[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.
---------------------------------------------------------------------------

    \11\ See Board and FDIC, Unfair or Deceptive Acts or Practices 
by State-Chartered Banks (Mar. 11, 2004) (available at http://www.federalreserve.gov/boarddocs/press/bcreg/2004/20040311/attachment.pdf ); OCC Advisory Letter 2002-3, Guidance on Unfair or 
Deceptive Acts or Practices (Mar. 22, 2002) (available at http://www.occ.treas.gov/ftp/advisory/2002-3.doc).
    \12\ See OTS ANPR, 72 FR at 43573.
---------------------------------------------------------------------------

    According to the FTC, an unfair act or practice will almost always 
represent a market failure or imperfection that prevents the forces of 
supply and demand from maximizing benefits and minimizing costs.\13\ 
Not all market failures or imperfections constitute unfair acts or 
practices, however. Instead, the central focus of the FTC's unfairness 
analysis is whether the act or practice causes substantial consumer 
injury.\14\
---------------------------------------------------------------------------

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

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

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

    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.'').
---------------------------------------------------------------------------

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

    \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.'').
---------------------------------------------------------------------------

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

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

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

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

    A representation or omission is material if it is likely to affect 
the consumer's conduct or decision regarding a product or service.\32\ 
Certain types of claims are presumed to be material, including express 
claims and

[[Page 28909]]

claims regarding the cost of a product or service.\33\
---------------------------------------------------------------------------

    \32\ Id. at 2, 6-7.
    \33\ See FTC Public Comment on OTS-2007-0015, at 21; FTC Policy 
Statement on Deception at 6; see also FTC v. Pantron I Corp., 33 
F.3d 1088, 1095-96 (9th Cir. 1994); In re Peacock Buick, 86 F.T.C. 
1532, 1562 (1975), aff'd 553 F.2d 97 (4th Cir. 1977).
---------------------------------------------------------------------------

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.
---------------------------------------------------------------------------

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

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

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

    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
---------------------------------------------------------------------------

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

    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.
---------------------------------------------------------------------------

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

    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.
---------------------------------------------------------------------------

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

    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.
---------------------------------------------------------------------------

    \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).''
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

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

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

    \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'').
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \45\ The Board has proposed additional revisions to these 
provisions elsewhere in today's Federal Register.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

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

    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.
---------------------------------------------------------------------------

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

    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.
---------------------------------------------------------------------------

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

    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.
---------------------------------------------------------------------------

    \50\ See GAO Credit Card Report at 25.
---------------------------------------------------------------------------

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

    \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).

---------------------------------------------------------------------------

[[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.
---------------------------------------------------------------------------

    \53\ The Board has proposed additional revisions to these 
provisions elsewhere in today's Federal Register.
---------------------------------------------------------------------------

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

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

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

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).
---------------------------------------------------------------------------

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

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

    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.
---------------------------------------------------------------------------

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

    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.
---------------------------------------------------------------------------

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

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

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

    \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'').

---------------------------------------------------------------------------

[[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.
---------------------------------------------------------------------------

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

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

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

    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.
---------------------------------------------------------------------------

    \70\ See 15 U.S.C. 1681m(d)(1)(C).
---------------------------------------------------------------------------

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

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

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

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

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

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

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

    \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.

---------------------------------------------------------------------------

[[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.
---------------------------------------------------------------------------

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

    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).
---------------------------------------------------------------------------

    \78\ For purposes of this rulemaking, as it relates to federal 
credit unions, the term ``consumer'' refers to natural person 
members.
---------------------------------------------------------------------------

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.
---------------------------------------------------------------------------

    \79\ See, e.g., American Bankers Association, ``Overdraft 
Protection: A Guide for Bankers'' at 18.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

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

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

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

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

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

    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.
---------------------------------------------------------------------------

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

----.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).
---------------------------------------------------------------------------

    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.)
---------------------------------------------------------------------------

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

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

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

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

    \93\ See 70 FR 8428 (Feb. 18, 2005).
---------------------------------------------------------------------------

    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.

[[Page 28945]]

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

[[Page 28948]]

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

[[Page 28953]]

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.

[[Page 28962]]

    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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