[Federal Register Volume 73, Number 97 (Monday, May 19, 2008)]
[Proposed Rules]
[Pages 28904-28964]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E8-10247]
[[Page 28903]]
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Part III
Federal Reserve System
12 CFR Part 227
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Department of the Treasury
Office of Thrift Supervision
12 CFR Part 535
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National Credit Union Administration
12 CFR Part 706
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Unfair or Deceptive Acts or Practices; Proposed Rule
Federal Register / Vol. 73, No. 97 / Monday, May 19, 2008 / Proposed
Rules
[[Page 28904]]
FEDERAL RESERVE SYSTEM
12 CFR Part 227
[Regulation AA; Docket No. R-1314]
DEPARTMENT OF THE TREASURY
Office of Thrift Supervision
12 CFR Part 535
[Docket ID. OTS-2008-0004]
RIN 1550-AC17
NATIONAL CREDIT UNION ADMINISTRATION
12 CFR Part 706
RIN 3133-AD47
Unfair or Deceptive Acts or Practices
AGENCIES: Board of Governors of the Federal Reserve System (Board);
Office of Thrift Supervision, Treasury (OTS); and National Credit Union
Administration (NCUA).
ACTION: Proposed rule; request for public comment.
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SUMMARY: The Board, OTS, and NCUA (collectively, the Agencies) are
proposing to exercise their authority under section 5(a) of the Federal
Trade Commission Act to prohibit unfair or deceptive acts or practices.
The proposed rule would prohibit institutions from engaging in certain
acts or practices in connection with consumer credit cards accounts and
overdraft services for deposit accounts. This proposal evolved from the
Board's June 2007 Notice of Proposed Rule under the Truth in Lending
Act and OTS's August 2007 Advance Notice of Proposed Rulemaking under
the Federal Trade Commission Act. The proposed rule relates to other
Board proposals under the Truth in Lending Act and the Truth in Savings
Act, which are published elsewhere in today's Federal Register.
DATES: Comments must be received on or before August 4, 2008.
ADDRESSES: Because paper mail in the Washington DC area and at the
Agencies is subject to delay, we encourage commenters to submit
comments by e-mail, if possible. We also encourage commenters to use
the title ``Unfair or Deceptive Acts or Practices'' to facilitate our
organization and distribution of the comments. Comments submitted to
one or more of the Agencies will be made available to all of the
Agencies. Interested parties are invited to submit comments as follows:
Board: You may submit comments, identified by Docket No. R-1314, by
any of the following methods:
Agency Web site: http://www.federalreserve.gov. Follow the
instructions for submitting comments at http://www.federalreserve.gov/generalinfo/foia/ProposedRegs.cfm.
Federal eRulemaking Portal: http://www.regulations.gov.
Follow the instructions for submitting comments.
E-mail: [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-2008-0004, by any
of the following methods:
Federal eRulemaking Portal- ``Regulations.gov'': Go to
http://www.regulations.gov, under the ``more Search Options'' tab click
next to the ``Advanced Docket Search'' option where indicated, select
``Office of Thrift Supervision'' from the agency drop-down menu, then
click ``Submit.'' In the ``Docket ID'' column, select ``OTS-2008-0004''
to submit or view public comments and to view supporting and related
materials for this proposed rulemaking. The ``How to Use This Site''
link on the Regulations.gov home page provides information on using
Regulations.gov, including instructions for submitting or viewing
public comments, viewing other supporting and related materials, and
viewing the docket after the close of the comment period.
Mail: Regulation Comments, Chief Counsel's Office, Office
of Thrift Supervision, 1700 G Street, NW., Washington, DC 20552,
Attention: OTS-2008-0004.
Facsimile: (202) 906-6518.
Hand Delivery/Courier: Guard's Desk, East Lobby Entrance,
1700 G Street, NW., from 9 a.m. to 4 p.m. on business days, Attention:
Regulation Comments, Chief Counsel's Office, Attention: OTS-2008-0004.
Instructions: All submissions received must include the
agency name and docket number for this rulemaking. All comments
received will be entered into the docket and posted on Regulations.gov
without change, including any personal information provided. Comments,
including attachments and other supporting materials received are part
of the public record and subject to public disclosure. Do not enclose
any information in your comment or supporting materials that you
consider confidential or inappropriate for public disclosure.
Viewing Comments Electronically: Go to http://www.regulations.gov, select ``Office of Thrift Supervision'' from the
agency drop-down menu, then click ``Submit.'' Select Docket ID ``OTS-
2008-0004'' to view public comments for this notice of proposed
rulemaking.
Viewing Comments On-Site: You may inspect comments at the
Public Reading Room, 1700 G Street, NW., by appointment. To make an
appointment for access, call (202) 906-5922, send an e-mail to
public.info@ots.treas.gov">public.info@ots.treas.gov, or send a facsimile transmission to (202)
906-6518. (Prior notice identifying the materials you will be
requesting will assist us in serving you.) We schedule appointments on
business days between 10 a.m. and 4 p.m. In most cases, appointments
will be available the next business day following the date we receive a
request.
NCUA: You may submit comments, identified by number RIN 3133-AD47,
by any of the following methods:
Federal eRulemaking Portal: http://www.regulations.gov.
Follow the instructions for submitting comments.
NCUA Web site: http://www.ncua.gov/news/proposed_regs/proposed_regs.html. Follow the instructions for submitting comments.
E-mail: Address to [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.
FOR FURTHER INFORMATION CONTACT:
Board: Benjamin K. Olson, Attorney, or Ky Tran-Trong, Counsel,
Division of Consumer and Community Affairs, at (202) 452-2412 or (202)
452-3667, Board of Governors of the Federal Reserve System, 20th and C
Streets,
[[Page 28905]]
NW., Washington, DC 20551. For users of Telecommunications Device for
the Deaf (TDD) only, contact (202) 263-4869.
OTS: April Breslaw, Director, Consumer Regulations, (202) 906-6989;
Suzanne McQueen, Consumer Regulations Analyst, Compliance and Consumer
Protection Division, (202) 906-6459; Glenn Gimble, Senior Project
Manager, Compliance and Consumer Protection Division, (202) 906-7158;
or Richard Bennett, Senior Compliance Counsel, Regulations and
Legislation Division, (202) 906-7409, at Office of Thrift Supervision,
1700 G Street, NW., Washington, DC 20552.
NCUA: Matthew J. Biliouris, Program Officer, Office of Examination
and Insurance, (703) 518-6360; or Moisette I. Green or Ross P. Kendall,
Staff Attorneys, Office of General Counsel, (703) 518-6540, National
Credit Union Administration, 1775 Duke Street, Alexandria, VA 22314-
3428.
SUPPLEMENTARY INFORMATION: The Federal Reserve Board (Board), the
Office of Thrift Supervision (OTS), and the National Credit Union
Administration (NCUA) (collectively, the Agencies) are proposing
several new provisions intended to protect consumers against unfair or
deceptive acts or practices with respect to consumer credit card
accounts and overdraft services for deposit accounts. These proposals
are promulgated pursuant to section 18(f)(1) of the Federal Trade
Commission Act (FTC Act), which makes the Agencies responsible for
prescribing regulations that prevent unfair or deceptive acts or
practices in or affecting commerce within the meaning of section 5(a)
of the FTC Act. See 15 U.S.C. 57a(f)(1), 45(a).
I. Background
A. The Board's June 2007 Regulation Z Proposal on Open-End (Non-Home
Secured) Credit
On June 14, 2007, the Board requested public comment on proposed
amendments to the open-end credit (not home-secured) provisions of
Regulation Z, which implements the Truth in Lending Act (TILA), as well
as proposed amendments to the corresponding staff commentary to
Regulation Z. 72 FR 32948 (June 2007 Proposal). The purpose of TILA is
to promote the informed use of consumer credit by providing disclosures
about its costs and terms. See 15 U.S.C. 1601 et seq. TILA's
disclosures differ depending on whether the consumer credit is an open-
end (revolving) plan or a closed-end (installment) loan. The goal of
the proposed amendments was to improve the effectiveness of the
disclosures that creditors provide to consumers at application and
throughout the life of an open-end (not home-secured) account.
As part of this effort, the Board retained a research and
consulting firm (Macro International) to assist the Board in conducting
extensive consumer testing in order to develop improved disclosures
that consumers would be more likely to pay attention to, understand,
and use in their decisions, while at the same time not creating undue
burdens for creditors. While the testing assisted the Board in
developing improved disclosures, the testing also identified the
limitations of disclosure, in certain circumstances, as a means of
enabling consumers to make decisions effectively. See 72 FR at 32948-
52.
In response to the June 2007 Proposal, the Board received more than
2,500 comments, including approximately 2,100 comments from individual
consumers. Comments from consumers, consumer groups, a member of
Congress, other government agencies, and some creditors were generally
supportive of the proposed revisions to Regulation Z. A number of
comments, however, urged the Board to take additional action with
respect to a number of credit card practices, including late fees and
other penalties resulting from perceived reductions in the amount of
time consumers are given to make timely payments, allocation of
payments to balances with the lowest annual percentage rate,
application of increased annual percentage rates to pre-existing
balances, and the so-called two-cycle method of computing interest.
B. The OTS's August 2007 FTC Act Advance Notice of Proposed Rulemaking
On August 6, 2007, OTS issued an ANPR requesting comment on its
rules under section 5 of the FTC Act. See 72 FR 43570 (OTS ANPR). The
purpose of OTS's ANPR was to determine whether OTS should expand on its
current prohibitions against unfair and deceptive acts or practices in
its Credit Practices Rule (12 CFR part 535).
OTS's ANPR discussed a very broad array of issues including:
The legal background on OTS's authority under the FTC Act
and the Home Owners' Loan Act (HOLA);
OTS's existing Credit Practices Rule;
Possible principles OTS could use to define unfair and
deceptive acts or practices, including looking to standards the FTC and
states follow;
Practices that OTS, individually or on an interagency
basis, has addressed through guidance;
Practices that other federal agencies have addressed
through rulemaking;
Practices that states have addressed statutorily;
Acts or practices OTS might target involving products such
as credit cards, residential mortgages, gift cards, and deposit
accounts; and
OTS's existing Advertising Rule (12 CFR 563.27).
OTS recognized in its ANPR that the financial services industry and
consumers have benefited from consistency in rules and guidance as the
federal banking agencies and the NCUA have adopted uniform or very
similar rules in many areas. 72 FR at 43571. OTS emphasized in its ANPR
that it would be mindful of the goal of consistent interagency
standards as it considered issues relating to unfair and deceptive acts
or practices. Id.
OTS received 29 comment letters on its ANPR, including thirteen
from financial institutions and their trade associations, three from
consumer advocacy organizations, two from members of Congress, one from
the FTC, and ten from others. Generally speaking, the commenters agreed
on only one point . . . that OTS should adopt the same principles-based
standards for unfairness and deception used by the FTC, the other
federal banking agencies, and the NCUA.
Financial industry commenters opposed OTS taking any further action
beyond issuing guidance along those lines. They argued that OTS must
not create an unlevel playing field for OTS-regulated institutions and
that uniformity among the federal banking agencies and the NCUA is
essential. They questioned the need for any new OTS rules. They
challenged the list of practices OTS had indicated it could consider
targeting, arguing that the practices listed were neither unfair nor
deceptive under the FTC standards. They explained the reasons they use
the particular practices listed and how some benefit consumers. Some
commenters urged OTS to await the Board's rulemaking under the Home
Ownership and Equity Protection Act (HOEPA) on unfair or deceptive acts
or practices and then follow the Board's lead.\1\ They also opposed
using state laws as a model or converting guidance to rules. Further,
they opposed OTS expanding its advertising rules.
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\1\ The Board issued its HOEPA proposed in January 2008. See 73
FR 1672 (Jan. 9, 2008).
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In contrast, the consumer commenters urged OTS to move ahead with a
rule that would combine the FTC's principles-based standards with
prohibitions on specific practices. They
[[Page 28906]]
urged OTS to ban numerous practices, including but not limited to those
the ANPR indicated OTS might target. One emphasized that whatever OTS
does must not preempt state laws on unfair and deceptive acts or
practices.
A joint comment from House Financial Services Committee Chairman
Barney Frank and Subcommittee on Financial Institutions and Consumer
Credit Chairman Carolyn Maloney urged OTS to proceed promptly to adopt
comprehensive regulations on unfair and deceptive acts or practices. A
comment from Senator Carl Levin urged OTS to move ahead with
rulemaking; he focused his comment on unfair or deceptive credit card
practices.
A comment from the FTC summarized the FTC's interest and experience
with respect to financial services, described how the FTC has used its
unfairness and deception authority in rulemaking and law enforcement
actions, and recommended that OTS consider the FTC's experience in
determining whether to impose rules prohibiting or restricting
particular acts and practices.
OTS received comments on several practices relevant to the specific
credit card practices addressed in today's proposal:
OTS received comments on the practice of ``universal
default'' or ``adverse action pricing,'' which the OTS ANPR described
as imposing an interest rate increase that is triggered by adverse
information unrelated to the credit card account. The OTS ANPR
contrasted this practice to long-established risk based pricing.
Consumer groups supported prohibiting these practices as abusive and
unfair to consumers. They cited inaccuracies in the credit reporting
system and disparate racial impact as reasons to prohibit using credit
reports or credit scores to impose penalty rates. On the other hand,
several industry commenters defended these practices. They commented
that credit cards should be priced to reflect their current risk. They
argued that otherwise, credit card issuers would build a risk premium
into all rates to the detriment of other customers.
OTS received comments on the practice of applying payments
first to balances subject to a lower rate of interest before applying
payments to balances subject to higher rates of interest, as well as
the practice of applying payments first to fees, penalties, or other
charges before applying them to principal and interest. Consumer groups
supported prohibiting these practices as abusive and unfair to
consumers. On the other hand, several industry commenters defended
these practices. They commented that if these practices were prohibited
fewer products would be available to consumers such as zero or low-cost
balance transfers. Some commented that applying payments in this manner
was fundamental and would impose significant implementation costs to
change.
OTS received comments on the practice of imposing an over-
the-credit-limit fee that is triggered by the imposition of a penalty
fee (such as a late fee) and the practice of charging penalty fees in
consecutive months based on previous late or over-the-credit-limit
transactions, not on new actions. Consumer groups supported prohibiting
these practices and prohibiting any over-the-credit-limit fee where the
creditor approved the transaction or padded the credit limit, as
abusive and unfair to consumers. On the other hand, several industry
commenters defended these practices. They commented that the practices
deter future defaults and are a way to charge a little more to a
customer who has demonstrated higher risk without permanently raising
the customer's borrowing costs. They argued that otherwise, these costs
would be passed on to borrowers who do not go over their credit limit
or pay late.
Consumer groups also commented on additional credit card practices
of concern that are relevant to the practices addressed in today's
proposal. They urged that payment cut-off times be prohibited and that
payments be treated as timely if they are postmarked as of the due
date. They also urged that subprime credit cards be prohibited if less
than $300 of available credit is left after initial fees are subtracted
or initial fees total more than 10% of the overall credit line.
C. Related Action by the Agencies
In addition to receiving information via comments, the Agencies
have conducted outreach regarding credit card practices, including
meetings and discussions with consumer group representatives, industry
representatives, other federal and state banking agencies, and the FTC.
On April 8, 2008, the Board hosted a forum on credit cards in which
card issuers and payment network operators, consumer advocates,
counseling agencies, and other regulatory agencies met to discuss
relevant industry trends and identify areas that may warrant action or
further study. Among the topics discussed were the Board's previously
announced plan to issue a proposal under the FTC Act and the Board's
June 2007 Proposal. In addition, the Agencies have reviewed consumer
complaints received by each of the federal banking agencies and several
studies of the credit card industry.\2\ The Agencies' understanding of
credit card practices and consumer behavior has also been informed by
the results of consumer testing conducted on behalf of the Board in
connection with its June 2007 Proposal under Regulation Z. Based on
this and other information discussed below, the Agencies have developed
proposed rules under the FTC Act prohibiting specific unfair acts or
practices regarding consumer credit card accounts.
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\2\ See, e.g., Am. Bankers Assoc., Likely Impact of Proposed
Credit Card Legislation: Survey Results of Credit Card Issuers
(Spring 2008); Darryl E. Getter, Cong. Research Srvc., The Credit
Card Market: Recent Trends, Funding Cost Issues, and Repricing
Practices (Feb. 2008); Tim Westrich & Christian E. Weller, Ctr. for
Am. Progress, House of Cards: Consumers Turn to Credit Cards Amid
the Mortgage Crisis, Delaying Inevitable Defaults (Feb. 2008)
(available at http://www.americanprogress.org/issues/2008/02/pdf/house_of_cards.pdf); Jose A. Garcia, Demos, Borrowing to Make Ends
Meet: The Rapid Growth of Credit Card Debt in America (Nov. 2007)
(available at http://www.demos.org/pubs/borrowing.pdf ); Nat'l
Consumer Law Ctr., Fee-Harvesters: Low-Credit, High-Cost Cards Bleed
Consumers (Nov. 2007) (available at http://www.consumerlaw.org/issues/credit_cards/content/FEE-HarvesterFinal.pdf); Jonathan M.
Orszag & Susan H. Manning, Am. Bankers Assoc., An Economic
Assessment of Regulating Credit Card Fees and Interest Rates (Oct.
2007) (available at http://www.aba.com/aba/documents/press/regulating_creditcard_fees_interest_rates92507.pdf); Cindy
Zeldin & Mark Rukavia, Demos, Borrowing to Stay Healthy: How Credit
Card Debt Is Related to Medical Expenses (Jan. 2007) (available at
http://www.demos.org/pubs/healthy_web.pdf); U.S. Gov't
Accountability Office, Credit Cards: Increased Complexity in Rates
and Fees Heightens Need for More Effective Disclosures to Consumers
(Sept. 2006) (``GAO Credit Card Report'') (available at http://www.gao.gov/new.items/d06929.pdf ); Board of Governors of the
Federal Reserve System, Report to Congress on Practices of the
Consumer Credit Industry in Soliciting and Extending Credit and
their Effects on Consumer Debt and Insolvency (June 2006) (available
at http://www.federalreserve.gov/boarddocs/rptcongress/bankruptcy/bankruptcybillstudy200606.pdf ); Demos & Ctr. for Responsible
Lending, The Plastic Safety Net: The Reality Behind Debt in America
(Oct. 2005) (available at http://www.demos.org/pubs/PSN_low.pdf).
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Finally, the Agencies have also gathered information from a number
of recent Congressional hearings on consumer protection issues
regarding credit cards.\3\ In these hearings, members of Congress heard
testimony from individual consumers,
[[Page 28907]]
representatives of consumer groups, representatives of financial and
credit card industry groups, and others. Consumer and community group
representatives generally testified that certain credit card practices
(including those discussed above) unfairly increase the cost of credit
after the consumer has committed to a particular transaction. These
witnesses further testified that these practices should be prohibited
because they lead consumers to underestimate the costs of using credit
cards and that disclosure of these practices under Regulation Z is
ineffective. Financial services and credit card industry
representatives agreed that consumers need better disclosures of credit
card terms but testified that substantive restrictions on specific
terms would lead to higher interest rates for all borrowers as well as
reduced access to credit for some. Members of Congress have proposed
several bills addressing consumer protection issues regarding credit
cards.\4\
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\3\ See, e.g., The Credit Cardholders' Bill of Rights: Providing
New Protections for Consumers: Hearing before the H. Subcomm. on
Fin. Instits. & Consumer Credit, 110th Cong. (2007); Credit Card
Practices: Unfair Interest Rate Increases: Hearing before the S.
Permanent Subcomm. on Investigations, 110th Cong. (2007); Credit
Card Practices: Current Consumer and Regulatory Issues: Hearing
before H. Comm. on Fin. Servs., 110th Cong. (2007); Credit Card
Practices: Fees, Interest Rates, and Grace Periods: Hearing before
the S. Permanent Subcomm. on Investigations, 110th Cong. (2007).
\4\ See, e.g., The Credit Card Reform Act of 2008, S. 2753,
110th Cong. (Mar. 12, 2008); The Credit Cardholders' Bill of Rights
Act of 2008, H.R. 5244, 110th Cong. (Feb. 7, 2008); The Stop Unfair
Practices in Credit Cards Act of 2007, H.R. 5280, 110th Cong. (Feb.
7, 2008); The Stop Unfair Practices in Credit Cards Act of 2007, S.
1395, 110th Cong. (May 15, 2007); The Universal Default Prohibition
Act of 2007, H.R. 2146, 110th Cong. (May 3, 2007); The Credit Card
Accountability Responsibility and Disclosure Act of 2007, H.R. 1461,
110th Cong. (Mar. 9, 2007).
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D. Agency Actions on Overdraft Services
Overdraft services are sometimes offered to transaction account
customers as an alternative to traditional ways of covering overdrafts
(e.g., overdraft lines of credit or linked accounts). Coverage is
generally ``automatically'' provided to consumers that meet a
depository institution's criteria, and the service may extend to check
as well as other transactions, such as automated teller machine (ATM)
withdrawals, debit card transactions and automated clearinghouse (ACH)
transactions. Most institutions state that payment of an overdraft is
at their discretion. If an overdraft is paid, the consumer will be
charged a flat fee for each item. A daily fee also may apply for each
day the account remains overdrawn.
In response to the increased availability and customer use of these
overdraft protection services, the FDIC, Board, OCC, OTS, and NCUA
published guidance on overdraft protection programs in February
2005.\5\ The Joint Guidance addresses three primary areas--safety and
soundness considerations, legal risks, and best practices--while the
OTS guidance focuses on safety and soundness considerations and best
practices. The best practices focus on the marketing and communications
that accompany the offering of overdraft services, as well as the
disclosure and operation of program features, including the provision
of a consumer election or opt-out of the overdraft service. The
Agencies have also published a consumer brochure on overdraft
services.\6\
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\5\ See Interagency Guidance on Overdraft Protection Programs
(Joint Guidance), 70 FR 9127 (Feb. 24, 2005) and OTS Guidance on
Overdraft Protection Programs, 70 FR 8428 (Feb. 18, 2005).
\6\ The brochure, entitled ``Protecting Yourself from Overdraft
and Bounced-Check Fees,'' can be found at: http://www.federalreserve.gov/pubs/bounce/default.htm.
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In May 2005, the Board separately issued revisions to Regulation DD
and the staff commentary pursuant to its authority under the Truth in
Savings Act (TISA) to address concerns about the uniformity and
adequacy of institutions' disclosure of overdraft fees generally, and
to address concerns about advertised overdraft services in
particular.\7\ The goal of the final rule was to improve the uniformity
and adequacy of disclosures provided to consumers about overdraft and
returned-item fees to assist consumers in better understanding the
costs associated with the payment of overdrafts. In addition, the final
rule addressed some of the Board's concerns about institutions'
marketing practices with respect to overdraft services.
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\7\ 70 FR 29582 (May 24, 2005). A substantively similar rule
applying to credit unions was issued separately by the NCUA. 71 FR
24568 (Apr. 26, 2006). The NCUA issued an interim final rule in
2005. 70 FR 72895 (Dec. 8, 2005).
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In addition to regulatory actions, there has also been significant
Congressional interest in overdraft services, with legislation
introduced seeking to curb some of the perceived abusive practices
associated with these services. In June 2007, a hearing was held to
discuss the proposed legislation with testimony from consumer advocates
and industry representatives.\8\
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\8\ H.R. 946, ``The Consumer Overdraft Protection Fair Practices
Act.'' See also Overdraft Protection: Fair Practices for Consumers:
Hearing Before the House Subcomm. on Financial Institutions and
Consumer Credit, 110th Cong. (2007).
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II. Statutory Authority Under the Federal Trade Commission Act To
Address Unfair or Deceptive Acts or Practices
A. Rulemaking and Enforcement Authority Under the FTC Act
Section 18(f)(1) of the FTC Act provides that the Board (with
respect to banks), OTS (with respect to savings associations), and the
NCUA (with respect to federal credit unions) are responsible for
prescribing ``regulations defining with specificity * * * unfair or
deceptive acts or practices, and containing requirements prescribed for
the purpose of preventing such acts or practices.'' 15 U.S.C.
57a(f)(1).\9\
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\9\ The FTC Act refers to OTS's predecessor agency, the Federal
Home Loan Bank Board (FHLBB), rather than to OTS. However, in
section 3(e) of HOLA, Congress transferred this rulemaking power of
the FHLBB, among others, to the Director of OTS. 12 U.S.C. 1462a(e).
The FTC Act refers to ``savings and loan institutions'' in some
provisions and ``savings associations'' in other provisions.
Although ``savings associations'' is the term currently used in the
HOLA, see, e.g., 12 U.S.C. 1462(4), the terms ``savings and loan
institutions'' and ``savings associations'' can be and are used
interchangeably. OTS has determined that the outdated language does
not affect OTS's rulemaking authority under the FTC Act.
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The FTC Act allocates responsibility for enforcing compliance with
regulations prescribed under section 18 with respect to banks, savings
associations, and federal credit unions among the Board, OTS, and NCUA,
as well as the Office of the Comptroller of the Currency (OCC) and the
Federal Deposit Insurance Corporation (FDIC). See 15 U.S.C. 57a(f)(2)-
(4). The FTC Act grants the FTC rulemaking and enforcement authority
with respect to other persons and entities, subject to certain
exceptions and limitations. See 15 U.S.C. 45(a)(2); 15 U.S.C. 57a(a).
The FTC Act, however, sets forth specific rulemaking procedures for the
FTC that do not apply to the Agencies. See 15 U.S.C. 57a(b)-(e), (g)-
(j); 15 U.S.C. 57a-3.
B. Standards for Unfairness Under the FTC Act
Congress has codified standards developed by the Federal Trade
Commission (FTC) for the FTC to use in determining whether acts or
practices are unfair under section 5(a) of the FTC Act.\10\
Specifically, the FTC Act provides that the FTC has no authority to
declare an act or practice is unfair unless: (1) It causes or is likely
to cause substantial injury to consumers; (2) the injury is not
reasonably avoidable by consumers themselves; and (3) the injury is not
outweighed by countervailing benefits to consumers or to competition.
In addition, the FTC may consider established public policy, but public
policy may not serve as the primary basis for its determination that an
act or practice is unfair. See 15 U.S.C. 45(n).
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\10\ See 15 U.S.C. 45(n); FTC Policy Statement on Unfairness,
Letter from the FTC to the Hon. Wendell H. Ford and the Hon. John C.
Danforth, S. Comm. on Commerce, Science & Transp. (Dec. 17, 1980)
(FTC Policy Statement on Unfairness) (available at http://www.ftc.gov/bcp/policystmt/ad-unfair.htm).
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[[Page 28908]]
In proposing rules under section 18(f)(1) of the FTC Act, the
Agencies have applied the statutory elements consistent with the
standards articulated by the FTC. The Board, FDIC, and OCC have issued
guidance generally adopting these standards for purposes of enforcing
the FTC Act's prohibition on unfair or deceptive acts or practices.\11\
Although the OTS has not taken similar action in generally applicable
guidance,\12\ the commenters on OTS's ANPR who addressed this issue
overwhelmingly urged OTS to be consistent with the FTC's standards for
unfairness.
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\11\ See Board and FDIC, Unfair or Deceptive Acts or Practices
by State-Chartered Banks (Mar. 11, 2004) (available at http://www.federalreserve.gov/boarddocs/press/bcreg/2004/20040311/attachment.pdf ); OCC Advisory Letter 2002-3, Guidance on Unfair or
Deceptive Acts or Practices (Mar. 22, 2002) (available at http://www.occ.treas.gov/ftp/advisory/2002-3.doc).
\12\ See OTS ANPR, 72 FR at 43573.
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According to the FTC, an unfair act or practice will almost always
represent a market failure or imperfection that prevents the forces of
supply and demand from maximizing benefits and minimizing costs.\13\
Not all market failures or imperfections constitute unfair acts or
practices, however. Instead, the central focus of the FTC's unfairness
analysis is whether the act or practice causes substantial consumer
injury.\14\
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\13\ Statement of Basis and Purpose and Regulatory Analysis for
Federal Trade Commission Credit Practices Rule (Statement for FTC
Credit Practices Rule), 49 FR 7740, 7744 (Mar. 1, 1984).
\14\ Id. at 7743.
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First, the FTC has stated that a substantial consumer injury
generally consists of monetary, economic, or other tangible harm.\15\
Trivial or speculative harms do not constitute substantial consumer
injury.\16\ Consumer injury may be substantial, however, if it imposes
a small harm on a large number of consumers or if it raises a
significant risk of concrete harm.\17\
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\15\ See id.; FTC Policy Statement on Unfairness at 3.
\16\ See Statement for FTC Credit Practices Rule, 49 FR at 7743
(``[E]xcept in aggravated cases where tangible injury can be clearly
demonstrated, subjective types of harm--embarrassment, emotional
distress, etc.--will not be enough to warrant a finding of
unfairness.''); FTC Unfairness Policy Statement at 3 (``Emotional
impact and other more subjective types of harm * * * will not
ordinarily make a practice unfair.'').
\17\ See Statement for FTC Credit Practices Rules, 49 FR at
7743; FTC Policy Statement on Unfairness at 3 & n.12.
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Second, the FTC has stated that an injury is not reasonably
avoidable when consumers are prevented from effectively making their
own decisions about whether to incur that injury.\18\ The marketplace
is normally expected to be self-correcting because consumers are relied
upon to survey the available alternatives, choose those that are most
desirable, and avoid those that are inadequate or unsatisfactory.\19\
Accordingly, the test is not whether the consumer could have made a
wiser decision but whether an act or practice unreasonably creates or
takes advantage of an obstacle to the consumer's ability to make that
decision freely.\20\
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\18\ See FTC Policy Statement on Unfairness at 3.
\19\ See Statement for FTC Credit Practices Rule, 49 FR at 7744
(``Normally, we can rely on consumer choice to govern the
market.''); FTC Policy Statement on Unfairness at 3.
\20\ See Statement for FTC Credit Practices Rule, 49 FR at 7744
(``In considering whether an act or practice is unfair, we look to
whether free market decisions are unjustifiably hindered.''); FTC
Policy Statement on Unfairness at 3 & n.19 (``In some senses any
injury can be avoided--for example, by hiring independent experts to
test all products in advance, or by private legal actions for
damages--but these courses may be too expensive to be practicable
for individual consumers to pursue.'').
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Third, the FTC has stated that the act or practice causing the
injury must not also produce benefits to consumers or competition that
outweigh the injury.\21\ Generally, it is important to consider both
the costs of imposing a remedy and any benefits that consumers enjoy as
a result of the practice.\22\ The FTC has stated that both consumers
and competition benefit from prohibitions on unfair or deceptive acts
or practices because prices may better reflect actual transaction costs
and merchants who do not rely on unfair or deceptive acts or practices
are no longer required to compete with those who do.\23\
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\21\ See Statement for FTC Credit Practices Rule, 49 FR at 7744;
FTC Policy Statement on Unfairness at 3; see also S. Rep. 103-130,
at 13 (1994), reprinted in 1994 U.S.C.C.A.N. 1776, 1788 (``In
determining whether a substantial consumer injury is outweighed by
the countervailing benefits of a practice, the Committee does not
intend that the FTC quantify the detrimental and beneficial effects
of the practice in every case. In many instances, such a numerical
benefit-cost analysis would be unnecessary; in other cases, it may
be impossible. This section would require, however, that the FTC
carefully evaluate the benefits and costs of each exercise of its
unfairness authority, gathering and considering reasonably available
evidence.'').
\22\ See FTC Public Comment on OTS-2007-0015, at 6 (Dec. 12,
2007) (available at http://www.ots.treas.gov/docs/9/963034.pdf ).
\23\ See FTC Public Comment on OTS-2007-0015, at 8 (citing
Preservation of Consumers' Claims and Defenses, Statement of Basis
and Purpose, 40 FR 53506, 53523 (Nov. 18, 1975) (codified at 16 CFR
433)); see also FTC Policy Statement on Deception, Letter from the
FTC to the Hon. John H. Dingell, H. Comm. on Energy & Commerce (Oct.
14, 1983) (FTC Policy Statement on Deception) (available at http://www.ftc.gov/bcp/policystmt/ad-decept.htm) (``Deceptive practices
injure both competitors and consumers because consumers who
preferred the competitor's product are wrongly diverted.'').
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C. Standards for Deception Under the FTC Act
The FTC has also adopted standards for determining whether an act
or practice is deceptive under the FTC Act.\24\ Under the FTC's
standards, an act or practice is deceptive where: (1) There is a
representation or omission of information that is likely to mislead
consumers acting reasonably under the circumstances; and (2) that
information is material to consumers.\25\ Although these standards have
not been codified, they have been applied by numerous courts.\26\
Accordingly, in proposing rules under section 18(f)(1) of the FTC Act,
the Agencies have applied the standards articulated by the FTC for
determining whether an act or practice is deceptive.\27\
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\24\ FTC Policy Statement on Deception.
\25\ Id. at 1-2. The FTC views deception as a subset of
unfairness but does not apply the full unfairness analysis because
deception is very unlikely to benefit consumers or competition and
consumers cannot reasonably avoid being harmed by deception. Id.
\26\ See, e.g., FTC v. Tashman, 318 F.3d 1273, 1277 (11th Cir.
2003); FTC v. Gill, 265 F.3d 944, 950 (9th Cir. 2001); FTC v. QT,
Inc., 448 F. Supp. 2d 908, 957 (N.D. Ill. 2006); FTC v. Think
Achievement, 144 F. Supp. 2d 993, 1009 (N.D. Ind. 2000); FTC v.
Minuteman Press, 53 F. Supp. 2d 248, 258 (E.D.N.Y. 1998).
\27\ As noted above, the Board, FDIC, and OCC have issued
guidance generally adopting these standards for purposes of
enforcing the FTC Act's prohibition on unfair or deceptive acts or
practices. As with the unfairness standard, comments on OTS's ANPR
addressing this issue overwhelmingly urged the OTS to adopt the same
deception standard as the FTC.
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A representation or omission is deceptive if the overall net
impression created is likely to mislead consumers.\28\ The FTC conducts
its own analysis to determine whether a representation or omission is
likely to mislead consumers acting reasonably under the
circumstances.\29\ When evaluating the reasonableness of an
interpretation, the FTC considers the sophistication and understanding
of consumers in the group to whom the act or practice is targeted.\30\
If a representation is susceptible to more than one reasonable
interpretation, and if one such interpretation is misleading, then the
representation is deceptive even if other, non-deceptive
interpretations are possible.\31\
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\28\ See, e.g., FTC v. Cyberspace.com, 453 F.3d 1196, 1200 (9th
Cir. 2006); Gill, 265 F.3d at 956; Removatron Int'l Corp. v. FTC,
884 F.2d 1489, 1497 (1st Cir. 1989).
\29\ See FTC v. Kraft, Inc., 970 F.2d 311, 319 (7th Cir. 1992);
QT, Inc., 448 F. Supp. 2d at 958.
\30\ FTC Policy Statement on Deception at 3.
\31\ Id.
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A representation or omission is material if it is likely to affect
the consumer's conduct or decision regarding a product or service.\32\
Certain types of claims are presumed to be material, including express
claims and
[[Page 28909]]
claims regarding the cost of a product or service.\33\
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\32\ Id. at 2, 6-7.
\33\ See FTC Public Comment on OTS-2007-0015, at 21; FTC Policy
Statement on Deception at 6; see also FTC v. Pantron I Corp., 33
F.3d 1088, 1095-96 (9th Cir. 1994); In re Peacock Buick, 86 F.T.C.
1532, 1562 (1975), aff'd 553 F.2d 97 (4th Cir. 1977).
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D. Choice of Remedy
The Agencies have wide latitude to determine what remedy is
necessary to prevent an unfair or deceptive act or practice so long as
that remedy has a reasonable relation to the act or practice.\34\ Thus,
the Agencies are not required to adopt the most restrictive means of
preventing the act or practice, nor are they required to adopt the
least restrictive means.
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\34\ See Am. Fin. Servs. Assoc. v. FTC, 767 F.2d 957, 988-89 (DC
Cir. 1985) (citing Jacob Siegel Co. v. FTC, 327 U.S. 608, 612-13
(1946)).
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III. Summary of Proposed Revisions
In order to best ensure that all entities that offer the products
addressed in the proposed rule are treated in a like manner, the Board,
OTS, and NCUA have joined together to issue today's proposal. This
interagency approach is consistent with section 303 of the Riegle
Community Development and Regulatory Improvement Act of 1994. See 12
U.S.C. 4803. Section 303(a)(3), 12 U.S.C. 4803(a)(3), directs the
federal banking agencies to work jointly to make uniform all
regulations and guidelines implementing common statutory or supervisory
policies. In today's proposal, two federal banking agencies--the Board
and OTS--are primarily implementing the same statutory provision,
section 18(f) of the FTC Act, as is the NCUA. Accordingly, the Agencies
have endeavored to propose rules that are as uniform as possible. The
Agencies also consulted with the two other federal banking agencies,
OCC and FDIC, as well as with the FTC.
The effort to achieve an even playing field is also furthered by
the Agencies' focus on unfair and deceptive acts or practices involving
credit cards and overdraft services, which are generally provided only
by depository institutions such as banks, savings associations, and
credit unions. The Agencies recognize that state-chartered credit
unions and any entities providing consumer credit card accounts
independent of a depository institution fall within the FTC's
jurisdiction and therefore would not be subject to these rules. The
Agencies believe, however, that FTC-regulated entities represent a
small percentage of the market for consumer credit card accounts and
overdraft services. For OTS, addressing certain deceptive credit card
practices in today's proposal, rather than through an interpretation or
expansion of its Advertising Rule, also fosters consistency because the
other Agencies do not have comparable advertising regulations.
Credit Practices Rule
The Agencies are proposing to make non-substantive, organizational
changes to the Credit Practices Rule. Specifically, in order to avoid
repetition, the Agencies would move the statement of authority,
purpose, and scope out of the Credit Practices Rule and revise it to
apply not only to the Credit Practices Rule but also to the proposed
rules regarding consumer credit card accounts and overdraft services.
OTS and NCUA have made additional, non-substantive changes to the
organization of their versions of the Credit Practices Rule.
Consumer Credit Card Accounts
The Agencies are proposing seven provisions under the FTC Act
regarding consumer credit card accounts. These provisions are intended
to ensure that consumers have the ability to make informed decisions
about the use of credit card accounts without being subjected to unfair
or deceptive acts or practices.
First, institutions would be prohibited from treating a payment as
late for any purpose unless consumers have been provided a reasonable
amount of time to make that payment. The proposed rule would create a
safe harbor for institutions that adopt reasonable procedures designed
to ensure that periodic statements (which provide payment information)
are mailed or delivered at least 21 days before the payment due date.
Elsewhere in today's Federal Register, the Board has made two
additional proposals under Regulation Z that would further ensure that
consumers receive a reasonable amount of time to make payment.
Specifically, the Board is proposing to revise 12 CFR 226.10(b) to
prohibit creditors from setting a cut-off time for mailed payments that
is earlier than 5 p.m. at the location specified by the creditor for
receipt of such payments. The Board is also proposing to add 12 CFR
226.10(d), which would require that, if the due date for payment is a
day on which the U.S. Postal Service does not deliver mail or the
creditor does not accept payment by mail, the creditor may not treat a
payment received by mail the next business day as late for any purpose.
Second, when different annual percentage rates apply to different
balances, institutions would be required to allocate amounts paid in
excess of the minimum payment using one of three specified methods or a
method that is no less beneficial to consumers. The specified methods
are applying the entire amount first to the balance with the highest
annual percentage rate, splitting the amount equally among the
balances, or splitting the amount pro rata among the balances.
Furthermore, when an account has a discounted promotional rate balance
or a balance on which interest is deferred, institutions would be
required to give consumers the full benefit of that discounted rate or
deferred interest plan by allocating amounts in excess of the minimum
payment first to balances on which the rate is not discounted or
interest is not deferred (except, in the case of a deferred interest
plan, for the last two billing cycles during which interest is
deferred). Institutions would also be prohibited from denying consumers
a grace period on purchases (if one is offered) solely because they
have not paid off a balance at a promotional rate or a balance on which
interest is deferred.
Third, institutions would be prohibited from increasing the annual
percentage rate on an outstanding balance. This prohibition would not
apply, however, where a variable rate increases due to the operation of
an index, where a promotional rate has expired or is lost (provided the
rate is not increased to a penalty rate), or where the minimum payment
has not been received within 30 days after the due date.
Fourth, institutions would be prohibited from assessing a fee if a
consumer exceeds the credit limit on an account solely due to a hold
placed on the available credit. If, however, the actual amount of the
transaction would have exceeded the credit limit, then a fee may be
assessed.
Fifth, institutions would be prohibited from imposing finance
charges on balances based on balances for days in billing cycles that
precede the most recent billing cycle. The proposed rule would prohibit
institutions from reaching back to earlier billing cycles when
calculating the amount of interest charged in the current cycle, a
practice that is sometimes referred to as two-or double-cycle billing.
Sixth, institutions would be prohibited from financing security
deposits or fees for the issuance or availability of credit (such as
account-opening fees or membership fees) if those deposits or fees
utilize the majority of the available credit on the
[[Page 28910]]
account. The proposal would also require security deposits and fees
exceeding 25 percent of the credit limit to be spread over the first
year, rather than charged as a lump sum during the first billing cycle.
In addition, elsewhere in today's Federal Register, the Board is
proposing to revise Regulation Z to provide that a creditor that
collects or obtains a consumer's agreement to pay a fee before
providing account-opening disclosures must permit that consumer to
reject the plan after receiving the disclosures and, if the consumer
does so, must refund any fee collected or take any other action
necessary to ensure the consumer is not obligated to pay the fee.
Seventh, institutions making firm offers of credit advertising
multiple annual percentage rates or credit limits would be required to
disclose in the solicitation the factors that determine whether a
consumer will qualify for the lowest annual percentage rate and highest
credit limit advertised.
Overdraft Services
The Agencies are proposing two provisions prohibiting unfair acts
or practices related to overdraft services in connection with consumer
deposit accounts. The proposed provisions are intended to ensure that
consumers understand overdraft services and have the choice to avoid
the associated costs where such services do not meet their needs.
The first would provide that it is an unfair act or practice for an
institution to assess a fee or charge on a consumer's account for
paying an overdraft unless the institution provides the consumer with
the right to opt out of the institution's payment of overdrafts and a
reasonable opportunity to exercise the opt out, and the consumer does
not opt out. The proposed opt-out right would apply to all transactions
that overdraw an account regardless of whether the transaction is, for
example, a check, an ACH transaction, an ATM withdrawal, a recurring
payment, or a debit card purchase at a point of sale.
The second proposal would prohibit certain acts or practices
associated with assessing overdraft fees in connection with debit
holds. Specifically, the proposal would prohibit an institution from
assessing an overdraft fee if the overdraft is caused solely by a hold
placed on funds that exceeds the actual purchase amount of the
transaction, unless this purchase amount would have caused the
overdraft.
Elsewhere in today's Federal Register, the Board is also proposing
to address potentially misleading balance disclosures by generally
requiring depository institutions to provide only balances that reflect
the consumer's own funds (without funds added by the institution to
cover overdrafts) in response to consumer inquiries received through an
automated system such as a telephone response system, ATM, or an
institution's Web site.
IV. Section-by-Section Analysis of the Credit Practices Subpart
On March 1, 1984, the FTC adopted its Credit Practices Rule
pursuant to its authority under the FTC Act to promulgate rules that
define and prevent unfair or deceptive acts or practices in or
affecting commerce.\35\ The FTC Act provides that, whenever the FTC
promulgates a rule prohibiting specific unfair or deceptive practices,
the Board, OTS (as the successor to the Federal Home Loan Bank Board),
and NCUA must adopt substantially similar regulations imposing
substantially similar requirements with respect to banks, savings and
loan institutions, and federal credit unions within 60 days of the
effective date of the FTC's rule unless the agency finds that such acts
or practices by banks, savings associations, or federal credit unions
are not unfair or deceptive or the Board finds that the adoption of
similar regulations for banks, savings associations, or federal credit
unions would seriously conflict with essential monetary and payment-
systems policies of the Board. The Agencies have adopted rules
substantially similar to the FTC's Credit Practices Rule.\36\
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\35\ See 42 FR 7740 (Mar. 1, 1984) (codified at 16 CFR part
444); see also 15 U.S.C. 57a(a)(1)(B), 45(a)(1).
\36\ See 12 CFR part 227, subpart B (Board); 12 CFR 535 (OTS);
12 CFR 706 (NCUA).
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As part of this rulemaking, the Agencies are proposing to
reorganize aspects of their respective Credit Practices Rules. Although
the Agencies have approached these revisions differently in some
respects, the Agencies do not intend to create any substantive
difference among their respective rules.
Proposal
Subpart A--General Provisions
Subpart A contains general provisions that apply to the entire
part. As discussed below, there are some differences among the
Agencies' proposals.
----.1 Authority, Purpose, and Scope 37
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\37\ The Board, OTS, and NCUA would place the proposed rules in,
respectively, parts 227, 535, and 706 of title 12 of the Code of
Federal Regulations. For each of reference, the discussion in this
Supplementary Information uses the shared numerical suffix of each
agency's rule. For example, proposed Sec. ----.1 would be codified
at 12 CFR 227.1 by the Board, 12 CFR 535.1 by OTS, and 12 CFR 706.1
by NCUA.
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The provisions in proposed Sec. ----.1 are largely drawn from the
current authority, purpose, and scope provisions in the Agencies'
respective Credit Practices Rules.
----.1(a) Authority
Proposed Sec. ----.1(a) provides that the Agencies have issued
this part under section 18(f) of the FTC Act. In OTS's proposed rule,
this provision further provides that OTS is also exercising its
authority under various provisions of HOLA, although the FTC Act is the
primary authority for OTS's rule.
----.1(b) Purpose
Proposed Sec. ----.1(b) provides that the purpose of the part is
to prohibit unfair or deceptive acts or practices in violation of
section 5(a)(1) of the FTC Act, 15 U.S.C. 45(a)(1). It further provides
that the part contains provisions that define and set forth
requirements prescribed for the purpose of preventing specific unfair
or deceptive acts or practices. The Agencies note that these provisions
define and prohibit specific unfair or deceptive acts or practices
within a single provision, rather than setting forth the definitions
and remedies separately. Finally, it clarifies that the prohibitions in
subparts B, C, and D do not limit the Agencies' authority to enforce
the FTC Act with respect to other unfair or deceptive acts or
practices.
----.1(c) Scope
Proposed Sec. ----.1(c) describes the scope of each agency's
rules. The Agencies have each tailored this paragraph to describe those
entities to which their part applies. The Board's provision states that
its rules would apply to banks and their subsidiaries, except savings
associations as defined in 12 U.S.C. 1813(b). The Board's provision
further explains that enforcement of its rules is allocated among the
Board, OCC, and FDIC, depending on the type of institution. This
provision has been updated to reflect intervening changes in law. The
Board's Staff Guidelines to the Credit Practices Rule would be revised
to remove questions 11(c)-1 and 11(c)-2 and the substance of the
Board's answers would be updated and published as commentary under
proposed Sec. 227.1(c). See proposed Board comments 227.1(c)-1 and -2.
The remaining questions and answers in the
[[Page 28911]]
Board's Staff Guidelines would remain in place.
OTS's provision would state that its rules apply to savings
associations and subsidiaries owned in whole or in part by a savings
association. OTS also enforces compliance with respect to these
institutions. The entire OTS part would have the same scope. OTS notes
that this scope is somewhat different from the scope of its existing
Credit Practices Rule. OTS's Credit Practices Rule currently applies to
savings associations and service corporations that are wholly owned by
one or more savings associations, which engage in the business of
providing credit to consumers. Since the proposed rules would cover
more practices than consumer credit, the reference to engaging in the
business of providing credit to consumers would be deleted. The
reference to wholly owned service corporations would be updated to
refer instead to subsidiaries, to reflect the current terminology used
in OTS's Subordinate Organizations Rule.\38\
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\38\ 12 CFR part 559. OTS has substantially revised this rule
since promulgating its Credit Practices Rule. See, e.g.,
Subsidiaries and Equity Investments: Final Rule, 61 FR 66561 (Dec.
18, 1996).
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The NCUA's provision would state that its rules apply to federal
credit unions.
227.1(d) Definitions
Proposed Sec. ----.1(d) of the Board's rule would clarify that,
unless otherwise noted, the terms used in the Board's proposed Sec. --
--.1(c) that are not defined in the FTC Act or in section 3(s) of the
Federal Deposit Insurance Act (12 U.S.C. 1813(s)) have the meaning
given to them in section 1(b) of the International Banking Act of 1978
(12 U.S.C. 3101). OTS and NCUA do not have a need for a comparable
subsection so none is included in their proposed rules.
227.2 Consumer-Complaint Procedure
In order to accommodate the revisions discussed above, the Board
would consolidate the consumer complaint provisions currently located
in 12 CFR 227.1 and 227.2 in proposed Sec. 227.2. OTS and NCUA do not
currently have and do not propose to add comparable provisions.
Subpart B--Credit Practices
Each agency would place the substantive provisions of their current
Credit Practices Rule in Subpart B. In order to retain the current
numbering in its Credit Practices Rule, the Board would reserve 12 CFR
227.11, which currently contains the Board's statement of authority,
purpose, and scope. The other provisions of the Board's Credit
Practices Rule (Sec. Sec. 227.12 through 227.16) would not be revised.
OTS is proposing the following notable changes to its version of
Subpart B:
Section 535.11 Definitions (Existing Section 535.1)
OTS would delete the definitions of ``Act,'' ``creditor,'' and
``savings association'' as unnecessary. For the convenience of the
user, OTS would incorporate the definition of ``consumer credit'' into
this section, instead of using a cross-reference to a definition
contained in a different part of OTS's rules. OTS would move the
definition of ``cosigner'' to the section on unfair or deceptive
cosigner practices. OTS would merge the definition of ``debt'' into the
definition of ``collecting a debt'' contained in the section on late
charges. OTS would move the definition of ``household goods'' to the
section on unfair credit contract provisions.
Section 535.12 Unfair Credit Contract Provisions (Existing Section
535.2)
OTS would revise the title of this section to reflect its focus on
credit contract provisions. OTS would delete the obsolete reference to
extensions of credit after January 1, 1986.
Section 535.13 Unfair or Deceptive Cosigner Practices (Existing Section
535.3)
OTS would delete the obsolete reference to extensions of credit
after January 1, 1986. OTS would substitute the term ``substantially
similar'' for the term ``substantially equivalent'' in referencing a
document that equates to the cosigner notice for consistency with the
Board's rule and to avoid confusion with the term of art ``substantial
equivalency'' used in the section on state exemptions. OTS would also
clarify that the date that may be stated on the cosigner notice is the
date of the transaction. NCUA would make similar amendments to its rule
in Sec. 706.13 (existing Sec. 706.3).
Section 535.14 Unfair Late Charges (Existing Section 535.4)
OTS would revise the title of this section to reflect its focus on
unfair late charges. OTS would delete the obsolete reference to
extensions of credit after January 1, 1986. Similarly, NCUA would
propose revisions to Sec. 706.14 (existing Sec. 706.4).
Section 535.15 State Exemptions (Existing Section 535.5)
OTS would revise the subsection on delegated authority to update
the current title of the OTS official with delegated authority to make
determinations under this section.
Request for Comment
The FTC's Credit Practices Rule included a provision allowing
states to seek exemptions from the rule if state law affords a greater
or substantially similar level of protection. See 16 CFR 444.5. The
Agencies adopted similar provisions in their respective Credit
Practices Rules. See 12 CFR 227.16; 12 CFR 535.5; 12 CFR 706.5. In the
absence of any legal requirement, however, the Agencies do not propose
to extend this provision to the proposed rules for consumer credit card
accounts and overdraft services.\39\ The Agencies note that only three
states have been granted exemptions under the Credit Practices
Rule.\40\ Because the exemption is available when state law is
``substantially equivalent'' to the federal rule, an exemption may
provide little relief from regulatory burden while undermining the
uniform application of federal standards. Accordingly, the Agencies
request comment on whether states should be permitted to seek exemption
from the proposed rules on consumer credit card accounts and overdraft
services if state law affords greater or substantially similar level of
protection.
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\39\ The provision of the FTC Act addressing exemptions applies
only to the FTC. See 12 U.S.C. 57a(g).
\40\ The Board and the FTC have granted exemptions to Wisconsin,
New York, and California. 51 FR 24304 (July 3, 1986) (FTC exemption
for Wisconsin); 51 FR 28238 (Aug. 7, 1986) (FTC exemption for New
York); 51 FR 41763 (Nov. 19, 1986) (Board exemption for Wisconsin);
52 FR 2398 (Jan. 22, 1987) (Board exemption for New York); 53 FR
19893 (June 1, 1988) (FTC exemption for California); 53 FR 29233
(Aug. 3, 1988) (Board exemption for California). OTS has granted an
exemption to Wisconsin. 51 FR 45879 (Dec. 23, 1986). The NCUA has
not granted any exemptions.
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In addition, OTS also requests comment on whether the state
exemption provision in its Credit Practices Rule should be retained.
V. Section-by-Section Analysis of the Consumer Credit Card Practices
Subpart
Pursuant to their authority under 15 U.S.C. 57a(f)(1), the Agencies
are proposing to adopt rules prohibiting specific unfair acts or
practices with respect to consumer credit card accounts. The Agencies
would locate these rules in a new Subpart C to their
[[Page 28912]]
respective regulations under the FTC Act. These proposals should not be
construed as a definitive conclusion by the Agencies that a particular
act or practice is unfair or deceptive.
Section ----.21--Definitions
Proposed Sec. ----.21 would define certain terms used in new
Subpart C.
----.21(a) Annual Percentage Rate
Proposed Sec. ----.21(a) defines ``annual percentage rate'' as the
product of multiplying each periodic rate for a balance or transaction
on a consumer credit card account by the number of periods in a year.
This definition corresponds to the definition of ``annual percentage
rate'' in 12 CFR 226.14(b). As discussed in the Board's official staff
commentary to Sec. 226.14(b), this computation does not reflect any
particular finance charge or periodic balance. See comment 14(b)-1.
This definition also incorporates the definition of ``periodic rate''
from Regulation Z. See 12 CFR 226.2.
----.21(b) Consumer
Proposed Sec. ----.21(b) defines ``consumer'' as a natural person
to whom credit is extended under a consumer credit card account or a
natural person who is a co-obligor or guarantor of a consumer credit
card account.
----.21(c) Consumer Credit Card Account
Proposed Sec. ----.21(c) defines ``consumer credit card account''
as an account provided to a consumer primarily for personal, family, or
household purposes under an open-end credit plan that is accessed by a
credit or charge card. This definition incorporates the definitions of
``open-end credit,'' ``credit card,'' and ``charge card'' from
Regulation Z. See 12 CFR 226.2. Under this definition, a number of
accounts would be excluded consistent with exceptions to disclosure
requirements for credit and charge card applications and solicitations.
See proposed 12 CFR 226.5a(a)(5), 72 FR at 33045-46. For example, home-
equity plans accessible by a credit card and lines of credit accessible
by a debit card are not covered by proposed Sec. ----.21(c).
----.21(d) Promotional Rate
Proposed Sec. ----.21(d) is similar to the definition of
``promotional rate'' proposed by the Board in 12 CFR 226.16(e)(2)
elsewhere in today's Federal Register. The first type of ``promotional
rate'' covered by this definition is any annual percentage rate
applicable to one or more balances or transactions on a consumer credit
card account for a specified period of time that is lower than the
annual percentage rate that will be in effect at the end of that
period. Proposed comment 21(d)(1)-1 clarifies that, for purposes of
determining whether a rate is a ``promotional rate'' when the rate that
will apply at the end of the specified period is a variable rate, the
rate offered by the institution is compared to the variable rate that
would have been disclosed at the time of the offer if the promotional
rate had not been offered by the institution, subject to applicable
accuracy requirements. See, e.g., 12 CFR 226.5a(b)(1)(iii); proposed 12
CFR 226.5a(c)(2)(ii), 72 FR at 33047.
The second type of ``promotional rate'' encompassed by the
definition is any annual percentage rate applicable to one or more
transactions on a consumer credit card account that is lower than the
annual percentage rate that applies to other transactions of the same
type. This definition is meant to capture ``life of balance'' offers
where a special rate is offered on a particular balance for as long as
that balance exists. Proposed comment 21(d)(2)-1 provides an example of
a rate that meets this definition.
Section ----.22--Unfair Acts or Practices Regarding Time To Make
Payment
The Agencies are proposing to prohibit institutions from treating
payments on a consumer credit card account as late for any purpose
unless the institution has provided a reasonable amount of time for
consumers to make payment. Currently, section 163(a) of TILA requires
creditors to send periodic statements at least 14 days before
expiration of any period during which consumers can avoid finance
charges on purchases by paying the balance in full (i.e., the ``grace
period''). 15 U.S.C. 1666b(a). Federal law does not, however, mandate a
grace period, and grace periods generally do not apply when consumers
carry a balance from month to month. Regulation Z requires that
creditors mail or deliver periodic statements 14 days before the date
by which payment is due for purposes of avoiding additional finance
charges or other charges, such as late fees. See 12 CFR
226.5(b)(2)(ii); comment 5(b)(2)(ii)-1.
In its June 2007 Proposal, the Board noted anecdotal evidence of
consumers receiving statements relatively close to the payment due
date, with little time remaining to mail their payments in order to
avoid having those payments treated as late. The Board observed that it
may take several days for a consumer to receive a statement after the
close of a billing cycle. The Board also observed that consumers who
pay by mail may need to mail their payments several days before the due
date to ensure that the payment is received on or before that date.
Accordingly, the Board requested comment on whether it should recommend
to Congress that the 14-day requirement in section 163(a) of TILA be
increased. See 72 FR at 32973.
The Board received comments from individual consumers, consumer
groups, and a member of Congress indicating that consumers were not
being provided with a reasonable amount of time to pay their credit
card bills. Comments indicated that, because of the time required for
periodic statements to reach consumers by mail and for consumers'
payments to reach creditors by mail, consumers had little time in
between to review their statements for accuracy before making payment.
This situation can be exacerbated if the consumer is traveling or
otherwise unable to give the statement immediate attention when it is
delivered or if the consumer needs to compare the statement to receipts
or other records. In addition, some comments indicated that consumers
are unable to accurately predict when their payment will be received by
a creditor due to uncertainties in how quickly mail is delivered. Some
comments argued that, because of these difficulties, consumers'
payments were received after the due date, leading to finance charges
as a result of loss of the grace period, late fees, rate increases, and
other adverse consequences.
Comments from industry, however, generally stated that consumers
currently receive ample time to make payments, particularly in light of
the increasing number of consumers who receive periodic statements
electronically and make payments electronically or by telephone. These
comments also stated that providing additional time for consumers to
make payments would be operationally difficult and would reduce
interest revenue, which would have to be recovered by raising the cost
of credit elsewhere.
The Agencies understand that, although increasing numbers of
consumers are receiving periodic statements and making payments
electronically, a significant number still utilize mail. In addition,
the Agencies recognize that, while first class mail is often delivered
within three business days, in some cases it can take
[[Page 28913]]
significantly longer.\41\ Indeed, some large credit card issuers
recommend that consumers allow up to seven days for their payments to
be received by the issuer via mail. Accordingly, in some cases, a
statement sent 14 days before the payment due date may not provide
consumers with a reasonable amount of time to pay in order to avoid
interest charges, late fees, or other adverse consequences.
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\41\ See, e.g., Testimony of Jody Berenblatt, Senior Vice
President--Postal Strategy, Bank of America, before the S. Subcomm.
on Fed. Fin. Mgmt., Gov't Info., Fed. Srvs., and Int'l Security
(Aug. 2, 2007).
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The Agencies recognize that, in enacting Sec. 163(a) of TILA,
Congress set the minimum amount of time between sending the periodic
statement and expiration of any grace period offered by the creditor at
14 days. At the time of its June 2007 Proposal, the Board believed that
consumers might benefit from receiving additional time to make payment.
The Board understands that most creditors currently offer grace periods
and that they use a single due date, which is both the expiration of
the grace period and the date after which a payment will be considered
late for other purposes (such as the assessment of late fees). For that
reason, the Board sought comment on whether it should request that
Congress increase the 14-day minimum mailing requirement with respect
to grace periods. Based on the comments and other information discussed
herein, however, the Agencies are concerned that a separate rule may be
needed that specifically addresses harms other than loss of the grace
period when institutions do not provide a reasonable amount of time for
consumers to make payment. This harm includes late fees and rate
increases as a penalty for late payment. The Agencies' proposal does
not affect the requirements of TILA Sec. 163(a).
Legal Analysis
Treating a payment on a consumer credit card account as late for
any purpose (other than expiration of a grace period) unless the
consumer has been provided a reasonable amount of time to make that
payment appears to be an unfair act or practice under 15 U.S.C. 45(n)
and the standards articulated by the FTC.
Substantial consumer injury. An institution's failure to provide
consumers a reasonable amount of time to make payment appears to cause
substantial monetary and other injury. When a payment is received after
the due date, institutions may impose late fees, increase the annual
percentage rate on the account as a penalty, or report the consumer as
delinquent to a credit reporting agency.
Injury is not reasonably avoidable. It appears that consumers
cannot reasonably avoid this injury unless they have been provided a
reasonable amount of time to pay. Although what constitutes a
reasonable amount of time may vary based on the circumstances, it may
be unreasonable to expect consumers to make payment if they are not
given a reasonable amount of time to do so after receiving a periodic
statement. TILA and Regulation Z provide consumers with the right to
dispute transactions or other items that appear on their periodic
statements. In order to exercise certain of these rights, consumers
must have a reasonable opportunity to review their statements. See 15
U.S.C. 1666i; 12 CFR 226.12(c). Furthermore, in some cases, travel or
other circumstances may prevent the consumer from reviewing the
statement immediately upon receipt. Finally, as discussed above,
consumers cannot control when a mailed payment will be received by the
institution. Thus, a payment mailed well in advance of the due date may
nevertheless arrive after that date.
Injury is not outweighed by countervailing benefits. The injury
does not appear to be outweighed by any countervailing benefits to
consumers or competition. The Agencies are not aware of any direct
benefit to consumers from receiving too little time to make their
payments. Although a longer time to make payment could result in
additional finance charges for consumers who do not receive a grace
period, the consumer would have the choice whether to wait until the
due date to make payment. The Agencies are also aware that, as a result
of the proposed rule, some institutions may be required to incur costs
to alter their systems and will, directly or indirectly, pass those
costs on to consumers. It does not appear, however, that these costs
would outweigh the benefits to consumers of receiving a reasonable
amount of time to make payment.
Proposal
Proposed Sec. ----.22(a) prohibits institutions from treating a
payment as late for any purpose unless the consumer has been provided a
reasonable amount of time to make that payment. Proposed comment 22(a)-
1 clarifies that treating a payment as late for any purpose includes
increasing the annual percentage rate as a penalty, reporting the
consumer as delinquent to a credit reporting agency, or assessing a
late fee or any other fee based on the consumer's failure to make a
payment within the amount of time provided under this section. Although
the proposed rule does not mandate a specific amount of time, the
commentary to the proposal states that reasonableness would be
evaluated from the perspective of the consumer, not the institution.
See proposed comment 22(a)-2.
Proposed Sec. ----.22(b) provides a safe harbor for institutions
that have adopted reasonable procedures designed to ensure that
periodic statements specifying the payment due date are mailed or
delivered to consumers at least 21 days before the payment due date.
Compliance with this safe harbor would allow seven days for the
periodic statement to reach the consumer by mail, seven days for the
consumer to review the statement and make payment, and seven days for
that payment to reach the institution by mail. As noted above, some
institutions already recommend that consumers allow seven days for
receipt of mailed payments. The Agencies believe 21 days to be
reasonable because it allows sufficient time for even delayed mail to
be delivered while also allowing most consumers at least a week to
review their bill and make payment.
In order to minimize burden and facilitate compliance, proposed
comment 22(b)-1 clarifies that an institution with reasonable
procedures in place designed to ensure that statements are mailed or
delivered within a certain number of days from the closing date of the
billing cycle may utilize the safe harbor by adding that number to the
21-day safe harbor for purposes of determining the payment due date on
the periodic statement. For example, if an institution had reasonable
procedures in place designed to the ensure that statements are mailed
or delivered within three days of the closing date of the billing
cycle, the institution could comply with the safe harbor by stating a
payment due date on its periodic statements that is 24 days from the
close of the billing cycle (i.e., 21 days plus three days). Similarly,
if an institution's procedures reasonably ensured that payments would
be sent within five days of the close of the billing cycle, the
institution could comply with the safe harbor by setting the due date
26 days from the close of the billing cycle. Proposed comment 22(b)-2
further clarifies that the payment due date is the date by which the
institution requires the consumer to make payment in order to avoid
being treated as late for any purpose (except with respect to
expiration of a grace period).
[[Page 28914]]
Finally, in order to avoid any potential conflict with section
163(a) of TILA, proposed Sec. ----.22(c) provides that proposed Sec.
----.22(a) does not apply to any time period provided by the
institution within which the consumer may repay the new balance or any
portion of the new balance without incurring finance charges (i.e., a
grace period).
Request for Comment
The Agencies request comment on:
The percentages of consumers who receive periodic
statements by mail and electronically.
The percentages of consumers who make payment by mail,
electronically, by telephone, and through other methods.
The number of days after the closing date of the billing
cycle that institutions typically mail or deliver periodic statements.
Whether the proposed 21-day safe harbor period between
mailing or delivery of the periodic statement and the due date would
give consumers sufficient time to review their statements and make
payment and is otherwise a reasonable amount of time to make payment.
The cost to institutions of altering their systems to
comply with the proposed rule and to mail or deliver periodic
statements 21 days in advance of the payment due date.
Whether the Agencies should adopt a rule that prohibits
institutions from treating a payment as late if received within a
certain number of days after the due date and, if so, the number of
days that would be appropriate.
Whether the Agencies should adopt a rule that requires
institutions, upon the request of a consumer, to reverse a decision to
treat a payment mailed before the due date as late and, if so, what
evidence the institution could require the consumer to provide (e.g., a
receipt from the U.S. Postal Service or other common carrier) and what
time frame would be appropriate (e.g., payment mailed at least five
days before the due date, payment received no more than two business
days late).
The impact of the proposed rule on the availability of
credit.
Section --.23--Unfair Acts or Practices Regarding Allocation of
Payments
The Agencies are proposing to prohibit certain unfair acts or
practices regarding the allocation of payments on consumer credit card
accounts with multiple balances at different interest rates. In its
June 2007 Proposal, the Board discussed the practice among some
creditors of allocating payments first to balances that are subject to
the lowest interest rate. 72 FR at 32982-83. Because many creditors
offer different rates for purchases, cash advances, and balance
transfers, this practice can result in consumers who do not pay the
balance in full each month incurring higher finance charges than they
would under a different allocation method. The Board was particularly
concerned that, when the consumer has responded to a promotional rate
offer, the allocation of payments to balances with the lowest interest
rate often prevents the consumer from receiving the full benefit of the
promotional rate if the consumer uses the card for other transactions.
For example, assume that a consumer responds to an offer of 5% on
transferred balances for six months by opening an account and
transferring $3,000. Then, during the same billing cycle, the consumer
uses the account for a $300 cash advance (to which an interest rate of
20% applies) and a $500 purchase (to which an interest rate of 15%
applies). If the consumer makes an $800 payment, most creditors would
apply the entire payment to the promotional rate balance and the
consumer would incur interest on the more costly cash advance and
purchase balances. Under these circumstances, the consumer is
effectively denied the benefit of the 5% promotional rate for six
months if the card is used for transactions because the consumer must
pay off the entire transferred balance in order to avoid paying a
higher rate on the transactions. Indeed, the only way for the consumer
to receive the benefit of the 5% promotional rate is to not use the
card for purchases, which would effectively require the consumer to use
an open-end credit account as a closed-end installment loan.
Deferred interest plans raise the same basic concerns. Many
creditors offer deferred interest plans where consumers may avoid
paying interest on purchases if the balance is paid in full by the end
of the deferred interest period. If the balance is not paid in full
when the deferred interest period ends, these deferred interest plans
often require the consumer to pay interest that has accrued during the
deferred interest period. A consumer whose payments are applied to a
balance on which interest is deferred instead of a balance on which
interest is not deferred incurs additional finance charges and
therefore does not receive the benefit of the deferred interest plan.
In addition, creditors typically offer a grace period for purchases
if a consumer pays in full each month but do not typically offer a
grace period on balance transfers or cash advances. Because payments
will be allocated to the transferred balance first, a consumer cannot
take advantage of both a promotional rate on balance transfers or cash
advances and a grace period on purchases. Under these circumstances,
the only way for a consumer to avoid paying interest on purchases is to
pay off the entire balance, including the transferred balance or cash
advance balance subject to the promotional rate.
In preparing its June 2007 Proposal, the Board sought to address
issues regarding payment allocation by developing disclosures
explaining payment allocation methods on accounts with multiple
balances at different annual percentage rates so that consumers could
make informed decisions about card usage, particularly in regard to
promotional rates. For example, if consumers knew that they would not
receive the full benefit of a promotional rate on a particular credit
card account if they used that account for purchases during the
promotional period, they might use a different account for purchases
and pay that account in full every month to take advantage of the grace
period. The Board conducted extensive consumer testing in an effort to
develop disclosures that would enable consumers to understand typical
payment allocation practices and make informed decisions regarding the
use of credit cards. In this testing, many participants did not
understand that they could not take advantage of the grace period on
purchases and the discounted rate on balance transfers at the same
time. Model forms were tested that included a disclosure notice
attempting to explain this to consumers. Nonetheless, testing showed
that a significant percentage of participants still did not fully
understand how payment allocation can affect their interest charges,
even after reading the disclosures tested. In the supplementary
information accompanying the June 2007 Proposal, the Board indicated
its plans to conduct further testing of the disclosure to determine
whether the disclosure could be improved to more effectively
communicate to consumers how payment allocation can affect their
interest charges. 72 FR at 33047, 33050.
In the June 2007 Proposal, the Board did, however, propose to add
Sec. 226.5a(b)(15) to require a creditor to explain payment allocation
to consumers. Specifically, the Board proposed that creditors explain
how payment allocation would affect consumers, if an initial discounted
rate was offered on balance transfers or cash advances but not
purchases. The Board proposed that creditors must disclose to
[[Page 28915]]
consumers that (1) the initial discounted rate applies only to balance
transfers or cash advances, as applicable, and not to purchases; (2)
that payments will be allocated to the balance transfer or cash advance
balance, as applicable, before being allocated to any purchase balance
during the time the discounted initial rate is in effect; and (3) that
the consumer will incur interest on the purchase balance until the
entire balance is paid, including the transferred balance or cash
advance balance, as applicable. 72 FR at 32948, 33047.
In response to the June 2007 Proposal, several commenters
recommended the Board test a simplified payment allocation disclosure
that covers situations other than low rate balance transfers offered
with cards. One credit card issuer, however, stated that, because
creditors almost uniformly apply payments to the balance with the
lowest annual percentage rate, consumers could not shop for a better
payment allocation method even if an effective disclosure could be
developed. Furthermore, comments from consumers and consumer groups
urged the Board to go further and prohibit payment allocation methods
that applied payments to the lowest rate balance before other balances.
In consumer testing conducted for the Board in March 2008, the
Board tested a revised payment allocation disclosure.\42\ Some
participants understood from earlier experience that creditors
typically will apply payments to lower rate balances first and that
this method causes them to incur higher interest charges. For those
participants, however, that did not know about payment allocation
methods from earlier experience, the disclosure tested was still not
effective in communicating payment allocation methods.
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\42\ This disclosure stated: ``Payments may be applied to
balances with lower APRs first. If you have balances at higher APRs,
you may pay more in interest because these balances cannot be paid
off until all lower-APR balances are paid in full (including balance
transfers you make at the introductory rate).''
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Accordingly, the Agencies propose to address the foregoing concerns
regarding payment allocation by prohibiting specific unfair acts or
practices under the FTC Act. To the extent the Agencies' proposals are
ultimately adopted, the Board would withdraw its proposal under
Regulation Z to require a creditor to explain payment allocation to
consumers.
Legal Analysis
Proposed Sec. ----.23 would prohibit three unfair acts or
practices. First, when different annual percentage rates apply to
different balances on a consumer credit card account, the Agencies
would prohibit allocation among the balances of any amount paid by the
consumer in excess of the required minimum periodic payment in a manner
that is less beneficial to consumers than one of three listed methods.
Second, when a consumer credit card account has one or more promotional
rate balances or balances on which interest is deferred, the Agencies
would prohibit allocation of amounts paid by the consumer in excess of
the minimum payment to such balances before other balances. Third, the
Agencies would prohibit institutions from requiring consumers to repay
any portion of a promotional rate balance or deferred interest balance
in order to receive any grace period offered for purchases. As
discussed below, these acts or practices appear to meet the definition
of unfairness under 15 U.S.C. 45(n) and the standards articulated by
the FTC.
Substantial consumer injury. Each of the three practices described
above appear to cause substantial monetary injury to consumers in the
form of higher interest charges than would be incurred if institutions
did not engage in these practices. Specifically, as discussed above,
consumers who do not pay the balance in full and whose payments in
excess of the minimum payment are first applied to the balance with the
lowest annual percentage rate incur higher interest charges than they
would under other payment allocation methods, such as division of the
amount among the balances or application of the amount to the balance
with the highest rate first. Similarly, consumers who do not receive a
grace period offered on a purchase balance solely because they also
have a promotional rate balance or deferred interest balance incur
higher interest charges than they would if they received the grace
period.
Injury is not reasonably avoidable. Several factors appear to
prevent consumers from reasonably avoiding these additional interest
charges. First, consumers generally have no control over the
institution's allocation of payments or provision of grace periods.
Second, the Board's consumer testing indicates that disclosures may not
enable consumers to understand sufficiently the effects of payment
allocation or the loss of the grace period. Even if disclosures were
effective, it appears that consumers still could not avoid the injury
by selecting a credit card account with more favorable terms because
institutions almost uniformly apply payments to the balance with the
lowest rate and do not provide a grace period when a consumer has a
promotional rate balance or deferred interest balance.\43\ Third,
although a consumer could avoid the injury by paying the balance in
full each month, this may not be a reasonable expectation as many
consumers are unable to do so. Similarly, it may be unreasonable to
expect a consumer to avoid the injury by, for example, taking a cash
advance or transferring a balance in response to a promotional rate
offer and then using a different account for purchases because this
would effectively require the consumer to use an open-end credit
account as a closed-end installment loan.
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\43\ See Statement for FTC Credit Practices Rule, 48 FR at 7746
(``If 80 percent of creditors include a certain clause in their
contracts, for example, even the consumer who examines contract[s]
from three different sellers has a less than even chance of finding
a contract without the clause. In such circumstances relatively few
consumers are likely to find the effort worthwhile, particularly
given the difficulties of searching for contract terms * * *''
(footnotes omitted)).
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Injury is not outweighed by countervailing benefits. The prohibited
practices do not appear to create benefits for consumers and
competition that outweigh the injury. The Agencies understand that, if
implemented, the proposal may reduce the revenue that institutions
receive from interest charges, which may in turn lead institutions to
increase rates generally or to offer higher promotional rates or fewer
deferred interest plans. As a result, consumers who, for example, do
not use an account for purchases after transferring a balance would
lose the benefit of the lower promotional rate. This effect should be
muted, however, because the Agencies' proposal prohibits only the
practices that are most harmful to consumers and leaves institutions
with considerable flexibility in the allocation of payments,
particularly with regard to the minimum payment. Furthermore, the
Agencies believe that the proposal would enhance transparency and
enable consumers to better assess the costs associated with using their
credit card accounts at the time they engage in transactions. To the
extent that upfront costs have been artificially reduced because many
consumers cannot reasonably avoid paying higher interest charges later,
the reduction does not represent a true benefit to consumers as a
whole. Finally, it appears that the Agencies' proposal should enhance
rather than harm competition because institutions offering rates that
reflect the institution's costs (including the cost to the institution
of borrowing funds and
[[Page 28916]]
operational expenses) would no longer be forced to compete with
institutions that offer artificially reduced rates.
Proposal
Proposed Sec. ----.23(a) would establish a general rule governing
payment allocation on accounts that do not have a promotional rate
balance or a balance on which interest is deferred. Proposed Sec. --
--.23(b) would establish special rules for accounts that do have a
promotional rate balance or a deferred interest balance.
Proposed Sec. ----.23 does not limit or otherwise address the
institution's ability to determine the amount of the minimum payment or
how that payment is allocated. See proposed comment 23-1. Furthermore,
an institution may adjust amounts to the nearest dollar when
allocating. See proposed comment 23-2.
----.23(a) General Rule for Accounts Within Different Annual Percentage
Rates on Different Balances
Proposed Sec. ----.23(a) would require the institution to allocate
any amount paid by the consumer in excess of the required minimum
periodic payment among the balances in a manner that is no less
beneficial to consumers than one of three listed methods. Although the
proposed rule does not prohibit institutions from using allocation
methods other than those listed, the method used must be no less
beneficial to consumers than one of the listed methods. A method is no
less beneficial to consumers if the method results in the assessment of
the same or a lesser amount of interest charges than would be assessed
under the listed method. For example, an institution may not reasonably
allocate the entire amount paid by the consumer in excess of the
required minimum periodic payment to the balance with the lowest annual
percentage rate because this method would result in higher interest
charges than any of the methods listed in proposed Sec. ----.23(a).
See proposed comment 23(a)-1. An example of an allocation method that
is no less beneficial to consumers than a listed method is provided in
proposed comment 23(a)-2.
Proposed Sec. ----.23(a) lists three permissible payment
allocation methods. First, proposed Sec. ----.23(a) would allow an
institution to apply the entire amount paid in excess of the minimum
payment first to the balance with the highest annual percentage rate
and any remaining amount to the balance with the next highest annual
percentage rate and so forth. Although this method could result in none
of the amount being applied to some balances, the Agencies believe that
institutions should be able to use this approach because it will
generally minimize interest charges. An example of this allocation
method is provided in proposed comment 23(a)(1)-1.
Second, proposed Sec. ----.23(a) would allow an institution to
allocate equal portions of the amount paid in excess of the minimum
payment to each balance. Third, the proposal would allow an institution
to allocate the amount among the balances in the same proportion as
each balance bears to the total balance (i.e., pro rata). Examples of
these allocation methods are provided in proposed comments 23(a)(2)-1
and 23(a)(3)-1.
----.23(b) Special Rules for Accounts With Promotional Rate Balances or
Deferred Interest Balances
The Agencies believe that separate requirements may be warranted
for accounts with promotional rate balances or balances on which
interest is deferred because, in many cases, the consumer will have
engaged in transactions based on representations made by the
institution regarding a promotional rate or a deferred interest plan.
Proposed Sec. ----.23(b) seeks to ensure that consumers receive the
benefit of promotional rates and deferred interest plans.
----.23(b)(1)(i) Rule Regarding Payment Allocation
Proposed Sec. ----.23(b)(1)(i) would ensure that consumers receive
the benefit of a promotional rate or deferred interest plan by
requiring that amounts paid in excess of the minimum payment would be
allocated to the promotional rate balance or the deferred interest
balance only if other balances have been fully paid. Specifically, the
proposal would require that amounts paid by the consumer in excess of
the minimum payment be allocated first among balances that are not
promotional rate balances or deferred interest balances, consistent
with proposed Sec. ----.23(a). If there is any remaining amount,
proposed Sec. ----.23(b)(1)(i) would require the institution to
allocate the remaining amount to each promotional rate balance or
deferred interest balance, consistent with proposed Sec. ----.23(a).
Proposed comment 23(b)(1)(i)-1 would provide illustrative examples of
how payments must be allocated under proposed Sec. ----.23(b)(1)(i).
----.23(b)(1)(ii) Exception for Balances on Which Interest Is Deferred
Proposed Sec. ----.23(b)(1)(ii) would create an exception to the
payment allocation rule in proposed Sec. ----.23(b)(1)(i) during the
last two billing cycles of a deferred interest plan. The Agencies
understand that currently some institutions begin to apply consumers'
payments to the deferred interest balance during the last two billing
cycles of a deferred interest plan because doing so will reduce or
eliminate that balance and thereby reduce or eliminate the deferred
interest that may be charged when the deferred interest plan expires.
Because this practice appears to be beneficial to consumers, the
Agencies propose to permit institutions to utilize this practice, at
their option. Proposed comment 23(b)(1)(ii)-1 provides illustrative
examples of how payments may be allocated under this exception. As
noted below, the Agencies request comment on whether this exception is
appropriate and, if so, whether it should apply during the last two
billing cycles of the deferred interest plan or a different period of
time.
----.23(b)(2) Rule Regarding Grace Period
Proposed Sec. ----.23(b)(2) would prohibit institutions from
requiring consumers who are otherwise eligible for a grace period to
repay any portion of a promotional rate balance or deferred interest
balance in order to receive the benefit of any grace period on other
balances. Under the provision, a consumer would not be denied the
benefits of a grace period solely because the consumer carries a
balance covered by a promotional rate or deferred interest plan.
Proposed comment 23(b)(2)-1 provides an example of when this
prohibition would apply.
Request for Comment
The Agencies request comment on:
Whether other methods of allocation should be listed in
proposed Sec. ----.23(a).
Whether proposed Sec. ----.23(a) should permit
institutions to apply amounts in excess of the minimum payment first to
balances on which the institution is prohibited from increasing the
rate (pursuant to proposed Sec. ----.24).
Whether the requirement in proposed Sec. ----.23(b)(1)(i)
that amounts in excess of the minimum payment be applied to other
balances before deferred interest balances may prevent consumers from
paying the deferred interest balance in full by the end of the deferred
interest period.
The need for the exception regarding deferred interest
balances in proposed Sec. ----.23(b)(1)(ii).
[[Page 28917]]
Whether the exception regarding deferred interest balances
in proposed Sec. ----.23(b)(1)(ii) should apply during the last two
billing cycles of the deferred interest plan or during a different time
period.
Whether consumers should be permitted to instruct the
institution regarding allocation of amounts in excess of the required
minimum periodic payment.
The cost to institutions of the proposed rule and the
impact on the availability of credit.
Section ----.24--Unfair Acts and Practices Regarding Application of
Increased Rates to Outstanding Balances
The Agencies are proposing to prohibit the application of increased
rates to pre-existing balances, except in certain limited
circumstances. Currently, Sec. 226.9(c) of Regulation Z requires 15
days advance notice of certain changes to the terms of an open-end plan
as well as increases in the minimum payment. However, advance notice is
not required if an interest rate or other finance charge increases due
to a consumer's default or delinquency. See 12 CFR 226.9(c)(1); comment
9(c)(1)-3. Furthermore, no change-in-terms notice is required if the
creditor set forth the specific change in the account-opening
disclosures. See 12 CFR 226.9(c), comment 9(c)-1.
In its June 2007 Proposal, the Board expressed concern that the
imposition of penalty pricing can come as a costly surprise to
consumers who are not aware of, or do not understand, what behavior is
considered a ``default'' under their agreement. See 72 FR at 33009-13.
The Board noted that penalty rates can be more than twice as much as
the consumer's normal rate on purchases and may apply to all of the
balances on the consumer's account for several months or longer.\44\
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\44\ See also GAO Credit Card Report at 24 (noting that, for the
28 credit cards it reviewed, ``[t]he default rates were generally
much higher than rates that otherwise applied to purchases, cash
advances, or balance transfers. For example, the average default
rate across the 28 cards was 27.3 percent in 2005--up from the
average of 23.8 in 2003--with as many as 7 cards charging rates over
30 percent'').
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Consumer testing conducted for the Board indicated that some
consumers do not understand what factors can trigger penalty pricing,
such as the fact that one late payment may constitute a ``default.'' In
addition, some participants did not appear to understand that penalty
rates can apply to all of their balances, including existing balances.
Some participants also did not appear to understand how long a penalty
rate could remain in effect. The Board observed that account-opening
disclosures may be provided to the consumer too far in advance for the
consumer to recall the circumstances that may cause his or her rates to
increase. In addition, the consumer may not have retained a copy of the
account-opening disclosures and may not be able to effectively link the
information disclosed at account opening to the current repricing of
his or her account.
The Board's June 2007 Proposal included revisions to Regulation Z
and its commentary designed to improve consumers' awareness about
changes in their account terms and increased rates, including rate
increases imposed as a penalty for delinquency or other acts or
omissions constituting default under the account agreement. These
revisions were also intended to enhance consumers' ability to shop for
alternative financing before such changes in terms or increased rates
become effective. Specifically, the Board proposed to give consumers 45
days advance notice of a change in terms or an increased rate imposed
as a penalty and to make the disclosures about changes in terms and
increased rates more effective. See proposed 12 CFR 226.9(c), (g), 72
FR at 33056-58.\45\ The Board also proposed to require that periodic
statements for credit card accounts disclose the annual percentage rate
or rates that may be imposed as a result of late payment. See proposed
12 CFR 226.7(b)(11)(i)(C), 72 FR at 33053.
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\45\ The Board has proposed additional revisions to these
provisions elsewhere in today's Federal Register.
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When developing the June 2007 Proposal, the Board considered, but
did not propose, a prohibition on so-called ``universal default
clauses'' or similar practices under which a creditor raises a
consumer's interest rate to the penalty rate if, for example, the
consumer makes a late payment on an account with a different creditor.
The Board also considered but did not propose a requirement similar to
that in some state laws providing consumers with the right to reject a
change in terms.
In response to its June 2007 Proposal, the Board received comments
from individual consumers, consumer groups, another federal banking
agency, and a member of Congress stating that notice alone was not
sufficient to protect consumers from the harm caused by rate increases.
These comments argued that many consumers would not read or understand
the proposed disclosures and, even if they did, many would be unable to
transfer the balance to a new credit card account with comparable terms
before the increased rate went into effect. Some of these comments
argued that creditors should be prohibited from increasing the rate on
an existing balance in all instances. Others argued that consumers
should be given the right to reject application of an increased rate to
an existing balance by closing the account, but only if the increase
was not triggered by a late payment or other violation of the terms of
that account. This approach was also endorsed by some creditors. On the
other hand, comments from the majority of creditors stated that the 45-
day notice requirement would delay creditors from increasing rates to
reflect a consumer's increased risk of default, requiring creditors to
account for that risk by, for example, charging higher annual
percentage rates at the outset of the account relationship. These
comments also noted that, because creditors use rate increases to pass
on the costs of funds the creditors themselves pay, delays in the
imposition of increased rates could result in higher costs of credit or
less available credit.
The Agencies are concerned that disclosure alone may be
insufficient to protect consumers from the harm caused by the
application of increased rates to pre-existing balances. Accordingly,
the Agencies are proposing to prohibit this practice except in certain
limited circumstances.
Legal Analysis
The Agencies propose to prohibit institutions from increasing the
annual percentage rate applicable to the outstanding balance before the
effective date of the rate increase, except in certain circumstances.
As discussed below, this practice appears to meet the test for
unfairness under 15 U.S.C. 45(n) and the standards articulated by the
FTC.
Substantial consumer injury. Application of an increased annual
percentage rate to an outstanding balance appears to cause substantial
monetary injury by increasing the interest charges assessed to a
consumer's credit card account.
Injury is not reasonably avoidable. Although the injury resulting
from increases in the annual percentage rate may be avoidable by some
consumers under certain circumstances, this injury does not appear to
be reasonably avoidable by consumers as a general matter. As discussed
above, the Board's consumer testing indicates that many consumers are
not aware of the circumstances under which their rates
[[Page 28918]]
may increase.\46\ Thus, when deciding whether to use a credit card for
a particular transaction or whether to pay off a credit card balance
versus some other obligation, the consumer is likely to consider only
the annual percentage rate in effect at that time. Although the
disclosures proposed by the Board under Regulation Z should, if
implemented, improve consumers' understanding, disclosures alone may
not be sufficient to enable consumers to avoid injury. Consumers may
ignore the disclosures because they overestimate their ability to avoid
the penalty triggers.\47\ Furthermore, although the Board's proposed 45
days advance notice of a rate increase would enable some consumers to
transfer the balance to another account with a comparable annual
percentage rate and terms, consumers who are not able to do so cannot
avoid the resulting injury. For these reasons, disclosures alone may
not enable consumers to avoid the injury caused by an increase in rate
on an existing balance.
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\46\ See also GAO Credit Card Report at 6 (``[O]ur interviews
with 112 cardholders indicated that many failed to understand key
terms or conditions that could affect their costs, including when
they would be charged for late payments or what actions could cause
issuers to raise rates.'').
\47\ See Statement for FTC Credit Practices Rule, 49 FR at 7744
(``Because remedies are relevant only in the event of default, and
default is relatively infrequent, consumers reasonably concentrate
their search on such factors as interest rates and payment
terms.''). This behavior is commonly referred to as ``hyperbolic
discounting.'' See, e.g., Angela Littwin, Beyond Usury: A Study of
Credit-Card Use and Preference Among Low-Income Consumers, 80 Tex.
L. Rev. 451, 467-478 (2008) (discussing consumers' tendency to
underestimate their future credit card usage when they apply for a
card and thereby failing to adequately anticipate the costs of the
product); Shane Frederick, et al., Time Discounting and Time
Preference: A Critical Review, 40 J. Econ. Literature 351, 366-67
(2002) (reviewing the literature on hyperbolic discounting); Ted
O'Donoghue & Matthew Rabin, Doing It Now or Later, 89 Am. Econ. Rev.
103, 103, 111 (1999) (explaining people's preference for delaying
unpleasant activities and accepting immediate rewards despite their
knowledge that the delay may lessen potential future rewards or
increase potential adverse consequences).
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Consumers also lack control over many of the circumstances under
which an institution increases an annual percentage rate. First, an
institution may increase a rate for reasons that are completely
unrelated to any individual consumer. For instance, an institution may
increase rates to increase revenues or in response to changes in the
cost to the institution of borrowing funds. Consumers lack any control
over these increases and therefore cannot reasonably avoid the
resulting injury. Furthermore, consumers cannot be reasonably expected
to predict when such repricing will occur because many institutions
reserve the right to change the terms of the consumer's account at any
time for any reason.
Second, an institution may increase an annual percentage rate based
on consumer behavior that is unrelated to the consumer's performance on
the credit card account with that institution. For example, an
institution may increase a rate due to a drop in a consumer's credit
score or a default on an account with a different creditor even though
the consumer has paid the credit card account with the institution
according to the terms of the cardholder agreement.\48\ As noted above,
this type of increase is sometimes referred to as ``universal
default.'' The consumer may or may not have been aware of or able to
control the factor that caused the drop in the consumer's credit score,
and the consumer cannot control what factors are considered or how
those factors are weighted in creating the credit score. For example, a
consumer may be unaware that using a certain amount of the available
credit on open-end credit accounts can lead to a reduction in credit
score. Furthermore, as discussed below, a default may not be reasonably
avoidable in some instances. Nor can the consumer control how the
institution uses credit scores or other information to set interest
rates.
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\48\ See, e.g., Statement of Janet Hard before S. Perm. Subcomm.
on Investigations, Hearing on Credit Card Practices: Unfair Interest
Rate Increases (Dec. 4, 2007) (available at http://www.senate.gov/
~govt-aff/index.cfm?Fuseaction=Hearings.Detail&HearingID=509).
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Third, an institution may increase an annual percentage rate based
on consumer behavior that is related to the consumer's credit card
account with the institution but does not violate the account terms.
For example, an institution may increase the annual percentage rates of
consumers who are close to (but not over) the credit limit on the
account or who make the minimum payment set by the institution for
several consecutive months.\49\ Although this type of activity may be
within the consumer's control, the consumer may not be able to
reasonably avoid the resulting injury because the consumer is not aware
that this behavior may be used by the institution's internal risk
models as a basis for increasing the rate on the account. Indeed, the
institution's provision of a specific credit limit or minimum payment,
for example, may be reasonably interpreted by the consumer as an
implicit representation that the consumer will not be penalized if the
credit limit is not exceeded or the minimum payment is made.
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\49\ See, e.g., Statement of Bruce Hammonds, President, Bank of
America Card Services before S. Perm. Subcomm. on Investigations,
Hearing on Credit Card Practices: Unfair Interest Rate Increases at
5 (Dec. 4, 2007) (available at http://hsgac.senate.gov/public/_files/STMTHammondsBOA.pdf).
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Fourth, an institution may increase an annual percentage rate based
on consumer behavior that violates the account terms. What violates the
account terms can vary from institution to institution and from account
to account. The Agencies understand that the most common violations of
the account terms that result in an increase in rate are exceeding the
credit limit, a payment that is returned for insufficient funds, and a
late payment.\50\ In some cases, it appears that individual consumers
may have been able to avoid these events by taking reasonable
precautions. In other cases, however, it appears that the event may not
be reasonably avoidable.
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\50\ See GAO Credit Card Report at 25.
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For example, consumers who carefully track their transactions may
still exceed the credit limit because of charges of which they were not
aware (such as the institution's imposition of interest or fees) or
because of the institution's delay in replenishing the credit limit
following payment. Similarly, although consumers can reduce the risk of
making a payment that will be returned for insufficient funds by
carefully tracking the credits and debits on their deposit account,
consumers still lack sufficient information about key aspects on their
accounts, including how holds will affect the availability of funds and
when funds from a deposit or a credit will be made available by the
depository institution.\51\ Finally, although the Agencies' proposed
Sec. ----.22 would, if implemented, ensure that consumers' payments
will not be treated as late for any reason (including for purposes of
triggering an increase in rate) unless they receive a reasonable amount
of time to make payment, there may be other reasons why consumers pay
late or miss a payment.\52\
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\51\ See discussion of overdrafts and debit holds in relation to
proposed Sec. ----.32 below.
\52\ See, e.g., Statement for FTC Credit Practices Rule, 49 FR
at 7747-48 (finding that ``the majority [of defaults] are not
reasonably avoidable by consumers'' because of factors such as loss
of income or illness); Testimony of Gregory Baer, Deputy General
Counsel, Bank of America before the H. Fin. Servs. Subcomm. on Fin.
Instit. & Consumer Credit at 4 (Mar. 13, 2008) (``If a customer
falls behind on an account, our experience tells us it is likely due
to circumstances outside his or her control.''); Sumit Agarwal &
Chunlin Liu, Determinants of Credit Card Delinquency and Bankruptcy:
Macroeconomic Factors, 27 J. of Econ. & Finance 75, 83 (2003)
(finding ``conclusive evidence that unemployment is critical in
determining delinquency''); Fitch: U.S. Credit Card & Auto ABS Would
Withstand Sizeable Unemployment Stress, Reuters (Mar. 24, 2008)
(``According to analysis performed by Fitch, increases in the
unemployment rate are expected to cause auto loan and credit card
loss rates to increase proportionally with subprime assets
experiencing the highest proportional rate.'') (available at http://www.reuters.com/article/pressRelease/idUS94254+24-Mar-2008+BW20080324).
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[[Page 28919]]
Accordingly, although the injury resulting from the application of
increased annual percentage rates to existing balances may be avoidable
in some individual cases, it appears that, as a general matter, this
injury is not reasonably avoidable. It does not appear, however, that
this reasoning extends to the application of increased rates to new
transactions. The Board's proposal under Regulation Z would, if
implemented, require creditors to provide notice 45 days in advance of
an increase in the annual percentage rate. See proposed 12 CFR
226.9(c), (g), 72 FR at 33056-58.\53\ In addition, as discussed below,
proposed ----.24 would not permit the institution to increase the rate
on purchases made up to 14 days after provision of the 45-day notice.
These proposals would enable consumers to reasonably avoid any injury
caused by application of an increased rate to new transactions by
providing consumers sufficient time to receive and review the 45-day
notice and to decide whether to continue using the card. Finally, as
also discussed below, it does not appear that, when a consumer has
violated the account terms, application of an increased rate to an
existing balance is an unfair practice in all circumstances.
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\53\ The Board has proposed additional revisions to these
provisions elsewhere in today's Federal Register.
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Injury is not outweighed by countervailing benefits. It appears
that the proposal will result in a net benefit to consumers because
some consumers are likely to benefit substantially while the adverse
effects on others are likely to be small. The Agencies are aware that
some institutions may offer lower annual percentage rates to consumers
at the outset of an account relationship knowing that the rate can be
subsequently adjusted to compensate for an increase in the cost of
funds or in the risk of default. The Agencies are also aware that, if
institutions are prohibited from increasing rates on existing balances,
they may charge higher rates or set lower credit limits initially or
curtail credit availability to higher risk consumers. As discussed
below, however, the Agencies have crafted the proposal to protect
consumers from the substantial injury caused by rate increases on
existing balances while, to the extent possible, minimizing the impact
on institutions' ability to adjust to market conditions and price for
risk.
As an initial matter, because the prohibition on applying an
increased annual percentage rate to an existing balance does not extend
to variable rates, an institution can guard against increases in the
cost of funds by utilizing a variable rate that reflects market
conditions. Furthermore, the Agencies do not propose to prohibit
institutions from increasing the annual percentage rate on an existing
balance if a consumer becomes 30 days delinquent. Although the
delinquency may not have been reasonably avoidable in certain
individual cases, the consumer will have received notice of the
delinquency (in the periodic statement and likely in other notices as
well) and had an opportunity to cure before becoming 30 days
delinquent. A consumer is unlikely, for example, to become 30 days
delinquent due to a single returned item or the loss of a payment in
the mail. Thus, even when the delinquency was not reasonably avoidable,
it appears that the harm in such cases is outweighed by the benefit to
consumers as a whole (in the form of lower annual percentage rates and
broader access to credit) from allowing institutions to reprice for
risk once a consumer has become significantly delinquent.\54\
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\54\ The Agencies also note that, although some consumers may
not have been able to avoid fees for violating the account terms
(for example, late payment fees or fees for exceeding the credit
limit), this injury does not appear to outweigh the countervailing
benefit to consumers or competition. The application of an increased
rate to an existing balance increases consumers' costs until the
balance is paid in full or is transferred to an account with more
favorable terms. The assessment of a fee, however, is generally an
isolated cost that will not be repeated unless the account terms are
violated again.
---------------------------------------------------------------------------
Accordingly, although the proposal could ultimately result in
higher upfront costs and less available credit for some consumers, it
appears that consumers and competition may benefit as a whole.
Consumers will not only be protected against unexpected increases in
the cost of transactions that have already been completed but will also
be able to more accurately assess the cost of using their credit card
accounts at the time they engage in new transactions. Furthermore, as
discussed in regard to payment allocation, upfront annual percentage
rates that are artificially reduced based on the expectation of future
increases do not represent a true benefit to consumers as a whole.
Similarly, competition may be enhanced because institutions that offer
annual percentage rates that realistically reflect risk and market
conditions will no longer be forced to compete with institutions
offering artificially reduced rates.
The Agencies considered the suggestion raised in some comments that
consumers be permitted to reject (or opt out of) the application of an
increased rate to an existing balance by closing the account. As
formulated in some of those comments, this proposal would not have
addressed the injury to consumers whose rates were increased due to an
unavoidable violation of the account terms. Even if consumers were
given a right to reject application of an increased rate to an existing
balance in all circumstances and were provided timely notice of that
right (for example, in the Board's proposed 45-day notice under
Regulation Z), it appears that the benefits to consumers of such a
right do not outweigh the injury caused by application of an increased
rate to an existing balance.
In most cases, it would not be economically rational for a consumer
to choose to pay more for credit that has already been extended,
particularly when the increased rate is significantly higher than the
prior rate. Accordingly, assuming consumers understand their right to
reject a rate increase, most would rationally exercise that right.\55\
As a result, the costs associated with prohibiting application of an
increased rate to an existing balance and providing consumers with the
right to reject such application should be similar. However, providing
consumers with notice and a means to exercise an opt-out right (e.g., a
toll-free telephone number) would create additional costs and burdens
for institutions and consumers. Furthermore, a right to reject
application of an increased rate to an existing balance would provide
fewer benefits to consumers as a whole than the proposed rule because,
no matter how well the right is disclosed, a substantial number of
consumers might inadvertently forfeit that right by failing to read,
understand, or act on the notice. In a 2006 report, the U.S. Government
Accountability Office (GAO) noted that, although state laws applying to
four of the six largest credit card issuers require an opt-out,
representatives of those issuers stated that few consumers exercise
that right.\56\ Thus, a right to reject application of an increased
rate to an existing balance could create similar
[[Page 28920]]
or greater costs while producing fewer benefits than the proposed rule.
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\55\ A consumer who cannot obtain a lower rate elsewhere may not
reject application of an increased rate to an existing balance. This
choice, however, may not enable the consumer to reasonably avoid
injury.
\56\ GAO Credit Card Report at 26-27.
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Proposal
----.24(a) General Rule
Proposed Sec. ----.24(a)(1) prohibits institutions from increasing
the annual percentage rate applicable to any outstanding balance on a
consumer credit card account, except in the circumstances set forth in
proposed Sec. ----.24(b). Proposed Sec. ----.24(a)(2) defines
``outstanding balance'' as meaning the amount owed on a consumer credit
card account at the end of the fourteenth day after the institution
provides a notice required by proposed 12 CFR 226.9(c) or (g) as set
forth in the Board's June 2007 Proposal.
As discussed above, the Board's June 2007 Proposal would require a
creditor to provide consumers with a written notice of a rate increase
at least 45 days before the effective date of that increase. See
proposed 12 CFR 226.9(c) and (g), 72 FR at 33056, 33058. The definition
of ``outstanding balance'' in proposed Sec. ----.24(a)(2) is intended
to prevent the Board's 45-day notice requirement from creating an
extended period following receipt of that notice during which new
transactions can be made at the prior rate. Although institutions could
address this concern by denying additional extensions of credit after
sending the 45-day notice, that outcome may not be beneficial to
consumers who have received the notice and wish to use the account for
new transactions. Accordingly, under proposed Sec. ----.24(a), the
balance to which an institution could not apply an increased rate is
the balance 14 days after the institution has provided the 45-day
notice. Consistent with the safe harbor in proposed Sec. ----.23(b),
14 days would allow seven days for the notice to reach the consumer and
seven days for the consumer to review that notice.
Proposed comment 24(a)-1 provides the following example of the
application of proposed Sec. ----.24(a): Assume that on December 30 a
consumer credit card account has a balance of $1,000 at an annual
percentage rate of 15%. On December 31, the institution mails or
delivers a notice required by proposed 12 CFR 226.9(c) informing the
consumer that the annual percentage rate will increase to 20% on
February 15. The consumer uses the account to make $2,000 in purchases
on January 10 and $1,000 in purchases on January 20. Assuming no other
transactions, the outstanding balance for purposes of proposed Sec. --
--.24 is the $3,000 balance as of the end of the day on January 14.
Therefore, under proposed Sec. ----.24(a), the institution cannot
increase the annual percentage rate applicable to that balance. The
institution can apply the 20% rate to the $1,000 in purchases made on
January 20 but, consistent with proposed 12 CFR 226.9(c), it cannot do
so until February 15.
Proposed comment 24(a)-2 clarifies that, consistent with the
approach in proposed Sec. ----.22(b), an institution is not required
to determine the specific date on which a notice required by proposed
12 CFR 226.9(c) or (g) was provided. For purposes of proposed Sec. --
--.24(a)(2), if the institution has adopted reasonable procedures
designed to ensure that notices required by proposed 12 CFR 226.9(c) or
(g) are provided to consumers no later than, for example, three days
after the event giving rise to the notice, the outstanding balance is
the balance at the end of the seventeenth day after such event.
----.24(b) Exceptions
Proposed Sec. ----.24(b) provides that an institution may apply an
increased annual percentage rate to an outstanding balance in three
circumstances. First, when the rate is increased due to the operation
of an index that is not under the institution's control and is
available to the general public, the increased rate may be applied to
the outstanding balance. This exception is similar to that in 12 CFR
226.5b(f)(1) and would apply to variable rates. Proposed comment
24(b)(1)-1 clarifies that an institution may not increase the rate on
an outstanding balance based on its own prime rate but may use a
published prime rate, such as that in the Wall Street Journal, even if
the institution's prime rate is one of several rates used to establish
the published rate. This comment would also clarify that an institution
may not increase the rate on an outstanding balance by changing the
method used to determine the indexed rate. Proposed comment 24(b)(1)-2
clarifies when a rate is considered ``publicly available.''
Second, when a promotional rate expires or is lost for a reason
specified in the account agreement (e.g., late payment), an increased
rate may be applied to the outstanding balance, provided that the
institution increases the rate to the standard rate rather than the
penalty rate. For example, as set forth in proposed comment 24(b)(2)-1,
assume that a consumer credit card account has a balance of $1,000 at a
5% promotional rate and that the institution also charges an annual
percentage rate of 15% for purchases and a penalty rate of 25%. If the
consumer does not make payment by the due date and the account
agreement specifies that event as a trigger for applying the penalty
rate, the institution may increase the annual percentage rate on the
$1,000 from the 5% promotional rate to the 15% annual percentage rate
for purchases. The institution may not, however, increase the rate on
the $1,000 from the 5% promotional rate to the 25% penalty rate, except
as otherwise permitted under proposed Sec. ----.24(b)(3).
Third, an institution may apply an increased rate to the
outstanding balance if the consumer's minimum payment has not been
received within 30 days after the due date. An example is provided in
proposed comment 24(b)(3)-1. As discussed above, a consumer will
generally have notice and an opportunity to cure the delinquency before
becoming 30 days past due.
----.24(c) Treatment of Outstanding Balances Following a Rate Increase
Proposed Sec. ----.24(c) prohibits institutions that have
increased the annual percentage rate applicable to a category of
transactions on a consumer credit card account with an outstanding
balance in that category from requiring payment of that outstanding
balance using a method that is less beneficial to the consumer than one
of two listed methods and from assessing fees or charges solely on an
outstanding balance. Proposed comment 24(c)-1 clarifies that proposed
Sec. ----.24(c) does not apply if the account does not have an
outstanding balance or if the rate on an outstanding balance is
increased pursuant to proposed Sec. ----.24(b). Proposed comment
24(c)-2 clarifies that proposed Sec. ----.24(c) does not apply to
balances in categories of transactions other than the category for
which an institution has increased the annual percentage rate. For
example, if an institution increases the annual percentage rate that
applies to purchases but not the rate that applies to cash advances,
proposed Sec. ----.24(c) applies to an outstanding balance consisting
of purchases but not an outstanding balance consisting of cash
advances.
Proposed Sec. ----.24(c)(1) would address the amount of time
provided to the consumer in which to pay off the outstanding balance.
While there may be circumstances in which institutions would accelerate
repayment of the outstanding balance to manage risk, proposed Sec. --
--.24(a) would provide little effective protection if consumers did not
receive a reasonable amount of time to pay off the outstanding balance.
Accordingly, proposed Sec. ----.24(c)(1) would require institutions to
provide consumers with a method of paying the outstanding balance that
is no less beneficial to the consumer than the
[[Page 28921]]
methods listed in proposed Sec. ----.24(c)(1)(i) and (ii). See
proposed comment 24(c)(1)-1. Proposed Sec. ----.24(c)(1)(i) would also
allow an institution to amortize the outstanding balance over a period
of no less than five years, starting from the date on which the
increased rate went into effect.\57\ Proposed Sec. ----.24(c)(1)(ii)
would allow the percentage of the outstanding balance that was included
in the required minimum periodic payment before the rate increase to be
doubled. Proposed comment 24(c)(1)(ii)-1 clarifies that this provision
does not limit or otherwise address an institution's ability to
determine the amount of the minimum payment on other balances. Proposed
comment 24(c)(1)(ii)-2 provides an example of how an institution could
adjust the minimum payment on the outstanding balance.
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\57\ This amortization period is consistent with guidance issued
by the Board, OCC, FDIC, and OTS, under the auspices of the Federal
Financial Institutions Examination Council, noting that credit card
workout programs should generally strive to have borrowers repay
debt within 60 months. 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).
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The protections of proposed Sec. ----.24(a) could also be undercut
if institutions were permitted to assess fees or other charges as a
substitute for an increase in the annual percentage rate. Accordingly,
proposed Sec. ----.24(c)(2) would prohibit institutions from assessing
any fee or charge based solely on the outstanding balance. As explained
in proposed comment 24(c)(2)-1, this proposal would prohibit, for
example, an institution from assessing a monthly maintenance fee on the
outstanding balance. The proposal would not, however, prohibit an
institution from assessing fees such as late payment fees or fees for
exceeding the credit limit that are based in part on the outstanding
balance.
Request for Comment
The Agencies request comment on:
The extent to which institutions raise rates on pre-
existing card balances.
The extent to which credit cards are offered pursuant to
agreements that do not permit institutions to raise rates on pre-
existing card balances.
The extent to which credit cards are offered pursuant to
agreements that permit consumers to reject application of increased
rates to pre-existing balances and the extent to which consumers take
advantage of this opportunity.
What consumer behavior with respect to an account
institutions consider when determining whether to increase the rate on
existing balances (other than late payment, returned payment for
insufficient funds, or exceeding the credit limit).
The reasons institutions currently increase rates on
existing balances and, for each reason, what percentage it represents
of all rate increases.
What effect the restrictions in proposed Sec. ----.24(a)
would have on outstanding securitizations and institutions' ability to
securitize credit card assets in the future.
Whether the restrictions in proposed Sec. ----.24(a)
would limit an institution's ability to effectively manage risk if the
default rate on credit cards is greater than anticipated in light of
the exceptions in proposed Sec. ----.24(b).
Whether the 14-day period in proposed Sec. ----.24(a)(2)
is an appropriate amount of time to enable consumers to receive and
review notice of a rate increase.
Whether other means of protecting consumers from
application of increased rates to existing balances (e.g., an opt-out)
are more appropriate.
Whether the exceptions in proposed Sec. ----.24(b) are
appropriate or necessary and whether other exceptions would be
appropriate. In particular, the Agencies seek comment on whether: (1)
Additional exceptions are needed to address safety and soundness
concerns; (2) additional exceptions are needed for a consumer's failure
to pay the account as agreed under the account terms, such as conduct
that results in imposition of a penalty rate (including late payment,
returned payment for insufficient funds, or exceeding the credit
limit); and (3) 30 days is the appropriate measure of a serious
delinquency.
Whether additional or different approaches to the
repayment of outstanding balances should be considered.
Whether restrictions similar to those in proposed Sec. --
--.24(c) should apply when, rather than increasing the rate on future
transactions, an institution declines to extend additional credit to
the consumer. For example, the Agencies seek comment on whether, if an
institution responds to an increased risk of default by declining to
extend additional credit to a consumer, the consumer should receive the
protections in proposed Sec. ----.24(c) with respect to any balance on
the account.
Sec. ----.25--Unfair Acts or Practices Regarding Fees for Exceeding
the Credit Limit Caused by Credit Holds
Although the Board's June 2007 Proposal did not directly address
over-the-credit-limit (OCL) fees, the Board received comments from
consumers, consumer groups, and members of Congress expressing concern
about the penalties imposed by creditors for exceeding the credit
limit. Specifically, commenters were concerned that consumers may
unknowingly exceed their credit limit and incur significant rate
increases and fees as a result. The Agencies' proposal to prohibit the
application of increased rates to existing balances addresses consumer
harm resulting from rate increases imposed as a penalty for exceeding
the credit limit. The Agencies also have concerns, however, about the
imposition of OCL fees in connection with credit holds. This proposal
is consistent with a parallel proposal in Subpart D with respect to
overdraft fees assessed in connection with debit holds.
As further discussed below in Subpart D, some merchants place a
temporary ``hold'' on an account when a consumer uses a credit or debit
card for a transaction in which the actual purchase amount is not known
at the time the transaction is authorized. For example, when a consumer
uses a credit card to obtain a hotel room, the hotel often will not
know the total amount of the transaction at the time because that
amount may depend on, for example, the number of days the consumer
stays at the hotel or the charges for incidental services the hotel may
provide to the consumer during the stay (e.g., room service).
Therefore, to cover against its risk of loss, the hotel may place a
hold on the available credit on the consumer's account in an amount
sufficient to cover the expected length of the stay plus an additional
amount for potential purchases of incidentals. In these circumstances,
the institution may authorize the hold but does not know the amount of
the transaction until the hotel submits the actual purchase amount for
settlement.
Typically, the hold is kept in place until the transaction amount
is presented to the institution for payment and settled, which may take
place a few days after the transaction occurred. During this time
between authorization and settlement, the hold remains in place on the
consumer's account. The Agencies are concerned that consumers
unfamiliar with credit hold practices may inadvertently exceed the
credit limit and incur an OCL fee because they assumed that only the
actual purchase
[[Page 28922]]
amount of the transaction was unavailable for additional transactions.
Legal Analysis
Assessing an OCL fee when the credit limit is exceeded as a result
of a credit hold appears to be an unfair act or practice under 15
U.S.C. 45(n) and the standards articulated by the FTC. First, an OCL
fee constitutes substantial monetary injury. Second, this injury does
not appear to be reasonably avoidable because consumers are generally
unaware that a hold has been placed on their account. The Agencies do
not believe that enhanced disclosures would enable consumers to avoid
the injury because, even if consumers were to receive notice of the
amount of the hold at point of sale, they could not know the length of
time the hold will remain in place. Third, there do not appear to be
countervailing benefits to consumers or competition. The proposal does
not prohibit the use of holds, only the assessment of an OCL fee caused
by a hold. The Agencies note that there is little risk to the
institution from an authorized transaction until the transaction is
presented for settlement by the merchant. At that point, the risk of
loss is not for the amount of the hold, but rather for the actual
purchase amount of the transaction. The Agencies do not, however,
propose to prohibit institutions from assessing an OCL fee if there is
insufficient available credit to cover the actual purchase amount.
Proposal
Proposed Sec. ----.25 would prohibit institutions from assessing
an OCL fee if the credit limit was exceeded due to a hold unless the
actual amount of the transaction for which the hold was placed would
have resulted in the consumer exceeding the credit limit. Proposed
comments 25-2 and 25-3 provide examples of two situations in which this
prohibition would apply. The first is where the amount of the hold for
an authorized transaction exceeds the credit limit. Assume that a
consumer has a credit limit of $2,000 and a balance of $1,500 on a
consumer credit card account. The consumer uses the credit card to
reserve a hotel room for five days. When the consumer checks in, the
hotel obtains authorization from the institution for a $750 ``hold'' on
the account to ensure there is adequate available credit to cover the
total cost of the anticipated stay. The consumer checks out of the
hotel after three days, and the total cost of the stay is $450, which
is charged to the consumer's credit card account. Assuming that there
is no other activity on the account, Sec. ----.25 prohibits the
institution from assessing an OCL fee with respect to the $750 hold.
If, however, the total cost of the stay had been more than $500, Sec.
----.25 would not prohibit the institution from assessing an OCL fee.
Another situation in which an institution would be prohibited from
assessing an OCL fee is when the hold for a transaction causes a
subsequent transaction to exceed the credit limit. Assume that a
consumer has a credit limit of $2,000 and a balance of $1,400 on a
consumer credit card account. The consumer uses the credit card to
reserve a hotel room for five days. When the consumer checks in, the
hotel obtains authorization from the institution for a $750 hold on the
account to ensure there is adequate available credit to cover the total
cost of the anticipated stay. While the hold remains in place, the
consumer uses the credit card to make a $150 purchase. The consumer
checks out of the hotel after three days, and the total cost of the
stay is $450, which is charged to the consumer's credit card account.
Assuming that there is no other activity on the account, Sec. ----.25
would prohibit the institution from assessing an OCL fee with respect
to either the $750 hold or the $150 purchase. If, however, the total
cost of the stay had been more than $450, Sec. ----.25 would not
prohibit the institution from assessing an OCL fee.
Proposed comments 25-4 and 25-5 provide additional examples of the
operation of this rule.
Request for Comment
The Agencies are concerned about other potentially unfair practices
regarding the assessment of fees for exceeding the credit limit. In
order to gather information for purposes of determining whether
additional prohibitions are warranted, the Agencies solicit comment on:
The extent to which institutions assess more than one fee
per billing cycle for exceeding the credit limit and, if so, what
factors determine whether a fee is assessed (e.g., one fee for each
transaction while the account is over the credit limit).
The extent to which institutions tier or otherwise vary
the fee for exceeding the credit limit based on the number or dollar
amount of transactions while the account is over the credit limit.
The extent to which institutions assess fees for exceeding
the credit limit when the transaction that exceeded the credit limit
occurred in an earlier billing cycle and the consumer has not engaged
in subsequent transactions.
Section----.26--Unfair Balance Computation Method
The Agencies propose to prohibit institutions, as an unfair act or
practice, from imposing finance charges on consumer credit card
accounts based on balances for days in billing cycles that precede the
most recent billing cycle. Currently, TILA requires creditors to
explain as part of the account-opening disclosures the method used to
determine the balance to which rates are applied. 15 U.S.C. 1637(a)(2).
In its June 2007 Proposal, the Board proposed that the balance
computation method be disclosed outside the account-opening table
because explaining lengthy and complex methods may not benefit
consumers. 72 FR at 32991-92. That proposal was based on the Board's
consumer testing, which indicated that consumers did not understand
explanations of balance computation methods. Nevertheless, the Board
observed that, because some balance computation methods are more
favorable to consumers than others, it was appropriate to highlight the
method used, if not the technical computation details.
In response to its proposal, the Board received comments from
consumers, consumer groups, and members of Congress urging the Board to
prohibit the balance computation method sometimes referred to as ``two-
cycle'' or ``double-cycle.'' This method has several permutations but,
generally speaking, an institution using the two-cycle method assesses
interest not only on the balance for the current billing cycle but also
on the balance for the preceding billing cycle. This method generally
does not result in additional finance charges for a consumer who
consistently carries a balance from month to month because interest is
always accruing on the balance. Nor does the two-cycle method affect
consumers who pay their balance in full within the grace period every
month because interest is not imposed on their balances. The two-cycle
method does, however, result in greater interest charges for consumers
who pay their balance in full one month but not the next month.
The following example illustrates how the two-cycle method results
in higher costs for these consumers than other balance computation
methods. A consumer has a zero balance on a credit card account on
January 1, which is the start of the billing cycle. The consumer uses
the credit card for a $500 purchase on January 15. The consumer makes
no other purchases and the billing cycle closes on January 31. The
consumer
[[Page 28923]]
pays $400 on the due date (February 25), leaving a $100 balance. Under
the average daily balance computation method that is used by most
credit card issuers, because the consumer did not pay the balance in
full on February 25, the periodic statement showing February activity
would reflect interest charged on the $500 purchase from the start of
the billing cycle (February 1) through February 24 and interest on the
remaining $100 from February 25 through the end of the billing cycle
(February 28). Under the two-cycle method, however, interest would also
be charged on the $500 purchase from the date of purchase (January 15)
to the end of the January billing cycle (January 31).
Legal Analysis
Imposing finance charges on consumer credit card accounts based on
balances for days in billing cycles that precede the most recent
billing cycle appears to be an unfair act or practice under 15 U.S.C.
45(n) and the standards articulated by the FTC.
First, as described above, computing finance charges based on
balances preceding the most recent billing cycle appears to cause
substantial consumer injury because consumers incur higher interest
charges than they would under a balance computation method that focuses
only on the most recent billing cycle. Second, it does not appear that
consumers can reasonably avoid this injury because, once they use the
card, they have no control over the methods used to calculate the
finance charges on their accounts. Furthermore, as noted above, the
Board's consumer testing indicates that disclosures are not successful
in helping consumers understand balance computation methods.
Accordingly, a disclosure will not enable the consumer to avoid that
method when comparing credit card accounts or to avoid its effects when
using a credit card.
Third, there do not appear to be any significant benefits to
consumers or competition from computing finance charges based on
balances preceding the most recent billing cycle. The Agencies
understand that many institutions no longer use the two-cycle
computation method. Although prohibition of the two-cycle computation
method may reduce revenue for the institutions that currently use it
and those institutions may replace that revenue by charging consumers
higher annual percentage rates or fees, it appears that this result
would nevertheless benefit consumers because it will result in more
transparent pricing.
Proposal
----.26(a) General Rule
Proposed Sec. ----.26(a) would prohibit institutions from imposing
finance charges on balances on consumer credit card accounts based on
balances for days in billing cycles preceding the most recent billing
cycle. Proposed comment 26(a)-1 cites the two-cycle average daily
balance computation method as an example of balance computation methods
that would be prohibited by the proposed rule and tracks commentary
under Regulation Z. See 12 CFR 226.5a cmt. 5a(g)-2. Proposed comment
26(a)-2 provides an example of the application of the two-cycle method.
----.26(b) Exceptions
Proposed Sec. ----.26(b) would create two exceptions to the
general prohibition in proposed Sec. ----.26(a). First, institutions
would not be prohibited from charging consumers for deferred interest
even though that interest may have accrued over multiple billing
cycles. Thus, if a consumer did not pay a balance or transaction in
full by the specified date under a deferred interest plan, the
institution would be permitted to charge the consumer for interest
accrued during the period the plan was in effect.
Second, institutions would not be prohibited from adjusting finance
charges following resolution of a billing error dispute. For example,
if after complying with the requirements of 12 CFR 226.13 an
institution determines that a consumer owes all or part of a disputed
amount, the institution would be permitted to adjust the finance charge
accordingly, even if that requires computing finance charges based on
balances in billing cycles preceding the most recent billing cycle.
Section----.27--Unfair Acts or Practices Regarding Security Deposits
and Fees for the Issuance or Availability of Credit
The Agencies propose to prohibit institutions from charging to a
consumer credit card account security deposits and fees for the
issuance or availability of credit during the twelve months after the
account is opened that, in the aggregate, constitute the majority of
the credit limit for that account. In addition, the proposal would
prohibit institutions from charging to the account during the first
billing cycle security deposits and fees for the issuance or
availability of credit that total more than 25 percent of the credit
limit. Finally, if security deposits and fees for the issuance or
availability of credit total more than 25 percent but less than the
majority of the credit limit during the first year, the institution
would be required to spread that amount equally over the eleven billing
cycles following the first billing cycle.
As the Board noted in its June 2007 Proposal, subprime credit cards
often have substantial fees related to the issuance or availability of
credit. See 72 FR at 32980, 32983. For example, these cards may impose
an annual fee and a monthly maintenance fee for the card. In other
cases, a security deposit may be charged to the account. These cards
may also impose multiple one-time fees when the consumer opens the card
account, such as an application fee and a program fee. Those amounts
are often billed to the consumer as part of the first statement and
substantially reduce the amount of credit that the consumer has
available to make purchases or other transactions on the account. For
example, after security deposits or fees have been billed to accounts
with a minimum credit line of $250, the consumer may have less than
$100 of available credit with which to make purchases or other
transactions unless the consumer pays the deposits or fees. In
addition, consumers will pay interest on security deposits and fees
until they are paid in full.
The federal banking agencies have received many complaints from
consumers with respect to cards of this type. Consumers often say that
they were not aware of how little available credit they would have
after the assessment of security deposits and fees. In an effort to
address these concerns, the Board's June 2007 Proposal included several
proposed amendments to Regulation Z's solicitation and application
disclosures for credit and charge cards.
Specifically, the Board proposed to require creditors to disclose
both the annualized and the periodic amount of the fee and how often
the periodic fee will be imposed. See proposed 12 CFR 226.5a(b)(2), 72
FR at 33046; see also 72 FR at 32980. The Board also proposed to
require creditors to disclose the impact of security deposits and fees
for the issuance or availability of credit on consumers' initial
available credit. See proposed 12 CFR 226.5a(b)(16), 72 FR at 33047.
Specifically, the Board proposed that, if the total amount of any
security deposit or required fees for the issuance or availability of
credit that will be charged against the card at account opening equals
25 percent or more of the minimum credit limit offered for the card,
the creditor must disclose an example of the amount of available credit
a consumer would have
[[Page 28924]]
remaining, assuming that the consumer receives the minimum credit limit
offered on the account. For example, if the minimum credit limit on an
account is $250 and security deposits and covered fees total $150, the
creditor would be required to disclose that the consumer may receive
only $100 in available credit.
Elsewhere in today's Federal Register, the Board is proposing to
clarify the circumstances in which a consumer who has received account-
opening disclosures, but has not yet used the account or paid a fee,
may reject the plan and not be obligated to pay upfront fees. Under
proposed 12 CFR 226.5(b)(1)(iv), the right to reject an open-end (not
home-secured) plan would apply when any fee (other than an application
fee that is charged to all applicants whether or not they receive the
credit) is charged or agreed to be paid before the consumer receives
the account-opening disclosures. Similarly, under proposed 12 CFR
226.6(b)(4)(vii), creditors that require substantial fees at account
opening and leave consumers with a limited amount of available credit
would be required to provide a notice of the consumer's right to reject
the plan and not pay fees (other than an application fee, as discussed
above) unless the consumer uses the account or pays the fees after
receiving a billing statement. As discussed below, however, the
Agencies are proposing additional, substantive protections.
Legal Analysis
Charging to a consumer credit card account security deposits and
fees for the issuance or availability of the credit during the first
year that total a majority of the credit limit appears to be an unfair
act or practice under 15 U.S.C. 45(n) and the standards articulated by
the FTC. Similarly, charging to the account in the first billing cycle
security deposits and fees for the issuance or availability of credit
that total more than 25 percent of the credit limit also appears to be
an unfair act or practice under 15 U.S.C. 45(n) and the standards
articulated by the FTC.
Substantial consumer injury. Consumers incur substantial monetary
injury when security deposits and fees for the issuance or availability
of credit are charged to a consumer credit card account, both in the
form of the charges themselves and in the form of interest on those
charges. Even in cases where the institution provides a grace period,
many consumers may not be able to pay the charges in full during that
grace period. The potential injury from interest charges increases when
security deposits and fees for the issuance or availability of credit
are charged to the account in the first billing cycle rather than over
a longer period of time. In addition, when security deposits and fees
for the issuance or availability of credit are charged to the
consumer's account, they diminish the value of that account by reducing
the credit available to the consumer for purchases or other
transactions.\58\
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\58\ See OCC Advisory Letter 2004-4, at 3 (Apr. 28, 2004)
(stating that a finding of unfairness with respect to subprime cards
with financed security deposits could be based on the fact that
``because charges to the card by the issuer utilize all or
substantially all of the nominal credit line assigned by the issuer,
they eliminate the card utility and credit availability applied and
paid for by the cardholder'') (available at http://www.occ.treas.gov/ftp/advisory/2004-4.txt).
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Injury is not reasonably avoidable. It does not appear that
consumers are able to avoid the injury caused by the financing of
security deposits and fees for the issuance or availability of credit.
As an initial matter, disclosures may not be effective in allowing
consumers to avoid these charges, particularly where deceptive sales
practices mislead consumers about the amount of credit available.\59\
For example, in one recent case, the court found that credit card
marketing materials sent to consumers who were otherwise unable to
qualify for credit ``did not represent an accurate estimation of a
consumer's credit limit'' and that, ``at all times, it appeared that
the confusion was purposely fostered by [the defendant's]
telemarketers.'' \60\ In these circumstances, consumers may lack the
information necessary to avoid harm.
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\59\ See, e.g., OCC Advisory Letter 2004-4, at 2-3 (finding that
``solicitations and other marketing materials used for [subprime]
credit card programs have not adequately informed consumers of the
costs and other terms, risks, and limitations of the product being
offered'' and that, ``[i]n a number of cases, disclosures problems
associated with secured credit cards and related products have
constituted deceptive practices under the applicable standards of
the FTC Act'' (emphasis in original)); In re First Nat'l Bank in
Brookings, No. 2003-1 (Dept. of the Treasury, OCC) (Jan. 17, 2003)
(available at www.occ.treas.gov/ftp/eas/ea2003-1.pdf); In re First
Nat'l Bank of Marin, No. 2001-97 (Dept. of the Treasury, OCC Dec. 3,
2001) (available at www.occ.treas.gov/ftp/eas/ea2001-97.pdf).
\60\ People v. Applied Card Sys., Inc., 805 N.Y.S.2d 175, 178
(App. Div. 2005).
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Furthermore, because cards with high security deposits and fees are
typically targeted at subprime consumers whose credit histories or
other characteristics may prevent them from obtaining a credit card
elsewhere, those consumers may not be able to avoid financing the fees
associated with these cards because they lack the funds to pay the
charges up front.\61\ Furthermore, because the Board's proposals under
Regulation Z focus on amounts charged when the account is opened, those
disclosures could be evaded by subsequent charges, leaving consumers
with less available credit than they anticipated. Thus, consumers may
not reasonably be able to avoid the injury caused by the financing of
security deposits and fees for the issuance or availability of credit.
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\61\ See Statement for FTC Credit Practices Rule, 48 FR at 7746
(``If 80 percent of creditors include a certain clause in their
contracts, for example, even the consumer who examines contract[s]
from three different sellers has a less than even chance of finding
a contract without the clause. In such circumstances relatively few
consumers are likely to find the effort worthwhile, particularly
given the difficulties of searching for contract terms. * * *''
(footnotes omitted)).
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Injury is not outweighed by countervailing benefits. The Agencies
understand that, in some cases, consumer credit card accounts with
financed security deposits and fees can provide benefits to consumers
who are unable to obtain a credit card without such charges and who
lack the available funds to pay the security deposit and fees at or
before account opening. Once, however, security deposits and fees for
the issuance or availability of credit consume a majority of the credit
limit, it appears that the benefit to consumers from access to
available credit is outweighed by the high cost of paying for that
credit. The Agencies have sought to narrowly tailor the proposal by
allowing institutions to charge to the account security deposits and
fees that total less than a majority of the credit limit during the
first year and by allowing institutions to charge amounts totaling no
more than 25 percent of the credit limit during the first billing
cycle. Security deposits and fees paid from separate funds would not be
affected by the proposal.
Finally, although public policy does not serve a primary basis for
the Agencies' determination, the established public policy in favor of
the safety and soundness of financial institutions appears to support
the proposed limitations on the financing of security deposits and fees
for the issuance or availability of credit because that practice
appears to create a greater risk of default.\62\
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\62\ See OCC Advisory Letter 2004-4, at 4 (``[P]roducts carrying
fee structures that are significantly higher than the norm pose a
greater risk of default. * * * This is particularly true when the
security deposit and fees deplete the credit line so as to provide
little or no card utility or credit availability upon issuance. In
such circumstances, when the consumer has no separate funds at
stake, and little or no consideration has been provided in exchange
for the fees and other amounts charged to the consumer, the product
may provide a disincentive for responsible credit behavior and
adversely affect the consumer's credit standing.'').
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[[Page 28925]]
Proposal
----.27(a) Annual Rule
Proposed Sec. ----.27(a) prohibits institutions from financing
security deposits and fees for the issuance or availability of credit
during the twelve months following account opening if, in the
aggregate, those fees constitute a majority of the initial credit
limit. Proposed Sec. ----.27(a) would not, however, apply to security
deposits and fees for the issuance or availability of credit that are
not charged to the account. For example, an institution would not be
prohibited from providing a credit card account that requires a
consumer to pay a security deposit equal to the amount of credit
extended if that deposit is not charged to the account. Proposed
comment 27-1 clarifies that the ``initial credit limit'' for purposes
of this section is the limit in effect when the account is opened.
Proposed comment 27(a)-1 clarifies that the total amount of security
deposits and fees for the issuance or availability of credit
constitutes a majority of the initial credit limit if that total is
greater than half of the limit. For example, assume that a consumer
credit card account has an initial credit limit of $500. Under proposed
Sec. ----.27(a), an institution may charge to the account security
deposits and fees for the issuance or availability of credit totaling
no more than $250 during the twelve months after the date on which the
account is opened (consistent with proposed Sec. ----.27(b)).
----.27(b) Monthly Rule
Proposed Sec. .27(b) prohibits institutions from charging to the
account during the first billing cycle security deposits and fees for
the issuance or availability of credit that, in the aggregate,
constitute more than 25 percent of the initial credit limit. Any
additional security deposits and fees must be spread equally among the
eleven billing cycles following the first billing cycle. Proposed
comment 27(b)-1 clarifies that, when dividing amounts pursuant to
proposed Sec. ----.27(b)(2), the institution may adjust amounts by one
dollar or less. For example, if an institution is dividing $125 over
eleven billing cycles, it may charge $12 for four months and $11 for
seven months. Proposed comment 27(b)-2 provides the following example
of the application of proposed Sec. ----.27(b): Assume that a consumer
credit card account opened on January 1 has an initial credit limit of
$500 and that an institution charges to the account security deposits
and fees for the issuance or availability of credit that total $250
during the twelve months after the date on which the account is opened.
Assume also that the billing cycles for this account begin on the first
day of the month and end on the last day of the month. Under proposed
Sec. ----.27(b), the institution may charge to the account no more
than $250 in security deposits and fees for the issuance or
availability of credit. If it charges $250, the institution may charge
as much as $125 during the first billing cycle. If it charges $125
during the first billing cycle, it may then charge $12 in any four
billing cycles and $11 in any seven billing cycles during the year.
----.27(c) Fees for the Issuance or Availability of Credit
Proposed Sec. ----.27(c) defines ``fees for the issuance or
availability of credit'' as including any annual or other periodic fee,
any fee based on account activity or inactivity, and any non-periodic
fee that relates to opening an account. This definition is based on the
definition of ``fees for the issuance or availability of credit'' in
proposed 12 CFR 226.5a(b)(2). See 72 FR at 33046. This definition does
not include fees such as late fees, fees for exceeding the credit
limit, or fees for replacing a card. Proposed comments 27(c)-1, 2, and
3 are based on similar commentary to proposed 12 CFR 226.5a(b)(2) and
clarify the meaning of ``fees for the issuance or availability of
credit.'' See 72 FR at 33108.
Request for Comment
The Agencies seek comment on:
The dollar amount of security deposits and fees for the
issuance or availability of credit typically charged to the account in
the first billing cycle.
The percentage of the initial credit line that is
typically made unavailable due to security deposits and fees charged to
the account during the first billing cycle.
The degree to which consumers (including consumers with
limited or damaged credit histories) can secure credit cards without
high fees for the issuance or availability of credit.
Whether the proposal would inappropriately curtail
consumers' access to credit.
Whether the final rule should impose additional, specific
restrictions on charges on credit card accounts that a creditor can
impose without the consumer's advance authorization.
Whether the twelve-month time period in the proposal is
the appropriate time period to consider in determining how much of the
credit limit is consumed by security deposits and fees.
Whether disclosure of security deposits and fees enables
consumers to understand the impact of those charges on the availability
of credit.
Whether alternatives to proposed Sec. ----.27(b) are
appropriate.
Section ----.28--Deceptive Acts or Practices Regarding Firm Offers of
Credit
Proposed Sec. ----.28 applies when institutions make firm offers
of credit for consumer credit card accounts that contain a range of or
multiple annual percentage rates or credit limits. When the rate or
credit limit that a consumer responding to such an offer will receive
depends on specific criteria bearing on creditworthiness, Sec. ----.28
requires that the institution disclose the types of eligibility
criteria in the solicitation. The disclosure must be provided in a
manner that is reasonably understandable to consumers and designed to
call attention to the nature and significance of the eligibility
criteria for the lowest annual percentage rate or highest credit limit
stated in the solicitation. Under the proposal, an institution may use
the following disclosure to meet these requirements, if it is presented
in a manner that calls attention to the nature and significance of the
eligibility information, as applicable: ``If you are approved for
credit, your annual percentage rate and/or credit limit will depend on
your credit history, income, and debts.''
Legal Analysis
The Fair Credit Reporting Act (FCRA) limits the purposes for which
consumer reports can be obtained. It permits consumer reporting
agencies to furnish consumer reports only for one of the ``permissible
purposes'' enumerated in the statute.\63\ One of the permissible
purposes set forth in the FCRA relates to prescreened firm offers of
credit or insurance.\64\ In a typical use of prescreening for firm
offers of credit, a creditor submits a request to a consumer reporting
agency for the contact information of consumers meeting certain pre-
established criteria that will be reflected in the consumer reporting
agency's records, such as credit scores in a certain range. The
creditor then sends offers of credit targeted to those consumers, which
state certain terms under which credit may be provided. For example, a
firm offer of credit may contain statements regarding the annual
percentage rate or credit limit that may be provided.
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\63\ See 15 U.S.C. 1681b. Similarly, persons obtaining consumer
reports may do so only with a permissible purpose. See 15 U.S.C.
1681b(f).
\64\ See 15 U.S.C. 1681a(l) (defining ``firm offer of credit or
insurance'').
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[[Page 28926]]
The FCRA requires that a firm offer of credit state, among other
things, that (1) information contained in the consumer's credit report
was used in connection with the transaction; (2) the consumer received
the firm offer because the consumer satisfied the criteria for
creditworthiness under which the consumer was selected for the offer;
and (3) if applicable, the credit may not be extended if, after the
consumer responds to the offer, the consumer does not meet the criteria
used to select the consumer for the offer or any other applicable
criteria bearing on creditworthiness or does not furnish any required
collateral.\65\ The creditor may apply certain additional criteria to
evaluate applications from consumers that respond to the offer, such as
the consumer's income or debt-to-income ratio.\66\ As discussed below,
the Agencies are concerned that consumers receiving firm offers of
credit may not understand that they are not necessarily eligible for
the lowest annual percentage rate and the highest credit limit stated
in the offer.
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\65\ See 15 U.S.C. 1681m(d)(1); see also 16 CFR 642.1-642.4
(Prescreen Opt-Out Notice Rule).
\66\ See, e.g., 15 U.S.C. 1681a(l).
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It appears to be a deceptive act or practice under the standards
articulated by the FTC to make a firm offer of credit for a consumer
credit card account without disclosing that consumers may not receive
the lowest annual percentage rate and highest credit limit offered.
Likely to mislead consumers acting reasonably under the
circumstances. As discussed above, the FCRA requires that firm offers
of credit state that the consumer was selected for the offer based on
certain criteria for creditworthiness.\67\ Indeed, firm offers of
credit often state that consumers have been ``pre-selected'' for credit
or make similar statements. Thus, in the absence of an affirmative
statement to the contrary, consumers may reasonably believe that they
can receive the lowest annual percentage rate and highest credit limit
stated in the offer even though that is not the case.\68\ For example,
assume that an institution obtains from a consumer reporting agency a
list of consumers with credit scores of 650 or higher for purposes of
sending those consumers a solicitation for a firm offer of credit. The
solicitation sent by the institution states that the consumer has been
``pre-selected'' for credit and advertises ``rates from 8.99% to
19.99%'' and ``credit limits from $1,000 to $10,000.'' But under the
criteria established by the institution before the selection of the
consumers for the offer, the institution will only provide an interest
rate of 8.99% and a credit limit of $10,000 to those consumers
responding to the solicitation who are verified to have a credit score
of 650 or higher, who have a debt-to-income ratio below a certain
amount, and who meet other specific criteria bearing on
creditworthiness. Because the consumers receiving the offer are not
informed of these requirements, consumers who do not meet one or more
of the requirements could reasonably interpret the offer as stating
that they may receive an interest rate of 8.99% or a credit limit of
$10,000 when, in fact, they will not.\69\
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\67\ See 15 U.S.C. 1681m(d)(1)(B).
\68\ See FTC Policy Statement on Deception at 3 (``To be
considered reasonable, the interpretation or reaction does not have
to be the only one. When a seller's representation conveys more than
one meaning to reasonable consumers, one of which is false, the
seller is liable for the misleading interpretation.'' (footnotes
omitted)). In consumer testing conducted in relation to the Board's
June 2007 Proposal, almost all participants understood that the
credit limit for which they would qualify depended on their
creditworthiness, such as credit history. See 72 FR at 32984. This
testing did not, however, specifically focus on firm offers of
credit, which, as discussed above, contain statements that the
consumer has been selected for the offer.
\69\ See FTC v. U.S. Sales Corp., 785 F. Supp. 737, 751 (N.D.
Ill. 1992) (concluding that express representations that consumers
would not be turned down for a secured credit card were misleading
because applicants could be denied a card if they had a poor credit
history).
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As noted above, the FCRA requires that firm offers of credit state,
where applicable, that credit may not be extended if the consumer no
longer meets the criteria used to select the consumer for the offer or
does not meet any other applicable criteria bearing on
creditworthiness.\70\ This statement, however, only informs the
consumer that there may be circumstances in which the consumer will not
be eligible to receive any credit. This statement does not enable
consumers to evaluate whether they will be eligible for the lowest
annual percentage rate and highest credit limit if they respond to the
firm offer.
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\70\ See 15 U.S.C. 1681m(d)(1)(C).
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Materiality. Statements in firm offers of credit that the consumer
has been selected for the offer based on certain criteria for
creditworthiness or that the consumer has been ``pre-selected'' for
credit are material because they are likely to affect a consumer's
decision about whether to respond to the offer of credit.\71\
Furthermore, statements in firm offers of credit regarding credit terms
are presumptively material because they relate to the cost of a product
or service.\72\
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\71\ FTC Policy Statement on Deception at 6-7 (``A `material'
misrepresentation or practice is one which is likely to affect a
consumer's choice of or conduct regarding a product. In other words,
it is information that is important to consumers.'' (footnotes
omitted)).
\72\ See id. at 6.
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Proposal
----.28(a) Disclosure of Criteria Bearing on Creditworthiness
Proposed Sec. ----.28(a) provides that, if an institution offers
a range or multiple annual percentage rates or credit limits when
making a solicitation for a firm offer of credit for a consumer credit
card account, and the annual percentage rate or credit limit that
consumers approved for credit will receive depends on specific criteria
bearing on creditworthiness, the institution must disclose the types of
criteria in the solicitation. The disclosure must be provided in a
manner that is reasonably understandable to consumers and designed to
call attention to the nature and significance of the information
regarding the eligibility criteria for the lowest annual percentage
rate or highest credit limit offered.
Under the proposal, an institution may use the following disclosure
to meet these requirements, if it is presented in a manner that calls
attention to the nature and significance of the eligibility
information: ``If you are approved for credit, your annual percentage
rate and credit limit will depend on your credit history, income, and
debts.'' Proposed comment .28(a)(1)-1 explains that whether a
disclosure has been provided in a manner that is designed to call
attention to the nature and significance of required information
depends on where the disclosure is placed in the solicitation and how
it is presented, including whether the disclosure uses a typeface and
type size that are easy to read and uses boldface or italics. Placing
the disclosure in a footnote would not satisfy this requirement.
Proposed comment .28(a)-2 clarifies that, to the extent that
disclosures required by proposed Sec. ----.28(a) are provided
electronically, the institution must comply with the requirements in 12
CFR 226.5a(a)(2)-8 and -9.
Proposed comment .28(a)-3 clarifies that a firm offer of credit
solicitation that states an annual percentage rate or credit limit for
a credit card feature and a different annual percentage rate or credit
limit for a different credit card feature does not offer multiple
annual percentage rates or credit limits. For example, if a firm offer
of credit solicitation offers a 15% annual percentage rate for
purchases and a 20% annual percentage rate for cash
[[Page 28927]]
advances, the solicitation does not offer multiple annual percentage
rates for purposes of proposed Sec. ----.28(a). Proposed comment
.28(a)-4 provides an example of the operation of proposed Sec. --
--.28(a).
Proposed comment .28(a)-5 clarifies that, when making a disclosure
under proposed Sec. ----.28, an institution may only disclose the
criteria it uses in evaluating whether consumers who are approved for
credit will receive the lowest annual percentage rate or the highest
credit limit. For example, if an institution does not consider the
consumer's debts when determining whether the consumer should receive
the lowest annual percentage rate or highest credit limit, the
disclosure must not refer to ``debts.''
.28(b) Firm Offer of Credit Defined
Proposed Sec. ----.28(c) provides that, for purposes of this
section, ``firm offer of credit'' has the same meaning as that term has
under the definition of ``firm offer of credit or insurance'' in
section 603(l) of the Fair Credit Reporting Act (15 U.S.C. 1681a(l)).
Request for Comment
The Agencies are concerned that the disclosure in proposed Sec. --
--.28(a) may not be effective unless it is provided in close proximity
to the annual percentage rate and/or credit limit in the firm offer of
credit. However, the Agencies also recognize that the annual percentage
rate and/or credit limit may be stated multiple times in the offer.
Accordingly, the Agencies request comment on whether proposed Sec. --
--.28 should contain a proximity requirement. If a proximity
requirement were to be adopted, the Agencies request comment on whether
the disclosure should be proximate to the first statement of the annual
percentage rate or credit limit or the most prominent statement of the
annual percentage rate or credit limit.
The Agencies also request comment on:
Whether consumers who receive firm offers of credit
offering a range of or multiple annual percentage rates or credit
limits understand that there may be no possibility that they will be
eligible for the lowest annual percentage rate and the highest credit
limit stated in the offer.
Whether the proposed disclosure would be effective in
informing consumers that they may not receive the best terms
advertised.
Other Credit Card Practices
The Agencies are also concerned about the potentially deceptive use
of the term ``interest free'' in connection with deferred interest
plans for credit cards. While consumers may benefit from making
payments over a period of time, the Agencies are concerned that some
consumers may not be adequately informed that accrued interest charges
will be added to the principal owed if they fail to make payment in
full by the end of the deferred interest term or otherwise default on
the agreement. Because the Board is addressing this concern in a
separate proposal under Regulation Z in today's Federal Register, the
Agencies are not proposing to address the issue in this rulemaking.
Under the Board's Regulation Z proposal, creditors that describe
deferred interest plans by using ``no interest'' or similar terms in
regard to interest during the deferred interest period would be
required to disclose in close proximity to the first listing of such
terms: (1) A statement that interest will be charged from the date of
purchase if the balance is not paid in full by the end of the deferred
interest period; and (2) if applicable, a statement that making only
the minimum payment will not pay off the balance or transaction in time
to avoid interest charges.
VI. Section-By-Section Analysis of Overdraft Services Subpart
Introduction
Historically, if a consumer engaged in a transaction that overdrew
his or her account, depository institutions used their discretion on an
ad hoc basis to pay the overdraft, usually imposing a fee. The Board
recognized this longstanding practice when it initially adopted
Regulation Z in 1969 to implement TILA. The regulation provided that
these transactions are generally not covered under Regulation Z where
there is no written agreement between the consumer and institution to
pay an overdraft and impose a fee. See 12 CFR Sec. 226.4(c)(3). The
treatment of overdrafts in Regulation Z was designed to facilitate
depository institutions' ability to accommodate consumers' transactions
on an ad hoc basis.
Over the years, most institutions have largely automated the
overdraft payment process, including setting specific criteria for
determining whether to honor overdrafts and limits on the amount of the
coverage provided. From the industry's perspective, the benefits of
overdraft, or bounced check, services include a reduction in the costs
of manually reviewing individual items, as well as the consistent
treatment for all customers with respect to overdraft payment
decisions. Moreover, industry representatives assert that overdraft
services are valued by consumers, particularly for check transactions,
as they allow consumers to avoid additional fees that would be charged
by the merchant if the item was returned unpaid, and other adverse
consequences, such as the furnishing of negative information to a
consumer reporting agency.\73\
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\73\ See, e.g., Overdraft Protection: Fair Practices for
Consumers: Hearing before the House Subcomm. on Financial
Institutions and Consumer Credit, House Comm. on Financial Services,
110th Cong. (2007) (Overdraft Protection Hearing) (available at
http://www.house.gov/apps/list/hearing/financialsvcs_dem/hr0705072.shtml).
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In contrast, consumer advocates believe overdraft transactions are
a high-cost form of lending that traps low- and moderate-income
consumers (particularly students and the elderly) into paying high
fees. They also note that consumers are enrolled in overdraft services
automatically, often with no chance to opt out. In addition, consumer
advocates believe that by honoring check and other types of overdrafts,
institutions encourage consumers to rely on this service and thereby
consumers incur greater costs. Consumer advocates also express concerns
about debit card overdrafts where the dollar amount of the fee may far
exceed the dollar amount of the overdraft, and multiple fees may be
assessed in a single day for a series of small-dollar transactions.\74\
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\74\ See, e.g., Overdraft Protection Hearing at n.42; Jacqueline
Duby, Eric Halperin & Lisa James, High Cost and Hidden From View:
The $10 Billion Overdraft Loan Market, Ctr. for Responsible Lending
(May 26, 2005) (noting that the bulk of overdraft fees are incurred
by repeat users) (available at www.responsiblelending.org).
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According to a recent report from the GAO, the average cost of
overdraft and insufficient funds fees has increased roughly 11 percent
between 2000 and 2007 to just over $26 per item.\75\ The GAO also
reported that large institutions charged between $4 and $5 more for
overdraft and insufficient fund fees compared to smaller institutions.
In addition, the GAO Bank Fees Report noted that a small number of
institutions (primarily large banks) apply tiered fees to overdrafts,
charging higher fees as the number of overdrafts in the account
increases.\76\
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\75\ See Bank Fees: Federal Banking Regulators Could Better
Insure That Consumers Have Required Disclosure Documents Prior to
Opening Checking or Savings Accounts, GAO Report 08-281 (January
2008) (GAO Bank Fees Report); see also Bankrate 2007 Checking
Account Study, posted Sep. 26, 2007 (reporting an average overdraft
fee of over $28 per item) (available at: www.bankrate.com/brm/news/chk/chkstudy/20070924_bounced_check_fee_a1.asp?caret=2e).
\76\ According to the GAO, of the financial institutions that
applied up to three tiers of fees in 2006, the average overdraft
fees were $26.74, $32.53 and $34.74, respectively. See GAO Bank Fees
Report at 14.
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[[Page 28928]]
Overdraft services vary among institutions but typically share
certain characteristics. Coverage is ``automatic'' for consumers who
meet the institution's criteria (e.g., the account has been open a
certain number of days, the account is in ``good standing,'' deposits
are made regularly). While institutions generally do not underwrite on
an individual account basis in determining whether to enroll the
consumer in the service initially, most institutions will review
individual accounts periodically to determine whether the consumer
continues to qualify for the service, and the amounts that may be
covered.
Most overdraft program disclosures state that payment of an
overdraft is discretionary on the part of the institution, and disclaim
any legal obligation of the institution to pay any overdraft.
Typically, the service is extended to also cover non-check
transactions, including withdrawals at ATMs, automated clearinghouse
(ACH) transactions, debit card transactions at point-of-sale, pre-
authorized automatic debits from a consumer's account, telephone-
initiated funds transfers, and on-line banking transactions. A flat fee
is charged each time an overdraft is paid and, commonly, institutions
charge the same amount for paying the overdraft as they would if they
returned the item unpaid. A daily fee also may apply for each day the
account remains overdrawn.
Where institutions vary most in their provision of overdraft
services is the extent to which institutions inform consumers about the
existence of the service or otherwise promote the use of the service.
For those institutions that choose to promote the existence and
availability of the service, they may also disclose to consumers,
typically in a brochure or welcome letter, the aggregate dollar limit
of overdrafts that may be paid under the service.
Notwithstanding the Agencies' issuance in February 2005 of guidance
on overdraft protection programs, the Board's May 2005 final rule under
Regulation DD, and NCUA's 2006 final rule under part 707,\77\ the
Agencies remain concerned about certain aspects of the marketing,
disclosure, and implementation of some overdraft services. For example,
many consumers may be automatically enrolled in their institution's
overdraft service, without being given an adequate opportunity to opt
out of the service and avoid the costs associated with the service.
While the February 2005 overdraft guidance recommended that consumers
be given an opportunity to opt out, this practice may not be uniform
across institutions and the opt-out right may not be adequately
disclosed to consumers. In addition, the Agencies remain concerned
about the adequacy of disclosures provided to consumers regarding the
costs of overdraft services.
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\77\ See Background section of the SUPPLEMENTARY INFORMATION for
discussion of February 2005 Joint Guidance and OTS Guidance, the
2005 final amendments under Regulation DD, and the 2006 final
amendments to part 707.
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Thus, pursuant to their authority under 15 U.S.C. 57a(f)(1), the
Agencies are proposing to adopt rules prohibiting specific unfair acts
or practices with respect to overdraft services. The Agencies would
locate these rules in a new Subpart D to their respective regulations
under the FTC Act. These proposals should not be construed as a
definitive conclusion by the Agencies that a particular act or practice
is unfair. The Board is also publishing a separate proposal addressing
overdraft services in today's Federal Register using its authority
under TISA and Regulation DD.
Section ----.31--Definitions
Proposed Sec. ----.31 sets forth certain key definitions to
clarify the scope and intent of the provisions addressing unfair acts
or practices involving overdraft services.
Account
The Agencies would limit the scope of the overdraft services
provisions to ``accounts'' as defined in TISA, Regulation DD, and part
707. Thus, the proposal uses a definition of ``account'' that is
limited to ``a deposit account at a depository institution that is held
by or offered to a consumer.'' See proposed Sec. ----.31(a); 12 CFR
230.2(a) and 707.2(a). Although the Agencies are aware that overdraft
services are sometimes provided for prepaid cards, such card products
are beyond the scope of this rulemaking.
Consumer
The term ``consumer'' refers to a person who holds an account
primarily for personal, family, or household purposes.\78\ Thus, the
proposal would not cover overdraft services that are provided for
business accounts, including sole proprietorships. See proposed Sec.
----.31(b).
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\78\ For purposes of this rulemaking, as it relates to federal
credit unions, the term ``consumer'' refers to natural person
members.
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Overdraft Service
Proposed Sec. ----.31(c) defines ``overdraft service'' to mean a
service under which an institution charges a fee for paying a
transaction (including a check, point-of-sale debit card transaction,
ATM withdrawal and other electronic transaction, such as a
preauthorized electronic fund transfer or an ACH debit) that overdraws
an account. The term covers circumstances when an institution pays an
overdraft pursuant to a promoted program or service or under an
undisclosed policy or practice and charges a fee for that service. The
term does not, however, include services in which an institution pays
an overdraft pursuant to a line of credit subject to the Board's
Regulation Z, including transfers from a credit card account, a home
equity line of credit or an overdraft line of credit. The term also
excludes any overdrafts paid through a service that transfers funds
from another account of the consumer held at the institution.
Section ----.32--Unfair Acts or Practices Regarding Overdraft Services
----.32(a) Consumer Right To Opt Out
In the February 2005 overdraft guidance, the FDIC, Board, OCC, OTS,
and NCUA recommended as a best practice that institutions should obtain
a consumer's affirmative consent to receive overdraft protection.
Alternatively, where the consumer is automatically enrolled in
overdraft protection, these agencies stated that institutions should
provide consumers the opportunity to ``opt out'' of the overdraft
program and provide a clear consumer disclosure of this option. 70 FR
at 9132; 70 FR at 8431.
While many institutions voluntarily provide consumers the right to
opt out of overdraft services,\79\ this may not be a uniform practice
across all institutions. Moreover, institutions vary significantly in
the manner in which they provide notice of the opt-out, leading to the
Agencies' concern that the opt-out may not be adequately disclosed to
consumers. For instance, some institutions may disclose the opt-out in
a clause in their deposit agreement, which many consumers are unlikely
to read, or the clause may not be written in clearly understandable
language. Others may disclose a consumer's right to opt out in a
welcome letter or brochure that highlights the potential benefits of
the overdraft service, while minimizing or obscuring either the fees
associated with the service or that there may be less costly
alternatives to the service.
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\79\ See, e.g., American Bankers Association, ``Overdraft
Protection: A Guide for Bankers'' at 18.
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In addition, opt-out notices may not be provided to consumers at a
time
[[Page 28929]]
when the consumer is most likely to act. For example, institutions may
provide notice of a consumer's right to opt out solely at account
opening or when the service is initially added to the consumer's
account. Subsequently, however, after experiencing an overdraft and
incurring the associated fees, the consumer will typically not receive
additional notice of the opt-out right, even though it may be the time
at which the consumer is most likely to focus on the merits and cost of
the service.
In light of these concerns, the Agencies are proposing to create a
new substantive right for consumers to opt out of an institution's
overdraft service to ensure that they have a meaningful opportunity to
decline the service.
Legal Analysis
Assessing overdraft fees before the consumer has been provided with
notice and a reasonable opportunity to opt out of the institution's
overdraft service appears to be an unfair act or practice under 15
U.S.C. 45(n) and the standards articulated by the FTC.
Substantial consumer injury. Consumers incur substantial monetary
injury due to the fees assessed in connection with the payment of
overdrafts. These fees may include per item fees as well as additional
fees that may be imposed for each day the account remains overdrawn. As
noted above, the GAO Bank Fees Report indicates that the cost to
consumers resulting from overdraft loans has grown over the past few
years to just over $26 per item.\80\ While the payment of overdrafts
may allow consumers to avoid merchant fees for a returned check or ACH
transaction, there are no similar consumer benefits for ACH withdrawals
and point-of-sale debit card transactions. Moreover, consumers relying
on overdraft services may be more likely to overdraw their accounts,
thereby incurring more overdraft fees in the long run.
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\80\ See GAO Bank Fees Report at 13-14; see also Marc Fusaro,
Hidden Consumer Loans: An Analysis of Implicit Interest Rates on
Bounced Checks, J. of Fam. & Econ. Issues (forthcoming June 2008)
(Hidden Consumer Loans) (citing a Moebs $ervices estimate that 60%
of service charge income comes from insufficient funds fees)
(available at: http://personal.ecu.edu/fusarom/fusarobpinterestrates.pdf); Eric Halperin and Peter Smith, Out of
Balance: Consumers Pay $17.5 Billion Per Year in Fees for Abusive
Overdraft Loans, Center for Responsible Lending (July 11, 2007)
(available at: http://www.responsiblelending.org/pdfs/out-of-balance-report-7-10-final.pdf) (estimating that consumers paid over
$17 billion in fees for overdraft loans in 2006); Howard Mason, The
Criminal Risk of Actively-Marketed Bounce Protection Programs,
Bernstein Research Call (Feb. 18, 2005) (suggesting that bounce
protection programs account for 2/3 or more of industry NSF fees of
an estimated $12-14 billion); Howard Mason, Impact of Regulatory
Best Practices on Bounce Protection Services and NSF Fees, Bernstein
Research Call (Feb. 17, 2005) (estimating that overdraft and NSF
fees make up approximately half of service charge income).
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Injury is not reasonably avoidable. It appears that consumers
cannot reasonably avoid this injury if they are automatically enrolled
in an institution's overdraft service without having an opportunity to
opt out. Although consumers can reduce the risk of overdrawing their
accounts by carefully tracking their credits and debits, consumers
often lack sufficient information about key aspects of their account.
For example, a consumer cannot know with any degree of certainty when
funds from a deposit or a credit for a returned purchase will be made
available.
Injury is not outweighed by countervailing benefits. The benefits
to consumers and competition from not providing an opt-out do not
appear to outweigh the injury. This is particularly the case for ATM
withdrawals and POS debit card transactions where, but for the
overdraft service, the transaction would typically be denied and the
consumer would be given the opportunity to provide other forms of
payment without incurring any fees.\81\
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\81\ According to one consumer group survey, most respondents
preferred that their debit card be declined for insufficient funds
at the checkout rather than having the overdraft paid and being
assessed a fee. Eric Halperin, Lisa James and Peter Smith, Debit
Card Danger, Center for Responsible Lending at 9 (Jan. 25, 2007)
(available at: http://responsiblelending.org/pdfs/Debit-Card-Danger-report.pdf).
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Moreover, for many POS debit card transactions, the amount of the
fee assessed may substantially exceed the amount of the overdraft
loan.\82\ This injury to consumers is further aggravated when multiple
fees are charged in a single day due to multiple small-dollar
overdrafts. Even in the case of check and ACH transactions, where
payment of the check or ACH overdraft may allow the consumer to avoid a
second fee assessed by the merchant for a returned item as well as
possible negative reporting consequences, consumers may prefer instead
not to have the overdraft paid to avoid additional daily fees.
Furthermore, consumers who have overdraft services may be more likely
to rely on the existence of the service and overdraw their accounts and
thereby incur substantial fees.\83\
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\82\ See Eric Halperin, Testimony on Overdraft Protection: Fair
Practices for Consumers Before the House Comm. on Financial
Services, Subcomm. on Fin. Instits. & Consumer Credit at 6 (July 11,
2007) (stating that consumers pay $1.94 in fees for every one dollar
borrowed to cover a debit card POS overdraft) (available at: http://www.house.gov/apps/list/hearing/financialsvcs_dem/hr0705072.shtml).
\83\ Some economic research suggests that when a bank pays
overdrafts through an overdraft program, consumers overdraw their
accounts more often. See Fusaro, Hidden Consumer Loans at 6. This
finding is consistent with assertions by some third-party vendors of
overdraft protection services that implementation of overdraft
protection can result in a substantial increase in fee income from
overdraft and insufficient funds fees. See, e.g., http://www.banccommercegroup.com/aarp.html (``guaranteeing'' that use of
overdraft protection can increase revenue from insufficient funds
income by at least 50%) (visited Mar. 21, 2008); http://www.cetoandassociates.com/index.php?option=com_content&task=view&id=147&Itemid=102 (representing that overdraft
protection can increase insufficient funds revenue by 200%) (visited
Mar. 21, 2008); http://www.jmfa.com/pageContent.aspx?id=126
(reporting an increase of 50-300% in insufficient funds revenue for
clients) (visited Mar. 21, 2008).
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Thus, while many consumers may derive some benefit from having
overdraft transactions paid, the proposed rule would allow each
consumer to decide whether this benefit sufficiently compensates for
the cost of the overdraft fees that will be assessed against his or her
account.
Proposal
----.32(a)(1) General Rule
Under Sec. ----.32(a)(1), institutions would be prohibited from
assessing any fees on a consumer's account in connection with an
overdraft service unless the consumer is given notice and a reasonable
opportunity to opt out of the service, and the consumer does not opt
out. The consumer's right to opt out of an institution's overdraft
service would apply to all methods of payment, including check, ACH and
other electronic methods of payment, such as ATM withdrawals and POS
debit card transactions. Institutions would also be required to provide
consumers with the option of opting out only of overdrafts at ATMs and
for POS debit card transactions under proposed Sec. ----.32(a)(2),
discussed below.
The proposal would require notice of the opt-out to be provided
both before the institution's assessment of any fee or charge for
paying an overdraft to allow consumers to avoid overdraft fees
altogether, and subsequently at least once during or for each periodic
statement cycle in which any overdraft fee or charge is assessed to the
consumer's account. The subsequent notice requirement is intended to
ensure that consumers are given notice of their right to opt out at a
time that may be most relevant to them, that is, after they have been
assessed fees or other charges for the service. The institution would
have flexibility with respect to the means by which it provides notice
of
[[Page 28930]]
the consumer's opt-out right following the payment of the overdraft.
For example, the consumer may be given notice on a periodic
statement that reflects the imposition of fees associated with payment
of an overdraft. Alternatively, the opt-out right may be disclosed on a
notice that the institution may send promptly after the payment of an
overdraft to alert the consumer of the overdraft, as is the practice of
many institutions. (Under the latter option, institutions need only
provide the opt-out notice once during a statement period, even if
multiple fees are charged in a single period.) The requirement to
provide subsequent notice of the opt-out would terminate if the
consumer has exercised this right. See proposed Sec. ----.32(a)(1). Of
course, if the consumer opts out after having incurred an overdraft
fee, the opt-out would apply only to subsequent transactions and the
consumer would remain responsible for the fee.
The Agencies are nevertheless aware that an opt-out will not
provide a meaningful consumer protection if the notice of the opt-out
right is not presented in a clear and conspicuous manner to a consumer,
or if the notice does not contain sufficient information for the
consumer to make an informed choice. Thus, in a separate proposal under
TISA and Regulation DD in today's Federal Register, the Board is
proposing additional amendments regarding the form, content and timing
requirements for the opt-out notice. See proposed comment 32(a)(1)-
1.\84\ As part of the rulemaking process, the Board intends to conduct
consumer testing on the proposed opt-out form to ensure that the notice
is presented effectively to consumers in a format they can easily
understand and use. The Agencies anticipate issuing any final rules
simultaneously after reviewing comments received on both proposals.
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\84\ While NCUA is not proposing amendments to its 12 CFR part
707 in today's Federal Register, TISA requires NCUA to promulgate
regulations substantially similar to Regulation DD. Accordingly,
NCUA will issue amendments to part 707 following the Board's
adoption of final rules under Regulation DD.
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----.32(a)(2) Partial Opt-Out
Some consumers may want their institution to pay overdrafts by
check and ACH, but do not want overdrafts paid in other circumstances,
such as for ATM withdrawals and debit card transactions at a point-of-
sale.\85\ Thus, the proposed rule requires institutions to provide
consumers with the option of opting out only of the payment of
overdrafts at ATMs and for debit card transactions at the point-of-
sale. See Sec. ----.32(a)(2). As previously stated, the Agencies note
that a consumer that opts out of an overdraft protection service
typically also incurs a cost when the check is returned and an
insufficient funds fee is charged by the institution (and possibly also
by the merchant). Accordingly, the partial opt-out requirement in Sec.
----.32(a)(2) is intended to allow consumers the ability to determine
for themselves whether they prefer that their institution deny the
payment of all overdrafts, or to have overdrafts paid for check and ACH
transactions in order to avoid potential merchant fees for returned
items or other adverse consequences. While the Agencies understand that
some processors do not currently have systems capable of paying
overdrafts for some, but not all, payment channels, it appears that the
benefits of providing consumers a choice regarding the transaction
types for which they want to have overdrafts paid outweighs the
potential programming costs associated with this requirement.
---------------------------------------------------------------------------
\85\ See Haperin, et al., Debit Card Danger at 3 (concluding
that debit card POS overdraft loans are more costly than overdraft
loans from other sources, such as overdrafts by check).
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As further discussed below, in light of the potential benefits to
consumers if overdrafts for check and ACH transactions are paid, the
Agencies seek comment on whether the consumer's right to opt out should
be limited to overdrafts caused by ATM withdrawals and debit card
transactions at a point-of-sale. Under this alternative approach,
institutions would be permitted, but not required, to provide consumers
the option of opting out of the payment of overdrafts for check and ACH
transactions.
----.32(a)(3) Exceptions
In some cases, an institution may not be able to avoid paying a
transaction that overdraws an account. Under the proposal, if the
institution does pay an overdraft, the consumer's decision to opt out
of the institution's overdraft service would not prohibit institutions
from paying overdrafts in all cases. Rather, if the institution does
pay an overdraft, the consumer's decision to opt out would generally
prohibit the institution from assessing a fee for the service. The
Agencies recognize, however, that, in certain narrow circumstances, it
may be appropriate to allow institutions to assess a fee or charge for
paying an overdraft even where the consumer has elected to opt out.
Section ----.32(a)(3)(i) would permit an institution to charge an
overdraft fee for a debit card transaction if the purchase amount
presented at settlement by a merchant exceeds the amount that was
originally requested for pre-authorization.\86\ This exception is
intended to cover circumstances in which the settlement amount exceeds
the authorization amount because the precise transaction amount is not
known to the consumer at the time of the transaction. (This situation
is distinct from the circumstances discussed below with respect to the
proposed prohibition of assessing an overdraft fee in connection with
debit holds in which the authorization amount exceeds the actual
purchase amount presented at settlement.)
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\86\ Pre-authorization describes the dollar amount of funds that
are held on a consumer's account (or against a credit line) when a
card is swiped to initiate a transaction. This typically occurs in
connection with debit and credit card transactions in which the
actual dollar amount of the transaction is not known until the end
of the transaction.
---------------------------------------------------------------------------
For example, for some fuel purchases, the consumer may swipe his or
her debit card and the merchant may seek a $1 pre-authorization that is
primarily intended to verify whether the consumer's account is valid.
After the consumer has completed the fuel purchase, the merchant will
submit the actual amount of the purchase for settlement, which may
cause the consumer to incur an overdraft. Similarly, for restaurant
meals, the settlement amount may not match the amount submitted for
pre-authorization if the consumer elects to add a tip to the amount of
the bill. Proposed comments 32(a)(3)(i)-1 and -2 illustrate this
exception for fuel purchases and restaurant transactions.
The second exception is intended to address circumstances in which
a merchant or other payee presents a debit card transaction for payment
by paper-based means, rather than electronically using a card terminal,
and in which the payee does not obtain authorization from the card
issuer at the time of the transaction. For example, the merchant may
use a card imprinter to take an imprint of the consumer's card and
later submit the sales slip with the imprint to its acquirer for
payment. In this circumstance, the card issuer does not learn about the
transaction, and thus cannot verify whether the consumer has sufficient
funds, until it receives the sales slip presenting the transaction for
payment. Section ----.32(a)(3)(ii) would permit an institution to
assess an overdraft fee or charge if the transaction causes the
consumer to overdraw his or her account, despite the consumer's
election to opt out. Proposed comment 32(a)(3)(ii)-1 illustrates this
exception.
The Agencies considered, but are not proposing, an exception that
would
[[Page 28931]]
allow an institution to impose an overdraft fee despite a consumer's
opt-out election as long as the institution did not ``knowingly''
authorize a transaction that resulted in an overdraft. The Agencies are
concerned, however, that given the difficulty in determining a
consumer's ``real-time'' account balance at any given time, such an
exception would undercut the protections provided by a consumer's
election to opt out. At the same time, the Agencies recognize that a
rule that generally prohibits institutions from imposing an overdraft
fee if the consumer has opted out could adversely impact small
institutions that use a daily batch balance method for authorizing
transactions. Because such institutions do not update the balance
during the day to reflect other authorizations or settlements for
transactions that occurred before the authorization request, their
authorization decisions would be based upon the same dollar amount
throughout the day. Accordingly, it would be infeasible for these
institutions to determine at any given point in time whether the
consumer in fact has a sufficient balance to cover the requested
transaction. Similarly, institutions that use a stand-in processor
because, for example, the ATM network is temporarily off-line, would
also be unable to determine at the time of the transaction whether the
consumer's balance is sufficient to cover a requested transaction. In
both of these cases, a transaction could result in an overdraft but the
institution would not be able to assess a fee for that service. Thus,
as discussed below in the request for comment, the Agencies seek
comment on whether exceptions are necessary to address these
circumstances, and if so, how such exceptions may be narrowly tailored
so as not to undermine protections afforded by a consumer's election to
opt out. Comment is also requested on whether there are additional
circumstances in which an exception may be appropriate to allow an
institution to impose a fee in connection with paying an overdraft,
notwithstanding a consumer's election to opt out.
----.32(a)(4)-(6)
Section ----.32(a)(4) provides that institutions must comply with a
consumer's opt-out request as soon as reasonably practicable after the
institution receives it. Proposed Sec. ----.32(a)(5) provides that a
consumer may opt out of an institution's overdraft service at any time
since consumers may decide later in the account relationship not to
have overdrafts paid. Once exercised, the consumer's opt-out remains in
effect unless subsequently revoked by the consumer in writing or, if
the consumer agrees, electronically. See Sec. ----.32(a)(6).
Request for Comment
The Agencies request comment on:
Whether the scope of the consumer's opt-out right under
Sec. ----.32(a)(1) should be limited to ATM transactions and debit
card transactions at the point-of-sale. Under this alternative
approach, institutions would be permitted, but not required, to provide
consumers the option of opting out of the payment of overdrafts for
check and ACH transactions.
The potential costs and consumer benefits for implementing
a partial opt-out that applies only to ATM transactions and debit card
transactions at the point-of-sale.
Whether there are other circumstances in which an
exception may be appropriate to allow an institution to impose a fee or
charge for paying an overdraft even if the consumer has opted out of
the institution's overdraft service, and if so how to narrowly craft
such an exception so as not to undermine protections provided by a
consumer's opt-out election.
Debit Holds
----.32(b) Debit Holds
Debit holds occur when a consumer uses a debit card for a
transaction in which the actual purchase amount is not known at the
time the transaction is authorized, causing the merchant (and in some
cases the card-issuing bank) to place a hold on the consumer's account
for an amount that may be in excess of the actual purchase amount in
order to protect against potential risk of loss. For example, this may
occur at a pay-at-the pump fuel dispenser, restaurant, or hotel. For
example, for fuel purchases, card network rules may allow the merchant
to place a pre-authorization hold of up to $75 on the consumer's
account in certain types of debit card transactions.\87\ Similarly, a
hotel may place a hold on the consumer's account in an amount
sufficient to cover the length of the stay, plus an additional amount
for incidentals, such as anticipated room service charges.
---------------------------------------------------------------------------
\87\ Other merchants may instead only place a pre-authorization
hold of $1 in order to verify that the consumer's account is valid.
---------------------------------------------------------------------------
While the merchant generally determines the hold amount based on
limits imposed by the card network, it is the card-issuing financial
institution that determines how long the hold remains in place, also
subject to any limits imposed by the card network rules. Typically, the
hold is kept in place until the transaction amount is presented to the
financial institution for payment and settled. While PIN-based debit
card transactions typically settle on the same day the card is used by
the consumer (assuming the transaction takes place before the
processing cut-off time that day), settlement for signature-based
transactions may take up to three days following authorization. During
the time between authorization and settlement, the hold remains in
place on the consumer's account. In some cases, where the merchant does
not use the same transaction number for both the authorization and the
settlement, both the authorization amount and the settlement amount are
held on the consumer's account until the institution is able to
reconcile the transactions.
The Agencies are concerned that consumers unfamiliar with debit
hold practices may inadvertently incur considerable overdraft fees on
the assumption that the available funds in their account will only be
reduced by the actual purchase amount of the transaction. For example,
a consumer who purchases $20 worth of gas, but has a debit hold of $75
placed on the funds in the consumer's account, may not realize that $55
has been made unavailable to the consumer to use until the merchant
presents the transaction for payment. During that time, the consumer
engaging in a subsequent transaction in the belief that they have only
``spent'' $20, may inadvertently spend more than the available amount
in the consumer's account, incurring overdraft fees in the process.
Legal Analysis
Assessing an overdraft fee when the overdraft would not have
occurred but for a hold placed on funds in the consumer's account that
is in excess of the actual purchase or transaction amount appears to be
an unfair act or practice under 15 U.S.C. 45(n) and the standards
articulated by the FTC.
Substantial consumer injury. There is substantial injury to
consumers from incurring overdraft fees resulting from debit hold
amounts that exceed the amount of the transaction. The effect can be
compounded if the consumer conducts more than one transaction
overdrawing his or her account, as a fee is generally charged each time
the consumer overdraws the account.
Injury is not reasonably avoidable. It appears that consumers
cannot reasonably avoid this injury as they are generally unaware of
the practice of debit holds. Even if the consumer were
[[Page 28932]]
to receive notice at point of sale that a hold, including the amount,
will be placed on the consumer's funds, the consumer cannot know the
length of time the hold will remain in place. As discussed above, the
length of a hold will vary depending on how fast the transaction is
processed and the procedures of the consumer's account-holding
institution. A consumer cannot reasonably be expected to verify whether
a hold remains in place before each and every subsequent transaction.
Injury is not outweighed by countervailing benefits. The benefits
to consumers and competition from allowing fees for an overdraft to be
charged when the overdraft was caused by a debit hold amount that
exceeds the transaction amount do not appear to outweigh the injury.
The Agencies understand that financial institutions charge overdraft
fees in part to account for the potential risk the institution may
assume if the consumer does not have sufficient funds for a requested
transaction. Under card network rules generally, institutions guarantee
merchants payment for debit card transactions that were properly
authorized by the consumer. Accordingly, without the ability to assess
overdraft fees to protect against potential losses due to non-payment,
account-holding institutions may be reluctant to issue debit cards to
consumers.
The Agencies note, however, that the card issuing financial
institution is not required to send payment for an authorized
transaction until the transaction is presented for settlement by the
merchant and is posted to the consumer's account. At this time, any
potential loss for the financial institution is not for the amount of
the debit hold, but rather for the actual purchase amount for the
transaction. The proposed provision would not prohibit institutions
from assessing an overdraft fee if the consumer's account has
insufficient funds to cover the actual purchase amount when the
transaction is presented for settlement (and the consumer has not opted
out). Thus, because the provision would allow account-holding
institutions to cover their risk of loss in the event consumers
overdraw their accounts for the purchase amount of the transaction, it
appears that the availability of debit cards for consumers will not be
adversely impacted even if this proposal is adopted. The proposed
provision, however, would allow consumers to avoid the injury of
unwarranted overdraft fees caused by debit holds that exceed the
purchase amount of the requested transaction.
Proposal
As discussed above, proposed Sec. ----.32(b) would provide that an
institution must not assess a fee or charge on the consumer's account
in connection with an overdraft service if an overdraft would not have
occurred but for a hold placed on funds in the consumer's account that
exceeds the actual purchase or transaction amount. The Agencies believe
that a substantive ban on assessing fees to address problems with debit
holds is appropriate rather than disclosure of the existence of the
hold in light of concerns that such disclosures may be ineffective for
the reasons discussed above.
Comment 32(b)-1 as proposed clarifies that the prohibition against
assessing an overdraft fee in connection with a debit hold applies only
if the overdraft is caused solely by the existence of the hold. Thus,
if there are other reasons or causes for the consumer's overdraft, the
institution may assess an overdraft fee or charge. These reasons may
include other transactions that may have been authorized but not yet
presented for settlement, a deposited check in the consumer's account
that is returned, or if the actual purchase or transaction amount for
the transaction for which the hold was placed would have caused the
consumer to overdraw his or her account.
Application of the rule is illustrated by four separate examples
set forth in proposed commentary provisions. See comments 32(b)-2
through -5. The first example describes the circumstance where the
amount of the hold for an authorized transaction exceeds the consumer's
balance. For example, assume that a consumer with $50 in his deposited
account purchases $20 worth of fuel. In authorizing the consumer to
begin dispensing fuel after the consumer has swiped his or her debit
card at the pump, the gas station imposes a hold for $75 on the
consumer's account. The proposal would prohibit the consumer's
financial institution from assessing an overdraft fee or charge because
the purchase amount for the fuel would not have caused the consumer to
overdraw his or her account. See proposed comment 32(b)-2. However, had
the consumer purchased $60 of fuel, the institution would be permitted
to assess an overdraft fee or charge (assuming the consumer had not
opted out of the overdraft service) because the transaction exceeds the
consumer's account balance.
The second example illustrates the prohibition when the hold is
made in connection with another transaction that has been authorized by
the institution but not yet been presented for settlement. To
illustrate, assume the same consumer as in the prior example has $100
in his deposit account, and uses his or her debit card to purchase
fuel. The gas station puts a hold for $75 on the consumer's account.
The consumer purchases $20 worth of fuel. Later that day, and assuming
no other transactions, the consumer withdraws $75 at an ATM. Under this
example, the consumer's account-holding institution would be prohibited
from assessing an overdraft fee or charge in connection with the $75
withdrawal because the overdraft would not have occurred but for the
$75 hold. See proposed comment 32(b)-3.
The third example illustrates the prohibition when both the
authorization amount and the settlement amount are held against the
consumer's account, because the merchant did not use the same
transaction code for both authorization and settlement, causing the
institution to later reconcile the transaction. To illustrate, assume a
consumer has $100 in his deposit account, and uses his debit card to
purchase $50 worth of fuel. At the time the consumer swipes his debit
card at the fuel pump, a hold of $75 is placed on the consumer's
account. Because the merchant does not use the same transaction code
for both the pre-authorization and for settlement, the consumer's
account is temporarily overdrawn. Because the overdraft would not have
occurred but for the existence of the $75 hold, the institution may not
assess a fee or charge for paying an overdraft. See proposed comment
32(b)-4.
The fourth example illustrates a circumstance in which an
institution may charge an overdraft fee despite the existence of a hold
on funds in the consumer's account because there are other reasons for
the overdraft. Using the same facts as in the example in proposed
comment 32(b)-3, the consumer makes a $35 purchase of fuel, instead of
$20. Under the third example, the institution could permissibly charge
an overdraft fee or charge for the subsequent $75 ATM withdrawal
because the consumer would have incurred the overdraft even if the hold
had been for the actual amount of the fuel purchase. See proposed
comment 32(b)-5.
Request for Comment
The Agencies seek comment on the operational issues and costs of
implementing the proposed prohibition on the imposition of overdraft
fees if the
[[Page 28933]]
overdraft occurs solely because of the existence of a hold.
Other Overdraft Practices
Balance Disclosures
The Agencies are also concerned about balance disclosures that may
be deceptive to consumers if they represent that the consumer has more
funds in his or her account due to the inclusion of additional funds
the institution may provide to cover an overdraft. The Board is
addressing this issue in a Regulation DD proposal published
contemporaneously with today's proposed rule.
Transaction Clearing Practices
The Agencies are also concerned about the impact of transaction
clearing practices on the amount of overdraft fees that may be incurred
by the consumer. The February 2005 overdraft guidance lists as a best
practice explaining the impact of transaction clearing policies to
consumers, including that transactions may not be processed in the
order in which they occurred and that the order in which transactions
are received by the institution and processed can affect the total
amount of overdraft fees incurred by the consumer.\88\ In its Guidance
on Overdraft Protection Programs, the OTS also recommended as best
practices: (1) clearly disclosing rules for processing and clearing
transactions; and (2) having transaction clearing rules that are not
administered unfairly or manipulated to inflate fees.\89\
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\88\ 70 FR at 8431; 70 FR at 9132.
\89\ 70 FR at 8431.
---------------------------------------------------------------------------
While today's proposal does not address transaction clearing
practices, the Agencies solicit comment on the impact of requiring
institutions to pay smaller dollar items before larger dollar items
when received on the same day for purposes of assessing overdraft fees
on a consumer's account. Under such an approach, institutions could use
an alternative clearing order, provided that it discloses this option
to the consumer and the consumer affirmatively opts in. The Agencies
solicit comment on how such a rule would impact an institution's
ability to process transactions on a real-time basis.
VII. Effective Date
The Agencies solicit comment on when any final rules should be
effective and whether a one-year time period is appropriate or whether
the period should be longer or shorter.
VIII. Regulatory Analysis
A. Regulatory Flexibility Act
Board: The Regulatory Flexibility Act (5 U.S.C. 601 et seq.) (RFA)
generally requires an agency to perform an assessment of the impact a
rule is expected to have on small entities.
However, under section 605(b) of the RFA, 5 U.S.C. 605(b), the
regulatory flexibility analysis otherwise required under section 604 of
the RFA is not required if an agency certifies, along with a statement
providing the factual basis for such certification, that the rule will
not have a significant economic impact on a substantial number of small
entities. Based on its analysis and for the reasons stated below, the
Board believes that this proposed rule will not have a significant
economic impact on a substantial number of small entities. A final
regulatory flexibility analysis will be conducted after consideration
of comments received during the public comment period.
1. Statement of the need for, and objectives of, the proposed rule.
The Federal Trade Commission Act (15 U.S.C. 41 et seq.) (FTC Act)
prohibits unfair or deceptive acts or practices in or affecting
commerce. 15 U.S.C. 45(a)(1). The FTC Act provides that the Board (with
respect to banks), OTS (with respect to savings associations), and the
NCUA (with respect to federal credit unions) are responsible for
prescribing regulations prohibiting such acts or practices. 15 U.S.C.
57a(f)(1). The Board, OTS, and NCUA are jointly proposing regulations
under the FTC Act to protect consumers from specific unfair or
deceptive acts or practices regarding consumer credit card accounts and
overdraft services. The Board's proposed rule will revise Regulation
AA.
Proposals Regarding Consumer Credit Card Accounts
The proposed requirements would provide several substantive
protections for consumers against unfair or deceptive acts or practices
with respect to consumer credit card accounts. First, proposed Sec.
227.22 ensures that consumers' credit card payments are not treated as
late unless they have been provided a reasonable amount of time to make
payment. Second, proposed Sec. 227.23 would ensure that, when
different annual percentage rates apply to different balances on a
credit card account, consumers' payments in excess of the required
minimum payment are allocated among the balances, rather than
exclusively to the balance with the lowest annual percentage rate.
Third, under proposed Sec. 227.24, an increase in the annual
percentage rate could not be applied to the outstanding balance on a
credit card account, except in certain circumstances. Fourth, proposed
Sec. 227.25 would protect consumers from being assessed a fee if the
credit limit is exceeded solely due to a hold placed on the available
credit. Fifth, proposed Sec. 227.26 would prohibit institutions from
reaching back to days in earlier billing cycles when calculating the
amount of interest charged in the current cycle. Sixth, proposed Sec.
227.27 would ensure that security deposits and fees for the issuance or
availability of credit (such as account-opening fees or membership
fees) do not consume the majority of the available credit on a credit
card account during the twelve months after the account is opened. In
addition, when such amounts exceed 25 percent of the credit limit, they
must be spread equally among the eleven billing cycles following the
first billing cycle. Seventh and last, proposed Sec. 227.28 would
require institutions to disclose in a firm offer of credit the criteria
that will determine whether consumers receive the lowest annual
percentage rate and highest credit limit.
Proposals Regarding Overdraft Services
The proposed rule would also provide substantive protections
against unfair or deceptive acts or practices with respect to overdraft
services. Proposed Sec. 227.32 is intended to ensure that consumers
understand overdraft services and have the choice to avoid the
associated costs where such services do not meet their needs. First,
consumers could not be assessed a fee or charge for paying an overdraft
unless the consumer is provided with the right to opt out of the
payment of overdrafts and a reasonable opportunity to exercise that
right but does not do so. Second, the proposal would protect consumers
from being assessed an overdraft fee if the overdraft is caused solely
by a hold on funds.
2. Small entities affected by the proposed rule. The Board's
proposed rule would apply to banks and their subsidiaries, except
savings associations as defined in 12 U.S.C. 1813(b). Based on 2007
call report data, there are approximately 2,159 banks with assets of
$165 million or less that would be required to comply with the Board's
proposed rule.
3. Recordkeeping, reporting, and compliance requirements. The
proposed rule does not impose any new recordkeeping or reporting
requirements. The proposed rule would, however, impose new compliance
requirements.
[[Page 28934]]
Proposals Regarding Consumer Credit Card Accounts
Proposed Sec. 227.22 may require some banks to extend the period
of time provided to consumers to make payments on consumer credit card
accounts. The Board notes, however, that some credit card issuers
already send periodic statements 21 days in advance of the payment due
date, which constitutes a reasonable amount of time under the proposed
rule. Thus, small entities following this practice would not be
required to alter their systems or procedures.
Proposed Sec. 227.23 would require small entities that provide
consumer credit card accounts with multiple balances at different rates
to redesign their systems to allocate payments in excess of the minimum
payment among the balances, consistent with the proposed rule.
Compliance with this proposal may also reduce interest revenue for
small entities that currently allocate payments first to balances with
the lowest annual percentage rate. Similarly, compliance with proposed
Sec. 227.24 will also reduce interest revenue because such entities
would be prohibited from increasing the annual percentage rate on an
outstanding balance, except in certain circumstances. However, small
entities are likely to adjust other terms (such as increasing the
annual percentage rates offered to consumers when the account is
opened) to compensate for the loss of revenue. In addition, although
proposed Sec. 227.24 will limit the ability of small entities to
impose higher rates on pre-existing balances, it would permit small
entities to increase the rates applicable to new transactions.
Furthermore, the use of variable rates that reflect market conditions
could mitigate this effect because proposed Sec. 227.24 does not apply
to variable rates. Finally, proposed Sec. 227.24 would also permit
small entities to apply an increased rate to an outstanding balance
when a promotional rate is lost or expires or when the consumer's
payment has not been received within 30 days after the due date.
Proposed Sec. 227.25 would require small entities that provide
credit cards to redesign their systems to prevent the assessment of
fees for exceeding the credit limit that are caused by holds on the
available credit. Similarly, proposed Sec. 227.26 could require some
small entities that provide credit cards to change the way finance
charges are calculated, although the Board understands that few
institutions still use the prohibited method.
Proposed Sec. 227.27 would require small entities that provide
credit cards to modify their systems in order to track security
deposits and fees for the issuance or availability of credit that are
charged to the account during the first year. This proposal could also
reduce revenue derived from security deposits and fees. These costs,
however, would likely be borne by the few entities offering cards with
security deposits and fees that consume a majority of the credit limit.
Proposed Sec. 227.28 would require small entities to disclose
that, if the consumer is approved for credit, the annual percentage
rate and the credit limit the consumer will receive will depend on
specific criteria bearing on creditworthiness. Because similar
disclosures are required by the FCRA, this proposal should not result
in substantial compliance costs.
Proposals Regarding Overdraft Services
Proposed Sec. 227.32 would convert current Board guidance
regarding provision of a notice and opportunity to opt out of overdraft
services into a rule. Thus, this proposal should not have a significant
impact on small entities if those entities are currently providing opt-
out notices. Proposed Sec. 227.32 would also require small entities to
redesign their systems to prevent the assessment of overdraft fees that
are caused by holds on the available credit.
4. Other federal rules. The Board has not identified any federal
rules that duplicate, overlap, or conflict with the proposed revisions
to Regulation AA.
5. Significant alternatives to the proposed revisions. One approach
to minimizing the burden on small entities would be to provide a
specific exemption for small institutions. However, the FTC Act's
prohibition against unfair or deceptive acts or practices makes no
provision for exempting small institutions and the Board has no
specific authority under the FTC Act to grant an exception that would
remove small institutions. Further, in considering rulemaking under the
Act, the Board believes an act or practice that is unfair or deceptive
remains so despite the size of the institution engaging in such act or
practice and, thus, should not be exempt from this rule.
In addition, the Board believes the proposed rule, where
appropriate, provides for sufficient flexibility and choice for
institutions, including small entities. As such, any institution,
regardless of size, may tailor its operations to its individual needs
and, thus, mitigate any incremental burden that may be created by the
proposed rule. For instance, Sec. 227.23, which addresses payment
allocation, provides an institution a choice of payment allocation
methods.
The Board solicits comment on any significant alternatives that
would minimize the impact of the proposed rule on small entities.
OTS: The Regulatory Flexibility Act (5 U.S.C. 601-612) (RFA)
requires an agency to either provide an Initial Regulatory Flexibility
Analysis with a proposed rule or certify that the proposed rule will
not have a significant economic impact on a substantial number of small
entities. For purposes of the RFA and OTS-regulated entities, a ``small
entity'' is a savings association with assets of $165 million or less
(small savings association). Based on its analysis and for the reason
stated below, OTS certifies that this proposed rule will not have a
significant economic impact on a substantial number of small entities.
1. Reasons for Proposed Rule
This proposed rule is promulgated pursuant to section 18(f)(1) of
the FTC Act (15 U.S.C. 57a(f)(1)), which makes OTS responsible for
prescribing regulations that prevent savings associations from engaging
in unfair or deceptive acts or practices in or affecting commerce
within the meaning of section 5(a) of the FTC Act (15 U.S.C. 45(a)).
OTS, the Board, and the NCUA are jointly proposing this rule to protect
consumers against unfair or deceptive acts or practices with respect to
consumer credit card accounts and overdraft services for deposit
accounts. The Agencies have identified a number of business practices
that present a significant risk of harm to consumers of these products
and services. As discussed in the SUPPLEMENTARY INFORMATION, the
Agencies have acquired information about these practices from several
sources, including consumer complaints, supervisory observations, and
comments received on OTS's ANPR issued August 6, 2007 and the Board's
Reg. Z open-end proposal issued June 14, 2007.
2. Statement of Objectives and Legal Basis
The SUPPLEMENTARY INFORMATION above contains this information. The
legal basis for OTS's portion of the proposed rule is section 57(a) of
the FTC Act and HOLA.
3. Description and Estimate of Small Entities to Which the Rule Applies
OTS's portion of the proposed rule would apply to savings
associations and
[[Page 28935]]
their subsidiaries. There are 407 thrifts with $165 million in assets
or less. There are 26 thrifts with $165 million in assets or less that
offer credit cards. Many of the thrifts with $165 million in assets or
less offer overdraft services.
4. Projected Recordkeeping, Reporting, and Other Compliance
Requirements
The proposed rule would not have a significant impact on a
substantial number of small entities. It imposes no new recordkeeping
requirements or new requirements to report information to the Agencies.
Some of the proposed requirements are not new. Section 535.13,
which involves providing disclosures to consumers so that consumers
will know their rights and responsibilities as cosigners on consumer
loans, is merely a recodification of a long-standing requirement
currently codified in section 535.3. Section 535.32, which would
require institutions to provide a notice and opportunity to consumers
to opt out of overdraft services on deposit accounts, would turn
current OTS guidance into a rule. Thus, these provisions of the
proposed rule would not have a significant impact on small entities.
The proposal in section 535.28 is new, and would require savings
associations that make a solicitation for a firm offer of credit for a
consumer credit card account to include certain consumer disclosures in
the solicitations. Since savings associations will have developed this
information in preparing the firm offer, the burden would be limited to
placing an appropriate disclosure in the solicitation and, therefore,
would not have a significant impact on small entities.
The professional skills necessary for preparation of the consumer
disclosures under sections 535.13 and 535.28 are the same skills needed
to prepare disclosures under many other consumer protection laws and
regulations, such as the Truth in Lending Act/Reg. Z (12 CFR part 226)
and the Truth in Savings Act/Reg. DD (12 CFR part 230). The
professional skills necessary for preparation of the notice and opt-out
notice under section 535.32 are the same skills needed to prepare opt-
out notices under a variety of consumer protection laws and
regulations, such as the Privacy Rule (12 CFR part 573) issued under
the Gramm-Leach-Bliley Act and the Fair Credit Reporting Act Rule (12
CFR part 571) . These professional skills could include attorneys and
compliance specialists, as well as computer programmers.
In addition to disclosures and opt-out notices, the proposed rule
would impose some additional compliance requirements. Under section
535.22, a savings association may need to extend the period of time it
gives consumers to make credit card account payments. Under section
535.23, a savings association may need to change the way it allocates
credit card account payments among multiple account balances. Under
section 535.24, a savings association may need to change the
circumstances in which it can raise interest rates on outstanding
credit card account balances. Under section 535.25, a savings
association may need to change the circumstances in which it imposes
over limit fees. Under section 535.26, a savings association may need
to change the way it computes finance charges on outstanding credit
card account balances. Under section 535.27, a savings association may
need to change the way it collects security deposits and fees for a
credit card's issuance or availability of credit. Each of these
provisions could require some adjustments to a savings association's
operations and require some additional training of staff as well as
computer programming.
Many savings associations already employ the professionals that
would be needed to meet the requirements that would be imposed by the
rule as proposed rule, since they need these professionals to meet
other existing consumer protection requirements. The others have pre-
existing arrangements with third party service providers to perform the
functions that would be affected by this rulemaking.
In addition, as discussed in the Executive Order 12866 analysis,
most of the practices which the proposed provisions would impact are
not common among savings associations.
Accordingly, the proposed provisions would not have a significant
impact on small entities.
While OTS believes the proposed rule does not have a significant
impact on a substantial number of small entities, OTS, nevertheless,
requests comment and data on the size and incremental burden on small
savings associations that would be created by the proposed rule.
5. Identification of Duplicative, Overlapping, or Conflicting Federal
Rules
OTS has not identified any federal statutes or regulations that
would duplicate, overlap, or conflict with the proposed rule. As
discussed in the SUPPLEMENTARY INFORMATION, the laws of only three
states have been found by any of the Agencies to provide substantially
equivalent rights as the existing Credit Practices rule. OTS seeks
comment regarding any statutes or regulations, including state or local
statutes or regulations, which would duplicate, overlap, or conflict
with the proposed rule.
6. Discussion of Significant Alternatives
One approach to minimizing the burden on small entities would be to
provide a specific exemption for small institutions. However, the FTC
Act's prohibition against unfair or deceptive acts or practices makes
no provision for exempting small institutions and OTS has no specific
authority under the FTC Act to grant an exception that would remove
small institutions. Further, in contemplating rulemaking under the Act,
OTS believes an act or practice that is unfair or deceptive remains so
despite the size of the institution engaging in such act or practice
and, thus, should not be exempt from this rule.
In addition, OTS believes the proposed rule, where appropriate,
provides for sufficient flexibility and choice for institutions,
including small entities. As such, any savings association, regardless
of size, may tailor its operations to its individual needs and, thus,
mitigate any incremental burden that may be created by the proposed
rule. For instance, Section 535.23, unfair payment allocations,
provides an institution a choice of payment allocation methods.
OTS welcomes comments on any significant alternatives that would
minimize the impact of the proposed rule on small entities.
NCUA: Under the Regulatory Flexibility Act, 5 U.S.C. 601 et seq.,
NCUA must publish an initial regulatory flexibility analysis with its
proposed rule, unless NCUA certifies the rule will not have a
significant economic impact on a substantial number of small entities.
For NCUA, these are federal credit unions with less than $10 million in
assets. NCUA certifies this proposed rule would not have a significant
economic impact on a substantial number of small entities.
1. Reasons for Proposed Rule
NCUA is exercising authority under section 18(f)(1) of the Federal
Trade Commission Act, 15 U.S.C. 57a(f)(1), and proposing to prohibit
certain unfair or deceptive acts or practices (UDAPs) that violate
section 5(a) of the Federal Trade Commission Act, 15 U.S.C. 45(a). The
proposed rule reorganizes and renames NCUA's longstanding Credit
Practices Rule, 12 CFR part 706, and addresses UDAPs involving credit
cards
[[Page 28936]]
and overdraft protection services. NCUA, the Board of Governors of the
Federal Reserve System, and the Office of Thrift Supervision are
jointly proposing this rule to protect consumers against unfair or
deceptive acts or practices with respect to consumer credit card
accounts and overdraft services for deposit accounts.
2. Statement of Objectives and Legal Basis
The SUPPLEMENTARY INFORMATION above contains this information. The
legal basis for the proposed rule is sections 45(a) and 57(a) of the
FTC Act.
3. Description and Estimate of Small Entities to Which the Rule Applies
NCUA's portion of the proposed rule would apply to all federal
credit unions. As of December 31, 2007, there are 5,036 federal credit
unions, of which 2,374 have total assets less than $10 million. NCUA
estimates 2,363 small credit unions offer loans to their members. NCUA
does not believe the disclosure requirements for co-signors will
significantly affect small credit unions because all credit unions have
complied with this requirement since 1987, when the credit practices
rule was initially promulgated. This proposed rule does not change the
co-signor disclosure requirements, but renumbers the applicable
sections of the rule.
The proposed rule contains new requirements regarding credit card
accounts and overdraft protection services. Approximately 2,461 federal
credit unions issue credit cards and have an aggregate portfolio of
$18.92 billion. Of these, 425 small federal credit unions issue credit
cards and have an aggregate credit card portfolio of approximately
$124.73 million. Approximately 2,094 federal credit unions offer
overdraft protection service, and 353 of these are small federal credit
unions.
4. Projected Recordkeeping, Reporting, and Other Compliance
Requirements
The proposed rule does not impose any new recordkeeping or
reporting requirements. The proposed rule would, however, impose new
compliance requirements.
Some of the proposed requirements are not new. Section 706.13,
which involves providing disclosures to cosigners on consumer loans, is
a recodification of a long-standing requirement currently in Sec.
706.3. Section 703.32, which would require institutions to provide a
notice and opportunity to consumers to opt out of overdraft services on
deposit accounts, would turn current interagency guidance into a rule.
Thus, these provisions of the proposed rule would not have a
significant impact on small entities.
The proposal in Sec. 706.28 is new, and would require federal
credit unions that make a solicitation for a firm offer of credit for a
consumer credit card account to include certain consumer disclosures in
the solicitations. Since federal credit unions will have developed this
information in preparing the firm offer, the burden would be limited to
placing an appropriate disclosure in the solicitation and, therefore,
would not have a significant impact on small entities.
The professional skills necessary for preparation of the consumer
disclosures under Sec. Sec. 706.13 and 706.28 are the same skills
needed to prepare disclosures under many other consumer protection laws
and regulations, such as the Truth in Lending Act, Regulation Z (12 CFR
part 226), and the Truth in Savings Act and part 707 (12 CFR part 707).
The professional skills necessary for preparation of the notice and
opt-out notice under Sec. 706.32 are the same skills needed to prepare
opt-out notices under a variety of consumer protection laws and
regulations, such as the Privacy Rule (12 CFR part 716) issued under
the Gramm-Leach-Bliley Act and the Fair Credit Reporting Act Rule (12
CFR part 717). These professional skills could include attorneys and
compliance specialists, as well as computer programmers.
In addition to disclosures and opt-out notices, the proposed rule
would impose some additional compliance requirements. Under Sec.
706.22, a federal credit union may need to extend the period of time it
gives consumers to make credit card account payments. Under Sec.
706.23, a federal credit union may need to change the way it allocates
credit card account payments among multiple account balances. Under
Sec. 706.24, a federal credit union may need to change the
circumstances in which it can raise interest rates on outstanding
credit card account balances. Under Sec. 706.25, a federal credit
union may need to change the circumstances in which it imposes over
limit fees. Under Sec. 706.26, a federal credit union may need to
change the way it computes finance charges on outstanding credit card
account balances. Under Sec. 706.27, a federal credit union may need
to change the way it collects security deposits and fees for a credit
card's issuance or availability of credit. Each of these provisions
could require some adjustments to a federal credit union's operations
and require additional computer programming and training of staff.
Many federal credit unions already employ the professionals that
would be needed to meet the requirements that would be imposed by the
rule as proposed rule, since they need these professionals to meet
other existing consumer protection requirements. The others have pre-
existing arrangements with third-party service providers to perform the
functions that would be affected by this rulemaking.
Additionally, most of the practices that the proposed provisions
would impact are not common among federal credit unions. Accordingly,
the proposed provisions would not have a significant impact on small
entities.
While NCUA believes the proposed rule does not have a significant
impact on a substantial number of small entities, it requests comments
on the size and incremental burden on small federal credit unions that
would be created by the proposed rule.
5. Identification of Duplicative, Overlapping, or Conflicting Federal
Rules
NCUA has not identified any federal statutes or regulations that
would duplicate, overlap, or conflict with the proposed rule. NCUA
seeks comment regarding any statutes or regulations, including state or
local statutes or regulations, which would duplicate, overlap, or
conflict with the proposed rule.
6. Discussion of Significant Alternatives
NCUA has not identified any significant alternatives to the
prohibitions and requirements in the proposed rule. The Agencies
explored requiring financial institutions provide disclosures regarding
the credit card and overdraft practices to consumers. NCUA does not
believe federal credit unions can provide clear or concise disclosures
that members could easily understand and use to make an informed
decision regarding their credit and saving needs.
Another approach to minimizing the burden on small entities would
be to provide a specific exemption to small federal credit unions.
However, the Federal Trade Commission Act's prohibition against unfair
or deceptive acts or practices makes no provision for exempting small
federal credit unions, and NCUA does not have authority to grant an
exception. Further, NCUA believes an act or practices that is unfair or
deceptive under the Federal Trade Commission Act remains unfair or
deceptive despite the size of a federal
[[Page 28937]]
credit union and should not be exempt from the proposed rule.
NCUA believes the proposed rule provides sufficient flexibility
where appropriate for all federal credit unions. NCUA welcomes comments
on any significant alternatives that would minimize the impact of the
proposed rule on small entities.
B. Paperwork Reduction Act
Board: In accordance with the Paperwork Reduction Act (PRA) of 1995
(44 U.S.C. 3506; 5 CFR part 1320 Appendix A.1), the Board reviewed the
rule under the authority delegated to the Board by the Office of
Management and Budget (OMB). The collections of information that are
required by this proposed rule are found in 12 CFR 227.14 and 227.28.
This information collection is required to provide benefits for
consumers and is mandatory (15 U.S.C. 4301 et seq.). The respondents/
recordkeepers are for-profit financial institutions, including small
businesses.
Regulation AA establishes consumer complaint procedures and defines
unfair or deceptive acts or practices in extending credit to consumers.
As discussed above, the Federal Reserve is seeking comment on a
proposed rule that would prohibit institutions from engaging in certain
acts or practices in connection with consumer credit card accounts and
overdraft services for deposit accounts. This proposal evolved from the
Board's June 2007 Proposal and OTS's August 2007 ANPR. The proposed
rule is coordinated with the Board's proposals under the Truth in
Lending Act and the Truth in Savings Act published in separate notices
in today's Federal Register.
Consumer Credit Card Accounts
Under proposed Sec. 227.28 (titled ``Deceptive acts or practices
regarding firm offers of credit''), banks would be prohibited from
certain marketing practices in relation to prescreened firm offers for
consumer credit card accounts unless a disclaimer sufficiently explains
the limitations of the offers. The Board anticipates that banks would,
with no additional burden, incorporate the proposed disclosure
requirement under proposed Sec. 227.28 with an existing disclosure
requirement in Regulation Z regarding credit and charge card
applications and solicitations. See 12 CFR 226.5a. Thus, in order to
avoid double-counting, the Board will account for the burden associated
with proposed Regulation AA Sec. 227.28 under Regulation Z (OMB No.
7100-0199) Sec. 226.5a. Under Regulation AA Sec. 227.14(b) (titled
``Unfair and deceptive practices involving cosigners''), a clear and
conspicuous disclosure statement shall be given in writing to the
cosigner prior to being obligated. The disclosure statement must be
substantively similar to the example provided in Sec. 227.14(b). The
Board will also account for the burden associated with Regulation AA
Sec. 227.14(b) under Regulation Z. The title of the Regulation Z
information collection will be updated to account for these sections of
Regulation AA.
Overdraft Services
The proposed rule would also provide substantive protections
against unfair and deceptive acts or practices with respect to
overdraft services. Proposed Sec. 227.32 is intended to ensure that
consumers understand overdraft services and have the choice to avoid
the associated costs where such services do not meet their needs. Under
this proposal, consumers could not be assessed a fee or charge for
paying an overdraft unless the consumer is provided with the right to
opt out of the payment of overdrafts and a reasonable opportunity to
exercise that right but does not do so.
The burden associated with Regulation AA Sec. 227.28 will be
accounted for under Regulation DD (OMB No. 7100-0271) Sec. Sec. 230.10
(opt-out disclosures for overdraft services), 230.11(a) (disclosure of
total fees on periodic statements), and 230.11(c) (disclosure of
account balances). The title of the Regulation DD information
collection will be updated to account for this section of Regulation
AA.
Comments are invited on: (a) Whether the proposed collection of
information is necessary for the proper performance of the Board's
functions, including whether the information has practical utility; (b)
the accuracy of the Board's estimate of the burden of the proposed
information collection, including the cost of compliance; (c) ways to
enhance the quality, utility, and clarity of the information to be
collected; and (d) ways to minimize the burden of information
collection on respondents, including through the use of automated
collection techniques or other forms of information technology.
Comments on the collection of information should be sent to Michelle
Shore, Federal Reserve Board Clearance Officer, Division of Research
and Statistics, Mail Stop 151-A, Board of Governors of the Federal
Reserve System, Washington, DC 20551, with copies of such comments sent
to the Office of Management and Budget, Paperwork Reduction Project
(Regulation AA), Washington, DC 20503.
OTS and NCUA: In accordance with section 3512 of the Paperwork
Reduction Act of 1995, 44 U.S.C. 3501-3521 (``PRA''), the Agencies may
not conduct or sponsor, and the respondent is not required to respond
to, an information collection unless it displays a currently valid
Office of Management and Budget (``OMB'') control number. The
information collection requirements contained in this joint notice of
proposed rulemaking have been submitted by the OTS and NCUA to OMB for
review and approval under section 3507 of the PRA and section 1320.11
of OMB's implementing regulations (5 CFR part 1320). The review and
authorization information for the Board is provided later in this
section along with the Board's burden estimates. The proposed rule
contains requirements subject to the PRA. The requirements are found in
12 CFR ----.13, and ----.32. Comments are invited on:
(a) Whether the collection of information is necessary for the
proper performance of the Agencies' functions, including whether the
information has practical utility;
(b) The accuracy of the estimates of the burden of the information
collection, including the validity of the methodology and assumptions
used;
(c) Ways to enhance the quality, utility, and clarity of the
information to be collected;
(d) Ways to minimize the burden of the information collection on
respondents, including through the use of automated collection
techniques or other forms of information technology; and
(e) Estimates of capital or start up costs and costs of operation,
maintenance, and purchase of services to provide information.
All comments will become a matter of public record.
Comments should be addressed to:
OTS: Information Collection Comments, Chief Counsel's Office,
Office of Thrift Supervision, 1700 G Street, NW., Washington, DC 20552;
send a facsimile transmission to (202) 906-6518; or send an e-mail to
[email protected]. OTS will post comments and the
related index on the OTS Internet site at http://www.ots.treas.gov. In
addition, interested persons may inspect the comments at the Public
Reading Room, 1700 G Street, NW., by appointment. To make an
appointment, 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)
906-7755.
[[Page 28938]]
NCUA: Jeryl Fish, Paperwork Clearance Officer, National Credit
Union Administration, 1775 Duke Street, Alexandria, VA 22314-3428; send
a facsimile to (703) 518-6319; or send an e-mail to
[email protected]. Please submit information collection comments by
one method. NCUA will post comments on its Web site at http://www.ncua.gov/RegulationsOpinionsLaws/proposedregs/proposedregs.html.
Also, interested persons may inspect the comments at NCUA, 1775 Duke
Street, Alexandria, Virginia 22314, by appointment. To make an
appointment, call (703) 518-6540, send an e-mail to [email protected],
or send a facsimile transmission to (703) 518-6667.
OTS: Savings associations and their subsidiaries.
NCUA: Federally-chartered credit unions.
Abstract: Under section 18(f) of the FTC Act, the Agencies are
responsible for prescribing rules to prevent unfair or deceptive acts
or practices in or affecting commerce, including acts or practices that
are unfair or deceptive to consumers. Under this proposed rulemaking,
the Agencies would incorporate their existing Credit Practices Rules,
which govern unfair or deceptive acts or practices involving consumer
credit, into new, more comprehensive rules that would also address
unfair or deceptive acts or practices involving credit cards and
overdraft protection services.
Estimated Burden: The burden associated with this collection of
information may be summarized as follows.
OTS:
Estimated number of respondents: 826.
Estimated time developing opt outs: 10 hours.
Estimated time developing disclaimer: 10 hours.
Estimated time for training: 4 hours.
Total estimated time per respondent: 24 hours.
Total estimated annual burden: 19,824 hours.
NCUA:
Estimated number of respondents: 5,036.
Estimated time developing opt outs: 10 hours.
Estimated time developing disclaimer: 10 hours.
Estimated time for training: 4 hours.
Total estimated time per respondent: 24 hours.
Total estimated annual burden: 120,864 hours.
C. OTS Executive Order 12866 Determination
OTS has determined that its portion of the proposed rulemaking is
not a significant regulatory action under Executive Order 12866.
However, OTS solicits comment on the economic impact of the rule as
proposed.
Summary
The proposed rulemaking is not a significant regulatory action
under Executive Order 12866 for a number of reasons. First, the OTS
proposal applies only to savings associations and their subsidiaries.
As explained in more detail below, these OTS-supervised institutions
account for only a small portion of the affected market. Second, these
OTS-supervised institutions already refrain from engaging in many of
the proposed prohibited practices. Issuing a rule to prevent
institutions from taking up these practices will help ensure that
market conduct standards remain high, but it will not cause significant
economic impact.
The prohibitions that relate to annual percentage rate (APR)
increases on outstanding balances and payment allocation practices
will, to some extent, limit fees and interest income currently
generated by these practices. However, to the extent income to savings
associations is affected, the corresponding offset provided by the
limitations is an equally sized consumer benefit of lower fees and
interest payments. As a result, most economic effects of the proposed
rulemaking would result in small transfers from institutions to
consumers, with an overall limited net effect.
Moreover, if such fee and interest income is economically justified
in a competitive environment for the allocation of credit, then a
likely longer-term outcome would be that institutions would reflect
such economic factors in the initial terms of a credit card contract.
If that occurs, then consumers will have clearer initial information
about potential costs with which to compare credit card offerings than
they do currently. Consequently, any shorter term disruptions to
institutions caused by the proposed rulemaking will likely be addressed
in the longer term by changes in disclosed credit card account APRs and
fees, thus making consumer costs and benefits more easily considered
and compared.
In-Depth Analysis
1. Limited Economic Effect: Limited Scope of the Proposal
OTS's portion of the proposed rulemaking would apply only to OTS-
supervised savings associations and their subsidiaries. OTS is the
primary federal regulator for 826 federally- and state-chartered
savings associations. The proposed rulemaking primarily addresses
certain credit card practices. Of the 826 savings associations, only
124 report any credit card assets. Among those 124 savings
associations, only 19 have more than 1% of their total assets in credit
card receivables. Moreover, credit card assets comprise only 3% of all
assets held by savings associations. In sum, OTS-supervised
institutions potentially engaged in the practices prohibited by the
proposed rulemaking are not representative of the overall industry that
OTS supervises. Most provisions of the proposed rulemaking would have
little economic effect on the vast majority of the institutions under
OTS jurisdiction.
The Board of Governors of the Federal Reserve System and the
National Credit Union Administration are simultaneously proposing a
similar set of rules governing credit card practices for other types of
federally insured financial institutions. As a consequence, the
rulemaking should have little or no intra-industry competitive effects.
2. Limited Economic Effect: Most Affected Practices Are Not Common
Most of the practices covered by this rulemaking have been included
as a prophylactic measure to ensure that institutions do not begin to
use or expand the use of activities deemed unfair or deceptive. Since
most OTS-supervised institutions do not currently engage in these
practices, the costs of complying with the provisions of the proposed
rule are likely to be minimal.
Sec. 535.22 Unfair time to make payments. This section would
prohibit treating a payment on a consumer credit card account as late
for any purpose unless consumers have been provided a reasonable amount
of time to make payment. The proposed rule would create a safe harbor
for institutions that adopt reasonable procedures designed to ensure
that periodic statements specifying the payment due date are mailed or
delivered to consumers at least 21 days before the payment due date.
Based on our supervisory observations and experience, OTS-supervised
institutions, in general, mail or deliver periodic statements to their
customers at least 21 days before the due date. Therefore, a rule that
requires institutions to provide a reasonable amount of time to make
payment, such as by mailing or delivering periodic statements to
customers at least 21 days in advance of the payment due date,
[[Page 28939]]
would have insignificant or no economic impact.
Sec. 535.25 Unfair fees for exceeding the credit limit due to
credit holds. This section would prohibit assessing a fee for exceeding
the credit limit on a consumer credit card account if the credit limit
would not have been exceeded but for a hold on any portion of the
available credit on the account that is in excess of the actual
purchase or transaction amount. Based on our supervisory observations
and experience, OTS-supervised institutions do not, in general, charge
overlimit fees in this manner. Therefore, prohibiting this practice
would have insignificant or no economic impact.
Sec. 535.26 Unfair balance computation method. This section would
prohibit imposing finance charges on outstanding balances on a consumer
credit card account based on balances in billing cycles preceding the
most recent billing cycle, subject to certain exceptions.
Very few institutions compute balances using any method other than
a single-cycle method. This conclusion was reached by the GAO as part
of its recent credit card study.\90\ According to the GAO, of the six
largest card issuers, only two used the double-cycle billing method
between 2003 and 2005.\91\ GAO's finding conforms to OTS's own
supervisory observations with respect to the prevalence of use of
balance computation methods other than single-cycle methods by
institutions OTS supervises. Use of a balance computation method other
than a single-cycle method is the exception, rather than the norm, for
OTS-supervised institutions.
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\90\ See GAO Credit Card Report.
\91\ GAO Credit Card Report at 28 (``In our review of 28 popular
cards from the six largest issuers, we found that two of the six
issuers used the double-cycle billing method on one or more popular
cards between 2003 and 2005. The other four issuers indicated they
would only go back one cycle to impose finance charges.'').
---------------------------------------------------------------------------
Moreover, the economic impact of this practice arises only in
instances where a card holder converts from a convenience user, i.e.,
one who pays off his/her card balance in full at the end of the billing
cycle, to a revolver, i.e., one who carries a balance beyond the end of
the billing cycle. Accounts that routinely stay in a ``convenience'' or
nonrevolving status would not be impacted by this prohibition. The same
would be true of accounts that routinely stay in a revolving status.
Only when an account would convert from a nonrevolving status to a
revolving status would the prohibition have an impact.
Sec. 535.27 Unfair charging to the account of security deposits
and fees for the issuance or availability of credit. During the period
beginning with the date on which a consumer credit card account is
opened and ending 12 months from that date, this section would prohibit
institutions from charging the account security deposits or fees for
the issuance or availability of credit if the total amount of such
security deposits and fees constituted a majority of the initial credit
limit for the account. During this same period, this rule would require
institutions that charge security deposits or fees against the account
for the issuance or availability of credit constituting more than 25
percent of the initial credit limit for the account, to apply these
charges in the following manner: during the first billing cycle, an
institution could charge no more than 25% of the initial credit limit
offered for the account; in each of 11 months following the first
billing cycle, an institution could charge no more than one eleventh of
the total security deposit or fees for the issuance of availability of
credit in excess of 25 percent of the initial credit limit for the
account.
Credit cards to which security deposits and high account opening
related fees are charged against the credit line are found
predominately in the subprime credit card market. Subprime credit cards
represent just 5% of all credit cards issued.\92\ Cards of this type
are rare among OTS-supervised institutions. Therefore, a rule
prohibiting this practice would have insignificant economic impact.
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\92\ Outstanding credit card balances as of February 2008 as
reported by Fitch Ratings, Know Your Risk; Asset Backed Securities
Prime Credit Card Index and Subprime Credit Card Index available at
http://www.fitchresearch.com/creditdesk/sectors/surveilance/asset_backed/credit_card.
---------------------------------------------------------------------------
Sec. 535.28 Deceptive firm offers of credit. This section would
prohibit the practice of offering a range of or multiple annual
percentage rates or credit limits in a solicitation for a firm offer of
credit for a consumer credit card unless it is disclosed to the
consumer that, if approved, the consumer's annual percentage rate and
the credit limit will depend on specific criteria bearing on
creditworthiness.
While the rule would affect how institutions advertise credit, it
would not limit the terms of credit offered nor impact any underwriting
strategy. Once the rule became effective, institutions would likely
adjust their marketing so as not to be misleading under the rule.
Operational costs to do so should be minimal and the economic impact,
overall, insignificant.
Sec. 535.32 Unfair overdraft service practices. This section
contains two main requirements. First, with certain exceptions, it
would prohibit assessing a fee or charge on a consumer's account in
connection with an overdraft service, unless an institution provides
the consumer with notice and reasonable opportunity to opt out of the
payment of all overdrafts and the consumer has not opted out. The
consumer would also have to be provided the more limited option of
opting out only for the payment of overdrafts for ATM and point-of-sale
transactions initiated by a debit card.
OTS Guidance on Overdraft Protection Programs suggests that, as a
best practice, institutions that have overdraft protection programs
should provide an election or opt-out of the service and obtain
affirmative consent from consumers to receive overdraft protection.\93\
Therefore, some OTS-supervised institutions may already be carrying out
the requirements proposed in this rule. For those institutions, the
effect of the opt-out provisions of this notice would be minimal. For
the institutions that do not currently offer an opt-out, the rule would
trigger some operational costs, but those costs are not likely to
materially reduce the revenue generated by overdraft fees. This is
because institutions often charge the same fee to pay an overdraft as
they do to return it.
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\93\ See 70 FR 8428 (Feb. 18, 2005).
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Second, this section would prohibit assessing a fee or charge on a
consumer's account in connection with an overdraft service if the
overdraft would not have occurred but for a hold placed on funds in the
consumer's account that is in excess of the actual purchase or
transaction amount. Based on our supervisory observations and
experience, OTS-supervised institutions do not, in general, charge
overdraft fees in this manner. Therefore, prohibiting this practice
would have insignificant or no economic impact.
3. Limited Economic Effect: Small Transfers From Institutions to
Consumers
The proposed rulemaking contains two other sections. One affects
the way in which payments received by the institution are allocated
among the customer's outstanding balances. The other specifies the
conditions under which the institution could raise the APRs on
outstanding balances.
Sec. 535.23 Unfair payment allocations. A consumer may have
multiple balances on a consumer credit card account. Currently, most
institutions allocate any
[[Page 28940]]
payment received from a consumer by first covering any fees and finance
charges, then allocating any remaining amounts from the lowest APR
balance to the highest. This section of the proposed rulemaking would
require allocation in a manner that is no less beneficial to the
consumer than one of the following methods: (1) Applying the entire
amount first to the balance with the highest annual percentage rate,
(2) splitting the amount equally among balances, or (3) allocating pro
rata among the balances. Any allocation method that would be less
beneficial to the consumer than these three methods would be
impermissible. For instance, applying the entire amount first to the
balance with the lowest annual percentage rate is an example of an
allocation method that would be less beneficial to the consumer. The
rule leaves open the door to the possibility of other reasonable
payment allocation methods.
The costs of the proposed rule are mitigated to some extent by
providing institutions with operational flexibility as to which of the
allocation methods they choose. To the extent there are economic costs
imposed by the payment allocation restrictions included in the
proposal, institutions are likely to adjust initial credit card terms
to reflect those costs. If this occurs, consumers will likely have a
clearer initial disclosure of potential costs with which to compare
credit card offerings than they do now. Their actual cost of credit
will not be increased by low-to-high balance payment allocation
strategies implemented by institutions after charges have been
incurred.
Sec. 535.24 Unfair annual percentage rate increases on outstanding
balances. This section would generally prohibit institutions from
increasing the annual percentage rate on an outstanding balance. This
prohibition would not apply, however, where a variable rate increases
due to the operation of an index that is not under the institution's
control and is available to the general public, where a promotional
rate has expired or is lost (provided the APR is not increased to a
rate greater than the APR that would have applied after expiration of
the promotional rate), or where the minimum payment has not been
received within 30 days after the due date.
The proposed rulemaking would not permit the institution to
increase the APR on the outstanding balances simply because the
consumer pays late or defaults on other debt obligations. This practice
is sometimes referred to as ``universal default.'' However, the section
would permit APR increases on new purchases or transactions.
Based on our supervisory observations and experience, most larger
OTS-supervised institutions do not practice universal default. However,
some institutions do raise APR on outstanding balances based on
external factors such as a decline in a consumer's credit score.
Institutions that make use of this approach would likely adjust to the
rule in the longer term by adjusting their initial interest rate
pricing schedule.
A potential small negative effect might be that the prohibition on
APR increases on outstanding balances would result in higher initial
average APRs across all consumers, if the increases on outstanding
balances acted as an effective screen for initially weaker credits.
However, the fact that most institutions do not use a universal default
trigger to increase APRs suggests that this effect may be limited.
D. OTS Executive Order 13132 Determination
OTS has determined that its portion of the proposed rulemaking does
not have any federalism implications for purposes of Executive Order
13132.
E. NCUA Executive Order 13132 Determination
Executive Order 13132 encourages independent regulatory agencies to
consider the impact of their actions on State and local interests. In
adherence to fundamental federalism principles, the NCUA, an
independent regulatory agency as defined in 44 U.S.C. 3502(5)
voluntarily complies with the Executive Order. The proposed rule apply
only to federally chartered credit unions and would not have
substantial direct effects on the States, on the connection between the
national government and the States, or on the distribution of power and
responsibilities among the various levels of government. The NCUA has
determined that the proposed rule does not constitute a policy that has
federalism implications for purposes of the Executive Order.
F. OTS Unfunded Mandates Reform Act of 1995 Determinations
Section 202 of the Unfunded Mandates Reform Act of 1995, Public Law
104-4 (Unfunded Mandates Act) requires that an agency prepare a
budgetary impact statement before promulgating a rule that includes a
Federal mandate that may result in expenditure by State, local, and
tribal governments, in the aggregate, or by the private sector, of $100
million or more in any one year. If a budgetary impact statement is
required, section 205 of the Unfunded Mandates Act also requires an
agency to identify and consider a reasonable number of regulatory
alternatives before promulgating a rule. OTS has determined that this
proposed rule will not result in expenditures by State, local, and
tribal governments, or by the private sector, of $100 million or more.
Accordingly, OTS has not prepared a budgetary impact statement or
specifically addressed the regulatory alternatives considered.
G. NCUA: The Treasury and General Government Appropriations Act, 1999--
Assessment of Federal Regulations and Policies on Families
The NCUA has determined that this proposed rule would not affect
family well-being within the meaning of section 654 of the Treasury and
General Government Appropriations Act, 1999, Pub. L. 105-277, 112 Stat.
2681 (1998).
IX. 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. For example:
Have we organized the material to suit your needs? If not,
how could this material be better organized?
Are the requirements in the proposed regulations clearly
stated? If not, how could the regulations be more clearly stated?
Do the proposed regulations contain language or jargon
that is not clear? If so, which language requires clarification?
Would a different format (grouping and order of sections,
use of headings, paragraphing) make the regulations easier to
understand? If so, what changes to the format would make them easier to
understand?
What else could we do to make the regulations 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,
[[Page 28941]]
Savings associations, Trade practices, Overdrafts, Unfairness.
12 CFR Part 706
Credit, Credit unions, Deception, Intergovernmental relations,
Overdrafts, 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 arrows while language that
would be deleted is set off with brackets.
Authority and Issuance
For the reasons discussed in the joint preamble, the Board proposes
to amend 12 CFR part 227 as set forth below:
PART 227--UNFAIR OR DECEPTIVE ACTS OR PRACTICES (REGULATION AA)
1. The authority citation for part 227 continues to read as
follows:
Authority: 15 U.S.C. 57a(f).
Subpart A--General Provisions
2. The heading for subpart A is revised to read as set forth above.
Sec. 227.1 [Removed]
Sec. 227.11 [Redesignated as Sec. 227.1]
3. Section 227.1 is removed and Sec. 227.11 is redesignated as
Sec. 227.1 and revised to read as follows:
Sec. 227.1 Authority, Purpose, and Scope.
(a) Authority. This [subpart] [rtrif]part[ltrif] is issued by the
Board under section 18(f) of the Federal Trade Commission Act, 15 [USC]
[rtrif]U.S.C.[ltrif] 57a(f) (Sec. 202(a) of the Magnuson-Moss
Warranty--Federal Trade Commission Improvement Act, Pub. L. 93-637).
(b) Purpose. [rtrif]The purpose of this part is to prohibit
unfair[ltrif] [Unfair] or deceptive acts or practices [rtrif]in
violation of[ltrif] [in or affecting commerce are unlawful under]
section 5(a)(1) of the Federal Trade Commission Act, 15 [USC]
[rtrif]U.S.C.[ltrif] 45(a)(1). [This subpart defines] [rtrif]Subparts
B, C, and D define and contain requirements prescribed for the purpose
of preventing specific[ltrif] unfair or deceptive acts or practices of
banks [in connection with extensions of credit to consumers].
[rtrif]The prohibitions in subparts B, C, and D do not limit the
Board's authority to enforce the FTC Act with respect to any other
unfair or deceptive acts or practices.[ltrif]
(c) Scope. [This subpart applies] [rtrif]Subparts B, C, and D
apply[ltrif] to all banks and their subsidiaries, except [Federal
savings banks] [rtrif]savings associations as defined in 12 U.S.C.
1813(b).[ltrif] Compliance is to be enforced by:
(1) The Comptroller of the Currency, in the case of national
banks[, banks operating under the code of laws for the District of
Columbia,] and federal branches and federal agencies of foreign banks;
(2) The Board of Governors of the Federal Reserve System, in the
case of banks that are members of the Federal Reserve System (other
than banks referred to in paragraph (c)(1) of this section), branches
and agencies of foreign banks (other than federal branches, federal
agencies, and insured state branches of foreign banks), commercial
lending companies owned or controlled by foreign banks, and
organizations operating under section 25 or 25A of the Federal Reserve
Act; and
(3) The Federal Deposit Insurance Corporation, in the case of banks
insured by the Federal Deposit Insurance Corporation (other than banks
referred to in paragraphs (c)(1) and (c)(2) of this section), and
insured state branches of foreign banks.
(d) [rtrif]Unless otherwise noted,[ltrif] [T][rtrif]t[ltrif]he
terms used in paragraph (c) of this section that are not defined in the
Federal Trade Commission Act or in section 3(s) of the Federal Deposit
Insurance Act (12 [USC] [rtrif]U.S.C.[ltrif] 1813(s)) shall have the
meaning given to them in section 1(b) of the International Banking Act
of 1978 (12 [USC] [rtrif]U.S.C.[ltrif] 3101).
4. Section 227.2 is amended by redesignating paragraphs (a) through
(c) as paragraphs (b) through (d), respectively, and republishing them,
and adding a new paragraph (a) to read as follows:
Sec. 227.2 Consumer-Complaint Procedure.
[rtrif](a) Definitions. For purposes of this section, unless the
context indicates otherwise, the following definitions apply:
(1) ``Board'' means the Board of Governors of the Federal Reserve
System.
(2) ``Consumer complaint'' means an allegation by or on behalf of
an individual, group of individuals, or other entity that a particular
act or practice of a State member bank is unfair or deceptive, or in
violation of a regulation issued by the Board pursuant to a Federal
statute, or in violation of any other act or regulation under which the
bank must operate.
(3) ``State member bank'' means a bank that is chartered by a State
and is a member of the Federal Reserve System.
(4) Unless the context indicates otherwise, ``bank'' shall be
construed to mean a ``State member bank,'' and ``complaint'' to mean a
``consumer complaint.''[ltrif]
(b) Submission of complaints. (1) Any consumer having a complaint
regarding a State member bank is invited to submit it to the Federal
Reserve System. The complaint should be submitted in writing, if
possible, and should include the following information:
(i) A description of the act or practice that is thought to be
unfair or deceptive, or in violation of existing law or regulation,
including all relevant facts;
(ii) The name and address of the bank that is the subject of the
complaint; and
(iii) The name and address of the complainant.
(2) Consumer complaints should be made to--Federal Reserve Consumer
Help Center, P.O. Box 1200, Minneapolis, MN 55480, Toll-free number:
(888) 851-1920, Fax number: (877) 888-2520, TDD number: (877) 766-8533.
(c) Response to complaints. Within 15 business days of receipt of a
written complaint by the Board or a Federal Reserve Bank, a substantive
response or an acknowledgment setting a reasonable time for a
substantive response will be sent to the individual making the
complaint.
(d) Referrals to other agencies. Complaints received by the Board
or a Federal Reserve Bank regarding an act or practice of an
institution other than a State member bank will be forwarded to the
Federal agency having jurisdiction over that institution.
Sec. 227.11 [Reserved]
5. In Subpart B, Sec. 227.11 is added and reserved.
6. A new Subpart C is added to part 227 to read as follows:
Subpart C--Consumer Credit Card Account Practices Rule
Sec.
227.21 Definitions.
227.22 Unfair acts or practices regarding time to make payment.
227.23 Unfair acts or practices regarding allocation of payments.
227.24 Unfair acts or practices regarding application of increased
annual percentage rates to outstanding balances.
227.25 Unfair acts or practices regarding fees for exceeding the
credit limit caused by credit holds.
227.26 Unfair balance computation method.
227.27 Unfair acts or practices regarding security deposits and fees
for the issuance or availability of credit.
[[Page 28942]]
227.28 Deceptive acts or practices regarding firm offers of credit.
Subpart C--Consumer Credit Card Account Practices Rule
Sec. 227.21 Definitions.
For purposes of this subpart, the following definitions apply:
(a) ``Annual percentage rate'' means the product of multiplying
each periodic rate for a balance or transaction on a consumer credit
card account by the number of periods in a year. The term ``periodic
rate'' has the same meaning as in 12 CFR 226.2.
(b) ``Consumer'' means a natural person to whom credit is extended
under a consumer credit card account or a natural person who is a co-
obligor or guarantor of a consumer credit card account.
(c) ``Consumer credit card account'' means an account provided to a
consumer primarily for personal, family, or household purposes under an
open-end credit plan that is accessed by a credit card or charge card.
The terms ``open-end credit,'' ``credit card,'' and ``charge card''
have the same meanings as in 12 CFR 226.2. The following are not
consumer credit card accounts for purposes of this subpart:
(1) Home equity plans subject to the requirements of 12 CFR 226.5b
that are accessible by a credit or charge card;
(2) Overdraft lines of credit tied to asset accounts accessed by
check-guarantee cards or by debit cards;
(3) Lines of credit accessed by check-guarantee cards or by debit
cards that can be used only at automated teller machines; and
(4) Lines of credit accessed solely by account numbers.
(d) ``Promotional rate'' means:
(1) Any annual percentage rate applicable to one or more balances
or transactions on a consumer credit card account for a specified
period of time that is lower than the annual percentage rate that will
be in effect at the end of that period; or
(2) Any annual percentage rate applicable to one or more
transactions on a consumer credit card account that is lower than the
annual percentage rate that applies to other transactions of the same
type.
Sec. 227.22 Unfair acts or practices regarding time to make payment.
(a) General rule. Except as provided in paragraph (c) of this
section, a bank must not treat a payment on a consumer credit card
account as late for any purpose unless the consumer has been provided a
reasonable amount of time to make the payment.
(b) Safe harbor. A bank satisfies the requirements of paragraph (a)
of this section if it has adopted reasonable procedures designed to
ensure that periodic statements specifying the payment due date are
mailed or delivered to consumers at least 21 days before the payment
due date.
(c) Exception for grace periods. Paragraph (a) of this section does
not apply to any time period provided by the bank within which the
consumer may repay any portion of the credit extended without incurring
an additional finance charge.
Sec. 227.23 Unfair acts or practices regarding allocation of
payments.
(a) General rule for accounts with different annual percentage
rates on different balances. Except as provided in paragraph (b) of
this section, when different annual percentage rates apply to different
balances on a consumer credit card account, the bank must allocate any
amount paid by the consumer in excess of the required minimum periodic
payment among the balances in a manner that is no less beneficial to
the consumer than one of the following methods:
(1) The amount 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) Equal portions of the amount are allocated to each balance; or
(3) The amount is allocated among the balances in the same
proportion as each balance bears to the total balance.
(b) Special rules for accounts with promotional rate balances or
deferred interest balances. (1) Rule regarding payment allocation. (i)
In general. When a consumer credit card account has one or more
balances at a promotional rate or balances on which interest is
deferred, the bank must allocate any amount paid by the consumer in
excess of the required minimum periodic payment among the other
balances on the account consistent with paragraph (a) of this section.
If any amount remains after such allocation, the bank must allocate
that amount among the promotional rate balances or the deferred
interest balances consistent with paragraph (a) of this section.
(ii) Exception for deferred interest balances. Notwithstanding
paragraph (b)(1)(i) of this section, the bank may allocate the entire
amount paid by the consumer in excess of the required minimum periodic
payment to a balance on which interest is deferred during the two
billing cycles immediately preceding expiration of the period during
which interest is deferred.
(2) Rule regarding grace periods. A bank must not require a
consumer to repay any portion of a promotional rate balance or deferred
interest balance on a consumer credit card account in order to receive
any time period offered by the bank in which to repay other credit
extended without incurring finance charges, provided that the consumer
is otherwise eligible for such a time period.
Sec. 227.24 Unfair acts or practices regarding application of
increased annual percentage rates to outstanding balances.
(a) Prohibition on increasing annual percentage rates on
outstanding balances. (1) General rule. Except as provided in paragraph
(b) of this section, a bank must not increase the annual percentage
rate applicable to any outstanding balance on a consumer credit card
account.
(2) Outstanding balance. For purposes of this section,
``outstanding balance'' means the amount owed on a consumer credit card
account at the end of the fourteenth day after the bank provides a
notice required by 12 CFR 226.9(c) or (g).
(b) Exceptions. Paragraph (a) of this section does not apply where
the annual percentage rate is increased due to:
(1) The operation of an index that is not under the bank's control
and is available to the general public;
(2) The expiration or loss of a promotional rate, provided that, if
a promotional rate is lost, the bank does not increase the annual
percentage rate to a rate that is greater than the annual percentage
rate that would have applied after expiration of the promotional rate;
or
(3) The bank not receiving the consumer's required minimum periodic
payment within 30 days after the due date for that payment.
(c) Treatment of outstanding balances following rate increase. (1)
Payment of outstanding balances. When a bank increases the annual
percentage rate applicable to a category of transactions on a consumer
credit card account and the bank is prohibited by this section from
applying the increased rate to outstanding balances in that category,
the bank must provide the consumer with a method of paying that
outstanding balance that is no less beneficial to the consumer than one
of the following methods:
(i) An amortization period for the outstanding balance of no less
than five years, starting from the date on which the increased annual
percentage rate went into effect; or
(ii) A required minimum periodic payment on the outstanding balance
[[Page 28943]]
that includes a percentage of that balance that is no more than twice
the percentage included before the date on which the increased annual
percentage rate went into effect.
(2) Fees and charges on outstanding balance. When a bank increases
the annual percentage rate applicable to a category of transactions on
a consumer credit card account and the bank is prohibited by this
section from applying the increased rate to outstanding balances in
that category, the bank must not assess any fee or charge based solely
on the outstanding balance.
Sec. 227.25 Unfair acts or practices regarding fees for exceeding the
credit limit caused by credit holds.
A bank must not assess a fee or charge for exceeding the credit
limit on a consumer credit card account if the credit limit would not
have been exceeded but for a hold placed on any portion of the
available credit on the account that is in excess of the actual
purchase or transaction amount.
Sec. 227.26 Unfair balance computation method.
(a) General rule. Except as provided in paragraph (b) of this
section, a bank must not impose finance charges on balances on a
consumer credit card account based on balances for days in billing
cycles that precede the most recent billing cycle.
(b) Exceptions. Paragraph (a) of this section does not apply to:
(1) The assessment of deferred interest; or
(2) Adjustments to finance charges following the resolution of a
billing error dispute under 12 CFR 226.12(b) or 12 CFR 226.13.
Sec. 227.27 Unfair acts or practices regarding security deposits and
fees for the issuance or availability of credit.
(a) Annual rule. During the period beginning with the date on which
a consumer credit card account is opened and ending twelve months from
that date, a bank must not charge to the account security deposits or
fees for the issuance or availability of credit if the total amount of
such security deposits and fees constitutes a majority of the initial
credit limit for the account.
(b) Monthly rule. If the total amount of security deposits and fees
for the issuance or availability of credit charged to a consumer credit
card account during the period beginning with the date on which a
consumer credit card account is opened and ending twelve months from
that date constitutes more than 25 percent of the initial credit limit
for the account:
(1) During the first billing cycle after the account is opened, the
bank must not charge to the account security deposits and fees for the
issuance or availability of credit that total more than 25 percent of
the initial credit limit for the account; and
(2) In each of the eleven billing cycles following the first
billing cycle, the bank must not charge to the account more than one
eleventh of the total amount of any security deposits and fees for the
issuance or availability of credit in excess of 25 percent of the
initial credit limit for the account.
(c) Fees for the issuance or availability of credit. For purposes
of paragraphs (a) and (b) of this section, fees for the issuance or
availability of credit include:
(1) Any annual or other periodic fee that may be imposed for the
issuance or availability of a consumer credit card account, including
any fee based on account activity or inactivity; and
(2) Any non-periodic fee that relates to opening an account.
Sec. 227.28 Deceptive acts or practices regarding firm offers of
credit.
(a) Disclosure of criteria bearing on creditworthiness. If a bank
offers a range or multiple annual percentage rates or credit limits
when making a solicitation for a firm offer of credit for a consumer
credit card account, and the annual percentage rate or credit limit
that consumers approved for credit will receive depends on specific
criteria bearing on creditworthiness, the bank must disclose the types
of criteria in the solicitation. The disclosure must be provided in a
manner that is reasonably understandable to consumers and designed to
call attention to the nature and significance of the information
regarding the eligibility criteria for the lowest annual percentage
rate or highest credit limit stated in the solicitation. If presented
in a manner that calls attention to the nature and significance of the
information, the following disclosure may be used to satisfy the
requirements of this section (as applicable): ``If you are approved for
credit, your annual percentage rate and/or credit limit will depend on
your credit history, income, and debts.''
(b) Firm offer of credit defined. For purposes of this section,
``firm offer of credit'' has the same meaning as that term has under
the definition of ``firm offer of credit or insurance'' in section
603(l) of the Fair Credit Reporting Act (15 U.S.C. 1681a(l)).
7. A new Subpart D is added to part 227 to read as follows:
Subpart D--Overdraft Services Rule
Sec.
227.31 Definitions.
227.32 Unfair acts or practices regarding overdraft services.
Subpart D--Overdraft Services Rule
Sec. 227.31 Definitions.
For purposes of this subpart, the following definitions apply:
(a) ``Account'' means a deposit account at a bank that is held by
or offered to a consumer, and has the same meaning as in Sec. 230.2(a)
of the Board's Regulation DD, Truth in Savings (12 CFR part 230).
(b) ``Consumer'' means a person who holds an account primarily for
personal, family, or household purposes.
(c) ``Overdraft service'' means a service under which a bank
charges a fee for paying a transaction (including a check or other
item) that overdraws an account. The term ``overdraft service'' does
not include any payment of overdrafts pursuant to--
(1) A line of credit subject to the Federal Reserve Board's
Regulation Z (12 CFR part 226), including transfers from a credit card
account, home equity line of credit or overdraft line of credit; or
(2) A service that transfers funds from another account of the
consumer.
Sec. 227.32 Unfair acts or practices regarding overdraft services.
(a) Opt-out requirement. (1) General rule. A bank must not assess a
fee or charge on a consumer's account in connection with an overdraft
service, unless the bank provides the consumer with the right to opt
out of the bank's payment of overdrafts and a reasonable opportunity to
exercise that opt-out and the consumer has not opted out. The consumer
must be given notice and an opportunity to opt out before the bank's
assessment of any fee or charge for an overdraft, and subsequently at
least once during or for any periodic statement cycle in which any fee
or charge for paying an overdraft is assessed. The notice requirements
in paragraphs (a)(1) and (a)(2) do not apply if the consumer has opted
out, unless the consumer subsequently revokes the opt-out.
(2) Partial opt-out. A bank must provide a consumer the option of
opting out only for the payment of overdrafts at automated teller
machines and for point-of-sale transactions initiated by a debit card,
in addition to the choice of opting out of the payment of overdrafts
for all transactions.
(3) Exceptions. Notwithstanding a consumer's election to opt out
under paragraphs (a)(1) or (a)(2) of this section, a bank may assess a
fee or charge on a consumer's account for paying a debit
[[Page 28944]]
card transaction that overdraws an account if:
(i) There were sufficient funds in the consumer's account at the
time the authorization request was received, but the actual purchase
amount for that transaction exceeds the amount that had been
authorized; or
(ii) The transaction is presented for payment by paper-based means,
rather than electronically through a card terminal, and the bank has
not previously authorized the transaction.
(4) Time to comply with opt-out. A bank must comply with a
consumer's opt-out request as soon as reasonably practicable after the
bank receives it.
(5) Continuing right to opt-out. A consumer may opt out of the
bank's future payment of overdrafts at any time.
(6) Duration of opt-out. A consumer's opt-out is effective unless
subsequently revoked by the consumer.
(b) Debit holds. A bank must not assess a fee or charge on a
consumer's account for an overdraft service if the consumer's overdraft
would not have occurred but for a hold placed on funds in the
consumer's account that is in excess of the actual purchase or
transaction amount.
8. A new Supplement I is added to part 227 as follows:
Supplement I to Part 227--Official Staff Commentary
Subpart A--General Provisions for Consumer Protection Rules
Section 227.1--Authority, Purpose, and Scope
1(c) Scope
1. Penalties for noncompliance. Administrative enforcement of
the rule for banks may involve actions under section 8 of the
Federal Deposit Insurance Act (12 U.S.C. 1818), including cease-and-
desist orders requiring that actions be taken to remedy violations
and civil money penalties.
2. Industrial loan companies. Industrial loan companies that are
insured by the Federal Deposit Insurance Corporation are covered by
the Board's rule.
Subpart C--Consumer Credit Card Account Practices Rule
Section 227.21--Definitions
(d) Promotional Rate
Paragraph (d)(1)
1. Rate in effect at the end of the promotional period. If the
annual percentage rate that will be in effect at the end of the
specified period of time is a variable rate, the rate in effect at
the end of that period for purposes of Sec. 227.21(d)(1) is the
rate that would otherwise apply if the promotional rate was not
offered, consistent with any applicable accuracy requirements under
12 CFR part 226.
Paragraph (d)(2)
1. Example. A bank generally offers a 15% annual percentage rate
for purchases on a consumer credit card account. For purchases made
during a particular month, however, the creditor offers a rate of 5%
that will apply until the consumer pays those purchases in full.
Under Sec. 227.21(d)(2), the 5% rate is a ``promotional rate''
because it is lower than the 15% rate that applies to other
purchases.
Section 227.22--Unfair Acts or Practices Regarding Time To Make
Payment
(a) General Rule
1. Treating a payment as late for any purpose. Treating a
payment as late for any purpose includes increasing the annual
percentage rate as a penalty, reporting the consumer as delinquent
to a credit reporting agency, or assessing a late fee or any other
fee based on the consumer's failure to make a payment within the
amount of time provided to make that payment under this section.
2. Reasonable amount of time to make payment. Whether an amount
of time is reasonable for purposes of making a payment is determined
from the perspective of the consumer, not the bank. Under Sec.
227.22(b), a bank provides a reasonable amount of time to make a
payment if it has adopted reasonable procedures designed to ensure
that periodic statements specifying the payment due date are mailed
or delivered to consumers at least 21 days before the payment due
date.
(b) Safe Harbor
1. Reasonable procedures. A bank is not required to determine
the specific date on which periodic statements are mailed or
delivered to each individual consumer. A bank provides a reasonable
amount of time to make a payment if it has adopted reasonable
procedures designed to ensure that periodic statements are mailed or
delivered to consumers no later than, for example, three days after
the closing date of the billing cycle and the payment due date on
the periodic statement is no less than 24 days after the closing
date of the billing cycle.
2. Payment due date. For purposes of Sec. 227.22(b), ``payment
due date'' means the date by which the bank requires the consumer to
make payment to avoid being treated as late for any purpose, except
as provided in Sec. 227.22(c).
Section 227.23--Unfair Acts or Practices Regarding Allocation of
Payments
1. Minimum periodic payment. This section addresses the
allocation of amounts paid by the consumer in excess of the minimum
periodic payment required by the bank. This section does not limit
or otherwise address the bank's ability to determine the amount of
the minimum periodic payment or how that payment is allocated.
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 equally among three balances,
the bank may apply $34 to one balance and $33 to the others.
Similarly, if a bank is splitting $100.50 between two balances, the
bank may apply $50 to one balance and $50.50 to another.
(a) General Rule for Accounts With Different Annual Percentage
Rates on Different Balances
1. No less beneficial to the consumer. A bank may allocate
payments using a method that is different from the methods listed in
Sec. 227.23(a) so long as the method used is no less beneficial to
the consumer than one of the listed methods. A method is no less
beneficial to the consumer than a listed method if it results in the
assessment of the same or a lesser amount of interest charges than
would be assessed under any of the listed methods. For example, a
bank may not allocate the entire amount paid by the consumer in
excess of the required minimum periodic payment to the balance with
the lowest annual percentage rate because this method would result
in a higher assessment of interest charges than any of the methods
listed in Sec. 227.23(a).
2. Example of payment allocation method that is no less
beneficial to consumers than a method listed in Sec. 227.23(a).
Assume that a consumer's account has a cash advance balance of $500
at an annual percentage rate of 20% and a purchase balance of $1,500
at an annual percentage rate of 15% and that the consumer pays $555
in excess of the required minimum periodic payment. A bank could
allocate one-third of this amount ($185) to the cash advance balance
and two-thirds ($370) to the purchase balance even though this is
not a method listed in Sec. 227.23(a) because the bank is applying
more of the amount to the balance with the highest annual percentage
rate (with the result that the consumer will be assessed less in
interest charges) than would be the case under the pro rata
allocation method in Sec. 227.23(a)(3). See comment 23(a)(3)-1.
Paragraph (a)(1)
1. Examples of allocating first to the balance with the highest
annual percentage rate.
(A) Assume that a consumer's account has a cash advance balance
of $500 at an annual percentage rate of 20% and a purchase balance
of $1,500 at an annual percentage rate of 15% and that the consumer
pays $800 in excess of the required minimum periodic payment. None
of the minimum periodic payment is allocated to the cash advance
balance. A bank using this method would allocate $500 to pay off the
cash advance balance and then allocate the remaining $300 to the
purchase balance.
(B) Assume that a consumer's account has a cash advance balance
of $500 at an annual percentage rate of 20% and a purchase balance
of $1,500 at an annual percentage rate of 15% and that the consumer
pays $400 in excess of the required minimum periodic payment. A bank
using this method would allocate the entire $400 to the cash advance
balance.
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Paragraph (a)(2)
1. Example of equal portion method. Assume that a consumer's
account has a cash advance balance of $500 at an annual percentage
rate of 20% and a purchase balance of $1,500 at an annual percentage
rate of 15% and that the consumer pays $555 in excess of the
required minimum periodic payment. A bank using this method would
allocate $278 to the cash advance balance and $277 to the purchase
balance (or vice versa).
Paragraph (a)(3)
1. Example of pro rata method. Assume that a consumer's account
has a cash advance balance of $500 at an annual percentage rate of
20% and a purchase balance of $1,500 at an annual percentage rate of
15% and that the consumer pays $555 in excess of the required
minimum periodic payment. A bank using this method would allocate
25% of the amount ($139) to the cash advance balance and 75% of the
amount ($416) to the purchase balance.
(b) Special Rules for Accounts With Promotional Rate Balances or
Deferred Interest Balances
Paragraph (b)(1)(i)
1. Examples of special rule regarding payment allocation for
accounts with promotional rate balances or deferred interest
balances.
(A) A consumer credit card account has a cash advance balance of
$500 at an annual percentage rate of 20%, a purchase balance of
$1,500 at an annual percentage rate of 15%, and a transferred
balance of $3,000 at a promotional rate of 5%. The consumer pays
$800 in excess of the required minimum periodic payment. The bank
must allocate the $800 between the cash advance and purchase
balances (consistent with Sec. 227.23(a)) and apply nothing to the
transferred balance.
(B) A consumer credit card account has a cash advance balance of
$500 at an annual percentage rate of 20%, a balance of $1,500 on
which interest is deferred, and a transferred balance of $3,000 at a
promotional rate of 5%. The consumer pays $800 in excess of the
required minimum periodic payment. None of the minimum periodic
payment is allocated to the cash advance balance. The bank must
allocate $500 to pay off the cash advance balance before allocating
the remaining $300 between the deferred interest balance and the
transferred balance (consistent with Sec. 227.23(a)).
Paragraph (b)(1)(ii)
1. Examples of exception for deferred interest balances. Assume
that on January 1 a consumer uses a credit card to make a $1,000
purchase on which interest is deferred until June 30. If this amount
is not paid in full by June 30, all interest accrued during the six-
month period will be charged to the account. The billing cycle for
this credit card begins on the first day of the month and ends on
the last day of the month. Each month from January through June the
consumer uses the credit card to make $200 in purchases on which
interest is not deferred.
(A) The consumer pays $300 in excess of the minimum periodic
payment each month from January through June. None of the minimum
periodic payment is applied to the deferred interest balance or the
purchase balance. For the January, February, March, and April
billing cycles, the bank must allocate $200 to the purchase balance
and $100 to the deferred interest balance. For the May and June
billing cycles, however, the bank has the option of allocating the
entire $300 to the deferred interest balance, which will result in
that balance being paid in full before the deferred interest period
expires on June 30. In this example, the interest that accrued
between January 1 and June 30 will not be assessed to the consumer's
account.
(B) The consumer pays $200 in excess of the minimum periodic
payment each month from January through June. None of the minimum
periodic payment is applied to the deferred interest balance or the
purchase balance. For the January, February, March, and April
billing cycles, the bank must allocate the entire $200 to the
purchase balance. For the May and June billing cycles, however, the
bank has the option to allocate the entire $200 to the deferred
interest balance, which will result in that balance being reduced to
$600 before the deferred interest period expires on June 30. In this
example, the interest that accrued between January 1 and June 30
will be assessed to the consumer's account.
Paragraph (b)(2)
1. Example of special rule regarding grace periods for accounts
with promotional rate balances or deferred interest balances. A bank
offers a promotional rate on balance transfers and a higher rate on
purchases. The bank also offers a grace period under which consumers
who pay their balances in full by the due date are not charged
interest on purchases. A consumer who has paid the balance for the
prior billing cycle in full by the due date transfers a balance of
$2,000 and makes a purchase of $500. Because the bank offers a grace
period, it must provide a grace period on the $500 purchase if the
consumer pays that amount in full by the due date, even though the
$2,000 balance at the promotional rate remains outstanding.
Section 227.24--Unfair Acts or Practices Regarding Application of
Increased Annual Percentage Rates to Outstanding Balances
(a) Prohibition Against Increasing Annual Percentage Rates on
Outstanding Balances
1. Example. Assume that on December 30 a consumer credit card
account has a balance of $1,000 at an annual percentage rate of 15%.
On December 31, the bank mails or delivers a notice required by 12
CFR 226.9(c) informing the consumer that the annual percentage rate
will increase to 20% on February 15. The consumer uses the account
to make $2,000 in purchases on January 10 and $1,000 in purchases on
January 20. Assuming no other transactions, the outstanding balance
for purposes of Sec. 227.24 is the $3,000 balance as of the end of
the day on January 14. Therefore, under Sec. 227.24(a), the bank
cannot increase the annual percentage rate applicable to that
balance. The bank can apply the 20% rate to the $1,000 in purchases
made on January 20 but, consistent with 12 CFR 226.9(c), the bank
cannot do so until February 15.
2. Reasonable procedures. A bank is not required to determine
the specific date on which a notice required by 12 CFR 226.9(c) or
(g) was provided. For purposes of Sec. 227.24(a)(2), if the bank
has adopted reasonable procedures designed to ensure that notices
required by 12 CFR 226.9(c) or (g) are provided to consumers no
later than, for example, three days after the event giving rise to
the notice, the outstanding balance is the balance at the end of the
seventeenth day after such event.
(b) Exceptions
Paragraph (b)(1)
1. External index. A bank may increase the annual percentage
rate on an outstanding balance if the increase is based on an index
outside the bank's control. A bank may not increase the rate on an
outstanding balance based on its own prime rate or cost of funds and
may not reserve a contractual right to change rates on outstanding
balances at its discretion. In addition, a bank may not increase the
rate on an outstanding balance by changing the method used to
determine that rate. A bank is permitted, however, to use a
published prime rate, such as that in the Wall Street Journal, even
if the bank's own prime rate is one of several rates used to
establish the published rate.
2. Publicly available. The index must be available to the
public. A publicly available index need not be published in a
newspaper, but it must be one the consumer can independently obtain
(by telephone, for example) and use to verify the rate applied to
the outstanding balance.
Paragraph (b)(2)
1. Example. Assume that a consumer credit card account has a
balance of $1,000 at a 5% promotional rate and that the bank also
charges an annual percentage rate of 15% for purchases and a penalty
rate of 25%. If the consumer does not make payment by the due date
and the account agreement specifies that event as a trigger for
applying the penalty rate, the bank may increase the annual
percentage rate on the $1,000 from the 5% promotional rate to the
15% annual percentage rate for purchases. The bank may not, however,
increase the rate on the $1,000 from the 5% promotional rate to the
25% penalty rate, except as otherwise permitted under Sec.
227.24(b)(3).
Paragraph (b)(3)
1. Example. Assume that the annual percentage rate applicable to
purchases on a consumer credit card account is increased from 15% to
20% and that the account has an outstanding balance of $1,000 at the
15% rate. The payment due date on the account is the twenty-fifth of
the month. If the bank has not received the required minimum
periodic payment due on March 15 on or before April 14, the bank may
increase the rate applicable to the $1,000 balance once the bank has
complied with the notice requirements in 12 CFR 226.9(g).
[[Page 28946]]
(c) Treatment of Outstanding Balances Following Rate Increase
1. Scope. This provision does not apply if the consumer credit
card account does not have an outstanding balance. This provision
also does not apply if a rate is increased pursuant to any of the
exceptions in Sec. 227.24(b).
2. Category of transactions. This provision does not apply to
balances in categories of transactions other than the category for
which the bank has increased the annual percentage rate. For
example, if a bank increases the annual percentage rate that applies
to purchases but not the rate that applies to cash advances, Sec.
227.24(c)(1) and (2) apply to an outstanding balance consisting of
purchases but not an outstanding balance consisting of cash
advances.
Paragraph (c)(1)
1. No less beneficial to the consumer. A bank may provide a
method of paying the outstanding balance that is different from the
methods listed in Sec. 227.24(c)(1) so long as the method used is
no less beneficial to the consumer than one of the listed methods. A
method is no less beneficial to the consumer if the method amortizes
the outstanding balance in five years or longer or if the method
results in a required minimum periodic payment on the outstanding
balance that is equal to or less than a minimum payment calculated
consistent with Sec. 227.24(c)(1)(ii). For example, a bank could
more than double the percentage of amounts owed included in the
minimum payment so long as the minimum payment does not result in
amortization of the outstanding balance in less than five years.
Alternatively, a bank could require a consumer to make a minimum
payment on the outstanding balance that amortizes that balance in
less than five years so long as the payment does not include a
percentage of the outstanding balance that is more than twice the
percentage included in the minimum payment before the effective date
of the increased rate.
Paragraph (c)(1)(ii)
1. Required minimum periodic payment on other balances. This
paragraph addresses the required minimum periodic payment on the
outstanding balance. This paragraph does not limit or otherwise
address the bank's ability to determine the amount of the minimum
periodic payment for other balances.
2. Example. Assume that the method used by a bank to calculate
the required minimum periodic payment for a consumer credit card
account requires the consumer to pay either the total of fees and
interest charges plus 1% of the total amount owed or $20, whichever
is greater. Assume also that the bank increases the annual
percentage rate applicable to purchases on a consumer credit card
account from 15% to 20% and that the account has an outstanding
balance of $1,000 at the 15% rate. Section 227.24(c)(1)(ii) would
permit the bank to calculate the required minimum periodic payment
on the outstanding balance by adding fees and interest charges to 2%
of the outstanding balance.
Paragraph (c)(2)
1. Fee or charge based solely on the outstanding balance. A bank
is prohibited from assessing a fee or charge based solely on an
outstanding balance. For example, a bank is prohibited from
assessing a maintenance or similar fee based on an outstanding
balance. A bank is not, however, prohibited from assessing fees such
as late payment fees or fees for exceeding the credit limit even if
such fees are based in part on an outstanding balance.
Section 227.25--Unfair Acts or Practices Regarding Fees for
Exceeding the Credit Limit Caused by Credit Holds
1. General. Under Sec. 227.25, a bank may not assess a fee for
exceeding the credit limit if the credit limit would not have been
exceeded but for a hold placed on the available credit for a
consumer credit card account for a transaction that has been
authorized but has not yet been presented for settlement, if the
amount of the hold is in excess of the actual purchase or
transaction amount when the transaction is settled. Section 227.25
does not limit a bank from charging a fee for exceeding the credit
limit in connection with a particular transaction if the consumer
would have exceeded the credit limit due to other reasons, such as
other transactions that may have been authorized but not yet
presented for settlement, a payment that is returned, or if the
purchase or transaction amount for the transaction for which the
hold was placed would have also caused the consumer to exceed the
credit limit.
2. Example of prohibition in connection with hold placed for
same transaction. Assume that a consumer credit card account has a
credit limit of $2,000 and a balance of $1,500. The consumer uses
the credit card to check into a hotel for an anticipated stay of
five days. When the consumer checks in, the hotel obtains
authorization from the bank for a $750 hold on the account to ensure
there is adequate available credit to cover the cost of the
anticipated stay. The consumer checks out of the hotel after three
days, and the total cost of the stay is $450, which is charged to
the consumer's credit card account. Assuming that there is no other
activity on the account, the bank is prohibited from assessing a fee
for exceeding the credit limit with respect to the $750 hold. If,
however, the total cost of the stay charged to the account had been
more than $500, the bank would not be prohibited from assessing a
fee for exceeding the credit limit.
3. Example of prohibition in connection with hold placed for
another transaction. Assume that a consumer credit card account has
a credit limit of $2,000 and a balance of $1,400. The consumer uses
the credit card to check into a hotel for an anticipated stay of
five days. When the consumer checks in, the hotel obtains
authorization from the bank for a $750 hold on the account to ensure
there is adequate available credit to cover the cost of the
anticipated stay. While the hold remains in place, the consumer uses
the credit card to make a $150 purchase. The consumer checks out of
the hotel after three days, and the total cost of the stay is $450,
which is charged to the consumer's credit card account. Assuming
that there is no other activity on the account, the bank is
prohibited from assessing a fee for exceeding the credit limit with
respect to either the $750 hold or the $150 purchase. If, however,
the total cost of the stay charged to the account had been more than
$450, the bank would not be prohibited from assessing a fee for
exceeding the credit limit.
4. Example of prohibition when authorization and settlement
amounts are held for the same transaction. Assume that a consumer
credit card account has a credit limit of $2,000 and a balance of
$1,400. The consumer uses the credit card to check into a hotel for
an anticipated stay of five days. When the consumer checks in, the
hotel obtains authorization from the bank for a $750 hold on the
account to ensure there is adequate available credit to cover the
cost of the anticipated stay. The consumer checks out of the hotel
after three days, and the total cost of the stay is $450, which is
charged to the consumer's credit card account. When the hotel
presents the $450 transaction for settlement, it uses a different
transaction code to identify the transaction than it had used for
the pre-authorization, causing both the $750 hold and the $450
purchase amount to be temporarily posted to the consumer's account
at the same time, and the consumer's balance to exceed the credit
limit. Under these circumstances, and assuming no other
transactions, the bank is prohibited from assessing a fee for
exceeding the credit limit because the credit limit was exceeded
solely due to the $750 hold.
5. Example of permissible fee for exceeding the credit limit in
connection with a hold. Assume that a consumer has a credit limit of
$2,000 and a balance of $1,400 on a consumer credit card account.
The consumer uses the credit card to check into a hotel for an
anticipated stay of five days. When the consumer checks in, the
hotel obtains authorization from the bank for a $750 hold on the
account to ensure there is adequate available credit to cover the
cost of the anticipated stay. While the hold remains in place, the
consumer uses the credit card to make a $650 purchase. The consumer
checks out of the hotel after three days, and the total cost of the
stay is $450, which is charged to the consumer's credit card
account. Notwithstanding the existence of the hold and assuming that
there is no other activity on the account, the bank may charge the
consumer a fee for exceeding the credit limit with respect to the
$650 purchase because the consumer would have exceeded the credit
limit even if the hold had been for the actual amount of the hotel
transaction.
Section 227.26--Unfair Balance Computation Method
(a) General Rule
1. Two-cycle method prohibited. A bank is prohibited from
computing the finance charge using the so-called two-cycle average
daily balance computation method. This method calculates the finance
charge using a balance that is the sum of the average daily balances
for two billing cycles. The first balance is for the current billing
cycle, and is calculated by adding the total balance (including or
excluding new purchases and
[[Page 28947]]
deducting payments and credits) for each day in the billing cycle,
and then dividing by the number of days in the billing cycle. The
second balance is for the preceding billing cycle.
2. Example. Assume that the billing cycle on a consumer credit
card account starts on the first day of the month and ends on the
last day of the month. A consumer has a zero balance on March 1. The
consumer uses the credit card to make a $500 purchase on March 15.
The consumer makes no other purchases and pays $400 on the due date
(April 25), leaving a $100 balance. The bank may charge interest on
the $500 purchase from the start of the billing cycle (April 1)
through April 24 and interest on the remaining $100 from April 25
through the end of the April billing cycle (April 30). The bank is
prohibited, however, from reaching back and charging interest on the
$500 purchase from the date of purchase (March 15) to the end of the
March billing cycle (March 31).
Section 227.27--Unfair Acts or Practices Regarding Security
Deposits and Fees for the Issuance or Availability of Credit
1. Initial credit limit for the account. For purposes of this
section, the initial credit limit is the limit in effect when the
account is opened.
(a) Annual Rule
1. Majority of the credit limit. The total amount of security
deposits and fees for the issuance or availability of credit
constitutes a majority of the initial credit limit if that total is
greater than half of the limit. For example, assume that a consumer
credit card account has an initial credit limit of $500. Under Sec.
227.27(a), a bank may only charge to the account security deposits
and fees for the issuance or availability of credit totaling no more
than $250 during the twelve months after the date on which the
account is opened (consistent with Sec. 227.27(b)).
(b) Monthly Rule
1. Adjustments of one dollar or less permitted. When dividing
amounts pursuant to Sec. 227.27(b)(2), the bank may adjust amounts
by one dollar or less. For example, if a bank is dividing $125 over
eleven billing cycles, the bank may charge $12 for four months and
$11 for the remaining seven months.
2. Example. Assume that a consumer credit card account opened on
January 1 has an initial credit limit of $500 and that a bank
charges to the account security deposits and fees for the issuance
or availability of credit that total $250 during the twelve months
after the date on which the account is opened. Assume also that the
billing cycles for this account begin on the first day of the month
and end on the last day of the month. Under Sec. 227.27(b), the
bank may charge to the account no more than $250 in security
deposits and fees for the issuance or availability of credit. If it
charges $250, the bank may charge as much as $125 during the first
billing cycle. If it charges $125 during the first billing cycle, it
may then charge $12 in any four billing cycles and $11 in any seven
billing cycles during the year.
(c) Fees for the Issuance or Availability of Credit
1. Membership fees. Membership fees for opening an account are
fees for the issuance or availability of credit. A membership fee to
join an organization that provides a credit or charge card as a
privilege of membership is a fee for the issuance or availability of
credit only if the card is issued automatically upon membership. If
membership results merely in eligibility to apply for an account,
then such a fee is not a fee for the issuance or availability of
credit.
2. Enhancements. Fees for optional services in addition to basic
membership privileges in a credit or charge card account (for
example, travel insurance or card-registration services) are not
fees for the issuance or availability of credit if the basic account
may be opened without paying such fees.
3. One-time fees. Only non-periodic fees related to opening an
account (such as one-time membership or participation fees) are fees
for the issuance or availability of credit. Fees for reissuing a
lost or stolen card and statement reproduction fees are examples of
fees that are not fees for the issuance or availability of credit.
Section 227.28--Deceptive Acts or Practices Regarding Firm Offers
of Credit
(a) Disclosure of Criteria Bearing on Creditworthiness
1. Designed to call attention. Whether a disclosure has been
provided in a manner that is designed to call attention to the
nature and significance of required information depends on where the
disclosure is placed in the solicitation and how it is presented,
including whether the disclosure uses a typeface and type size that
are easy to read and uses boldface or italics. Placing the
disclosure in a footnote would not satisfy this requirement.
2. Form of electronic disclosures. Electronic disclosures must
be provided consistent with 12 CFR 226.5a(a)(2)-8 and -9.
3. Multiple annual percentage rates or credit limits. For
purposes of this section, a firm offer of credit solicitation that
states an annual percentage rate or credit limit for a credit card
feature and a different annual percentage rate or credit limit for a
different credit card feature does not offer multiple annual
percentage rates or credit limits. For example, if a firm offer of
credit solicitation offers a 15% annual percentage rate for
purchases and a 20% annual percentage rate for cash advances, the
solicitation does not offer multiple annual percentage rates for
purposes of this section.
4. Example. Assume that a bank requests from a consumer
reporting agency a list of consumers with credit scores of 650 or
higher so that the bank can send those consumers a firm offer of
credit solicitation. The bank sends a solicitation to those
consumers for a consumer credit card account advertising ``rates
from 8.99% to 19.99%'' and ``credit limits from $1,000 to $10,000.''
Before selection of the consumers for the offer, however, the bank
determines that it will provide an interest rate of 8.99% and a
credit limit of $10,000 only to those consumers responding to the
solicitation who are verified to have a credit score of 650 or
higher, who have a debt-to-income ratio below a certain amount, and
who meet other specific criteria bearing on creditworthiness. Under
Sec. 227.28, this solicitation is deceptive unless the bank
discloses, in a manner that is reasonably understandable to the
consumer and designed to call attention to the nature and
significance of the information, that, if the consumer is approved
for credit, the annual percentage rate and credit limit the consumer
will receive will depend on specific criteria bearing on the
consumer's creditworthiness. The bank may satisfy this requirement
by using a typeface and type size that are easy to read and stating
in boldface in a manner that otherwise calls attention to the nature
and significance of the information: ``If you are approved for
credit, your annual percentage rate and/or credit limit will depend
on your credit history, income, and debts.''
5. Applicability of criteria in disclosure. When making a
disclosure under this section, a bank may only disclose the criteria
it uses in evaluating whether consumers who are approved for credit
will receive the lowest annual percentage rate or the highest credit
limit. For example, if a bank does not consider the consumer's debts
when determining whether the consumer should receive the lowest
annual percentage rate or highest credit limit, the disclosure must
not refer to ``debts.''
Subpart D--Overdraft Services Rule
Section 227.32--Unfair Acts or Practices Regarding Overdraft
Services
(a) Opt-Out Requirement
(a)(1) General Rule
1. Form, content and timing of disclosure. The form, content and
timing of the opt-out notice required to be provided under paragraph
(a) of this section are addressed under Sec. 230.10 of the Board's
Regulation DD, Truth in Savings (12 CFR 230).
(a)(3) Exceptions
Paragraph (a)(3)(i)
1. Example of transaction amount exceeding authorization amount
(fuel purchase). A consumer has $30 in a deposit account. The
consumer uses a debit card to purchase fuel. Before permitting the
consumer to use the fuel pump, the merchant verifies the validity of
the card by obtaining authorization from the bank for a $1
transaction. The consumer purchases $50 of fuel. If the bank pays
the transaction, it would be permitted to assess a fee or charge for
paying the overdraft, even if the consumer has opted out of the
payment of overdrafts.
2. Example of transaction amount exceeding authorization amount
(restaurant). A consumer has $50 in a deposit account. The consumer
pays for a $45 meal at a restaurant using a debit card. While the
restaurant may obtain authorization for the $45 cost of the meal,
the consumer may add $10 for a tip. If the bank pays the $55
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transaction (including the tip amount), it would be permitted to
assess a fee or charge for paying the overdraft, even if the
consumer has opted out of the payment of overdrafts.
Paragraph (a)(3)(ii)
1. Example of transaction presented by paper-based means. A
consumer has $50 in a deposit account. The consumer makes a $60
purchase and presents his or her debit card for payment. The
merchant takes an imprint of the card. Later that day, the merchant
submits a sales slip with the card imprint to its processor for
payment. If the consumer's bank pays the transaction, it would be
permitted to assess a fee or charge for paying the overdraft, even
if the consumer has opted out of the payment of overdrafts.
(b) Debit Holds
1. General. Under Sec. 227.32(b), a bank may not assess an
overdraft fee if the overdraft would not have occurred but for a
hold placed on funds in the consumer's account for a transaction
that has been authorized but has not yet been presented for
settlement, if the amount of the hold is in excess of the actual
purchase or transaction amount when the transaction is settled.
Section 227.32(b) does not limit a bank from charging an overdraft
fee in connection with a particular transaction if the consumer
would have incurred an overdraft due to other reasons, such as other
transactions that may have been authorized but not yet presented for
settlement, a deposited check that is returned, or if the purchase
or transaction amount for the transaction for which the hold was
placed would have also caused the consumer to overdraw his or her
account.
2. Example of prohibition in connection with hold placed for
same transaction. A consumer has $50 in a deposit account. The
consumer makes a fuel purchase using his or her debit card. Before
permitting the consumer to use the fuel pump, the merchant obtains
authorization from the consumer's bank for a $75 ``hold'' on the
account which exceeds the consumer's funds. The consumer purchases
$20 of fuel. Under these circumstances, Sec. 227.32(b) prohibits
the bank from assessing a fee or charge in connection with the debit
hold because the actual amount of the fuel purchase did not exceed
the funds in the consumer's account. However, if the consumer had
purchased $60 of fuel, the bank could assess a fee or charge for an
overdraft because the transaction exceeds the funds in the
consumer's account, unless the consumer has opted out of the payment
of overdrafts under Sec. 227.32(a).
3. Example of prohibition in connection with hold placed for
another transaction. A consumer has $100 in a deposit account. The
consumer makes a fuel purchase using his or her debit card. Before
permitting the consumer to use the fuel pump, the merchant obtains
authorization from the consumer's bank for a $75 ``hold'' on the
account. The consumer purchases $20 of fuel, but the transaction is
not presented for settlement until the next day. Later on the first
day, and assuming no other transactions, the consumer withdraws $75
at an ATM. Under these circumstances, Sec. 227.32(b) prohibits the
bank from assessing a fee or charge for paying an overdraft with
respect to the $75 withdrawal because the overdraft was caused
solely by the $75 hold.
4. Example of prohibition when authorization and settlement
amounts are held for the same transaction. A consumer has $100 in
his deposit account, and uses his debit card to purchase $50 worth
of fuel. Before permitting the consumer to use the fuel pump, the
merchant obtains authorization from the consumer's bank for a $75
``hold'' on the account. The consumer purchases $50 of fuel. When
the merchant presents the $50 transaction for settlement, it uses a
different transaction code to identify the transaction than it had
used for the pre-authorization, causing both the $75 hold and the
$50 purchase amount to be temporarily posted to the consumer's
account at the same time, and the consumer's account to be
overdrawn. Under these circumstances, and assuming no other
transactions, Sec. 227.32(b) prohibits the bank from assessing a
fee or charge for paying an overdraft because the overdraft was
caused solely by the $75 hold.
5. Example of permissible overdraft fees in connection with a
hold. A consumer has $100 in a deposit account. The consumer makes a
fuel purchase using his or her debit card. Before permitting the
consumer to use the fuel pump, the merchant obtains authorization
from the consumer's bank for a $75 ``hold'' on the account. The
consumer purchases $35 of fuel, but the transaction is not presented
for settlement until the next day. Later on the first day, and
assuming no other transactions, the consumer withdraws $75 at an
ATM. Notwithstanding the existence of the hold, and assuming the
consumer has not opted out of the payment of overdrafts under Sec.
227.32(a), the consumer's bank may charge the consumer an overdraft
fee for the $75 ATM withdrawal, because the consumer would have
incurred the overdraft even if the hold had been for the actual
amount of the fuel purchase.
9. The Federal Reserve System Board of Governors' Staff
Guidelines on the Credit Practices Rule, published August 3, 1988 at
51 FR 29225, is amended as follows:
Staff Guidelines on the Credit Practices Rule
Effective January 1, 1986; as amended effective [August 1, 1988]
[rtrif]Insert effective date of new amendments[ltrif]
Introduction
* * * * *
3. Scope; enforcement.[rtrif]As stated in subpart A of
Regulation AA,[ltrif] [The Board's] [rtrif]this[ltrif] rule applies
to all banks and their subsidiaries[rtrif], except savings
associations as defined in 12 U.S.C. 1813(b).[ltrif] [institutions
that are members of the Federal Home Loan Bank System and nonbank
subsidiaries of bank holding companies are covered by the rules of
the Federal Home Loan Bank Board and the FTC, respectively.] The
Board has enforcement responsibility for state-chartered banks that
are members of the Federal Reserve System. The Office of the
Comptroller of the Currency has enforcement responsibility for
national banks. The Federal Deposit Insurance Corporation has
enforcement responsibility for insured state-chartered banks that
are not members of the Federal Reserve System.
* * * * *
[Section 227.11 Authority, Purpose, and Scope
Q11(c)-1: Penalties for noncompliance. What are the penalties
for noncompliance with the rule?
A: Administrative enforcement of the rule for banks may involve
actions under section 8 of the Federal Deposit Insurance Act (12
U.S.C. 1818), including cease-and-desist orders requiring that
actions be taken to remedy violations. If the terms of the order are
violated, the federal supervisory agency may impose penalties of up
to $1,000 per day for every day that the bank is in violation of the
order.
Q11(c)-2: Industrial loan companies. Are industrial loan
companies subject to the Board's rule?
A: Industrial loan companies that are insured by the Federal
Deposit Insurance Corporation are covered by the Board's rule.]
* * * * *
Department of the Treasury
Office of Thrift Supervision
12 CFR Chapter V
For the reasons discussed in the joint preamble, the Office of
Thrift Supervision proposes to amend chapter V of title 12 of the Code
of Federal Regulations by revising 12 CFR part 535 to read as follows:
PART 535--UNFAIR OR DECEPTIVE ACTS OR PRACTICES
Subpart A--General Provisions
Sec.
535.1 Authority, purpose, and scope.
Subpart B--Consumer Credit Practices
535.11 Definitions.
535.12 Unfair credit contract provisions.
535.13 Unfair or deceptive cosigner practices.
535.14 Unfair late charges.
535.15 State exemptions.
Subpart C--Consumer Credit Card Account Practices
535.21 Definitions.
535.22 Unfair time to make payment.
535.23 Unfair payment allocations.
535.24 Unfair annual percentage rate increases on outstanding
balances.
535.25 Unfair fees for exceeding the credit limit due to credit
holds.
535.26 Unfair balance computation method.
535.27 Unfair charging to the account of security deposits and fees
for the issuance or availability of credit.
535.28 Deceptive firm offers of credit.
Subpart D--Overdraft Service Practices
535.31 Definitions.
535.32 Unfair overdraft service practices.
Appendix to Part 535--Official Staff Commentary
Authority: 12 U.S.C. 1462a, 1463, 1464; 15 U.S.C. 57a.
[[Page 28949]]
Subpart A--General Provisions
Sec. 535.1 Authority, purpose and scope.
(a) Authority. This part is issued by OTS under section 18(f) of
the Federal Trade Commission Act, 15 U.S.C. 57a(f).
(b) Purpose. The purpose of this part is to prohibit unfair or
deceptive acts or practices in violation of section 5(a)(1) of the
Federal Trade Commission Act, 15 U.S.C. 45(a)(1). This part defines and
contains requirements prescribed for the purpose of preventing specific
unfair or deceptive acts or practices of savings associations. The
prohibitions in this part do not limit OTS's authority to enforce the
FTC Act with respect to any other unfair or deceptive acts or
practices.
(c) Scope. This part applies to savings associations and
subsidiaries owned in whole or in part by a savings association.
Subpart B--Consumer Credit Practices
Sec. 535.11 Definitions.
For purposes of this subpart, the following definitions apply:
(a) Consumer means a natural person who seeks or acquires goods,
services, or money for personal, family, or household purposes, other
than for the purchase of real property, and who applies for or is
extended consumer credit.
(b) Consumer credit means credit extended to a natural person for
personal, family, or household purposes. It includes consumer loans;
educational loans; unsecured loans for real property alteration, repair
or improvement, or for the equipping of real property; overdraft loans;
and credit cards. It also includes loans secured by liens on real
estate and chattel liens secured by mobile homes and leases of personal
property to consumers that may be considered the functional equivalent
of loans on personal security but only if the savings association
relies substantially upon other factors, such as the general credit
standing of the borrower, guaranties, or security other than the real
estate or mobile home, as the primary security for the loan.
(c) Earnings means compensation paid or payable to an individual or
for the individual's account for personal services rendered or to be
rendered by the individual, whether denominated as wages, salary,
commission, bonus, or otherwise, including periodic payments pursuant
to a pension, retirement, or disability program.
(d) Obligation means an agreement between a consumer and a
creditor.
(e) Person means an individual, corporation, or other business
organization.
Sec. 535.12 Unfair credit contract provisions.
It is an unfair act or practice for you, directly or indirectly, to
enter into a consumer credit obligation that constitutes or contains,
or to enforce in a consumer credit obligation you purchased, any of the
following provisions:
(a) Confession of judgment. A cognovit or confession of judgment
(for purposes other than executory process in the State of Louisiana),
warrant of attorney, or other waiver of the right to notice and the
opportunity to be heard in the event of suit or process thereon.
(b) Waiver of exemption. An executory waiver or a limitation of
exemption from attachment, execution, or other process on real or
personal property held, owned by, or due to the consumer, unless the
waiver applies solely to property subject to a security interest
executed in connection with the obligation.
(c) Assignment of wages. An assignment of wages or other earnings
unless:
(1) The assignment by its terms is revocable at the will of the
debtor;
(2) The assignment is a payroll deduction plan or preauthorized
payment plan, commencing at the time of the transaction, in which the
consumer authorizes a series of wage deductions as a method of making
each payment; or
(3) The assignment applies only to wages or other earnings already
earned at the time of the assignment.
(d) Security interest in household goods. A nonpossessory security
interest in household goods other than a purchase-money security
interest. For purposes of this paragraph, household goods:
(1) Means clothing, furniture, appliances, linens, china, crockery,
kitchenware, and personal effects of the consumer and the consumer's
dependents.
(2) Does not include:
(i) Works of art;
(ii) Electronic entertainment equipment (except one television and
one radio);
(iii) Antiques (any item over one hundred years of age, including
such items that have been repaired or renovated without changing their
original form or character); or
(iv) Jewelry (other than wedding rings).
Sec. 535.13 Unfair or deceptive cosigner practices.
(a) Prohibited deception. It is a deceptive act or practice for
you, directly or indirectly in connection with the extension of credit
to consumers, to misrepresent the nature or extent of cosigner
liability to any person.
(b) Prohibited unfairness. It is an unfair act or practice for you,
directly or indirectly in connection with the extension of credit to
consumers, to obligate a cosigner unless the cosigner is informed,
before becoming obligated, of the nature of the cosigner's liability.
(c) Disclosure requirement. (1) Disclosure statement. A clear and
conspicuous statement must be given in writing to the cosigner before
becoming obligated. In the case of open-end credit, the disclosure
statement must be given to the cosigner before the time that the
cosigner becomes obligated for any fees or transactions on the account.
The disclosure statement must contain the following statement or one
that is substantially similar:
Notice of Cosigner
You are being asked to guarantee this debt. Think carefully
before you do. If the borrower doesn't pay the debt, you will have
to. Be sure you can afford to pay if you have to, and that you want
to accept this responsibility.
You may have to pay up to the full amount of the debt if the
borrower does not pay. You may also have to pay late fees or
collection costs, which increase this amount.
The creditor can collect this debt from you without first trying
to collect from the borrower. The creditor can use the same
collection methods against you that can be used against the
borrower, such as suing you, garnishing your wages, etc. If this
debt is ever in default, that fact may become a part of your credit
record.
(2) Compliance. Compliance with paragraph (d)(1) of this section
constitutes compliance with the consumer disclosure requirement in
paragraph (b) of this section.
(3) Additional content limitations. If the notice is a separate
document, nothing other than the following items may appear with the
notice:
(i) Your name and address;
(ii) An identification of the debt to be cosigned (e.g., a loan
identification number);
(iii) The date (of the transaction); and
(iv) The statement, ``This notice is not the contract that makes
you liable for the debt.''
(d) Cosigner defined. (1) Cosigner means a natural person who
assumes liability for the obligation of a consumer without receiving
goods, services, or money in return for the obligation, or, in the case
of an open-end credit obligation, without receiving the contractual
right to obtain extensions of credit under the account.
(2) Cosigner includes any person whose signature is requested as a
condition to granting credit to a
[[Page 28950]]
consumer, or as a condition for forbearance on collection of a
consumer's obligation that is in default. The term does not include a
spouse or other person whose signature is required on a credit
obligation to perfect a security interest pursuant to state law.
(3) A person who meets the definition in this paragraph is a
cosigner, whether or not the person is designated as such on a credit
obligation.
Sec. 535.14 Unfair late charges.
(a) Prohibition. In connection with collecting a debt arising out
of an extension of credit to a consumer, it is an unfair act or
practice for you, directly or indirectly, to levy or collect any
delinquency charge on a payment, when the only delinquency is
attributable to late fees or delinquency charges assessed on earlier
installments and the payment is otherwise a full payment for the
applicable period and is paid on its due date or within an applicable
grace period.
(b) Collecting a debt defined. Collecting a debt means, for the
purposes of this section, any activity, other than the use of judicial
process, that is intended to bring about or does bring about repayment
of all or part of money due (or alleged to be due) from a consumer.
Sec. 535.15 State exemptions.
(a) Applications. An appropriate state agency may apply to OTS for
a determination that:
(1) There is a state requirement or prohibition in effect that
applies to any transaction to which a provision of this subpart
applies; and
(2) The state requirement or prohibition affords a level of
protection to consumers that is substantially equivalent to, or greater
than, the protection afforded by this subpart.
(b) Determinations. If OTS makes a determination under paragraph
(a) of this section, then the provision of this subpart will not be in
effect in that state to the extent specified by OTS in its
determination, for as long as the state administers and enforces the
state requirement or prohibition effectively, as determined by OTS.
(c) Delegated authority. The Managing Director, Compliance and
Consumer Protection in consultation with the Chief Counsel has
delegated authority to make such determinations as are required under
this subpart.
Subpart C--Consumer Credit Card Account Practices
Sec. 535.21 Definitions.
For purposes of this subpart, the following definitions apply:
(a) Annual percentage rate means the product of multiplying each
periodic rate for a balance or transaction on a consumer credit card
account by the number of periods in a year. The term periodic rate has
the same meaning as in Sec. 226.2 of this title.
(b) Consumer means a natural person to whom credit is extended
under a consumer credit card account or a natural person who is a co-
obligor or guarantor of a consumer credit card account.
(c) Consumer credit card account means an account provided to a
consumer primarily for personal, family, or household purposes under an
open-end credit plan that is accessed by a credit card or charge card.
The terms open-end credit, credit card, and charge card have the same
meanings as in Sec. 226.2 of this title. The following are not
consumer credit card accounts for purposes of this subpart:
(1) Home equity plans subject to the requirements of Sec. 226.5b
of this title that are accessible by a credit or charge card;
(2) Overdraft lines of credit tied to asset accounts accessed by
check-guarantee cards or by debit cards;
(3) Lines of credit accessed by check-guarantee cards or by debit
cards that can be used only at automated teller machines; and
(4) Lines of credit accessed solely by account numbers.
(d) Promotional rate means:
(1) Any annual percentage rate applicable to one or more balances
or transactions on a consumer credit card account for a specified
period of time that is lower than the annual percentage rate that will
be in effect at the end of that period; or
(2) Any annual percentage rate applicable to one or more
transactions on a consumer credit card account that is lower than the
annual percentage rate that applies to other transactions of the same
type.
Sec. 535.22 Unfair time to make payment.
(a) General rule. Except as provided in paragraph (c) of this
section, you must not treat a payment on a consumer credit card account
as late for any purpose unless you have provided the consumer a
reasonable amount of time to make the payment.
(b) Safe harbor. You satisfy the requirements of paragraph (a) of
this section if you have adopted reasonable procedures designed to
ensure that periodic statements specifying the payment due date are
mailed or delivered to consumers at least 21 days before the payment
due date.
(c) Exception for grace periods. Paragraph (a) of this section does
not apply to any time period you provide within which the consumer may
repay any portion of the credit extended without incurring an
additional finance charge.
Sec. 535.23 Unfair payment allocations.
(a) General rule for accounts with different annual percentage
rates on different balances. Except as provided in paragraph (b) of
this section, when different annual percentage rates apply to different
balances on a consumer credit card account, you must allocate any
amount paid by the consumer in excess of the required minimum periodic
payment among the balances in a manner that is no less beneficial to
the consumer than one of the following methods:
(1) You allocate the amount first to the balance with the highest
annual percentage rate and any remaining portion to the other balances
in descending order based on the applicable annual percentage rate;
(2) You allocate equal portions of the amount to each balance; or
(3) You allocate the amount among the balances in the same
proportion as each balance bears to the total balance.
(b) Special rules for accounts with promotional rate balances or
deferred interest balances. (1) Rule regarding payment allocation. (i)
In general. When a consumer credit card account has one or more
balances at a promotional rate or balances on which interest is
deferred, you must allocate any amount paid by the consumer in excess
of the required minimum periodic payment among the other balances on
the account consistent with paragraph (a) of this section. If any
amount remains after such allocation, you must allocate that amount
among the promotional rate balances or the deferred interest balances
consistent with paragraph (a) of this section.
(ii) Exception for deferred interest balances. Notwithstanding
paragraph (b)(1)(i) of this section, you may allocate the entire amount
paid by the consumer in excess of the required minimum periodic payment
to a balance on which interest is deferred during the two billing
cycles immediately preceding expiration of the period during which
interest is deferred.
(2) Rule regarding grace period. You must not require a consumer to
repay any portion of a promotional rate balance or deferred interest
balance on a consumer credit card account in order to receive any time
period you offer in which to repay other credit extended without
incurring finance charges, provided that the consumer is otherwise
eligible for such a time period.
[[Page 28951]]
Sec. 535.24 Unfair annual percentage rate increases on outstanding
balances.
(a) Prohibition against increasing annual percentage rates on
outstanding balances. (1) General rule. Except as provided in paragraph
(b) of this section, you must not increase the annual percentage rate
applicable to any outstanding balance on a consumer credit card
account.
(2) Outstanding balance defined. For purposes of this section,
outstanding balance means the amount owed on a consumer credit card
account at the end of the fourteenth day after you provide a notice
required by Sec. Sec. 226.9(c) or 226.9(g) of this title.
(b) Exceptions. Paragraph (a) of this section does not apply where
the annual percentage rate is increased due to:
(1) The operation of an index that is not under your control and is
available to the general public;
(2) The expiration or loss of a promotional rate provided that, if
a promotional rate is lost, you do not increase the annual percentage
rate to a rate that is greater than the annual percentage rate that
would have applied after expiration of the promotional rate; or
(3) You not receiving the consumer's required minimum payment
within 30 days after the due date for that payment.
(c) Treatment of outstanding balances following rate increase. (1)
Payment of outstanding balances. When you increase the annual
percentage rate applicable to a category of transaction on a consumer
credit card account and this section prohibits you from applying the
increased rate to outstanding balances in that category, you must
provide the consumer with a method of paying that outstanding balance
that is no less beneficial to the consumer than one of the following
methods:
(i) An amortization period for the outstanding balance of no less
than five years, starting from the date on which the increased annual
percentage rate went into effect; or
(ii) A required minimum periodic payment on the outstanding balance
that includes a percentage of that balance that is no more than twice
the percentage included before the date on which the increased annual
percentage rate went into effect.
(2) Fees and charges on outstanding balance. When you increase the
annual percentage rate applicable to a category of transactions on a
consumer credit card account and this section prohibits you from
applying the increased rate to outstanding balances in that category,
you must not assess any fee or charge based solely on the outstanding
balance.
Sec. 535.25 Unfair fees for exceeding the credit limit due to credit
holds.
You must not assess a fee or charge for exceeding the credit limit
on a consumer credit card account if the credit limit would not have
been exceeded but for a hold placed on any portion of the available
credit on the account that is in excess of the actual purchase or
transaction amount.
Sec. 535.26 Unfair balance computation method.
(a) General rule. Except as provided in paragraph (b) of this
section, you must not impose finance charges on balances on a consumer
credit card account based on balances for days in billing cycles that
precede the most recent billing cycle.
(b) Exceptions. Paragraph (a) of this section does not apply to:
(1) The assessment of deferred interest; or
(2) Adjustments to finance charges following the resolution of a
billing error dispute under Sec. Sec. 226.12(b) or 226.13 of this
title.
Sec. 535.27 Unfair charging to the account of security deposits and
fees for the issuance or availability of credit.
(a) Annual rule. During the period beginning with the date on which
a consumer credit card account is opened and ending twelve months from
that date, you must not charge to the account security deposits or fees
for the issuance or availability of credit if the total amount of such
security deposits and fees constitutes a majority of the initial credit
limit for the account.
(b) Monthly rule. If the total amount of security deposits and fees
for the issuance or availability of credit charged to a consumer credit
card account during the period beginning with the date on which a
consumer credit card account is opened and ending twelve months from
that date constitutes more than 25 percent of the initial credit limit
for the account:
(1) During the first billing cycle after the account is opened, you
must not charge to the account security deposits and fees for the
issuance or availability of credit that total more than 25 percent of
the initial credit limit for the account; and
(2) In each of the eleven billing cycles following the first
billing cycle, you must not charge to the account more than one
eleventh of the total amount of any security deposits and fees for the
issuance or availability of credit in excess of 25 percent of the
initial credit limit for the account.
(c) Fees for the issuance or availability of credit. For purposes
of paragraphs (a) and (b) of this section, fees for the issuance or
availability of credit include:
(1) Any annual or other periodic fee that may be imposed for the
issuance or availability of a consumer credit card account, including
any fee based on account activity or inactivity; and
(2) Any non-periodic fee that relates to opening an account.
Sec. 535.28 Deceptive firm offers of credit.
(a) Disclosure of criteria bearing on creditworthiness. If you
offer a range or multiple annual percentage rates or credit limits when
you make a solicitation for a firm offer of credit for a consumer
credit card account, and the annual percentage rate or credit limit
that consumers approved for credit will receive depends on specific
criteria bearing on creditworthiness, you must disclose the types of
criteria in the solicitation. You must provide the disclosure in a
manner that is reasonably understandable to consumers and designed to
call attention to the nature and significance of the eligibility
criteria for the lowest annual percentage rate or highest credit limit
stated in the solicitation. If presented in a manner that calls
attention to the nature and significance of the information, the
following disclosure may be used to satisfy the requirements of this
section (as applicable): ``If you are approved for credit, your annual
percentage rate and/or credit limit will depend on your credit history,
income, and debts.''
(b) Firm offer of credit defined. For purposes of this section,
firm offer of credit has the same meaning as that term has under the
definition of firm offer of credit or insurance in section 603(l) of
the Fair Credit Reporting Act (15 U.S.C. 1681a(l)).
Subpart D--Overdraft Service Practices
Sec. 535.31 Definitions.
For purposes of this subpart, the following definitions apply:
(a) Account means a deposit account at a savings association that
is held by or offered to a consumer. The term account has the same
meaning as in Sec. 230.2(a) of this title.
(b) Consumer means a person who holds an account primarily for
personal, family, or household purposes.
(c) Overdraft service means a service under which a savings
association charges a fee for paying a transaction (including a check
or other item) that overdraws an account. The term overdraft service
does not include any payment of overdrafts pursuant to:
[[Page 28952]]
(1) A line of credit subject to part 226 of this title, including
transfers from a credit card account, home equity line of credit, or
overdraft line of credit; or
(2) A service that transfers funds from another account of the
consumer.
Sec. 535.32 Unfair overdraft service practices.
(a) Opt-out requirement. (1) General rule. You must not assess a
fee or charge on a consumer's account in connection with an overdraft
service, unless you provide the consumer with the right to opt out of
your payment of overdrafts and a reasonable opportunity to exercise
that opt out and the consumer has not opted out. The consumer must be
given notice and an opportunity to opt out before you assess any fee or
charge for an overdraft, and subsequently at least once during or for
any periodic statement cycle in which any fee or charge for paying an
overdraft is assessed. The notice requirements in paragraphs (a)(1) and
(a)(2) of this section do not apply if the consumer has opted out,
unless the consumer subsequently revokes the opt-out.
(2) Partial opt-out. You must provide a consumer the option of
opting out only for the payment of overdrafts at automated teller
machines and for point-of-sale transactions initiated by a debit card,
in addition to the choice of opting out of the payment of overdrafts
for all transactions.
(3) Exceptions. Notwithstanding a consumer's election to opt out
under paragraphs (a)(1) or (a)(2) of this section, you may assess a fee
or charge on a consumer's account for paying a debit card transaction
that overdraws an account if:
(i) There were sufficient funds in the consumer's account at the
time the authorization request was received, but the actual purchase
amount for that transaction exceeds the amount that had been
authorized; or
(ii) The transaction is presented for payment by paper-based means,
rather than electronically through a card terminal, and you have not
previously authorized the transaction.
(4) Time to comply with opt-out. You must comply with a consumer's
opt-out request as soon as reasonably practicable after you receive it.
(5) Continuing right to opt-out. A consumer may opt out of your
future payment of overdrafts at any time.
(6) Duration of opt-out. A consumer's opt-out is effective unless
the consumer subsequently revokes it.
(b) Debit holds. You must not assess a fee or charge on a
consumer's account for an overdraft service if the consumer's overdraft
would not have occurred but for a hold placed on funds in the
consumer's account that is in excess of the actual purchase or
transaction amount.
Appendix to Part 535--Official Staff Commentary
Subpart A--General Provisions
Section 535.1--Authority, Purpose, and Scope
1(c) Scope
1. Penalties for noncompliance. Administrative enforcement of
the rule for savings associations may involve actions under section
8 of the Federal Deposit Insurance Act (12 U.S.C. 1818), including
cease-and-desist orders requiring that action be taken to remedy
violations and civil money penalties.
Subpart C--Consumer Credit Card Account Practices
Section 535.21--Definitions
(d) Promotional Rate
Paragraph (d)(1)
1. Rate in effect at the end of the promotional period. If the
annual percentage rate that will be in effect at the end of the
specified period of time is a variable rate, the rate in effect at
the end of that period for purposes of Sec. 535.21(d)(1) is the
rate that would otherwise apply if the promotional rate were not
offered, consistent with any applicable accuracy requirements under
part 226 of this title.
Paragraph (d)(2)
1. Example. A savings association generally offers a 15% annual
percentage rate for purchases on a consumer credit card account. For
purchases made during a particular month, however, the creditor
offers a rate of 5% that will apply until the consumer pays those
purchases in full. Under Sec. 535.21(d)(2), the 5% rate is a
``promotional rate'' because it is lower than the 15% rate that
applies to other purchases.
Section 535.22--Unfair Time To Make Payment
(a) General Rule
1. Treating a payment as late for any purpose. Treating a
payment as late for any purpose includes increasing the annual
percentage rate as a penalty, reporting the consumer as delinquent
to a credit reporting agency, or assessing a late fee or any other
fee based on the consumer's failure to make a payment within the
amount of time provided to make that payment under this section.
2. Reasonable amount of time to make payment. Whether an amount
of time is reasonable for purposes of making a payment is determined
from the perspective of the consumer, not the savings association.
Under Sec. 535.22(b), a savings association provides a reasonable
amount of time to make a payment if it has adopted reasonable
procedures designed to ensure that periodic statements specifying
the payment due date are mailed or delivered to consumers at least
21 days before the payment due date.
(b) Safe Harbor
1. Reasonable procedures. A savings association is not required
to determine the specific date on which periodic statements are
mailed or delivered to each individual consumer. A savings
association provides a reasonable amount of time to make a payment
if it has adopted reasonable procedures designed to ensure that
periodic statements are mailed or delivered to consumers no later
than, for example, three days after the closing date of the billing
cycle and the payment due date on the periodic statement is no less
than 24 days after the closing date of the billing cycle.
2. Payment due date. For purposes of Sec. 535.22(b), ``payment
due date'' means the date by which the savings association requires
the consumer to make payment to avoid being treated as late for any
purpose, except as provided in Sec. 535.22(c).
Section 535.23--Unfair Payment Allocations
1. Minimum periodic payment. This section addresses the
allocation of amounts paid by the consumer in excess of the minimum
periodic payment required by the savings association. This section
does not limit or otherwise address the savings association's
ability to determine the amount of the minimum periodic payment or
how that payment is allocated.
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
equally among three balances, the savings association may apply $34
to one balance and $33 to the others. Similarly, if a savings
association is splitting $100.50 between two balances, the savings
association may apply $50 to one balance and $50.50 to another.
(a) General Rule for Accounts With Different Annual Percentage
Rates on Different Balances
1. No less beneficial to the consumer. A savings association may
allocate payments using a method that is different from the methods
listed in Sec. 535.23(a) so long as the method used is no less
beneficial to the consumer than one of the listed methods. A method
is no less beneficial to the consumer than a listed method if it
results in the assessment of the same or a lesser amount of interest
charges than would be assessed under any of the listed methods. For
example, a savings association may not allocate the entire amount
paid by the consumer in excess of the required minimum periodic
payment to the balance with the lowest annual percentage rate
because this method would result in a higher assessment of interest
charges than any of the methods listed in Sec. 535.23(a).
2. Example of payment allocation method that is no less
beneficial to consumers than a method listed in Sec. 535.23(a).
Assume that a consumer's account has a cash advance balance of $500
at an annual percentage rate of 20% and a purchase balance of $1,500
at an annual percentage rate of 15% and that the consumer pays $555
in excess of the
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required minimum periodic payment. A savings association could
allocate one-third of this amount ($185) to the cash advance balance
and two-thirds ($370) to the purchase balance even though this is
not a method listed in Sec. 535.23(a) because the savings
association is applying more of the amount to the balance with the
highest annual percentage rate (with the result that the consumer
will be assessed less in interest charges) than would be the case
under the pro rata allocation method in Sec. 535.23(a)(3). See
comment 23(a)(3)-1.
Paragraph (a)(1)
1. Examples of allocating first to the balance with the highest
annual percentage rate.
(A) Assume that a consumer's account has a cash advance balance
of $500 at an annual percentage rate of 20% and a purchase balance
of $1,500 at an annual percentage rate of 15% and that the consumer
pays $800 in excess of the required minimum periodic payment. None
of the minimum periodic payment is allocated to the cash advance
balance. A savings association using this method would allocate $500
to pay off the cash advance balance and then allocate the remaining
$300 to the purchase balance.
(B) Assume that a consumer's account has a cash advance balance
of $500 at an annual percentage rate of 20% and a purchase balance
of $1,500 at an annual percentage rate of 15% and that the consumer
pays $400 in excess of the required minimum periodic payment. A
savings association using this method would allocate the entire $400
to the cash advance balance.
Paragraph (a)(2)
1. Example of equal portion method. Assume that a consumer's
account has a cash advance balance of $500 at an annual percentage
rate of 20% and a purchase balance of $1,500 at an annual percentage
rate of 15% and that the consumer pays $555 in excess of the
required minimum periodic payment. A savings association using this
method would allocate $278 to the cash advance balance and $277 to
the purchase balance (or vice versa).
Paragraph (a)(3)
1. Example of pro rata method. Assume that a consumer's account
has a cash advance balance of $500 at an annual percentage rate of
20% and a purchase balance of $1,500 at an annual percentage rate of
15% and that the consumer pays $555 in excess of the required
minimum periodic payment. A savings association using this method
would allocate 25% of the amount ($139) to the cash advance balance
and 75% of the amount ($416) to the purchase balance.
(b) Special Rules for Accounts With Promotional Rate Balances or
Deferred Interest Balances
Paragraph (b)(1)(i)
1. Examples of special rule regarding payment allocation for
accounts with promotional rate balances or deferred interest
balances.
(A) A consumer credit card account has a cash advance balance of
$500 at an annual percentage rate of 20%, a purchase balance of
$1,500 at an annual percentage rate of 15%, and a transferred
balance of $3,000 at a promotional rate of 5%. The consumer pays
$800 in excess of the required minimum periodic payment. The savings
association must allocate the $800 between the cash advance and
purchase balances (consistent with Sec. 535.23(a)) and apply
nothing to the transferred balance.
(B) A consumer credit card account has a cash advance balance of
$500 at an annual percentage rate of 20%, a balance of $1,500 on
which interest is deferred, and a transferred balance of $3,000 at a
promotional rate of 5%. The consumer pays $800 in excess of the
required minimum periodic payment. None of the minimum periodic
payment is allocated to the cash advance balance. The savings
association must allocate $500 to pay off the cash advance balance
before allocating the remaining $300 between the deferred interest
balance and the transferred balance (consistent with Sec.
535.23(a)).
Paragraph (b)(1)(ii)
1. Examples of exception for deferred interest balances. Assume
that on January 1, a consumer uses a credit card to make a $1,000
purchase on which interest is deferred until June 30. If this amount
is not paid in full by June 30, all interest accrued during the six-
month period will be charged to the account. The billing cycle for
this credit card begins on the first day of the month and ends on
the last day of the month. Each month from January through June the
consumer uses the credit card to make $200 in purchases on which
interest is not deferred.
(A) The consumer pays $300 in excess of the minimum periodic
payment each month from January through June. None of the minimum
periodic payment is applied to the deferred interest balance or the
purchase balance. For the January, February, March, and April
billing cycles, the savings association must allocate $200 to the
purchase balance and $100 to the deferred interest balance. For the
May and June billing cycles, however, the savings association has
the option of allocating the entire $300 to the deferred interest
balance, which will result in that balance being paid in full before
the deferred interest period expires on June 30. In this example,
the interest that accrued between January 1 and June 30 will not be
assessed to the consumer's account.
(B) The consumer pays $200 in excess of the minimum periodic
payment each month from January through June. None of the minimum
periodic payment is applied to the deferred interest balance or the
purchase balance. For the January, February, March, and April
billing cycles, the savings association must allocate the entire
$200 to the purchase balance. For the May and June billing cycles,
however, the savings association has the option to allocate the
entire $200 to the deferred interest balance, which will result in
that balance being reduced to $600 before the deferred interest
period expires on June 30. In this example, the interest that
accrued between January 1 and June 30 will be assessed to the
consumer's account.
Paragraph (b)(2)
1. Example of special rule regarding grace periods for accounts
with promotional rate balances or deferred interest balances. A
savings association offers a promotional rate on balance transfers
and a higher rate on purchases. The savings association also offers
a grace period under which consumers who pay their balances in full
by the due date are not charged interest on purchases. A consumer
who has paid the balance for the prior billing cycle in full by the
due date transfers a balance of $2,000 and makes a purchase of $500.
Because the savings association offers a grace period, it must
provide a grace period on the $500 purchase if the consumer pays
that amount in full by the due date, even though the $2,000 balance
at the promotional rate remains outstanding.
Section 535.24--Unfair Annual Percentage Rate Increases on Outstanding
Balances
(a) Prohibition Against Increasing Annual Percentage Rates on
Outstanding Balances
1. Example. Assume that on December 30, a consumer credit card
account has a balance of $1,000 at an annual percentage rate of 15%.
On December 31, the savings association mails or delivers a notice
required by Sec. 226.9(c) of this title informing the consumer that
the annual percentage rate will increase to 20% on February 15. The
consumer uses the account to make $2,000 in purchases on January 10
and $1,000 in purchases on January 20. Assuming no other
transactions, the outstanding balance for purposes of Sec. 535.24
is the $3,000 balance as of the end of the day on January 14.
Therefore, under Sec. 535.24(a), the savings association cannot
increase the annual percentage rate applicable to that balance. The
savings association can apply the 20% rate to the $1,000 in
purchases made on January 20 but, consistent with Sec. 226.9(c) of
this title, the savings association cannot do so until February 15.
2. Reasonable procedures. A savings association is not required
to determine the specific date on which a notice required by
Sec. Sec. 226.9(c) or 226.9(g) of this title was provided. For
purposes of Sec. 535.24(a)(2), if the savings association has
adopted reasonable procedures designed to ensure that notices
required by Sec. Sec. 226.9(c) or 229.9(g) of this title are
provided to consumers no later than, for example, three days after
the event giving rise to the notice, the outstanding balance is the
balance at the end of the seventeenth day after such event.
(b) Exceptions
Paragraph (b)(1)
1. External index. A savings association may increase the annual
percentage rate on an outstanding balance if the increase is based
on an index outside the savings association's control. A savings
association may not increase the rate on an outstanding balance
based on its own prime rate or cost of funds and may not reserve a
contractual right to change rates on outstanding balances at its
discretion. In addition, a savings association may not increase the
rate on an outstanding balance by changing the method used to
determine that rate. A savings
[[Page 28954]]
association is permitted, however, to use a published prime rate,
such as that in the Wall Street Journal, even if the savings
association's own prime rate is one of several rates used to
establish the published rate.
2. Publicly available. The index must be available to the
public. A publicly available index need not be published in a
newspaper, but it must be one the consumer can independently obtain
(by telephone, for example) and use to verify the rate applied to
the outstanding balance.
Paragraph (b)(2)
1. Example. Assume that a consumer credit card account has a
balance of $1,000 at a 5% promotional rate and that the savings
association also charges an annual percentage rate of 15% for
purchases and a penalty rate of 25%. If the consumer does not make
payment by the due date and the account agreement specifies that
event as a trigger for applying the penalty rate, the savings
association may increase the annual percentage rate on the $1,000
from the 5% promotional rate to the 15% annual percentage rate for
purchases. The savings association may not, however, increase the
rate on the $1,000 from the 5% promotional rate to the 25% penalty
rate, except as otherwise permitted under Sec. 535.24(b)(3).
Paragraph (b)(3)
1. Example. Assume that the annual percentage rate applicable to
purchases on a consumer credit card account is increased from 15% to
20% and that the account has an outstanding balance of $1,000 at the
15% rate. The payment due date on the account is the twenty-fifth of
the month. If the savings association has not received the required
minimum periodic payment due on March 15 on or before April 14, the
savings association may increase the rate applicable to the $1,000
balance once the savings association has complied with the notice
requirements Sec. 226.9(g) of this title.
(c) Treatment of Outstanding Balances Following Rate Increase
1. Scope. This provision does not apply if the consumer credit
card account does not have an outstanding balance. This provision
also does not apply if a rate is increased pursuant to any of the
exceptions in Sec. 535.24(b).
2. Category of transactions. This provision does not apply to
balances in categories of transactions other than the category for
which the savings association has increased the annual percentage
rate. For example, if a savings association increases the annual
percentage rate that applies to purchases but not the rate that
applies to cash advances, Sec. Sec. 535.24(c)(1) and 535.(c)(2)
apply to an outstanding balance consisting of purchases but not an
outstanding balance consisting of cash advances.
Paragraph (c)(1)
1. No less beneficial to the consumer. A savings association may
provide a method of paying the outstanding balance that is different
from the methods listed in Sec. 535.24(c)(1) so long as the method
used is no less beneficial to the consumer than one of the listed
methods. A method is no less beneficial to the consumer if the
method amortizes the outstanding balance in five years or longer or
if the method results in a required minimum periodic payment on the
outstanding balance that is equal to or less than a minimum payment
calculated consistent with Sec. 535.24(c)(1)(ii). For example, a
savings association could more than double the percentage of amounts
owed included in the minimum payment so long as the minimum payment
does not result in amortization of the outstanding balance in less
than five years. Alternatively, a savings association could require
a consumer to make a minimum payment on the outstanding balance that
amortizes that balance in less than five years so long as the
payment does not include a percentage of the outstanding balance
that is more than twice the percentage included in the minimum
payment before the effective date of the increased rate.
Paragraph (c)(1)(ii)
1. Required minimum periodic payment on other balances. This
paragraph addresses the required minimum periodic payment on the
outstanding balance. This paragraph does not limit or otherwise
address the savings association's ability to determine the amount of
the minimum periodic payment for other balances.
2. Example. Assume that the method used by a savings association
to calculate the required minimum periodic payment for a consumer
credit card account requires the consumer to pay either the total of
fees and interest charges plus 1% of the total amount owed or $20,
whichever is greater. Assume also that the savings association
increases the annual percentage rate applicable to purchases on a
consumer credit card account from 15% to 20% and that the account
has an outstanding balance of $1,000 at the 15% rate. Section
535.24(c)(1)(ii) would permit the savings association to calculate
the required minimum periodic payment on the outstanding balance by
adding fees and interest charges to 2% of the outstanding balance.
Paragraph (c)(2)
1. Fee or charge based solely on the outstanding balance. You
are prohibited from assessing a fee or charge based solely on an
outstanding balance. For example, a savings association is
prohibited from assessing a maintenance or similar fee based on an
outstanding balance. A savings association is not, however,
prohibited from assessing fees such as late payment fees or fees for
exceeding the credit limit even if such fees are based in part on an
outstanding balance.
Section 535.25--Unfair Fees for Exceeding the Credit Limit Due to
Credit Holds
1. General. Under Sec. 535.25, a savings association may not
assess a fee for exceeding the credit limit if the credit limit
would not have been exceeded but for a hold placed on the available
credit for a consumer credit card account for a transaction that has
been authorized but has not yet been presented for settlement, if
the amount of the hold is in excess of the actual purchase or
transaction amount when the transaction is settled. Section 535.25
does not limit a savings association from charging a fee for
exceeding the credit limit in connection with a particular
transaction if the consumer would have exceeded the credit limit due
to other reasons, such as other transactions that may have been
authorized but not yet presented for settlement, a payment that is
returned, or if the purchase or transaction amount for the
transaction for which the hold was placed would have also caused the
consumer to exceed the credit limit.
2. Example of prohibition in connection with hold placed for
same transaction. Assume that a consumer credit card account has a
credit limit of $2,000 and a balance of $1,500. The consumer uses
the credit card to check into a hotel for an anticipated stay of
five days. When the consumer checks in, the hotel obtains
authorization from the savings association for a $750 hold on the
account to ensure there is adequate available credit to cover the
cost of the anticipated stay. The consumer checks out of the hotel
after three days, and the total cost of the stay is $450, which is
charged to the consumer's credit card account. Assuming that there
is no other activity on the account, the savings association is
prohibited from assessing a fee for exceeding the credit limit with
respect to the $750 hold. If, however, the total cost of the stay
charged to the account had been more than $500, the savings
association would not be prohibited from assessing a fee for
exceeding the credit limit.
3. Example of prohibition in connection with hold placed for
another transaction. Assume that a consumer credit card account has
a credit limit of $2,000 and a balance of $1,400. The consumer uses
the credit card to check into a hotel for an anticipated stay of
five days. When the consumer checks in, the hotel obtains
authorization from the savings association for a $750 hold on the
account to ensure there is adequate available credit to cover the
cost of the anticipated stay. While the hold remains in place, the
consumer uses the credit card to make a $150 purchase. The consumer
checks out of the hotel after three days, and the total cost of the
stay is $450, which is charged to the consumer's credit card
account. Assuming that there is no other activity on the account,
the savings association is prohibited from assessing a fee for
exceeding the credit limit with respect to either the $750 hold or
the $150 purchase. If, however, the total cost of the stay charged
to the account had been more than $450, the savings association
would not be prohibited from assessing a fee for exceeding the
credit limit.
4. Example of prohibition when authorization and settlement
amounts are held for the same transaction. Assume that a consumer
credit card account has a credit limit of $2,000 and a balance of
$1,400. The consumer uses the credit card to check into a hotel for
an anticipated stay of five days. When the consumer checks in, the
hotel obtains authorization from the savings association for a $750
hold on the account to ensure there is adequate available credit to
cover the cost of the anticipated stay. The consumer checks out of
the hotel after three days, and the total cost of the stay is $450,
which is charged to the consumer's credit card account. When the
hotel presents the
[[Page 28955]]
$450 transaction for settlement, it uses a different transaction
code to identify the transaction than it had used for the pre-
authorization, causing both the $750 hold and the $450 purchase
amount to be temporarily posted to the consumer's account at the
same time, and the consumer's balance to exceed the credit limit.
Under these circumstances, and assuming no other transactions, the
savings association is prohibited from assessing a fee for exceeding
the credit limit because the credit limit was exceeded solely due to
the $750 hold.
5. Example of permissible fee for exceeding the credit limit in
connection with a hold. Assume that a consumer has a credit limit of
$2,000 and a balance of $1,400 on a consumer credit card account.
The consumer uses the credit card to check into a hotel for an
anticipated stay of five days. When the consumer checks in, the
hotel obtains authorization from the savings association for a $750
hold on the account to ensure there is adequate available credit to
cover the cost of the anticipated stay. While the hold remains in
place, the consumer uses the credit card to make a $650 purchase.
The consumer checks out of the hotel after three days, and the total
cost of the stay is $450, which is charged to the consumer's credit
card account. Notwithstanding the existence of the hold and assuming
that there is no other activity on the account, the savings
association may charge the consumer a fee for exceeding the credit
limit with respect to the $650 purchase because the consumer would
have exceeded the credit limit even if the hold had been for the
actual amount of the hotel transaction.
Section 535.26--Unfair Balance Computation Method
(a) General Rule
1. Two-cycle method prohibited. A savings association is
prohibited from computing the finance charge using the so-called
two-cycle average daily balance computation method. This method
calculates the finance charge using a balance that is the sum of the
average daily balances for two billing cycles. The first balance is
for the current billing cycle, and is calculated by adding the total
balance (including or excluding new purchases and deducting payments
and credits) for each day in the billing cycle, and then dividing by
the number of days in the billing cycle. The second balance is for
the preceding billing cycle.
2. Example. Assume that the billing cycle on a consumer credit
card account starts on the first day of the month and ends on the
last day of the month. A consumer has a zero balance on March 1. The
consumer uses the credit card to make a $500 purchase on March 15.
The consumer makes no other purchases and pays $400 on the due date
(April 25), leaving a $100 balance. The savings association may
charge interest on the $500 purchase from the start of the billing
cycle (April 1) through April 24 and interest on the remaining $100
from April 25 through the end of the April billing cycle (April 30).
The savings association is prohibited, however, from reaching back
and charging interest on the $500 purchase from the date of purchase
(March 15) to the end of the March billing cycle (March 31).
Section 535.27--Unfair Charging to the Account of Security Deposits and
Fees for the Issuance or Availability of Credit
1. Initial credit limit for the account. For purposes of this
section, the initial credit limit is the limit in effect when the
account is opened.
(a) Annual Rule
1. Majority of the credit limit. The total amount of security
deposits and fees for the issuance or availability of credit
constitutes a majority of the initial credit limit if that total is
greater than half of the limit. For example, assume that a consumer
credit card account has an initial credit limit of $500. Under Sec.
535.27(a), a savings association may charge to the account security
deposits and fees for the issuance or availability of credit
totaling no more than $250 during the twelve months after the date
on which the account is opened (consistent with Sec. 535.27(b)).
(b) Monthly Rule
1. Adjustments of one dollar or less permitted. When dividing
amounts pursuant to Sec. 535.27(b)(2), the savings association may
adjust amounts by one dollar or less. For example, if a savings
association is dividing $125 over eleven billing cycles, the savings
association may charge $12 for four months and $11 for the remaining
seven months.
2. Example. Assume that a consumer credit card account opened on
January 1 has an initial credit limit of $500 and that a savings
association charges to the account security deposits and fees for
the issuance or availability of credit that total $250 during the
twelve months after the date on which the account is opened. Assume
also that the billing cycles for this account begin on the first day
of the month and end on the last day of the month. Under Sec.
535.27(b), the savings association may charge to the account no more
than $250 in security deposits and fees for the issuance or
availability of credit. If it charges $250, the savings association
may charge as much as $125 during the first billing cycle. If it
charges $125 during the first billing cycle, it may then charge $12
in any four billing cycles and $11 in any seven billing cycles
during the year.
(c) Fees for the Issuance or Availability of Credit
1. Membership fees. Membership fees for opening an account are
fees for the issuance or availability of credit. A membership fee to
join an organization that provides a credit or charge card as a
privilege of membership is a fee for the issuance or availability of
credit only if the card is issued automatically upon membership. If
membership results merely in eligibility to apply for an account,
then such a fee is not a fee for the issuance or availability of
credit.
2. Enhancements. Fees for optional services in addition to basic
membership privileges in a credit or charge card account (for
example, travel insurance or card-registration services) are not
fees for the issuance or availability of credit if the basic account
may be opened without paying such fees.
3. One-time fees. Only non-periodic fees related to opening an
account (such as one-time membership or participation fees) are fees
for the issuance or availability of credit. Fees for reissuing a
lost or stolen card and statement reproduction fees are examples of
fees that are not fees for the issuance or availability of credit.
Section 535.28--Deceptive Firm Offers of Credit
(a) Disclosure of Criteria Bearing on Creditworthiness
1. Designed to call attention. Whether a disclosure has been
provided in a manner that is designed to call attention to the
nature and significance of required information depends on where the
disclosure is placed in the solicitation and how it is presented,
including whether the disclosure uses a typeface and type size that
are easy to read and uses boldface or italics. Placing the
disclosure in a footnote would not satisfy this requirement.
2. Form of electronic disclosures. Electronic disclosures must
be provided consistent with Sec. Sec. 226.5a(a)(2)-8 and
226.5a(a)(2)-9 of this title.
3. Multiple annual percentage rates or credit limits. For
purposes of this section, a firm offer of credit solicitation that
states an annual percentage rate or credit limit for a credit card
feature and a different annual percentage rate or credit limit for a
different credit card feature does not offer multiple annual
percentage rates or credit limits. For example, if a firm offer of
credit solicitation offers a 15% annual percentage rate for
purchases and a 20% annual percentage rate for cash advances, the
solicitation does not offer multiple annual percentage rates for
purposes of this section.
4. Example. Assume that a savings association requests from a
consumer reporting agency a list of consumers with credit scores of
650 or higher, so that the savings association can send those
consumers a firm offer of credit solicitation. The savings
association sends a solicitation to those consumers for a consumer
credit card account advertising ``rates from 8.99% to 19.99%'' and
``credit limits from $1,000 to $10,000.'' Before selection of the
consumers for the offer, however, the savings association determines
that it will provide an interest rate of 8.99% and a credit limit of
$10,000 only to those consumers responding to the solicitation who
are verified to have a credit score of 650 or higher, who have a
debt-to-income ratio below a certain amount, and who meet other
specific criteria bearing on creditworthiness. Under Sec. 535.28,
this solicitation is deceptive unless the savings association
discloses, in a manner that is reasonably understandable to the
consumer and designed to call attention to the nature and
significance of the information, that, if the consumer is approved
for credit, the annual percentage rate and credit limit the consumer
will receive will depend on specific criteria bearing on the
consumer's creditworthiness. The savings association may satisfy
this requirement by using a typeface and type size that are easy to
read and stating in boldface in a manner that otherwise calls
attention to the nature and
[[Page 28956]]
significance of the information: ``If you are approved for credit,
your annual percentage rate and/or credit limit will depend on your
credit history, income, and debts.''
5. Applicability of criteria in disclosure. When making a
disclosure under this section, a savings association may only
disclose the criteria it uses in evaluating whether consumers who
are approved for credit will receive the lowest annual percentage
rate or the highest credit limit. For example, if a savings
association does not consider the consumer's debts when determining
whether the consumer should receive the lowest annual percentage
rate or highest credit limit, the disclosure must not refer to
``debts.''
Subpart D--Overdraft Service Practices
Section 535.32--Unfair Overdraft Service Practices
(a) Opt-Out Requirement
(a)(1) General Rule
1. Form, content and timing of disclosure. The form, content and
timing of the opt-out notice required to be provided under paragraph
(a) of this section are addressed under Sec. 230.10 of this title.
(a)(3) Exceptions
Paragraph (a)(3)(i)
1. Example of transaction amount exceeding authorization amount
(fuel purchase). A consumer has $30 in a deposit account. The
consumer uses a debit card to purchase fuel. Before permitting the
consumer to use the fuel pump, the merchant verifies the validity of
the card by obtaining authorization from the savings association for
a $1 transaction. The consumer purchases $50 of fuel. If the savings
association pays the transaction, it would be permitted to assess a
fee or charge for paying the overdraft, even if the consumer has
opted out of the payment of overdrafts.
2. Example of transaction amount exceeding authorization amount
(restaurant). A consumer has $50 in a deposit account. The consumer
pays for a $45 meal at a restaurant using a debit card. While the
restaurant may obtain authorization for the $45 cost of the meal,
the consumer may add $10 for a tip. If the savings association pays
the $55 transaction (including the tip amount), it would be
permitted to assess a fee or charge for paying the overdraft, even
if the consumer has opted out of the payment of overdrafts.
Paragraph (a)(3)(ii)
1. Example of transaction presented by paper-based means. A
consumer has $50 in a deposit account. The consumer makes a $60
purchase and presents his or her debit card for payment. The
merchant takes an imprint of the card. Later that day, the merchant
submits a sales slip with the card imprint to its processor for
payment. If the consumer's savings association pays the transaction,
it would be permitted to assess a fee or charge for paying the
overdraft, even if the consumer has opted out of the payment of
overdrafts.
(b) Debit Holds
1. General. Under Sec. 535.32(b), a savings association may not
assess an overdraft fee if the overdraft would not have occurred but
for a hold placed on funds in the consumer's account for a
transaction that has been authorized but has not yet been presented
for settlement, if the amount of the hold is in excess of the actual
purchase or transaction amount when the transaction is settled.
Section 535.32(b) does not limit a savings association from charging
an overdraft fee in connection with a particular transaction if the
consumer would have incurred an overdraft due to other reasons, such
as other transactions that may have been authorized but not yet
presented for settlement, a deposited check that is returned, or if
the purchase or transaction amount for the transaction for which the
hold was placed would have also caused the consumer to overdraw his
or her account.
2. Example of prohibition in connection with hold placed for
same transaction. A consumer has $50 in a deposit account. The
consumer makes a fuel purchase using his or her debit card. Before
permitting the consumer to use the fuel pump, the merchant obtains
authorization from the consumer's savings association for a $75
``hold'' on the account which exceeds the consumer's funds. The
consumer purchases $20 of fuel. Under these circumstances, Sec.
535.32(b) prohibits the savings association from assessing a fee or
charge in connection with the debit hold because the actual amount
of the fuel purchase did not exceed the funds in the consumer's
account. However, if the consumer had purchased $60 of fuel, the
savings association could assess a fee or charge for an overdraft
because the transaction exceeds the funds in the consumer's account,
unless the consumer has opted out of the payment of overdrafts under
Sec. 535.32(a).
3. Example of prohibition in connection with hold placed for
another transaction. A consumer has $100 in a deposit account. The
consumer makes a fuel purchase using his or her debit card. Before
permitting the consumer to use the fuel pump, the merchant obtains
authorization from the consumer's savings association for a $75
``hold'' on the account. The consumer purchases $20 of fuel, but the
transaction is not presented for settlement until the next day.
Later on the first day, and assuming no other transactions, the
consumer withdraws $75 at an ATM. Under these circumstances, Sec.
535.32(b) prohibits the savings association from assessing a fee or
charge for paying an overdraft with respect to the $75 withdrawal
because the overdraft was caused solely by the $75 hold.
4. Example of prohibition when authorization and settlement
amounts are held for the same transaction. A consumer has $100 in
his deposit account, and uses his debit card to purchase $50 worth
of fuel. Before permitting the consumer to use the fuel pump, the
merchant obtains authorization from the consumer's savings
association for a $75 ``hold'' on the account. The consumer
purchases $50 of fuel. When the merchant presents the $50
transaction for settlement, it uses a different transaction code to
identify the transaction than it had used for the pre-authorization,
causing both the $75 hold and the $50 purchase amount to be
temporarily posted to the consumer's account at the same time, and
the consumer's account to be overdrawn. Under these circumstances,
and assuming no other transactions, Sec. 535.32(b) prohibits the
savings association from assessing a fee or charge for paying an
overdraft because the overdraft was caused solely by the $75 hold.
5. Example of permissible overdraft fees in connection with a
hold. A consumer has $100 in a deposit account. The consumer makes a
fuel purchase using his or her debit card. Before permitting the
consumer to use the fuel pump, the merchant obtains authorization
from the consumer's savings association for a $75 ``hold'' on the
account. The consumer purchases $35 of fuel, but the transaction is
not presented for settlement until the next day. Later on the first
day, and assuming no other transactions, the consumer withdraws $75
at an ATM. Notwithstanding the existence of the hold, and assuming
the consumer has not opted out of the payment of overdrafts under
Sec. 535.32(a), the consumer's savings association may charge the
consumer an overdraft fee for the $75 ATM withdrawal, because the
consumer would have incurred the overdraft even if the hold had been
for the actual amount of the fuel purchase.
National Credit Union Administration
12 CFR Part 706
For the reasons discussed in the joint preamble, the National
Credit Union Administration proposes to revise part 706 of title 12 of
the Code of Federal Regulations to read as follows:
PART 706--UNFAIR OR DECEPTIVE ACTS OR PRACTICES
Subpart A--General Provisions
Sec.
706.1 Authority, purpose, and scope.
706.2-706.10 [Reserved]
Subpart B--Consumer Credit Practices
706.11 Definitions.
706.12 Unfair credit contract provisions.
706.13 Unfair or deceptive cosigner practices.
706.14 Unfair late charges.
706.15 State exemptions.
706.16-703.20 [Reserved]
Subpart C--Consumer Credit Card Account Practices
706.21 Definitions.
706.22 Unfair time to make payments.
706.23 Unfair allocation of payments.
706.24 Unfair application of increased annual percentage rates to
outstanding balances.
706.25 Unfair fees for exceeding the credit limit caused by credit
holds.
706.26 Unfair balance computation method.
706.27 Unfair financing of security deposits and fees for the
issuance or availability of credit.
706.28 Deceptive firm offers of credit.
706.29-706.30 [Reserved]
[[Page 28957]]
Subpart D--Overdraft Service Practices
706.31 Definitions.
706.32 Unfair practices involving overdraft services.
Appendix to Part 706--Official Staff Interpretations
Authority: 15 U.S.C. 57a(f).
Subpart A--General Provisions
Sec. 706.1 Authority, purpose and scope.
(a) Authority. This part is issued by NCUA under section 18(f) of
the Federal Trade Commission Act, 15 U.S.C. 57a(f).
(b) Purpose. The purpose of this part is to prohibit unfair or
deceptive acts or practices in violation of section 5(a)(1) of the
Federal Trade Commission Act, 15 U.S.C. 45(a)(1). This part defines and
contains requirements prescribed for the purpose of preventing specific
unfair or deceptive acts or practices of federal credit unions. The
prohibitions in this part do not limit NCUA's authority to enforce the
FTC Act with respect to any other unfair or deceptive acts or
practices.
(c) Scope. This part applies to federal credit unions.
Sec. Sec. 706.2-706.10 [Reserved]
Subpart B--Consumer Credit Practices
Sec. 706.11 Definitions.
For purposes of this subpart, the following definitions apply:
Antique means any item over one hundred years of age, including
items that have been repaired or renovated without changing their
original form or character.
Consumer means a natural person member who seeks or acquires goods,
services, or money for personal, family, or household purposes, other
than for the purchase of real property.
Cosigner means a natural person who renders himself or herself
liable for the obligation of another person without receiving goods,
services, or money in return for the credit obligation, or, in the case
of an open-end credit obligation, without receiving the contractual
right to obtain extensions of credit under the obligation. The term
includes any person whose signature is requested as a condition to
granting credit to a consumer, or as a condition for forbearance on
collection of a consumer's obligation that is in default. The term does
not include a spouse whose signature is required on a credit obligation
to perfect a security interest pursuant to state law. A person is a
cosigner within the meaning of this definition whether or not he or she
is designated as such on a credit obligation.
Debt means money that is due or alleged to be due from one person
to another.
Earnings mean compensation paid or payable to an individual or for
his or her account for personal services rendered or to be rendered by
him or her, whether denominated as wages, salary, commission, bonus, or
otherwise, including periodic payments pursuant to a pension,
retirement, or disability program.
Household goods mean clothing, furniture, appliances, one radio and
one television, linens, china, crockery, kitchenware, and personal
effects, including wedding rings of the consumer and his or her
dependents, provided that the following are not included within the
scope of the term ``household goods'':
(1) Works of art;
(2) Electronic entertainment equipment, except one television and
one radio;
(3) Items acquired as antiques; and
(4) Jewelry, except wedding rings.
Obligation means an agreement between a consumer and a federal
credit union.
Person means an individual, corporation, or other business
organization.
Sec. 706.12 Unfair credit contract provisions.
In connection with the extension of credit to consumers, it is an
unfair act or practice for a federal credit union, directly or
indirectly, to take or receive from a consumer an obligation that:
(a) Constitutes or contains a cognovit or confession of judgment
(for purposes other than executory process in the State of Louisiana),
warrant of attorney, or other waiver of the right to notice and the
opportunity to be heard in the event of suit or process.
(b) Constitutes or contains an executory waiver or a limitation of
exemption from attachment, execution, or other process on real or
personal property held, owned by, or due to the consumer, unless the
waiver applies solely to property subject to a security interest
executed in connection with the obligation.
(c) Constitutes or contains an assignment of wages or other
earnings unless:
(1) The assignment by its terms is revocable at the will of the
debtor, or
(2) The assignment is a payroll deduction plan or preauthorized
payment plan, commencing at the time of the transaction, in which the
consumer authorizes a series of wage deductions as a method of making
each payment, or
(3) The assignment applies only to wages or other earnings already
earned at the time of the assignment.
(d) Constitutes or contains a nonpossessory security interest in
household goods other than a purchase money security interest.
Sec. 706.13 Unfair or deceptive cosigner practices.
(a) Prohibited practices. In connection with the extension of
credit to consumers, it is:
(1) A deceptive act or practice for a federal credit union,
directly or indirectly, to misrepresent the nature or extent of
cosigner liability to any person.
(2) An unfair act or practice for a federal credit union, directly
or indirectly, to obligate a cosigner unless the cosigner is informed
prior to becoming obligated, which in the case of open-end credit means
prior to the time that the agreement creating the cosigner's liability
for future charges is executed, of the nature of his or her liability
as cosigner.
(b) Disclosure requirement. (1) To comply with the cosigner
information requirement of paragraph (a)(2), a clear and conspicuous
disclosure statement shall be given in writing to the cosigner prior to
becoming obligated. The disclosure statement must contain only the
following statement, or one which is substantially similar, and shall
either be a separate document or included in the documents evidencing
the consumer credit obligation.
Notice to Cosigner
You are being asked to guarantee this debt. Think carefully
before you do. If the borrower doesn't pay the debt, you will have
to. Be sure you can afford to pay if you have to, and that you want
to accept this responsibility.
You may have to pay up to the full amount of the debt if the
borrower does not pay. You may also have to pay late fees or
collection costs, which increase this amount.
The creditor can collect this debt from you without first trying
to collect from the borrower. The creditor can use the same
collection methods against you that can be used against the
borrower, such as suing you, garnishing your wages, etc. If this
debt is ever in default, that fact may become a part of your credit
record.
This notice is not the contract that makes you liable for the
debt.
(2) If the notice to cosigner is a separate document, nothing other
than the following items may appear with the notice. Paragraphs
(b)(2)(i) through (v) of this section may not be part of the narrative
portion of the notice to cosigner.
(i) The name and address of the federal credit union;
[[Page 28958]]
(ii) An identification of the debt to be cosigned, e.g., a loan
identification number;
(iii) The amount of the loan;
(iv) The date of the loan;
(v) A signature line for a cosigner to acknowledge receipt of the
notice; and
(vi) To the extent permitted by state law, a cosigner notice
required by state law may be included in the paragraph (b)(1) notice.
(3) To the extent the notice to cosigner specified in paragraph
(b)(1) refers to an action against a cosigner that is not permitted by
state law, the notice to cosigner may be modified.
Sec. 706.14 Unfair late charges.
(a) In connection with collecting a debt arising out of an
extension of credit to a consumer, it is an unfair act or practice for
a federal credit union, directly or indirectly, to levy or collect any
delinquency charge on a payment, which payment is otherwise a full
payment for the applicable period and is paid on its due date or within
an applicable grace period, when the only delinquency is attributable
to late fee(s) or delinquency charge(s) assessed on earlier
installment(s).
(b) For purposes of this section, ``collecting a debt'' means any
activity other than the use of judicial process that is intended to
bring about or does bring about repayment of all or part of a consumer
debt.
Sec. 706.15 State exemptions.
(a) If, upon application to the NCUA by an appropriate state
agency, the NCUA determines that:
(1) There is a state requirement or prohibition in effect that
applies to any transaction to which a provision of this rule applies;
and
(2) The state requirement or prohibition affords a level of
protection to consumers that is substantially equivalent to, or greater
than, the protection afforded by this rule; then that provision of this
rule will not be in effect in the state to the extent specified by the
NCUA in its determination, for as long as the state administers and
enforces the state requirement or prohibition effectively.
(b) States that received an exemption from the Federal Trade
Commission's Credit Practices Rule prior to September 17, 1987, are not
required to reapply to NCUA for an exemption under paragraph (a) of
this section provided that the state forwards a copy of its exemption
determination to the appropriate Regional Office. NCUA will honor the
exemption for as long as the state administers and enforces the state
requirement or prohibition effectively. Any state seeking a greater
exemption than that granted to it by the Federal Trade Commission must
apply to NCUA for the exemption.
Sec. Sec. 706.16-706.20 [Reserved]
Subpart C--Consumer Credit Card Account Practices
Sec. 706.21 Definitions.
For purposes of this subpart, the following definitions apply:
Annual percentage rate means the product of multiplying each
periodic rate for a balance or transaction on a consumer credit card
account by the number of periods in a year. The term ``periodic rate''
has the same meaning as in 12 CFR 226.2.
Consumer means a natural person member to whom credit is extended
under a consumer credit card account or a natural person who is a co-
obligor or guarantor of a consumer credit card account.
Consumer credit card account means an account provided to a
consumer primarily for personal, family, or household purposes under an
open-end credit plan that is accessed by a credit card or charge card.
The terms ``open-end credit,'' ``credit card,'' and ``charge card''
have the same meanings as in 12 CFR 226.2. The following are not
consumer credit card accounts for purposes of this subpart:
(1) Home equity plans subject to the requirements of 12 CFR 226.5b
that are accessible by a credit or charge card;
(2) Overdraft lines of credit tied to asset accounts accessed by
check-guarantee cards or by debit cards;
(3) Lines of credit accessed by check-guarantee cards or by debit
cards that can be used only at automated teller machines; and
(4) Lines of credit accessed solely by account numbers.
Promotional rate means:
(1) Any annual percentage rate applicable to one or more balances
or transactions on a consumer credit card account for a specified
period of time that is lower than the annual percentage rate that will
be in effect at the end of that period; or
(2) Any annual percentage rate applicable to one or more
transactions on a consumer credit card account that is lower than the
annual percentage rate that applies to other transactions of the same
type.
Sec. 706.22 Unfair time to make payments.
(a) General rule. Except as provided in paragraph (c) of this
section, a federal credit union must not treat a payment on a consumer
credit card account as late for any purpose unless the consumer has
been provided a reasonable amount of time to make the payment.
(b) Safe harbor. A federal credit union provides a reasonable
amount of time to make a payment if it has adopted reasonable
procedures to ensure that periodic statements specifying the payment
due date are mailed or delivered to consumers at least 21 days prior to
the payment due date.
(c) Exception for grace periods. Paragraph (a) of this section does
not apply to any time period provided by the federal credit union
within which the consumer may repay any portion of the credit extended
without incurring an additional finance charge.
Sec. 706.23 Unfair allocation of payments.
(a) General rule for accounts with different annual percentage
rates on different balances. Except as provided in paragraph (b) of
this section, when different annual percentage rates apply to different
balances on a consumer credit card account, the federal credit union
must allocate any amount paid by the consumer in excess of the required
minimum periodic payment among the balances in a manner that is no less
beneficial to the consumer than one of the following methods:
(1) The amount 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) Equal portions of the amount are allocated to each balance; or
(3) The amount is allocated among the balances in the same
proportion as each balance bears to the total outstanding balance.
(b) Special rules for accounts with promotional rate balances or
deferred interest balances. (1) Rule regarding payment allocation. (i)
In general, when a consumer credit card account has one or more
balances at a promotional rate or balances on which interest is
deferred, the federal credit union must allocate any amount paid by the
consumer in excess of the required minimum periodic payment among the
other balances on the account consistent with paragraph (a) of this
section. If any amount remains after such allocation, the federal
credit union must allocate that amount among the promotional rate
balances or the deferred interest balances consistent with paragraph
(a) of this section.
(ii) Exception for deferred interest balances. Notwithstanding
paragraph (b)(1)(i) of this section, the federal credit union may
allocate the entire amount paid by the consumer in excess of the
[[Page 28959]]
required minimum periodic payment to a balance on which interest is
deferred during the two billing cycles immediately preceding expiration
of the period during which interest is deferred.
(2) Rule regarding grace periods. A federal credit union must not
require a consumer to repay any portion of a promotional rate balance
or deferred interest balance on a consumer credit card account in order
to receive any time period offered by the federal credit union in which
to repay other credit extended without incurring finance charges,
provided that the consumer is otherwise eligible for such a time
period.
Sec. 706.24 Unfair application of increased annual percentage rates
to outstanding balances.
(a) Prohibition on increasing annual percentage rates on
outstanding balances.
(1) General rule. Except as provided in paragraph (b) of this
section, a federal credit union must not increase the annual percentage
rate applicable to any outstanding balance on a consumer credit card
account.
(2) Outstanding balance. For purposes of this section,
``outstanding balance'' means the amount owed on a consumer credit card
account at the end of the fourteenth day after the federal credit union
provides a notice required by 12 CFR 226.9(c) or (g).
(b) Exceptions. Paragraph (a) of this section does not apply where
the annual percentage rate is increased due to:
(1) The operation of an index or formula that is not under the
federal credit union's control and is available to the general public;
(2) The expiration or loss of a promotional rate, provided that, if
a promotional rate is lost, the federal credit union does not increase
the annual percentage rate to a rate that is greater than the annual
percentage rate that would have applied after expiration of the
promotional rate; or
(3) The federal credit union not receiving the consumer's required
minimum periodic payment within 30 days after the due date for that
payment.
(c) Treatment of outstanding balances following rate increase. (1)
Payment of outstanding balances. When a federal credit union increases
the annual percentage rate applicable to a category of transactions on
a consumer credit card account, and the federal credit union is
prohibited by this section from applying the increased rate to
outstanding balances in that category, the federal credit union must
provide the consumer with a method of paying the outstanding balance
that is no less beneficial to the consumer than one of the following
methods:
(i) An amortization period for the outstanding balance of no less
than five years, starting from the date on which the increased annual
percentage rate went into effect; or
(ii) A required minimum periodic payment on the outstanding balance
that includes a percentage of that balance that is no more than twice
the percentage included before the date on which the increased annual
percentage rate went into effect.
(2) Fees and charges on outstanding balance. When a federal credit
union increases the annual percentage rate applicable to a category of
transactions on a consumer credit card account, and the federal credit
union is prohibited by this section from applying the increased rate to
outstanding balances in that category, the federal credit union must
not assess any fee or charge based solely on the outstanding balance.
Sec. 706.25 Unfair fees for exceeding the credit limit caused by
credit holds.
A federal credit union must not assess a fee or charge for
exceeding the credit limit on a consumer credit card account if the
credit limit would not have been exceeded but for a hold on any portion
of the available credit on the account that is in excess of the actual
purchase or transaction amount.
Sec. 706.26 Unfair balance computation method.
(a) General rule. Except as provided in paragraph (b) of this
section, a federal credit union must not impose finance charges on
outstanding balances on a consumer credit card account based on
balances for days in billing cycles that precede the most recent
billing cycle.
(b) Exceptions. Paragraph (a) of this section does not apply to:
(1) The assessment of deferred interest; or
(2) Adjustments to finance charges following the resolution of a
billing error dispute under 12 CFR 226.12(b) or 12 CFR 226.13.
Sec. 706.27 Unfair financing of security deposits and fees for the
issuance or availability of credit.
(a) Annual rule. During the period beginning with the date on which
a consumer credit card account is opened and ending twelve months from
that date, a federal credit union must not charge to the account
security deposits or fees for the issuance or availability of credit if
the total amount of such security deposits and fees constitutes a
majority of the credit limit for the account.
(b) Monthly rule. If the total amount of security deposits and fees
for the issuance or availability of credit charged to a consumer credit
card account during the period beginning with the date on which a
consumer credit card account is opened and ending twelve months from
that date constitutes more than 25 percent of the initial credit limit
for the account:
(1) During the first billing cycle after the account is opened, the
federal credit union must not charge security deposits and fees for the
issuance or availability of credit that total more than 25 percent of
the initial credit limit for the account; and
(2) In each of the eleven billing cycles following the first
billing cycle, the federal credit union must not charge to the account
more than one eleventh of the total amount of any additional security
deposits and fees for the issuance of availability of credit in excess
of 25 percent of the initial credit limit for the account.
(c) Fees for the issuance or availability of credit. For purposes
of paragraphs (a) and (b) of this section, fees for the issuance or
availability of credit include:
(1) Any annual or other periodic fee that may be imposed for the
issuance or availability of a consumer credit card account, including
any fee based on account activity or inactivity; and
(2) Any non-periodic fee that relates to opening an account.
Sec. 706.28 Deceptive firm offers of credit.
(a) Disclosure of criteria bearing on creditworthiness. If a
federal credit union offers a range or multiple annual percentage rates
or credit limits when making a solicitation for a firm offer of credit
for a consumer credit card account, and the annual percentage rate or
credit limit that consumers approved for credit will receive depends on
specific criteria bearing on creditworthiness, the federal credit union
must disclose the types of criteria in the solicitation. The disclosure
must be provided in a manner that is reasonably understandable to
consumers and is designed to call attention to the nature and
significance of the information regarding the eligibility criteria for
the lowest annual percentage rate or highest credit limit stated in the
solicitation. If presented in a manner that calls attention to the
nature and significance of the information, the following disclosure
may be used to satisfy the requirements of this section, as applicable:
``If you are approved for credit, your annual percentage rate and/or
credit limit will
[[Page 28960]]
depend on your credit history, income, and debts.''
(b) Firm offer of credit defined. For purposes of this section,
``firm offer of credit'' has the same meaning as ``firm offer of credit
or insurance'' in section 603(l) of the Fair Credit Reporting Act (15
U.S.C. 1681a(l)).
Sec. Sec. 706.29-706.30 [Reserved]
Subpart D--Overdraft Services
Sec. 706.31 Definitions.
For purposes of this subpart, the following definitions apply:
Account means a share account at a federal credit union that is
held by or offered to a consumer, and has the same meaning as in Sec.
707.2(a) of this chapter.
Consumer means a member who holds an account primarily for
personal, family, or household purposes.
Overdraft service means a service under which a federal credit
union charges a fee for paying a transaction, including a check or
other item, that overdraws an account. The term ``overdraft service''
does not include any payment of overdrafts pursuant to--
(1) A line of credit subject to the Federal Reserve Board's
Regulation Z, 12 CFR part 226, including transfers from a credit card
account, home equity line of credit, or overdraft line of credit; or
(2) A service that transfers funds from another account of the
consumer.
Sec. 706.32 Unfair practices involving overdraft services.
(a) Opt-out requirement. (1) General rule. A federal credit union
must not assess a fee or charge on a consumer's account in connection
with an overdraft service, unless the federal credit union provides the
consumer the right to opt out of the federal credit union's payment of
overdrafts and a reasonable opportunity to exercise that opt-out, and
the consumer has not opted out. The consumer must be given notice and
an opportunity to opt out before the federal credit union's assessment
of any fee or charge for an overdraft, and subsequently at least once
during or for any periodic statement cycle in which any fee or charge
for paying an overdraft is assessed. The notice requirements in this
paragraph (a)(1) and (a)(2) do not apply if the consumer has opted out,
unless the consumer subsequently revokes the opt-out.
(2) Partial opt-out. A federal credit union must provide a consumer
the option of opting out only for the payment of overdrafts at
automated teller machines and for point-of-sale transactions initiated
by a debit card, in addition to the choice of opting out of the payment
of overdrafts for all transaction.
(3) Exceptions. Notwithstanding a consumer's election to opt out
under paragraphs (a)(1) or (a)(2) of this section, a federal credit
union may assess a fee or charge on a consumer's account for paying a
debit card transaction that overdraws an account if:
(i) There were sufficient funds in the consumer's account at the
time the authorization request was received, but the actual purchase
amount for that transaction exceeds the amount that had been
authorized; or
(ii) The transaction is presented for payment by paper-based means,
rather than electronically through a card terminal, and the federal
credit union has not previously authorized the transaction.
(4) Time to comply with opt-out. A federal credit union must comply
with a consumer's opt-out request as soon as reasonably practicable
after the federal credit union receives it.
(5) Continuing right to opt-out. A consumer may opt out of the
federal credit union's future payment of overdrafts at any time.
(6) Duration of opt-out. A consumer's opt-out is effective unless
subsequently revoked by the consumer.
(b) Debit holds. A federal credit union shall not assess a fee or
charge on a consumer's account for an overdraft service if the
consumer's overdraft would not have occurred but for a hold placed on
funds in the consumer's account that is in excess of the actual
purchase or transaction amount.
Appendix to Part 706--Official Staff Interpretations
Subpart C--Consumer Credit Card Account Practices
Section 706.21--Definitions
(d) Promotional Rate
Paragraph (d)(1)
1. Rate in effect at the end of the promotional period. If the
annual percentage rate that will be in effect at the end of the
specified period of time is a variable rate, the rate in effect at
the end of that period for purposes of Sec. 706.21(d)(1) is the
rate that would otherwise apply if the promotional rate was not
offered, consistent with any applicable accuracy requirements under
12 CFR part 226.
Paragraph (d)(2)
1. Example. A federal credit union generally offers a 15% annual
percentage rate for purchases on a consumer credit card account. For
purchases made during a particular month, however, the creditor
offers a rate of 5% that will apply until the consumer pays those
purchases in full. Under Sec. 706.21(d)(2), the 5% rate is a
``promotional rate'' because it is lower than the 15% rate that
applies to other purchases.
Section 706.22--Unfair Time To Make Payment
(a) General Rule
1. Treating a payment as late for any purpose. Treating a
payment as late for any purpose includes increasing the annual
percentage rate as a penalty, reporting the consumer as delinquent
to a credit reporting agency, or assessing a late fee or any other
fee based on the consumer's failure to make a payment within the
amount of time provided under this section.
2. Reasonable amount of time to make payment. Whether an amount
of time is reasonable for purposes of making a payment is determined
from the perspective of the consumer, not the federal credit union.
Under Sec. 706.22(b), a federal credit union provides a reasonable
amount of time to make a payment if it has adopted reasonable
procedures designed to ensure that periodic statements specifying
the payment due date are mailed or delivered to consumers at least
21 days prior to the payment due date.
(b) Safe Harbor
1. Reasonable procedures. A federal credit union is not required
to determine the specific date on which periodic statements are
mailed or delivered to each individual consumer. A federal credit
union provides a reasonable amount of time to make a payment if the
federal credit union has adopted reasonable procedures designed to
ensure that periodic statements are mailed or delivered to consumers
no later than, for example, three days after the closing date of the
billing cycle and the payment due date on the periodic statement is
no less than 24 days after the closing date of the billing cycle.
2. Payment due date. For purposes of Sec. 706.22(b), ``payment
due date'' means the date by which the federal credit union requires
the consumer to make payment to avoid being treated as late for any
purpose, except as provided in Sec. 706.22(c).
Section 706.23--Unfair Allocation of Payments
1. Minimum periodic payment. This section addresses the
allocation of amounts paid by the consumer in excess of the minimum
periodic payment required by the federal credit union. This section
does not limit or otherwise address the federal credit union's
ability to determine the amount of the minimum periodic payment or
how that payment is allocated.
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
equally among three balances, the federal credit union may apply $34
to one balance and $33 to the others. Similarly, if a federal credit
union is splitting $100.50 between two balances, the federal credit
union may apply $50 to one balance and $50.50 to another.
[[Page 28961]]
(a) General Rule for Accounts With Different Annual Percentage
Rates on Different Balances
1. No less beneficial to the consumer. A federal credit union
may allocate payments using a method that is different from the
methods listed in Sec. 706.23(a) so long as the method used is no
less beneficial to the consumer than one of the listed methods. A
method is no less beneficial to the consumer than a listed method if
it results in the assessment of the same or a lesser amount of
interest charges than would be assessed under any of the listed
methods. For example, a federal credit union may not allocate the
entire amount paid by the consumer in excess of the required minimum
periodic payment to the balance with the lowest annual percentage
rate because this method would result in a higher assessment of
interest charges than any of the methods listed in Sec. 706.23(a).
2. Example of payment allocation method that is no less
beneficial to consumers than a method listed in Sec. 706.23(a).
Assume that a consumer's account has a cash advance balance of $500
at annual percentage rate of 15% and a purchase balance of $1,500 at
an annual percentage rate of 10% and that the consumer pays $555 in
excess of the required minimum periodic payment. A federal credit
union could allocate one-third of this amount ($185) to the cash
advance balance and two-thirds ($370) to the purchase balance even
though this is not a method listed in Sec. 706.23(a) because the
federal credit union is applying more of the amount to the balance
with the highest annual percentage rate, with the result that the
consumer will be assessed less in interest charges, than would be
the case under the pro rata allocation method in Sec. 706.23(a)(3).
See comment 23(a)(3)-1.
Paragraph (a)(1)
1. Examples of allocating first to the balance with the highest
annual percentage rate.
(A) Assume that a consumer's account has a cash advance balance
of $500 at an annual percentage rate of 15% and a purchase balance
of $1,500 at an annual percentage rate of 10% and that the consumer
pays $800 in excess of the required minimum periodic payment. None
of the minimum periodic payment is allocated to the cash advance
balance. A federal credit union using this method would allocate
$500 to pay off the cash advance balance and then allocate the
remaining $300 to the purchase balance.
(B) Assume that a consumer's account has a cash advance balance
of $500 at an annual percentage rate of 15% and a purchase balance
of $1,500 at an annual percentage rate of 10% and that the consumer
pays $400 in excess of the required minimum periodic payment. A
federal credit union using this method would allocate the entire
$400 to the cash advance balance.
Paragraph (a)(2)
1. Example of equal portion method. Assume that a consumer's
account has a cash advance balance of $500 at an annual percentage
rate of 15% and a purchase balance of $1,500 at an annual percentage
rate of 10% and that the consumer pays $555 in excess of the
required minimum periodic payment. A federal credit union using this
method would allocate $278 to the cash advance balance and $277 to
the purchase balance, or vice versa.
Paragraph (a)(3)
1. Example of pro rata method. Assume that a consumer's account
has a cash advance balance of $500 at an annual percentage rate of
15% and a purchase balance of $1,500 at an annual percentage rate of
10% and that the consumer pays $555 in excess of the required
minimum periodic payment. A federal credit union using this method
would allocate 25% of the amount ($139) to the cash advance balance
and 75% of the amount ($416) to the purchase balance.
(b) Special Rules for Accounts With Promotional Rate Balances or
Deferred Interest Balances
Paragraph (b)(1)(i)
1. Examples of special rule regarding payment allocation for
accounts with promotional rate balances or deferred interest
balances.
(A) A consumer credit card account has a cash advance balance of
$500 at an annual percentage rate of 15%, a purchase balance of
$1,500 at an annual percentage rate of 10%, and a transferred
balance of $3,000 at a promotional rate of 5%. The consumer pays
$800 in excess of the required minimum periodic payment. The federal
credit union must allocate the $800 between the cash advance and
purchase balances, consistent with Sec. 706.23(a), and apply
nothing to the transferred balance.
(B) A consumer credit card account has a cash advance balance of
$500 at an annual percentage rate of 15%, a balance of $1,500 on
which interest is deferred, and transferred balance of $3,000 at a
promotional rate of 5%. The consumer pays $800 in excess of the
required minimum periodic payment. None of the minimum periodic
payment is allocated to the cash advance balance. The federal credit
union must allocate $500 to pay off the cash advance balance before
allocating the remaining $300 among the balance on which interest is
deferred and the transferred balance, consistent with Sec.
706.23(a).
Paragraph (b)(1)(ii)
1. Examples of exception for deferred interest balances. Assume
that on January 1, a consumer uses a credit card to make a $1,000
purchase on which interest is deferred until June 30. If this amount
is not paid in full by June 30, all interest accrued during the six-
month period will be charged to the account. The billing cycle for
this credit card begins on the first day of the month and ends on
the last day of the month. Each month from January through June, the
consumer uses the credit card to make $200 in purchases on which
interest is not deferred.
(A) The consumer pays $300 in excess of the minimum periodic
payment each month from January through June. None of the minimum
periodic payment is applied to the deferred interest balance or the
purchase balance. For the January, February, March, and April
billing cycles, the federal credit union must allocate $200 to the
purchase balance and $100 to the deferred interest balance. For the
May and June billing cycles, however, the federal credit union has
the option of allocating the entire $300 to the deferred interest
balance, which will result in that balance being paid in full before
the deferred interest period expires on June 30. In this example,
the interest that accrued between January 1 and June 30 will not be
assessed to the consumer's account.
(B) The consumer pays $200 in excess of the minimum periodic
payment each month from January through June. None of the minimum
periodic payment is applied to the deferred interest balance or the
purchase balance. For the January, February, March, and April
billing cycles, the federal credit union must allocate the entire
$200 to the purchase balance. For the May and June billing cycles,
however, the federal credit union has the option to allocate the
entire $200 to the deferred interest balance, which will result in
that balance being reduced to $600 before the deferred interest
period expires on June 30. In this example, the interest that
accrued between January 1 and June 30 will be assessed to the
consumer's account.
Paragraph (b)(2)
1. Example of special rule regarding grace periods for accounts
with promotional rate balances or deferred interest balances. A
federal credit union offers a promotional rate on balance transfers
and a higher rate on purchases. The federal credit union also offers
a grace period under which consumers who pay their balances in full
by the due date are not charged interest on purchases. A consumer
who has paid the balance for the prior billing cycle in full by the
due date transfers a balance of $2,000 and makes a purchase of $500.
Because the federal credit union offers a grace period, the federal
credit union must provide a grace period on the $500 purchase if the
consumer pays that amount in full by the due date, even though the
$2,000 balance at the promotional rate remains outstanding.
Section 706.24--Unfair Application of Increased Annual Percentage Rates
to Outstanding Balances
(a) Prohibition Against Increasing Annual Percentage Rates on
Outstanding Balances
1. Example. Assume that on December 30 a consumer credit card
account has a balance of $1,000 at an annual percentage rate of 10%.
On December 31, the federal credit union mails or delivers a notice
required by 12 CFR 226.9(c) informing the consumer that the annual
percentage rate will increase to 15% on February 15. The consumer
uses the account to make $2,000 in purchases on January 10 and
$1,000 in purchases on January 20. Assuming no other transactions,
the outstanding balance for purposes of Sec. 706.24 is the $3,000
balance as of the end of the day on January 14. Therefore, under
Sec. 706.24(a), the federal credit union cannot increase the annual
percentage rate applicable to that balance. The federal credit union
can apply the 15% rate to the $1,000 in purchases made on January 20
but, consistent with 12 CFR 226.9(c), the federal credit union
cannot do so until February 15.
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2. Reasonable procedures. A federal credit union is not required
to determine the specific date on which a notice required by 12 CFR
226.9(c) or (g) was provided. For purposes of Sec. 706.24(a)(2), if
the federal credit union has adopted reasonable procedures designed
to ensure that notices required by 12 CFR 226.9(c) or (g) are
provided to consumers no later than, for example, three days after
the event giving rise to the notice, the outstanding balance is the
balance at the end of the seventeenth day after such event.
(b) Exceptions
Paragraph (b)(1)
1. External index. A federal credit union may increase the
annual percentage rate on an outstanding balance if the increase is
based on an index outside the federal credit union's control. A
federal credit union may not increase the rate on an outstanding
balance based on its own prime rate or cost of funds and may not
reserve a contractual right to change rates on outstanding balances
at its discretion. In addition, a federal credit union may not
increase the rate on an outstanding balance by changing the method
used to determine that rate. A federal credit union is permitted,
however, to use a published prime rate, such as that in the Wall
Street Journal, even if the federal credit union's own prime rate is
one of several rates used to establish the published rate.
2. Publicly available. The index must be available to the
public. A publicly available index need not be published in a
newspaper, but it must be one the consumer can independently obtain
(by telephone, for example) and use to verify the rate applied to
the outstanding balance.
Paragraph (b)(2)
1. Example. Assume that a consumer credit card account has a
balance of $1,000 at a 5% promotional rate and that the federal
credit union also charges an annual percentage rate of 15% for
purchases and a penalty rate of 25%. If the consumer does not make
payment by the due date and the account agreement specifies that
event as a trigger for applying the penalty rate, the federal credit
union may increase the annual percentage rate on the $1,000 from the
5% promotional rate to the 15% annual percentage rate for purchases.
The federal credit union may not, however, increase the rate on the
$1,000 from the 5% promotional rate to the 25% penalty rate, except
as otherwise permitted under Sec. 706.24(b)(3).
Paragraph (b)(3)
1. Example. Assume that the annual percentage rate applicable to
purchases on a consumer credit card account is increased from 10% to
15% and that the account has an outstanding balance of $1,000 at the
10% rate. The payment due date on the account is the twenty-fifth of
the month. If the federal credit union has not received the required
minimum periodic payment due on March 15 on or before April 14, the
federal credit union may increase the rate applicable to the $1,000
balance once the federal credit union has complied with the notice
requirements in 12 CFR 226.9(g).
(c) Treatment of Outstanding Balances Following Rate Increase
1. Scope. This provision does not apply if the consumer credit
card account does not have an outstanding balance. This provision
also does not apply if a rate is increased pursuant to any of the
exceptions in Sec. 706.24(b).
2. Category of transactions. This provision does not apply to
balances in categories of transactions other than the category for
which the federal credit union has increased the annual percentage
rate. For example, if a federal credit union increases the annual
percentage rate that applies to purchases but not the rate that
applies to cash advances, Sec. 706.24(c)(1) and (2) apply to an
outstanding balance consisting of purchases but not an outstanding
balance consisting of cash advances.
Paragraph (c)(1)
1. No less beneficial to the consumer. A federal credit union
may provide a method of paying the outstanding balance that is
different from the methods listed in Sec. 706.24(c)(1) so long as
the method used is no less beneficial to the consumer than one of
the listed methods. A method is no less beneficial to the consumer
if the method amortizes the outstanding balance in five years or
longer or if the method results in a required minimum periodic
payment on the outstanding balance that is equal to or less than a
minimum payment calculated consistent with Sec. 706.24(c)(1)(ii).
For example, a federal credit union could more than double the
percentage of amounts owed included in the minimum payment so long
as the minimum payment does not result in amortization of the
outstanding balance in less than five years. Alternatively, a
federal credit union could require a consumer to make a minimum
payment on the outstanding balance that amortizes that balance in
less than five years so long as the payment does not include a
percentage of the outstanding balance that is more than twice the
percentage included in the minimum payment before the effective date
of the increased rate.
Paragraph (c)(1)(ii)
1. Required minimum periodic payment on other balances. This
paragraph addresses the required minimum periodic payment on the
outstanding balance. This paragraph does not limit or otherwise
address the federal credit union's ability to determine the amount
of the minimum periodic payment for other balances.
2. Example. Assume that the method used by a federal credit
union to calculate the required minimum periodic payment for a
consumer credit card account requires the consumer to pay either the
total of fees and interest charges plus 1% of the total amount owed
or $20, whichever is greater. Assume also that the federal credit
union increases the annual percentage rate applicable to purchases
on a consumer credit card account from 10% to 15% and that the
account has an outstanding balance of $1,000 at the 10% rate.
Section 706.24(c)(1)(ii) would permit the federal credit union to
calculate the required minimum periodic payment on the outstanding
balance by adding fees and interest charges to 2% of the outstanding
balance.
Paragraph (c)(2)
1. Fee or charge based solely on the outstanding balance. A
federal credit union is prohibited from assessing a fee or charge
based solely on an outstanding balance. For example, a federal
credit union is prohibited from assessing a maintenance or similar
fee based on an outstanding balance. A federal credit union is not,
however, prohibited from assessing fees such as late payment fees or
fees for exceeding the credit limit even if such fees are based in
part on an outstanding balance.
Section 706.25--Unfair Fees for Exceeding the Credit Limit Caused by
Credit Holds
1. General. Under Sec. 706.25, a federal credit union may not
assess a fee for exceeding the credit limit if the credit limit
would not have been exceeded but for a hold placed on the available
credit for a consumer credit card account for a transaction that has
been authorized but has not yet been presented for settlement, if
the amount of the hold is in excess of the actual purchase or
transaction amount when the transaction is settled. Section 706.25
does not limit a federal credit union from charging a fee for
exceeding the credit limit in connection with a particular
transaction if the consumer would have exceeded the credit limit due
to other reasons, such as other transactions that may have been
authorized but not yet presented for settlement, a payment that is
returned, or if the purchase or transaction amount for the
transaction for which the hold was placed would have also caused the
consumer to exceed the credit limit.
2. Example of prohibition in connection with hold placed for
same transaction. Assume that a consumer credit card account has a
credit limit of $2,000 and a balance of $1,500. The consumer uses
the credit card to check into a hotel for an anticipated stay of
five days. When the consumer checks in, the hotel obtains
authorization from the federal credit union for a $750 hold on the
account to ensure there is adequate available credit to cover the
cost of the anticipated stay. The consumer checks out of the hotel
after three days, and the total cost of the stay is $450, which is
charged to the consumer's credit card account. Assuming that there
is no other activity on the account, the federal credit union is
prohibited from assessing a fee for exceeding the credit limit with
respect to the $750 hold. If, however, the total cost of the stay
charged to the account had been more than $500, the federal credit
union would not be prohibited from assessing a fee for exceeding the
credit limit.
3. Example of prohibition in connection with hold placed for
another transaction. Assume that a consumer credit card account has
a credit limit of $2,000 and a balance of $1,400. The consumer uses
the credit card to check into a hotel for an anticipated stay of
five days. When the consumer checks in, the hotel obtains
authorization from the federal credit union for a $750 hold on the
account to ensure there is adequate available credit to cover the
cost of the anticipated stay. While the hold remains in place, the
consumer uses the credit card to make a $150 purchase. The
[[Page 28963]]
consumer checks out of the hotel after three days, and the total
cost of the stay is $450, which is charged to the consumer's credit
card account. Assuming there is no other activity on the account,
the federal credit union is prohibited from assessing a fee for
exceeding the credit limit with respect to either the $750 hold or
the $150 purchase. If, however, the total cost of the stay charged
to the account had been more than $450, the federal credit union
would not be prohibited from assessing a fee for exceeding the
credit limit.
4. Example of prohibition when authorization and settlement
amounts are held for the same transaction. Assume that a consumer
credit card account has a credit limit of $2,000 and a balance of
$1,400. The consumer uses the credit card to check into a hotel for
an anticipated stay of five days. When the consumer checks in, the
hotel obtains authorization from the federal credit union for a $750
hold on the account to ensure there is adequate available credit to
cover the cost of the anticipated stay. The consumer checks out of
the hotel after three days, and the total cost of the stay is $450,
which is charged to the consumer's credit card account. When the
hotel presents the $450 transaction for settlement, it uses a
different transaction code to identify the transaction than it had
used for the pre-authorization, causing both the $750 hold and the
$450 purchase amount to be temporarily posted to the consumer's
account at the same time, and the consumer's balance to exceed the
credit limit. Under these circumstances, and assuming no other
transactions, the federal credit union is prohibited from assessing
a fee for exceeding the credit limit because the credit limit was
exceeded solely due to the $750 hold.
5. Example of permissible fee for exceeding the credit limit in
connection with a hold. Assume that a consumer credit card account
has a credit limit of $2,000 and a balance of $1,400. The consumer
uses the credit card to check into a hotel for an anticipated stay
of five days. When the consumer checks in, the hotel obtains
authorization from the federal credit union for a $750 hold on the
account to ensure there is adequate available credit to cover the
cost of the anticipated stay. While the hold remains in place, the
consumer uses the credit card to make a $650 purchase. The consumer
checks out of the hotel after three days, and the total cost of the
stay is $450, which is charged to the consumer's credit card
account. Notwithstanding the existence of the hold and assuming
there is no other activity on the account, the federal credit union
may charge the consumer a fee for exceeding the credit limit with
respect to the $650 purchase because the consumer would have
exceeded the credit limit even if the hold had been for the actual
amount of the hotel transaction.
Section 706.26--Unfair Balance Computation Method
(a) General Rule
1. Two-cycle method prohibited. A federal credit union is
prohibited from computing the finance charge using the so-called
two-cycle average daily balance computation method. This method
calculates the finance charge using a balance that is the sum of the
average daily balances for two billing cycles. The first balance is
for the current billing cycle, and is calculated by adding the
outstanding balance, including or excluding new purchases and
deducting payments and credits, for each day in the billing cycle,
and then dividing by the number of days in the billing cycle. The
second balance is for the preceding billing cycle.
2. Example. Assume that the billing cycle on a consumer credit
card account starts on the first day of the month and ends on the
last day of the month. A consumer has a zero balance on March 1. The
consumer uses the credit card to make a $500 purchase on March 15.
The consumer makes no other purchases and pays $400 on the due date,
April 25, leaving a $100 balance. The federal credit union may
charge interest on the $500 purchase from the start of the billing
cycle April 1 through April 24, and interest on the remaining $100
from April 25 through the end of the April billing cycle, April 30.
The federal credit union is prohibited, however, from reaching back
and charging interest on the $500 purchase from the date of
purchase, March 15, to the end of the March billing cycle, March 31.
Section 706.27--Unfair Financing of Security Deposits and Fees for the
Issuance or Availability of Credit
1. Initial credit limit for the account. For purposes of this
section the credit limit is the limit in effect when the account is
opened.
(a) Annual Rule
1. Majority of the credit limit. The total amount of security
deposits and fees for the issuance or availability of credit
constitutes a majority of the credit limit if that total is greater
than half of the credit limit. For example, assume that a consumer
credit card account has a credit limit of $500. Under Sec.
706.27(a), a federal credit union may charge to the account security
deposits and fees for the issuance or availability of credit
totaling no more than $250 during the twelve months after the date
on which the account is opened, consistent with Sec. 706.27(b), but
may not charge any more than that amount.
(b) Monthly Rule
1. Adjustments of one dollar or less permitted. When dividing
amounts pursuant to Sec. 706.27(b)(2), the federal credit union may
adjust amounts by one dollar or less. For example, if a federal
credit union is dividing $125 over eleven billing cycles, the
federal credit union may charge $12 for four months and $11 for the
remaining seven months.
2. Example. Assume that a consumer credit card account opened on
January 1 has a credit limit of $500 and that a federal credit union
charges to the account security deposits and fees for the issuance
or availability of credit that total $250 during the twelve months
after the date on which the account is opened. Assume also that the
billing cycles for this account begin on the first day of the month
and end on the last day of the month. Under Sec. 706.27(b), the
federal credit union may charge to the account no more than $250 in
security deposits and fees for the issuance or availability of
credit. If it charges $250, the federal credit union may charge as
much as $125 during the first billing cycle. If it charges $125
during the first billing cycle, it may then charge $12 in any four
billing cycles and $11 in any seven billing cycles during the year.
(c) Fees for the Issuance or Availability of Credit
1. Membership fees. Membership fees for opening an account are
fees for the issuance or availability of credit. A membership fee to
join an organization that provides a credit or charge card as a
privilege of membership is a fee for the issuance or availability of
credit only if the card is issued automatically upon membership. If
membership results merely in eligibility to apply for an account,
then such a fee is not a fee for the issuance or availability of
credit.
2. Enhancements. Fees for optional services in addition to basic
membership privileges in a credit or charge card account, for
example, travel insurance or card-registration services, are not
fees for the issuance or availability of credit if the basic account
may be opened without paying such fees.
3. One-time fees. Only non-periodic fees related to opening an
account, such as one-time membership or participation fees, are fees
for the issuance or availability of credit. Fees for reissuing a
lost or stolen card and statement reproduction fees are examples of
fees that are not fees for the issuance or availability of credit.
Section 706.28--Deceptive Firm Offers of Credit
(a) Disclosure of Criteria Bearing on Creditworthiness
1. Designed to call attention. Whether a disclosure has been
provided in a manner that is designed to call attention to the
nature and significance of required information depends on where the
disclosure is placed in the solicitation and how it is presented,
including whether the disclosure uses a typeface and type size that
are easy to read and uses boldface or italics. Placing the
disclosure in a footnote would not satisfy this requirement.
2. Form of electronic disclosures. Electronic disclosures must
be provided consistent with 12 CFR 226.5a(a)(2)-8 and -9.
3. Multiple annual percentage rates or credit limits. For
purposes of this section, a firm offer of credit solicitation that
states an annual percentage rate or credit limit for a credit card
feature and a different annual percentage rate or credit limit for a
different credit card feature does not offer multiple annual
percentage rates or credit limits. For example, if a firm offer of
credit solicitation offers a 10% annual percentage rate for
purchases and a 15% annual percentage rate for cash advances, the
solicitation does not offer multiple annual percentage rates for
purposes of this section.
4. Example. Assume that a federal credit union requests from a
consumer reporting agency a list of consumers with credit scores of
650 or higher so that the federal credit union can send those
consumers a firm offer of credit solicitation. The federal credit
union sends a solicitation to those consumers for a
[[Page 28964]]
consumer credit card account advertising ``rates from 8.99% to
14.99%'' and ``credit limits from $1,000 to $10,000.'' Before
selection of the consumers for the offer, however, the federal
credit union determines that it will offer an interest rate of 8.99%
only to those consumers responding to the solicitation who are
verified to have a credit score of 650 or higher, who have a debt-
to-income ratio below a certain amount, and who meet other specific
criteria bearing on creditworthiness. Under Sec. 706.28, this
solicitation is deceptive unless the federal credit union discloses,
in a manner that is reasonably understandable to the consumer and
designed to call attention to the nature and significance of the
information, that, if the consumer is approved for credit, the
annual percentage rate and credit limit the consumer will receive
will depend specific criteria bearing on the consumer's
creditworthiness. The federal credit union may satisfy this
requirement by using a typeface and type size that are easy to read
and stating in boldface in a manner that otherwise calls attention
to the nature and significance of the information: ``If you are
approved for credit, your annual percentage rate and/or credit limit
will depend on your credit history, debt-to-income ratio, and
debts.''
5. Applicability of criteria in disclosure. When making a
disclosure under this section, a federal credit union may only
disclose the criteria it uses in evaluating whether consumers who
are approved for credit will receive the lowest annual percentage
rate or the highest credit limit. For example, if a federal credit
union does not consider the consumer's debts when determining
whether the consumer should receive the lowest annual percentage
rate or highest credit limit, the disclosure must not refer to
``debts.''
Subpart D--Overdraft Services
Section 706.32--Unfair Practices Involving Overdraft Services
(a) Opt-Out Requirement
(a)(1) General Rule
1. Form, content, and timing of disclosure. The form, content,
and timing of the opt-out notice required to be provided under
paragraph (a) of this section are addressed under Sec. 707.10 of
this chapter.
(a)(3) Exceptions
Paragraph (a)(3)(i)
1. Example of transaction amount exceeding authorization amount
(fuel purchase). A consumer has $30 in a deposit account. The
consumer uses a debit card to purchase fuel. Before permitting the
consumer to use the fuel pump, the merchant verifies the validity of
the card by obtaining authorization from the federal credit union
for a $1 transaction. The consumer purchases $50 of fuel. If the
federal credit union pays the transaction, it would be permitted to
assess a fee or charge for paying the overdraft, even if the
consumer has opted out of the payment of overdrafts.
2. Example of transaction amount exceeding authorization amount
(restaurant). A consumer has $50 in a deposit account. The consumer
pays for a $45 meal at a restaurant using a debit card. While the
restaurant may obtain authorization for the $45 cost of the meal,
the consumer may add $10 for a tip. If the federal credit union pays
the $55 transaction, including the tip amount, it would be permitted
to assess a fee or charge for paying the overdraft, even if the
consumer has opted out of the payment of overdrafts.
Paragraph (a)(3)(ii)
1. Example of transaction presented by paper-based means. A
consumer has $50 in a deposit account. The consumer makes a $60
purchase and presents his or her debit card for payment. The
merchant takes an imprint of the card. Later that day, the merchant
submits a sales slip with the card imprint to its processor for
payment. If the consumer's federal credit union pays the
transaction, it would be permitted to assess a fee or charge for
paying the overdraft, even if the consumer has opted out of the
payment of overdrafts.
(b) Debit Holds
1. General. Under Sec. 706.32(b), a federal credit union may
not assess an overdraft fee if the overdraft would not have occurred
but for a hold placed on funds in the consumer's account for a
transaction that has been authorized but has not yet been presented
for settlement, if the amount of the hold is in excess of the actual
purchase or transaction amount when the transaction is settled.
Section 706.32(b) does not limit a federal credit union from
charging an overdraft fee in connection with a particular
transaction if the consumer would have incurred an overdraft due to
other reasons, such as other transactions that may have been
authorized but not yet presented for settlement, a deposited check
that is returned, or if the purchase or transaction amount for the
transaction for which the hold was placed would have also caused the
consumer to overdraw his or her account.
2. Example of prohibition in connection with hold placed for
same transaction. A consumer has $50 in a deposit account. The
consumer makes a fuel purchase using his or her debit card. Before
permitting the consumer to use the fuel pump, the merchant obtains
authorization from the consumer's federal credit union for a $75
``hold'' on the account which exceeds the consumer's funds. The
consumer purchases $20 of fuel. Under these circumstances, Sec.
706.32(b) prohibits the federal credit union from assessing a fee or
charge in connection with the debit hold because the actual amount
of the fuel purchase did not exceed the funds in the consumer's
account. However, if the consumer had purchased $60 of fuel, the
federal credit union could assess a fee or charge for an overdraft
because the transaction exceeds the funds in the consumer's account,
unless the consumer has opted out of the payment of overdrafts under
Sec. 706.32(a).
3. Example of prohibition in connection with hold placed for
another transaction. A consumer has $100 in a deposit account. The
consumer makes a fuel purchase using his or her debit card. Before
permitting the consumer to use the fuel pump, the merchant obtains
authorization from the consumer's federal credit union for a $75
``hold'' on the account. The consumer purchases $20 of fuel, but the
transaction is not presented for settlement until the next day.
Later on the first day, and assuming no other transactions, the
consumer withdraws $75 at an ATM. Under these circumstances, Sec.
706.32(b) prohibits the federal credit union from assessing a fee or
charge for paying an overdraft with respect to the $75 withdrawal
because the overdraft was caused solely by the $75 hold.
4. Example of prohibition when authorization and settlement
amounts are held for the same transaction. A consumer has $100 in
his deposit account, and uses his debit card to purchase $50 worth
of fuel. Before permitting the consumer to use the fuel pump, the
merchant obtains authorization from the consumer's federal credit
union for a $75 ``hold'' on the account. The consumer purchases $50
of fuel. When the merchant presents the $50 transaction for
settlement, it uses a different transaction code to identify the
transaction than it had used for the pre-authorization, causing both
the $75 hold and the $50 purchase amount to be temporarily posted to
the consumer's account at the same time, and the consumer's account
to be overdrawn. Under these circumstances, and assuming no other
transactions, Sec. 706.32(b) prohibits the federal credit union
from assessing a fee or charge for paying an overdraft because the
overdraft was caused solely by the $75 hold.
5. Example of permissible overdraft fees in connection with a
hold. A consumer has $100 in a deposit account. The consumer makes a
fuel purchase using his or her debit card. Before permitting the
consumer to use the fuel pump, the merchant obtains authorization
from the consumer's federal credit union for a $75 ``hold'' on the
account. The consumer purchases $35 of fuel, but the transaction is
not presented for settlement until the next day. Later on the first
day, and assuming no other transactions, the consumer withdraws $75
at an ATM. Notwithstanding the existence of the hold, and assuming
the consumer has not opted out of the payment of overdrafts under
Sec. 706.32(a), the consumer's federal credit union may charge the
consumer an overdraft fee for the $75 ATM withdrawal, because the
consumer would have incurred the overdraft even if the hold had been
for the actual amount of the fuel purchase.
By order of the Board of Governors of the Federal Reserve
System, May 2, 2008.
Jennifer J. Johnson,
Secretary of the Board.
Dated: April 29, 2008.
By the Office of Thrift Supervision.
John M. Reich,
Director.
By the National Credit Union Administration Board, on May 2,
2008.
Mary F. Rupp,
Secretary of the Board.
[FR Doc. E8-10247 Filed 5-16-08; 8:45 am]
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