doing so will result in the loss of a grace period. For
example, as illustrated in proposed comment 54(a)(1)-6.ii, a card
issuer must generally allocate a payment in excess of the required
minimum periodic payment to a cash advance balance with a 25% rate
before a purchase balance with a purchase balance with a 15% rate even
if this will result in the loss of a grace period on the purchase
balance. Although there could be a narrow set of circumstances in
which--depending on the size of the balances and the amount of the
difference between the rates--this allocation would result in higher
interest charges than if the excess payment were applied in a way that
preserved the grace period, Congress did not create an exception for
these circumstances in the provisions of the Credit Card Act
specifically addressing payment allocation.
54(b) Exceptions
New TILA Section 127(j)(2) provides that the prohibitions in
Section 127(j)(1) do not apply to any adjustment to a finance charge as
a result of resolution of a dispute or as a result of the return of a
payment for insufficient funds. The Board proposes to implement these
exceptions in proposed Sec. 226.54(b).
The Board interprets the exception for the ``resolution of a
dispute'' in new TILA Section 127(j)(2)(A) to apply when the dispute is
resolved pursuant to TILA's dispute resolution procedures. Accordingly,
proposed Sec. 226.54(b)(1) would permit adjustments to finance charges
when a dispute is resolved under Sec. 226.12 (which governs the right
of a cardholder to assert claims or defenses against the card issuer)
or Sec. 226.13 (which governs resolution of billing errors).
In addition, because a payment may be returned for reasons other
than insufficient funds (such as because the account on which the
payment is drawn has been closed or because the consumer has instructed
the institution holding that account not to honor the payment), the
Board proposes to use its authority under TILA Section 105(a) to apply
the exception in new TILA Section 127(j)(2)(B) to all circumstances in
which adjustments to finance charges are made as a result of the return
of a payment.
Section 226.55 Limitations on Increasing Annual Percentage Rates, Fees,
and Charges
As revised by the Credit Card Act, TILA Section 171(a) generally
prohibits creditors from increasing any annual percentage rate, fee, or
finance charge applicable to any outstanding balance on a credit card
account under an open-end consumer credit plan. See 15 U.S.C. 1666i-1.
Revised TILA Section 171(b), however, provides exceptions to this rule
for temporary rates that expire after a specified period of time and
rates that vary with an index. Revised TILA Section 171(b) also
provides exceptions in circumstances where the creditor has not
received the required minimum periodic payment within 60 days after the
due date and where the consumer completes or fails to comply with the
terms of a workout or temporary hardship arrangement. Revised TILA
Section 171(c) limits a creditor's ability to change the terms
governing repayment of an outstanding balance. The Credit Card Act also
creates a new TILA Section 172, which provides that a creditor
generally cannot increase a rate, fee, or finance charge during the
first year after account opening and that a promotional rate (as
defined by the Board) generally cannot expire earlier than six months
after it takes effect. As discussed in detail below, the Board proposes
to implement both revised TILA Section 171 and new TILA Section 172 in
Sec. 226.55.
55(a) General Rule
As noted above, revised TILA Section 171(a) generally prohibits
increases in annual percentage rates, fees, and finance charges on
outstanding balances. Revised TILA Section 171(d) defines ``outstanding
balance'' as the amount owed as of the end of the fourteenth day after
the date on which the creditor provides notice of an increase in the
annual percentage rate, fee, or finance charge in accordance with TILA
Section 127(i).\25\ TILA Section 127(i)(1) and (2), which went into
effect on August 20, 2009, generally require creditors to notify
consumers 45 days before an increase in an annual percentage rate or
any other significant change in the terms of a credit card account (as
determined by rule of the Board).
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\25\ As discussed in the July 2009 Regulation Z Interim Final
Rule (at 74 FR 36090), the Board believes that this fourteen-day
period is intended to balance the interests of consumers and
creditors. On the one hand, the fourteen-day period ensures that the
increased rate, fee, or charge will not apply to transactions that
occur before the consumer has received the notice and had a
reasonable amount of time to review it and decide whether to use the
account for additional transactions. On the other hand, the
fourteen-day period reduces the potential that a consumer--having
been notified of an increase for new transactions--will use the 45-
day notice period to engage in transactions to which the increased
rate, fee, or charge cannot be applied.
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In the July 2009 Regulation Z Interim Final Rule, the Board
implemented new TILA Section 127(i)(1) and (2) in Sec. 226.9(c) and
(g). In addition to increases in annual percentage rates, Sec.
226.9(c)(2)(ii) lists the fees and other charges for which an increase
constitutes a significant change to the account terms necessitating 45
days' advance notice, including annual or other periodic fees, fixed
finance charges, minimum interest charges, transaction charges, cash
advance fees, late payment fees, over-the-limit fees, balance transfer
fees, returned-payment fees, and fees for required insurance, debt
cancellation, or debt suspension coverage. As discussed above, however,
the Board is proposing to amend Sec. 226.9(c)(2)(ii) to identify these
significant account terms by a cross-reference to the account-opening
disclosure requirements in Sec. 226.6(b). Because the definition of
outstanding balance in revised TILA Section 171(d) is expressly
conditioned on the provision of the 45-day advance notice,
[[Page 54169]]
the Board believes that it is consistent with the purposes of the
Credit Card Act to limit the general prohibition in revised TILA
Section 171(a) on increasing fees and finance charges to increases in
fees and charges for which a 45-day notice is required under Sec.
226.9.
Furthermore, because revised TILA Section 171(a) prohibits the
application of increased fees and charges to outstanding balances
rather than to new transactions or to the account as a whole, the Board
believes that it is appropriate to apply that prohibition only to fees
and charges that could be applied to an outstanding balance. For
example, increased cash advance or balance transfer fees would apply
only to new cash advances or balance transfers, not to existing
balances. Similarly, increased penalty fees such as late payment fees,
over-the-limit fees, and returned-payment fees would apply to the
account as a whole rather than any specific balance.\26\ Accordingly,
the Board proposes to use its authority under TILA Section 105(a) to
limit the general prohibition in revised TILA Section 171(a) to
increases in annual percentage rates and in fees and charges required
to be disclosed under Sec. 226.6(b)(2)(ii) (fees for the issuance or
availability of credit), Sec. 226.6(b)(2)(iii) (fixed finance charges
and minimum interest charges), or Sec. 226.6(b)(2)(xii) (fees for
required insurance, debt cancellation, or debt suspension
coverage).\27\
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\26\ However, the Board notes that a consumer that does not want
to accept an increase in these types of fees may reject the increase
pursuant to Sec. 226.9(h).
\27\ As discussed below with respect to proposed Sec.
226.55(b)(3), a card issuer may still increase these types of fees
and charges so long as the increased fee or charge is not applied to
the outstanding balance.
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In addition, for clarity and organizational purposes, proposed
Sec. 226.55(a) generally prohibits increases in annual percentage
rates and fees and charges required to be disclosed under Sec.
226.6(b)(2)(ii), (b)(2)(iii), or (b)(2)(xii) with respect to all
transactions, rather than just increases on existing balances. The
Board does not intend to alter the substantive requirements in revised
TILA Section 171. Instead, the Board believes that revised TILA Section
171 can be more clearly and effectively implemented if increases in
rates, fees, and charges that apply to transactions that occur more
than fourteen days after provision of a Sec. 226.9(c) or (g) notice
are addressed in an exception to the general prohibition rather than
placed outside that prohibition. The Board and the other Agencies
adopted a similar approach in the January 2009 FTC Act Rule. See 12 CFR
227.24, 74 FR 5560. Accordingly, proposed Sec. 226.55(a) states that,
except as provided in Sec. 226.55(b), a card issuer must not increase
an annual percentage rate or a fee or charge required to be disclosed
under Sec. 226.6(b)(2)(ii), (b)(2)(iii), or (b)(2)(xii).
Proposed comment 55(a)-1 provides examples of the general
application of Sec. 226.55(a) and the exceptions in Sec. 226.55(b).
Additional examples illustrating specific aspects of the exceptions in
Sec. 226.55(b) are provided in the commentary to those exceptions.
Proposed comment 55(a)-2 clarifies that nothing in Sec. 226.55
prohibits a card issuer from assessing interest due to the loss of a
grace period to the extent consistent with Sec. 226.54. In addition,
the comment states that a card issuer has not reduced an annual
percentage rate on a credit account for purposes of Sec. 226.55 if the
card issuer does not charge interest on a balance or a portion thereof
based on a payment received prior to the expiration of a grace period.
For example, if the annual percentage rate for purchases on an account
is 15% but the card issuer does not charge any interest on a $500
purchase balance because that balance was paid in full prior to the
expiration of the grace period, the card issuer has not reduced the 15%
purchase rate to 0% for purposes of Sec. 226.55.
55(b) Exceptions
Revised TILA Section 171(b) lists the exceptions to the general
prohibition in revised Section 171(a). Similarly, proposed Sec.
226.55(b) lists the exceptions to the general prohibition in proposed
Sec. 226.55(a). In addition, proposed Sec. 226.55(b) clarifies that
the listed exceptions are not mutually exclusive. In other words, a
card issuer may increase an annual percentage rate or a fee or charge
required to be disclosed under Sec. 226.6(b)(2)(ii), (b)(2)(iii), or
(b)(2)(xii) pursuant to an exception set forth in Sec. 226.55(b) even
if that increase would not be permitted under a different exception.
Proposed comment 55(b)-1 clarifies that, for example, although a card
issuer cannot increase an annual percentage rate pursuant to Sec.
226.55(b)(1) unless that rate is provided for a specified period of at
least six months, the card issuer may increase an annual percentage
rate during a specified period due to an increase in an index
consistent with Sec. 226.55(b)(2). Similarly, although Sec.
226.55(b)(3) does not permit a card issuer to increase an annual
percentage rate during the first year after account opening, the card
issuer may increase the rate during the first year after account
opening pursuant to Sec. 226.55(b)(4) if the required minimum periodic
payment is not received within 60 days after the due date.
Proposed comment 55(b)-2 addresses circumstances where the date on
which a rate, fee, or charge may be increased pursuant to an exception
in Sec. 226.55(b) does not fall on the first day of a billing cycle.
Because the Board understands that it may be operationally difficult
for some card issuers to apply an increased rate, fee, or charge in the
middle of a billing cycle, the comment clarifies that, in these
circumstances, the card issuer may delay application of the increased
rate, fee, or charge until the first day of the following billing cycle
without relinquishing the ability to apply that rate, fee, or charge.
An illustrative example is provided.
Proposed comment 55(b)-3 clarifies that, although nothing in Sec.
226.55 prohibits a card issuer from lowering an annual percentage rate
or a fee or charge required to be disclosed under Sec.
226.6(b)(2)(ii), (b)(2)(iii), or (b)(2)(xii), a card issuer that does
so cannot subsequently increase the rate, fee, or charge unless
permitted by one of the exceptions in Sec. 226.55(b). The Board
believes that this interpretation is consistent with the intent of
revised TILA Section 171 insofar as it ensures that consumers are
informed of the key terms and conditions associated with a lowered
rate, fee, or charge before relying on that rate, fee, or charge. For
example, revised Section 171(b)(1)(A) requires creditors to disclose
how long a temporary rate will apply and the rate that will apply after
the temporary rate expires before the consumer engages in transactions
in reliance on the temporary rate. Similarly, revised Section
171(b)(3)(B) requires the creditor to disclose the terms of a workout
or temporary hardship arrangement before the consumer agrees to the
arrangement. The comment provides examples illustrating the application
of Sec. 226.55 when an annual percentage rate is lowered.
As discussed below, several of the exceptions in proposed Sec.
226.55 require the creditor to determine when a transaction occurred.
For example, consistent with revised TILA Section 171(d)'s definition
of ``outstanding balance,'' proposed Sec. 226.55(b)(3)(ii) provides
that a card issuer that discloses an increased rate pursuant to Sec.
226.9(c) or (g) may not apply that increased rate to transactions that
occurred prior to or within fourteen days after provision of the
notice. Accordingly, proposed comment 55(b)-4 clarifies that when a
transaction occurred, for purposes of Sec. 226.55, is generally
determined by the
[[Page 54170]]
date of the transaction. The Board understands that, in certain
circumstances, a short delay can occur between the date of the
transaction and the date on which the merchant charges that transaction
to the account. As a general matter, the Board believes that these
delays should not affect the application of Sec. 226.55. However, to
address the operational difficulty for card issuers in the rare
circumstance where a transaction that occurred within fourteen days
after provision of a Sec. 226.9(c) or (g) notice is not charged to the
account prior to the effective date of the increase or change, this
comment would clarify that the card issuer may treat the transaction as
occurring more than fourteen days after provision of the notice for
purposes of Sec. 226.55. In addition, the comment would clarify that,
when a merchant places a ``hold'' on the available credit on an account
for an estimated transaction amount because the actual transaction
amount will not be known until a later date, the date of the
transaction for purposes of Sec. 226.55 is the date on which the card
issuer receives the actual transaction amount from the merchant.
Illustrative examples are provided in proposed comment 55(b)(3)-4.iii.
This comment is based on comment 9(h)(3)(ii)-2, which was adopted in
the July 2009 Regulation Z Interim Final Rule. See 74 FR 36101.
Proposed comment 55(b)-5 clarifies the meaning of the term
``category of transactions,'' which is used in some of the exceptions
in Sec. 226.55(b). This comment states that, for purposes of Sec.
226.55, a ``category of transactions'' is a type or group of
transactions to which an annual percentage rate applies that is
different than the annual percentage rate that applies to other
transactions.\28\ For example, purchase transactions, cash advance
transactions, and balance transfer transactions are separate categories
of transactions for purposes of Sec. 226.55 if a card issuer applies
different annual percentage rates to each. Furthermore, if, for
example, the card issuer applies different annual percentage rates to
different types of purchase transactions (such as one rate for
purchases of gasoline or purchases over $100 and a different rate for
all other purchases), each type constitutes a separate category of
transactions for purposes of Sec. 226.55.
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\28\ Similarly, a type or group of transactions is a ``category
of transactions'' for purposes of Sec. 226.55 if a fee or charge
required to be disclosed under Sec. 226.6(b)(2)(ii), (b)(2)(iii),
or (b)(2)(xii) applies to those transactions that is different than
the fee or charge that applies to other transactions.
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Proposed comment 55(b)-6 clarifies the relationship between the
exceptions in Sec. 226.55(b) and the 45-day advance notice
requirements in Sec. 226.9(c) and (g). Specifically, it states that
nothing in Sec. 226.55 alters the requirements in Sec. 226.9(c) and
(g) that creditors provide written notice at least 45 days prior to the
effective date of certain increases in annual percentage rates, fees,
and charges. For example, although proposed Sec. 226.55(b)(3)(ii)
permits a card issuer that discloses an increased rate pursuant to
Sec. 226.9(c) or (g) to apply that rate to transactions that occurred
more than fourteen days after provision of the notice, the card issuer
cannot begin to accrue interest at the increased rate until that
increase goes into effect, consistent with Sec. 226.9(c) or (g).
Illustrative examples are provided in proposed comment 55(b)(3)-4.
Similarly, the comment clarifies that, on or after the effective date,
the card issuer cannot calculate interest charges for days before the
effective date based on the increased rate.\29\
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\29\ The Board understands that, when the effective date for an
increased rate falls in the middle of a billing cycle, some card
issuers are unable to begin accruing interest at the increased rate
on the effective date without applying that increased rate for the
entire billing cycle (including to balances on days preceding the
effective date). Although neither Sec. 226.9 nor Sec. 226.55
permits a card issuer to accrue interest at the increased rate for
days that precede the effective date, proposed comment 55(b)-2
acknowledges this operational difficulty by clarifying that card
issuers may delay application of the increased rate until the first
day of the following billing cycle without relinquishing the ability
to apply that rate.
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55(b)(1) Temporary Rate Exception
Revised TILA Section 171(b)(1) provides that a creditor may
increase an annual percentage rate upon the expiration of a specified
period of time, subject to three conditions. First, prior to
commencement of the period, the creditor must have disclosed to the
consumer, in a clear and conspicuous manner, the length of the period
and the increased annual percentage rate that will apply after
expiration of the period. Second, at the end of the period, the
creditor must not apply a rate that exceeds the increased rate that was
disclosed prior to commencement of the period. Third, at the end of the
period, the creditor must not apply the previously-disclosed increased
rate to transactions that occurred prior to commencement of the period.
Thus, under this exception, a creditor that, for example, discloses at
account opening that a 5% rate will apply to purchases for six months
and that a 15% rate will apply thereafter would be permitted to
increase the rate on the purchase balance to 15% after six months.
Proposed Sec. 226.55(b)(1) implements the exception in revised
TILA Section 171(b)(1) regarding temporary rates as well as the
requirements in new TILA Section 172(b) regarding promotional rates.
New TILA Section 172(b) provides that ``[n]o increase in any * * *
promotional rate (as that term is defined by the Board) shall be
effective before the end of the 6-month period beginning on the date on
which the promotional rate takes effect, subject to such reasonable
exceptions as the Board may establish by rule.'' Pursuant to this
authority, the Board believes that promotional rates should be subject
to the same requirements and exceptions as other temporary rates that
expire after a specified period of time. In particular, the Board
believes that consumers who rely on promotional rates should receive
the disclosures and protections set forth in revised TILA Section
171(b)(1) and proposed Sec. 226.55(b)(1). This will ensure that a
consumer will receive disclosure of the terms of the promotional rate
before engaging in transactions in reliance on that rate and that, at
the expiration of the promotion, the rate will only be increased
consistent with those terms. Accordingly, the Board has incorporated
the requirement that promotional rates last at least six months into
proposed Sec. 226.55(b)(1), which would permit a card issuer to
increase a temporary annual percentage rate upon the expiration of a
specified period that is six months or longer.
Furthermore, pursuant to its authority under new TILA Section
172(b) to establish reasonable exceptions to the six-month requirement
for promotional rates, the Board believes that it is appropriate to
apply the other exceptions in revised TILA Section 171(b) and proposed
Sec. 226.55(b) to promotional rate offers. For example, the Board
believes that a card issuer should be permitted to offer a consumer a
promotional rate that varies with an index consistent with revised TILA
Section 171(b)(2) and proposed Sec. 226.55(b)(2) (such as a rate that
is one percentage point over a prime rate that is not under the card
issuer's control). Similarly, the Board believes that a card issuer
should be permitted to increase a promotional rate if the account
becomes more than 60 days delinquent during the promotional period
consistent with revised TILA Section 171(b)(4) and proposed Sec.
226.55(b)(4). Thus, the Board would apply to promotional rates the
general proposition in proposed Sec. 226.55(b) that a rate may be
increased pursuant to an exception in Sec. 226.55(b) even if that
increase would not be permitted under a different exception.
The Board proposes to implement the requirement in revised TILA
Section
[[Page 54171]]
171(b)(1)(A) that creditors disclose the length of the period and the
annual percentage rate that will apply after the expiration of that
period in proposed Sec. 226.55(b)(1)(i). This language tracks Sec.
226.9(c)(2)(v)(B)(1), which the Board adopted in the July 2009
Regulation Z Interim Final Rule as part of an exception to the general
requirement that creditors provide 45 days notice before an increase in
annual percentage rate. Because the disclosure requirements in Sec.
226.9(c)(2)(v)(B)(1) and proposed Sec. 226.55(b)(1)(i) implement the
same statutory provision (revised TILA Section 171(b)(1)(A)), the Board
believes a single set of disclosures should satisfy both requirements.
Accordingly, proposed comment 55(b)(1)-1 clarifies that a card issuer
that has complied with the disclosure requirements in Sec.
226.9(c)(2)(v)(B) has also complied with the disclosure requirements in
Sec. 226.55(b)(2)(i). In other words, the expiration of a temporary
rate cannot be used as a reason to apply an increased rate to a balance
that preceded application of the temporary rate. For example, assume
that a credit card account has a $5,000 purchase balance at a 15% rate
and that the card issuer reduces the rate that applies to all purchases
(including the $5,000 balance) to 10% for six months with a 22% rate
applying thereafter. Under proposed Sec. 226.55(b)(1)(ii)(A), the card
issuer could not apply the 22% rate to the $5,000 balance upon
expiration of the six-month period (although the card issuer could
apply the original 15% rate to that balance).
The Board proposes to implement in Sec. 226.55(b)(1)(ii) the
limitations in revised TILA Section 171(b)(1)(B) and (C) on the
application of increased rates following expiration of the specified
period. First, proposed Sec. 226.55(b)(1)(ii)(A) states that, upon
expiration of the specified period, a card issuer must not apply an
annual percentage rate to transactions that occurred prior to the
period that exceeds the rate that applied to those transactions prior
to the period.
Second, proposed Sec. 226.55(b)(1)(ii)(B) states that, if the
disclosures required by Sec. 226.55(b)(1)(i) are provided pursuant to
Sec. 226.9(c), the card issuer must not--upon expiration of the
specified period--apply an annual percentage rate to transactions that
occurred within fourteen days after provision of the notice that
exceeds the rate that applied to that category of transactions prior to
provision of the notice. The Board believes that this clarification is
necessary to ensure that card issuers do not apply an increased rate to
an outstanding balance (as defined in revised TILA Section 171(d)) upon
expiration of the specified period. Accordingly, consistent with the
purpose of revised TILA Section 171(d), proposed Sec.
226.55(b)(1)(ii)(B) would ensure that a consumer will have fourteen
days to receive the Sec. 226.9(c) notice and review the terms of the
temporary rate (including the increased rate that will apply upon
expiration of the specified period) before engaging in transactions to
which that increased rate may eventually apply.
Third, proposed Sec. 226.55(b)(1)(ii)(C) states that, upon
expiration of the specified period, the card issuer must not apply an
annual percentage rate to transactions that occurred during the
specified period that exceeds the increased rate disclosed pursuant to
Sec. 226.55(b)(1)(i). In other words, the card issuer can only
increase the rate consistent with the previously-disclosed terms.
Examples illustrating the application of proposed Sec.
226.55(b)(1)(ii)(A), (B), and (C) are provided in comments 55(a)-1 and
55(b)-3.
Proposed comment 55(b)(1)-2 clarifies when the specified period
begins for purposes of the six-month requirement in Sec. 226.55(b)(1).
As a general matter, proposed comment 55(b)(1)-1 states that the
specified period must expire no less than six months after the date on
which the creditor discloses to the consumer the length of the period
and rate that will apply thereafter (as required by Sec.
226.55(b)(1)(i)). However, if the card issuer provides these
disclosures before the consumer can use the account for transactions to
which the temporary rate will apply, the temporary rate must expire no
less than six months from the date on which it becomes available. For
example, assume that on January 1 a card issuer offers a 5% annual
percentage rate for six months on purchases (with a 15% rate applying
thereafter). If a consumer may begin making purchases at the 5% rate on
January 1, Sec. 226.55(b)(1) would permit the issuer to begin accruing
interest at the 15% rate on July 1. However, if a consumer may not
begin making purchases at the 5% rate until February 1, Sec.
226.55(b)(1) would not permit the issuer to begin accruing interest at
the 15% rate until August 1.
The Board understands that card issuers often limit the application
of a promotional rate to particular categories of transactions (such as
balance transfers or purchases over $100). The Board does not believe
that the six-month requirement in new TILA Section 172(b) was intended
to prohibit this practice so long as the consumer receives the benefit
of the promotional rate for at least six months. Accordingly, proposed
comment 55(b)(1)-2 clarifies that Sec. 226.55(b)(1) does not prohibit
these types of limitations. However, the comment also clarifies that,
in circumstances where the card issuer limits application of the
temporary rate to a particular transaction, the temporary rate must
expire no less than six months after the date on which that transaction
occurred. For example, if on January 1 a creditor offers a 0% temporary
rate on the purchase of an appliance and the consumer uses the account
to purchase a $1,000 appliance on March 1, the creditor cannot increase
the rate on that $1,000 purchase until September 1.
The Board believes that this application of the six-month
requirement is consistent with the intent of new TILA Section 172(b).
Although the six-month requirement could be interpreted as requiring a
separate six-month period for every transaction to which the temporary
rate applies, the Board believes this interpretation would create a
level of complexity that would be not only confusing for consumers but
also operationally burdensome for card issuers, potentially leading to
a reduction in promotional rate offers that provide significant
consumer benefit.
Proposed comment 55(b)(1)-3 clarifies that the general prohibition
in Sec. 226.55(a) applies to the imposition of accrued interest upon
the expiration of a deferred interest or similar promotional program
under which the consumer is not obligated to pay interest that accrues
on a balance if that balance is paid in full prior to the expiration of
a specified period of time. As discussed in the January 2009 FTC Act
Rule, the assessment of deferred interest is effectively an increase in
rate on an existing balance. See 74 FR 5527-5528. However, if properly
disclosed, deferred interest programs can provide substantial benefits
to consumers. See 74 FR 20812-20813. Furthermore, as discussed above
with respect to proposed comment 54(a)(1)-2, the Board does not believe
that the Credit Card Act was intended to ban properly-disclosed
deferred interest programs. Accordingly, proposed comment 55(b)(1)-3
further clarifies that card issuers may continue to offer such programs
consistent with the requirements of Sec. 226.55(b)(1). In particular,
prior to the commencement of the deferred interest period, Sec.
226.55(b)(1)(i) requires the card issuer to disclose the length of the
period and the rate that will apply to the balance subject to the
deferred interest program
[[Page 54172]]
if that balance is not paid in full prior to expiration of the period.
The comment provides examples illustrating the application of Sec.
226.55 to deferred interest and similar programs.
Finally, proposed comment 55(b)(1)-4 clarifies that Sec.
226.55(b)(1) does not permit a card issuer to apply an increased rate
that is contingent on a particular event or occurrence or that may be
applied at the card issuer's discretion. The comment provides examples
of rate increases that are not permitted by Sec. 226.55.
55(b)(2) Variable Rate Exception
Revised TILA Section 171(b)(2) provides that a card issuer may
increase ``a variable annual percentage rate in accordance with a
credit card agreement that provides for changes in the rate according
to operation of an index that is not under the card issuer's control
and is available to the general public.'' The Board proposes to
implement this exception in Sec. 226.55(b)(2), which states that a
creditor may increase an annual percentage rate that varies according
to an index that is not under the creditor's control and is available
to the general public when the increase in rate is due to an increase
in the index.
The proposed commentary to Sec. 226.55(b)(2) is modeled on
commentary adopted by the Board and the other Agencies in the January
2009 FTC Act Rule as well as Sec. 226.5b(f) and its commentary. See 12
CFR 227.24 comments 24(b)(2)-1 through 6, 74 FR 5531, 5564; Sec.
226.5b(f)(1), (3)(ii); comment 5b(f)(1)-1 and -2; comment 5b(f)(3)(ii)-
1. Proposed comment 55(b)(2)-1 clarifies that Sec. 226.55(b)(2) does
not permit a card issuer to increase a variable annual percentage rate
by changing the method used to determine that rate (such as by
increasing the margin), even if that change will not result in an
immediate increase. However, consistent with existing comment
5b(f)(3)(v)-2, the comment also clarifies that a card issuer may change
the day of the month on which index values are measured to determine
changes to the rate.
Proposed comment 55(b)(1)-2 further clarifies that a card issuer
may not increase a variable rate based on its own prime rate or cost of
funds. A card issuer is permitted, however, to use a published prime
rate, such as that in the Wall Street Journal, even if the card
issuer's own prime rate is one of several rates used to establish the
published rate. In addition, proposed comment 55(b)(2)-3 clarifies that
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 annual percentage rate applied to the
credit card account.
Because the conversion of a non-variable rate to a variable rate
could lead to future increases in the rate that applies to an existing
balance, proposed comment 55(b)(2)-4 clarifies that a non-variable rate
may be converted to a variable rate only when specifically permitted by
one of the exceptions in Sec. 226.55(b). For example, under Sec.
226.55(b)(1), a card issuer may convert a non-variable rate to a
variable rate at the expiration of a specified period if this change
was disclosed prior to commencement of the period.
Because Sec. 226.55 applies only to increases in annual percentage
rates, proposed comment 55(b)(2)-5 clarifies that nothing in Sec.
226.55 prohibits a card issuer 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
card issuer provides the notice required by Sec. 226.9(c). An
illustrative example is provided.
Proposed comment 55(b)(2)-6 clarifies that a card issuer 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.
55(b)(3) Advance Notice Exception
Proposed Sec. 226.55(a) prohibits increases in annual percentage
rates and fees and charges required to be disclosed under Sec.
226.6(b)(2)(ii), (b)(2)(iii), or (b)(2)(xii) with respect to both
existing balances and new transactions. However, as discussed above,
the prohibition on increases in rates, fees, and finance charges in
revised TILA Section 171 applies only to ``outstanding balances'' as
defined in Section 171(d). Accordingly, proposed Sec. 226.55(b)(3)
provides that a card issuer may generally increase an annual percentage
rate or a fee or charge required to be disclosed under Sec.
226.6(b)(2)(ii), (b)(2)(iii), or (b)(2)(xii) with respect to new
transactions after complying with the notice requirements in Sec.
226.9(b), (c), or (g).
Because Sec. 226.9 applies different notice requirements in
different circumstances, proposed Sec. 226.55(b)(3) clarifies that the
transactions to which an increased rate, fee, or charge may be applied
depend on the type of notice required. As a general matter, when an
annual percentage rate, fee, or charge is increased pursuant to Sec.
226.9(c) or (g), proposed Sec. 226.55(b)(3)(ii) provides that the card
issuer must not apply the increased rate, fee, or charge to
transactions that occurred within fourteen days after provision of the
notice. This is consistent with revised TILA Section 171(d), which
defines the outstanding balance to which an increased rate, fee, or
finance charge may not be applied as the amount due at the end of the
fourteenth day after notice of the increase is provided.
However, pursuant to its authority under TILA Section 105(a), the
Board proposes to establish a different approach for increased rates,
fees, and charges disclosed pursuant to Sec. 226.9(b). As discussed in
the July 2009 Regulation Z Interim Final Rule, the Board believes that
the fourteen-day period is intended, in part, to ensure that an
increased rate, fee, or charge will not apply to transactions that
occur before the consumer has received the notice of the increase and
had a reasonable amount of time to review it and decide whether to
engage in transactions to which the increased rate, fee, or charge will
apply. See 74 FR 36090. The Board does not believe that a fourteen-day
period is necessary for increases disclosed pursuant to Sec. 226.9(b),
which requires card issuers to disclose any new finance charge terms
applicable to supplemental access devices (such as convenience checks)
and additional features added to the account after account opening
before the consumer uses the device or feature for the first time. For
example, Sec. 226.9(b)(3)(i)(A) requires that card issuers providing
checks that access a credit card account to which a temporary
promotional rate applies disclose key terms on the front of the page
containing the checks, including the promotional rate, the period
during which the promotional rate will be in effect, and the rate that
will apply after the promotional rate expires. Thus, unlike increased
rates, fees, and charges disclosed pursuant to a Sec. 226.9(c) and (g)
notice, the fourteen-day period is not necessary for increases
disclosed pursuant to Sec. 226.9(b) because the device or feature will
not be used before the consumer has received notice of the applicable
terms. Accordingly, proposed
[[Continued on page 54173]]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
]
[[pp. 54173-54222]] Truth in Lending
[[Continued from page 54172]]
[[Page 54173]]
Sec. 226.55(b)(3)(i) provides that, if a card issuer discloses an
increased annual percentage rate, fee, or charge pursuant to Sec.
226.9(b), the card issuer must not apply that rate, fee, or charge to
transactions that occurred prior to provision of the notice.
Proposed Sec. 226.55(b)(3)(iii) provides that the exception in
Sec. 226.55(b)(3) does not permit a card issuer to increase an annual
percentage rate or a fee or charge required to be disclosed under Sec.
226.6(b)(2)(ii), (b)(2)(iii), or (b)(2)(xii) during the first year
after the credit card account is opened. This provision implements new
TILA Section 172(a), which generally prohibits increases in annual
percentage rates, fees, and finance charges during the one-year period
beginning on the date the account is opened.
Proposed comment 55(b)(3)-1 clarifies that a card issuer may not
increase a fee or charge required to be disclosed under Sec.
226.6(b)(2)(ii), (b)(2)(iii), or (b)(2)(xii) pursuant to Sec.
226.55(b)(3) if the consumer has rejected the increased fee or charge
pursuant to Sec. 226.9(h). In addition, proposed comment 55(b)(3)-2
clarifies that, if an increased annual percentage rate, fee, or charge
is disclosed pursuant to both Sec. 226.9(b) and (c), the requirements
in Sec. 226.55(b)(3)(ii) control and the rate, fee, or charge may only
be applied to transactions that occur more than fourteen days after
provision of the Sec. 226.9(c) notice.
Proposed comment 55(b)(3)-3 clarifies whether certain changes to a
credit card account constitute an ``account opening'' for purposes of
the prohibition in Sec. 226.55(b)(3)(iii) on increasing annual
percentage rates and fees and charges required to be disclosed under
Sec. 226.6(b)(2)(ii), (b)(2)(iii), or (b)(2)(xii) during the first
year after account opening. In particular, the comment would
distinguish between circumstances in which a card issuer opens multiple
accounts for the same consumer and circumstances in which a card issuer
substitutes, replaces, or consolidates one account with another. As an
initial matter, this comment would clarify that, when a consumer has a
credit card account with a card issuer and the consumer opens a new
credit card account with the same card issuer (or its affiliate or
subsidiary), the opening of the new account constitutes the opening of
a credit card account for purposes of Sec. 226.55(b)(3)(iii) if, more
than 30 days after the new account is opened, the consumer has the
option to obtain additional extensions of credit on each account. Thus,
for example, if a consumer opens a credit card account with a card
issuer on January 1 of year one and opens a second credit card account
with that card issuer on July 1 of year one, the opening of the second
account constitutes an account opening for purposes of Sec.
226.55(b)(3)(iii) so long as, on August 1, the consumer has the option
to engage in transactions using either account. This is the case even
if the consumer transfers a balance from the first account to the
second. Thus, because the card issuer has two separate account
relationships with the consumer, the prohibition in Sec.
226.55(b)(3)(iii) on increasing annual percentage rates and fees and
charges required to be disclosed under Sec. 226.6(b)(2)(ii),
(b)(2)(iii), or (b)(2)(xii) during the first year after account opening
would apply to the opening of the second account.\30\
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\30\ This comment is based on commentary to the January 2009 FTC
Act Rule proposed by the Board and the other Agencies in May 2009.
See 12 CFR 227.24, proposed comment 24-4, 74 FR 20816; see also 74
FR 20809. In that proposal, the Board recognized that the process of
replacing one account with another generally is not instantaneous.
If, for example, a consumer requests that a credit card account with
a $1,000 balance be upgraded to a credit card account that offers
rewards on purchases, the second account may be opened immediately
or within a few days but, for operational reasons, there may be a
delay before the $1,000 balance can be transferred and the first
account can be closed. For this reason, the Board sought comment on
whether 15 or 30 days was the appropriate amount of time to complete
this process. In response, industry commenters generally stated that
at least 30 days was required. Accordingly, the Board is proposing a
30-day period in comment 55(b)(3)-3.
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In contrast, the comment would clarify that an account has not been
opened for purposes of Sec. 226.55(b)(3)(iii) when a card issuer
substitutes or replaces one credit card account with another credit
card account (such as when a retail credit card is replaced with a
cobranded general purpose card that can be used at a wider number of
merchants) or when a card issuer consolidates or combines a credit card
account with one or more other credit card accounts into a single
credit card account. As discussed below with respect to proposed Sec.
226.55(d)(2), the Board believes that these transfers should be treated
as a continuation of the existing account relationship rather than the
creation of a new account relationship. Similarly, the comment would
also clarify that the substitution or replacement of an acquired credit
card account does not constitute an ``account opening'' for purposes of
Sec. 226.55(b)(3)(iii). Thus, in these circumstances, the prohibition
in Sec. 226.55(b)(3)(iii) would not apply. However, when a
substitution, replacement or consolidation occurs during the first year
after account opening, proposed comment 55(b)(3)-3.ii.B would clarify
that the card issuer may not increase an annual percentage rate, fee,
or charge in a manner otherwise prohibited by Sec. 226.55.\31\
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\31\ For example, assume that, on January 1 of year one, a
consumer opens a credit card account with a purchase rate of 15%. On
July 1 of year one, the account is replaced with a credit card
account issued by the same card issuer, which offers different
features (such as rewards on purchases). Under these circumstances,
the card issuer could not increase the annual percentage rate for
purchases to a rate that is higher than 15% pursuant to Sec.
226.55(b)(3) until January 1 of year two (which is one year after
the first account was opened).
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Proposed comment 55(b)(3)-4 provides illustrative examples of the
application of the exception in proposed Sec. 226.55(b)(3). Proposed
comment 55(b)(3)-5 contains a cross-reference to proposed comment
55(c)(1)-3, which clarifies the circumstances in which increased fees
and charges required to be disclosed under Sec. 226.6(b)(2)(ii),
(b)(2)(iii), or (b)(2)(xii) may be imposed consistent with Sec.
226.55.
55(b)(4) Delinquency Exception
Revised TILA Section 171(b)(4) permits a creditor to increase an
annual percentage rate, fee, or finance charge ``due solely to the fact
that a minimum payment by the [consumer] has not been received by the
creditor within 60 days after the due date for such payment.'' However,
this exception is subject to two conditions. First, revised Section
171(b)(4)(A) provides that the notice of the increase must include ``a
clear and conspicuous written statement of the reason for the increase
and that the increase will terminate not later than 6 months after the
date on which it is imposed, if the creditor receives the required
minimum payments on time from the [consumer] during that period.''
Second, revised Section 171(b)(4)(B) provides that the creditor must
``terminate [the] increase not later than 6 months after the date on
which it is imposed, if the creditor receives the required minimum
payments on time during that period.''
The Board proposes to implement this exception in Sec.
226.55(b)(4). The additional notice requirements in revised TILA
Section 171(b)(4)(A) are set forth in proposed Sec. 226.55(b)(4)(i).
The requirement in revised Section 171(b)(4)(B) that the increase be
terminated if the card issuer receives timely payments during the six
months following the increase is implemented in proposed Sec.
226.55(b)(4)(ii), although the Board proposes three adjustments to the
statutory requirement pursuant to its authority under TILA Section
105(a).
First, proposed Sec. 226.55(b)(4)(ii) interprets the requirement
that the
[[Page 54174]]
creditor ``terminate'' the increase as a requirement that the card
issuer reduce the annual percentage rate, fee, or charge to the rate,
fee, or charge that applied prior to the increase. The Board believes
that this interpretation is consistent with the intent of revised TILA
Section 171(b)(4)(B) insofar as the effect of the increase will be
undone. The Board does not interpret revised TILA Section 171(b)(4)(B)
to require the card issuer to refund or credit the account for amounts
charged as a result of the increase prior to the termination.
Second, for clarity, proposed Sec. 226.55(b)(4)(ii) provides that
the card issuer must reduce the annual percentage rate, fee, or charge
after receiving six consecutive required minimum periodic payments on
or before the payment due date beginning with the first payment due
following the effective date of the increase. The Board believes that
shifting the focus from months to minimum payments provides more
specificity and clarity for both consumers and card issuers as to what
is required to obtain the reduction. Furthermore, the Board believes
that limiting this requirement to the period immediately following the
increase is consistent with revised TILA Section 171(b)(4)(B), which
requires a creditor to terminate an increase ``6 months after the date
on which it is imposed, if the creditor receives the required minimum
payments on time during that period.'' Thus, as clarified in proposed
comment 55(b)(4)-3 (which is discussed below), proposed Sec.
226.55(b)(4)(ii) would not require a card issuer to terminate an
increase if, at some later point in time, the card issuer receives six
consecutive required minimum periodic payments on or before the payment
due date.
Third, proposed Sec. 226.55(b)(4)(ii) provides that the card
issuer must also reduce the annual percentage rate, fee, or charge with
respect to transactions that occurred within fourteen days after
provision of the Sec. 226.9(c) or (g) notice. This requirement is
consistent with the definition of ``outstanding balance'' in revised
TILA Section 171(d), as applied in proposed Sec. 226.55(b)(1)(ii)(B)
and proposed Sec. 226.55(b)(3)(ii).
Proposed comment 55(b)(4)-1 clarifies that, in order to satisfy the
condition in Sec. 226.55(b)(4) that the card issuer has not received
the consumer's required minimum periodic payment within 60 days after
the payment due date, a card issuer that requires monthly minimum
payments generally must not have received two consecutive minimum
payments. The comment further clarifies that whether a required minimum
periodic payment has been received for purposes of Sec. 226.55(b)(4)
depends on whether the amount received is equal to or more than the
first outstanding required minimum periodic payment. The comment
provides the following example: Assume that the required minimum
periodic payments for a credit card account are due on the fifteenth
day of the month. On May 13, the card issuer has not received the $50
required minimum periodic payment due on March 15 or the $150 required
minimum periodic payment due on April 15. If the card issuer receives a
$50 payment on May 14, Sec. 226.55(b)(4) does not apply because the
payment is equal to the required minimum periodic payment due on March
15 and therefore the account is not more than 60 days delinquent.
However, if the card issuer instead received a $40 payment on May 14,
Sec. 226.55(b)(4) would apply because the payment is less than the
required minimum periodic payment due on March 15. Furthermore, if the
card issuer received the $50 payment on May 15, Sec. 226.55(b)(4)
would apply because the card issuer did not receive the required
minimum periodic payment due on March 15 within 60 days after the due
date for that payment.
As discussed above, proposed Sec. 226.9(g)(3)(i)(B) would require
that the written notice provided to consumers 45 days before an
increase in rate due to delinquency or default or as a penalty include
the information required by revised Section 171(b)(4)(A). Accordingly,
proposed comment 55(b)(4)-2 clarifies that a card issuer that has
complied with the disclosure requirements in Sec. 226.9(g)(3)(i)(B)
has also complied with the disclosure requirements in Sec.
226.55(b)(4)(i).
Proposed comment 55(b)(4)-3 clarifies the requirements in Sec.
226.55(b)(4)(ii) regarding the reduction of annual percentage rates,
fees, or charges that have been increased pursuant to Sec.
226.55(b)(4). First, as discussed above, the comment clarifies that
Sec. 226.55(b)(4)(ii) does not apply if the card issuer does not
receive six consecutive required minimum periodic payments on or before
the payment due date beginning with the payment due immediately
following the effective date of the increase, even if, at some later
point in time, the card issuer receives six consecutive required
minimum periodic payments on or before the payment due date.
Second, the comment states that, although Sec. 226.55(b)(4)(ii)
requires the card issuer to reduce an annual percentage rate, fee, or
charge increased pursuant to Sec. 226.55(b)(4) to the annual
percentage rate, fee, or charge that applied prior to the increase,
this provision does not prohibit the card issuer from applying an
increased annual percentage rate, fee, or charge consistent with any of
the other exceptions in Sec. 226.55(b). For example, if a temporary
rate applied prior to the Sec. 226.55(b)(4) increase and the temporary
rate expired before a reduction in rate pursuant to Sec. 226.55(b)(4),
the card issuer may apply an increased rate to the extent consistent
with Sec. 226.55(b)(1). Similarly, if a variable rate applied prior to
the Sec. 226.55(b)(4) increase, the card issuer may apply any increase
in that variable rate to the extent consistent with Sec. 226.55(b)(2).
This is consistent with proposed Sec. 226.55(b), which provides that a
card issuer may increase an annual percentage rate or a fee or charge
required to be disclosed under Sec. 226.6(b)(2)(ii), (b)(2)(iii), or
(b)(2)(xii) pursuant to one of the exceptions in Sec. 226.55(b) even
if that increase would not be permitted under a different exception.
Third, the comment states that, if Sec. 226.55(b)(4)(ii) requires
a card issuer to reduce an annual percentage rate, fee, or charge on a
date that is not the first day of a billing cycle, the card issuer may
delay application of the reduced rate, fee, or charge until the first
day of the following billing cycle. This is consistent with proposed
comment 55(b)-2, which clarifies that a card issuer may delay
application of an increase in a rate, fee, or charge until the start of
the next billing cycle without relinquishing its ability to apply that
rate, fee, or charge. Finally, the comment provides examples
illustrating the application of Sec. 226.55(b)(4)(ii).
55(b)(5) Workout and Temporary Hardship Arrangement Exception
Revised TILA Section 171(b)(3) permits a creditor to increase an
annual percentage rate, fee, or finance charge ``due to the completion
of a workout or temporary hardship arrangement by the [consumer] or the
failure of a [consumer] to comply with the terms of a workout or
temporary hardship arrangement.'' However, like the exception for
delinquencies of more than 60 days in revised TILA Section 171(b)(4),
this exception is subject to two conditions. First, revised Section
171(b)(3)(A) provides that ``the annual percentage rate, fee, or
finance charge applicable to a category of transactions following any
such increase does not exceed the rate, fee, or finance charge that
applied to that category of transactions prior to commencement of the
arrangement.'' Second, revised Section 171(b)(3)(B) provides that the
creditor must have ``provided the
[[Page 54175]]
[consumer], prior to the commencement of such arrangement, with clear
and conspicuous disclosure of the terms of the arrangement (including
any increases due to such completion or failure).''
The Board proposes to implement this exception in Sec.
226.55(b)(5). The notice requirements in revised Section 171(b)(3)(B)
are set forth in proposed Sec. 226.55(b)(5)(i). The limitation on
increases following completion or failure of a workout or temporary
hardship arrangement is set forth in proposed Sec. 226.55(b)(5)(ii).
Proposed comment 55(b)(5)-1 clarifies that nothing in Sec.
226.55(b)(5) permits a card issuer to alter the requirements of Sec.
226.55 pursuant to a workout or temporary hardship arrangement. For
example, a card issuer cannot increase an annual percentage rate or a
fee or charge required to be disclosed under Sec. 226.6(b)(2)(ii),
(b)(2)(iii), or (b)(2)(xii) pursuant to a workout or temporary hardship
arrangement unless otherwise permitted by Sec. 226.55. In addition, a
card issuer cannot require the consumer to make payments with respect
to a protected balance that exceed the payments permitted under Sec.
226.55(c).\32\
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\32\ The definition of ``protected balance'' and the permissible
repayment methods for such a balance are discussed in detail below
with respect to proposed Sec. 226.55(c).
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Proposed comment 55(b)(5)-2 clarifies that a card issuer that has
complied with the disclosure requirements in Sec. 226.9(c)(2)(v)(D)
has also complied with the disclosure requirements in Sec.
226.55(b)(5)(i). The comment also contains a cross-reference to
proposed comment 9(c)(2)(v)-8, which the Board adopted in the July 2009
Regulation Z Interim Final Rule to clarify the terms a creditor is
required to disclose prior to commencement of a workout or temporary
hardship arrangement for purposes of Sec. 226.9(c)(2)(v)(D), which is
an exception to the general requirement that a creditor provide 45 days
advance notice of an increase in annual percentage rate. See 74 FR
36099. Because the disclosure requirements in Sec. 226.9(c)(2)(v)(D)
and proposed Sec. 226.55(b)(5)(i) implement the same statutory
provision (revised TILA Section 171(b)(3)(B)), the Board believes a
single set of disclosures should satisfy the requirements of all three
provisions.
Similar to the commentary to proposed Sec. 226.55(b)(4), proposed
comment 55(b)(5)-3 states that, although the card issuer may not apply
an annual percentage rate, fee, or charge to transactions that occurred
prior to commencement of the arrangement that exceeds the rate, fee, or
charge that applied to those transactions prior to commencement of the
arrangement, Sec. 226.55(b)(5)(ii) does not prohibit the card issuer
from applying an increased rate, fee, or charge upon completion or
failure of the arrangement to the extent consistent with any of the
other exceptions in Sec. 226.55(b) (such as an increase in a variable
rate consistent with proposed Sec. 226.55(b)(2)). Finally, proposed
comment 55(b)(5)-4 provides illustrative examples of the application of
this exception.
55(b)(6) Servicemembers Civil Relief Act Exception
The Board proposes to use its authority under TILA Section 105(a)
to clarify the relationship between the general prohibition on
increasing annual percentage rates in revised TILA Section 171 and
certain provisions of the Servicemembers Civil Relief Act (SCRA), 50
U.S.C. app. 501 et seq. Specifically, 50 U.S.C. app. 527(a)(1) provides
that ``[a]n obligation or liability bearing interest at a rate in
excess of 6 percent per year that is incurred by a servicemember, or
the servicemember and the servicemember's spouse jointly, before the
servicemember enters military service shall not bear interest at a rate
in excess of 6 percent. * * *'' With respect to credit card accounts,
this restriction applies during the period of military service. See 50
U.S.C. app. 527(a)(1)(B).\33\
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\33\ 50 U.S.C. app. 527(a)(1)(B) applies to obligations or
liabilities that do not consist of a mortgage, trust deed, or other
security in the nature of a mortgage.
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Under revised TILA Section 171, a creditor that complies with the
SCRA by lowering the annual percentage rate that applies to an existing
balance on a credit card account when the consumer enters military
service arguably would not be permitted to increase the rate for that
balance once the period of military service ends and the protections of
the SCRA no longer apply. In May 2009, the Board and the other Agencies
proposed to create an exception to the general prohibition in the
January 2009 FTC Act Rule on applying increased rates to existing
balances for these circumstances, provided that the increased rate does
not exceed the rate that applied prior to the period of military
service. See 12 CFR 227.24(b)(6), 74 FR 20814; see also 74 FR 20812.
Revised TILA Section 171 does not contain a similar exception. However,
the Board does not believe that Congress intended to prohibit creditors
from returning an annual percentage rate that has been reduced by
operation of the SCRA to its pre-military service level once the SCRA
no longer applies. Accordingly, the Board proposes to create Sec.
226.55(b)(6), which states that, if an annual percentage rate has been
decreased pursuant to the SCRA, a card issuer may increase that annual
percentage rate once the SCRA no longer applies. However, the card
issuer would not be permitted to apply an annual percentage rate to any
transactions that occurred prior to the decrease that exceeds the rate
that applied to those transactions prior to the decrease. Furthermore,
because the Board believes that a consumer leaving military service
should receive 45 days advance notice of this increase in rate, the
Board has not proposed a corresponding exception to Sec. 226.9.
Proposed comment 55(b)(6)-1 clarifies that, although Sec.
226.55(b)(6) requires the card issuer to apply to any transactions that
occurred prior to a decrease in annual percentage rate pursuant to 50
U.S.C. app. 527 a rate that does not exceed the rate that applied to
those transactions prior to the decrease, the card issuer may apply an
increased rate once 50 U.S.C. app 527 no longer applies, to the extent
consistent with any of the other exceptions in Sec. 226.55(b). For
example, if the rate that applied prior to the decrease was a variable
rate, the card issuer may apply any increase in that variable rate to
the extent consistent with Sec. 226.55(b)(2). This comment mirrors
similar commentary to proposed Sec. 226.55(b)(4) and (b)(5). An
illustrative example is provided in proposed comment 26(b)(6)-2.
55(c) Treatment of Protected Balances
Revised TILA Section 171(c)(1) states that ``[t]he creditor shall
not change the terms governing the repayment of any outstanding
balance, except that the creditor may provide the [consumer] with one
of the methods described in [revised Section 171(c)(2)] * * * or a
method that is no less beneficial to the [consumer] than one of those
methods.'' Revised TILA Section 171(c)(2) lists two methods of repaying
an outstanding balance: First, an amortization period of not less than
five years, beginning on the effective date of the increase set forth
in the Section 127(i) notice; and, second, a required minimum periodic
payment that includes a percentage of the outstanding balance that is
equal to not more than twice the percentage required before the
effective date of the increase set forth in the Section 127(i) notice.
For clarity, proposed Sec. 226.55(c)(1) defines the balances
subject to the
[[Page 54176]]
protections in revised TILA Section 171(c) as ``protected balances.''
Under this definition, a ``protected balance'' is the amount owed for a
category of transactions to which an increased annual percentage rate
or an increased fee or charge required to be disclosed under Sec.
226.6(b)(2)(ii), (b)(2)(iii), or (b)(2)(xii) cannot be applied after
the annual percentage rate, fee, or charge for that category of
transactions has been increased pursuant to Sec. 226.55(b)(3). For
example, when a card issuer notifies a consumer of an increase in the
annual percentage rate that applies to new purchases pursuant to Sec.
226.9(c), the protected balance is the purchase balance at the end of
the fourteenth day after provision of the notice. See Sec.
226.55(b)(3)(ii). The Board and the other Agencies adopted a similar
definition in the January 2009 FTC Act Rule. See 12 CFR 227.24(c), 74
FR 5560; see also 74 FR 5532.
Proposed comment 55(c)(1)-1 would provide an illustrative example
of a protected balance. Proposed comment 55(c)(1)-2 would clarify that,
because Sec. 226.55(b)(3)(iii) does not permit a card issuer to
increase an annual percentage rate or a fee or charge required to be
disclosed under Sec. 226.6(b)(2)(ii), (b)(2)(iii), or (b)(2)(xii)
during the first year after account opening, Sec. 226.55(c) does not
apply to balances during the first year after account opening.
Proposed comment 55(c)(1)-3 clarifies that, although Sec.
226.55(b)(3) does not permit a card issuer to apply an increased fee or
charge required to be disclosed under Sec. 226.6(b)(2)(ii),
(b)(2)(iii), or (b)(2)(xii) to a protected balance, a card issuer is
not prohibited from increasing a fee or charge that applies to the
account as a whole or to balances other than the protected balance. For
example, a card issuer may add a new annual or a monthly maintenance
fee to an account or increase such a fee so long as the fee is not
based solely on the protected balance. However, if the consumer rejects
an increase in a fee or charge pursuant to Sec. 226.9(h), the card
issuer is prohibited from applying the increased fee or charge to the
account and from imposing any other fee or charge solely as a result of
the rejection. See Sec. 226.9(h)(2)(i) and (ii); comment 9(h)(2)(ii)-
2.
Proposed Sec. 226.55(c)(2) implements the restrictions on
accelerating the repayment of protected balances in revised TILA
Section 171(c). As discussed above with respect to Sec. 226.9(h), the
Board previously implemented these restrictions in the July 2009
Regulation Z Interim Final Rule as Sec. 226.9(h)(2)(iii). However, for
clarity and consistency, the Board proposes to move these restrictions
to proposed Sec. 226.55(c)(2). Proposed Sec. 226.55(c)(2) is
consistent with current Sec. 226.9(h)(2)(iii), except that the
repayment methods in Sec. 226.55(c)(2) focus on the effective date of
the increase (rather than the date on which the card issuer is notified
of the rejection pursuant to Sec. 226.9(h)).
Similarly, for the reasons discussed above with respect to Sec.
226.9(h), the Board proposes to move the commentary clarifying the
application of these repayment methods from current Sec.
226.9(h)(2)(iii) to Sec. 226.55(c) and to adjust that commentary for
consistency with Sec. 226.55(c). In addition, proposed comment
55(c)(2)(iii)-1 would clarify that, although Sec. 226.55(c)(2)(iii)
limits the extent to which the portion of the required minimum periodic
payment based on the protected balance may be increased, it does not
limit or otherwise address the creditor's ability to determine the
amount of the required minimum periodic payment based on other balances
on the account or to apply that portion of the minimum payment to the
balances on the account. Proposed comment 55(c)(2)(iii)-2 would provide
an illustrative example.
55(d) Continuing Application of Sec. 226.55
Pursuant to its authority under TILA Section 105(a), the Board
proposes to adopt Sec. 226.55(d), which provides that the limitations
in Sec. 226.55 continue to apply to a balance on a credit card account
after the account is closed or acquired by another card issuer or the
balance is transferred from a credit card account issued by a card
issuer to another credit account issued by the same card issuer or its
affiliate or subsidiary (unless the account to which the balance is
transferred is subject to Sec. 226.5b). This provision is based on
commentary to the January 2009 FTC Act Rule proposed by the Board and
the other Agencies in May 2009, primarily in response to concerns that
permitting card issuers to apply an increased rate to an existing
balance in these circumstances could lead to circumvention of the
general prohibition on such increases. See 12 CFR 227.21 comments
21(c)-1 through -3, 74 FR 20814-20815; see also 74 FR 20805-20807.
Because the protections in revised TILA Section 171 and new TILA
Section 172 cannot be waived or forfeited, proposed Sec. 226.55(d)
does not distinguish between closures or transfers initiated by the
card issuer and closures or transfers initiated by the consumer.
Although there may be circumstances in which individual consumers could
make informed choices about the benefits and costs of waiving the
protections in revised Section 171 and new Section 172, an exception
for those circumstances would create a significant loophole that could
be used to deny the protections to other consumers. For example, if a
card issuer offered to transfer its cardholder's existing balance to a
credit product that would reduce the rate on the balance for a period
of time in exchange for the cardholder accepting a higher rate after
that period, the cardholder would have to determine whether the savings
created by the temporary reduction would offset the cost of the
subsequent increase, which would depend on the amount of the balance,
the amount and length of the reduction, the amount of the increase, and
the length of time it would take the consumer to pay off the balance at
the increased rate. Based on extensive consumer testing conducted
during the preparation of the January 2009 Regulation Z Rule and the
January 2009 FTC Act Rule, the Board believes that it would be very
difficult to ensure that card issuers disclosed this information in a
manner that will enable most consumers to make informed decisions about
whether to accept the increase in rate. Although some approaches to
disclosure may be effective, others may not and it would be impossible
to distinguish among such approaches in a way that would provide clear
guidance for card issuers. Furthermore, consumers might be presented
with choices that are not meaningful (such as a choice between
accepting a higher rate on an existing balance or losing credit
privileges on the account).
Proposed 226.55(d)(1) provides that Sec. 226.55 continues to apply
to a balance on a credit card account after the account is closed or
acquired by another card issuer. In some cases, the acquiring
institution may elect to close the acquired account and replace it with
its own credit card account. See comment 12(a)(2)-3. The acquisition of
an account does not involve any choice on the part of the consumer, and
the Board believes that consumers whose accounts are acquired should
receive the same level of protection against increases in annual
percentage rates after acquisition as they did beforehand.\34\ Proposed
[[Page 54177]]
comment 55(d)-1 clarifies that Sec. 226.55 continues to apply
regardless of whether the account is closed by the consumer or the card
issuer and provides illustrative examples of the application of Sec.
226.55(d)(1). Proposed comment 55(d)-2 clarifies the application of
Sec. 226.55(d)(1) to circumstances in which a card issuer acquires a
credit card account with a balance by, for example, merging with or
acquiring another institution or by purchasing another institution's
credit card portfolio.
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\34\ Thus, as discussed in the proposed commentary to Sec.
226.55(b)(2), a card issuer that acquires a credit card account with
a balance to which a variable rate applies would not be permitted to
substitute a new index for the index used to determine the variable
rate if the change could result in an increase in the annual
percentage rate. However, the proposed commentary to Sec.
226.55(b)(2) does clarify that a card issuer that does not utilize
the index used to determine the variable rate for an acquired
balance may convert that rate to an equal or lower non-variable
rate, subject to the notice requirements of Sec. 226.9(c).
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Proposed 226.55(d)(2) provides that Sec. 226.55 continues to apply
to a balance on a credit card account after the balance is transferred
from a credit card account issued by a card issuer to another credit
account issued by the same card issuer or its affiliate or subsidiary
(unless the account to which the balance is transferred is subject to
Sec. 226.5b). Proposed comment 55(d)-3.i provides examples of
circumstances in which balances may be transferred from one credit card
account issued by a card issuer to another credit card account issued
by the same card issuer (or its affiliate or subsidiary), such as when
the consumer's account is converted from a retail credit card that may
only be used at a single retailer or an affiliated group of retailers
to a co-branded general purpose credit card which may be used at a
wider number of merchants. Because of the concerns discussed above
regarding circumvention and informed consumer choice and for
consistency with the issuance rules regarding card renewals or
substitutions for accepted credit cards under Sec. 226.12(a)(2), the
Board believes--and proposed Sec. 226.55(d)(2) provides--that these
transfers should be treated as a continuation of the existing account
relationship rather than the creation of a new account relationship.
See comment 12(a)(2)-2.
Proposed Sec. 226.55(d)(2) does not apply to balances transferred
from a credit card account issued by a card issuer to a credit account
issued by the same card issuer (or its affiliate or subsidiary) that is
subject to Sec. 226.5b (which applies to open-end credit plans secured
by the consumer's dwelling). The Board believes that excluding
transfers to such accounts is appropriate because Sec. 226.5b provides
protections that are similar to--and, in some cases, more stringent
than--the protections in Sec. 226.55. For example, a card issuer may
not change the annual percentage rate on a home-equity plan unless the
change is based on an index that is not under the card issuer's control
and is available to the general public. See 12 CFR 226.5b(f)(1).
Proposed comment 55(d)-3.ii clarifies that, when a consumer chooses
to transfer a balance to a credit card account issued by a different
card issuer, Sec. 226.55 does not prohibit the card issuer to which
the balance is transferred from applying its account terms to that
balance, provided those terms comply with 12 CFR part 226. For example,
if a credit card account issued by card issuer A has a $1,000 purchase
balance at an annual percentage rate of 15% and the consumer transfers
that balance to a credit card account with a purchase rate of 17%
issued by card issuer B, card issuer B may apply the 17% rate to the
$1,000 balance. However, card issuer B may not subsequently increase
the rate that applies to that balance unless permitted by one of the
exceptions in Sec. 226.55(b).
Although balance transfers from one card issuer to another raise
some of the same concerns as balance transfers involving the same card
issuer, the Board believes that transfers between card issuers are not
contrary to the intent of revised TILA Section 171 and proposed Sec.
226.55 because the card issuer to which the balance is transferred is
not increasing the cost of credit it previously extended to the
consumer. For example, assume that card issuer A has extended a
consumer $1,000 of credit at a rate of 15%. Because proposed Sec.
226.55 generally prohibits card issuer A from increasing the rate that
applies to that balance, it would be inconsistent with Sec. 226.55 to
allow card issuer A to reprice that balance simply by transferring it
to another of its accounts. In contrast, in order for the $1,000
balance to be transferred to card issuer B, card issuer B must provide
the consumer with a new $1,000 extension of credit in an arms-length
transaction and should be permitted to price that new extension
consistent with its evaluation of prevailing market rates, the risk
presented by the consumer, and other factors. Thus, the transfer from
card issuer A to card issuer B does not appear to raise concerns about
circumvention of proposed Sec. 226.55 because card issuer B is not
increasing the cost of credit it previously extended.
The Board understands from comments on the May 2009 proposal that
drawing this distinction between balance transfers involving the same
card issuer and balance transfers involving different card issuers may
limit a card issuer's ability to offer its existing cardholders the
same terms that it would offer another issuer's cardholders. As noted
in that proposal, however, the Board understands that currently card
issuers generally do not make promotional balance transfer offers
available to their existing cardholders for balances held by the issuer
because it is not cost-effective to do so. Furthermore, although many
card issuers do offer existing cardholders the opportunity to upgrade
to accounts offering different terms or features (such as upgrading to
an account that offers a particular type of rewards), the Board
understands that these offers generally are not conditioned on a
balance transfer, which indicates that it may be cost-effective for
card issuers to make these offers without repricing an existing
balance. Nevertheless, the Board again solicits comment on the extent
to which proposed Sec. 226.55(d)(2) would affect card issuers' ability
to make offers to their own cardholders.
Section 226.56 Requirements for Over-the-Limit Transactions
When a consumer seeks to engage in a credit card transaction that
may cause his or her credit limit to be exceeded, the creditor may, at
its discretion, authorize the over-the-limit transaction. If the
creditor pays an over-the-limit transaction, the consumer is typically
assessed a fee or charge for the service.\35\ In addition, the over-
the-limit transaction may also be considered a default under the terms
of the credit card agreement and trigger a rate increase, in some cases
up to the default, or penalty, rate on the account.\36\
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\35\ According to the GAO, the average over-the-limit fee
assessed by issuers in 2005 was $30.81, an increase of 138 percent
since 1995. See Credit Cards: Increased Complexity in Rates and Fees
Heightens Need for More Effective Disclosures to Consumers, GAO
Report 06-929, at 20 (September 2006) (citing data reported by
CardWeb.com). The GAO also reported that among cards issued by the
six largest issuers in 2005, most charged an over-the-limit fee
amount between $35 and $39. Id. at 21.
\36\ See id. at 25.
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The Credit Card Act adds new TILA Section 127(k) and requires a
creditor to obtain a consumer's express election, or opt-in, before the
creditor may impose any fees on a consumer's credit card account for
making an extension of credit that exceeds the consumer's credit limit.
15 U.S.C. 1637(k). TILA Section 127(k)(2) further provides that no
election shall take effect unless the consumer, before making such
election, has received a notice from the creditor of any fees that may
be assessed for an over-the-limit transaction. If the consumer opts in
to the service, the creditor is also required to provide
[[Page 54178]]
notice of the consumer's right to revoke that election on any periodic
statement that reflects the imposition of an over-the-limit fee during
the relevant billing cycle. The Board is proposing to implement the
over-the-limit consumer consent requirements in Sec. 226.56.
The Credit Card Act directs the Board to issue rules governing the
disclosures required by TILA Section 127(k), including rules regarding
(i) the form, manner and timing of the initial opt-in notice and (ii)
the form of the subsequent notice describing how an opt-in may be
revoked. See TILA Section 127(k)(2). In addition, the Board must
prescribe rules to prevent unfair or deceptive acts or practices in
connection with the manipulation of credit limits designed to increase
over-the-limit fees or other penalty fees. See TILA Section
127(k)(5)(B).
56(a) Definition
Proposed Sec. 226.56(a) defines ``over-the-limit transaction'' to
mean any extension of credit by a creditor to complete a transaction
that causes a consumer's credit card account balance to exceed the
consumer's credit limit. The proposed term is limited to extensions of
credit required to complete a transaction that has been requested by a
consumer (for example, to make a purchase at a point of sale or on-
line, or to transfer a balance from another account). The term is not
intended to cover the assessment of fees or interest charges by the
creditor that may cause the consumer to exceed the credit limit. See,
however, proposed Sec. 226.56(j)(4), discussed below.
56(b) Opt-In Requirement
General rule. Proposed Sec. 226.56(b)(1) sets forth the general
rule prohibiting a creditor from assessing a fee or charge on a
consumer's account for paying an over-the-limit transaction unless the
consumer is given notice and a reasonable opportunity to affirmatively
consent, or opt in, to the creditor's payment of over-the-limit
transactions and the consumer has opted in. If the consumer
affirmatively consents, or ``opts in,'' to the service, the creditor
must provide the consumer notice of the right to revoke that consent
after assessing an over-the-limit fee or charge on the consumer's
account.
Under the proposed rule, the creditor may provide the opt-in notice
orally, electronically, or in writing. Compliance with the consumer
consent provisions or other requirements necessary to provide consumer
disclosures electronically pursuant to the E-Sign Act would not be
required if the creditor elects to provide the opt-in notice
electronically. See also proposed Sec. 226.5(a)(1)(ii)(A). However, as
discussed below under proposed Sec. 226.56(d)(1)(ii), before the
consumer may consent orally or electronically, the creditor must also
have provided the opt-in notice immediately prior to and
contemporaneously with obtaining that consent. In addition, while the
opt-in notice may be provided orally, electronically, or in writing,
the revocation notice must be provided to the consumer in writing,
consistent with the statutory requirement that such notice appear on
the periodic statement reflecting the assessment of an over-the-limit
fee or charge on the consumer's account. See TILA Section 127(k)(2),
and proposed Sec. 226.56(d)(2), discussed below.
The proposed notice and opt-in requirements would apply only to
credit card accounts under an open-end (not home-secured) consumer
credit plan, and would therefore not apply to credit cards that access
a home equity line of credit or to debit cards linked to an overdraft
line of credit. See proposed Sec. 226.2(a)(15)(ii). Although creditors
must obtain consumer consent before any over-the-limit fees or charges
are assessed on a consumer's account, the rule would not require that
the creditor obtain the consumer's separate consent for each extension
of credit that causes the consumer to exceed his or her credit limit.
Such an approach is not compelled by the Credit Card Act. Proposed
comment 56(b)-1 also explains, however, that even if a consumer has
affirmatively consented or opted in to a creditor's over-the-limit
service, the creditor is not required or obligated to pay or authorize
any over-the-limit transactions.
Proposed comment 56(b)-2 clarifies that a creditor that has a
policy and practice of declining to pay or authorize any transactions
that the creditor reasonably believes would cause the consumer to
exceed the credit limit is not subject to the requirements of this
section and would therefore not be required to provide the consumer
notice or an opt-in right. This ``reasonable belief'' standard
recognizes that creditors generally do not have real-time information
regarding a consumer's prior transactions or credits that may have
posted to the consumer's credit card account. As discussed below in
proposed Sec. 226.56(b)(2), however, that if an over-the-limit
transaction is paid without the consumer providing affirmative consent,
the institution would not be permitted to charge a fee for paying the
transaction.
Proposed comment 56(b)-3 provides that the opt-in requirement
applies whether a creditor assesses over-the-limit fees or charges on a
per transaction basis or as a periodic account or maintenance fee that
is imposed each cycle for the creditor's payment of over-the-limit
transactions regardless of whether the consumer has exceeded the credit
limit during a particular cycle (for example, a monthly ``over-the-
limit protection'' fee).
As further discussed below, the proposal would require creditors to
obtain consumer consent for all credit card accounts, including those
opened prior to the effective date of the rule, before the creditor
could assess any fees or charges on a consumer's account for paying
over-the-limit transactions.
Reasonable opportunity to opt in. Proposed Sec. 226.56(b)(1)(ii)
requires a creditor to provide a reasonable opportunity for the
consumer to affirmatively consent to the creditor's payment of over-
the-limit transactions. TILA Section 127(k)(3) provides that the
consumer's affirmative consent (and revocation) may be completed
orally, electronically, or in writing, pursuant to regulations
prescribed by the Board. See also proposed Sec. 226.56(e), discussed
below. Proposed comment 56(b)-4 contains examples to illustrate what
would constitute providing a consumer a reasonable opportunity to
affirmatively consent using the specified methods.
The first example provides that a creditor may include the notice
on an application form that a consumer may fill out to request the
service as part of the application process. See proposed comment 56(b)-
4.i. Alternatively, after the consumer has been approved for the card,
the creditor could provide a form with the account-opening disclosures
that can be filled out separately and mailed to affirmatively request
the service. See proposed comment 56(b)-4.ii and proposed Model Form G-
25(A) in Appendix G, discussed below.
Proposed comment 56(b)-4.iii illustrates that a creditor may obtain
consumer consent through a readily available telephone line. Proposed
comment 56(b)-4.iv illustrates that a creditor may provide an
electronic means for the consumer to affirmatively consent. For
example, a creditor could provide a form on its Web site that enables
the consumer to check a box to indicate his or her agreement to the
over-the-limit service and confirm that opt-in choice by clicking on a
consent box. See also proposed Sec. 226.56(d)(1)(ii) (requiring the
opt-in notice to be provided immediately prior to and contemporaneous
with the consumer's consent).
[[Page 54179]]
Comment is requested regarding whether creditors should be required
to segregate the opt-in notice from other account disclosures. Such a
requirement may ensure that the information is not obscured within
other account documents and overlooked by the consumer, for example, in
preprinted language in the account-opening disclosures, leading the
consumer to inadvertently consent to having over-the-limit transactions
paid or authorized by the creditor.
Notwithstanding the manner in which notice of the opt-in right may
be provided, proposed comment 56(b)-5 would clarify that the consumer's
consent must be obtained separately from other consents or
acknowledgments provided by the consumer. For example, a consumer's
signature on an application for a credit card alone would not
sufficiently evidence the consumer's consent to the creditor's payment
of over-the-limit transactions. Under the proposal, the consumer must
initial, sign, or otherwise make a separate request for the over-the-
limit service. However, the proposed comment would not preclude a
creditor from including a separate check box or signature line for
requesting the over-the-limit service in the signature block on a
credit application, provided that the check box or signature is used
solely to indicate the consumer's opt-in decision and not for any other
purpose, such as to also obtain consumer consents for other account
services or features. Under Regulation Z's record retention rules,
creditors would be required to retain evidence of the consumer's
consent or opt-in for a period of at least two years, regardless of the
means by which consent is obtained. See Sec. 226.25.
The Board also solicits comment on whether creditors should be
required to provide the consumer with written confirmation once the
consumer has opted in under proposed Sec. 226.56(b)(1)(iii) to verify
that the consumer intended to make the election. In the case of
telephone or in person requests in particular, written confirmation may
be appropriate to evidence the consumer's intent to opt in to the
service. A creditor could comply with such a requirement, for example,
by sending a letter to the consumer acknowledging that the consumer has
elected to opt in to the creditor's service, or, in the case of a
mailed request, the creditor could provide a copy of the consumer's
completed opt-in form.
Payment of over-the-limit transactions where consumer has not opted
in. Proposed Sec. 226.56(b)(2) provides that a creditor may pay an
over-the-limit transaction even if the consumer has not provided
affirmative consent, so long as the creditor does not impose a fee or
charge for paying the transaction. Proposed comment 56(b)(2)-1 contains
further guidance stating that the prohibition on imposing fees for
paying an over-the-limit transaction where the consumer has not opted
in applies even in circumstances where the creditor is unable to avoid
paying a transaction that exceeds the consumer's credit limit. Nothing
in the statute suggests that Congress intended to permit an exception
to allow any over-the-limit fees to be charged in these circumstances
absent consumer consent. Proposed comment 56(b)(2)-1 contains
illustrative examples of this provision.
For example, in some cases, a merchant may not submit a credit card
transaction to the creditor for authorization. Such an event may occur,
for instance, because the transaction is below the floor limits
established by the card network rules requiring authorization or
because the small dollar amount of the transaction does not pose
significant payment risk to the merchant. If the transaction exceeds
the consumer's credit limit, the creditor would not be permitted to
assess an over-the-limit fee if the consumer has not consented to the
creditor's payment of over-the-limit transactions.
Similarly, the proposed rule does not permit the creditor to assess
a fee for an over-the-limit transaction that occurs because the final
transaction amount exceeds the amount submitted for authorization. For
example, a consumer may use his or her credit card at a pay-at-the-pump
fuel dispenser to purchase $50 of fuel. At the time of authorization,
the gas station may request an authorization hold of $1 to verify the
validity of the card. Even if the subsequent $50 transaction amount
exceeds the consumer's credit limit, Sec. 226.56(b)(2) would prohibit
the creditor from assessing an over-the-limit fee if the consumer has
not opted in to the creditor's over-the-limit service.
Proposed comment 56(b)(2)-2 clarifies that a creditor is not
precluded from assessing other fees and charges unrelated to the
payment of the over-the-limit transaction itself even where the
consumer has not provided consent to the creditor's over-the-limit
service, to the extent permitted under applicable law. For example, if
a consumer has not opted in, a creditor could permissibly assess a
balance transfer fee for a balance transfer, provided that such a fee
is assessed whether or not the transfer exceeds the credit limit. The
creditor could also continue to assess interest charges for the over-
the-limit transaction.\37\
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\37\ The proposed rule does not prohibit a creditor from
increasing the consumer's interest rate as a result of an over-the-
limit transaction, subject to the creditor's compliance with the 45-
day advance notice requirement in Sec. 226.9(g), the limitations on
applying an increased rate to an existing balance in Sec. 226.55,
and other provisions of the Credit Card Act.
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56(c) Method of Election
TILA Section 127(k)(2) provides that a consumer may make or revoke
consent to permit over-the-limit transactions orally, electronically,
or in writing, and directs the Board to prescribe rules to ensure that
the same options are available for both making and revoking such
election. Proposed Sec. 226.56(c) implements this requirement.
Proposed comment 56(c)-1 clarifies that the creditor may determine the
means by which consumers may provide affirmative consent. The creditor
could decide, for example, whether to obtain consumer consents in
writing, electronically, by telephone, or to offer some or all of these
options. The proposed rule recognizes that creditors have a strong
interest in facilitating a consumer's ability to opt in, and thus would
permit them to determine the most effective means in obtaining such
consent.
Notwithstanding the creditor's choice(s), however, proposed Sec.
226.56(c) requires that whatever method a creditor provides for
obtaining consent, such method must be equally available to the
consumer to revoke the prior consent. See TILA Section 127(k)(3).
Proposed comment 56(c)-2 provides guidance that because consumer
consent or revocation requests are not consumer disclosures for
purposes of the E-Sign Act, creditors would not be required to comply
with the consumer consent or other requirements for providing
disclosures electronically pursuant to the E-Sign Act for consumer
requests submitted electronically. Comment is requested whether the
Board should require creditors to allow consumers to opt in and to
revoke that consent using each of the three methods (that is, orally,
electronically, and in writing).
56(d) Timing
Proposed Sec. 226.56(d)(1)(i) establishes a general requirement
that a creditor provide an opt-in notice before the creditor assesses
any fee or charge on the consumer's account for paying an over-the-
limit transaction. For example, a creditor could include the notice as
part of the credit card application. See proposed comment 56(b)-4.i.
[[Page 54180]]
Alternatively, the creditor could include the notice with other
account-opening documents, either within the account-opening
disclosures under Sec. 226.6 or in a stand-alone document. See
proposed comment 56(b)-4.ii.
The proposed rule would require that all consumers, including
existing account holders, receive notice regarding the opt-in right if
the creditor imposes a fee or charge for paying an over-the-limit
transaction. The Board believes that had Congress intended to permit
existing customers to continue to have over-the-limit transactions paid
or authorized without their prior consent, it would have so specified.
Nothing in the statute or the legislative history suggests that
Congress intended that existing account holders should not have the
same rights regarding consumer choice for over-the-limit transactions
as those afforded to new customers. As a result, the proposal would
apply the over-the-limit consumer consent requirements to credit card
accounts opened prior to February 22, 2010.
For credit card accounts opened prior to the effective date of the
final rule, a creditor may elect to provide an opt-in notice to all of
its account holders on or with the first periodic statement sent after
the effective date of the final rule. Creditors that choose to do so
would be prohibited from assessing any over-the-limit fees or charges
after the effective date of the rule and prior to providing the opt-in
notice, and subsequently could not assess any such fees or charges
unless and until the consumer opts in.
Comment is requested regarding whether a creditor should be
permitted to obtain consumer consent for the payment of over-the-limit
transactions prior to the effective date of the final rule and, if so,
under what circumstances. Such an approach could allow creditors to
phase in their processing of consumer opt-ins and alleviate the
compliance burden that may otherwise occur if notices could not be
sent, and opt-ins obtained until February 22, 2010.
In addition to the general requirement that the creditor provide an
opt-in notice prior to imposing any fee or charge for an over-the-limit
transaction, proposed Sec. 226.56(d)(1)(ii) states that if the
consumer decides to consent orally or electronically, the opt-in notice
must be given by the creditor immediately before and contemporaneously
with a consumer's election. For example, if a consumer calls the
creditor to consent to the creditor's payment of over-the-limit
transactions, the creditor must provide the opt-in notice immediately
prior to obtaining the consumer's consent. This proposed requirement is
intended to ensure that a consumer has full information regarding the
opt-in right at a time that is most likely to be meaningful to the
consumer, that is, when the opt-in decision is made.
Proposed Sec. 226.56(d)(2) provides that notice of the consumer's
right to revoke a prior election for the creditor's over-the-limit
service must appear on each periodic statement that reflects the
assessment of an over-the-limit fee or charge on a consumer's account.
See TILA Section 127(k)(2). A revocation notice would be required
regardless of whether the fee was imposed due to an over-the-limit
transaction initiated by the consumer in the prior cycle or because the
consumer failed to reduce the account balance below the credit limit in
the next cycle. To ensure that the revocation notice is clear and
conspicuous to the consumer, the proposed rule requires that the notice
appear on the front of any page of the periodic statement. Proposed
comment 56(d)-1 clarifies that creditors have flexibility regarding how
often a revocation notice must be provided. At the creditor's option,
it may, but is not required to, include the revocation notice on every
periodic statement sent to the consumer, even if the consumer has not
incurred an over-the-limit fee or charge during a particular billing
cycle.
56(e) Content and Format
TILA Section 127(k)(2) provides that a consumer's election to
permit a creditor to extend credit that would exceed the credit limit
may not take effect unless the consumer receives notice from the
creditor of any over-the-limit fee ``in the form and manner, and at the
time, determined by the Board.'' TILA Section 127(k)(2) also requires
that the creditor provide notice to the consumer of the right to revoke
the election, ``in the form prescribed by the Board,'' in any periodic
statement reflecting the imposition of an over-the-limit fee. Proposed
Sec. 226.56(e) sets forth the content requirements for both notices.
See also proposed Model Forms G-25(A) and G-25(B) in Appendix G.
Initial notice content. Proposed Sec. 226.56(e)(1) sets forth the
information that must be included in the opt-in notice provided to
consumers before a creditor may assess any fees or charges for paying
an over-the-limit transaction. To ensure that consumers can make an
informed decision regarding whether and how to affirmatively consent to
a creditor's payment of over-the-limit transactions, creditors would be
required to provide in the opt-in notice certain information in
addition to the amount of the over-the-limit fee. The additional
information would be prescribed pursuant to the Board's authority under
TILA Section 105(a) to make adjustments that are necessary to
effectuate the purposes of TILA. 15 U.S.C. 1604(a).
Proposed Sec. 226.56(e)(1)(i) would require the opt-in notice to
include information about the dollar amount of any fees or charges
assessed on a consumer's credit card account for an over-the-limit
transaction. The proposed requirement to state the fee amount on the
opt-in notice itself is separate from other required disclosures
regarding the amount of the over-the-limit fee. See, e.g., Sec.
226.5a(b)(10). Because a creditor could comply with the opt-in notice
requirement in several forms, such as providing the notice in the
application or solicitation, in the account-opening disclosures, or as
a stand-alone document, the Board believes that including the fee
disclosure in the opt-in notice itself is necessary to ensure that
consumers can easily determine the amounts they could be charged for an
over-the-limit transaction.
Some creditors may wish to vary the fee amount that may be imposed
based upon the number of times the consumer has gone over the limit,
the amount the consumer has exceeded the credit limit, or due to other
factors. Under these circumstances, the creditor may disclose the
maximum fee that may be imposed or a range of fees. Proposed comment
56(e)-1 provides that the creditor may indicate that the consumer may
be assessed a fee ``up to'' the maximum fee or provide the range of
fees. Comment is requested whether additional guidance is necessary if
an over-the-limit fee is determined by other means, such as a
percentage of the over-the-limit transaction.
In addition to disclosing the amount of the fee or charge that may
be imposed for an over-the-limit transaction, proposed Sec.
226.56(e)(1)(ii) would require creditors to disclose any increased rate
that may apply if consumers exceed their credit limit. The Board
believes the additional requirement is necessary to ensure consumers
fully understand the potential consequences of exceeding their credit
limit, particularly as a rate increase can be more costly than the
imposition of a fee. This requirement is consistent with the content
required to be disclosed regarding the consequences of a late payment.
See TILA Section 127(b)(12); Sec. 226.7(b)(11) of the January 2009
Regulation Z Rule. Accordingly, if, under the terms of the account
agreement, an over-the-limit transaction could result in the loss of a
promotional
[[Page 54181]]
rate, the imposition of a penalty rate, or both, this fact must be
included in the opt-in notice.
Proposed Sec. 226.56(e)(1)(iii) requires creditors to explain the
consumer's right to affirmatively consent to the creditor's payment of
over-the-limit transactions, including the methods that the consumer
may use to exercise the right to opt in.
In addition to providing the required content, some creditors may
wish to include more information about the effects of opting in,
including potential benefits. Proposed comment 56(e)-2 provides that
creditors may briefly describe these benefits. For example, the
creditor may state that if the consumer consents, or opts in, to the
payment of over-the-limit transactions, the consumer may avoid having
transactions declined if a transaction may exceed the credit limit.
Creditors may also wish to disclose that over-the-limit transactions
may be paid at the creditor's discretion or that the payment of over-
the-limit transactions is not guaranteed. Comment is requested
regarding whether the rule should permit or require any other
information to be included in the opt-in notice.
The Board notes that permitting creditors to include additional
content in the opt-in notice could lead to the potential consequence
that the additional information may overwhelm the required content in
the notice. Thus, comment is also requested regarding whether creditors
should be permitted to include any information in the opt-in notice
beyond the content specified in the rule.
Revocation notice. Proposed Sec. 226.56(e)(2) would implement the
requirement in TILA Section 127(k)(2) that a creditor must provide
notice of the right to revoke consent that was previously granted for
paying over-the-limit transactions. The proposed rule states that the
notice must describe the consumer's right to revoke any consent
previously granted, including the methods by which the consumer may
revoke the service. As discussed above, creditors may include this
notice on every periodic statement after the consumer has opted in to
the creditor's payment of over-the-limit transactions or only on
statements that reflect the imposition of an over-the-limit fee. See
proposed comment 56(d)-1.
Model forms. Proposed Model Forms G-25(A) and (B) include sample
language that creditors may use to comply with the proposed notice
content requirement. Use of the model forms, or substantially similar
notices, would provide creditors a safe harbor for compliance under
proposed Sec. 226.56(e)(3).
56(f)-(i) Additional Provisions Addressing Consumer Opt-in Right
Joint accounts. Proposed Sec. 226.56(f) requires a creditor to
treat affirmative consent provided by any joint consumer of a credit
card account as affirmative consent for the account from all of the
joint consumers. This provision recognizes the operational difficulties
that would otherwise arise if a creditor had to determine which account
holder was responsible for a particular transaction and then decide
whether to authorize or pay an over-the-limit transaction based on that
account-holder's opt-in choice. Moreover, because the same credit limit
presumably applies to a joint account, one joint account holder's
decision to opt in to the payment of over-the-limit transactions would
also necessarily impact the other account holder. Accordingly, if one
joint consumer opts in to the creditor's payment of over-the-limit
transactions, the creditor must treat the consent as applying to all
over-the-limit transactions for that account. The proposed rule also
provides that a creditor shall treat a revocation of consent by any of
the joint consumers as revocation of consent for the joint account.
Proposed Sec. 226.56(f) applies only to consumer consent and
revocation requests from consumers that are jointly liable on a credit
card account. Accordingly, creditors would not be required or permitted
to honor a request by an authorized user on an account to opt in or
revoke a prior consent with respect to the creditor's over-the-limit
transaction. Proposed comment 56(f)-1 provides this guidance.
Continuing right to opt in or revoke opt-in. Proposed Sec.
226.56(g) provides that a consumer may affirmatively consent to a
creditor's payment of over-the-limit transactions at any time in the
manner described in the opt-in notice. Similarly, a consumer may revoke
a prior consent at any time in the manner described in the revocation
notice provided under Sec. 226.56(b)(1)(iv). See TILA Section
127(k)(4).
Proposed comment 56(g)-1 clarifies that a consumer's decision to
revoke a prior consent would not require the creditor to waiver or
reverse any over-the-limit fee or charges assessed to the consumer's
account prior to the creditor's implementation of the consumer's
revocation request. In addition, the proposed rule does not prevent the
creditor from assessing over-the-limit fees in a subsequent cycle if
the consumer's account balance continues to exceed the credit limit as
a result of an over-the-limit transaction that was completed prior to
the consumer's revocation of consent.
Duration of opt-in. Proposed Sec. 226.56(h) provides that a
consumer's affirmative consent is generally effective until revoked by
the consumer. Proposed comment 56(h)-1 clarifies, however, that a
creditor may cease paying over-the-limit transactions at any time and
for any reason even if the consumer has consented to the service. For
example, a creditor may wish to stop providing the service in response
to changes in the credit risk presented by the consumer.
Time to implement consumer revocation. Proposed Sec. 226.56(i)
requires that a creditor must implement a consumer's revocation request
as soon as reasonably practicable after the creditor receives the
request. The proposed requirement recognizes that while creditors will
presumably want to implement a consumer's consent request as soon as
possible, the same incentives may not apply if the consumer
subsequently decides to revoke that request. The Board is not proposing
to prescribe a specific period of time within which the creditor must
honor the consumer's revocation request, however, because the
appropriate time period may depend on a number of variables, including
the method used by the consumer to communicate the revocation request
(for example, in writing or orally) and the channel in which the
request is received (for example, if a consumer sends a written request
to the creditor's general address for receiving correspondence or to an
address specifically designated to receive consumer opt-in and
revocation requests). Comment is requested whether a safe harbor for
implementing revocation requests, such as five business days from the
date of the request, may be helpful to facilitate compliance with the
proposed rule.
The Board also solicits comment on the merits of an alternative
approach which would require creditors to implement revocation requests
within the same time period that a creditor generally takes to
implement opt-in requests. Such a timing rule could be dependent upon
the method of the consumer's request. For example under the alternative
approach, if the creditor typically takes three business days to
implement a consumer's written opt-in request, it should take no more
than three business days to implement the consumer's later written
request to revoke that consent. However, if a creditor typically
implements written consent requests within three business
[[Page 54182]]
days and telephone requests within one business day, the alternative
approach would provide that the creditor could implement a written
revocation request within three business days, even if the consumer had
previously opted into the service by telephone.
56(j) Prohibited Practices
Proposed Sec. 226.56(j) prohibits certain creditor practices in
connection with the assessment of over-the-limit fees or charges. These
prohibitions implement separate requirements set forth in TILA Sections
127(k)(5) and 127(k)(7), and apply even if the consumer has
affirmatively consented to the creditor's payment of over-the-limit
transactions.
56(j)(1) Fees Imposed per Billing Cycle
New TILA Section 127(k)(7) provides that a creditor may not impose
more than one over-the-limit fee during a billing cycle. In addition,
Section 127(k)(7) generally provides that an over-the-limit fee may be
imposed ``only once in each of the 2 subsequent billing cycles'' for
the same over-the-limit transaction. Proposed Sec. 226.56(j)(1)
implements these restrictions.
Proposed Sec. 226.56(j)(1)(i) would prohibit a creditor from
imposing more than one over-the-limit fee or charge on a consumer's
credit card account in any billing cycle. In addition, a creditor must
not impose an over-the-limit fee or charge on the account for the same
over-the-limit transaction or transactions in more than three billing
cycles. As a further limitation, however, fees may not be imposed for
the second or third cycle unless the consumer has failed to reduce the
account balance below the credit limit by the payment due date of
either cycle. The Board believes that this interpretation of TILA
Section 127(k)(7) is consistent with Congress's general intent to limit
a creditor's ability to impose multiple over-the-limit fees for the
same transaction as well as the requirement in TILA Section 106(b) that
consumers be given a sufficient amount of time to make payments.
Moreover, as discussed below, a creditor's failure to provide a
consumer sufficient time to reduce his or her balance below the credit
limit would appear to be an unfair or deceptive act or practice. See
TILA Section 127(k)(5) and discussion below.
As discussed above, the proposed rule would give a consumer until
the payment due date to reduce the account balance below the credit
limit to avoid over-the-limit fees during the second and third billing
cycles. Although new TILA Section 127(k)(7) could be construed as
providing until the end of the billing cycle to make a payment that
reduces the account balance below the credit limit, the Board believes
that using the payment due date as the relevant date will facilitate
compliance.
Under current billing practices, the end of the billing cycle
serves as the statement cut-off date and occurs a certain number of
days after the due date for payment on the prior cycle's activity. The
time period between the payment due date and the end of the billing
cycle allows the creditor sufficient time to reflect timely payments on
the subsequent periodic statement and to determine the fees and
interest charges for the statement period. If the rule were to give
consumers until the end of the billing cycle to reduce the account
balance below the credit limit, creditors would have difficulty
determining whether or not they could impose another over-the-limit fee
for the statement cycle, which could delay the generation and mailing
of the periodic statement and impede their ability to comply with the
21-day requirement for mailing statements in advance of the payment due
date.
Moreover, tying the time in which a consumer could make payment to
reduce the account balance below the credit limit to the payment due
date would cause minimal if any adverse harm to consumers. Because a
consumer is likely to make payment by the due date to avoid other
adverse financial consequences (such as a late payment fee or increased
APRs for new transactions), the additional time to make payment to
avoid successive over-the-limit fees would appear to be unnecessary
from a consumer protection perspective. Such a date also could confuse
consumers by providing two distinct dates, each with different
consequences (that is, penalties for late payment or the assessment of
over-the-limit fees). For these reasons, the Board is proposing to
exercise its TILA Section 105(a) authority to provide that a creditor
may not impose an over-the-limit fee or charge on the account for a
consumer's failure to reduce the account balance below the credit limit
during the second or third billing cycle unless the consumer has not
done so by the payment due date.
To illustrate the proposed limitation, assume that a consumer has
exceeded the credit limit and is assessed an over-the-limit fee on the
January billing statement for a transaction in the December billing
cycle. Under this circumstance, the creditor must not assess additional
over-the-limit fees on the consumer's credit card account for the
February or March billing statements for the same over-the-limit
transaction unless the consumer has not made sufficient payment by the
January or February payment due dates to reduce the account balance
below the credit limit.
Proposed Sec. 226.56(j)(1)(ii) provides that the limitation on
imposing over-the-limit fees for more than three billing cycles does
not apply if a consumer engages in an additional over-the-limit
transaction in either of the two billing cycles following the cycle in
which the consumer is first assessed a fee for exceeding the credit
limit. The assessment of fees or interest charges by the creditor would
not constitute an additional over-the-limit transaction for purposes of
this exception, consistent with the definition of ``over-the-limit
transaction'' under proposed Sec. 226.56(a). In addition, the proposed
exception would not permit a creditor to impose fees for both the
initial over-the-limit transaction as well as the additional over-the-
limit transaction(s), as the general restriction on assessing more than
one over-the-limit fee in the same billing cycle would continue to
apply. Proposed comment 56(j)-1 contains examples illustrating the
general rule and the exception.
Proposed Prohibitions on Unfair or Deceptive Over-the-Limit Acts or
Practices
Proposed Sec. 226.56(j) includes additional substantive
limitations and restrictions on certain creditor acts or practices
regarding the imposition of over-the-limit fees. These proposed
limitations and restrictions are based on the Board's authority under
TILA Section 127(k)(5)(B) which directs the Board to prescribe
regulations that prevent unfair or deceptive acts or practices in
connection with the manipulation of credit limits designed to increase
over-the-limit fees or other penalty fees.
Legal Authority
The Credit Card Act does not set forth a standard for what is an
``unfair or deceptive act or practice'' and the legislative history for
the Credit Card Act is similarly silent. Congress has elsewhere
codified standards developed by the Federal Trade Commission for
determining whether acts or practices are unfair under Section 5(a) of
the Federal Trade Commission Act, 15 U.S.C. 45(a).\38\ Specifically,
the FTC Act provides that an act or practice is unfair when it causes
or is likely to cause
[[Page 54183]]
substantial injury to consumers which is not reasonably avoidable by
consumers themselves and not outweighed by countervailing benefits to
consumers or to competition. In addition, in determining whether an act
or practice is unfair, the FTC may consider established public policy,
but public policy considerations may not serve as the primary basis for
its determination that an act or practice is unfair. 15 U.S.C. 45(a).
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\38\ See 15 U.S.C. 45(n); Letter from 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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According to the FTC, an unfair act or practice will almost always
represent a market failure or market imperfection that prevents the
forces of supply and demand from maximizing benefits and minimizing
costs.\39\ 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.\40\
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\39\ 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).
\40\ Id. at 7743.
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The FTC has also adopted standards for determining whether an act
or practice is deceptive, although these standards, unlike unfairness
standards, have not been incorporated in to the FTC Act.\41\ 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.\42\
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\41\ 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.html).
\42\ 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.
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Many states also have adopted statutes prohibiting unfair or
deceptive acts or practices, and these statutes may employ standards
that are different from the standards currently applied to the FTC
Act.\43\ In proposing rules under TILA Section 127(k)(5), the Board has
considered the standards currently applied to the FTC Act's prohibition
against unfair or deceptive acts or practices, as well as the standards
applied to similar state statutes. These proposals should not, however,
be construed as a definitive conclusion by the Board that a particular
practice is unfair or deceptive.
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\43\ For example, a number of states follow an unfairness
standard formerly used by the FTC. Under this standard, an act or
practice is unfair where it offends public policy; or is immoral,
unethical, oppressive, or unscrupulous; and causes substantial
injury to consumers. See, e.g., Kenai Chrysler Ctr., Inc. v.
Denison, 167 P.3d 1240, 1255 (Alaska 2007) (quoting FTC v. Sperry &
Hutchinson Co., 405 U.S. 233, 244-45 n.5 (1972)); State v. Moran,
151 N.H. 450, 452, 861 A.2d 763, 755-56 (N.H. 2004); Robinson v.
Toyota Motor Credit Corp., 201 Ill. 2d 403, 417-418, 775, N.E.2d
951, 961-62 (2002).
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Insufficient Time To Reduce Excess Credit
As discussed above, proposed Sec. 226.56(j)(1) would generally
prohibit a creditor from assessing an over-the-limit fee on a
consumer's credit card account in a subsequent billing cycle unless the
consumer has not reduced the account balance below the credit limit by
the payment due date. This provision, which implements a statutory
restriction set forth in TILA Section 127(k)(7), is intended to ensure
that a consumer who has been assessed an over-the-limit fee or charge
in one billing cycle does not incur a second over-the-limit fee or
charge in the next billing cycle solely because the consumer has not
made payment on or before the due date. For example, a creditor would
be prohibited from assessing a second over-the-limit fee or charge on
the first day of the next billing cycle before the consumer has had an
opportunity to reduce the account balance. Assessing an over-the-limit
fee in a subsequent billing cycle without providing the consumer
sufficient time to reduce the account balance would also appear to be
an unfair or deceptive act or practice.
Legal Analysis
Potential injury that is not reasonably avoidable. Consumers may
incur substantial monetary injury due to the fees assessed in
connection with the payment of over-the-limit transactions. In addition
to costly per transaction fees, consumers may also trigger rate
increases if the over-the-limit transaction is deemed to be a violation
of the credit card contract. A 2006 Government Accountability Office
(GAO) report on credit cards indicates that the average cost to
consumers resulting from over-the-limit transactions exceeded $30 in
2005.\44\ The GAO also reported that in the majority of credit card
agreements that it surveyed, default rates could apply if a consumer
exceeded the credit limit on the card.\45\
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\44\ See U.S. Gov't Accountability Office, Credit Cards:
Increased Complexity in Rates and Fees Heightens Need for More
Effective Disclosures to Consumers at 20-21 (Sept. 2006) (GAO Credit
Card Report) (available at http://www.gao.gov/new.items/d06929.pdf).
\45\ See id. at 25.
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Although consumers can reduce the risk of exceeding their credit
limit by carefully tracking their credit card transactions and payments
made, consumers often lack sufficient information about key aspects of
their credit card accounts. For example, a consumer cannot know with
any degree of certainty when a payment will be credited to his or her
account and the credit limit replenished or when a credit for a
returned purchase will be made available. Equally, given the lack of
real-time information available to the authorization system, even the
creditor's decision to authorize a transaction does not necessarily
indicate at the time of the authorization that the creditor has
knowingly authorized an over-the-limit transaction.\46\
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\46\ See Household Credit Servs. v. Pfennig, 541 U.S. 232, 244
(2004) (recognizing that a creditor's ``authorization'' of a point
of sale transaction ``does not represent a final determination that
a particular transaction is within a consumer's credit limit because
the authorization system is not suited to identify instantaneously
and accurately over-limit transactions'').
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Potential costs and benefits. There appears to be little if any
direct benefit to consumers from receiving insufficient time to bring
their account balances below their credit limit. While requiring
creditors to wait an additional period of time before assessing over-
the-limit fees or charges may reduce revenue for some institutions and
those institutions may replace that revenue by charging consumers
higher annual percentage rates or fees, it appears that consumers will
benefit overall from having a reasonable period of time in which to
reduce their account balances below the credit limit and avoiding
additional penalties such as the assessment of an over-the-limit fee or
application of a rate increase.
56(j)(2) Failure to Promptly Replenish
Section 226.10 generally requires creditors to credit consumer
payments as of the date of receipt, except when a delay in crediting
does not result in a finance or other charge. This provision does not
address, however, when a creditor must replenish the consumer's credit
limit after receiving payment. Thus, a consumer may submit payment
sufficient to reduce his or her account balance below the credit limit
and make additional purchases during the next cycle on the assumption
that the credit line will be replenished once the payment is credited.
If the creditor does not promptly replenish the credit line, the
additional transactions may cause the consumer to exceed the credit
limit and incur fees. Proposed Sec. 226.56(j)(2) would prohibit a
creditor from assessing
[[Page 54184]]
an over-the-limit fee or charge that is caused by the creditor's
failure to promptly replenish the consumer's available credit.
Legal Analysis
Potential injury that is not reasonably avoidable. In most cases,
creditors replenish the available credit on a credit card account
shortly after the payment has been credited to the account to enable
the cardholder to make new transactions on the account. As a result, a
consumer that has used all or most of the available credit during one
billing cycle would again be able to make transactions using the credit
card once the consumer has made payments on the account balance and the
available credit is restored to the account. If, however, the creditor
delays replenishment on the account after crediting the payment to the
consumer's account, the consumer could inadvertently exceed the credit
limit if the cardholder uses the credit card account for new
transactions and such transactions are authorized by the creditor. In
addition to the potential assessment of over-the-limit fees, the
resulting over-the-limit transaction may also cause the consumer to
trigger increased rates due to default on the credit agreement. In
those circumstances, it appears that consumers cannot reasonably avoid
the injury caused by the over-the-limit fee and rate increase because
they will be unaware of the creditor's delay in restoring the
consumer's credit line particularly if the payment has been credited to
the consumer's account.
Potential costs and benefits. The prohibited practice would not
appear to create benefits for consumers and competition that outweigh
the injury. While a creditor may reasonably decide to delay
replenishing a consumer's available credit, for example, in the case of
potential fraud on the account, there does not appear to be any benefit
to the consumer from permitting the creditor to assess over-the-limit
fees that may be incurred as a result of the delay in replenishment.
Proposal
Proposed Sec. 226.56(j)(2) prohibits a creditor from imposing any
over-the-limit fee or charge solely because of the creditor's failure
to promptly replenish the consumer's available credit after the
creditor has credited the consumer's payment under Sec. 226.10.
Proposed comment 56(j)(2)-1 clarifies that the proposed prohibition is
not intended to require creditors to immediately replenish the
available credit upon crediting a consumer's payment, or to prevent
creditors from delaying replenishment where appropriate, for example,
in cases of suspected fraud. Nor does the proposed prohibition require
creditors to decline all transactions for consumers who have opted in
to the creditor's payment of over-the-limit transactions until the
available credit has been restored. Rather, the creditor would only be
prohibited from assessing any over-the-limit fees or charges caused by
the creditor's decision not to replenish the available credit after
posting the consumer's payment to the account. Comment is requested
regarding whether the rule should provide a safe harbor specifying the
number of days following crediting of a consumer's payment by which a
creditor must replenish a consumer's available credit.
56(j)(3) Conditioning
Proposed Sec. 226.56(j)(3) would prohibit a creditor from
conditioning the amount of available credit provided on the consumer's
affirmative consent to the creditor's payment of over-the-limit
transactions. The proposed provision addresses concerns that a creditor
may seek to tie the amount of credit provided to the consumer
affirmatively consenting to the creditor's payment of over-the-limit
transactions.
Legal Analysis
Potential injury that is not reasonably avoidable. As the Board has
previously stated elsewhere, consumers receive considerable benefits
from receiving credit cards that provide a meaningful amount of
available credit. For example, credit cards enable consumers to engage
in certain types of transactions, such as making purchases by telephone
or on-line, or renting a car or hotel room. Given these benefits, some
consumers might be compelled to opt in to a creditor's payment of over-
the-limit transactions if not doing so may result in the consumer
otherwise obtaining a minimal amount of credit or failing to qualify
for credit altogether. Thus, it would appear that such consumers would
be prevented from exercising a meaningful choice regarding the
creditor's payment of over-the-limit transactions. Moreover, the
practice of conditioning the amount of credit provided based on whether
the consumer opts in to the creditor's payment of over-the-limit
transactions would also appear to raise significant concerns under the
Equal Credit Opportunity Act. See 15 U.S.C. 1691(a)(3).
Potential costs and benefits. There do not appear to be any
significant benefits to consumers or competition from conditioning or
linking the amount of credit available to the consumer based on the
consumer consenting to the creditor's payment of over-the-limit
transactions. While some creditors may seek to replace the revenue from
over-the-limit fees by charging consumers higher annual percentage
rates or fees, overall, consumers will benefit from having a meaningful
choice regarding whether to have over-the-limit transactions approved
by the creditor.
Proposal
Proposed Sec. 226.56(j)(3) is intended to prevent creditors from
effectively circumventing the consumer choice requirement by
prohibiting a creditor from conditioning or otherwise linking the
amount of credit granted on the consumer opting in to the creditor's
payment of over-the-limit transactions. Under the proposed rule, a
creditor could not, for example, require a consumer to opt in to the
creditor's fee-based over-the-limit service in order to receive a
higher credit limit for the account. Similarly, a creditor would be
prohibited from denying a consumer's credit card application solely
because the consumer did not opt in to the creditor's over-the-limit
service. The proposed rule is illustrated by way of example in proposed
comment 56(j)-1.
56(j)(4) Over-the-Limit Fees Attributed to Fees or Interest
Proposed Sec. 226.56(j)(4) would prohibit the imposition of any
over-the-limit fees or charges if the credit limit is exceeded solely
because of the creditor's assessment of accrued interest charges or
fees on the consumer's credit card account.
Legal Analysis
Potential injury that is not reasonably avoidable. As discussed
above, consumers may incur substantial monetary injury due to the fees
assessed in connection with the payment of over-the-limit transactions.
In addition to per transaction fees, consumers may also trigger rate
increases if the over-the-limit transaction is deemed to be a violation
of the credit card contract.
The injury from over-the-limit fees and potential rate increases
would not appear to be reasonably avoidable in these circumstances
because consumers are, as a general matter, unlikely to be aware of the
amount of interest charges or fees that may be added to their account
balance when deciding whether or not to engage in a credit card
transaction. With respect to accrued interest charges, these additional
amounts are typically added to a consumer's account balance at the end
[[Page 54185]]
of the billing cycle after the consumer has completed his or her
transactions for the cycle and thus are unlikely to have been taken
into account when the consumer engages in the transactions.
Potential costs and benefits. Although prohibition of the
assessment of over-the-limit fees caused by accrued finance charges and
fees may reduce creditor revenues and lead creditors to replace lost
revenue by charging consumers higher rates or fees, it appears that the
proposal will result in a net benefit to consumers because some
consumers are likely to benefit substantially while the adverse effects
on others are likely to be small. Because permitting fees and interest
charges to trigger over-the-limit fees may have the effect of
retroactively reducing a consumer's available credit for prior
transactions, prohibiting such a practice would protect consumers
against unexpected over-the-limit fees and rate increases which could
substantially add to their cost of credit. Moreover, consumers will be
able to more accurately manage their credit lines without having to
factor additional costs that cannot be easily determined. While some
consumers may pay higher fees and initial rates, consumers are likely
to benefit overall through more transparent pricing.
Proposal
Proposed Sec. 226.56(j)(4) would prohibit creditors from imposing
an over-the-limit fee or charge if a consumer exceeds a credit limit
solely because of fees or interest charged by the creditor to the
consumer's account during the billing cycle. The proposed prohibition
is generally intended to prohibit creditors from assessing over-the-
limit fees or charges on consumer credit card accounts unless the
credit limit was exceeded solely by transactions or charges that were
not initiated by the consumer during the billing cycle.
For purposes of this prohibition, the fees or interest charges that
may not trigger the imposition of an over-the-limit fee would be
considered charges imposed as part of the plan under Sec.
226.6(b)(3)(i). Thus, the proposed rule would also prohibit the
assessment of an over-the-limit fee or charge even if the credit limit
was exceeded due to fees for services requested by the consumer if such
fees would constitute charges imposed as part of the plan (for example,
fees for voluntary debt cancellation or suspension coverage).
The proposed prohibition would not restrict creditors from
assessing over-the-limit fees due to accrued finance charges or fees
from prior cycles that have subsequently been added to the account
balance. Comment is requested regarding the operational issues that may
arise from the proposed prohibition.
Notice of Reduction of the Credit Limit
In the July 2009 Regulation Z Interim Final Rule, the Board adopted
a provision applicable to credit card accounts under an open-end (not
home-secured) plan that addresses notices of changes in a consumer's
credit limit. As set forth in the interim final rule, Sec.
226.9(c)(2)(vi) requires a creditor to provide a consumer with 45 days'
advance notice that a credit limit is being decreased or will be
decreased prior to the imposition of any over-the-limit fee or penalty
rate imposed solely as the result of the balance exceeding the newly
decreased credit limit.\47\ The new provision is intended to protect
consumers against costly surprises potentially associated with a
reduction in the credit limit, specifically, fees and rate increases,
while giving a consumer adequate time to mitigate the effect of the
credit line reduction. See 74 FR 36077.
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\47\ A substantively similar provision was adopted in the
January 2009 Regulation Z Rule. See Sec. 226.9(c)(2)(v).
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Neither Sec. 226.9(c)(2)(vi) nor the restrictions proposed
pursuant to the Board's authority under TILA Section 127(k)(5) would
limit a creditor's ability to use line reductions to address safety and
soundness concerns when a borrower's risk increases. As stated in the
July 2009 Regulation Z Interim Final Rule, the Board recognizes that
creditors have a legitimate interest in mitigating the risk of a loss
when a consumer's creditworthiness deteriorates and that it may be
appropriate in some cases for creditors to reduce the credit limit as a
risk mitigation tool.
Section 226.57 Special Rules for Marketing Open-End Credit to College
Students
Section 304 of the Credit Card Act adds new TILA Section 140(f) to
require the public disclosure of contracts or other agreements between
card issuers and institutions of higher education for the purpose of
marketing a credit card and to impose new restrictions related to
marketing open-end credit to college students. 15 U.S.C. 1650(f). The
Board proposes to implement these provisions in new Sec. 226.57.
The Board also proposes to implement provisions related to new TILA
Section 127(r) in Sec. 226.57. 15 U.S.C. 1637(r). TILA Section 127(r),
which was added by Section 305 of the Credit Card Act, requires card
issuers to submit an annual report to the Board containing the terms
and conditions of business, marketing, promotional agreements, and
college affinity card agreements with an institution of higher
education, or other related entities, with respect to any college
student credit card issued to a college student at such institution.
57(a) Definitions
New TILA Section 140(f) does not provide any definitions while new
TILA Section 127(r) provides definitions for terms that are also used
in new TILA Section 140(f). See 15 U.S.C. 1650(f). To ensure the use of
these terms is consistent throughout these sections, the Board proposes
to incorporate the definitions set forth in TILA Section 127(r) in
Sec. 226.57(a).
Proposed Sec. 226.57(a)(1) would define ``college student credit
card'' as a credit card issued under a credit card account under an
open-end (not home-secured) consumer credit plan to any college
student. This definition is similar to TILA Section 127(r)(1)(B), which
defines ``college student credit card account'' as a credit card
account under an open-end consumer credit plan established or
maintained for or on behalf of any college student. Proposed Sec.
226.57(a)(1) defines ``college student credit card'' rather than
``college student credit card account'' because the statute and
regulation use the former term but not the latter. Also, the proposed
definition uses the proposed defined term ``credit card account under
an open-end (not home-secured) consumer credit plan'' (in proposed
Sec. 226.2(a)(15)) for consistency with other sections of the proposed
regulations implementing the Credit Card Act. The term would exclude
home-equity lines of credit accessed by credit cards and overdraft
lines of credit accessed by debit cards, which the Board believes are
not typical types of college student credit cards.
TILA Section 127(r)(1)(A) defines ``college affinity card'' as a
credit card issued under an open end consumer credit plan in
conjunction with an agreement between the issuer and an institution of
higher education or an alumni organization or a foundation affiliated
with or related to an institution of higher education under which cards
are issued to college students having an affinity with the institution,
organization or foundation where at least one of three criteria also is
met. These three criteria are: (1) The creditor has agreed to donate a
portion of the proceeds of the credit card to the institution,
organization, or foundation (including a lump-sum or one-time payment
of money for access); (2) the
[[Page 54186]]
creditor has agreed to offer discounted terms to the consumer; or (3)
the credit card bears the name, emblem, mascot, or logo of such
institution, organization, or foundation, or other words, pictures or
symbols readily identified with such institution or affiliated
organization. The Board is not proposing a regulatory definition
comparable to this definition in the statute; it appears that the
definition of ``college student credit card,'' discussed above, is
broad enough to encompass any ``college affinity card'' as defined in
TILA Section 127(r)(1)(A), and therefore the definition of ``college
affinity card'' is unnecessary. However, the Board solicits comment on
whether the regulations should contain a definition of ``college
affinity card'' as well as a definition of ``college student credit
card.''
Proposed comment 57(a)(1)-1 would clarify that a college student
credit card includes a college affinity card, as discussed above, and
that, in addition, a card may fall within the scope of the definition
regardless of the fact that it is not intentionally targeted at or
marketed to college students.
Proposed Sec. 226.57(a)(2) would define ``college student'' as an
individual who is a full-time or a part-time student attending an
institution of higher education. This definition is consistent with the
definition of ``college student'' in TILA Section 127(r)(1)(C). The
definition is intended to be broad and would apply to students of any
age attending an institution of higher education. Furthermore, the term
``college student'' is not limited to students attending an
undergraduate program at an institution of higher education. The term
applies to all students, including those enrolled in graduate programs
or joint degree programs.
TILA Section 127(r)(1)(D) states that the term ``institution of
higher education'' has the same meaning as in section 101 and 102 of
the Higher Education Act of 1965. 20 U.S.C. 1001 and 1002. Meanwhile,
TILA Section 140(a)(3), as added by the Higher Education Opportunity
Act of 2008, contains a definition for ``institution of higher
education'' that differs slightly from the definition in TILA Section
127(r)(1)(D). Specifically, TILA Section 140(a)(3) states that
``institution of higher education'' has the same meaning as in section
102 of the Higher Education Act of 1965 (20 U.S.C. 1002), without
reference to section 101 of the Higher Education Act of 1965 (20 U.S.C.
1001). However, as discussed in the Board's recently adopted amendments
regarding private education loans, the Board understands that
institutions covered under section 101 of the Higher Education Act of
1965 would also be covered under section 102 of the Higher Education
Act of 1965. As a result, the definition of ``institution of higher
education'' adopted in Sec. 226.46(b)(2) to implement TILA Section
140(a)(3), as it applies to private education loans references both
sections 101 and 102 of the Higher Education Act of 1965.\48\
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\48\ 74 FR 41194 (Aug. 14, 2009).
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In order to have a consistent definition of the term for all
sections added by the Credit Card Act and to facilitate compliance, the
Board proposes to use its authority under TILA Section 105(a) to apply
the definition in TILA Section 127(r)(1)(D) to TILA Section 140(f). 15
U.S.C. 1604(a). As a result proposed Sec. 226.57(a)(3) would adopt the
definition of ``institution of higher education'' in TILA Section
127(r)(1)(D) and would be applicable not only to the provisions in TILA
Section 127(r), but also TILA Section 140(f). This definition would
also be consistent with the definition of ``institution of higher
education'' in Sec. 226.46(b)(2) for private education loans.
Proposed Sec. 226.57(a)(4) would define ``affiliated
organization'' as an alumni organization or foundation affiliated with
or related to an institution of higher education, to provide a
conveniently shorter term to be used to refer to such organizations and
foundations in various provisions of the proposed regulations.
Proposed Sec. 226.57(a)(5) would delineate the types of agreements
for which creditors must provide annual reports to the Board, under the
defined term ``college credit card agreement.'' The term would be
defined to include any business, marketing or promotional agreement
between a card issuer and an institution of higher education or an
affiliated organization in connection with which college student credit
cards are issued to college students currently enrolled at that
institution. The definition would not incorporate the concept of a
college affinity card agreement, which is used in TILA Section
127(r)(1)(A), as discussed above. The Board believes that the
definition of ``college credit card agreement'' as proposed would be
broad enough to include agreements concerning college affinity cards;
however, the Board requests comment on whether language referring to
college affinity card agreements should also be included in the
regulations.
As proposed comment 57(a)(5)-1 would clarify, business, marketing
and promotional agreements may include a broad range of arrangements
between a creditor and an institution of higher education or affiliated
organization, including arrangements that do not fall within the
concept of a college affinity card agreement as discussed in TILA
Section 127(r)(1)(A). For example, TILA Section 127(r)(1)(A) specifies
that under a college affinity card agreement, the card issuer has
agreed to make a donation to the institution or affiliated
organization, the card issuer has agreed to offer discounted terms to
the consumer, or the credit card will display pictures, symbols, or
words identified with the institution or affiliated organization; even
if these conditions are not met, an agreement may qualify as a college
credit card agreement, if the agreement is a business, marketing or
promotional agreement that contemplates the issuance of college student
credit cards to college students currently enrolled at the institution.
An agreement may qualify as a college credit card agreement even if
marketing of cards under the agreement is targeted at alumni, faculty,
staff, and other non-student consumers, as long as cards may also be
issued to students in connection with the agreement.
57(b) Public Disclosure of Agreements
The Board proposes to implement new TILA Section 140(f)(1) in Sec.
226.57(b). Consistent with the statute, proposed Sec. 226.57(b) would
state that an institution of higher education shall publicly disclose
any credit card marketing contract or other agreement made with a card
issuer or creditor. The Board also proposes commentary to provide
examples of how an institution of higher education may publicly
disclose such contracts or agreements, and to clarify that the entire
agreement must be disclosed. Proposed comment 57(b)-1 would specify
that an institution of higher education may fulfill its duty to
publicly disclose any contract or other agreement made with a card
issuer or creditor for the purposes of marketing a credit card by
posting such contract or agreement on its Web site. Alternatively, the
institution of higher education may make such contract or agreement
available upon request, provided the procedures for requesting the
documents are reasonable and free of cost to the requestor, and the
contract or agreement is provided within a reasonable time frame. The
list in proposed comment 57(b)-1 is not exhaustive, so an institution
of higher education may publicly disclose these contracts or agreements
in other ways.
In addition, proposed comment 57(b)-2 would bar institutions of
higher
[[Page 54187]]
education from redacting any contracts or agreements they are required
to publicly disclose under proposed Sec. 226.57(b). As a result, any
clauses in existing contract or agreements addressing the
confidentiality of such contracts or agreements would be invalid to the
extent they prevent institutions of higher education from publicly
disclosing such contracts or agreements in accordance with proposed
Sec. 226.57(b). The Board believes that it is important that all
provisions of these contracts or agreements be available to college
students and other interested parties. If institutions were permitted
to redact portions of these contracts or agreements, interested parties
may be deprived of a full understanding of these arrangements.
57(c) Prohibited Inducements
Under TILA Section 140(f)(2), no card issuer or creditor may offer
to a student at an institution of higher education any tangible item to
induce such student to apply for or participate in an open-end consumer
credit plan offered by such card issuer or creditor, if such offer is
made on the campus of an institution of higher education, near the
campus of an institution of higher education, or at an event sponsored
by or related to an institution of higher education. The Board proposes
to implement this provision in Sec. 226.57(c), which generally would
track the statutory language. The Board notes that unlike other
statutory provisions the Board proposes to implement in Sec. 226.57,
TILA Section 140(f)(2) applies not only to credit card accounts, but
also other open-end consumer credit plans, such as lines of credit.
To provide further guidance on the prohibition in Sec. 226.57(c),
the Board also proposes several new comments. Proposed comment 57(c)-1
would clarify that a tangible item under Sec. 226.57(c) includes any
physical item, such as a gift card, a t-shirt, or a magazine
subscription, that a card issuer or creditor offers to induce a college
student to apply for or open an open-end consumer credit plan offered
by such card issuer or creditor. The proposed comment would also
provide some examples of non-physical inducements that would not be
considered tangible items, such as discounts, rewards points, or
promotional credit terms.
Because offering tangible items to college students is prohibited
only if the items are offered to induce the student to apply for or
open an open-end consumer credit plan, proposed comment 57(c)-2 would
clarify that if a tangible item is offered to a person whether or not
that person applies for or opens an open-end consumer credit plan, the
item is not an inducement. As an example, proposed comment 57(c)-2
states that refreshments offered to a college student on campus that
are not conditioned on whether the student has applied for or agreed to
open an open-end consumer credit plan would not be considered
inducements that would cause a creditor to violate Sec. 226.57(c).
The prohibition in Sec. 226.57(c) extends to an offer that is
made, among other places, near the campus of an institution of higher
education. The Board is not aware of any standard for determining a
location near a school that is analogous to the prohibition in TILA
Section 140(f)(2), but is aware of existing standards for other types
of prohibitions. TILA Section 140(f)(2)(B) requires the Board to
determine what is considered near the campus of an institution of
higher education. Based on the distances used in State and Federal laws
for other restricted activities near a school,\49\ the Board proposes
comment 57(c)-3 to provide that a location that is within 1,000 feet of
the border of the campus of an institution of higher education, as
defined by the institution of higher education, be considered near the
campus of an institution of higher education. The Board solicits
comment on other appropriate ways to determine a location that is
considered near the campus of an institution of higher education.
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\49\ See, e.g., 18 U.S.C. 922(q)(2) (making it unlawful for an
individual to possess an unlicensed firearm in a school zone,
defined in 18 U.S.C. 921(a)(25) as within 1,000 feet of the school);
the Family Smoking Prevention and Tobacco Control Act (Pub. L. 111-
31, June 22, 2009) (requiring regulations to ban outdoor tobacco
advertisements within 1,000 feet of a school or playground); and
Mass. Gen. Laws ch. 94C, Sec. 32J (requiring mandatory minimum term
of imprisonment for drug violations committed within 1,000 feet of a
school).
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Proposed comment 57(c)-4 would clarify that offers of tangible
items mailed to a college student at an address on or near the campus
of an institution of higher education would be subject to the
restrictions in Sec. 226.57(c). The statutory language does not
distinguish between different methods of making offers of tangible
items, and proposed comment 57(c)-4 would make clear that offers of
tangible items made on or near the campus of an institution of higher
education for purposes of Sec. 226.57(c) include offers of tangible
items that are sent to those locations through the mail.
Furthermore, under proposed Sec. 226.57(c), an offer of a tangible
item to induce a college student to apply for or open an open-end
consumer credit plan may not be made at an event sponsored by or
related to an institution of higher education. In order to give card
issuers and creditors guidance on determining whether an event is
related to an institution, the Board proposes comment 57(c)-5. Proposed
comment 57(c)-5 would provide that an event is related to an
institution of higher education if the marketing of such event uses the
name, emblem, mascot, or logo of an institution of higher education, or
other words, pictures, or symbols identified with an institution of
higher education in a way that implies that the institution of higher
education endorses or otherwise sponsors the event. The proposed
comment was adapted from guidance the Board recently adopted in Sec.
226.48 regarding co-branding restrictions for certain private education
loans.
Since the prohibition in Sec. 226.57(c) applies solely to offering
a tangible item to a college student at specified locations, a card
issuer or creditor would be permitted to offer any person who is not a
college student a tangible item to induce such person to apply for or
open an open-end consumer credit plan offered by such card issuer or
creditor at such locations. The Board believes a card issuer or
creditor who opts to have a marketing program on or near the campus of
an institution of higher education, or at an event sponsored by or
related to an institution of higher education where a tangible item
will be offered to induce people to apply for or open an open-end
consumer credit plan should have reasonable procedures for determining
whether an applicant or participant is a college student before giving
the applicant or participant the tangible item.
Proposed comment 57(c)-6 illustrates one way in which a card issuer
or creditor might meet this standard. Specifically, the Board provides
that a card issuer or creditor may ask whether the applicant is a
college student as part of the application process. Proposed comment
57(c)-6 would also provide that the card issuer or creditor may rely on
the representations made by the applicant Therefore, if an applicant
misrepresents his or her status as a student, the card issuer or
creditor would not violate Sec. 226.57(c) by relying on that
representation.
57(d) Annual Report to the Board
The Board proposes to implement new TILA Section 127(r)(2) in
proposed Sec. 226.57(d). Consistent with the statute, proposed Sec.
226.57(d) would require creditors that are a party to one or more
[[Page 54188]]
college credit card agreements to register with the Board and to submit
annual reports to the Board regarding those agreements. Creditors that
were a party to one or more college credit card agreements at any time
during the 2009 calendar year would be required to register with the
Board by February 1, 2010. The initial report from creditors would be
due by February 22, 2010, as required by TILA Section 127(r)(2)(D).
Creditors would be required to submit subsequent annual reports by the
first business day on or after March 31 of the following year.
Proposed Sec. 226.57(d) would require that annual report include a
copy of each college credit card agreement to which the creditor was a
party that was in effect during the period covered by the report, as
well as certain related information including the total dollar amount
of payments pursuant to the agreement from the creditor to the
institution (or affiliated organization) during the period covered by
the report, and how such amount is determined; the number of credit
card accounts opened pursuant to the agreement during the period; and
the total number of such credit card accounts that were open at the end
of the period.
The annual report would also be required to include a copy of any
memorandum of understanding that ``directly or indirectly relates to
the college credit card agreement or that controls or directs any
obligations or distribution of benefits between any such entities.''
Proposed comment 57(d)(3)-1 would clarify what types of documents would
be considered memoranda of understanding for purposes of this
requirement, by providing that a memorandum of understanding includes
any document that amends the college credit card agreement, or that
constitutes a further agreement between the parties as to the
interpretation or administration of the agreement, and by providing of
examples of documents that would or would not be included.
The Board solicits comment on whether additional items of
information should be required to be included in the annual report. New
TILA Section 127(r)(2)(A) specifies that the required annual report
contain ``the terms and conditions'' of college credit card agreements
between the card issuer and institutions of higher education or
affiliated organizations. For example, information that may be part of
the terms and conditions of a college credit card agreement and that,
if so, could be required to be included in the report, could include
any terms that differentiate between student and non-student accounts
(for example, that provide for difference in payments based on whether
an account is a student or non-student account), or that relate to
advertising or marketing (such as provisions on mailing lists, online
advertising, or on-campus marketing). The report could also be required
to specify the terms and conditions of credit card accounts (for
example, rates and fees) that may be opened in connection with the
college credit card agreement. Inclusion of such information in
issuers' annual reports could facilitate the Board's review of the
reports and preparation of the Board's report to Congress concerning
college credit card agreements, but could also impose additional costs
on card issuers in preparing their reports to the Board. The Board
requests comment on the costs and benefits of requiring these (or any
other) items of information to be included in the annual report.
Section 226.58 Internet Posting of Credit Card Agreements
Section 204 of the Credit Card Act adds new TILA Section 122(d) to
require creditors to post agreements for open-end consumer credit card
plans on the creditors' Web sites and to submit those agreements to the
Board for posting on a publicly-available Web site established and
maintained by the Board. 15 U.S.C. 1632(d). The Board proposes to
implement these provisions in new Sec. 226.58.
58(a) Applicability
Proposed Sec. 226.58(a) would make proposed Sec. 226.58
applicable to any card issuer that issues a credit card under a credit
card account under an open-end (not home-secured) consumer credit plan,
as defined in proposed revised Sec. 226.2(a)(15). Thus, consistent
with the approach the Board is proposing in implementing other sections
of the Credit Card Act, home-equity lines of credit accessible by
credit cards and overdraft lines of credit accessed by debit cards
would not be covered by proposed Sec. 226.58.
58(b) Definitions
Proposed Sec. 226.58(b)(1) defines ``agreement'' or ``credit card
agreement'' as a written document or documents evidencing the terms of
the legal obligation or the prospective legal obligation between a card
issuer and a consumer for a credit card account under an open-end (not
home-secured) consumer credit plan. As proposed, Sec. 226.58(b)(1)
states and proposed comment 58(b)(1)-1 further clarifies that the
agreement is deemed to include certain information, such as annual
percentage rates and fees, even if the issuer does not otherwise
technically include this information in the document evidencing the
terms of the legal obligation. This information is listed under the
defined term ``pricing information'' in Sec. 226.58(b)(4). The Board
believes that, to enable consumers to shop for credit cards and compare
information about various credit card plans in an effective manner, it
is necessary that the credit card agreements posted on the Board's Web
site include information such as rates and fees, in addition to other
terms and conditions of the agreements. However, the Board solicits
comment on the definition of agreement and on whether more or less
information should be included. As proposed comment 58(b)(1)-2 would
clarify, the agreement would not include documents that may be sent to
the consumer along with the credit card or credit card agreement, such
as a cover letter, a validation sticker on the card, other information
about card security, offers for credit insurance or other optional
products, advertisements, and disclosures required under Federal or
State law that are not incorporated into the agreement itself.
Proposed Sec. 226.58(b)(2) defines ``business day'' as a day on
which the creditor's offices are open to the public for carrying on
substantially all of its business functions. This is consistent with
the definition of business day used in most other sections of
Regulation Z.
Proposed Sec. 226.58(b)(3) states that an issuer ``offers'' or
``offers to the public'' an agreement if the issuer is soliciting or
accepting applications for new accounts that would be subject to that
agreement. As proposed comment 58(b)(3)-1 would clarify, a card issuer
is deemed to offer a credit card agreement to the public even if the
issuer solicits, or accepts applications from, only a limited group of
persons. For example, an issuer may market affinity cards to students