[Federal Register Volume 74, Number 85 (Tuesday, May 5, 2009)]
[Proposed Rules]
[Pages 20804-20832]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E9-9861]



[[Page 20803]]

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Part III





Federal Reserve System





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Department of the Treasury





Office of Thrift Supervision



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National Credit Union Administration





12 CFR Part 227, 535, and 706



Unfair or Deceptive Acts or Practices; Clarifications; Proposed Rule

Federal Register / Vol. 74, No. 85 / Tuesday, May 5, 2009 / Proposed 
Rules

[[Page 20804]]


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FEDERAL RESERVE SYSTEM

12 CFR Part 227

[Regulation AA; Docket No. R-1314]

DEPARTMENT OF THE TREASURY

Office of Thrift Supervision

12 CFR Part 535

[Docket ID OTS-2009-0006]
RIN 1550-AC17

NATIONAL CREDIT UNION ADMINISTRATION

12 CFR Part 706

RIN 3133-AD62


Unfair or Deceptive Acts or Practices; Clarifications

AGENCIES: Board of Governors of the Federal Reserve System (Board); 
Office of Thrift Supervision, Treasury (OTS); and National Credit Union 
Administration (NCUA).

ACTION: Proposed rule; request for public comment.

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SUMMARY: In December 2008, the Board, OTS, and NCUA (collectively, the 
Agencies) exercised their authority under the Federal Trade Commission 
Act to issue a final rule prohibiting institutions from engaging in 
specific acts or practices in connection with consumer credit card 
accounts. The Agencies understand that clarification is needed 
regarding certain aspects of the final rule. Accordingly, in order to 
facilitate compliance, the Agencies propose to amend specific portions 
of the regulations and official staff commentary.

DATES: Comments must be received on or before June 4, 2009.

ADDRESSES: Because paper mail in the Washington DC area and at the 
Agencies is subject to delay, we encourage commenters to submit 
comments by e-mail, if possible. We also encourage commenters to use 
the title ``Unfair or Deceptive Acts or Practices'' to facilitate our 
organization and distribution of the comments. Comments submitted to 
one or more of the Agencies will be made available to all of the 
Agencies. Interested parties are invited to submit comments as follows:
    Board: You may submit comments, identified by Docket No. R-1314, by 
any of the following methods:
     Agency Web site: http://www.federalreserve.gov. Follow the 
instructions for submitting comments at http://www.federalreserve.gov/generalinfo/foia/ProposedRegs.cfm.
     Federal eRulemaking Portal: http://www.regulations.gov. 
Follow the instructions for submitting comments.
     E-mail: [email protected]. Include the 
docket number in the subject line of the message.
     Facsimile: (202) 452-3819 or (202) 452-3102.
     Mail: Jennifer J. Johnson, Secretary, Board of Governors 
of the Federal Reserve System, 20th Street and Constitution Avenue, 
NW., Washington, DC 20551.
    All public comments are available from the Board's Web site at 
http://www.federalreserve.gov/generalinfo/foia/ProposedRegs.cfm as 
submitted, unless modified for technical reasons. Accordingly, your 
comments will not be edited to remove any identifying or contact 
information. Public comments may also be viewed electronically or in 
paper form in Room MP-500 of the Board's Martin Building (20th and C 
Streets, NW.), between 9 a.m. and 5 p.m. on weekdays.
    OTS: You may submit comments, identified by OTS-2009-0006, by any 
of the following methods:
     Federal eRulemaking Portal-``Regulations.gov'': Go to 
http://www.regulations.gov, under the ``more Search Options'' tab click 
next to the ``Advanced Docket Search'' option where indicated, select 
``Office of Thrift Supervision'' from the agency drop-down menu, then 
click ``Submit.'' In the ``Docket ID'' column, select ``OTS-2009-0006'' 
to submit or view public comments and to view supporting and related 
materials for this proposed rulemaking. The ``How to Use This Site'' 
link on the Regulations.gov home page provides information on using 
Regulations.gov, including instructions for submitting or viewing 
public comments, viewing other supporting and related materials, and 
viewing the docket after the close of the comment period.
     Mail: Regulation Comments, Chief Counsel's Office, Office 
of Thrift Supervision, 1700 G Street, NW., Washington, DC 20552, 
Attention: OTS-2009-0006.
     Facsimile: (202) 906-6518.
     Hand Delivery/Courier: Guard's Desk, East Lobby Entrance, 
1700 G Street, NW., from 9 a.m. to 4 p.m. on business days, Attention: 
Regulation Comments, Chief Counsel's Office, Attention: OTS-2009-0006.
     Instructions: All submissions received must include the 
agency name and docket number for this rulemaking. All comments 
received will be entered into the docket and posted on Regulations.gov 
without change, including any personal information provided. Comments, 
including attachments and other supporting materials received are part 
of the public record and subject to public disclosure. Do not enclose 
any information in your comment or supporting materials that you 
consider confidential or inappropriate for public disclosure.
     Viewing Comments Electronically: Go to http://www.regulations.gov, select ``Office of Thrift Supervision'' from the 
agency drop-down menu, then click ``Submit.'' Select Docket ID ``OTS-
2009-0006'' to view public comments for this notice of proposed 
rulemaking.
     Viewing Comments On-Site: You may inspect comments at the 
Public Reading Room, 1700 G Street, NW., by appointment. To make an 
appointment for access, call (202) 906-5922, send an e-mail to 
public.info@ots.treas.gov">public.info@ots.treas.gov, or send a facsimile transmission to (202) 
906-6518. (Prior notice identifying the materials you will be 
requesting will assist us in serving you.) We schedule appointments on 
business days between 10 a.m. and 4 p.m. In most cases, appointments 
will be available the next business day following the date we receive a 
request.
    NCUA: You may submit comments, identified by number RIN 3133-AD62, 
by any of the following methods:
     Federal eRulemaking Portal: http://www.regulations.gov. 
Follow the instructions for submitting comments.
     NCUA Web site: http://www.ncua.gov/news/proposed_regs/proposed_regs.html. Follow the instructions for submitting comments.
     E-mail: Address to [email protected]. Include ``[Your 
name] Comments on Proposed Rule Part 706'' in the e-mail subject line.
     Facsimile: (703) 518-6319. Use the subject line described 
above for e-mail.
     Mail: Address to Mary Rupp, Secretary of the Board, 
National Credit Union Administration, 1775 Duke Street, Alexandria, VA 
22314-3428.
     Hand Delivery/Courier: Same as mail address.
     Public Inspection: All public comments are available on 
the agency's Web site at http://www.ncua.gov/RegulationsOpinionsLaws/comments as submitted, except as may not be possible for technical 
reasons. Public comments will not be edited to remove any identifying 
or contact information. Paper copies of comments may be inspected in 
NCUA's law library at 1775 Duke Street, Alexandria, Virginia 22314, by 
appointment, weekdays between 9 a.m. and 3 p.m. To make an appointment, 
call (703) 518-6540 or send an e-mail to [email protected].

FOR FURTHER INFORMATION CONTACT:

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    Board: Benjamin K. Olson, Attorney, or Ky Tran-Trong, Counsel, 
Division of Consumer and Community Affairs, at (202) 452-2412 or (202) 
452-3667, Board of Governors of the Federal Reserve System, 20th and C 
Streets, NW., Washington, DC 20551. For users of Telecommunications 
Device for the Deaf (TDD) only, contact (202) 263-4869.
    OTS: April Breslaw, Director, Consumer Regulations, (202) 906-6989; 
Suzanne McQueen, Consumer Regulations Analyst, Compliance and Consumer 
Protection Division, (202) 906-6459; or Richard Bennett, Senior 
Compliance Counsel, Regulations and Legislation Division, (202) 906-
7409, at Office of Thrift Supervision, 1700 G Street, NW., Washington, 
DC 20552.
    NCUA: Matthew J. Biliouris, Program Officer, Office of Examination 
and Insurance, (703) 518-6360; or Moisette I. Green, Staff Attorney, 
Office of General Counsel, (703) 518-6540, National Credit Union 
Administration, 1775 Duke Street, Alexandria, VA 22314-3428.

SUPPLEMENTARY INFORMATION:

I. Background

    In December 2008, the Federal Reserve Board (Board), the Office of 
Thrift Supervision (OTS), and the National Credit Union Administration 
(NCUA) (collectively, the Agencies) adopted a final rule under the 
Federal Trade Commission Act (FTC Act) to protect consumers from unfair 
acts or practices with respect to consumer credit card accounts. This 
rule was published in the Federal Register on January 29, 2009. See 74 
FR 5498 (January 2009 Rule). On that same date, the Board published a 
final rule amending the provisions regarding open-end credit (not home 
secured) in Regulation Z, which implements the Truth in Lending Act 
(TILA). See 74 FR 5244 (January 2009 Regulation Z Rule). The effective 
date for both rules is July 1, 2010. See 74 FR 5548; 74 FR 5388-5390.
    Since publication of the two rules, the Agencies have become aware 
that clarification is needed to resolve confusion regarding how 
institutions will comply with particular aspects of those rules. 
Accordingly, in order to provide guidance and facilitate compliance 
with the January 2009 Rule by the effective date, the Agencies propose 
to amend portions of the rule and the accompanying staff commentary. 
These proposed amendments are discussed in detail in section III of 
this SUPPLEMENTARY INFORMATION. Similarly, elsewhere in today's Federal 
Register, the Board has proposed to amend certain aspects of the 
January 2009 Regulation Z Rule.
    Although comment is requested on the proposed amendments, the 
Agencies emphasize that the purpose of these rulemakings is to clarify 
and facilitate compliance with the final rule, not to reconsider the 
need for--or the extent of--the protections that the rule affords 
consumers. Thus, commenters are encouraged to limit their submissions 
accordingly.
    In addition, because the Agencies do not intend to extend the 
effective date for the January 2009 Rule, any amendments must be 
adopted in final form with sufficient time for institutions to 
implement the amended rule on or prior to July 1, 2010. The Agencies 
emphasize that, because this rulemaking focuses on clarifications to 
discrete aspects of the January 2009 Rule, institutions should continue 
their efforts to come into compliance with that rule as soon as 
practicable and, in any event, prior to July 1, 2010. In order to 
ensure that final clarifications can be provided as soon as possible, 
the Agencies are requiring that comments on this proposal be submitted 
within 30 days from publication in the Federal Register.\1\
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    \1\ Generally, NCUA gives the public 60 days to comment on 
proposed rules; however, a shorter comment period is appropriate in 
this instance to ensure compliance with the January 2009 Rule. See 
IRPS 87-2, 52 FR 35231 (Sept. 18, 1987).
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II. Statutory Authority

    Section 18(f)(1) of the FTC Act provides that the Board (with 
respect to banks), OTS (with respect to savings associations), and the 
NCUA (with respect to federal credit unions) are responsible for 
prescribing ``regulations defining with specificity * * * unfair or 
deceptive acts or practices, and containing requirements prescribed for 
the purpose of preventing such acts or practices.'' 15 U.S.C. 
57a(f)(1). In the SUPPLEMENTARY INFORMATION for the January 2009 Rule, 
the Agencies set forth the standards codified by Congress or adopted by 
the Federal Trade Commission for determining whether an act or practice 
is unfair or deceptive and applied those standards to the practices 
prohibited by the final rule. See 74 FR 5501 et seq. In addition, the 
OTS relied on its authority under the Home Owners' Loan Act (HOLA) as a 
secondary basis for its final rule. See, e.g., 74 FR 5505-5506. For 
purposes of this rulemaking, the Agencies continue to rely on this 
legal authority and analysis.

III. Section-by-Section Analysis

    The final rules adopted by the Board, OTS, and NCUA under the FTC 
Act are located in, respectively, parts 227, 535, and 706 of title 12 
of the Code of Federal Regulations. For purposes of the discussion in 
this SUPPLEMENTARY INFORMATION, the Agencies use the shared numerical 
suffix for each provision. For example, Sec.  --.21 refers to the 
Board's 12 CFR 227.21, the OTS's 12 CFR 535.21, and the NCUA's 12 CFR 
706.21.

Section --.21--Definitions

    Subpart C to the Agencies' rules contains the provisions addressing 
consumer credit card accounts. Section --.21 defines certain terms used 
in Subpart C.

Section --.21(a) Annual Percentage Rate

    Section --.21(a) defines ``annual percentage rate'' as the product 
of multiplying each periodic rate for a balance or transaction on a 
consumer credit card account by the number of periods in a year. In the 
text of the regulations and in the commentary, the Agencies sometimes 
use the term ``rate'' in place of ``annual percentage rate'' to 
conserve space and avoid repetition. To avoid possible confusion, the 
Agencies propose to add a new comment 21(a)-1, clarifying that, for 
purposes of Subpart C, ``rate'' has the same meaning as ``annual 
percentage rate'' unless otherwise specified. Furthermore, for clarity 
and consistency, the Agencies propose to substitute ``rate'' for 
``annual percentage rate'' in the titles to certain comments. See 
comments 23-3, 23-6, 24(b)(2)-5, 24(b)(5)-2, 24(c)(1)(i)-2.

Section --.21(c) Consumer Credit Card Account

    The provisions of Subpart C apply to ``consumer credit card 
accounts,'' which are defined in Sec.  --.21(c) as accounts provided to 
a consumer primarily for personal, family, or household purposes under 
an open-end credit plan that is accessed by a credit or charge card. 
Based on questions received following issuance of the January 2009 
Rule, the Agencies understand that clarification is needed regarding 
whether an outstanding balance on a consumer credit card account 
remains subject to Subpart C when the account is closed, when the 
account is acquired by another institution, and when the balance is 
transferred to another credit account. In particular, concerns have 
been raised that permitting institutions to apply an increased rate to 
an outstanding balance in these circumstances could lead to

[[Page 20806]]

circumvention of the general prohibition in Sec.  --.24 on such 
increases.
    To address these concerns, the Agencies propose to add comments 
21(c)-1 through 3, which would clarify that, as a general matter, the 
protections in Subpart C continue to apply to an outstanding balance 
following the closure or acquisition of the account or the transfer of 
the balance to another credit account issued by the same institution 
(or its affiliate or subsidiary). Accordingly, in these circumstances, 
an institution must, for example, continue to provide consumers a 
reasonable amount of time to make payment on such balances pursuant to 
Sec.  --.22; allocate payments in excess of the required minimum 
periodic payment among such balances consistent with Sec.  --.23; and 
increase the annual percentage rates that apply to such balances only 
to the extent permitted by Sec.  --.24.
    Because the protections in Subpart C cannot be waived or forfeited, 
the proposed comments do not distinguish between closures or transfers 
initiated by the institution and closures or transfers initiated by the 
consumer. In the January 2009 Rule, the Agencies determined that, 
because many of the prohibited practices cannot be effectively 
disclosed, consumers are unable to reasonably avoid the harm caused by 
those practices. Thus, as discussed below, allowing institutions to 
engage in the prohibited practices by obtaining the consumer's 
agreement could undercut the purpose of the rule.
    Although there may be circumstances in which individual consumers 
could make informed choices about the benefits and costs of waiving the 
protections in Subpart C, an exception for those circumstances would 
create a significant loophole that could be used to deny the 
protections to other consumers. For example, if an institution offered 
to transfer its cardholder's outstanding 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 Rule (and the Board's January 2009 
Regulation Z Rule), the Agencies believe that it would be very 
difficult to ensure that institutions disclose 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 institutions. Furthermore, consumers might be presented 
with choices that are not meaningful (such as a choice between 
accepting a higher rate on an outstanding balance or losing credit 
privileges on the account). Thus, the proposed commentary to Sec.  
--.21(c) would clarify that, as a general matter, the protections in 
Subpart C do not depend on whether the consumer agrees to the closure 
of an account or the transfer of a balance.
    Accordingly, proposed comment 21(c)-1 states that, if a consumer 
credit card account with an outstanding balance is closed by the 
consumer or the institution, the account continues to be the same 
consumer credit card account for purposes of Subpart C with respect to 
that balance. Thus, in these circumstances, the institution could not 
increase the rate that applies to the outstanding balance (except to 
the extent permitted by Sec.  --.24).
    Proposed comment 21(c)-2 addresses circumstances in which an 
institution acquires a consumer credit card account with an outstanding 
balance by, for example, merging with or acquiring another institution 
or by purchasing another institution's credit card portfolio. In some 
cases, the acquiring institution may elect to close the acquired 
account and replace it with its own credit card account. See 12 CFR 
226.12 comment 12(a)(2)-3. The acquisition of an account does not 
involve any choice on the part of consumers, and the Agencies believe 
that consumers whose accounts are acquired should receive the same 
level of protection after acquisition as they did beforehand. 
Accordingly, the proposed comment states that an institution that 
acquires a consumer credit card account remains subject to the 
provisions of Subpart C with respect to any outstanding balances on the 
account. For example, the institution would generally be prohibited 
from increasing the annual percentage rate on an outstanding purchase 
balance to the rate that the institution applies to purchases on its 
accounts.\2\
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    \2\ Thus, the acquiring institution would not be permitted to 
substitute a new index for the index applicable to an acquired 
variable rate balance if the change could result in an increase in 
the applicable annual percentage rate. See comment 24(b)(2)-1. An 
institution that does not utilize the index used to determine the 
variable rate for an acquired balance may, however, convert that 
rate to an equal or lower non-variable rate, subject to the notice 
requirements of 12 CFR 226.9(c). See comment 24(b)(2)-5.
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    Finally, proposed comment 21(c)-3 addresses balance transfers 
between accounts issued by the same institution (or its affiliate or 
subsidiary) and balance transfers between accounts issued by different 
institutions. Balances may be transferred from one consumer credit card 
account issued by an institution to another consumer credit card 
account issued by the same institution when, for example, the 
consumer's account is converted from a retail credit card that may only 
be used at a single retailer or 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 Regulation Z, 12 CFR 226.12(a)(2), the Agencies 
believe--and proposed comment 21(c)-3 states--that these transfers 
should be treated as a continuation of the existing account 
relationship rather than the creation of a new account relationship. 
See 12 CFR 226.12 comment 12(a)(2)-2. Similarly, proposed comment 
21(c)-3 would apply to circumstances where a balance is transferred to 
a line of credit accessed solely by an account number or another type 
of credit account issued by the same institution or its affiliate or 
subsidiary (except for an open-end credit plan secured by the 
consumer's dwelling).\3\ Accordingly, under these circumstances, an 
institution could not, for example, apply an increased rate to an 
existing balance in a manner prohibited by Sec.  --.24.
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    \3\ Proposed comment 21(c)-3 clarifies that Subpart C would not 
apply to balances transferred from a consumer credit card account 
issued by an institution to an open-end credit plan secured by the 
consumer's dwelling issued by the same institution (or its affiliate 
or subsidiary) because these plans provide protections that are 
similar to--and, in some cases, more stringent than--the protections 
in Subpart C. For example, a creditor 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 creditor's control and is available 
to the general public. See 12 CFR 226.5a(f)(1).
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    In contrast, proposed comment 21(c)-3 also states that, when a 
consumer chooses to transfer a balance to a consumer credit card 
account issued by a different institution, Subpart C does not prohibit 
the institution to which the balance is transferred from applying its

[[Page 20807]]

account terms to that balance, provided those terms comply with Subpart 
C. For example, if a consumer credit card account issued by institution 
A has a $1,000 purchase balance at an annual percentage rate of 15% and 
the consumer transfers that balance to a consumer credit card account 
with a purchase rate of 17% issued by institution B, institution B may 
apply the 17% rate to the $1,000 balance. However, institution B may 
not subsequently increase the rate that applies to that balance unless 
permitted by one of the exceptions in Sec.  --.24(b).
    Although balance transfers from one institution to another raise 
some of the same concerns as balance transfers involving the same 
institution, the Agencies believe that transfers between institutions 
are not contrary to Subpart C because the institution to which the 
balance is transferred is not increasing the cost of credit it 
previously extended to the consumer. For example, assume that 
institution A has extended a consumer $1,000 of credit at a rate of 
15%. Because Sec.  --.24 generally prohibits institution A from 
increasing the rate that applies to that balance, it would be 
inconsistent with Sec.  --.24 to allow institution A to reprice that 
balance simply by transferring it to another account. In contrast, in 
order for the $1,000 balance to be transferred to institution B, 
institution 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 institution A to institution B does not appear to raise 
concerns about circumvention of Sec.  --.24 because institution B is 
not increasing the cost of credit it previously extended.
    The Agencies understand that drawing this distinction between 
balance transfers involving the same institution and balance transfers 
involving different institutions may limit an institution's ability to 
offer its existing cardholders the same terms that it would offer 
another institution's cardholders. Currently, however, the Agencies 
understand that institutions generally do not make promotional balance 
transfer offers available to their existing cardholders for balances 
held by the institution because it is not cost-effective to do so. 
Furthermore, although many institutions 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 Agencies understand that these offers generally are 
not conditioned on a balance transfer, which indicates that it may be 
cost-effective for institutions to make these offers without repricing 
an outstanding balance. Nevertheless, the Agencies solicit comment on 
the extent to which proposed comment 21(c)-3 would affect institutions' 
ability to make offers to existing cardholders.

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

    Section --.22(a) provides that an institution must not treat a 
payment on a consumer credit card account as late for any purpose 
unless the consumer has been provided a reasonable amount of time to 
make the payment. Section --.22(b)(1) states that an institution must 
be able to demonstrate that it has complied with this requirement, and 
Sec.  --.22(b)(2) provides a safe harbor for institutions that have 
adopted reasonable procedures designed to ensure that periodic 
statements specifying the payment due date are mailed or delivered to 
consumers at least 21 days before the payment due date.
    Comment 22(b)-3 offers an example of an alternative method of 
complying with Sec.  --.22(a). In this example, an institution that 
only provides periodic statements electronically and only accepts 
payments electronically for a particular type of consumer credit card 
account could comply with Sec.  --.22(a) even if it does not provide 
periodic statements 21 days before the payment due date. The Agencies 
understand that, although the example states that this type of account 
must also comply with ``applicable law and regulatory guidance,'' an 
explicit reference to the consumer notice and consent procedures of the 
Electronic Signatures in Global and National Commerce Act (E-Sign Act), 
15 U.S.C. 7001 et seq., may be helpful to avoid confusion. Accordingly, 
the Agencies propose to add an explicit reference to the E-Sign Act in 
comment 22(b)-3.

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

    When different annual percentage rates apply to different balances 
on a consumer credit card account, Sec.  --.23 requires institutions to 
allocate any amount paid by the consumer in excess of the required 
minimum periodic payment (the excess payment) among the balances using 
one of two methods. The institution may apply the excess payment 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 rate (the high-to-low method). Alternatively, the 
institution may allocate the excess payment among the balances in the 
same proportion as each balance bears to the total balance (the pro 
rata method).
    When the Agencies originally proposed to address payment 
allocation, the proposed rule contained provisions specifically 
addressing accounts with a balance subject to a deferred interest 
program.\4\ One of these proposed provisions would have permitted (but 
not required) an existing practice by some institutions of allocating 
excess payments first to a balance on which interest is deferred during 
the last two billing cycles of the deferred interest period so that 
consumers could pay off that balance and avoid assessment of the 
accrued interest. See proposed Sec.  --.23(b)(1)(ii), 73 FR 28916, 
28942 (May 19, 2008). Some industry commenters supported this aspect of 
the proposal, while others argued that it would require burdensome 
changes to their systems. Some consumer group commenters argued that, 
rather than allowing institutions to choose whether to apply excess 
payments to deferred interest balances in the last two billing cycles, 
this allocation method should be mandatory. Due to other concerns about 
deferred interest plans, however, the January 2009 Rule did not include 
this provision. See 74 FR 5519, 5527-5528.
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    \4\ Many creditors offer deferred interest programs under which 
consumers are not obligated to pay interest on purchases if those 
purchases are paid in full by the end of a specified period. If the 
purchases are not paid in full when the period ends, these programs 
generally require the consumer to pay interest that has accrued on 
the purchases during the period.
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    As discussed in greater detail below with respect to Sec.  --.24, 
the Agencies propose to clarify that--so long as consumers receive 
sufficient protections--institutions may continue to provide 
promotional programs under which a consumer will not be obligated to 
pay interest that accrues on a balance if that balance is paid in full 
prior to a specified date or expiration of a specified period of time 
(deferred or waived interest programs).\5\ One area in which 
clarification is needed with respect to such programs is payment 
allocation. Under the current version of Sec.  --.23, if the deferred 
or waived interest balance is not the only balance on the account, the 
consumer would generally be required to pay off the entire outstanding 
balance in order to avoid interest charges on the deferred or

[[Page 20808]]

waived interest balance.\6\ If the consumer is unaware of the need to 
pay off the entire balance, the consumer would be charged interest on 
the deferred or waived interest balance and thus would not obtain the 
benefits of the promotional program.
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    \5\ For purposes of this SUPPLEMENTARY INFORMATION, a waived 
interest program includes a promotional program where interest is 
refunded if a balance is paid in full within a specified period of 
time.
    \6\ For example, assume that a consumer 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. Regardless of 
whether the institution uses the high-to-low allocation method or 
the pro rata allocation method, the consumer would be required to 
pay $3,000 in order to avoid interest charges on the $1,000 balance. 
Indeed, under the current version of Sec.  --.23, the only 
circumstance in which the consumer could pay off the $1,000 balance 
without also paying off the $2,000 purchase balance would be if the 
$1,000 balance had a higher annual percentage rate than the $2,000 
purchase balance and the institution chose to use the high-to-low 
method.
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    To ensure that consumers are adequately protected, the Agencies 
propose to amend Sec.  --.23 to require institutions to allocate excess 
payments first to deferred or waived interest balances during the last 
two billing cycles of the promotional period. As noted above, this is 
consistent with the current practice of many institutions with respect 
to deferred interest plans and is generally beneficial to consumers 
insofar as it enables them to avoid interest charges by paying off the 
accrued interest balance in full prior to expiration without paying off 
all other balances on the account.\7\ Accordingly, the Agencies propose 
to move the provisions in the current version of Sec.  --.23 to Sec.  
--.23(a), to place the new provision for deferred or waived programs in 
Sec.  --.23(b), and to renumber the existing commentary accordingly. 
The Agencies also propose to add a new example in comment 23(a)-1 
(proposed comment 23(a)(1)-1) illustrating the application of proposed 
Sec.  --.23(b). In addition, elsewhere in today's Federal Register, the 
Board has proposed to amend the disclosure requirements for periodic 
statements in Regulation Z, 12 CFR 226.7, to ensure that consumers are 
informed of the amount of interest accrued on the deferred or waived 
balance and the date by which that balance must be paid in full to 
avoid those accrued interest charges.\8\
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    \7\ As discussed above, for purposes of this proposal, the 
Agencies continue to rely on the legal authority and analysis 
contained in the January 2009 Rule. In particular, with respect to 
the proposed amendment to Sec.  --.23, the Agencies rely on the 
legal analysis regarding unfair payment allocation practices at 74 
FR 5514-5517. In addition, the Agencies note that failing to 
allocate excess payments first to deferred or waived interest 
balances during the last two billing cycles of the promotional 
period appears to cause substantial consumer injury insofar as a 
different allocation method would result in the assessment of 
accrued interest (unless the consumer pays off all balances on the 
account). Because one of the intended purposes of a credit card 
account is to finance purchases over multiple billing cycles, it 
would be unreasonable to expect consumers to avoid accrued interest 
charges on a deferred or waived interest balance by paying off all 
balances on the account. Finally, failing to comply with the 
proposed amendment does not appear to create any benefits for 
consumers that would outweigh the injury. Indeed, the Agencies 
understand that the payment allocation practices of many 
institutions offering deferred or waived interest programs already 
comply with the proposed amendment.
    \8\ Specifically, the Board is proposing to amend 12 CFR 226.7 
comment 7(b)-1 to require creditors offering deferred or waived 
interest programs to disclose on the periodic statement the balance 
subject to the program and the amount of interest that has accrued 
on that balance. In addition, the Board is proposing to add a new 12 
CFR 226.7(b)(14) that would require creditors to state on the front 
of the periodic statement for the two billing cycles immediately 
preceding expiration of the promotional period the date on which the 
period expires and that the deferred or waived interest balance must 
be paid in full by a specific date in order to avoid accrued 
interest charges.
---------------------------------------------------------------------------

    Furthermore, the Agencies propose to amend comment 23-6 to clarify 
that, for purposes of Sec.  --.23, a balance on which interest will not 
be charged if the balance is paid in full prior to expiration of a 
specified period should be treated as a balance with an annual 
percentage rate of zero rather than a balance with the rate at which 
interest accrues during the promotional period (the accrual rate). As 
an initial matter, treating the rate as zero is consistent with the 
nature of the deferred or waived interest program 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, because Sec.  
--.23 only applies when different annual percentage rates apply to 
different balances on the account, using the accrual rate for purposes 
of Sec.  --.23 could significantly narrow the protections of the 
payment allocation rules. Specifically, when the accrual rate for a 
deferred or waived interest balance is the same as the rate that 
applies to purchases (which the Agencies understand is often the case) 
and there are no other balances on the account, Sec.  --.23 would not 
apply if the accrual rate was used. For example, if an account has a 
$1,000 purchase balance with an annual percentage rate of 15% and a 
$2,000 balance on which interest accrues at 15% but will not be charged 
if that balance is paid in full within a specific period of time, Sec.  
--.23 would not apply if the accrual rate of 15% was the applicable 
rate for the $2,000 balance for purposes of payment allocation. The 
Agencies believe that, in these circumstances, consumers should be 
afforded the protections in Sec.  --.23 (and, in particular, the 
protections in proposed Sec.  --.23(b)).
    In addition, for purposes of the high-to-low allocation method in 
Sec.  --.23(a)(1), treating the rate on this type of promotional 
balance as zero during the accrued interest period ensures that excess 
payments will be applied first to balances on which interest is being 
charged, which will generally result in lower interest charges if the 
consumer pays the deferred or waived interest balance in full prior to 
expiration of the promotional period. Thus, using the above example, 
the amendments to comment 23-6 would clarify that an institution using 
the high-to-low method would allocate excess payments to the $1,000 
purchase balance before the $2,000 balance until the last two billing 
cycles of the accrued interest period (when proposed Sec.  --.24(b) 
would require that excess payments be applied first to any remaining 
portion of the $2,000 balance). Although treating the rate on the 
deferred or waived interest balance as zero could prevent consumers who 
wish to pay off that balance in installments over the course of the 
promotional period from doing so, the Agencies believe that, on 
balance, this treatment produces the best overall outcome for consumers 
when the high-to-low allocation method is used.\9\
---------------------------------------------------------------------------

    \9\ The Agencies note that, if the institution uses the pro rata 
allocation method, a proportionate amount of the excess payment will 
be applied to the deferred or waived interest balance each month 
during the promotional period.
---------------------------------------------------------------------------

    Finally, proposed comment 23(b)-1 would clarify that Sec.  --.23(b) 
applies to promotional programs 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, not 
to grace periods offered by the institution.

Requests for Comment

    The Agencies request comment on:
     Whether the provision in proposed Sec.  --.23(b) regarding 
balances on which interest will not be charged if the balance is paid 
in full by a specified date should apply during the last two billing 
cycles of the deferred or waived interest period or during a longer or 
shorter time period.
     Whether proposed Sec.  --.23(b) should apply to a grace 
period offered by the institution. In particular, the Agencies request 
comment on whether institutions offer grace periods that only require 
consumers to pay certain balances in full each billing cycle (rather 
than the entire balance) and, if so, whether proposed Sec.  --.23(b) 
should

[[Page 20809]]

permit institutions to apply excess payments to those balances first.

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

    Section --.24(a) requires institutions to disclose, at account 
opening, the annual percentage rates that will apply to each category 
of transactions on a consumer credit card account. In addition, Sec.  
--.24(a) prohibits institutions from increasing those rates unless 
specifically permitted by one of the exceptions in Sec.  --.24(b).
    As an initial matter, the Agencies understand that clarification is 
needed regarding the meaning of ``category of transactions'' for 
purposes of Sec.  --.24. Accordingly, the Agencies propose to add a new 
comment 24-3 to clarify that, for purposes of Sec.  --.24, 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. For example, purchase 
transactions, cash advance transactions, and balance transfer 
transactions are separate categories of transactions for purposes of 
Sec.  --.24 if an institution applies different annual percentage rates 
to each. Furthermore, if, for example, the institution applies 
different annual percentage rates to different types of purchase 
transactions (such as one rate for purchases of gasoline and a 
different rate for all other purchases), each type constitutes a 
separate category of transactions for purposes of Sec.  --.24.\10\
---------------------------------------------------------------------------

    \10\ As noted below, the Agencies request comment on whether 
institutions establish separate categories of transactions based on 
factors other than annual percentage rates and, if so, for what 
reasons.
---------------------------------------------------------------------------

    In addition, the Agencies understand there is some confusion 
regarding whether certain changes to a consumer credit card account 
constitute an ``account opening'' for purposes of Sec.  --.24 generally 
and, in particular, the general prohibition on increasing rates during 
the first year after account opening. Accordingly, the Agencies propose 
to add a new comment 24-4 clarifying that, when a consumer has a credit 
card account with an institution and the consumer opens a new credit 
card account with the same institution (or its affiliate or 
subsidiary), the opening of the new account constitutes an ``account 
opening'' for purposes of Sec.  --.24 if the consumer retains the 
ability to obtain additional extensions of credit on both accounts. 
Thus, for example, if a consumer opens a credit card account with an 
institution on January 1 of year one and opens a second credit card 
account with that institution on July 1 of year one, the opening of the 
second account constitutes an account opening for purposes of Sec.  
--.24 so long as the consumer can 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 institution has two 
separate account relationships with the consumer, the general 
prohibition in Sec.  --.24 on increasing rates during the first year 
after account opening would apply to the opening of the second account.
    In contrast, the comment would clarify that an account has not been 
opened for purposes of Sec.  --.24 when an institution replaces one 
consumer credit card account with another consumer 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 
an institution consolidates or combines a credit card account with one 
or more other credit card accounts into a single credit card account. 
As discussed above, the Agencies believe 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 replacement of an acquired credit card 
account does not constitute an ``account opening'' for purposes of 
Sec.  --.24. Thus, in these circumstances, the general prohibition in 
Sec.  --.24 on increasing rates during the first year after account 
opening would not apply. However, when a replacement or consolidation 
occurs during the first year after account opening, proposed comment 
24-4 would clarify that the institution may not increase an annual 
percentage rate in a manner otherwise prohibited by Sec.  --.24.\11\ 
Similarly, the other protections in Sec.  --.24 (such as the 
limitations on repayment of protected balances in Sec.  --.24(c)) would 
still apply following the replacement or consolidation.
---------------------------------------------------------------------------

    \11\ For example, assume that, on January 1 of year one, a 
consumer opens a consumer credit card account with a purchase rate 
of 15%. On July 1 of year one, the account is replaced with a 
consumer credit card account issued by the same institution, which 
offers different features (such as rewards on purchases). Under 
these circumstances, the institution could not increase the annual 
percentage rate for purchases to a rate that is higher than 15% 
pursuant to Sec.  --.24(b)(3) until January 1 of year two (which is 
one year after the first account was opened).
---------------------------------------------------------------------------

    Finally, the Agencies understand that the replacement of one 
consumer credit card 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.\12\ Accordingly, the Agencies solicit 
comment on whether the appropriate amount of time for the replacement 
of one consumer credit card account with another is 15 days, 30 days, 
or a different period.\13\
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    \12\ As discussed above, the proposed commentary to Sec.  --.21 
would clarify that, in these circumstances, the institution could 
not increase the annual percentage rate that applies to the $1,000 
balance unless otherwise permitted by Sec.  --.24.
    \13\ Proposed comment 24-4 provides 15 days and 30 days as 
alternatives.
---------------------------------------------------------------------------

Section --.24(a) General Rule

    The Agencies also understand that there is some confusion regarding 
the relationship between comment 24(a)-1 and Regulation Z, 12 CFR 
226.6(b)(2)(i)(D) with respect to the disclosure of penalty rates. 
Specifically, comment 24(a)-1 states that institutions cannot satisfy 
the disclosure requirements in Sec.  --.24(a) by disclosing a range of 
annual percentage rates or that a rate will be ``up to'' a particular 
amount. In contrast, when more than one penalty rate may apply, 12 CFR 
226.6(b)(2)(i)(D) permits creditors to disclose ``the highest rate that 
could apply, instead of disclosing the specific rates or the range of 
rates that could apply.'' Because the disclosure requirements in Sec.  
--.24(a) are intended to ensure that consumers receive notice at 
account opening of the specific annual percentage rates that will apply 
to the categories of transactions on the account, those requirements do 
not apply to rates that may or may not apply depending on a particular 
event or occurrence (such as penalty rates) or rates that may be 
applied at the institution's discretion. Therefore, the Agencies 
propose to amend comment 24(a)-1 accordingly. The Agencies note, 
however, that this clarification is limited to the disclosure 
requirements in Sec.  --.24(a) and does not alter Sec.  --.24(a)'s 
general prohibition on applying penalty rates or other contingent rates 
unless specifically permitted by Sec.  --.24(b).
    The Agencies also propose the following clarifications and 
technical corrections to the commentary to Sec.  --.24(a):
     Amend the example in comment 24(a)-2.i to clarify that the 
institution

[[Page 20810]]

disclosed a penalty rate at account opening.
     Amend the example in comment 24(a)-2.iii to clarify that 
the 12 CFR 226.9(g) notice states that, if the consumer becomes more 
than 30 days late on the account, the penalty rate will apply to all 
balances on the account.
     Amend the example in comment 24(a)-2.iii.C to correct a 
typographical error.

Section --.24(b)(1) Account Opening Disclosure Exception

    Section --.24(b)(1) provides that an annual percentage rate for a 
category of transactions may be increased to a rate disclosed at 
account opening upon expiration of a period of time disclosed at 
account opening. Under this exception, if, for example, an institution 
discloses at account opening that a 5% rate will apply to purchases for 
six months and that a 15% rate will apply thereafter, the institution 
can increase the rate on the existing purchase balance and on new 
purchases to 15% after six months. These plans are sometimes referred 
to as ``stepped rates.''
    Comment 24(b)(1)-1 states that, because Sec.  --.24(b)(1) is 
limited to increased rates that will apply after a specified period of 
time, the exception does not permit application of increased rates that 
are disclosed at account opening but are contingent on a particular 
event or occurrence or may be applied at the institution's discretion. 
For example, as illustrated in comment 24(b)(1)-1.i, Sec.  --.24(b)(1) 
does not permit an institution to apply an increased penalty rate when 
a consumer makes a late payment even if the institution disclosed that 
rate at account opening. For clarity, the Agencies propose to move this 
language into the text of Sec.  --.24(b)(1). The Agencies also propose 
to amend comment 24(b)(1)-1 to clarify that the examples illustrate the 
application of Sec.  --.24, rather than just Sec.  --.24(a).
    Comment 24(b)(1)-2 clarifies that nothing in Sec.  --.24 prohibits 
an institution from assessing interest due to the loss of a grace 
period to the extent consistent with the prohibition on two-cycle 
billing in Sec.  --.25. Because the Agencies understand that there is 
some confusion regarding the relationship between Sec.  --.24 and the 
provision of a grace period, the Agencies propose to add language to 
this comment clarifying that an institution has not reduced an annual 
percentage rate on a consumer credit card account for purposes of Sec.  
--.24 if the institution does not charge interest on a balance when the 
consumer pays that balance in full prior to the expiration of a grace 
period. In addition, for organizational purposes, the Agencies propose 
to redesignate this comment as 24-2 and renumber comment 24(b)(1)-3 
accordingly.
    Finally, the Agencies understand that there is some confusion as to 
whether an institution waives the right to impose an increased rate 
pursuant to Sec.  --.24(b)(1) if it does not do so immediately upon 
expiration of the specified time period. As a general matter, because 
Sec.  --.24 is intended to increase predictability and transparency for 
consumers, the exceptions in Sec.  --.24(b) do not permit institutions 
to retain the right to increase a rate indefinitely and at their 
discretion. For example, if at account opening an institution discloses 
a stepped rate of 15% on purchases for one year and 20% thereafter, the 
institution can apply a lower rate of 17% at the end of the year but, 
if it wants to retain its right under Sec.  --.24(b)(1) to apply the 
20% rate to purchases made during the first year, it must disclose to 
the consumer (pursuant to 12 CFR 226.9(c)) how long the 17% rate will 
apply and that the 20% rate will apply thereafter so that the consumer 
can make informed decisions when using the card. See comment 24(b)(1)-3 
(proposed comment 24(b)(1)-2)).
    The Agencies understand, however, that applying an increased rate 
on a specific date can present operational difficulties when that date 
falls in the middle of a billing cycle. Accordingly, to address this 
concern, the Agencies propose to add a new comment 24(b)-1 clarifying 
that, if Sec.  --.24(b) permits an institution to apply an increased 
annual percentage rate on a date that is not the first day of a billing 
cycle, the institution may delay application of the increased rate 
until the first day of the following billing cycle without 
relinquishing the ability to apply that rate.\14\
---------------------------------------------------------------------------

    \14\ For example, assume that, at account opening on January 1, 
an institution discloses that a 10% rate will apply to purchases for 
six months and a 15% rate will apply thereafter. The first day of 
the billing cycle for the account is the fifteenth of the month. If 
the six-month period expires on July 1, the institution may delay 
application of the 15% rate until July 15 without relinquishing its 
ability to apply that rate under Sec.  --.24(b)(1).
---------------------------------------------------------------------------

Section --.24(b)(3) Advance Notice Exception

    Section --.24(b)(3) provides that an annual percentage rate for a 
category of transactions may be increased pursuant to a notice under 12 
CFR 226.9(c) or (g) for transactions that occur more than seven days 
after provision of the notice. The Agencies understand that there has 
been some confusion regarding the interaction between this seven-day 
period in Sec.  --.24(b)(3) and the requirement in 12 CFR 226.9(c) and 
(g) that notice of an increased rate be provided at least 45 days prior 
to imposition of the increased rate. As illustrated in the examples in 
comment 24(b)(3)-3, the distinction is that the institution may apply 
the increased rate to any transaction that occurs after the seventh day 
following provision of the notice, but it must wait 45 days to begin 
accruing interest at that rate. The reason for this distinction is that 
the two time periods serve different purposes. The seven-day period is 
intended to ensure that the consumer receives the notice and is aware 
of the increased rate before engaging in transactions to which that 
increased rate will eventually apply (unless the consumer transfers or 
pays off the balance). See 74 FR 5531. In contrast, the 45-day period 
is intended to give the consumer sufficient time to evaluate whether to 
continue using the credit card account at the increased rate or whether 
better terms can be obtained elsewhere. See 74 FR 5344-5356. For 
additional clarity, the Agencies propose to amend comment 24(b)(3)-2 to 
state that, when calculating interest charges, Sec.  --.24(b)(3) does 
not permit an institution to reach back to days before the effective 
date of the rate increase under 12 CFR 226.9(c) or (g)--in other words, 
the date 45 days after provision of the notice.
    The Agencies also propose to amend comment 24(b)(3)-2 to clarify 
when a transaction is deemed to have occurred for purposes of Sec.  
--.24(b)(3). Specifically, the current version of comment 24(b)(3)-2 
states that an institution may apply a rate increased pursuant to Sec.  
--.24(b)(3) to transactions that are authorized within seven days--but 
are settled more than seven days--after provision of the notice. The 
Agencies understand, however, that this distinction has created some 
confusion because, for example, authorization may not be obtained for 
all transactions and because the term ``settled'' could refer to 
different points in the payment process, including settlement between 
the acquirer and the merchant or settlement between the consumer and 
the card issuer. Accordingly, for consistency and clarity, the Agencies 
propose to amend comment 24(b)(3)-2 to clarify that when a transaction 
occurred for purposes of Sec.  --.24(b)(3) is determined by the date of 
the transaction (without regard to when the transaction is authorized, 
settled, or posted to the consumer's account). In addition, the 
Agencies would clarify that, when a merchant places a ``hold''

[[Page 20811]]

on the available credit on an account for an estimated transaction 
amount when the actual transaction amount will not be known until a 
later date, the date of the transaction for purposes of Sec.  
--.24(b)(3) is the date on which the merchant determines the actual 
transaction amount. The Agencies also propose to amend the examples in 
comment 24(b)(3)-3 for consistency with these proposed changes.
    In addition, the Agencies propose to amend Sec.  --.24(b)(3) and 
its commentary to reflect that notice of an increased rate may be 
provided under 12 CFR 226.9(b), which applies to supplemental access 
devices (such as convenience checks) and additional features added to 
the account after account opening. 12 CFR 226.9(b) requires creditors 
to disclose the rates and other key terms applicable to the device or 
feature before the consumer uses the device or feature for the first 
time. For example, 12 CFR 226.9(b)(3)(A) requires that creditors 
providing convenience checks 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 rates increased pursuant to 
a 12 CFR 226.9(c) and (g) notice, the seven-day period is not necessary 
for rate increases disclosed pursuant to 12 CFR 226.9(b) because the 
device or feature will not be used before the consumer has received 
notice of the applicable rates and terms. Accordingly, the Agencies 
propose to amend Sec.  --.24(b)(3) to provide that increased rates 
disclosed pursuant to 12 CFR 226.9(b) must not be applied to 
transactions that occurred prior to provision of the notice. Section 
--.24(b)(3) would continue to provide that increased rates disclosed 
pursuant to 12 CFR 226.9(c) or (g) must not be applied to transactions 
that occurred within seven days after provision of the notice. The 
Agencies would also clarify in comment 24(b)(3)-2 that, if a rate 
increase is disclosed pursuant to both 12 CFR 226.9(b) and 12 CFR 
226.9(c), that rate may only be applied to transactions that occur more 
than seven days after provision of the 12 CFR 226.9(c) notice. In 
addition, the Agencies would add an illustrative example in new comment 
24(b)(3)-4.iv.
    Finally, the Agencies understand that clarification is needed 
regarding the application of discounted promotional rates to existing 
accounts. As discussed above, Sec.  --.24(b)(1) permits stepped rates 
disclosed at account opening. In addition, comment 24(b)(3)-3 provides 
some examples of how a stepped rate could be provided pursuant to a 12 
CFR 226.9(c) notice. The Agencies did not, however, specifically 
address circumstances in which a discounted promotional stepped rate is 
offered after account opening. Consistent with comment 24(b)(3)-3, the 
Agencies believe that, if the consumer receives advance notice of the 
term of the discounted rate and the rate that will apply after that 
term expires, a promotional stepped rate offer on an existing account 
can provide the same benefits to consumers as a promotional stepped 
rate offer at account opening so long as the offer cannot be used to 
increase the rate that applies to pre-existing balances.
    Accordingly, to clarify that such offers are permitted, the 
Agencies propose to add a new comment 24(b)(3)-4 stating that nothing 
in Sec.  --.24 prohibits an institution from lowering the annual 
percentage rate that applies to an existing balance or to new 
transactions. The comment would further state, however, that, if a 
lower rate is applied to an existing balance, the institution cannot 
subsequently increase the rate on that balance unless it has provided 
the consumer with advance notice of the increase pursuant to 12 CFR 
226.9(b) or (c). This notice must state the period of time during which 
the lower rate will apply (or the date until which that rate will 
apply) and the rate that will apply after expiration of that period. 
Furthermore, to ensure that the consumer receives notice of the offer 
before engaging in transactions that are subject to that offer (and 
will therefore eventually be taken to a higher rate), the comment would 
clarify that, when an institution applies a decreased rate to 
transactions that occurred prior to provision of the notice (or, in the 
case of a 12 CFR 226.9(c) or (g) notice, transactions that occurred 
within seven days after provision of the notice), the institution may 
not subsequently increase the rate that applies to those transactions 
to a rate that is higher than the rate that applied prior to the 
decrease.\15\ Finally, the comment would provide illustrative examples 
of stepped rate offers that would comply with these requirements.\16\
---------------------------------------------------------------------------

    \15\ For example, assume that the annual percentage rate for 
purchases on an account is 15% and that, pursuant to 12 CFR 
226.9(c), the institution provides notice on July 1 that a rate of 
5% will apply to purchases until December 31, after which a rate of 
17% will apply. If the institution applies the 5% rate to purchases 
made on or before July 8, the institution may only increase the rate 
on those purchases to a maximum of 15% on December 31.
    \16\ For the same reasons, the Agencies propose to amend comment 
24(b)(1)-3 (proposed comment 24(b)(1)-2) to clarify that 
institutions may offer discounted stepped rates during the first 
year after account opening so long as the rate that applies after 
expiration of the discounted rate does not exceed the rate disclosed 
at account opening for that category of transactions.
---------------------------------------------------------------------------

Section --.24(b)(5) Workout Arrangement Exception

    Section --.24(b)(5) provides that an annual percentage rate may be 
increased due to the consumer's failure to comply with the terms of a 
workout arrangement between the institution and the consumer, provided 
that the annual percentage rate applicable to a category of 
transactions following any such increase does not exceed the rate that 
applied to that category of transactions prior to commencement of the 
workout arrangement. This exception is intended to encourage 
institutions to continue offering workout arrangements that reduce 
rates for consumers in serious default, while also ensuring that a 
consumer who enters into such an arrangement but is unable to comply 
with its terms is not charged a rate that exceeds the rate that applied 
prior to the arrangement. See 74 FR 5532.
    Because the term ``workout'' has been used by the Agencies in other 
contexts,\17\ the Agencies understand that there is some confusion as 
to whether this exception also applies to temporary hardship 
arrangements that assist consumers in overcoming financial difficulties 
by lowering the annual percentage rate for a period of time. For 
example, if an account becomes seriously delinquent because of a loss 
of employment, the institution may reduce the rate that applies to the 
outstanding balance from the penalty rate to a rate of zero on the 
condition that the consumer make payments that will cure the 
delinquency within a specified period of time. If the arrangement is 
successful, the institution may choose to return the annual percentage 
rate to the rate that applied prior to commencement of the temporary 
hardship arrangement. Because such arrangements can provide important 
benefits to consumers, the Agencies propose to amend Sec.  --.24(b)(5) 
and its commentary to clarify that this exception also applies to 
temporary hardship arrangements and when the consumer completes a 
workout or temporary hardship arrangement.
---------------------------------------------------------------------------

    \17\ See, e.g., Board Supervisory Letter SR 03-1 on Account 
Management and Loss Allowance Methodology for Credit Card Lending 
(Jan. 8, 2003) (available at http://www.federalreserve.gov/boarddocs/srletters/2003/sr0301.htm); OTS Regulatory Bulletin RB 37-
16 on Examination Handbook, Asset Quality Section 218, Credit Card 
Lending (May 8, 2006) (available at http://files.ots.treas.gov/74827.pdf).

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[[Page 20812]]

Proposed Sec.  --.24(b)(6) Servicemembers Civil Relief Act Exception

    The Agencies understand that clarification is required regarding 
the relationship between Sec.  --.24 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 consumer credit card accounts, this 
restriction applies during the period of military service. See 50 
U.S.C. app. 527(a)(1)(B).\18\
---------------------------------------------------------------------------

    \18\ 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.
---------------------------------------------------------------------------

    Under the current version of Sec.  --.24, an institution that 
complies with the SCRA by lowering the rate that applies to an existing 
balance on a consumer credit card account when the consumer enters 
military service 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. The Agencies did not intend this result, 
which appears to be inconsistent with the plain language of the SCRA. 
Accordingly, the Agencies propose to add a new exception in Sec.  
--.24(b)(6) stating that an annual percentage rate that has been 
decreased pursuant to 50 U.S.C. app. 527 may be increased once that 
provision no longer applies, provided that the increased rate does not 
exceed the rate that applied prior to the period of military service.

Treatment of Deferred Interest and Similar Promotional Programs

    In the final rule, the Agencies concluded that deferred interest 
programs, as currently designed and marketed, are inconsistent with the 
general prohibition in Sec.  --.24 on the application of increased 
rates to existing balances. See 74 FR 5527-5528. The Agencies noted 
that, although such programs provide substantial benefits to consumers 
who pay the balance in full prior to expiration of the program (thereby 
avoiding the assessment of interest charges), consumers who do not do 
so may be unfairly surprised, particularly because these programs are 
typically marketed as ``interest free.'' Accordingly, the Agencies 
determined that the assessment of deferred interest is effectively a 
repricing of past transactions subject to Sec.  --.24 and that 
prohibiting this practice would improve transparency and enable 
consumers to make more informed decisions regarding the cost of using 
credit. See id.
    The Agencies specifically stated, however, that Sec.  --.24 does 
not prohibit institutions from offering promotional programs that 
provide similar benefits to consumers but do not raise concerns about 
unfair surprise. In particular, the Agencies noted that an institution 
could offer a program where interest is assessed on purchases at a 
disclosed rate for a period of time but the interest charged is waived 
if the principal is paid in full by the end of that period.
    The Agencies understand that the distinction in the January 2009 
Rule between deferred interest and waived interest has caused confusion 
with respect to the manner in which institutions should structure 
promotional programs under which the consumer will not be obligated to 
pay interest that accrues on a balance if that balance is paid in full 
by a specified date or within a specified period of time. In light of 
this confusion, the Agencies believe that the January 2009 Rule focused 
too heavily on the form or technical aspects of these programs.\19\ 
Deferred interest programs should not be categorically prohibited while 
waived interest programs are categorically exempt from the requirements 
of the final rule. Instead, the Agencies believe the better approach is 
to focus on applying consistent standards to ensure that consumers are 
not unfairly surprised by the cost of using these types of promotional 
programs. Accordingly, the Agencies propose the following amendments.
---------------------------------------------------------------------------

    \19\ In particular, the Agencies understand that the references 
in the January 2009 Rule to ``assessing'' or ``charging'' interest 
have caused uncertainty about whether, during the promotional 
period, an institution must treat accrued interest for which the 
consumer may or may not ultimately be responsible (depending on 
whether the balance is paid in full prior to expiration) as part of 
the consumer's debt. The Agencies did not intend to regulate the 
accounting treatment of this accrued interest. Instead, the Agencies 
intended to ensure that consumers understand the amount of interest 
for which they will be responsible if the balance is not paid in 
full before expiration. As discussed elsewhere in this SUPPLEMENTARY 
INFORMATION, the Board is proposing amendments to Regulation Z in 
today's Federal Register to accomplish this purpose.
---------------------------------------------------------------------------

    As an initial matter, the Agencies understand that the distinction 
in the January 2009 Rule between ``deferred interest'' programs and 
``waived interest'' programs could be read to suggest that some 
programs were covered by the final rule and others were not. Because 
the protections consumers receive should not depend on this technical 
distinction, the Agencies propose to amend the commentary to Sec.  
--.24 to clarify that, although institutions may continue to provide 
promotional programs under which the consumer will not be obligated to 
pay interest that accrues on a balance if that balance is paid in full 
within a specified period of time, those programs are subject to all of 
the protections in Sec.  --.24, including the general prohibition on 
so-called ``hair trigger'' or ``universal default'' repricings of 
existing balances. See proposed comments 24(a)-2.iv and 24(b)(3)-4.iii. 
Thus, for example, if a consumer relies on this type of promotional 
program when making a purchase, the institution cannot deny the 
consumer the opportunity to avoid interest charges on that purchase by 
paying the purchase in full prior to expiration of the promotional 
period unless the consumer is more than 30 days' delinquent on the 
account.\20\
---------------------------------------------------------------------------

    \20\ If, however, the waived or deferred interest balance is not 
paid in full on or before the date the program expires, the 
institution is not required to wait an additional 30 days before 
charging accrued interest. See proposed comment 24(a)-2.iv.
---------------------------------------------------------------------------

    Furthermore, as discussed above, the Agencies propose to amend the 
payment allocation rules in Sec.  --.23 to ensure that consumers are 
not required to pay off all balances on the account in order to receive 
the benefits of these types of promotional programs. In addition, 
elsewhere in today's Federal Register, the Board has proposed to amend 
the advertising requirements in Regulation Z, 12 CFR 226.16, to address 
concerns that the use of terms such as ``no interest'' to describe 
deferred or waived interest programs may confuse consumers. 
Specifically, whenever ``no interest'' or a similar term is used in an 
advertisement for a deferred or waived interest program, proposed 12 
CFR 226.16(h) would require the creditor to disclose that any balance 
subject to the program must be paid in full by the end of the 
promotional period to avoid interest charges (for example, ``no 
interest if paid in full within six months''). In addition, the 
creditor would be required to state that, if the balance subject to the 
program is not paid in full within the promotional period, interest 
will be charged from the date the consumer became obligated for each 
transaction subject to the program.\21\ The Agencies believe that

[[Page 20813]]

these amendments will ensure that institutions can continue to offer 
programs that provide substantial benefits to consumers while 
protecting consumers from unexpected increases in the cost of completed 
transactions.
---------------------------------------------------------------------------

    \21\ As discussed above, the Board has also proposed to amend 
the periodic statement disclosures in Regulation Z, 12 CFR 226.7, to 
ensure that consumers who utilize these types of promotional 
programs are informed of the date on which the program expires and 
the amount of interest for which they will be responsible if the 
promotional balance is not paid in full by that date.
---------------------------------------------------------------------------

    Finally, the Agencies understand that there is some confusion 
regarding implementation of the final rule with respect to existing 
deferred interest programs. As noted above, the effective date of the 
January 2009 Rule is July 1, 2010. In the SUPPLEMENTARY INFORMATION to 
that rule, the Agencies provided guidance regarding the implementation 
of Sec.  --.24. See 74 FR 5534. The Agencies did not, however, address 
the effect of the rule on deferred interest programs established prior 
to the effective date that expire after that date. The Agencies did not 
intend to convert these programs into interest-free loans by 
prohibiting an institution from charging interest if the deferred 
interest balance is not paid in full prior to expiration of the 
deferred interest period. However, the Agencies will not permit 
institutions to continue practices prohibited by the January 2009 Rule 
after the effective date. Accordingly, if a deferred interest program 
established prior to the effective date permits a consumer to avoid 
deferred interest charges by paying the deferred interest balance in 
full by a date that falls on or after July 1, 2010, the institution may 
charge deferred interest to the account consistent with the terms of 
the program, provided that: (1) Any periodic statement mailed or 
delivered on or after July 1, 2010 complies with the disclosure 
requirements in 12 CFR 226.7 (as amended); and (2) as of July 1, 2010, 
the institution fully complies with the protections in the January 2009 
Rule (as amended), including the payment allocation requirements in 
proposed Sec.  --.23(b) and the prohibitions on ``hair trigger'' and 
``universal default'' repricings in Sec.  --.24.

24(c) Treatment of Protected Balances

    The Agencies propose to amend comment 24(c)(2)-1 to clarify that 
Sec.  --.24(c)(2) does not prohibit an institution from continuing to 
assess a periodic fee that was assessed before the account had a 
protected balance or from assessing fees such as late payment fees if 
the only balance on the account is a protected balance.

Requests for Comment

    The Agencies request comment on:
     Whether institutions establish separate categories of 
transactions based on factors other than annual percentage rates and, 
if so, for what reasons and whether proposed comment 24-3 should be 
revised accordingly.
     Whether the proposed implementation guidance regarding 
deferred interest plans provides sufficient protections for consumers 
and flexibility for institutions.

Section --.25--Unfair Balance Computation Method

    Section --.25(a) prohibits institutions from imposing finance 
charges on balances on a consumer credit card account based on balances 
for days in billing cycles that precede the most recent billing cycle 
as a result of the loss of any time period provided by the institution 
within which the consumer may repay any portion of the credit extended 
without incurring finance charges. The prohibited practice is sometimes 
referred to as ``two-cycle'' or ``double-cycle'' billing.
    As discussed above, the Agencies are proposing amendments to Sec.  
--.23, Sec.  --.24, and Regulation Z that would clarify the substantive 
and disclosure requirements for promotional programs under which a 
consumer will not be obligated to pay interest that accrues on a 
balance if that balance is paid in full prior to a specified date or 
the expiration of a specified period of time. Consistent with these 
proposed amendments, the Agencies also propose to add a new comment 
25(a)-3, clarifying that Sec.  --.25 does not prohibit the institution 
from charging accrued interest under this type of program if the 
balance is not paid in full prior to the specified date.

IV. Regulatory Analysis

    Section VIII of the SUPPLEMENTARY INFORMATION to the January 2009 
Rule sets forth the Agencies' respective analyses under the Regulatory 
Flexibility Act (5 U.S.C. 601 et seq.) and the Paperwork Reduction Act 
of 1995 (44 U.S.C. 3506; 5 CFR part 1320 Appendix A.1). See 74 FR 5548-
5551. This section also sets forth the OTS's determinations with 
respect to Executive Orders 12866 and 13132 and the Unfunded Mandates 
Reform Act of 1995 as well as the NCUA's determinations with respect to 
Executive Order 13132 and the Treasury and General Government 
Appropriations Act, 1999. See 74 FR 5551-5558. Because the proposed 
amendments are clarifications and would not, if adopted, alter the 
substance of the analyses and determinations accompanying the January 
2009 Rule, the Agencies continue to rely on those analyses and 
determinations for purposes of this rulemaking.

V. Solicitation of Comments on Use of Plain Language

    Section 722 of the Gramm-Leach-Bliley Act requires the Board and 
OTS to use plain language in all proposed and final rules published 
after January 1, 2000. Additionally, NCUA's goal is to promulgate clear 
and understandable regulations that impose minimal regulatory burdens. 
Therefore, the Agencies specifically invite your comments on how to 
make this proposal easier to understand.

List of Subjects

12 CFR Part 227

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

12 CFR Part 535

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

12 CFR Part 706

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

Board of Governors of the Federal Reserve System

12 CFR Chapter II

Text of Proposed Revisions

    Certain conventions have been used to highlight the proposed 
revisions. New language is shown inside [rtrif]bold-type arrows[ltrif] 
while language that would be deleted is set off with [lsqbb]bold-type 
brackets[rsqbb].

Authority and Issuance

    For the reasons discussed in the joint preamble, the Board proposes 
to further amend 12 CFR part 227, as amended at 74 FR 5559, January 29, 
2009, as set forth below:

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

    1. Section 227.23 is revised to read as follows:


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

    When different annual percentage rates apply to different balances 
on a consumer credit card account[rtrif]:
    (a) General rule. Except as provided in paragraph (b) of this 
section[ltrif], the bank must allocate any amount paid by the consumer 
in excess of the required

[[Page 20814]]

minimum periodic payment among the balances using one of the following 
methods:
    [rtrif](1)[ltrif] [lsqbb](a)[rsqbb] High-to-low method. The amount 
paid by the consumer in excess of the required minimum periodic payment 
is allocated first to the balance with the highest annual percentage 
rate and any remaining portion to the other balances in descending 
order based on the applicable annual percentage rate.
    [rtrif](2)[ltrif] [lsqbb](b)[rsqbb] Pro rata method. The amount 
paid by the consumer in excess of the required minimum periodic payment 
is allocated among the balances in the same proportion as each balance 
bears to the total balance.
    [rtrif](b) Special rule for accounts subject to certain promotional 
programs. When a promotional program provides that a consumer will not 
be 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, 
the bank must allocate amounts 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 specified period 
and any remaining portion to the other balances consistent with 
paragraph (a) of this section.[ltrif]
    2. Section 227.24 is amended by revising paragraph (b) to read as 
follows:


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

* * * * *
    (b) Exceptions. The prohibition in paragraph (a) of this section on 
increasing annual percentage rates does not apply where an annual 
percentage rate may be increased pursuant to one of the exceptions in 
this paragraph.
    (1) Account opening disclosure exception. An annual percentage rate 
for a category of transactions may be increased to [rtrif]an annual 
percentage rate[ltrif] [lsqbb]a rate[rsqbb] disclosed at account 
opening upon expiration of a period of time disclosed at account 
opening. [rtrif]This exception does not permit application of an 
increased annual percentage rate disclosed at account opening that is 
contingent on a particular event or occurrence or that may be applied 
at the bank's discretion.[ltrif]
    (2) Variable rate exception. An annual percentage rate for a 
category of transactions that varies according to an index that is not 
under the bank's control and is available to the general public may be 
increased due to an increase in the index.
    (3) Advance notice exception. An annual percentage rate for a 
category of transactions may be increased pursuant to a notice under 12 
CFR 226.9[rtrif](b), (c), or (g)[ltrif] [lsqbb](c) or 
(g)[rsqbb][rtrif], provided that:
    (i) If the bank discloses the increased rate pursuant to 12 CFR 
226.9(b), that rate must not be applied to transactions that occurred 
prior to provision of the notice;
    (ii) If the bank discloses the increased rate pursuant to 12 CFR 
226.9(c) or (g), that rate must not be applied to transactions that 
occurred within seven days after provision of the notice; and
    (iii) This exception does not permit an increase in any annual 
percentage rate during the first year after the account is 
opened.[ltrif] [lsqbb]for transactions that occur more than seven days 
after provision of the notice. This exception does not permit an 
increase in any annual percentage rate during the first year after the 
account is opened.[rsqbb]
    (4) Delinquency exception. An annual percentage rate may be 
increased due to the bank not receiving the consumer's required minimum 
periodic payment within 30 days after the due date for that payment.
    (5) Workout [rtrif]and temporary hardship[ltrif] arrangement 
exception. An annual percentage rate may be increased due to the 
consumer's [rtrif]completion of[ltrif] [lsqbb]failure to comply with 
the terms of[rsqbb] a workout [rtrif]or temporary hardship[ltrif] 
arrangement between the bank and the consumer [rtrif]or the consumer's 
failure to comply with the terms of such an arrangement[ltrif], 
provided that the annual percentage rate applicable to a category of 
transactions following any such increase does not exceed the rate that 
applied to that category of transactions prior to commencement of the 
[lsqbb]workout[rsqbb] arrangement.
    [rtrif](6) Servicemembers Civil Relief Act exception. An annual 
percentage rate that has been decreased pursuant to 50 U.S.C. app. 527 
may be increased once that provision no longer applies, provided that 
the annual percentage rate applicable to a category of transactions 
following any such increase does not exceed the rate that applied to 
that category of transactions prior to the decrease.[ltrif]
* * * * *
    3. In Supplement I to Part 227:
    A. Add Section 227.21--Definitions.
    B. Under Section 227.22--Unfair Acts or Practices Regarding Time to 
Make Payment, under 22(b) Compliance with General Rule, paragraph 3. is 
revised.
    C. Under Section 227.23--Unfair Acts or Practices Regarding 
Allocation of Payments:
    (i) Paragraph 2., the heading of paragraph 3., and paragraphs 4. 
and 6. are revised;
    (ii) Redesignate 23(a) High-to-Low Method as 23(a)(1) High-to-Low 
Method;
    (iii) Under 23(a)(1) High-to-Low Method, paragraph 1.v is added;
    (iv) Redesignate 23(b) Pro Rata Method as 23(a)(2) Pro Rata Method;
    (v) Under 23(a)(2) Pro Rata Method, paragraph 1. is revised; and
    (vi) Add 23(b) Special Rule for Accounts Subject to Certain 
Promotional Programs.
    D. Under Section 227.24--Unfair Acts or Practices Regarding 
Increases in Annual Percentage Rates:
    (i) Paragraph 1. is revised;
    (ii) Add paragraphs 2., 3., 4.;
    (iii) Under 24(a) General Rule, paragraphs 1., 2.i. introductory 
text, 2.iii. introductory text, and 2.iii.C. are revised, and paragraph 
2.iv is added;
    (iv) Under 24(b) Exceptions, add paragraph 1.;
    (v) Under 24(b)(1) Account Opening Disclosure Exception, paragraph 
1. introductory text is revised, paragraph 1.iii. and paragraph 2. are 
removed, paragraph 3. is redesignated as paragraph 2., the introductory 
text of newly designated paragraph 2. is revised, and paragraph 2.ii. 
is added;
    (vi) Under 24(b)(2) Variable Rate Exception, the heading of 
paragraph 5. is revised;
    (vii) Under 24(b)(3) Advance Notice Exception, paragraphs 2. and 3. 
are revised and paragraph 4. is added;
    (viii) Revise 24(b)(5) Workout Arrangement Exception;
    (ix) Under 24(c) Treatment of Protected Balances, under 24(c)(1) 
Repayment, under Paragraph 24(c)(1)(i), the heading of paragraph 2. is 
revised; and
    (x) Under 24(c) Treatment of Protected Balances, under 24(c)(2) 
Fees and Charges, paragraph 1. is revised.
    E. Under Section 227.25--Unfair Balance Computation Method, under 
25(a) General Rule, paragraph 3. is added.
* * * * *

Subpart C--Consumer Credit Card Account Practices Rule

[rtrif]Sec.  227.21--Definitions

21(a) Annual Percentage Rate

    1. Use of ``rate.'' For purposes of Subpart C, ``rate'' has the 
same meaning as ``annual percentage rate'' unless otherwise specified.

21(c) Consumer Credit Card Account

    1. Closed accounts. If a consumer credit card account with an 
outstanding balance is closed, the account continues to be the same 
consumer credit card account for purposes of Subpart C with

[[Page 20815]]

respect to that balance. For example, if a bank or a consumer closes a 
consumer credit card account with an outstanding balance, the bank 
would still be prohibited from increasing the annual percentage rate 
that applies to that balance unless permitted by one of the exceptions 
in Sec.  227.24(b).
    2. Acquired accounts. If, through merger or acquisition (for 
example), a bank acquires a consumer credit card account with an 
outstanding balance, the account continues to be the same consumer 
credit card account for purposes of Subpart C with respect to that 
balance. For example, if a consumer credit card account has a $1,000 
purchase balance with an annual percentage rate of 15% and the bank 
that acquires that account applies an 18% rate to purchases, the bank 
would be prohibited from applying the 18% rate to the $1,000 balance 
unless permitted by one of the exceptions in Sec.  227.24(b).
    3. Balance transfers.
    i. Between accounts issued by the same bank. If a balance is 
transferred from a consumer credit card account issued by a bank to 
another credit account issued by the same bank or its affiliate or 
subsidiary, the account continues to be the same consumer credit card 
account for purposes of Subpart C with respect to that balance unless 
the account to which the balance is transferred is an open-end credit 
plan secured by the consumer's dwelling. For example, if a consumer 
credit card account has a $2,000 purchase balance with an annual 
percentage rate of 15% and that balance is transferred to another 
consumer credit card account issued by the same bank that applies an 
18% rate to purchases, the bank would be prohibited from applying the 
18% rate to the $2,000 balance unless permitted by one of the 
exceptions in Sec.  227.24(b). Additional circumstances in which a 
balance is considered transferred for purposes of this comment include 
when:
    A. A retail credit card with an outstanding balance is replaced or 
substituted with a cobranded general purpose card that can be used with 
a broader merchant base;
    B. A credit card account with an outstanding balance is replaced or 
substituted with another credit card account offering different 
features;
    C. A credit card account with an outstanding balance is 
consolidated or combined with one or more other credit card accounts 
into a single credit card account; and
    D. A credit card account is replaced or substituted with a line of 
credit that can be accessed solely by an account number.
    ii. Between accounts issued by different institutions. If a balance 
is transferred to a consumer credit card account issued by a bank from 
a credit account issued by a different bank or an institution that is 
not an affiliate or subsidiary of the bank that issued the consumer 
credit card account, the account is not the same consumer credit card 
account for purposes of Subpart C with respect to that balance. Thus, 
the provisions of Subpart C do not prohibit the bank to which the 
balance is transferred from applying its account terms to that balance, 
provided that those terms comply with Subpart C. For example, if a 
consumer credit card account issued by bank A has a $1,000 purchase 
balance at an annual percentage rate of 15% and the consumer transfers 
that balance to a consumer credit card account with a purchase rate of 
17% issued by bank B, bank B may apply the 17% rate to the $1,000 
balance. However, bank B may not subsequently increase the rate on that 
balance unless permitted by one of the exceptions in Sec.  
227.24(b).[ltrif]

Sec.  227.22--Unfair Acts or Practices Regarding Time To Make Payment

* * * * *

22(b) Compliance With General Rule

* * * * *
    3. Example of alternative method of compliance. Assume that, for a 
particular type of consumer credit card account, a bank only provides 
periodic statements electronically and only accepts payments 
electronically (consistent with applicable law and regulatory 
guidance[rtrif], including the consumer notice and consent procedures 
of the Electronic Signatures in Global and National Commerce Act (E-
Sign Act), 15 U.S.C. 7001 et seq.[ltrif]). Under these circumstances, 
the bank could comply with Sec.  227.22(a) even if it does not provide 
periodic statements 21 days before the payment due date consistent with 
Sec.  227.22(b)(2).

Sec.  227.23--Unfair Acts or Practices Regarding Allocation of Payments

* * * * *
    2. Adjustments of one dollar or less permitted. When allocating 
payments, the bank may adjust amounts by one dollar or less. For 
example, if a bank is allocating $100 pursuant to Sec.  
227.23[rtrif](a)(2)[ltrif][lsqbb](b)[rsqbb] among balances of $1,000, 
$2,000, and $4,000, the bank may apply $14 to the $1,000 balance, $29 
to the $2,000 balance, and $57 to the $4,000 balance.
    3. Applicable balances and [lsqbb]annual percentage[rsqbb] rates. * 
* *
    4. Use of permissible allocation methods. A bank is not prohibited 
from changing the allocation method for a consumer credit card account 
or from using different allocation methods for different consumer 
credit card accounts, so long as the methods used are consistent with 
Sec.  227.23. For example, a bank may change from allocating to the 
highest rate balance first pursuant to Sec.  227.23(a)[rtrif](1)[ltrif] 
to allocating pro rata pursuant to Sec.  
227.23[rtrif](a)(2)[ltrif][lsqbb](b)[rsqbb] or vice versa. Similarly, a 
bank may allocate to the highest rate balance first pursuant to Sec.  
227.23(a)[rtrif](1)[ltrif] on some of its accounts and allocate pro 
rata pursuant to Sec.  227.23[rtrif](a)(2)[ltrif][lsqbb](b)[rsqbb] on 
other accounts.
* * * * *
    6. Balances with the same [lsqbb]annual percentage[rsqbb] rate. 
When the same annual percentage rate applies to more than one balance 
on an account and a different annual percentage rate applies to at 
least one other balance on that account, Sec.  227.23 
[rtrif]generally[ltrif] does not require that any particular method be 
used when allocating among the balances with the same annual percentage 
rate. Under these circumstances, a bank may treat the balances with the 
same rate as a single balance or separate balances. See comments 
23(a)[rtrif](1)[ltrif]-1.iv and 
23[rtrif](a)(2)[ltrif][lsqbb](b)[rsqbb]-2.iv. [rtrif]However, when a 
consumer will not be 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, that balance must be treated as a balance 
with an annual percentage rate of zero for purposes of Sec.  227.23 
during that period of time. For example, if an account has a $1,000 
purchase balance and a $2,000 balance on which the consumer will not be 
obligated to pay interest if that balance is paid in full prior to July 
1 and a 15% annual percentage rate applies to both, the balances must 
be treated as balances with different rates for purposes of Sec.  
227.23 until July 1. In addition, for purposes of allocating pursuant 
to Sec.  227.23(a)(1), 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 
promotional period (when it must be applied first to any remaining 
portion of the $2,000 balance). See comment 23(a)(1)-1.v.[ltrif]

23(a)[rtrif](1)[ltrif] High-to-Low Method

    1. * * *
    [rtrif]v. Assume that on January 1 a consumer uses a credit card 
account to make a $1,200 purchase subject to a

[[Page 20816]]

promotional offer under which interest accrues at an annual percentage 
rate of 15% but the consumer will not be obligated to pay that interest 
if the balance is paid in full on or before June 30. The billing cycles 
for this account begin on the first day of the month and end on the 
last day of the month. Each month from January through June, the 
consumer uses the account to make $200 in purchases that are not 
subject to the promotional offer but are subject to the 15% rate. Each 
month from February through June, the consumer pays $400 in excess of 
the required minimum periodic payment on the payment due date, which is 
the twenty-fifth of the month. Any interest that accrues on the non-
promotional purchases is paid by the required minimum periodic payment. 
A bank using this method would allocate the $400 excess payments 
received on February 25, March 25, and April 25 as follows: $200 to pay 
off the non-promotional balance (that is subject to the 15% rate) and 
the remaining $200 to the promotional balance (that is treated as a 
balance with a rate of zero). Section 227.23(b), however, requires the 
bank to allocate the entire $400 excess payment received on May 25 to 
the promotional balance. Similarly, Sec.  227.23(b) requires the bank 
to allocate the $400 excess payment received on June 25 as follows: 
$200 to the promotional balance (which pays that purchase in full) and 
the remaining $200 to the non-promotional balance.[ltrif]

23[rtrif](a)(2)[ltrif][lsqbb](b)[rsqbb] Pro Rata Method

    1. Total balance. A bank may, but is not required to, deduct 
amounts paid by the consumer's required minimum periodic payment when 
calculating the total balance for purposes of Sec.  
227.23[rtrif](a)(2)[ltrif][lsqbb](b)(3)[rsqbb]. See comment 
23[rtrif](a)(2)[ltrif][lsqbb](b)[rsqbb]-2.iii.
* * * * *

[rtrif]23(b) Special Rule for Accounts Subject to Certain Promotional 
Programs

    1. Grace periods. Section 227.23(b) applies to promotional programs 
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. A grace period during which a consumer may 
repay one or more balances on a consumer credit card account is not a 
``promotional program'' for purposes of Sec.  227.23(b).[ltrif]

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

    1. Relationship to Regulation Z, 12 CFR part 226. A bank that 
complies with the applicable disclosure requirements in Regulation Z, 
12 CFR part 226, has complied with the disclosure requirements in Sec.  
227.24. See 12 CFR 226.5a, 226.6, 226.9. For example, a bank may comply 
with the requirement in Sec.  227.24(a) to disclose at account opening 
the annual percentage rates that will apply to each category of 
transactions by complying with the disclosure requirements in 12 CFR 
226.5a regarding applications and solicitations and the requirements in 
12 CFR 226.6 regarding account-opening disclosures. Similarly, in order 
to increase an annual percentage rate on new transactions pursuant to 
Sec.  227.24(b)(3), a bank must comply with the disclosure requirements 
in 12 CFR 226.9[rtrif](b), (c), or (g)[ltrif] [lsqbb](c) or (g)[rsqbb]. 
However, nothing in Sec.  227.24 alters the requirements in 12 CFR 
226.9(c) and (g) that creditors provide consumers with written notice 
at least 45 days prior to the effective date of certain increases in 
the annual percentage rates on open-end (not home-secured) credit 
plans.
    [rtrif]2. Relationship to grace period. Nothing in Sec.  227.24 
prohibits a bank from assessing interest due to the loss of a grace 
period to the extent consistent with Sec.  227.25. In addition, a bank 
has not reduced an annual percentage rate on a consumer credit account 
for purposes of Sec.  227.24 if the bank does not charge interest on a 
balance when the consumer pays that balance in full prior to the 
expiration of a grace period.
    3. Category of transactions. For purposes of Sec.  227.24, 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. For example, 
purchase transactions, cash advance transactions, and balance transfer 
transactions are separate categories of transactions for purposes of 
Sec.  227.24 if a bank applies different annual percentage rates to 
each. Furthermore, if, for example, the bank applies different annual 
percentage rates to different types of purchase transactions (such as 
one rate for purchases of gasoline and a different rate for all other 
purchases), each type constitutes a separate category of transactions 
for purposes of Sec.  227.24.
    4. Account opening.
    i. Multiple accounts with same bank. When a consumer has a credit 
card account with a bank and the consumer opens a new credit card 
account with the same bank (or its affiliate or subsidiary), the 
opening of the new account constitutes an ``account opening'' for 
purposes of Sec.  227.24 if, more than 15/30 days after the new account 
is opened, the consumer has the ability to obtain additional extensions 
of credit on each account. For example, assume that, on January 1 of 
year one, a consumer opens a credit card account with a bank. On July 1 
of year one, the consumer opens a second credit card account with that 
bank. On July 15, a $1,000 balance is transferred from the first 
account to the second account. The opening of the second account 
constitutes the opening of an account for purposes of Sec.  227.24 so 
long as, on July 17/August 1, the consumer can engage in transactions 
using either account. Under these circumstances, the bank could not 
increase an annual percentage rate on the second account pursuant to 
Sec.  227.24(b)(3) until July 1 of year two (which is one year after 
the second account was opened).
    ii. Replacement or consolidation.
    A. Generally. A consumer credit card account has not been opened 
for purposes of Sec.  227.24 when a consumer credit card account issued 
by a bank is replaced or consolidated with another consumer credit card 
account issued by the same bank (or its affiliate or subsidiary). 
Circumstances in which a consumer credit card account has not been 
opened for purposes of Sec.  227.24 include when:
    (1) A retail credit card is replaced with a cobranded general 
purpose card that can be used at a wider number of merchants;
    (2) A credit card account is replaced with another consumer credit 
card account offering different features;
    (3) A credit card account is consolidated or combined with one or 
more other credit card accounts into a single credit card account; or
    (4) A credit card account acquired through merger or acquisition is 
replaced with a credit card account issued by the acquiring bank.
    B. Limitation. A bank that replaces or consolidates a consumer 
credit card account with another consumer credit card account issued by 
the bank (or its affiliate or subsidiary) may not increase an annual 
percentage rate in a manner otherwise prohibited by Sec.  227.24. For 
example, assume that, on January 1 of year one, a consumer opens a 
consumer credit card account with an annual percentage rate for 
purchases of 15%. On July 1 of year one, the account is replaced with a 
consumer credit card account that offers different features (such as 
rewards on purchases). Under

[[Page 20817]]

these circumstances, the bank cannot increase the annual percentage 
rate for purchases to a rate that is higher than 15% pursuant to Sec.  
227.24(b)(3) until January 1 of year two (which is one year after the 
first account was opened).[ltrif]

24(a) General Rule

    1. Rates that will apply to each category of transactions. Section 
227.24(a) requires banks to disclose, at account opening, the annual 
percentage rates that will apply to each category of transactions on 
the account. A bank cannot satisfy this requirement by disclosing at 
account opening only a range of rates or that a rate will be ``up to'' 
a particular amount. [rtrif]The disclosure requirements in Sec.  
227.24(a) do not apply to annual percentage rates that are contingent 
on a particular event or occurrence or may be applied at the bank's 
discretion (such as penalty rates) insofar as those rates may be 
applied consistent with Sec.  227.24.[ltrif]
    2. * * *
    i. Assume that, at account opening on January 1 of year one, a bank 
discloses that the annual percentage rate for purchases is a non-
variable rate of 15% and will apply for six months. The bank also 
discloses that, after six months, the annual percentage rate for 
purchases will be a variable rate that is currently 18% and will be 
adjusted quarterly by adding a margin of 8 percentage points to a 
publicly available index not under the bank's control. 
[rtrif]Furthermore,[ltrif] [lsqbb]Finally,[rsqbb] the bank discloses 
that the annual percentage rate for cash advances is the same variable 
rate that will apply to purchases after six months. [rtrif]Finally, the 
bank discloses that, to the extent consistent with Sec.  227.24 and 
other applicable law, a non-variable penalty rate of 30% may apply if 
the consumer makes a late payment.[ltrif] The payment due date for the 
account is the twenty-fifth day of the month and the required minimum 
periodic payments are applied to accrued interest and fees but do not 
reduce the purchase and cash advance balances.
* * * * *
    iii. Assume that, at account opening on January 1 of year one, a 
bank discloses that the annual percentage rate for purchases is a 
variable rate determined by adding a margin of 6 percentage points to a 
publicly-available index outside of the bank's control. The bank also 
discloses that, to the extent consistent with Sec.  227.24 and other 
applicable law, a non-variable penalty rate of 28% may apply if the 
consumer makes a late payment. The due date for the account is the 
fifteenth of the month. On May 30 of year two, the account has a 
purchase balance of $1,000. On May 31, the creditor provides a notice 
pursuant to 12 CFR 226.9(c) informing the consumer of a new variable 
rate that will apply on July 16 for all purchases made on or after June 
8 (calculated by using the same index and an increased margin of 8 
percentage points). On June 7, the consumer makes a $500 purchase. On 
June 8, the consumer makes a $200 purchase. On June 25, the bank has 
not received the payment due on June 15 and provides the consumer with 
a notice pursuant to 12 CFR 226.9(g) stating that the penalty rate of 
28% will apply as of August 9 to all transactions made on or after July 
3 [rtrif]and that, if the consumer becomes more than 30 days late, the 
penalty rate will apply to all balances on the account[ltrif]. On July 
4, the consumer makes a $300 purchase.
* * * * *
    C. Same facts as paragraph A. above except the payment due on June 
15 of year two is received on July 20. Section 227.24(b)(4) permits the 
bank to apply the 28% penalty rate to all balances on the account and 
to future transactions because it has not received payment within 30 
days after the due date. Because the bank provided a 12 CFR 226.9(g) 
notice on June [rtrif]25[ltrif][lsqbb]24[rsqbb] stating the 28% penalty 
rate, the bank may apply the 28% penalty rate to all balances on the 
account as well as any future transactions on August 9 without 
providing an additional notice pursuant to 12 CFR 226.9(g).
    [rtrif]iv. Assume that, at account opening on January 1 of year 
one, the bank discloses a promotional program under which interest on 
purchases made during January will accrue at a non-variable rate of 
20%, but the consumer will not be obligated to pay that interest if 
those purchases are paid in full by December 31 of year one. On January 
15, the consumer makes a purchase of $2,000. No other transactions are 
made on the account. The payment due on April 1 is not received until 
April 10. Section 227.24 does not permit the bank to deny the consumer 
the opportunity to avoid interest charges on the $2,000 purchase by 
paying that purchase in full on or before December 31 of year one. If, 
however, the $2,000 purchase remains unpaid on January 1 of year two, 
Sec.  227.24 does not prohibit the bank from charging the interest 
accrued on that purchase during year one.[ltrif]

24(b) Exceptions

    [rtrif]1. Delayed implementation of rate increase. If Sec.  
227.24(b) permits a bank to apply an increased annual percentage rate 
on a date that is not the first day of a billing cycle, the bank may 
delay application of the increased rate until the first day of the 
following billing cycle without relinquishing the ability to apply that 
rate. For example, assume that, at account opening on January 1, a bank 
discloses that a non-variable annual percentage rate of 10% will apply 
to purchases for six months and a non-variable rate of 15% will apply 
thereafter. The first day of the billing cycle for the account is the 
fifteenth of the month. If the six-month period expires on July 1, the 
bank may delay application of the 15% rate until July 15 without 
relinquishing its ability to apply that rate under Sec.  
227.24(b)(1).[ltrif]

24(b)(1) Account Opening Disclosure Exception

    1. Prohibited increases in rate. Section Sec.  227.24(b)(1) permits 
an increase in the annual percentage rate for a category of 
transactions to a rate disclosed at account opening upon expiration of 
a period of time that was also disclosed at account opening. Section 
227.24(b)(1) does not permit application of [rtrif]an increased annual 
percentage rate[ltrif] [lsqbb]increased rates that are[rsqbb] disclosed 
at account opening [rtrif]that is[ltrif] [lsqbb]but are[rsqbb] 
contingent on a particular event or occurrence or [rtrif]that[ltrif] 
may be applied at the bank's discretion. The following examples 
illustrate rate increases that are not permitted by Sec.  
227.24[lsqbb](a)[rsqbb]:
* * * * *
    [lsqbb]iii. Assume that a bank discloses at account opening on 
January 1 of year one that interest on purchases will be deferred for 
one year, although interest will accrue on purchases during that year 
at a non-variable rate of 20%. The bank further discloses that, if all 
purchases made during year one are not paid in full by the end of that 
year, the bank will begin charging interest on the purchase balance and 
new purchases at 20% and will retroactively charge interest on the 
purchase balance at a rate of 20% starting on the date of each purchase 
made during year one. On January 1 of year one, the consumer makes a 
purchase of $1,500. No other transactions are made on the account. On 
January 1 of year two, $500 of the $1,500 purchase remains unpaid. 
Section 227.24 does not permit the bank to reach back to charge 
interest on the $1,500 purchase from January 1 through December 31 of 
year one. However, the bank may apply the previously-disclosed 20% rate 
to the $500 purchase balance beginning on January 1 of year two 
(pursuant to Sec.  227.24(b)(1)).[rsqbb]
    [lsqbb]2. Loss of grace period. Nothing in Sec.  227.24 prohibits a 
bank from assessing interest due to the loss of a grace period to the 
extent consistent with Sec.  227.25.[rsqbb]

[[Page 20818]]

    [rtrif]2.[ltrif] [lsqbb]3.[rsqbb] Application of rate that is lower 
than disclosed rate. Section Sec.  227.24(b)(1) permits an increase in 
the annual percentage rate for a category of transactions to a rate 
disclosed at account opening upon expiration of a period of time that 
was also disclosed at account opening. Nothing in Sec.  227.24 
prohibits a bank from applying a rate that is lower than 
[rtrif]a[ltrif] [lsqbb]the[rsqbb] disclosed rate [rtrif]either during 
or[ltrif] upon expiration of the period. However, [rtrif]once 
the[ltrif] [lsqbb]if a[rsqbb] lower rate is applied to an existing 
balance, the bank cannot subsequently increase the rate on that balance 
unless it [lsqbb]has[rsqbb] provided the consumer with advance notice 
of the increase pursuant to 12 CFR 226.9[rtrif](b)[ltrif] or (c). 
[rtrif]This notice must state the period of time during which the lower 
rate will apply and the rate that will apply after expiration of that 
period.[ltrif] Furthermore, [rtrif]a bank that applies a lower rate to 
transactions that occurred during the first year after account opening 
may not subsequently increase the rate that applies to those 
transactions to a rate that is higher than the increased rate disclosed 
at account opening[ltrif] [lsqbb]the bank cannot increase the rate on 
that existing balance to a rate that is higher than the increased rate 
disclosed at account opening[rsqbb]. The following [rtrif]examples 
illustrate[ltrif] [lsqbb]example illustrates[rsqbb] the application of 
[rtrif]the[ltrif] [lsqbb]this[rsqbb] rule:
* * * * *
    [rtrif]ii. Assume that a bank discloses at account opening on 
January 1 of year one that a non-variable annual percentage rate of 15% 
will apply to purchases for one year, after which that rate will 
increase to a non-variable rate of 18%. The bank also discloses that, 
to the extent consistent with Sec.  227.24 and other applicable law, a 
non-variable penalty rate of 30% may apply if the consumer's required 
minimum periodic payment is received after the payment due date, which 
is the tenth of the month. The required minimum periodic payments are 
applied to accrued interest and fees but do not reduce the purchase 
balance.
    A. On September 30 of year one, the account has a purchase balance 
of $1,400 at the 15% rate. On October 1, the bank provides a notice 
pursuant to 12 CFR 226.9(c) informing the consumer that the rate for 
new purchases will decrease to a non-variable rate of 10% for six 
months (from October 1 through March 31 of year two) and that, 
beginning on April 1 of year two, the rate for purchases will increase 
to a non-variable rate of 20%. The bank does not apply the 10% rate to 
the $1,400 purchase balance. On October 15 of year one, the consumer 
makes a $300 purchase at the 10% rate. On January 1 of year two, the 
bank may begin accruing interest on the $1,400 purchase balance at 18% 
(as disclosed at account opening). On January 15 of year two, the 
consumer makes a $150 purchase at the 10% rate. On April 1 of year two, 
the 10% rate that applies to the $300 purchase and the $150 purchase 
expires. The bank may begin accruing interest on the $150 purchase at 
20% (as disclosed in the 12 CFR 226.9(c) notice). Because, however, the 
$300 purchase occurred during the first year after account opening, the 
bank cannot increase the rate that applies to that purchase to a rate 
that is higher than the 18% rate disclosed at account opening.
    B. Same facts as above except that the required minimum periodic 
payment due on November 10 of year one is not received until November 
15. Section 227.24(b)(1) does not permit the bank to increase any 
annual percentage rate on the account at this time. The bank may, 
however, apply the 30% penalty rate to new transactions beginning on 
January 1 of year two pursuant to Sec.  227.24(b)(3) by providing a 12 
CFR 226.9(g) notice informing the consumer of this increase no later 
than November 16 of year one. On January 1 of year two, Sec.  
227.24(b)(1) permits the bank to begin accruing interest on the $1,400 
purchase balance at 18% (as disclosed at account opening). If the 
consumer makes the $150 purchase on January 15 of year two, Sec.  
227.24(b)(3) would permit the bank to apply the 30% rate to that 
purchase. On April 1 of year two, the 10% rate that applies to the $300 
purchase expires. Because this purchase occurred during the first year 
after account opening, the bank cannot increase the rate that applies 
to that purchase to a rate that is higher than the 18% rate disclosed 
at account opening.[ltrif]

24(b)(2) Variable Rate Exception

* * * * *
    5. Changing a variable [lsqbb]annual percentage[rsqbb] rate to a 
non-variable [lsqbb]annual percentage[rsqbb] rate. * * *
* * * * *

24(b)(3) Advance Notice Exception

* * * * *
    2. Transactions that [rtrif]occurred prior to provision of notice 
or within seven days after provision of notice[ltrif] [lsqbb]occur more 
than seven days after notice provided[rsqbb]. [rtrif]Section 
227.24(b)(3) generally permits a bank to apply an increased rate to 
transactions that occur after provision of a 12 CFR 226.9(b) notice or 
more than seven days after provision of a 12 CFR 226.9(c) or (g) 
notice. If a rate increase is disclosed pursuant to both 12 CFR 
226.9(b) and 12 CFR 226.9(c), that rate may only be applied to 
transactions that occur more than seven days after provision of the 12 
CFR 226.9(c) notice. Section 227.24(b)(3) does not permit a bank to 
reach back to days before the effective date of the rate increase under 
12 CFR 226.9(c) or (g) when calculating interest charges. See comment 
24(b)(3)-3.[ltrif] [lsqbb]Section 227.24(b)(3) generally prohibits a 
bank from applying an increased rate to transactions that occur within 
seven days after provision of the 12 CFR 226.9 (c) or (g) 
notice.[rsqbb] [rtrif]Whether a transaction occurred prior to provision 
of a notice or within seven days after provision of a notice is 
determined by the date of the transaction. In some cases, however, a 
merchant may place a ``hold'' on the available credit on an account for 
an estimated transaction amount when the actual transaction amount will 
not be known until a later date. In these circumstances, the date of 
the transaction for purposes of Sec.  227.24(b)(3) is the date on which 
the merchant determines the actual transaction amount. For example, 
assume that, when a consumer uses a credit card account to check into a 
hotel on July 1, the hotel obtains authorization for a $750 hold on the 
account to ensure there is adequate available credit to cover the 
anticipated cost of the stay. When the consumer checks out on July 4, 
the actual cost of the stay is $850 because of additional incidental 
costs, and the hotel charges this amount to the account. For purposes 
of Sec.  227.24(b)(3), the transaction occurred on July 4.[ltrif] 
[lsqbb]This prohibition does not, however, apply to transactions that 
are authorized within seven days after provision of the 12 CFR 226.9 
(c) or (g) notice but are settled more than seven days after the notice 
was provided.[rsqbb]
    3. Examples.
    i. Assume that a consumer credit card account is opened on January 
1 of year one. On March 14 of year two, the account has a purchase 
balance of $2,000 at a non-variable annual percentage rate of 15%. On 
March 15, the bank provides a notice pursuant to 12 CFR 226.9(c) 
informing the consumer that the rate for new purchases will increase to 
a non-variable rate of 18% on May 1. The notice further states that the 
18% rate will apply for six months (until November 1) and states that 
thereafter the bank will apply a variable rate that is currently 22% 
and is determined by adding a margin of 12 percentage points to a 
publicly-available index that is not under the bank's

[[Page 20819]]

control. The seventh day after provision of the notice is March 22 and, 
on that date, the consumer makes a $200 purchase. On March 24, the 
consumer makes a $1,000 purchase. On May 1, Sec.  227.24(b)(3) permits 
the bank to begin accruing interest at 18% on the $1,000 purchase made 
on March 24. The bank is not permitted to apply the 18% rate to the 
$2,200 purchase balance as of March 22. After six months (November 2), 
the bank may begin accruing interest on any remaining portion of the 
$1,000 purchase at the previously-disclosed variable rate determined 
using the 12-point margin.
    [lsqbb]ii. Same facts as above except that the $200 purchase is 
authorized by the bank on March 22 but is not settled until March 23. 
On May 1, Sec.  227.24(b)(3) permits the bank to start charging 
interest at 18% on both the $200 purchase and the $1,000 purchase. The 
bank is not permitted to apply the 18% rate to the $2,000 purchase 
balance as of March 22.[rsqbb]
    [rtrif]ii.[ltrif] [lsqbb]iii.[rsqbb] Same facts as [lsqbb]in 
paragraph i.[rsqbb] above except that on September 17 of year two 
(which is 45 days before expiration of the 18% non-variable rate), the 
bank provides a notice pursuant to 12 CFR 226.9(c) informing the 
consumer that, on November 2, a new variable rate will apply to new 
purchases and any remaining portion of the $1,000 balance (calculated 
by using the same index and a reduced margin of 10 percentage points). 
The notice further states that, on May 1 of year three, the margin will 
increase to the margin disclosed [rtrif]in the March 15 notice[ltrif] 
[lsqbb]at account opening[rsqbb] (12 percentage points). On May 1 of 
year three, Sec.  227.24(b)(3) permits the bank to increase the margin 
used to determine the variable rate that applies to new purchases to 12 
percentage points and to apply that rate to any remaining portion of 
the $1,000 purchase as well as to new purchases. [lsqbb]See comment 
24(b)(1)-3.[rsqbb] The bank is not permitted to apply this rate to any 
remaining portion of the $2,200 purchase balance as of March 22.
    [rtrif]4. Application of a lower rate. Nothing in Sec.  227.24 
prohibits a bank from lowering the annual percentage rate that applies 
to an existing balance or to new transactions. However, once the lower 
rate is applied to an existing balance, the bank cannot subsequently 
increase the rate on that balance unless it provided the consumer with 
advance notice of the increase pursuant to 12 CFR 226.9(b) or (c). This 
notice must state the period of time during which the lower rate will 
apply and the rate that will apply after expiration of that period. 
Furthermore, a bank that applies a decreased rate to transactions that 
occurred prior to provision of the notice--or, in the case of a 12 CFR 
226.9(c) or (g) notice, transactions that occurred within seven days 
after provision of the notice--may not subsequently increase the rate 
that applies to those transactions to a rate that is higher than the 
rate that applied prior to the decrease. The following examples 
illustrate the application of the rule:
    i. Assume that a bank discloses at account opening on January 1 of 
year one that a non-variable annual percentage rate of 10% will apply 
to purchases for one year, after which that rate will increase to a 
non-variable rate of 15%. The bank also discloses that, to the extent 
consistent with Sec.  227.24 and other applicable law, a non-variable 
penalty rate of 30% may apply if the consumer's required minimum 
periodic payment is received after the payment due date, which is the 
tenth of the month. The required minimum periodic payments are applied 
to accrued interest and fees but do not reduce the purchase balance. On 
June 30 of year two, the account has a purchase balance of $1,000 at 
the 15% rate. On July 1, the bank provides a notice pursuant to 12 CFR 
226.9(c) informing the consumer that the rate for new purchases will 
decrease to a non-variable rate of 5% for six months (from July 1 
through December 31 of year two) and that, beginning on January 1 of 
year three, the rate for purchases will increase to a non-variable rate 
of 17%. On July 8 of year two, the consumer makes a $200 purchase. On 
July 9, the consumer makes a $100 purchase. On January 1 of year three, 
Sec.  227.24(b)(3) permits the bank to begin accruing interest on the 
$100 purchase at 17%. The bank may not apply the 17% rate to the $200 
purchase because that transaction occurred within seven days after 
provision of the 12 CFR 226.9(c) notice. If the bank applied the 5% 
rate to the $1,000 purchase balance and the $200 purchase, the bank may 
not increase the rate that applies to those amounts to a rate that is 
higher than 15% on January 1 of year three.
    ii. Same facts as above except that the required minimum periodic 
payment due on September 10 of year two is not received until September 
15 of year two. On September 15 of year two, the bank provides a notice 
pursuant to 12 CFR 226.9(g) informing the consumer that the rate for 
new purchases will increase to the 30% penalty rate on October 31. On 
October 31, Sec.  227.23(b)(3) permits the bank to begin accruing 
interest at 30% on any purchase made on or after September 23. The bank 
may not, however, apply the 30% rate to the $1,300 in purchases. 
Instead, the bank must continue to apply the 5% rate to the $100 
purchase until at least January 1 of year three when Sec.  227.24(b)(3) 
permits the bank to begin accruing interest on that purchase at 17%. 
Similarly, if the bank applied the 5% rate to the $1,000 purchase 
balance and the $200 purchase, the bank may begin accruing interest on 
those amounts at 15% on January 1 of year three.
    iii. Assume that a bank discloses at account opening on January 1 
of year one that the rate that applies to purchases is a variable 
annual percentage rate that is currently 18% and will be adjusted 
quarterly by adding a margin of 8 percentage points to a publicly 
available index not under the bank's control. The bank also discloses 
that, to the extent consistent with Sec.  227.24 and other applicable 
law, a non-variable penalty rate of 30% may apply if the consumer's 
required minimum periodic payment is received after the payment due 
date, which is the first of the month. On July 30 of year two, the 
consumer uses the account for a $1,000 purchase in response to a 
promotional offer. Under the terms of this offer, interest on purchases 
made during the months of July through September will accrue at the 
variable rate for purchases but the consumer will not be obligated to 
pay that interest if all purchases made during that three-month period 
are paid in full by December 31 of year two. The payment due on 
September 1 of year two is not received until September 6. Section 
227.24 does not permit the bank to deny the consumer the opportunity to 
avoid interest charges on the $1,000 purchase by paying that purchase 
in full on or before December 31 of year two. The bank may, however, 
provide a notice pursuant to 12 CFR 226.9(g) on September 2 of year two 
informing the consumer that the promotional offer does not apply to 
purchases made on or after September 10 and that the rate for such 
purchases will increase to the 30% penalty rate on October 18. On 
December 31 of year two, the $1,000 purchase has been paid in full. 
Under these circumstances, the bank may not charge any interest accrued 
on the $1,000 purchase.
    iv. Assume that a bank discloses at account opening on January 1 of 
year one that the rate that applies to cash advances is a variable 
annual percentage rate that is currently 24% and will be adjusted 
quarterly by adding a margin of 14 percentage points to a publicly 
available index not under the bank's control. On July 1 of year two, 
the bank provides checks that access the account

[[Page 20820]]

and, pursuant to 12 CFR 226.9(b)(3)(A), discloses that a promotional 
rate of 15% will apply to credit extended by use of the checks until 
January 1 of year three, after which the cash advance rate determined 
using the 14-point margin will apply. On July 15 of year two, the 
consumer uses one of the checks to pay for a $500 transaction. On 
January 1 of year three, Sec.  227.24(b)(3) permits the bank to apply 
the cash advance rate determined using the 14-point margin to the $500 
transaction.[ltrif]

24(b)(5) Workout [rtrif]and Temporary Hardship[ltrif] Arrangement 
Exception

    1. Scope of exception. Nothing in Sec.  227.24(b)(5) permits a bank 
to alter the requirements of Sec.  227.24 pursuant to a workout 
[rtrif]or temporary hardship[ltrif] arrangement between a consumer and 
the bank. For example, a bank cannot increase an annual percentage rate 
pursuant to a workout [rtrif]or temporary hardship[ltrif] arrangement 
unless otherwise permitted by Sec.  227.24. In addition, a bank cannot 
require the consumer to make payments with respect to a protected 
balance that exceed the payments permitted under Sec.  227.24(c).
    2. Variable [lsqbb]annual percentage[rsqbb] rates. If the annual 
percentage rate that applied to a category of transactions prior to 
commencement of the workout [rtrif]or temporary hardship[ltrif] 
arrangement varied with an index consistent with Sec.  227.24(b)(2), 
the rate applied to that category of transactions following an increase 
pursuant to Sec.  227.24(b)(5) must be determined using the same 
formula (index and margin).
    3. Example[rtrif]s[ltrif].
    [rtrif]i.[ltrif] Assume that, consistent with Sec.  227.24(b)(4), 
the margin used to determine a variable annual percentage rate that 
applies to a $5,000 balance is increased from 5 percentage points to 15 
percentage points. Assume also that the bank and the consumer 
subsequently agree to a workout arrangement that reduces the margin 
back to 5 points on the condition that the consumer pay a specified 
amount by the payment due date each month. If the consumer does not pay 
the agreed-upon amount by the payment due date, the bank may increase 
the margin for the variable rate that applies to the $5,000 balance up 
to 15 percentage points. 12 CFR 226.9 does not require advance notice 
of this type of increase.
    [rtrif]ii. Assume that a consumer fails to make four consecutive 
minimum payments totaling $480 on a consumer credit card account with a 
balance of $6,000 and that, consistent with Sec.  227.24(b)(4), the 
annual percentage rate that applies to that balance is increased from a 
non-variable rate of 15% to a non-variable penalty rate of 30%. Assume 
also that the bank and the consumer subsequently agree to a temporary 
hardship arrangement that reduces all rates on the account to 0% on the 
condition that the consumer pay an amount by the payment due date each 
month that is sufficient to cure the $480 delinquency within six 
months. If the consumer pays the agreed-upon amount by the payment due 
date during the six-month period and cures the delinquency, the bank 
may increase the rate that applies to any remaining portion of the 
$6,000 balance to 15% or any other rate up to the 30% penalty 
rate.[ltrif]

24(c) Treatment of Protected Balances

* * * * *

24(c)(1) Repayment

* * * * *
Paragraph 24(c)(1)(i)
* * * * *
    2. Amortization when applicable [lsqbb]annual percentage[rsqbb] 
rate is variable. * * *
* * * * *

24(c)(2) Fees and Charges

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

Sec.  227.25--Unfair Balance Computation Method

25(a) General Rule

* * * * *
    [rtrif]3. Charging accrued interest at expiration of certain 
promotional programs. When a bank offers a promotional program under 
which a consumer will not be obligated to pay interest that accrues on 
a balance if that balance is paid in full prior to a specified date or 
expiration of a specified period of time, Sec.  227.25 does not 
prohibit the bank from charging that accrued interest to the account if 
the balance is not paid in full prior to the specified date (consistent 
with applicable law and regulatory guidance).[ltrif]
* * * * *

Department of the Treasury

Office of Thrift Supervision

12 CFR Chapter V

Text of Proposed Revisions

    Certain conventions have been used to highlight the proposed 
revisions. New language is shown inside [rtrif]bold-type arrows[ltrif] 
while language that would be deleted is set off with [lsqbb]bold-type 
brackets[rsqbb].

Authority and Issuance

    For the reasons discussed in the joint preamble, OTS proposes to 
further amend 12 CFR part 535, as amended at 74 FR 5567, January 29, 
2009, as set forth below:

PART 535--UNFAIR OR DECEPTIVE ACTS OR PRACTICES

    1. Section 535.23 is revised to read as follows:


Sec.  535.23  Unfair allocation of payments.

    When different annual percentage rates apply to different balances 
on a consumer credit card account[rtrif]:
    (a) General rule. Except as provided in paragraph (b) of this 
section[ltrif], you must allocate any amount paid by the consumer in 
excess of the required minimum periodic payment among the balances 
using one of the following methods:
    [rtrif](1)[ltrif] [lsqbb](a)[rsqbb] High-to-low method. The amount 
paid by the consumer in excess of the required minimum periodic payment 
is allocated first to the balance with the highest annual percentage 
rate and any remaining portion to the other balances in descending 
order based on the applicable annual percentage rate.
    [rtrif](2)[ltrif] [lsqbb](b)[rsqbb] Pro rata method. The amount 
paid by the consumer in excess of the required minimum periodic payment 
is allocated among the balances in the same proportion as each balance 
bears to the total balance.
    [rtrif](b) Special rule for accounts subject to certain promotional 
programs. When a promotional program provides that a consumer will not 
be 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, 
you must allocate amounts 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 specified period 
and any remaining

[[Page 20821]]

portion to the other balances consistent with paragraph (a) of this 
section.[ltrif]
    2. Section 535.24 is amended by revising paragraph (b) to read as 
follows:


Sec.  535.24  Unfair increases in annual percentage rates.

* * * * *
    (b) Exceptions. The prohibition in paragraph (a) of this section on 
increasing annual percentage rates does not apply where an annual 
percentage rate may be increased pursuant to one of the exceptions in 
this paragraph.
    (1) Account opening disclosure exception. An annual percentage rate 
for a category of transactions may be increased to [rtrif]an annual 
percentage rate[ltrif] [lsqbb]a rate[rsqbb] disclosed at account 
opening upon expiration of a period of time disclosed at account 
opening. [rtrif]This exception does not permit application of an 
increased annual percentage rate disclosed at account opening that is 
contingent on a particular event or occurrence or that may be applied 
at your discretion.[ltrif]
    (2) Variable rate exception. An annual percentage rate for a 
category of transactions that varies according to an index that is not 
under your control and is available to the general public may be 
increased due to an increase in the index.
    (3) Advance notice exception. An annual percentage rate for a 
category of transactions may be increased pursuant to a notice under 12 
CFR 226.9[rtrif](b), (c), or (g)[ltrif] [lsqbb](c) or 
(g)[rsqbb][rtrif], provided that:
    (i) If you disclose the increased rate pursuant to 12 CFR 226.9(b), 
that rate must not be applied to transactions that occurred prior to 
provision of the notice;
    (ii) If you disclose the increased rate pursuant to 12 CFR 226.9(c) 
or (g), that rate must not be applied to transactions that occurred 
within seven days after provision of the notice; and
    (iii) This exception does not permit an increase in any annual 
percentage rate during the first year after the account is 
opened.[ltrif] [lsqbb]for transactions that occur more than seven days 
after provision of the notice. This exception does not permit an 
increase in any annual percentage rate during the first year after the 
account is opened.[rsqbb]
    (4) Delinquency exception. An annual percentage rate may be 
increased due to your not receiving the consumer's required minimum 
periodic payment within 30 days after the due date for that payment.
    (5) Workout [rtrif]and temporary hardship[ltrif] arrangement 
exception. An annual percentage rate may be increased due to the 
consumer's [rtrif]completion of[ltrif] [lsqbb]failure to comply with 
the terms of[rsqbb] a workout [rtrif]or temporary hardship[ltrif] 
arrangement between you and the consumer [rtrif]or the consumer's 
failure to comply with the terms of such an arrangement[ltrif], 
provided that the annual percentage rate applicable to a category of 
transactions following any such increase does not exceed the rate that 
applied to that category of transactions prior to commencement of the 
[lsqbb]workout[rsqbb] arrangement.
    [rtrif](6) Servicemembers Civil Relief Act exception. An annual 
percentage rate that has been decreased pursuant to 50 U.S.C. app. 527 
may be increased once that provision no longer applies, provided that 
the annual percentage rate applicable to a category of transactions 
following any such increase does not exceed the rate that applied to 
that category of transactions prior to the decrease.[ltrif]
* * * * *
    3. In Appendix A to Part 535:
    A. Add Section 535.21--Definitions.
    B. Under Section 535.22--Unfair Acts or Practices Regarding Time to 
Make Payment, under 22(b) Compliance with General Rule, paragraph 3. is 
revised.
    C. Under Section 535.23--Unfair Acts or Practices Regarding 
Allocation of Payments:
    (i) Paragraph 2., the heading of paragraph 3., and paragraphs 4. 
and 6. are revised;
    (ii) Redesignate 23(a) High-to-Low Method as 23(a)(1) High-to-Low 
Method;
    (iii) Under 23(a)(1) High-to-Low Method, paragraph 1.v. is added;
    (iv) Redesignate 23(b) Pro Rata Method as 23(a)(2) Pro Rata Method;
    (v) Under 23(a)(2) Pro Rata Method, paragraph 1. is revised; and
    (vi) Add 23(b) Special Rule for Accounts Subject to Certain 
Promotional Programs.
    D. Under Section 535.24--Unfair Acts or Practices Regarding 
Increases in Annual Percentage Rates:
    (i) Paragraph 1. is revised;
    (ii) Add paragraphs 2., 3., 4.;
    (iii) Under 24(a) General Rule, paragraphs 1., 2.i. introductory 
text, 2.iii. introductory text, and 2.iii.C. are revised, and paragraph 
2.iv. is added;
    (iv) Under 24(b) Exceptions, add paragraph 1.;
    (v) Under 24(b)(1) Account Opening Disclosure Exception, paragraph 
1. introductory text is revised, paragraph 1.iii. and paragraph 2. are 
removed, paragraph 3. is redesignated as paragraph 2., the introductory 
text of newly designated paragraph 2. is revised, and paragraph 2.ii. 
is added;
    (vi) Under 24(b)(2) Variable Rate Exception, the heading of 
paragraph 5. is revised;
    (vii) Under 24(b)(3) Advance Notice Exception, paragraphs 2. and 3. 
are revised and paragraph 4. is added;
    (viii) Revise 24(b)(5) Workout Arrangement Exception;
    (ix) Under 24(c) Treatment of Protected Balances, under 24(c)(1) 
Repayment, under Paragraph 24(c)(1)(i), the heading of paragraph 2. is 
revised; and
    (x) Under 24(c) Treatment of Protected Balances, under 24(c)(2) 
Fees and Charges, paragraph 1. is revised.
    E. Under Section 535.25--Unfair Balance Computation Method, under 
25(a) General Rule, paragraph 3. is revised.

Appendix A to Part 535--Official Staff Commentary

* * * * *

Subpart C--Consumer Credit Card Account Practices

[rtrif]Sec.  535.21--Definitions

21(a) Annual Percentage Rate

    1. Use of ``rate.'' For purposes of Subpart C, ``rate'' has the 
same meaning as ``annual percentage rate'' unless otherwise 
specified.

21(c) Consumer Credit Card Account

    1. Closed accounts. If a consumer credit card account with an 
outstanding balance is closed, the account continues to be the same 
consumer credit card account for purposes of Subpart C with respect 
to that balance. For example, if a savings association or a consumer 
closes a consumer credit card account with an outstanding balance, 
the savings association would still be prohibited from increasing 
the annual percentage rate that applies to that balance unless 
permitted by one of the exceptions in Sec.  535.24(b).
    2. Acquired accounts. If, through merger or acquisition (for 
example), a savings association acquires a consumer credit card 
account with an outstanding balance, the account continues to be the 
same consumer credit card account for purposes of Subpart C with 
respect to that balance. For example, if a consumer credit card 
account has a $1,000 purchase balance with an annual percentage rate 
of 15% and the savings association that acquires that account 
applies an 18% rate to purchases, the savings association would be 
prohibited from applying the 18% rate to the $1,000 balance unless 
permitted by one of the exceptions in Sec.  535.24(b).
    3. Balance transfers.
    i. Between accounts issued by the same savings association. If a 
balance is transferred from a consumer credit card account issued by 
a savings association to another credit account issued by the same 
savings association or its affiliate or subsidiary, the account 
continues to be the same consumer credit card account for purposes 
of Subpart C with respect to that balance unless the account to 
which the balance is transferred is an open-end credit plan secured 
by the consumer's dwelling. For example, if a

[[Page 20822]]

consumer credit card account has a $2,000 purchase balance with an 
annual percentage rate of 15% and that balance is transferred to 
another consumer credit card account issued by the same savings 
association that applies an 18% rate to purchases, the savings 
association would be prohibited from applying the 18% rate to the 
$2,000 balance unless permitted by one of the exceptions in Sec.  
535.24(b). Additional circumstances in which a balance is considered 
transferred for purposes of this comment include when:
    A. A retail credit card with an outstanding balance is replaced 
or substituted with a cobranded general purpose card that can be 
used with a broader merchant base;
    B. A credit card account with an outstanding balance is replaced 
or substituted with another credit card account offering different 
features;
    C. A credit card account with an outstanding balance is 
consolidated or combined with one or more other credit card accounts 
into a single credit card account; and
    D. A credit card account is replaced or substituted with a line 
of credit that can be accessed solely by an account number.
    ii. Between accounts issued by different institutions. If a 
balance is transferred to a consumer credit card account issued by a 
savings association from a credit account issued by a different 
savings association or an institution that is not an affiliate or 
subsidiary of the savings association that issued the consumer 
credit card account, the provisions of Subpart C do not prohibit the 
savings association to which the balance is transferred from 
applying its account terms to that balance, provided that those 
terms comply with Subpart C. For example, if a consumer credit card 
account issued by savings association A has a $1,000 purchase 
balance at an annual percentage rate of 15% and the consumer 
transfers that balance to a consumer credit card account with a 
purchase rate of 17% issued by savings association B, savings 
association B may apply the 17% rate to the $1,000 balance. However, 
savings association B may not subsequently increase the rate on that 
balance unless permitted by one of the exceptions in Sec.  
535.24(b).[ltrif]

Sec.  535.22--Unfair Time To Make Payment

* * * * *

22(b) Compliance With General Rule

* * * * *
    3. Example of alternative method of compliance. Assume that, for 
a particular type of consumer credit card account, a savings 
association only provides periodic statements electronically and 
only accepts payments electronically (consistent with applicable law 
and regulatory guidance[rtrif], including the consumer notice and 
consent procedures of the Electronic Signatures in Global and 
National Commerce Act (E-Sign Act), 15 U.S.C. 7001 et seq.[ltrif]). 
Under these circumstances, the savings association could comply with 
Sec.  535.22(a) even if it does not provide periodic statements 21 
days before the payment due date consistent with Sec.  535.22(b)(2).

Sec.  535.23--Unfair Allocation of Payments

* * * * *
    2. Adjustments of one dollar or less permitted. When allocating 
payments, the savings association may adjust amounts by one dollar 
or less. For example, if a savings association is allocating $100 
pursuant to Sec.  535.23[rtrif](a)(2)[ltrif][lsqbb](b)[rsqbb] among 
balances of $1,000, $2,000, and $4,000, the savings association may 
apply $14 to the $1,000 balance, $29 to the $2,000 balance, and $57 
to the $4,000 balance.
    3. Applicable balances and [annual percentage] rates. * * *
    4. Use of permissible allocation methods. A savings association 
is not prohibited from changing the allocation method for a consumer 
credit card account or from using different allocation methods for 
different consumer credit card accounts, so long as the methods used 
are consistent with Sec.  535.23. For example, a savings association 
may change from allocating to the highest rate balance first 
pursuant to Sec.  535.23(a)[rtrif](1)[ltrif] to allocating pro rata 
pursuant to Sec.  535.23[rtrif](a)(2)[ltrif][lsqbb](b)[rsqbb] or 
vice versa. Similarly, a savings association may allocate to the 
highest rate balance first pursuant to Sec.  
535.23(a)[rtrif](1)[ltrif] on some of its accounts and allocate pro 
rata pursuant to Sec.  535.23[rtrif](a)(2)[ltrif][lsqbb](b)[rsqbb] 
on other accounts.
* * * * *
    6. Balances with the same [annual percentage] rate. When the 
same annual percentage rate applies to more than one balance on an 
account and a different annual percentage rate applies to at least 
one other balance on that account, Sec.  535.23 
[rtrif]generally[ltrif] does not require that any particular method 
be used when allocating among the balances with the same annual 
percentage rate. Under these circumstances, a savings association 
may treat the balances with the same rate as a single balance or 
separate balances. See comments 23(a)[rtrif](1)[ltrif]-1.iv and 
23[rtrif](a)(2)[ltrif][lsqbb](b)[rsqbb]-2.iv. [rtrif]However, when a 
consumer will not be 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, that balance must be treated as a balance 
with an annual percentage rate of zero for purposes of Sec.  535.23 
during that period of time. For example, if an account has a $1,000 
purchase balance and a $2,000 balance on which the consumer will not 
be obligated to pay interest if that balance is paid in full prior 
to July 1 and a 15% annual percentage rate applies to both, the 
balances must be treated as balances with different rates for 
purposes of Sec.  535.23 until July 1. In addition, for purposes of 
allocating pursuant to Sec.  535.23(a)(1), 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 promotional period (when it must be 
applied first to any remaining portion of the $2,000 balance). See 
comment 23(a)(1)-1.v.[ltrif]

23(a)[rtrif](1)[ltrif] High-to-Low Method

    1. * * *
    [rtrif]v. Assume that on January 1 a consumer uses a credit card 
account to make a $1,200 purchase subject to a promotional offer 
under which interest accrues at an annual percentage rate of 15% but 
the consumer will not be obligated to pay that interest if the 
balance is paid in full on or before June 30. The billing cycles for 
this account begin on the first day of the month and end on the last 
day of the month. Each month from January through June, the consumer 
uses the account to make $200 in purchases that are not subject to 
the promotional offer but are subject to the 15% rate. Each month 
from February through June, the consumer pays $400 in excess of the 
required minimum periodic payment on the payment due date, which is 
the twenty-fifth of the month. Any interest that accrues on the non-
promotional purchases is paid by the required minimum periodic 
payment. A savings association using this method would allocate the 
$400 excess payments received on February 25, March 25, and April 25 
as follows: $200 to pay off the non-promotional balance (that is 
subject to the 15% rate) and the remaining $200 to the promotional 
balance (that is treated as a balance with a rate of zero). Section 
535.23(b), however, requires the savings association to allocate the 
entire $400 excess payment received on May 25 to the promotional 
balance. Similarly, Sec.  535.23(b) requires the savings association 
to allocate the $400 excess payment received on June 25 as follows: 
$200 to the promotional balance (which pays that purchase in full) 
and the remaining $200 to the non-promotional balance.[ltrif]

23[rtrif](a)(2)[ltrif][lsqbb](b)[rsqbb] Pro Rata Method

    1. Total balance. A savings association may, but is not required 
to, deduct amounts paid by the consumer's required minimum periodic 
payment when calculating the total balance for purposes of Sec.  
535.23[rtrif](a)(2)[ltrif][lsqbb](b)(3)[rsqbb]. See comment 
23[rtrif](a)(2)[ltrif][lsqbb](b)[rsqbb]-2.iii.
* * * * *

[rtrif]23(b) Special Rule for Accounts Subject to Certain 
Promotional Programs

    1. Grace periods. Section 535.23(b) applies to promotional 
programs 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. A grace period during 
which a consumer may repay one or more balances on a consumer credit 
card account is not a ``promotional program'' for purposes of Sec.  
535.23(b).[ltrif]

Sec.  535.24--Unfair Increases in Annual Percentage Rates

    1. Relationship to Regulation Z, 12 CFR part 226. A savings 
association that complies with the applicable disclosure 
requirements in Regulation Z, 12 CFR part 226, has complied with the 
disclosure requirements in Sec.  535.24. See 12 CFR 226.5a, 226.6, 
226.9. For example, a savings association may comply with the 
requirement in Sec.  535.24(a) to disclose at account opening the 
annual percentage rates that will apply to each category of 
transactions by complying with the disclosure requirements in 12 CFR 
226.5a regarding applications and solicitations and the requirements 
in 12 CFR 226.6 regarding account-opening disclosures. Similarly, in

[[Page 20823]]

order to increase an annual percentage rate on new transactions 
pursuant to Sec.  535.24(b)(3), a savings association must comply 
with the disclosure requirements in 12 CFR 226.9[rtrif](b), (c), or 
(g)[ltrif][lsqbb](c) or (g)[rsqbb]. However, nothing in Sec.  535.24 
alters the requirements in 12 CFR 226.9(c) and (g) that creditors 
provide consumers with written notice at least 45 days prior to the 
effective date of certain increases in the annual percentage rates 
on open-end (not home-secured) credit plans.
    [rtrif]2. Relationship to grace period. Nothing in Sec.  535.24 
prohibits a savings association from assessing interest due to the 
loss of a grace period to the extent consistent with Sec.  535.25. 
In addition, a savings association has not reduced an annual 
percentage rate on a consumer credit account for purposes of Sec.  
535.24 if the savings association does not charge interest on a 
balance when the consumer pays that balance in full prior to the 
expiration of a grace period.
    3. Category of transactions. For purposes of Sec.  535.24, 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. For 
example, purchase transactions, cash advance transactions, and 
balance transfer transactions are separate categories of 
transactions for purposes of Sec.  535.24 if a savings association 
applies different annual percentage rates to each. Furthermore, if, 
for example, the savings association applies different annual 
percentage rates to different types of purchase transactions (such 
as one rate for purchases of gasoline and a different rate for all 
other purchases), each type constitutes a separate category of 
transactions for purposes of Sec.  535.24.
    4. Account opening.
    i. Multiple accounts with same savings association. When a 
consumer has a credit card account with a savings association and 
the consumer opens a new credit card account with the same savings 
association (or its affiliate or subsidiary), the opening of the new 
account constitutes an ``account opening'' for purposes of Sec.  
535.24 if, more than 15/30 days after the new account is opened, the 
consumer has the ability to obtain additional extensions of credit 
on each account. For example, assume that, on January 1 of year one, 
a consumer opens a credit card account with a savings association. 
On July 1 of year one, the consumer opens a second credit card 
account with that savings association. On July 15, a $1,000 balance 
is transferred from the first account to the second account. The 
opening of the second account constitutes the opening of an account 
for purposes of Sec.  535.24 so long as, on July 17/August 1, the 
consumer can engage in transactions using either account. Under 
these circumstances, the savings association could not increase an 
annual percentage rate on the second account pursuant to Sec.  
535.24(b)(3) until July 1 of year two (which is one year after the 
second account was opened).
    ii. Replacement or consolidation.
    A. Generally. A consumer credit card account has not been opened 
for purposes of Sec.  535.24 when a consumer credit card account 
issued by a savings association is replaced or consolidated with 
another consumer credit card account issued by the same savings 
association (or its affiliate or subsidiary). Circumstances in which 
a consumer credit card account has not been opened for purposes of 
Sec.  535.24 include when:
    (1) A retail credit card is replaced with a cobranded general 
purpose card that can be used at a wider number of merchants;
    (2) A credit card account is replaced with another consumer 
credit card account offering different features;
    (3) A credit card account is consolidated or combined with one 
or more other credit card accounts into a single credit card 
account; or
    (4) A credit card account acquired through merger or acquisition 
is replaced with a credit card account issued by the acquiring 
institution.
    B. Limitation. A savings association that replaces or 
consolidates a consumer credit card account with another consumer 
credit card account issued by the savings association (or its 
affiliate or subsidiary) may not increase an annual percentage rate 
in a manner otherwise prohibited by Sec.  535.24. For example, 
assume that, on January 1 of year one, a consumer opens a consumer 
credit card account with an annual percentage rate for purchases of 
15%. On July 1 of year one, the account is replaced with a consumer 
credit card account that offers different features (such as rewards 
on purchases). Under these circumstances, the savings association 
cannot increase the annual percentage rate for purchases to a rate 
that is higher than 15% pursuant to Sec.  535.24(b)(3) until January 
1 of year two (which is one year after the first account was 
opened).[ltrif]

24(a) General Rule

    1. Rates that will apply to each category of transactions. 
Section 535.24(a) requires savings associations to disclose, at 
account opening, the annual percentage rates that will apply to each 
category of transactions on the account. A savings association 
cannot satisfy this requirement by disclosing at account opening 
only a range of rates or that a rate will be ``up to'' a particular 
amount. [rtrif]The disclosure requirements in Sec.  535.24(a) do not 
apply to annual percentage rates that are contingent on a particular 
event or occurrence or may be applied at the savings association's 
discretion (such as penalty rates) insofar as those rates may be 
applied consistent with Sec.  535.24.[ltrif]
    2. * * *
    i. Assume that, at account opening on January 1 of year one, a 
savings association discloses that the annual percentage rate for 
purchases is a non-variable rate of 15% and will apply for six 
months. The savings association also discloses that, after six 
months, the annual percentage rate for purchases will be a variable 
rate that is currently 18% and will be adjusted quarterly by adding 
a margin of 8 percentage points to a publicly available index not 
under the savings association's control. [rtrif]Furthermore,[ltrif] 
[lsqbb]Finally,[rsqbb] the savings association discloses that the 
annual percentage rate for cash advances is the same variable rate 
that will apply to purchases after six months. [rtrif]Finally, the 
savings association discloses that, to the extent consistent with 
Sec.  535.24 and other applicable law, a non-variable penalty rate 
of 30% may apply if the consumer makes a late payment.[ltrif] The 
payment due date for the account is the twenty-fifth day of the 
month and the required minimum periodic payments are applied to 
accrued interest and fees but do not reduce the purchase and cash 
advance balances.
* * * * *
    iii. Assume that, at account opening on January 1 of year one, a 
savings association discloses that the annual percentage rate for 
purchases is a variable rate determined by adding a margin of 6 
percentage points to a publicly-available index outside of the 
savings association's control. The savings association also 
discloses that, to the extent consistent with Sec.  535.24 and other 
applicable law, a non-variable penalty rate of 28% may apply if the 
consumer makes a late payment. The due date for the account is the 
fifteenth of the month. On May 30 of year two, the account has a 
purchase balance of $1,000. On May 31, the creditor provides a 
notice pursuant to 12 CFR 226.9(c) informing the consumer of a new 
variable rate that will apply on July 16 for all purchases made on 
or after June 8 (calculated by using the same index and an increased 
margin of 8 percentage points). On June 7, the consumer makes a $500 
purchase. On June 8, the consumer makes a $200 purchase. On June 25, 
the savings association has not received the payment due on June 15 
and provides the consumer with a notice pursuant to 12 CFR 226.9(g) 
stating that the penalty rate of 28% will apply as of August 9 to 
all transactions made on or after July 3 [rtrif]and that, if the 
consumer becomes more than 30 days late, the penalty rate will apply 
to all balances on the account[ltrif]. On July 4, the consumer makes 
a $300 purchase.
* * * * *
    C. Same facts as paragraph A. above except the payment due on 
June 15 of year two is received on July 20. Section 535.24(b)(4) 
permits the savings association to apply the 28% penalty rate to all 
balances on the account and to future transactions because it has 
not received payment within 30 days after the due date. Because the 
savings association provided a 12 CFR 226.9(g) notice on June 
[rtrif]25[ltrif][lsqbb]24[rsqbb] stating the 28% penalty rate, the 
savings association may apply the 28% penalty rate to all balances 
on the account as well as any future transactions on August 9 
without providing an additional notice pursuant to 12 CFR 226.9(g).
    [rtrif]iv. Assume that, at account opening on January 1 of year 
one, the savings association discloses a promotional program under 
which interest on purchases made during January will accrue at a 
non-variable rate of 20%, but the consumer will not be obligated to 
pay that interest if those purchases are paid in full by December 31 
of year one. On January 15, the consumer makes a purchase of $2,000. 
No other transactions are made on the account. The payment due on 
April 1 is not received until April 10. Section 535.24 does not 
permit the savings association to deny the consumer the opportunity 
to avoid interest charges on the $2,000 purchase by

[[Page 20824]]

paying that purchase in full on or before December 31 of year one. 
If, however, the $2,000 purchase remains unpaid on January 1 of year 
two, Sec.  535.24 does not prohibit the savings association from 
charging the interest accrued on that purchase during year 
one.[ltrif]

24(b) Exceptions

    [rtrif]1. Delayed implementation of rate increase. If Sec.  
535.24(b) permits a savings association to apply an increased annual 
percentage rate on a date that is not the first day of a billing 
cycle, the savings association may delay application of the 
increased rate until the first day of the following billing cycle 
without relinquishing the ability to apply that rate. For example, 
assume that, at account opening on January 1, a savings association 
discloses that a non-variable annual percentage rate of 10% will 
apply to purchases for six months and a non-variable rate of 15% 
will apply thereafter. The first day of the billing cycle for the 
account is the fifteenth of the month. If the six-month period 
expires on July 1, the savings association may delay application of 
the 15% rate until July 15 without relinquishing its ability to 
apply that rate under Sec.  535.24(b)(1).[ltrif]

24(b)(1) Account Opening Disclosure Exception

    1. Prohibited increases in rate. Section Sec.  535.24(b)(1) 
permits an increase in the annual percentage rate for a category of 
transactions to a rate disclosed at account opening upon expiration 
of a period of time that was also disclosed at account opening. 
Section 535.24(b)(1) does not permit application of [rtrif]an 
increased annual percentage rate[ltrif] [lsqbb]increased rates that 
are[rsqbb] disclosed at account opening [rtrif]that is[ltrif] 
[lsqbb]but are[rsqbb] contingent on a particular event or occurrence 
or [rtrif]that[ltrif] may be applied at the savings association's 
discretion. The following examples illustrate rate increases that 
are not permitted by Sec.  535.24[lsqbb](a)[rsqbb]:
* * * * *
    [lsqbb]iii. Assume that a savings association discloses at 
account opening on January 1 of year one that interest on purchases 
will be deferred for one year, although interest will accrue on 
purchases during that year at a non-variable rate of 20%. The 
savings association further discloses that, if all purchases made 
during year one are not paid in full by the end of that year, the 
savings association will begin charging interest on the purchase 
balance and new purchases at 20% and will retroactively charge 
interest on the purchase balance at a rate of 20% starting on the 
date of each purchase made during year one. On January 1 of year 
one, the consumer makes a purchase of $1,500. No other transactions 
are made on the account. On January 1 of year two, $500 of the 
$1,500 purchase remains unpaid. Section 535.24 does not permit the 
savings association to reach back to charge interest on the $1,500 
purchase from January 1 through December 31 of year one. However, 
the savings association may apply the previously-disclosed 20% rate 
to the $500 purchase balance beginning on January 1 of year two 
(pursuant to Sec.  535.24(b)(1)).[rsqbb]
    [lsqbb]2. Loss of grace period. Nothing in Sec.  535.24 
prohibits a savings association from assessing interest due to the 
loss of a grace period to the extent consistent with Sec.  
535.25.[rsqbb]
    [rtrif]2.[ltrif] [lsqbb]3.[rsqbb] Application of rate that is 
lower than disclosed rate. Section Sec.  535.24(b)(1) permits an 
increase in the annual percentage rate for a category of 
transactions to a rate disclosed at account opening upon expiration 
of a period of time that was also disclosed at account opening. 
Nothing in Sec.  535.24 prohibits a savings association from 
applying a rate that is lower than [rtrif]a[ltrif] [lsqbb]the[rsqbb] 
disclosed rate [rtrif]either during or[ltrif] upon expiration of the 
period. However, [rtrif]once the[ltrif] [lsqbb]if a[rsqbb] lower 
rate is applied to an existing balance, the savings association 
cannot subsequently increase the rate on that balance unless it 
[lsqbb]has[rsqbb] provided the consumer with advance notice of the 
increase pursuant to 12 CFR 226.9[rtrif](b)[ltrif] or (c). 
[rtrif]This notice must state the period of time during which the 
lower rate will apply and the rate that will apply after expiration 
of that period.[ltrif] Furthermore, [rtrif]a savings association 
that applies a lower rate to transactions that occurred during the 
first year after account opening may not subsequently increase the 
rate that applies to those transactions to a rate that is higher 
than the increased rate disclosed at account opening[ltrif] 
[lsqbb]the savings association cannot increase the rate on that 
existing balance to a rate that is higher than the increased rate 
disclosed at account opening[rsqbb]. The following [rtrif]examples 
illustrate[ltrif] [lsqbb]example illustrates[rsqbb] the application 
of [rtrif]the[ltrif] [lsqbb]this[rsqbb] rule:
* * * * *
    [rtrif]ii. Assume that a savings association discloses at 
account opening on January 1 of year one that a non-variable annual 
percentage rate of 15% will apply to purchases for one year, after 
which that rate will increase to a non-variable rate of 18%. The 
savings association also discloses that, to the extent consistent 
with Sec.  535.24 and other applicable law, a non-variable penalty 
rate of 30% may apply if the consumer's required minimum periodic 
payment is received after the payment due date, which is the tenth 
of the month. The required minimum periodic payments are applied to 
accrued interest and fees but do not reduce the purchase balance.
    A. On September 30 of year one, the account has a purchase 
balance of $1,400 at the 15% rate. On October 1, the savings 
association provides a notice pursuant to 12 CFR 226.9(c) informing 
the consumer that the rate for new purchases will decrease to a non-
variable rate of 10% for six months (from October 1 through March 31 
of year two) and that, beginning on April 1 of year two, the rate 
for purchases will increase to a non-variable rate of 20%. The 
savings association does not apply the 10% rate to the $1,400 
purchase balance. On October 15 of year one, the consumer makes a 
$300 purchase at the 10% rate. On January 1 of year two, the savings 
association may begin accruing interest on the $1,400 purchase 
balance at 18% (as disclosed at account opening). On January 15 of 
year two, the consumer makes a $150 purchase at the 10% rate. On 
April 1 of year two, the 10% rate that applies to the $300 purchase 
and the $150 purchase expires. The savings association may begin 
accruing interest on the $150 purchase at 20% (as disclosed in the 
12 CFR 226.9(c) notice). Because, however, the $300 purchase 
occurred during the first year after account opening, the savings 
association cannot increase the rate that applies to that purchase 
to a rate that is higher than the 18% rate disclosed at account 
opening.
    B. Same facts as above except that the required minimum periodic 
payment due on November 10 of year one is not received until 
November 15. Section 535.24(b)(1) does not permit the savings 
association to increase any annual percentage rate on the account at 
this time. The savings association may, however, apply the 30% 
penalty rate to new transactions beginning on January 1 of year two 
pursuant to Sec.  535.24(b)(3) by providing a 12 CFR 226.9(g) notice 
informing the consumer of this increase no later than November 16 of 
year one. On January 1 of year two, Sec.  535.24(b)(1) permits the 
savings association to begin accruing interest on the $1,400 
purchase balance at 18% (as disclosed at account opening). If the 
consumer makes the $150 purchase on January 15 of year two, Sec.  
535.24(b)(3) would permit the savings association to apply the 30% 
rate to that purchase. On April 1 of year two, the 10% rate that 
applies to the $300 purchase expires. Because this purchase occurred 
during the first year after account opening, the savings association 
cannot increase the rate that applies to that purchase to a rate 
that is higher than the 18% rate disclosed at account 
opening.[ltrif]

24(b)(2) Variable Rate Exception

* * * * *
    5. Changing a variable [lsqbb]annual percentage[rsqbb] rate to a 
non-variable [lsqbb]annual percentage[rsqbb] rate. * * *
* * * * *

24(b)(3) Advance Notice Exception

* * * * *
    2. Transactions that [rtrif]occurred prior to provision of 
notice or within seven days after provision of notice[ltrif] 
[lsqbb]occur more than seven days after notice provided[rsqbb]. 
[rtrif]Section 535.24(b)(3) generally permits a savings association 
to apply an increased rate to transactions that occur after 
provision of a 12 CFR 226.9(b) notice or more than seven days after 
provision of a 12 CFR 226.9(c) or (g) notice. If a rate increase is 
disclosed pursuant to both 12 CFR 226.9(b) and 12 CFR 226.9(c), that 
rate may only be applied to transactions that occur more than seven 
days after provision of the 12 CFR 226.9(c) notice. Section 
535.24(b)(3) does not permit a savings association to reach back to 
days before the effective date of the rate increase under 12 CFR 
226.9(c) or (g) when calculating interest charges. See comment 
24(b)(3)-3.[ltrif] [lsqbb]Section 535.24(b)(3) generally prohibits a 
savings association from applying an increased rate to transactions 
that occur within seven days after provision of the 12 CFR 226.9 (c) 
or (g) notice.[rsqbb] [rtrif]Whether a transaction occurred prior to 
provision of a notice or within seven days after provision of a 
notice is determined by the date of the transaction. In some cases, 
however, a merchant may place a ``hold'' on the available credit on 
an account for an

[[Page 20825]]

estimated transaction amount when the actual transaction amount will 
not be known until a later date. In these circumstances, the date of 
the transaction for purposes of Sec.  535.24(b)(3) is the date on 
which the merchant determines the actual transaction amount. For 
example, assume that, when a consumer uses a credit card account to 
check into a hotel on July 1, the hotel obtains authorization for a 
$750 hold on the account to ensure there is adequate available 
credit to cover the anticipated cost of the stay. When the consumer 
checks out on July 4, the actual cost of the stay is $850 because of 
additional incidental costs, and the hotel charges this amount to 
the account. For purposes of Sec.  535.24(b)(3), the transaction 
occurred on July 4.[ltrif] [lsqbb]This prohibition does not, 
however, apply to transactions that are authorized within seven days 
after provision of the 12 CFR 226.9 (c) or (g) notice but are 
settled more than seven days after the notice was provided.[rsqbb]
    3. Examples.
    i. Assume that a consumer credit card account is opened on 
January 1 of year one. On March 14 of year two, the account has a 
purchase balance of $2,000 at a non-variable annual percentage rate 
of 15%. On March 15, the savings association provides a notice 
pursuant to 12 CFR 226.9(c) informing the consumer that the rate for 
new purchases will increase to a non-variable rate of 18% on May 1. 
The notice further states that the 18% rate will apply for six 
months (until November 1) and states that thereafter the savings 
association will apply a variable rate that is currently 22% and is 
determined by adding a margin of 12 percentage points to a publicly-
available index that is not under the savings association's control. 
The seventh day after provision of the notice is March 22 and, on 
that date, the consumer makes a $200 purchase. On March 24, the 
consumer makes a $1,000 purchase. On May 1, Sec.  535.24(b)(3) 
permits the savings association to begin accruing interest at 18% on 
the $1,000 purchase made on March 24. The savings association is not 
permitted to apply the 18% rate to the $2,200 purchase balance as of 
March 22. After six months (November 2), the savings association may 
begin accruing interest on any remaining portion of the $1,000 
purchase at the previously-disclosed variable rate determined using 
the 12-point margin.
    [lsqbb]ii. Same facts as above except that the $200 purchase is 
authorized by the savings association on March 22 but is not settled 
until March 23. On May 1, Sec.  535.24(b)(3) permits the savings 
association to start charging interest at 18% on both the $200 
purchase and the $1,000 purchase. The savings association is not 
permitted to apply the 18% rate to the $2,000 purchase balance as of 
March 22.[rsqbb]
    [rtrif]ii.[ltrif] [lsqbb]iii.[rsqbb] Same facts as [lsqbb]in 
paragraph i.[rsqbb] above except that on September 17 of year two 
(which is 45 days before expiration of the 18% non-variable rate), 
the savings association provides a notice pursuant to 12 CFR 
226.9(c) informing the consumer that, on November 2, a new variable 
rate will apply to new purchases and any remaining portion of the 
$1,000 balance (calculated by using the same index and a reduced 
margin of 10 percentage points). The notice further states that, on 
May 1 of year three, the margin will increase to the margin 
disclosed [rtrif]in the March 15 notice[ltrif] [lsqbb]at account 
opening[rsqbb] (12 percentage points). On May 1 of year three, Sec.  
535.24(b)(3) permits the savings association to increase the margin 
used to determine the variable rate that applies to new purchases to 
12 percentage points and to apply that rate to any remaining portion 
of the $1,000 purchase as well as to new purchases. [lsqbb]See 
comment 24(b)(1)-3.[rsqbb] The savings association is not permitted 
to apply this rate to any remaining portion of the $2,200 purchase 
balance as of March 22.
    [rtrif]4. Application of a lower rate. Nothing in Sec.  535.24 
prohibits a savings association from lowering the annual percentage 
rate that applies to an existing balance or to new transactions. 
However, once the lower rate is applied to an existing balance, the 
savings association cannot subsequently increase the rate on that 
balance unless it provided the consumer with advance notice of the 
increase pursuant to 12 CFR 226.9(b) or (c). This notice must state 
the period of time during which the lower rate will apply and the 
rate that will apply after expiration of that period. Furthermore, a 
savings association that applies a decreased rate to transactions 
that occurred prior to provision of the notice--or, in the case of a 
12 CFR 226.9(c) or (g) notice, transactions that occurred within 
seven days after provision of the notice--may not subsequently 
increase the rate that applies to those transactions to a rate that 
is higher than the rate that applied prior to the decrease. The 
following examples illustrate the application of the rule:
    i. Assume that a savings association discloses at account 
opening on January 1 of year one that a non-variable annual 
percentage rate of 10% will apply to purchases for one year, after 
which that rate will increase to a non-variable rate of 15%. The 
savings association also discloses that, to the extent consistent 
with Sec.  535.24 and other applicable law, a non-variable penalty 
rate of 30% may apply if the consumer's required minimum periodic 
payment is received after the payment due date, which is the tenth 
of the month. The required minimum periodic payments are applied to 
accrued interest and fees but do not reduce the purchase balance. On 
June 30 of year two, the account has a purchase balance of $1,000 at 
the 15% rate. On July 1, the savings association provides a notice 
pursuant to 12 CFR 226.9(c) informing the consumer that the rate for 
new purchases will decrease to a non-variable rate of 5% for six 
months (from July 1 through December 31 of year two) and that, 
beginning on January 1 of year three, the rate for purchases will 
increase to a non-variable rate of 17%. On July 8 of year two, the 
consumer makes a $200 purchase. On July 9, the consumer makes a $100 
purchase. On January 1 of year three, Sec.  535.24(b)(3) permits the 
savings association to begin accruing interest on the $100 purchase 
at 17%. The savings association may not apply the 17% rate to the 
$200 purchase because that transaction occurred within seven days 
after provision of the 12 CFR 226.9(c) notice. If the savings 
association applied the 5% rate to the $1,000 purchase balance and 
the $200 purchase, the savings association may not increase the rate 
that applies to those amounts to a rate that is higher than 15% on 
January 1 of year three.
    ii. Same facts as above except that the required minimum 
periodic payment due on September 10 of year two is not received 
until September 15 of year two. On September 15 of year two, the 
savings association provides a notice pursuant to 12 CFR 226.9(g) 
informing the consumer that the rate for new purchases will increase 
to the 30% penalty rate on October 31. On October 31, Sec.  
535.23(b)(3) permits the savings association to begin accruing 
interest at 30% on any purchase made on or after September 23. The 
savings association may not, however, apply the 30% rate to the 
$1,300 in purchases. Instead, the savings association must continue 
to apply the 5% rate to the $100 purchase until at least January 1 
of year three when Sec.  535.24(b)(3) permits the savings 
association to begin accruing interest on that purchase at 17%. 
Similarly, if the savings association applied the 5% rate to the 
$1,000 purchase balance and the $200 purchase, the savings 
association may begin accruing interest on those amounts at 15% on 
January 1 of year three.
    iii. Assume that a savings association discloses at account 
opening on January 1 of year one that the rate that applies to 
purchases is a variable annual percentage rate that is currently 18% 
and will be adjusted quarterly by adding a margin of 8 percentage 
points to a publicly available index not under the savings 
association's control. The savings association also discloses that, 
to the extent consistent with Sec.  535.24 and other applicable law, 
a non-variable penalty rate of 30% may apply if the consumer's 
required minimum periodic payment is received after the payment due 
date, which is the first of the month. On July 30 of year two, the 
consumer uses the account for a $1,000 purchase in response to a 
promotional offer. Under the terms of this offer, interest on 
purchases made during the months of July through September will 
accrue at the variable rate for purchases but the consumer will not 
be obligated to pay that interest if all purchases made during that 
three-month period are paid in full by December 31 of year two. The 
payment due on September 1 of year two is not received until 
September 6. Section 535.24 does not permit the savings association 
to deny the consumer the opportunity to avoid interest charges on 
the $1,000 purchase by paying that purchase in full on or before 
December 31 of year two. The savings association may, however, 
provide a notice pursuant to 12 CFR 226.9(g) on September 2 of year 
two informing the consumer that the promotional offer does not apply 
to purchases made on or after September 10 and that the rate for 
such purchases will increase to the 30% penalty rate on October 18. 
On December 31 of year two, the $1,000 purchase has been paid in 
full. Under these circumstances, the savings association may not 
charge any interest accrued on the $1,000 purchase.
    iv. Assume that a savings association discloses at account 
opening on January 1 of year one that the rate that applies to cash 
advances is a variable annual percentage rate

[[Page 20826]]

that is currently 24% and will be adjusted quarterly by adding a 
margin of 14 percentage points to a publicly available index not 
under the savings association's control. On July 1 of year two, the 
savings association provides checks that access the account and, 
pursuant to 12 CFR 226.9(b)(3)(A), discloses that a promotional rate 
of 15% will apply to credit extended by use of the checks until 
January 1 of year three, after which the cash advance rate 
determined using the 14-point margin will apply. On July 15 of year 
two, the consumer uses one of the checks to pay for a $500 
transaction. On January 1 of year three, Sec.  535.24(b)(3) permits 
the savings association to apply the cash advance rate determined 
using the 14-point margin to the $500 transaction.[ltrif]

24(b)(5) Workout [rtrif]and Temporary Hardship[ltrif] Arrangement 
Exception

    1. Scope of exception. Nothing in Sec.  535.24(b)(5) permits a 
savings association to alter the requirements of Sec.  535.24 
pursuant to a workout [rtrif]or temporary hardship[ltrif] 
arrangement between a consumer and the savings association. For 
example, a savings association cannot increase an annual percentage 
rate pursuant to a workout [rtrif]or temporary hardship[ltrif] 
arrangement unless otherwise permitted by Sec.  535.24. In addition, 
a savings association cannot require the consumer to make payments 
with respect to a protected balance that exceed the payments 
permitted under Sec.  535.24(c).
    2. Variable [lsqbb]annual percentage[rsqbb] rates. If the annual 
percentage rate that applied to a category of transactions prior to 
commencement of the workout [rtrif]or temporary hardship[ltrif] 
arrangement varied with an index consistent with Sec.  535.24(b)(2), 
the rate applied to that category of transactions following an 
increase pursuant to Sec.  535.24(b)(5) must be determined using the 
same formula (index and margin).
    3. Example [rtrif]s[ltrif].
    [rtrif]i.[ltrif] Assume that, consistent with Sec.  
535.24(b)(4), the margin used to determine a variable annual 
percentage rate that applies to a $5,000 balance is increased from 5 
percentage points to 15 percentage points. Assume also that the 
savings association and the consumer subsequently agree to a workout 
arrangement that reduces the margin back to 5 points on the 
condition that the consumer pay a specified amount by the payment 
due date each month. If the consumer does not pay the agreed-upon 
amount by the payment due date, the savings association may increase 
the margin for the variable rate that applies to the $5,000 balance 
up to 15 percentage points. 12 CFR 226.9 does not require advance 
notice of this type of increase.
    [rtrif]ii. Assume that a consumer fails to make four consecutive 
minimum payments totaling $480 on a consumer credit card account 
with a balance of $6,000 and that, consistent with Sec.  
535.24(b)(4), the annual percentage rate that applies to that 
balance is increased from a non-variable rate of 15% to a non-
variable penalty rate of 30%. Assume also that the savings 
association and the consumer subsequently agree to a temporary 
hardship arrangement that reduces all rates on the account to 0% on 
the condition that the consumer pay an amount by the payment due 
date each month that is sufficient to cure the $480 delinquency 
within six months. If the consumer pays the agreed-upon amount by 
the payment due date during the six-month period and cures the 
delinquency, the savings association may increase the rate that 
applies to any remaining portion of the $6,000 balance to 15% or any 
other rate up to the 30% penalty rate.[ltrif]

24(c) Treatment of Protected Balances

* * * * *

24(c)(1) Repayment

* * * * *

Paragraph 24(c)(1)(i)

* * * * *
    2. Amortization when applicable [lsqbb]annual percentage[rsqbb] 
rate is variable. * * *
* * * * *

24(c)(2) Fees and Charges

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

Sec.  535.25--Unfair Balance Computation Method

25(a) General Rule

* * * * *
    [rtrif]3. Charging accrued interest at expiration of certain 
promotional programs. When a savings association offers a 
promotional program under which a consumer will not be obligated to 
pay interest that accrues on a balance if that balance is paid in 
full prior to a specified date or expiration of a specified period 
of time, Sec.  535.25 does not prohibit the savings association from 
charging that accrued interest to the account if the balance is not 
paid in full prior to the specified date (consistent with applicable 
law and regulatory guidance).[ltrif]
* * * * *

National Credit Union Administration

    For the reasons discussed in the joint preamble, the NCUA Board 
proposes to further amend 12 CFR Part 706, as amended at 74 FR 5575, 
January 29, 2009, as set forth below:

PART 706--UNFAIR OR DECEPTIVE ACTS OR PRACTICES

    1. The authority citation for part 706 continues to read as 
follows:

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

    2. Revise Sec.  706.23 as follows:


Sec.  706.23  Unfair allocation of payments.

    When different annual percentage rates apply to different balances 
on a consumer credit card account:
    (a) General rule. Except as provided in paragraph (b) of this 
section, a federal credit union must allocate any amount paid by a 
member in excess of the required minimum periodic payment among the 
balances using one of the following methods:
    (1) High-to-low method. The amount paid by a member in excess of 
the required minimum periodic payment is allocated first to the balance 
with the highest annual percentage rate and any remaining portion to 
the other balances in descending order based on the applicable annual 
percentage rate.
    (2) Pro rata method. The amount paid by a member in excess of the 
required minimum periodic payment is allocated among the balances in 
the same proportion as each balance bears to the total balance.
    (b) Special rule for accounts subject to certain promotional 
programs. When a promotional program provides that a member will not be 
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, a 
federal credit union must allocate amounts paid by a member in excess 
of the required minimum periodic payment first to that balance during 
the two billing cycles immediately preceding expiration of the 
specified period and any remaining portion to the other balances 
consistent with paragraph (a) of this section.
    3. Amend Sec.  706.24 by revising paragraphs (b)(1) through (b)(5) 
and adding paragraph (b)(6) to read as follows:


Sec.  706.24  Unfair increases in annual percentage rates.

* * * * *
    (b) * * *
    (1) Account opening disclosure exception. An annual percentage rate 
for a category of transactions may be increased to an annual percentage 
rate disclosed at account opening upon expiration of a period of time 
disclosed at account opening. This exception does not permit 
application of an increased annual percentage rate disclosed at account 
opening that is contingent on a particular event or occurrence or that 
may be applied at the federal credit union's discretion.
    (2) Variable rate exception. An annual percentage rate for a 
category of transactions that varies according to an

[[Page 20827]]

index that is not under the federal credit union's control and is 
available to the general public may be increased due to an increase in 
the index.
    (3) Advance notice exception. An annual percentage rate for a 
category of transactions may be increased pursuant to a notice under 12 
CFR 226.9(b), (c), or (g), provided that:
    (i) If the federal credit union discloses the increased rate 
pursuant to 12 CFR 226.9(b), that rate must not be applied to 
transactions that occurred prior to provision of the notice;
    (ii) If the federal credit union discloses the increased rate 
pursuant to 12 CFR 226.9(c) or (g), that rate must not be applied to 
transactions that occurred within seven days after provision of the 
notice; and
    (iii) This exception does not permit an increase in any annual 
percentage rate during the first year after an account is opened.
    (4) Delinquency exception. An annual percentage rate may be 
increased due to the federal credit union not receiving a member's 
required minimum periodic payment within 30 days after the due date for 
that payment.
    (5) Workout and temporary hardship arrangement exception. An annual 
percentage rate may be increased due to a member's completion of a 
workout or temporary hardship arrangement between a federal credit 
union and the member or a member's failure to comply with the terms of 
such an arrangement, provided that the annual percentage rate 
applicable to a category of transactions following any such increase 
does not exceed the rate that applied to that category of transactions 
prior to commencement of the arrangement.
    (6) Servicemembers Civil Relief Act exception. An annual percentage 
rate that has been decreased pursuant to 50 U.S.C. app. 527 may be 
increased once that provision no longer applies, provided that the 
annual percentage rate applicable to a category of transactions 
following any such increase does not exceed the rate that applied to 
that category of transactions prior to the decrease.
* * * * *
    4. In Appendix A to Part 706:
    A. Add Section 706.21--Definitions.
    B. Under Section 706.22--Unfair Acts or Practices Regarding Time To 
Make Payment, under 22(b) Compliance with General Rule, paragraph 3. is 
revised.
    C. Under Section 706.23--Unfair Acts or Practices Regarding 
Allocation of Payments:
    (i) Paragraph 2., the heading of paragraph 3., and paragraphs 4. 
and 6. are revised;
    (ii) Redesignate 23(a) High-to-Low Method as 23(a)(1) High-to-Low 
Method;
    (iii) Under 23(a)(1) High-to-Low Method, paragraph 1.v. is added;
    (iv) Redesignate 23(b) Pro Rata Method as 23(a)(2) Pro Rata Method;
    (v) Under 23(a)(2) Pro Rata Method, paragraph 1. is revised; and
    (vi) Add 23(b) Special Rule for Accounts Subject to Certain 
Promotional Programs.
    D. Under Section 706.24--Unfair Acts or Practices Regarding 
Increases in Annual Percentage Rates:
    (i) Paragraph 1. is revised;
    (ii) Add paragraphs 2., 3., 4.;
    (iii) Under 24(a) General Rule, paragraphs 1., 2.i. introductory 
text, 2.iii. introductory text, and 2.iii.C. are revised, and paragraph 
2.iv. is added;
    (iv) Under 24(b) Exceptions, add paragraph 1.;
    (v) Under 24(b)(1) Account Opening Disclosure Exception, paragraph 
1. introductory text is revised, paragraph 1.iii. and paragraph 2. are 
removed, paragraph 3. is redesignated as paragraph 2., the introductory 
text of newly designated paragraph 2. is revised, and paragraph 2.ii. 
is added;
    (vi) Under 24(b)(2) Variable Rate Exception, the heading of 
paragraph 5. is revised;
    (vii) Under 24(b)(3) Advance Notice Exception, paragraphs 2. and 3. 
are revised and paragraph 4. is added;
    (viii) Revise 24(b)(5) Workout Arrangement Exception;
    (ix) Under 24(c) Treatment of Protected Balances, under 24(c)(1) 
Repayment, under Paragraph 24(c)(1)(i), the heading of paragraph 2. is 
revised; and
    (x) Under 24(c) Treatment of Protected Balances, under 24(c)(2) 
Fees and Charges, paragraph 1. is revised.
    E. Under Section 706.25--Unfair Balance Computation Method, under 
25(a) General Rule, paragraph 3. is revised.

Appendix A to Part 706--Official Staff Commentary

* * * * *

Subpart C--Consumer Credit Card Account Practices Rule

Sec.  706.21--Definitions

21(a) Annual Percentage Rate

    1. Use of ``rate.'' For purposes of Subpart C, ``rate'' has the 
same meaning as ``annual percentage rate'' unless otherwise 
specified.

21(c) Consumer Credit Card Account

    1. Closed accounts. If a consumer credit card account with an 
outstanding balance is closed, the account continues to be the same 
consumer credit card account for purposes of Subpart C with respect 
to that balance. For example, if a federal credit union or a member 
closes a consumer credit card account with an outstanding balance, 
the federal credit union would still be prohibited from increasing 
the annual percentage rate that applies to that balance unless 
permitted by one of the exceptions in Sec.  706.24(b).
    2. Acquired accounts. If, through merger or acquisition, for 
example, a federal credit union acquires a consumer credit card 
account with an outstanding balance, the account continues to be the 
same consumer credit card account for purposes of Subpart C with 
respect to that balance. For example, if a consumer credit card 
account has a $1,000 purchase balance with an annual percentage rate 
of 12% and the federal credit union that acquires that account 
applies a 15% rate to purchases, the federal credit union would be 
prohibited from applying the 15% rate to the $1,000 balance unless 
permitted by one of the exceptions in Sec.  706.24(b).
    3. Balance transfers.
    i. Between accounts issued by the same federal credit union. If 
a balance is transferred from a consumer credit card account issued 
by a federal credit union to another credit account issued by the 
same federal credit union, the account continues to be the same 
consumer credit card account for purposes of Subpart C with respect 
to that balance unless the account to which the balance is 
transferred is an open-end credit plan secured by a member's 
dwelling. For example, if a consumer credit card account has a 
$2,000 purchase balance with an annual percentage rate of 12% and 
that balance is transferred to another consumer credit card account 
issued by the same federal credit union that applies a 15% rate to 
purchases, the federal credit union would be prohibited from 
applying the 15% rate to the $2,000 balance unless permitted by one 
of the exceptions in Sec.  706.24(b). Additional circumstances in 
which a balance is considered transferred for purposes of this 
comment include when:
    A. A retail credit card with an outstanding balance is replaced 
or substituted with a cobranded general purpose card that can be 
used with a broader merchant base;
    B. A credit card account with an outstanding balance is replaced 
or substituted with another credit card account offering different 
features;
    C. A credit card account with an outstanding balance is 
consolidated or combined with one or more other credit card accounts 
into a single credit card account; and
    D. A credit card account is replaced or substituted with a line 
of credit that can be accessed solely by an account number.
    ii. Between accounts issued by different federal credit unions. 
If a balance is transferred to a consumer credit card account issued 
by a federal credit union from a consumer credit card account issued 
by a different financial institution that is not an affiliate or 
subsidiary of the federal credit union that issued the consumer 
credit card account, the account is not the same consumer credit 
card account for purposes of Subpart C with respect to that balance. 
Thus,

[[Page 20828]]

the provisions of Subpart C do not prohibit the federal credit union 
to which the balance is transferred from applying its account terms 
to that balance, provided that those terms comply with Subpart C. 
For example, if a consumer credit card account issued by federal 
credit union A has a $1,000 purchase balance at an annual percentage 
rate of 13% and a member transfers that balance to a consumer credit 
card account with a purchase rate of 15% issued by federal credit 
union B, federal credit union B may apply the 15% rate to the $1,000 
balance. However, federal credit union B may not subsequently 
increase the rate on that balance unless permitted by one of the 
exceptions in Sec.  706.24(b).

706.22--Unfair Time To Make Payment

* * * * *

22(b) Compliance With General Rule

* * * * *
    3. Example of alternative method of compliance. Assume that, for 
a particular type of consumer credit card account, a federal credit 
union only provides periodic statements electronically and only 
accepts payments electronically (consistent with applicable law and 
regulatory guidance, including the consumer notice and consent 
procedures of the Electronic Signatures in Global and National 
Commerce Act (E-Sign Act), 15 U.S.C. 7001 et seq.). Under these 
circumstances, the federal credit union could comply with Sec.  
706.22(a) even if it does not provide periodic statements 21 days 
before the payment due date consistent with Sec.  706.22(b)(2).
* * * * *

Sec.  706.23--Unfair Acts or Practices Regarding Allocation of 
Payments

* * * * *
    2. Adjustments of one dollar or less permitted. When allocating 
payments, the federal credit union may adjust amounts by one dollar 
or less. For example, if a federal credit union is allocating $100 
pursuant to Sec.  706.23(a)(2) among balances of $1,000, $2,000, and 
$4,000, the federal credit union may apply $14 to the $1,000 
balance, $29 to the $2,000 balance, and $57 to the $4,000 balance.
    3. Applicable balances and rates. * * *
    4. Use of permissible allocation methods. A federal credit union 
is not prohibited from changing the allocation method for a consumer 
credit card account or from using different allocation methods for 
different consumer credit card accounts, so long as the methods used 
are consistent with Sec.  706.23. For example, a federal credit 
union may change from allocating to the highest rate balance first 
pursuant to Sec.  706.23(a)(1) to allocating pro rata pursuant to 
Sec.  706.23(a)(2) or vice versa. Similarly, a federal credit union 
may allocate to the highest rate balance first pursuant to Sec.  
706.23(a)(1) on some of its accounts and allocate pro rata pursuant 
to Sec.  706.23(a)(2) on other accounts.
* * * * *
    6. Balances with the same rate. When the same annual percentage 
rate applies to more than one balance on an account and a different 
annual percentage rate applies to at least one other balance on that 
account, Sec.  706.23 generally does not require that any particular 
method be used when allocating among the balances with the same 
annual percentage rate. Under these circumstances, a federal credit 
union may treat the balances with the same rate as a single balance 
or separate balances. See comments 23(a)(1)-1.iv and 23(a)(2)-2.iv. 
However, when a member will not be 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, that balance must be 
treated as a balance with an annual percentage rate of zero for 
purposes of Sec.  706.23 during that period of time. For example, if 
an account has a $1,000 purchase balance and a $2,000 balance on 
which the member will not be obligated to pay interest if that 
balance is paid in full prior to July 1 and a 15% annual percentage 
rate applies to both, the balances must be treated as balances with 
different rates for purposes of Sec.  706.23 until July 1. In 
addition, for purposes of allocating pursuant to Sec.  706.23(a)(1), 
any amount paid by the member 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 promotional 
period (when it must be applied first to any remaining portion of 
the $2,000 balance). See comment 23(a)(1)-1.v.

23(a)(1) High-to-Low Method

    1. * * *
    v. Assume that on January 1 a member uses a credit card account 
to make a $1,200 purchase subject to a promotional offer under which 
interest accrues at an annual percentage rate of 15% but the member 
will not be obligated to pay that interest if the balance is paid in 
full on or before June 30. The billing cycles for this account begin 
on the first day of the month and end on the last day of the month. 
Each month from January through June, the member uses the account to 
make $200 in purchases that are not subject to the promotional offer 
but are subject to the 15% rate. Each month from February through 
June, the member pays $400 in excess of the required minimum 
periodic payment on the payment due date, which is the twenty-fifth 
of the month. Any interest that accrues on the non-promotional 
purchases is paid by the required minimum periodic payment. A 
federal credit union using this method would allocate the $400 
excess payments received on February 25, March 25, and April 25 as 
follows: $200 to pay off the non-promotional balance (that is 
subject to the 15% rate) and the remaining $200 to the promotional 
balance (that is treated as a balance with a rate of zero). Section 
706.23(b), however, requires the federal credit union to allocate 
the entire $400 excess payment received on May 25 to the promotional 
balance. Similarly, Sec.  706.23(b) requires the federal credit 
union to allocate the $400 excess payment received on June 25 as 
follows: $200 to the promotional balance (which pays that purchase 
in full) and the remaining $200 to the non-promotional balance.

23(a)(2) Pro Rata Method

    1. Total balance. A federal credit union may, but is not 
required to, deduct amounts paid by the member's required minimum 
periodic payment when calculating the total balance for purposes of 
Sec.  706.23(a)(2). See comment 23(a)(2)-2.iii.
* * * * *

23(b) Special Rule for Accounts Subject to Certain Promotional 
Programs

    1. Grace periods. Section 706.23(b) applies to promotional 
programs under which the member 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. A grace period during 
which a member may repay one or more balances on a consumer credit 
card account is not a ``promotional program'' for purposes of Sec.  
706.23(b).
* * * * *

Sec.  706.24--Unfair Increases in Annual Percentage Rates

    1. Relationship to Regulation Z, 12 CFR part 226. A federal 
credit union that complies with the applicable disclosure 
requirements in Regulation Z, 12 CFR part 226, has complied with the 
disclosure requirements in Sec.  706.24. See 12 CFR 226.5a, 226.6, 
226.9. For example, a federal credit union may comply with the 
requirement in Sec.  706.24(a) to disclose at account opening the 
annual percentage rates that will apply to each category of 
transactions by complying with the disclosure requirements in 12 CFR 
226.5a regarding applications and solicitations and the requirements 
in 12 CFR 226.6 regarding account-opening disclosures. Similarly, in 
order to increase an annual percentage rate on new transactions 
pursuant to Sec.  706.24(b)(3), a federal credit union must comply 
with the disclosure requirements in 12 CFR 226.9(b), (c), or (g). 
However, nothing in Sec.  706.24 alters the requirements in 12 CFR 
226.9(c) and (g) that creditors provide consumers with written 
notice at least 45 days prior to the effective date of certain 
increases in the annual percentage rates on open-end (not home-
secured) credit plans.
    2. Relationship to grace period. Nothing in Sec.  706.24 
prohibits a federal credit union from assessing interest due to the 
loss of a grace period to the extent consistent with Sec.  706.25. 
Additionally, a federal credit union has not reduced an annual 
percentage rate on a consumer credit account for purposes of Sec.  
706.24 if the federal credit union does not charge interest on a 
balance when the member pays that balance in full prior to the 
expiration of a grace period.
    3. Category of transactions. For purposes of Sec.  706.24, 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. For 
example, purchase transactions, cash advance transactions, and 
balance transfer transactions are separate categories of 
transactions for purposes of Sec.  706.24 if a federal credit union 
applies different annual percentage rates to each. Furthermore, if, 
for example, the federal credit union applies

[[Page 20829]]

different annual percentage rates to different types of purchase 
transactions (such as one rate for purchases of gasoline and a 
different rate for all other purchases), each type constitutes a 
separate category of transactions for purposes of Sec.  706.24.
    4. Account opening.
    i. Multiple accounts with same federal credit union. When a 
member has a credit card account with a federal credit union and the 
member opens a new credit card account with the same federal credit 
union (or its affiliate or subsidiary), the opening of the new 
account constitutes an ``account opening'' for purposes of Sec.  
706.24 if, more than 15/30 days after the new account is opened, the 
member has the ability to obtain additional extensions of credit on 
each account. For example, assume that, on January 1 of year one, a 
member opens a credit card account with a federal credit union. On 
July 1 of year one, the member opens a second credit card account 
with that federal credit union. On July 15, a $1,000 balance is 
transferred from the first account to the second account. The 
opening of the second account constitutes the opening of an account 
for purposes of Sec.  706.24 so long as, on July 17/August 1, the 
member can engage in transactions using either account. Under these 
circumstances, the bank could not increase an annual percentage rate 
on the second account pursuant to Sec.  706.24(b)(3) until July 1 of 
year two (which is one year after the second account was opened).
    ii. Replacement or consolidation.
    A. Generally. A consumer credit card account has not been opened 
for purposes of Sec.  227.24 when a consumer credit card account 
issued by a bank is replaced or consolidated with another consumer 
credit card account issued by the same bank (or its affiliate or 
subsidiary). Circumstances in which a consumer credit card account 
has not been opened for purposes of Sec.  227.24 include when:
    (1) A retail credit card is replaced with a cobranded general 
purpose card that can be used at a wider number of merchants;
    (2) A credit card account is replaced with another consumer 
credit card account offering different features;
    (3) A credit card account is consolidated or combined with one 
or more other credit card accounts into a single credit card 
account; or
    (4) A credit card account acquired through merger or acquisition 
is replaced with a credit card account issued by the acquiring 
federal credit union.
    B. Limitation. A bank that replaces or consolidates a consumer 
credit card account with another consumer credit card account issued 
by the bank (or its affiliate or subsidiary) may not increase an 
annual percentage rate in a manner otherwise prohibited by Sec.  
227.24. For example, assume that, on January 1 of year one, a 
consumer opens a consumer credit card account with an annual 
percentage rate for purchases of 15%. On July 1 of year one, the 
account is replaced with a consumer credit card account that offers 
different features (such as rewards on purchases). Under these 
circumstances, the bank cannot increase the annual percentage rate 
for purchases to a rate that is higher than 15% pursuant to Sec.  
227.24(b)(3) until January 1 of year two (which is one year after 
the first account was opened).

24(a) General Rule

    1. Rates that will apply to each category of transactions. 
Section 706.24(a) requires federal credit unions to disclose, at 
account opening, the annual percentage rates that will apply to each 
category of transactions on the account. A federal credit union 
cannot satisfy this requirement by disclosing at account opening 
only a range of rates or that a rate will be ``up to'' a particular 
amount. The disclosure requirements in Sec.  706.24(a) do not apply 
to annual percentage rates that are contingent on a particular event 
or occurrence or may be applied at the federal credit union's 
discretion (such as penalty rates) insofar as those rates may be 
applied consistent with Sec.  706.24.
    2. * * *
    i. Assume that, at account opening on January 1 of year one, a 
federal credit union discloses that the annual percentage rate for 
purchases is a non-variable rate of 5% and will apply for six 
months. The federal credit union also discloses that, after six 
months, the annual percentage rate for purchases will be a variable 
rate that is currently 9% and will be adjusted quarterly by adding a 
margin of 3 percentage points to a publicly available index not 
under the federal credit union's control. Furthermore, the federal 
credit union discloses that the annual percentage rate for cash 
advances is the same variable rate that will apply to purchases 
after six months. Finally, the federal credit union discloses that, 
to the extent consistent with Sec.  706.24 and other applicable law, 
a non-variable penalty rate of 15% may apply if a member makes a 
late payment. The payment due date for the account is the twenty-
fifth day of the month and the required minimum periodic payments 
are applied to accrued interest and fees but do not reduce the 
purchase and cash advance balances.
* * * * *
    iii. Assume that, at account opening on January 1 of year one, a 
federal credit union discloses that the annual percentage rate for 
purchases is a variable rate determined by adding a margin of 2 
percentage points to a publicly-available index outside of the 
federal credit union's control. The federal credit union also 
discloses that, to the extent consistent with Sec.  706.24 and other 
applicable law, a non-variable penalty rate of 15% may apply if a 
member makes a late payment. The due date for the account is the 
fifteenth of the month. On May 30 of year two, the account has a 
purchase balance of $1,000. On May 31, the federal credit union 
provides a notice pursuant to 12 CFR 226.9(c) informing the member 
of a new variable rate that will apply on July 16 for all purchases 
made on or after June 8 (calculated by using the same index and an 
increased margin of 8 percentage points). On June 7, the member 
makes a $500 purchase. On June 8, the member makes a $200 purchase. 
On June 25, the federal credit union has not received the payment 
due on June 15 and provides the member with a notice pursuant to 12 
CFR 226.9(g) stating that the penalty rate of 15% will apply as of 
August 9 to all transactions made on or after July 3 and that, if 
the member becomes more than 30 days late, the penalty rate will 
apply to all balances on the account. On July 4, the member makes a 
$300 purchase.
* * * * *
    C. Same facts as paragraph A. above except the payment due on 
June 15 of year two is received on July 20. Section 706.24(b)(4) 
permits the federal credit union to apply the 15% penalty rate to 
all balances on the account and to future transactions because it 
has not received payment within 30 days after the due date. Because 
the federal credit union provided a 12 CFR 226.9(g) notice on June 
25 stating the 15% penalty rate, the federal credit union may apply 
the 15% penalty rate to all balances on the account as well as any 
future transactions on August 9 without providing an additional 
notice pursuant to 12 CFR 226.9(g).
    iv. Assume that, at account opening on January 1 of year one, 
the federal credit union discloses a promotional program under which 
interest on purchases made during January will accrue at a non-
variable rate of 10%, but the member will not be obligated to pay 
that interest if those purchases are paid in full by December 31 of 
year one. On January 15, the member makes a purchase of $2,000. No 
other transactions are made on the account. The payment due on April 
1 is not received until April 10. Section 706.24 does not permit the 
federal credit union to deny the member the opportunity to avoid 
interest charges on the $2,000 purchase by paying that purchase in 
full on or before December 31 of year one. If, however, the $2,000 
purchase remains unpaid on January 1 of year two, Sec.  706.24 does 
not prohibit the federal credit union from charging the interest 
accrued on that purchase during year one.

24(b) Exceptions

    1. Delayed implementation of rate increase. If Sec.  706.24(b) 
permits a federal credit union to apply an increased annual 
percentage rate on a date that is not the first day of a billing 
cycle, the federal credit union may delay application of the 
increased rate until the first day of the following billing cycle 
without relinquishing the ability to apply that rate. For example, 
assume that, at account opening on January 1, a federal credit union 
discloses that a non-variable annual percentage rate of 10% will 
apply to purchases for six months and a non-variable rate of 15% 
will apply thereafter. The first day of the billing cycle for the 
account is the fifteenth of the month. If the six-month period 
expires on July 1, the federal credit union may delay application of 
the 15% rate until July 15 without relinquishing its ability to 
apply that rate under Sec.  706.24(b)(1).

24(b)(1) Account Opening Disclosure Exception

    1. Prohibited increases in rate. Section Sec.  706.24(b)(1) 
permits an increase in the annual percentage rate for a category of 
transactions to a rate disclosed at account opening upon expiration 
of a period of time that was also disclosed at account opening. 
Section 706.24(b)(1) does not permit application of an increased 
annual percentage rate disclosed at account opening that is 
contingent on a particular event or

[[Page 20830]]

occurrence or may be applied at the federal credit union's 
discretion. The following examples illustrate rate increases that 
are not permitted by Sec.  706.24:
* * * * *
    2. Application of rate that is lower than disclosed rate. 
Section Sec.  706.24(b)(1) permits an increase in the annual 
percentage rate for a category of transactions to a rate disclosed 
at account opening upon expiration of a period of time that was also 
disclosed at account opening. Nothing in Sec.  706.24 prohibits a 
federal credit union from applying a rate that is lower than a 
disclosed rate either during or upon expiration of the period. 
However, once the lower rate is applied to an existing balance, the 
federal credit union cannot subsequently increase the rate on that 
balance unless it provided the member with advance notice of the 
increase pursuant to 12 CFR 226.9(b) or (c). This notice must state 
the period of time during which the lower rate will apply and the 
rate that will apply after expiration of that period. Furthermore, a 
federal credit union that applies a lower rate to transactions that 
occurred during the first year after account opening may not 
subsequently increase the rate that applies to those transactions to 
a rate that is higher than the increased rate disclosed at account 
opening. The following examples illustrate the application of the 
rule:
* * * * *
    ii. Assume that a federal credit union discloses at account 
opening on January 1 of year one that a non-variable annual 
percentage rate of 10% will apply to purchases for one year, after 
which that rate will increase to a non-variable rate of 12%. The 
federal credit union also discloses that, to the extent consistent 
with Sec.  706.24 and other applicable law, a non-variable penalty 
rate of 15% may apply if the member's required minimum periodic 
payment is received after the payment due date, which is the tenth 
of the month. The required minimum periodic payments are applied to 
accrued interest and fees but do not reduce the purchase balance.
    A. On September 30 of year one, the account has a purchase 
balance of $1,400 at the 10% rate. On October 1, the federal credit 
union provides a notice pursuant to 12 CFR 226.9(c) informing the 
member that the rate for new purchases will decrease to a non-
variable rate of 7% for six months (from October 1 through March 31 
of year two) and that, beginning on April 1 of year two, the rate 
for purchases will increase to a non-variable rate of 13%. The 
federal credit union does not apply the 7% rate to the $1,400 
purchase balance. On October 15 of year one, the member makes a $300 
purchase at the 7% rate. On January 1 of year two, the federal 
credit union may begin accruing interest on the $1,400 purchase 
balance at 12% (as disclosed at account opening). On January 15 of 
year two, the member makes a $150 purchase at the 7% rate. On April 
1 of year two, the 7% rate that applies to the $300 purchase and the 
$150 purchase expires. The federal credit union may begin accruing 
interest on the $150 purchase at 13% (as disclosed in the 12 CFR 
226.9(c) notice). Because, however, the $300 purchase occurred 
during the first year after account opening, the federal credit 
union cannot increase the rate that applies to that purchase to a 
rate that is higher than the 12% rate disclosed at account opening.
    B. Same facts as above except that the required minimum periodic 
payment due on November 10 of year one is not received until 
November 15. Section 706.24(b)(1) does not permit the federal credit 
union to increase any annual percentage rate on the account at this 
time. The federal credit union may, however, apply the 15% penalty 
rate to new transactions beginning on January 1 of year two pursuant 
to Sec.  706.24(b)(3) by providing a 12 CFR 226.9(g) notice 
informing the member of this increase no later than November 16 of 
year one. On January 1 of year two, Sec.  706.24(b)(1) permits the 
federal credit union to begin accruing interest on the $1,400 
purchase balance at 12% (as disclosed at account opening). If the 
member makes the $150 purchase on January 15 of year two, Sec.  
706.24(b)(3) would permit the federal credit union to apply the 15% 
rate to that purchase. On April 1 of year two, the 7% rate that 
applies to the $300 purchase expires. Because this purchase occurred 
during the first year after account opening, the federal credit 
union cannot increase the rate that applies to that purchase to a 
rate that is higher than the 12% rate disclosed at account opening.

24(b)(2) Variable Rate Exception

* * * * *
    5. Changing a variable rate to a non-variable rate. * * *
* * * * *

24(b)(3) Advance Notice Exception

* * * * *
    2. Transactions that occurred prior to provision of notice or 
within seven days after provision of notice. Section 706.24(b)(3) 
generally permits a federal credit union to apply an increased rate 
to transactions that occur after provision of a 12 CFR 226.9(b) 
notice or more than seven days after provision of a 12 CFR 226.9(c) 
or (g) notice. If a rate increase is disclosed pursuant to both 12 
CFR 226.9(b) and 12 CFR 226.9(c), that rate may only be applied to 
transactions that occur more than seven days after provision of the 
12 CFR 226.9(c) notice. Section 706.24(b)(3) does not permit a 
federal credit union to reach back to days before the effective date 
of the rate increase under 12 CFR 226.9(c) or (g) when calculating 
interest charges. See comment 24(b)(3)-3. Whether a transaction 
occurred prior to provision of a notice or within seven days after 
provision of a notice is determined by the date of the transaction. 
In some cases, however, a merchant may place a ``hold'' on the 
available credit on an account for an estimated transaction amount 
when the actual transaction amount will not be known until a later 
date. In these circumstances, the date of the transaction for 
purposes of Sec.  706.24(b)(3) is the date on which the merchant 
determines the actual transaction amount. For example, assume that, 
when a member uses a credit card account to check into a hotel on 
July 1, the hotel obtains authorization for a $750 hold on the 
account to ensure there is adequate available credit to cover the 
anticipated cost of the stay. When the member checks out on July 4, 
the actual cost of the stay is $850 because of additional incidental 
costs, and the hotel charges this amount to the account. For 
purposes of Sec.  706.24(b)(3), the transaction occurred on July 4.
    3. Examples.
    i. Assume that a consumer credit card account is opened on 
January 1 of year one. On March 14 of year two, the account has a 
purchase balance of $2,000 at a non-variable annual percentage rate 
of 5%. On March 15, the federal credit union provides a notice 
pursuant to 12 CFR 226.9(c) informing a member that the rate for new 
purchases will increase to a non-variable rate of 8% on May 1. The 
notice further states that the 8% rate will apply for six months 
(until November 1) and states that thereafter the federal credit 
union will apply a variable rate that is currently 9% and is 
determined by adding a margin of 5 percentage points to a publicly-
available index that is not under the federal credit union's 
control. The seventh day after provision of the notice is March 22 
and, on that date, the member makes a $200 purchase. On March 24, 
the member makes a $1,000 purchase. On May 1, Sec.  706.24(b)(3) 
permits the federal credit union to begin accruing interest at 8% on 
the $1,000 purchase made on March 24. The federal credit union is 
not permitted to apply the 8% rate to the $2,200 purchase balance as 
of March 22. After six months (November 2), the federal credit union 
may begin accruing interest on any remaining portion of the $1,000 
purchase at the previously-disclosed variable rate determined using 
the 3-point margin.
    ii. Same facts as above except that on September 17 of year two 
(which is 45 days before expiration of the 8% non-variable rate), 
the federal credit union provides a notice pursuant to 12 CFR 
226.9(c) informing the member that, on November 2, a new variable 
rate will apply to new purchases and any remaining portion of the 
$1,000 balance (calculated by using the same index and a reduced 
margin of 3 percentage points). The notice further states that, on 
May 1 of year three, the margin will increase to the margin 
disclosed in the March 15 notice (6 percentage points). On May 1 of 
year three, Sec.  706.24(b)(3) permits the federal credit union to 
increase the margin used to determine the variable rate that applies 
to new purchases to 5 percentage points and to apply that rate to 
any remaining portion of the $1,000 purchase as well as to new 
purchases. The federal credit union is not permitted to apply this 
rate to any remaining portion of the $2,200 purchase balance as of 
March 22.
    4. Application of a lower rate. Nothing in Sec.  706.24 
prohibits a federal credit union from lowering the annual percentage 
rate that applies to an existing balance or to new transactions. 
However, once the lower rate is applied to an existing balance, the 
federal credit union cannot subsequently increase the rate on that 
balance unless it provided a member with advance notice of the 
increase pursuant to 12 CFR 226.9(b) or (c). This notice must state 
the period of time during

[[Page 20831]]

which the lower rate will apply and the rate that will apply after 
expiration of that period. Furthermore, a federal credit union that 
applies a decreased rate to transactions that occurred prior to 
provision of the notice--or, in the case of a 12 CFR 226.9(c) or (g) 
notice, transactions that occurred within seven days after provision 
of the notice--may not subsequently increase the rate that applies 
to those transactions to a rate that is higher than the rate that 
applied prior to the decrease. The following examples illustrate the 
application of the rule:
    i. Assume that a federal credit union discloses at account 
opening on January 1 of year one that a non-variable annual 
percentage rate of 7% will apply to purchases for one year, after 
which that rate will increase to a non-variable rate of 9%. The 
federal credit union also discloses that, to the extent consistent 
with Sec.  706.24 and other applicable law, a non-variable penalty 
rate of 15% may apply if the member's required minimum periodic 
payment is received after the payment due date, which is the tenth 
of the month. The required minimum periodic payments are applied to 
accrued interest and fees but do not reduce the purchase balance. On 
June 30 of year two, the account has a purchase balance of $1,000 at 
the 9% rate. On July 1, the federal credit union provides a notice 
pursuant to 12 CFR 226.9(c) informing the consumer that the rate for 
new purchases will decrease to a non-variable rate of 5% for six 
months (from July 1 through December 31 of year two) and that, 
beginning on January 1 of year three, the rate for purchases will 
increase to a non-variable rate of 10%. On July 8 of year two, the 
member makes a $200 purchase. On July 9, the member makes a $100 
purchase. On January 1 of year three, Sec.  706.24(b)(3) permits the 
federal credit union to begin accruing interest on the $100 purchase 
at 10%. The federal credit union may not apply the 10% rate to the 
$200 purchase because that transaction occurred within seven days 
after provision of the 12 CFR 226.9(c) notice. If the federal credit 
union applied the 5% rate to the $1,000 purchase balance and the 
$200 purchase, the federal credit union may not increase the rate 
that applies to those amounts to a rate that is higher than 9% on 
January 1 of year three.
    ii. Same facts as above except that the required minimum 
periodic payment due on September 10 of year two is not received 
until September 15 of year two. On September 15 of year two, the 
federal credit union provides a notice pursuant to 12 CFR 226.9(g) 
informing the member that the rate for new purchases will increase 
to the 15% penalty rate on October 31. On October 31, Sec.  
706.23(b)(3) permits the federal credit union to begin accruing 
interest at 15% on any purchase made on or after September 23. The 
federal credit union may not, however, apply the 15% rate to the 
$1,300 in purchases. Instead, the federal credit union must continue 
to apply the 5% rate to the $100 purchase until at least January 1 
of year three when Sec.  706.24(b)(3) permits the federal credit 
union to begin accruing interest on that purchase at 10%. Similarly, 
if the federal credit union applied the 5% rate to the $1,000 
purchase balance and the $200 purchase, the federal credit union may 
begin accruing interest on those amounts at 9% on January 1 of year 
three.
    iii. Assume that a federal credit union discloses at account 
opening on January 1 of year one that the rate that applies to 
purchases is a variable annual percentage rate that is currently 7% 
and will be adjusted quarterly by adding a margin of 3 percentage 
points to a publicly available index not under the federal credit 
union's control. The federal credit union also discloses that, to 
the extent consistent with Sec.  706.24 and other applicable law, a 
non-variable penalty rate of 15% may apply if the member's required 
minimum periodic payment is received after the payment due date, 
which is the first of the month. On July 30 of year two, the member 
uses the account for a $1,000 purchase in response to a promotional 
offer. Under the terms of this offer, interest on purchases made 
during the months of July through September will accrue at the 
variable rate for purchases but the member will not be obligated to 
pay that interest if all purchases made during that three-month 
period are paid in full by December 31 of year two. The payment due 
on September 1 of year two is not received until September 6. 
Section 706.24 does not permit the federal credit union to deny the 
member the opportunity to avoid interest charges on the $1,000 
purchase by paying that purchase in full on or before December 31 of 
year two. The federal credit union may, however, provide a notice 
pursuant to 12 CFR 226.9(g) on September 2 of year two informing the 
member that the promotional offer does not apply to purchases made 
on or after September 10 and that the rate for such purchases will 
increase to the 15% penalty rate on October 18. On December 31 of 
year two, the $1,000 purchase has been paid in full. Under these 
circumstances, the federal credit union may not charge any interest 
accrued on the $1,000 purchase.
    iv. Assume that a federal credit union discloses at account 
opening on January 1 of year one that the rate that applies to cash 
advances is a variable annual percentage rate that is currently 9% 
and will be adjusted quarterly by adding a margin of 3 percentage 
points to a publicly available index not under the federal credit 
union's control. On July 1 of year two, the federal credit union 
provides checks that access the account and, pursuant to 12 CFR 
226.9(b)(3)(A), discloses that a promotional rate of 5% will apply 
to credit extended by use of the checks until January 1 of year 
three, after which the cash advance rate determined using the 3-
point margin will apply. On July 15 of year two, the member uses one 
of the checks to pay for a $500 transaction. On January 1 of year 
three, Sec.  706.24(b)(3) permits the federal credit union to apply 
the cash advance rate determined using the 3-point margin to the 
$500 transaction.

24(b)(5) Workout and Temporary Hardship Arrangement Exception

    1. Scope of exception. Nothing in Sec.  706.24(b)(5) permits a 
federal credit union to alter the requirements of Sec.  706.24 
pursuant to a workout or temporary hardship arrangement between a 
member and the federal credit union. For example, a federal credit 
union cannot increase an annual percentage rate pursuant to a 
workout or temporary hardship arrangement unless otherwise permitted 
by Sec.  706.24. In addition, a federal credit union cannot require 
the member to make payments with respect to a protected balance that 
exceeds the payments permitted under Sec.  706.24(c).
    2. Variable rates. If the annual percentage rate that applied to 
a category of transactions prior to commencement of the workout or 
temporary hardship arrangement varied with an index consistent with 
Sec.  706.24(b)(2), the rate applied to that category of 
transactions following an increase pursuant to Sec.  706.24(b)(5) 
must be determined using the same formula (index and margin).
    3. Examples.
    i. Assume that, consistent with Sec.  706.24(b)(4), the margin 
used to determine a variable annual percentage rate that applies to 
a $5,000 balance is increased from 3 percentage points to 5 
percentage points. Assume also that the federal credit union and the 
member subsequently agree to a workout arrangement that reduces the 
margin back to 3 points on the condition that the member pay a 
specified amount by the payment due date each month. If the member 
does not pay the agreed-upon amount by the payment due date, the 
federal credit union may increase the margin for the variable rate 
that applies to the $5,000 balance up to 5 percentage points. 12 CFR 
226.9 does not require advance notice of this type of increase.
    ii. Assume that a member fails to make four consecutive minimum 
payments totaling $480 on a consumer credit card account with a 
balance of $6,000 and that, consistent with Sec.  706.24(b)(4), the 
annual percentage rate that applies to that balance is increased 
from a non-variable rate of 5% to a non-variable penalty rate of 
15%. Assume also that the federal credit union and the member 
subsequently agree to a temporary hardship arrangement that reduces 
all rates on the account to 0% on the condition that the member pay 
an amount by the payment due date each month that is sufficient to 
cure the $480 delinquency within six months. If the member pays the 
agreed-upon amount by the payment due date during the six-month 
period and cures the delinquency, the federal credit union may 
increase the rate that applies to any remaining portion of the 
$6,000 balance to 5% or any other rate up to the 15% penalty rate.

24(c) Treatment of Protected Balances

* * * * *

24(c)(1) Repayment

* * * * *

Paragraph 24(c)(1)(i)

* * * * *
    2. Amortization when applicable rate is variable. * * *
* * * * *

24(c)(2) Fees and Charges

    1. Fee or charge based solely on the protected balance. A 
federal credit union is prohibited from assessing a fee or charge 
based solely on balances to which Sec.  706.24(c) applies. For 
example, a federal credit union

[[Page 20832]]

is prohibited from assessing a monthly maintenance fee that would 
not be charged if the account did not have a protected balance. A 
federal credit union is not, however, prohibited from continuing to 
assess a periodic fee that was assessed before the account had a 
protected balance. Similarly, a federal credit union is not 
prohibited from assessing fees such as late payment fees or fees for 
exceeding the credit limit even if such fees are based in part on 
the protected balance or if the only balance on the account is a 
protected balance.

Sec.  706.25--Unfair Balance Computation Method

25(a) General Rule

* * * * *
    3. Charging accrued interest at expiration of certain 
promotional programs. When a federal credit union offers a 
promotional program under which a member will not be obligated to 
pay interest that accrues on a balance if that balance is paid in 
full prior to a specified date or expiration of a specified period 
of time, Sec.  706.25 does not prohibit the federal credit union 
from charging that accrued interest to the account if the balance is 
not paid in full prior to the specified date (consistent with 
applicable law and regulatory guidance).
* * * * *

    By order of the Board of Governors of the Federal Reserve 
System, April 24, 2009.

Jennifer J. Johnson,
Secretary of the Board.
    Dated: April 17, 2009.

    By the Office of Thrift Supervision.
John E. Bowman,
Acting Director.
    By the National Credit Union Administration Board, on April 24, 
2009.
Mary F. Rupp,
Secretary of the Board.
[FR Doc. E9-9861 Filed 5-4-09; 8:45 am]
BILLING CODE 6210-01-P, 6720-01-P, 7535-01-P