Federal Register, Volume 74 Issue 18 (Thursday, January 29, 2009)

[Federal Register Volume 74, Number 18 (Thursday, January 29, 2009)]
[Rules and Regulations]
[Pages 5244-5498]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E8-31185]

Federal Register / Vol. 74, No. 18 / Thursday, January 29, 2009 /
Rules and Regulations

[[Page 5244]]

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FEDERAL RESERVE SYSTEM

12 CFR Part 226

[Regulation Z; Docket No. R-1286]

Truth in Lending

AGENCY: Board of Governors of the Federal Reserve System.

ACTION: Final rule.

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SUMMARY: The Board is amending Regulation Z, which implements the Truth
in Lending Act (TILA), and the staff commentary to the regulation,
following a comprehensive review of TILA's rules for open-end
(revolving) credit that is not home-secured. Consumer testing was
conducted as a part of the review.
Except as otherwise noted, the changes apply solely to open-end
credit. Disclosures accompanying credit card applications and
solicitations must highlight fees and reasons penalty rates might be
applied, such as for paying late. Creditors are required to summarize
key terms at account opening and when terms are changed. Specific fees
are identified that must be disclosed to consumers in writing before an
account is opened, and creditors are given flexibility regarding how
and when to disclose other fees imposed as part of the open-end plan.
Costs for interest and fees are separately identified for the cycle and
year to date. Creditors are required to give 45 days' advance notice
prior to certain changes in terms and before the rate applicable to a
consumer's account is increased as a penalty. Rules of general
applicability such as the definition of open-end credit, dispute
resolution procedures, and payment processing limitations apply to all
open-end plans, including home-equity lines of credit. Rules regarding
the disclosure of debt cancellation and debt suspension agreements are
revised for both closed-end and open-end credit transactions. Loans
taken against employer-sponsored retirement plans are exempt from TILA
coverage.

DATES: The rule is effective July 1, 2010.

FOR FURTHER INFORMATION CONTACT: Benjamin K. Olson, Attorney, Amy Burke
or Vivian Wong, Senior Attorneys, or Krista Ayoub, Ky Tran-Trong, or
John Wood, Counsels, Division of Consumer and Community Affairs, Board
of Governors of the Federal Reserve System, at (202) 452-3667 or 452-
2412; for users of Telecommunications Device for the Deaf (TDD) only,
contact (202) 263-4869.

SUPPLEMENTARY INFORMATION:

I. Background on TILA and Regulation Z

Congress enacted the Truth in Lending Act (TILA) based on findings
that economic stability would be enhanced and competition among
consumer credit providers would be strengthened by the informed use of
credit resulting from consumers' awareness of the cost of credit. The
purposes of TILA are (1) to provide a meaningful disclosure of credit
terms to enable consumers to compare credit terms available in the
marketplace more readily and avoid the uninformed use of credit; and
(2) to protect consumers against inaccurate and unfair credit billing
and credit card practices.
TILA's disclosures differ depending on whether consumer credit is
an open-end (revolving) plan or a closed-end (installment) loan. TILA
also contains procedural and substantive protections for consumers.
TILA is implemented by the Board's Regulation Z. An Official Staff
Commentary interprets the requirements of Regulation Z. By statute,
creditors that follow in good faith Board or official staff
interpretations are insulated from civil liability, criminal penalties,
or administrative sanction.

II. Summary of Major Changes

The goal of the amendments to Regulation Z is 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. The changes are the result of the Board's review of the
provisions that apply to open-end (not home-secured) credit. The Board
is adopting changes to format, timing, and content requirements for the
five main types of open-end credit disclosures governed by Regulation
Z: (1) Credit and charge card application and solicitation disclosures;
(2) account-opening disclosures; (3) periodic statement disclosures;
(4) change-in-terms notices; and (5) advertising provisions. The Board
is also adopting additional protections that complement rules issued by
the Board and other federal banking agencies published elsewhere in
today's Federal Register regarding certain credit card practices.
Applications and solicitations. Format and content changes are
adopted to make the credit and charge card application and solicitation
disclosures more meaningful and easier for consumers to use. The
changes include:

Adopting new format requirements for the summary table,
including rules regarding: type size and use of boldface type for
certain key terms, and placement of information.
Revising content, including: a requirement that
creditors disclose the duration that penalty rates may be in effect,
a shorter disclosure about variable rates, new descriptions when a
grace period is offered on purchases or when no grace period is
offered, and a reference to consumer education materials on the
Board's Web site.
Account-opening disclosures. Requirements for cost disclosures
provided at account opening are adopted to make the information more
conspicuous and easier to read. The changes include:

Disclosing certain key terms in a summary table at
account opening, in order to summarize for consumers key information
that is most important to informed decision-making. The table is
substantially similar to the table required for credit and charge
card applications and solicitations.
Adopting a different approach to disclosing fees, to
provide greater clarity for identifying fees that must be disclosed.
In addition, creditors would have flexibility to disclose charges
(other than those in the summary table) in writing or orally.

Periodic statement disclosures. Revisions are adopted to make
disclosures on periodic statements more understandable, primarily by
making changes to the format requirements, such as by grouping fees and
interest charges together. The changes include:

Itemizing interest charges for different types of
transactions, such as purchases and cash advances, grouping interest
charges and fees separately, and providing separate totals of fees
and interest for the month and year-to-date.
Eliminating the requirement to disclose an ``effective
APR.''
Requiring disclosure of the effect of making only the
minimum required payment on the time to repay balances, as required
by the Bankruptcy Act.

Changes in consumer's interest rate and other account terms. The
final rule expands the circumstances under which consumers receive
written notice of changes in the terms (e.g., an increase in the
interest rate) applicable to their accounts, and increase the amount of
time these notices must be sent before the change becomes effective.
The changes include:

Increasing advance notice before a changed term can be
imposed from 15 to 45 days, to better allow consumers to obtain
alternative financing or change their account usage.
Requiring creditors to provide 45 days' prior notice
before the creditor increases a rate either due to a change in the
terms applicable to the consumer's account or due to the consumer's
delinquency or default or as a penalty.
When a change-in-terms notice accompanies a periodic
statement, requiring

[[Page 5245]]

a tabular disclosure on the front side of the periodic statement of
the key terms being changed.

Advertising provisions. Rules governing advertising of open-end
credit are revised to help ensure consumers better understand the
credit terms offered. These revisions include:

Requiring advertisements that state a periodic payment
amount on a plan offered to finance the purchase of goods or
services to state, in equal prominence to the periodic payment
amount, the time period required to pay the balance and the total of
payments if only periodic payments are made.
Permitting advertisements to refer to a rate as
``fixed'' only if the advertisement specifies a time period for
which the rate is fixed and the rate will not increase for any
reason during that time, or if a time period is not specified, if
the rate will not increase for any reason while the plan is open.

Additional protections. Rules are adopted that provide additional
protections to consumers. These include:

In setting reasonable cut-off hours for mailed payments
to be received on the due date and be considered timely, deeming 5
p.m. to be a reasonable time.
Requiring creditors that do not accept mailed payments
on the due date, such as on weekends or holidays, to treat a mailed
payment received on the next business day as timely.
Clarifying that advances that are separately
underwritten are generally not open-end credit, but closed-end
credit for which closed-end disclosures must be given.

III. The Board's Review of Open-end Credit Rules

A. Advance Notices of Proposed Rulemaking

December 2004 ANPR. The Board began a review of Regulation Z in
December 2004.\1\ The Board initiated its review of Regulation Z by
issuing an advance notice of proposed rulemaking (December 2004 ANPR).
69 FR 70925, December 8, 2004. At that time, the Board announced its
intent to conduct its review of Regulation Z in stages, focusing first
on the rules for open-end (revolving) credit accounts that are not
home-secured, chiefly general-purpose credit cards and retailer credit
card plans. The December 2004 ANPR sought public comment on a variety
of specific issues relating to three broad categories: the format of
open-end credit disclosures, the content of those disclosures, and the
substantive protections provided for open-end credit under the
regulation. The December 2004 ANPR solicited comment on the scope of
the Board's review, and also requested commenters to identify other
issues that the Board should address in the review. A summary of the
comments received in response to the December 2004 ANPR is contained in
the supplementary information to proposed revisions to Regulation Z
published by the Board in June 2007 (June 2007 Proposal). 72 FR 32948,
32949, June 14, 2007.
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\1\ The review was initiated pursuant to requirements of section
303 of the Riegle Community Development and Regulatory Improvement
Act of 1994, section 610(c) of the Regulatory Flexibility Act of
1980, and section 2222 of the Economic Growth and Regulatory
Paperwork Reduction Act of 1996.
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October 2005 ANPR. The Bankruptcy Abuse Prevention and Consumer
Protection Act of 2005 (the Bankruptcy Act) primarily amended the
federal bankruptcy code, but also contained several provisions amending
TILA. Public Law 109-8, 119 Stat. 23. The Bankruptcy Act's TILA
amendments principally deal with open-end credit accounts and require
new disclosures on periodic statements, on credit card applications and
solicitations, and in advertisements.
In October 2005, the Board published a second ANPR to solicit
comment on implementing the Bankruptcy Act amendments (October 2005
ANPR). 70 FR 60235, October 17, 2005. In the October 2005 ANPR, the
Board stated its intent to implement the Bankruptcy Act amendments as
part of the Board's ongoing review of Regulation Z's open-end credit
rules. A summary of the comments received in response to the October
2005 ANPR also is contained in the supplementary information to the
June 2007 Proposal. 72 FR 32948, 32950, June 14, 2007.

B. Notices of Proposed Rulemakings

June 2007 Proposal. The Board published proposed amendments to
Regulation Z's rules for open-end plans that are not home-secured in
June 2007. 72 FR 32948, June 14, 2007. The goal of the proposed
amendments to Regulation Z 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. In
developing the proposal, the Board conducted consumer research, in
addition to considering comments received on the two ANPRs.
Specifically, the Board retained a research and consulting firm (Macro
International) to assist the Board in using consumer testing to develop
proposed model forms, as discussed in C. Consumer Testing of this
section, below. The proposal would have made changes to format, timing,
and content requirements for the five main types of open-end credit
disclosures governed by Regulation Z: (1) Credit and charge card
application and solicitation disclosures; (2) account-opening
disclosures; (3) periodic statement disclosures; (4) change-in-terms
notices; and (5) advertising provisions.
For credit and charge card application and solicitation
disclosures, the June 2007 Proposal included new format requirements
for the summary table, such as rules regarding type size and use of
boldface type for certain key terms, placement of information, and the
use of cross-references. Content revisions included requiring creditors
to disclose the duration that penalty rates may be in effect and a
shorter disclosure about variable rates.
For disclosures provided at account opening, the June 2007 Proposal
called for creditors to disclose certain key terms in a summary table
that is substantially similar to the table required for credit and
charge card applications and solicitations. A different approach to
disclosing fees was proposed, to provide greater clarity for
identifying fees that must be disclosed, and to provide creditors with
flexibility to disclose charges (other than those in the summary table)
in writing or orally.
The June 2007 Proposal also included changes to the format
requirements for periodic statements, such as by grouping fees,
interest charges, and transactions together and providing separate
totals of fees and interest for the month and year-to-date. The
proposal also modified the provisions for disclosing the ``effective
APR,'' including format and terminology requirements to make it more
understandable. Because of concerns about the disclosure's
effectiveness, however, the Board also solicited comment on whether
this rate should be required to be disclosed. The proposal required
card issuers to disclose the effect of making only the minimum required
payment on repayment of balances, as required by the Bankruptcy Act.
For changes in consumer's interest rate and other account terms,
the June 2007 Proposal expanded the circumstances under which consumers
receive written notice of changes in the terms (e.g., an increase in
the interest rate) applicable to their accounts to include increases of
a rate due to the consumer's delinquency or default, and increased the
amount of time (from 15 to 45 days) these notices must be sent before
the change becomes effective.
For advertisements that state a minimum monthly payment on a plan
offered to finance the purchase of goods or services, the June 2007
Proposal required additional information about

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the time period required to pay the balance and the total of payments
if only minimum payments are made. The proposal also limited the
circumstances under which an advertisement may refer to a rate as
``fixed.''
The Board received over 2,500 comments on the June 2007 Proposal.
About 85% of these were from consumers and consumer groups, and of
those, nearly all (99%) were from individuals. Of the approximately 15%
of comment letters received from industry representatives, about 10%
were from financial institutions or their trade associations. The vast
majority (90%) of the industry letters were from credit unions and
their trade associations. Those latter comments mainly concerned a
proposed revision to the definition of open-end credit that could
affect how many credit unions currently structure their consumer loan
products.
In general, commenters generally supported the June 2007 Proposal
and the Board's use of consumer testing to develop revisions to
disclosure requirements. There was opposition to some aspects of the
proposal. For example, industry representatives opposed many of the
format requirements for periodic statements as being overly
prescriptive. They also opposed the Board's proposal to require
creditors to provide at least 45 days' advance notice before certain
key terms change or interest rates are increased due to default or
delinquency or as a penalty. Consumer groups opposed the Board's
proposed alternative that would eliminate the effective annual
percentage rate (effective APR) as a periodic statement disclosure.
Consumers and consumer groups also believed the Board's proposal was
too limited in scope and urged the Board to provide more substantive
protections and prohibit certain card issuer practices. Comments on
specific proposed revisions are discussed in VI. Section-by-Section
Analysis, below.
May 2008 Proposal. In May 2008, the Board published revisions to
several disclosures in the June 2007 Proposal (May 2008 Proposal). 73
FR 28866, May 19, 2008. In developing these revisions, the Board
considered comments received on the June 2007 Proposal and worked with
its testing consultant, Macro International, to conduct additional
consumer research, as discussed in C. Consumer Testing of this section,
below. In addition, the May 2008 Proposal contained proposed amendments
to Regulation Z that complemented a proposal published by the Board,
along with the Office of Thrift Supervision and the National Credit
Union Administration, to adopt rules prohibiting specific unfair acts
or practices with respect to consumer credit card accounts under their
authority under the Federal Trade Commission Act (FTC Act). See 15
U.S.C. 57a(f)(1). 73 FR 28904, May 19, 2008.
The May 2008 Proposal would have, among other things, required
changes for the summary table provided on or with application and
solicitations for credit and charge cards. Specifically, it would have
required different terminology than the term ``grace period'' as a
heading that describes whether the card issuer offers a grace period on
purchases, and added a de minimis dollar amount trigger of more than
$1.00 for disclosing minimum interest or finance charges.
Under the May 2008 Proposal, creditors assessing fees at account
opening that are 25% or more of the minimum credit limit would have
been required to provide in the account-opening summary table a notice
of the consumer's right to reject the plan after receiving disclosures
if the consumer has not used the account or paid a fee (other than
certain application fees).
Currently, creditors may require consumers to comply with
reasonable payment instructions. The May 2008 Proposal would have
deemed a cut-off hour for receiving mailed payments before 5 p.m. on
the due date to be an unreasonable instruction. The proposal also would
have prohibited creditors that set due dates on a weekend or holiday
but do not accept mailed payments on those days from considering a
payment received on the next business day as late for any reason.
For deferred interest plans that advertise ``no interest'' or
similar terms, the May 2008 Proposal would have added notice and
proximity requirements to require advertisements to state the
circumstances under which interest is charged from the date of purchase
and, if applicable, that the minimum payments required will not pay off
the balance in full by the end of the deferral period.
The Board received over 450 comments on the May 2008 Proposal.
About 88% of these were from consumers and consumer groups, and of
those, nearly all (98%) were from individuals. Six comments (1%) were
from government officials or organizations, and the remaining 11%
represented industry, such as financial institutions or their trade
associations and payment system networks.
Commenters generally supported the May 2008 Proposal, although like
the June 2007 Proposal, some commenters opposed aspects of the
proposal. For example, operational concerns and costs for system
changes were cited by industry representatives that opposed limitations
on when creditors may consider mailed payments to be untimely.
Regarding revised disclosure requirements, some industry and consumer
group commenters opposed proposed heading descriptions for accounts
offering a grace period, although these commenters were split between
those that favor retaining the current term (``grace period'') and
those that suggested other heading descriptions. Consumer groups
opposed the May 2008 proposal to permit card issuers and creditors to
omit charges in lieu of interest that are $1.00 or less from the table
provided with credit or charge card applications and solicitations and
the table provided at account opening. Some retailers opposed the
proposed advertising rules for deferred interest offers. Comments on
specific proposed revisions are discussed in VI. Section-by-Section
Analysis, below.

C. Consumer Testing

Developing the June 2007 Proposal. A principal goal for the
Regulation Z review was to produce revised and improved credit card
disclosures that consumers will be more likely to pay attention to,
understand, and use in their decisions, while at the same time not
creating undue burdens for creditors. In April 2006, the Board retained
a research and consulting firm (Macro International) that specializes
in designing and testing documents to conduct consumer testing to help
the Board review Regulation Z's credit card rules. Specifically, the
Board used consumer testing to develop model forms that were proposed
in June 2007 for the following credit card disclosures required by
Regulation Z:

Summary table disclosures provided in direct-mail
solicitations and applications;
Disclosures provided at account opening;
Periodic statement disclosures; and
Subsequent disclosures, such as notices provided when
key account terms are changed, and notices on checks provided to
access credit card accounts.

Working closely with the Board, Macro International conducted
several tests. Each round of testing was conducted in a different city
throughout the United States. In addition, the consumer testing groups
contained participants with a range of ethnicities, ages, educational
levels, and credit card behavior. The consumer testing groups also
contained participants likely to have subprime credit cards as well as
those likely to have prime credit cards.

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Initial research and design of disclosures for testing. In advance
of testing a series of revised disclosures, the Board conducted
research to learn what information consumers currently use in making
decisions about their credit card accounts, and how they currently use
disclosures that are provided to them. In May and June 2006, the Board
worked with Macro International to conduct two sets of focus groups
with credit card consumers. Through these focus groups, the Board
gathered information on what credit terms consumers usually consider
when shopping for a credit card, what information they find useful when
they receive a new credit card in the mail, and what information they
find useful on periodic statements. In August 2006, the Board worked
with Macro International to conduct one-on-one discussions with credit
card account holders. Consumers were asked to view existing sample
credit card disclosures. The goals of these interviews were: (1) To
learn more about what information consumers read when they receive
current credit card disclosures; (2) to research how easily consumers
can find various pieces of information in these disclosures; and (3) to
test consumers' understanding of certain credit card-related words and
phrases. In the fall of 2006, the Board worked with Macro International
to develop sample credit card disclosures to be used in the later
rounds of testing, taking into account information learned through the
focus groups and the one-on-one interviews.
Additional testing and revisions to disclosures. In late 2006 and
early 2007, the Board worked with Macro International to conduct four
rounds of one-on-one interviews (seven to nine participants per round),
where consumers were asked to view new sample credit card disclosures
developed by the Board and Macro International. The rounds of
interviews were conducted sequentially to allow for revisions to the
testing materials based on what was learned from the testing during
each previous round.
Several of the model forms contained in the June 2007 Proposal were
developed through the testing. A report summarizing the results of the
testing is available on the Board's public Web site: http://www.federalreserve.gov (May 2007 Macro Report).\2\ See also VI.
Section-by-Section Analysis, below. To illustrate by example:
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\2\ Design and Testing of Effective Truth in Lending
Disclosures, Macro International, May 16, 2007.

Testing participants generally read the summary table
provided in direct-mail credit card solicitations and applications
and ignored information presented outside of the table. The June
2007 Proposal would have required that information about events that
trigger penalty rates and about important fees (late-payment fees,
over-the-credit-limit fees, balance transfer fees, and cash advance
fees) be placed in the table. Currently, this information may be
placed outside the table.
With respect to the account-opening disclosures,
consumer testing indicates that consumers commonly do not review
their account agreements, which currently are often in small print
and dense prose. The June 2007 Proposal would have required
creditors to include a table summarizing the key terms applicable to
the account, similar to the table required for credit card
applications and solicitations. The goal of setting apart the most
important terms in this way is to better ensure that consumers are
apprised of those terms.
With respect to periodic statement disclosures, many
consumers more easily noticed the number and amount of fees when the
fees were itemized and grouped together with interest charges.
Consumers also noticed fees and interest charges more readily when
they were located near the disclosure of the transactions on the
account. The June 2007 Proposal would have required creditors to
group all fees together and describe them in a manner consistent
with consumers' general understanding of costs (``interest charge''
or ``fee''), without regard to whether the fees would be considered
``finance charges,'' ``other charges'' or neither under the
regulation.
With respect to change-in-terms notices, creditors
commonly provide notices about changes to terms or rates in the same
envelope with periodic statements. Consumer testing indicates that
consumers may not typically look at the notices if they are provided
as separate inserts given with periodic statements. In such cases
under the June 2007 Proposal, a table summarizing the change would
have been required on the periodic statement directly above the
transaction list, where consumers are more likely to notice the
changes.

Developing the May 2008 Proposal. In early 2008, the Board worked
with a testing consultant, Macro International, to revise model
disclosures published in the June 2007 Proposal in response to comments
received. In March 2008, the Board conducted an additional round of
one-on-one interviews on revised disclosures provided with applications
and solicitations, on periodic statements, and with checks that access
a credit card account. A report summarizing the results of the testing
is available on the Board's public Web site: http://www.federalreserve.gov (December 2008 Macro Report on Qualitative
Testing).\3\
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\3\ Design and Testing of Effective Truth in Lending
Disclosures: Findings from Qualitative Consumer Research, Macro
International, December 15, 2008.
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With respect to the summary table provided in direct-mail credit
card solicitations and applications, participants who read the heading
``How to Avoid Paying Interest on Purchases'' on the row describing a
grace period generally understood what the phrase meant. The May 2008
Proposal would have required issuers to use that phrase, or a
substantially similar phrase, as the row heading to describe an account
with a grace period for purchases, and the phrase ``Paying Interest,''
or a substantially similar phrase, if no grace period is offered. (The
same row headings were also proposed for tables provided at account-
opening and with checks that access credit card accounts.)
Prior to the May 2008 Proposal, the Board also tested a disclosure
of a use-by date applicable to checks that access a credit card
account. The responses given by testing participants indicated that
they generally did not understand prior to the testing that there may
be a use-by date applicable to an offer of a promotional rate for a
check that accesses a credit card account. However, the participants
that saw and read the tested language understood that a standard cash
advance rate, not the promotional rate, would apply if the check was
used after the date disclosed. Thus, in May 2008 the Board proposed to
require that creditors disclose any use-by date applicable to an offer
of a promotional rate for access checks.
Testing conducted after May 2008. In July and August 2008, the
Board worked with Macro International to conduct two additional rounds
of one-on-one interviews. See the December 2008 Macro Report on
Qualitative Testing, which summarizes the results of these interviews.
The results of this consumer testing were used to develop the final
rule, and are discussed in more detail in VI. Section-by-Section
Analysis.
For example, these rounds of interviews examined, among other
things, whether consumers understand the meaning of a minimum interest
charge disclosed in the summary table provided in direct-mail credit
card solicitations and applications. Most participants could correctly
explain the meaning of a minimum interest charge, and most participants
indicated that a minimum interest charge would not be important to them
because it is a relatively small sum of money ($1.50 on the forms
tested). The final rule accordingly establishes a threshold of $1.00;
if the minimum interest charge is $1.00 or less it is not required to
be disclosed in the table.
Consumers also were asked to review periodic statements that
disclosed an impending rate increase, with a tabular summary of the
change appearing on statement, as proposed by the Board in

[[Page 5248]]

June 2007. This testing was used in the development of final Samples G-
20 and G-21, which give creditors guidance on how advance notice of
impending rate increases or changes in terms should be presented.
Quantitative testing. In September 2008, the Board worked with
Macro International to develop a survey to conduct quantitative
testing. The goal of quantitative testing was to measure consumers'
comprehension and the usability of the newly-developed disclosures
relative to existing disclosures and formats. A report summarizing the
results of the testing is available on the Board's public Web site:
http://www.federalreserve.gov (December 2008 Macro Report on
Quantitative Testing).\4\
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\4\ Design and Testing of Effective Truth in Lending
Disclosures: Findings from Experimental Study, Macro International,
December 15, 2008.
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The quantitative consumer testing conducted for the Board consisted
of mall-intercept interviews of a total of 1,022 participants in seven
cities: Dallas, TX; Detroit, MI; Los Angeles, CA; Seattle, WA;
Springfield, IL; St. Louis, MO; and Tallahassee, FL. Each interview
lasted approximately fifteen minutes and consisted of showing the
participant models of the summary table provided in direct-mail credit
card solicitations and applications and the periodic statement and
asking a series of questions designed to assess the effectiveness of
certain formatting and content requirements proposed by the Board or
suggested by commenters.
With regard to the summary table provided in direct-mail credit
card solicitations and applications, consumers were asked questions
intended to gauge the impact of (i) combining rows for APRs applicable
to different transaction types, (ii) the inclusion of cross-references
in the table, and (iii) the impact of splitting the table onto two
pages instead of presenting the table entirely on a single page. More
details about the specific forms used in the testing as well as the
questions asked are available in the December 2008 Macro Report on
Quantitative Testing.
The results of the testing demonstrated that combining the rows for
APRs applicable to different transaction types that have the same
applicable rate did not have a statistically significant impact on
consumers' ability to identify those rates. Thus, the final rule
permits creditors to combine rows disclosing the rates for different
transaction types to which the same rate applies.
Similarly, the testing indicated that the inclusion of cross-
references in the table did not have a statistically significant impact
on consumers' ability to identify fees and rates applicable to their
accounts. As a result, the Board has not adopted the proposed
requirement that certain cross-references between certain rates and
fees be included in the table.
Finally, the testing demonstrated that consumers have more
difficulty locating fees applicable to their accounts when the table is
split on two pages and the fee appears on the second page of the table.
As discussed further in VI. Section-by-Section Analysis, the Board is
not requiring that creditors use a certain paper size or present the
entire table on a single page, but is requiring creditors that split
the table onto two or more pages to include a reference indicating that
additional important information regarding the account is presented on
a separate page.
The Board also tested whether consumers' understanding of payment
allocation practices could be improved through disclosure. The testing
showed that a disclosure, even of the relatively simple payment
allocation practice of applying payments to lower-interest balances
before higher-interest balances,\5\ improved understanding for very few
consumers. The disclosure also confused some consumers who had
understood payment allocation based on prior knowledge before reviewing
the disclosure. Based on this result, and because of substantive
protections adopted by the Board and other federal banking agencies
published elsewhere in this Federal Register, the Board is not
requiring a payment allocation disclosure in the summary table provided
in direct-mail solicitations and applications or at account-opening.
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\5\ Under final rules issued by the Board and other federal
banking agencies published elsewhere in today's Federal Register,
issuers are prohibited from allocating payments to low-interest
balances before higher-interest balances. However, the Board chose
to test a disclosure of this practice in quantitative consumer
testing because (i) it is currently the practice of many issuers and
(ii) to test one of the simpler payment allocation methods on the
assumption that consumers might be more likely to understand
disclosure of a simpler payment allocation method than a more
complex one.
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With regard to periodic statements, the Board's testing consultant
examined (i) the effectiveness of grouping transactions and fees on the
periodic statement, (ii) consumers' understanding of the effective APR
disclosure, (iii) the formatting and location of change-in-terms
notices included with periodic statements, and (iv) the formatting and
grouping of various payment information, including warnings about the
effect of late payments and making only the minimum payment.
The testing demonstrated that grouping of fees and transactions, by
type, separately on the periodic statement improved consumers' ability
to find fees that were charged to the account and also moderately
improved consumers' ability to locate transactions. Grouping fees
separately from transactions made it more difficult for some consumers
to match a transaction fee to the relevant transaction, although most
consumers could successfully match the transaction and fee regardless
of how the transaction list was presented. As discussed in more detail
in VI. Section-by-Section Analysis, the final rule requires grouping of
fees and interest separate from transactions on the periodic statement,
but the Board has provided flexibility for issuers to disclose
transactions on the periodic statement.
With regard to the effective APR, testing overwhelmingly showed
that few consumers understood the disclosure and that some consumers
were less able to locate the interest rate applicable to cash advances
when the effective APR also was disclosed on the periodic statement.
Accordingly, and for the additional reasons discussed in more detail in
VI. Section-by-Section Analysis, the final rule eliminates the
requirement to disclose an effective APR for open-end (not home-
secured) credit.
When a change-in-terms notice for the APR for purchases was
included with the periodic statement, disclosure of a tabular summary
of the change on the front of the statement moderately improved
consumers' ability to identify the rate that would apply when the
changes take effect. However, whether the tabular summary was presented
on page one or page two of the statement did not have an effect on the
ability of participants to notice or comprehend the disclosure. Thus,
the final rule requires a tabular summary of key changes on the
periodic statement, when a change-in-terms notice is included with the
periodic statement, but permits creditors to disclose that summary on
the front of any page of the statement.
The formatting of certain grouped information regarding payments,
including the amount of the minimum payment, due date, and warnings
regarding the effect of making late or minimum payments did not have an
effect on consumers' ability to notice or comprehend these disclosures.
Thus, while the final rule requires that this

[[Page 5249]]

information be grouped, creditors are not required to format this
information in any particular manner.

D. Other Outreach and Research

Throughout the Board's review of Regulation Z's rules affecting
open-end (not home-secured) plans, the Board solicited input from
members of the Board's Consumer Advisory Council on various issues.
During 2005 and 2006, for example, the Council discussed the
feasibility and advisability of reviewing Regulation Z in stages, ways
to improve the summary table provided on or with credit card
applications and solicitations, issues related to TILA's substantive
protections (including dispute resolution procedures), and issues
related to the Bankruptcy Act amendments. In 2007 and 2008, the Council
discussed the June 2007 and May 2008 Proposals, respectively, and
comments received by the Board in response to the proposals. In
addition, Board met or conducted conference calls with various industry
and consumer group representatives throughout the review process
leading to the June 2007 and May 2008 Proposals. Consistent with the
Bankruptcy Act, the Board also met with the other federal banking
agencies, the National Credit Union Administration (NCUA), and the
Federal Trade Commission (FTC) regarding the clear and conspicuous
disclosure of certain information required by the Bankruptcy Act. The
Board also reviewed disclosures currently provided by creditors,
consumer complaints received by the federal banking agencies, and
surveys on credit card usage to help inform the June 2007 Proposal.\6\
---------------------------------------------------------------------------

\6\ Surveys reviewed include: Thomas A. Durkin, Credit Cards:
Use and Consumer Attitudes, 1970-2000, FEDERAL RESERVE BULLETIN,
(September 2000); Thomas A. Durkin, Consumers and Credit
Disclosures: Credit Cards and Credit Insurance, FEDERAL RESERVE
BULLETIN (April 2002).
---------------------------------------------------------------------------

E. Reviewing Regulation Z in Stages

The Board is proceeding with a review of Regulation Z in stages.
This final rule largely contains revisions to rules affecting open-end
plans other than home-equity lines of credit (HELOCs) subject to Sec.
226.5b. Possible revisions to rules affecting HELOCs will be considered
in the Board's review of home-secured credit, currently underway. To
minimize compliance burden for creditors offering HELOCs as well as
other open-end credit, many of the open-end rules have been reorganized
to delineate clearly the requirements for HELOCs and other forms of
open-end credit. Although this reorganization increases the size of the
regulation and commentary, the Board believes a clear delineation of
rules for HELOCs and other forms of open-end credit pending the review
of HELOC rules provides a clear compliance benefit to creditors.
In addition, as discussed elsewhere in this section and in VI.
Section-by-Section Analysis, the Board has eliminated the requirement
to disclose an effective annual percentage rate for open-end (not home-
secured) credit. For a home-equity plan subject to Sec. 226.5b, under
the final rule a creditor has the option to disclose an effective APR
(according to the current rules in Regulation Z for computing and
disclosing the effective APR), or not to disclose an effective APR. The
Board notes that the rules for computing and disclosing the effective
APR for HELOCs could be the subject of comment during the review of
rules affecting HELOCs.

IV. The Board's Rulemaking Authority

TILA mandates that the Board prescribe regulations to carry out the
purposes of the act. TILA also specifically authorizes the Board, among
other things, to do the following:

Issue regulations that contain such classifications,
differentiations, or other provisions, or that provide for such
adjustments and exceptions for any class of transactions, that in
the Board's judgment are necessary or proper to effectuate the
purposes of TILA, facilitate compliance with the act, or prevent
circumvention or evasion. 15 U.S.C. 1604(a).
Exempt from all or part of TILA any class of
transactions if the Board determines that TILA coverage does not
provide a meaningful benefit to consumers in the form of useful
information or protection. The Board must consider factors
identified in the act and publish its rationale at the time it
proposes an exemption for comment. 15 U.S.C. 1604(f).
Add or modify information required to be disclosed with
credit and charge card applications or solicitations if the Board
determines the action is necessary to carry out the purposes of, or
prevent evasions of, the application and solicitation disclosure
rules. 15 U.S.C. 1637(c)(5).
Require disclosures in advertisements of open-end
plans. 15 U.S.C. 1663.

In adopting this final rule, the Board has considered the
information collected from comment letters submitted in response to its
ANPRs and the June 2007 and May 2008 Proposals, its experience in
implementing and enforcing Regulation Z, and the results obtained from
testing various disclosure options in controlled consumer tests. For
the reasons discussed in this notice, the Board believes this final
rule is appropriate to effectuate the purposes of TILA, to prevent the
circumvention or evasion of TILA, and to facilitate compliance with the
act.
Also as explained in this notice, the Board believes that the
specific exemptions adopted are appropriate because the existing
requirements do not provide a meaningful benefit to consumers in the
form of useful information or protection. In reaching this conclusion,
the Board considered (1) the amount of the loan and whether the
disclosure provides a benefit to consumers who are parties to the
transaction involving a loan of such amount; (2) the extent to which
the requirement complicates, hinders, or makes more expensive the
credit process; (3) the status of the borrower, including any related
financial arrangements of the borrower, the financial sophistication of
the borrower relative to the type of transaction, and the importance to
the borrower of the credit, related supporting property, and coverage
under TILA; (4) whether the loan is secured by the principal residence
of the borrower; and (5) whether the exemption would undermine the goal
of consumer protection. The rationales for these exemptions are
explained in VI. Section-by-Section Analysis, below.

V. Discussion of Major Revisions

The goal of the revisions adopted in this final rule is to improve
the effectiveness of the Regulation Z disclosures that must be provided
to consumers for open-end accounts. A summary of the key account terms
must accompany applications and solicitations for credit card accounts.
For all open-end credit plans, creditors must disclose costs and terms
at account opening, generally before the first transaction. Consumers
must receive periodic statements of account activity, and creditors
must provide notice before certain changes in the account terms may
become effective.
To shop for and understand the cost of credit, consumers must be
able to identify and understand the key terms of open-end accounts.
However, the terms and conditions that impact credit card account
pricing can be complex. The revisions to Regulation Z are intended to
provide the most essential information to consumers when the
information would be most useful to them, with content and formats that
are clear and conspicuous. The revisions are expected to improve
consumers' ability to make informed credit decisions and enhance
competition among credit card issuers. Many of the changes are based on
the consumer testing that was conducted in

[[Page 5250]]

connection with the review of Regulation Z.
In considering whether to adopt the revisions, the Board has also
sought to balance the potential benefits for consumers with the
compliance burdens imposed on creditors. For example, the revisions
seek to provide greater certainty to creditors in identifying what
costs must be disclosed for open-end plans, and when those costs must
be disclosed. The Board has adopted the proposal that fees must be
grouped on periodic statements, but has withdrawn from the final rule
proposed requirements that would have required additional formatting
changes to the periodic statement, such as the grouping of
transactions, for which the burden to creditors may exceed the benefit
to consumers. More effective disclosures may also reduce customer
confusion and misunderstanding, which may also ease creditors' costs
relating to consumer complaints and inquiries.

A. Credit Card Applications and Solicitations

Under Regulation Z, credit and charge card issuers are required to
provide information about key costs and terms with their applications
and solicitations.\7\ This information is abbreviated, to help
consumers focus on only the most important terms and decide whether to
apply for the credit card account. If consumers respond to the offer
and are issued a credit card, creditors must provide more detailed
disclosures at account opening, generally before the first transaction
occurs.
---------------------------------------------------------------------------

\7\ Charge cards are a type of credit card for which full
payment is typically expected upon receipt of the billing statement.
To ease discussion, this notice will refer simply to ``credit
cards.''
---------------------------------------------------------------------------

The application and solicitation disclosures are considered among
the most effective TILA disclosures principally because they must be
presented in a standardized table with headings, content, and format
substantially similar to the model forms published by the Board. In
2001, the Board revised Regulation Z to enhance the application and
solicitation disclosures by adding rules and guidance concerning the
minimum type size and requiring additional fee disclosures.
Proposal. The proposal added new format requirements for the
summary table,\8\ including rules regarding type size and use of
boldface type for certain key terms, placement of information, and the
use of cross-references. Content revisions included a requirement that
creditors disclose the duration that penalty rates may be in effect, a
shorter disclosure about variable rates, and a reference to consumer
education materials available on the Board's Web site.
---------------------------------------------------------------------------

\8\ This table is commonly referred to as the ``Schumer box.''
---------------------------------------------------------------------------

Summary of final rule.
Penalty pricing. The final rule makes several revisions that seek
to improve consumers' understanding of default or penalty pricing.
Currently, credit card issuers must disclose inside the table the APR
that will apply in the event of the consumer's ``default.'' Some
creditors define a ``default'' as making one late payment or exceeding
the credit limit once. The actions that may trigger the penalty APR are
currently required to be disclosed outside the table.
Consumer testing indicated that many consumers did not notice the
information about penalty pricing when it was disclosed outside the
table. Under the final rule, card issuers are required to include in
the table the specific actions that trigger penalty APRs (such as a
late payment), the rate that will apply and the circumstances under
which the penalty rate will expire or, if true, the fact that the
penalty rate could apply indefinitely. The regulation requires card
issuers to use the term ``penalty APR'' because the testing
demonstrated that some consumers are confused by the term ``default
rate.''
Similarly, the final rule requires card issuers to disclose inside
(rather than outside) the table the fees for paying late, exceeding a
credit limit, or making a payment that is returned. Cash advance fees
and balance transfer fees also must be disclosed inside the table. This
change is also based on consumer testing results; fees disclosed
outside the table were often not noticed. Requiring card issuers to
disclose returned-payment fees, required credit insurance, debt
suspension, or debt cancellation coverage fees, and foreign transaction
fees are new disclosures.
Variable-rate information. Currently, applications and
solicitations offering variable APRs must disclose inside the table the
index or formula used to make adjustments and the amount of any margin
that is added. Additional details, such as how often the rate may
change, must be disclosed outside the table. Under the final rule,
information about variable APRs is reduced to a single phrase
indicating the APR varies ``with the market,'' along with a reference
to the type of index, such as ``Prime.'' Consumer testing indicated
that few consumers use the variable-rate information when shopping for
a card. Moreover, participants were distracted or confused by details
about margin values, how often the rate may change, and where an index
can be found.
Subprime accounts. The final rule addresses a concern that has been
raised about subprime credit cards, which are generally offered to
consumers with low credit scores or credit problems. Subprime credit
cards often have substantial fees associated with opening the account.
Typically, fees for the issuance or availability of credit are billed
to consumers on the first periodic statement, and can substantially
reduce the amount of credit available to the consumer. For example, the
initial fees on an account with a $250 credit limit may reduce the
available credit to less than $100. Consumer complaints received by the
federal banking agencies state that consumers were unaware when they
applied for subprime cards of how little credit would be available
after all the fees were assessed at account opening.
The final rule requires additional disclosures if the card issuer
requires fees or a security deposit to issue the card that are 15
percent or more of the minimum credit limit offered for the account. In
such cases, the card issuer is required to include an example in the
table of the amount of available credit the consumer would have after
paying the fees or security deposit, assuming the consumer receives the
minimum credit limit.
Balance computation methods. TILA requires creditors to identify
their balance computation method by name, and Regulation Z requires
that the disclosure be inside the table. However, consumer testing
demonstrates that these names hold little meaning for consumers, and
that consumers do not consider such information when shopping for
accounts. The final rule requires creditors to place the name of the
balance computation method outside the table, so that the disclosure
does not detract from information that is more important to consumers.
Description of grace period. The final rule requires card issuers
to use the heading ``How to Avoid Paying Interest on Purchases'' on the
row describing a grace period offered on all purchases, and the phrase
``Paying Interest'' if a grace period is not offered on all purchases.
Consumer testing indicates consumers do not understand the term ``grace
period'' as a description of actions consumers must take to avoid
paying interest.

B. Account-Opening Disclosures

Regulation Z requires creditors to disclose costs and terms before
the first transaction is made on the account. The disclosures must
specify the

[[Page 5251]]

circumstances under which a ``finance charge'' may be imposed and how
it will be determined. A ``finance charge'' is any charge that may be
imposed as a condition of or an incident to the extension of credit,
and includes, for example, interest, transaction charges, and minimum
charges. The finance charge disclosures include a disclosure of each
periodic rate of interest that may be applied to an outstanding balance
(e.g., purchases, cash advances) as well as the corresponding annual
percentage rate (APR). Creditors must also explain any grace period for
making a payment without incurring a finance charge. In addition, they
must disclose the amount of any charge other than a finance charge that
may be imposed as part of the credit plan (``other charges''), such as
a late-payment charge. Consumers' rights and responsibilities in the
case of unauthorized use or billing disputes must also be explained.
Currently, there are few format requirements for these account-opening
disclosures, which are typically interspersed among other contractual
terms in the creditor's account agreement.
Proposal. Certain key terms were proposed to be disclosed in a
summary table at account opening, which would be substantially similar
to the table required for applications and solicitations. A different
approach to disclosing fees was proposed, including providing creditors
with flexibility to disclose charges (other than those in the summary
table) in writing or orally after the account is opened, but before the
charge is imposed.
Summary of final rule.
Account-opening summary table. Account-opening disclosures have
often been criticized because the key terms TILA requires to be
disclosed are often interspersed within the credit agreements, and such
agreements are long and complex. To address this concern and make the
information more conspicuous, the final rule requires creditors to
provide at account-opening a table summarizing key terms. Creditors may
continue, however, to provide other account-opening disclosures, aside
from the fees and terms specified in the table, with other terms in
their account agreements.
The new table provided at account opening is substantially similar
to the table provided with direct-mail credit card applications and
solicitations. Consumer testing indicates that consumers generally are
aware of the table on applications and solicitations. Consumer testing
also indicates that consumers may not typically read their account
agreements, which are often in small print and dense prose. Thus,
setting apart the most important terms in a summary table will better
ensure that consumers are aware of those terms.
The table required at account opening includes more information
than the table required at application. For example, it includes a
disclosure whether or not there is a grace period for all features of
an account. For subprime credit cards, to give consumers the
opportunity to avoid fees, the final rule also requires issuers to
provide consumers at account opening, a notice about the right to
reject a plan when fees have been charged but the consumer has not used
the plan. However, to reduce compliance burden for creditors that
provide account-opening disclosures at application, the final rule
allows creditors to provide the more specific and inclusive account-
opening table at application in lieu of the table otherwise required at
application.
How charges are disclosed. Under the current rules, a creditor must
disclose any ``finance charge'' or ``other charge'' in the account-
opening disclosures. A subsequent notice is required if one of the fees
disclosed at account opening increases or if certain fees are newly
introduced during the life of the plan. The terms ``finance charge''
and ``other charge'' are given broad and flexible meanings in the
regulation and commentary. This ensures that TILA adapts to changing
conditions, but it also creates uncertainty. The distinctions among
finance charges, other charges, and charges that do not fall into
either category are not always clear. As creditors develop new kinds of
services, some find it difficult to determine if associated charges for
the new services meet the standard for a ``finance charge'' or ``other
charge'' or are not covered by TILA at all. This uncertainty can pose
legal risks for creditors that act in good faith to comply with the
law. Examples of included or excluded charges are in the regulation and
commentary, but these examples cannot provide definitive guidance in
all cases. Creditors are subject to civil liability and administrative
enforcement for under-disclosing the finance charge or otherwise making
erroneous disclosures, so the consequences of an error can be
significant. Furthermore, over-disclosure of rates and finance charges
is not permitted by Regulation Z for open-end credit.
The fee disclosure rules also have been criticized as being
outdated. These rules require creditors to provide fee disclosures at
account opening, which may be months, and possibly years, before a
particular disclosure is relevant to the consumer, such as when the
consumer calls the creditor to request a service for which a fee is
imposed. In addition, an account-related transaction may occur by
telephone, when a written disclosure is not feasible.
The final rule is intended to respond to these criticisms while
still giving full effect to TILA's requirement to disclose credit
charges before they are imposed. Accordingly, the rules are revised to
(1) specify precisely the charges that creditors must disclose in
writing at account opening (interest, minimum charges, transaction
fees, annual fees, and penalty fees such as for paying late), which
must be listed in the summary table, and; (2) permit creditors to
disclose other less critical charges orally or in writing before the
consumer agrees to or becomes obligated to pay the charge. Although the
final rule permits creditors to disclose certain costs orally for
purposes of TILA, the Board anticipates that creditors will continue to
identify fees in the account agreement for contract or other reasons.
Under the final rule, some charges are covered by TILA that the
current regulation, as interpreted by the staff commentary, excludes
from TILA coverage, such as fees for expedited payment and expedited
delivery. It may not have been useful to consumers to cover such
charges under TILA when such coverage would have meant only that the
charges were disclosed long before they became relevant to the
consumer. The Board believes it will be useful to consumers to cover
such charges under TILA as part of a rule that permits their disclosure
at a time and in a manner that consumers would be likely to notice the
disclosure of the charge. Further, as new services (and associated
charges) are developed, the proposal minimizes risk of civil liability
as well as inconsistency among creditors associated with the
determination as to whether a fee is a finance charge or an other
charge, or is not covered by TILA at all.

C. Periodic Statements

Creditors are required to provide periodic statements reflecting
the account activity for the billing cycle (typically, about one
month). In addition to identifying each transaction on the account,
creditors must identify each ``finance charge'' using that term, and
each ``other charge'' assessed against the account during the statement
period. When a periodic interest rate is applied to an outstanding
balance to compute the finance charge, creditors must disclose the
periodic rate and its corresponding APR. Creditors must also disclose
an ``effective'' or ``historical''

[[Page 5252]]

APR for the billing cycle, which, unlike the corresponding APR,
includes not just interest but also finance charges imposed in the form
of fees (such as cash advance fees or balance transfer fees). Periodic
statements must also state the time period a consumer has to pay an
outstanding balance to avoid additional finance charges (the ``grace
period''), if applicable.
Proposal. Interest charges for different types of transactions,
such as purchases and cash advances would be itemized, and separate
totals of fees and interest for the month and year-to-date would be
disclosed. The proposal offered two approaches regarding the
``effective APR.'' One modified the provisions for disclosing the
``effective APR,'' including format and terminology requirements,\9\
and the other solicited comment on whether this rate should be required
to be disclosed. To implement changes required by the Bankruptcy Act,
the proposal required creditors to disclose of the effect of making
only the minimum required payment on repayment of balances.
---------------------------------------------------------------------------

\9\ The ``effective'' APR reflects interest and other finance
charges such as cash advance fees or balance transfer fees imposed
for the billing cycle.
---------------------------------------------------------------------------

Summary of final rule.
Fees and interest costs. The final rule contains a number of
revisions to the periodic statement to improve consumers' understanding
of fees and interest costs. Currently, creditors must identify on
periodic statements any ``finance charges'' added to the account during
the billing cycle, and creditors typically intersperse these charges
with other transactions, such as purchases, chronologically on the
statement. The finance charges must be itemized by type. Thus, interest
charges might be described as ``finance charges due to periodic
rates.'' Charges such as late payment fees, which are not ``finance
charges,'' are typically disclosed individually and are interspersed
among other transactions.
Consumer testing indicated that consumers generally understand that
``interest'' is the cost that results from applying a rate to a balance
over time and distinguish ``interest'' from other fees, such as a cash
advance fee or a late payment fee. Consumer testing also indicated that
many consumers more easily determine the number and amount of fees when
the fees are itemized and grouped together.
Thus, under the final rule, creditors are required to group all
fees together and to separately itemize interest charges by transaction
type, and describe them in a manner consistent with consumers' general
understanding of costs (``interest charge'' or ``fee''), without regard
to whether the charges are considered ``finance charges,'' ``other
charges,'' or neither. Interest charges must be identified by type (for
example, interest on purchases or interest on balance transfers) as
must fees (for example, cash advance fee or late-payment fee).
Consumer testing also indicated that many consumers more quickly
and accurately determined the total dollar cost of credit for the
billing cycle when a total dollar amount of fees for the cycle was
disclosed. Thus, the final rule requires creditors to disclose the (1)
total fees and (2) total interest imposed for the cycle. Creditors must
also disclose year-to-date totals for interest charges and fees. For
many consumers, costs disclosed in dollars are more readily understood
than costs disclosed as percentage rates. The year-to-date figures are
intended to assist consumers in better understanding the overall cost
of their credit account and are an important disclosure and an
effective aid in understanding annualized costs. The Board believes
these figures will better ensure consumers understand the cost of
credit than the effective APR currently provided on periodic
statements.
The effective APR. The ``effective'' APR disclosed on periodic
statements reflects the cost of interest and certain other finance
charges imposed during the statement period. For example, for a cash
advance, the effective APR reflects both interest and any flat or
proportional fee assessed for the advance.
For the reasons discussed below, the Board is eliminating the
requirement to disclose the effective APR.
Consumer testing conducted prior to the June 2007 Proposal, in
March 2008, and after the May 2008 Proposal demonstrates that consumers
find the current disclosure of an APR that combines rates and fees to
be confusing. The June 2007 Proposal would have required disclosure of
the nominal interest rate and fees in a manner that is more readily
understandable and comparable across institutions. The Board believes
that this approach can better inform consumers and further the goals of
consumer protection and the informed use of credit for all types of
open-end credit.
The Board also considered whether there were potentially competing
considerations that would suggest retention of the requirement to
disclose an effective APR. First, the Board considered the extent to
which ``sticker shock'' from the effective APR benefits consumers, even
if the disclosure may not enable consumers to meaningfully compare
costs from month to month or between different credit products. A
second consideration is whether the effective APR may be a hedge
against fee-intensive pricing by creditors, and if so, the extent to
which it promotes transparency. On balance, however, the Board believes
that the benefits of eliminating the requirement to disclose the
effective APR outweigh these considerations.
The consumer testing conducted for the Board strongly supports this
determination. Although in one round of testing conducted prior to the
June 2007 Proposal a majority of participants evidenced some
understanding of the effective APR, the overall results of the testing
show that most consumers do not correctly understand the effective APR.
Some consumers in the testing offered no explanation of the difference
between the corresponding and effective APR, and others appeared to
have an incorrect understanding. The results were similar in the
consumer testing conducted in March 2008 and after the May 2008
proposal; in all rounds of the testing, a majority of participants did
not offer a correct explanation of the effective APR. In quantitative
testing conducted for the Board in the fall of 2008, only 7% of
consumers answered a question correctly that was designed to test their
understanding of the effective APR. In addition, including the
effective APR on the statement had an adverse effect on some consumers'
ability to identify the interest rate applicable to the account.
Even if some consumers have some understanding of the effective
APR, the Board believes sound reasons support eliminating the
requirement for its disclosure. Disclosure of the effective APR on
periodic statements does not assist consumers in credit shopping,
because the effective APR disclosed on a statement on one credit card
account cannot be compared to the nominal APR disclosed on a
solicitation or application for another credit card account. In
addition, even for the same account, the effective APR for a given
cycle is unlikely to accurately indicate the cost of credit in a future
cycle, because if any of several factors (such as timing of
transactions and payments) is different in the future cycle, the
effective APR will be different even if the amount of the transaction
is the same. As to suggestions that the effective APR for a particular
billing cycle provides the consumer a rough indication that it is
costly to engage in transactions that trigger transaction fees, the
Board believes the requirements adopted in the final rule to disclose

[[Page 5253]]

interest and fee totals for the cycle and year-to-date will better
serve the same purpose. In addition, the interest and fee total
disclosure requirements should address concerns that elimination of the
effective APR would remove disincentives for creditors to introduce new
fees.
Transactions. Currently, there are no format requirements for
disclosing different types of transactions, such as purchases, cash
advances, and balance transfers on periodic statements. Often,
transactions are presented together in chronological order. Consumer
testing indicated that participants found it helpful to have similar
types of transactions grouped together on the statement. Consumers also
found it helpful, within the broad grouping of fees and transactions,
when transactions were segregated by type (e.g., listing all purchases
together, separate from cash advances or balance transfers). Further,
consumers noticed fees and interest charges more readily when they were
located near the transactions. For these reasons, the final rule
requires creditors to group fees and interest charges together,
itemized by type, with the list of transactions. The Board has not
adopted the proposed requirement that creditors group transactions by
type on the periodic statement. In consumer testing, most consumers
indicated that they review the transactions on their periodic
statements, and grouping transactions together only moderately improved
consumers' ability to locate transactions compared to when the
transaction list was presented chronologically. In addition, the cost
to creditors of reformatting periodic statements to group transactions
by type appears to outweigh any benefit to consumers.
Late payments. Currently, creditors must disclose the date by which
consumers must pay a balance to avoid finance charges. Creditors must
also disclose any cut-off time for receiving payments on the payment
due date; this is usually disclosed on the reverse side of periodic
statements. The Bankruptcy Act amendments expressly require creditors
to disclose the payment due date (or if different, the date after which
a late-payment fee may be imposed) along with the amount of the late-
payment fee.
Under the final rule, creditors are required to disclose the
payment due date on the front side of the periodic statement. Creditors
also are required to disclose, in close proximity to the due date, the
amount of the late-payment fee and the penalty APR that could be
triggered by a late payment, to alert consumers to the consequence of
paying late.
Minimum payments. The Bankruptcy Act requires creditors offering
open-end plans to provide a warning about the effects of making only
minimum payments. The proposal would implement this requirement solely
for credit card issuers. Under the final rule, card issuers must
provide (1) a ``warning'' statement indicating that making only the
minimum payment will increase the interest the consumer pays and the
time it takes to repay the consumer's balance; (2) a hypothetical
example of how long it would take to pay a specified balance in full if
only minimum payments are made; and (3) a toll-free telephone number
that consumers may call to obtain an estimate of the time it would take
to repay their actual account balance using minimum payments. Most card
issuers must establish and maintain their own toll-free telephone
numbers to provide the repayment estimates. However, the Board is
required to establish and maintain, for two years, a toll-free
telephone number for creditors that are depository institutions having
assets of $250 million or less. This number is for the customers of
those institutions to call to get answers to questions about how long
it will take to pay their account in full making only the minimum
payment. The FTC must maintain a similar toll-free telephone number for
use by customers of creditors that are not depository institutions. In
order to standardize the information provided to consumers through the
toll-free telephone numbers, the Bankruptcy Act amendments direct the
Board to prepare a ``table'' illustrating the approximate number of
months it would take to repay an outstanding balance if the consumer
pays only the required minimum monthly payments and if no other
advances are made (``generic repayment estimate'').
Pursuant to the Bankruptcy Act amendments, the final rule also
allows a card issuer to establish a toll-free telephone number to
provide customers with the actual number of months that it will take
consumers to repay their outstanding balance (``actual repayment
disclosure'') instead of providing an estimate based on the Board-
created table. A card issuer that does so need not include a
hypothetical example on its periodic statements, but must disclose the
warning statement and the toll-free telephone number.
The final rule also allows card issuers to provide the actual
repayment disclosure on their periodic statements. Card issuers are
encouraged to use this approach. Participants in consumer testing who
typically carry credit card balances (revolvers) found an estimated
repayment period based on terms that apply to their own account more
useful than a hypothetical example. To encourage card issuers to
provide the actual repayment disclosure on their periodic statements,
the final rule provides that if card issuers do so, they need not
disclose the warning, the hypothetical example and a toll-free
telephone number on the periodic statement, nor need they maintain a
toll-free telephone number to provide the actual repayment disclosure.
As described above, the Bankruptcy Act also requires the Board to
develop a ``table'' that creditors, the Board and the FTC must use to
create generic repayment estimates. Instead of creating a table, the
final rule contains guidance for how to calculate generic repayment
estimates. Consumers that call the toll-free telephone number may be
prompted to input information about their outstanding balance and the
APR applicable to their account. Although issuers have the ability to
program their systems to obtain consumers' account information from
their account management systems, for the reasons discussed in the
section-by-section analysis to Appendix M1 to part 226, the final rule
does not require issuers to do so.

D. Changes in Consumer's Interest Rate and Other Account Terms

Regulation Z requires creditors to provide advance written notice
of some changes to the terms of an open-end plan. The proposal included
several revisions to Regulation Z's requirements for notifying
consumers about such changes.
Currently, Regulation Z requires creditors to send, in most cases,
notices 15 days before the effective date of certain changes in the
account terms. However, creditors need not inform consumers in advance
if the rate applicable to their account increases due to default or
delinquency. Thus, consumers may not realize until they receive their
monthly statement for a billing cycle that their late payment triggered
application of the higher penalty rate, effective the first day of the
month's statement.
Proposal. The proposal generally would have increased advance
notice before a changed term, such as a rate increase due to a change
in the contract, can be imposed from 15 to 45 days. The proposal also
would have required creditors to provide 45 days' prior notice before
the creditor increases a rate due to the consumer's delinquency

[[Page 5254]]

or default or as a penalty. When a change-in-terms notice accompanies a
periodic statement, the proposal would have required a tabular
disclosure on the front of the first page of the periodic statement of
the key terms being changed.
Summary of final rule.
Timing. Under the final rule, creditors generally must provide 45
days' advance notice prior to a change in any term required to be
disclosed in the tabular disclosure provided at account-opening, as
discussed above. This increase in the advance notice for a change in
terms is intended to give consumers approximately a month to act,
either to change their usage of the account or to find an alternative
source of financing before the change takes effect.
Penalty rates. Currently, creditors must inform consumers about
rates that are increased due to default or delinquency, but not in
advance of implementation of the increase. Contractual thresholds for
default are sometimes very low, and currently penalty pricing commonly
applies to all existing balances, including low-rate promotional
balances.
The final rule generally requires creditors to provide 45 days'
advance notice before rate increases due to the consumer's delinquency
or default or as a penalty, as proposed. Permitting creditors to apply
the penalty rate immediately upon the consumer triggering the rate may
lead to undue surprise and insufficient time for a consumer to consider
alternative options regarding use of the card. Even though the final
rule contain provisions intended to improve disclosure of penalty
pricing at account opening, the Board believes that consumers will be
more likely to notice and be motivated to act if they receive a
specific notice alerting them of an imminent rate increase, rather than
a general disclosure stating the circumstances when a rate might
increase.
When asked which terms were the most important to them when
shopping for an account, participants in consumer testing seldom
mentioned the penalty rate or penalty rate triggers. Some consumers may
not find this information relevant when shopping for or opening an
account because they do not anticipate that they will trigger penalty
pricing. As a result, they may not recall this information later, after
they have begun using the account, and may be surprised when penalty
pricing is subsequently imposed.
In addition, the Board believes that the notice required by Sec.
226.9(g) is the most effective time to inform consumers of the
circumstances under which penalty rates can be applied to their
existing balances for the reasons discussed above and in VI. Section-
by-Section Analysis.
Format. Currently, there are few format requirements for change-in-
terms disclosures. As with account-opening disclosures, creditors
commonly intersperse change-in-terms notices with other amendments to
the account agreement, and both are provided in pamphlets in small
print and dense prose. Consumer testing indicates many consumers set
aside and do not read densely-worded pamphlets.
Under the final rule, creditors may continue to notify consumers
about changes to terms required to be disclosed by Regulation Z,
together with other changes to the account agreement. However, if a
changed term is one that must be provided in the account-opening
summary table, creditors must provide that change in a summary table to
enhance the effectiveness of the change-in-terms notice. Consumer
testing conducted for the Board suggests that consumer understanding of
change in terms notices is improved by presentation of that information
in a tabular format.
Creditors commonly enclose notices about changes to terms or rates
with periodic statements. Under the final rule, if a notice enclosed
with a periodic statement discusses a change to a term that must be
disclosed in the account-opening summary table, or announces that a
penalty rate will be imposed on the account, a table summarizing the
impending change must appear on the periodic statement. The table must
appear on the front of the periodic statement, although it is not
required to appear on the first page. Consumers who participated in
testing often set aside change-in-terms pamphlets that accompanied
periodic statements, while participants uniformly looked at the front
side of periodic statements.

E. Advertisements

Currently, creditors that disclose certain terms in advertisements
must disclose additional information, to help ensure consumers
understand the terms of credit being offered.
Proposal. For advertisements that state a minimum monthly payment
on a plan offered to finance the purchase of goods or services,
additional information must also be stated about the time period
required to pay the balance and the total of payments if only minimum
payments are made. The proposal also limited the circumstances under
which advertisements may refer to a rate as ``fixed.''
Summary of final rule.
Advertising periodic payments. Consumers commonly are offered the
option to finance the purchase of goods or services (such as appliances
or furniture) by establishing an open-end credit plan. The periodic
payments (such as $20 a week or $45 per month) associated with the
purchase are often advertised as part of the offer. Under current
rules, advertisements for open-end credit plans are not required to
include information about the time it will take to pay for a purchase
or the total cost if only periodic payments are made; if the
transaction were a closed-end installment loan, the number of payments
and the total cost would be disclosed. Under the final rule,
advertisements stating a periodic payment amount for an open-end credit
plan that would be established to finance the purchase of goods or
services must state, in equal prominence to the periodic payment
amount, the time period required to pay the balance and the total of
payments if only periodic payments are made.
Advertising ``fixed'' rates. Creditors sometimes advertise the APR
for open-end accounts as a ``fixed'' rate even though the creditor
reserves the right to change the rate at any time for any reason.
Consumer testing indicated that many consumers believe that a ``fixed
rate'' will not change, and do not understand that creditors may use
the term ``fixed'' as a shorthand reference for rates that do not vary
based on changes in an index or formula. Under the final rule, an
advertisement may refer to a rate as ``fixed'' if the advertisement
specifies a time period the rate will be fixed and the rate will not
increase during that period. If a time period is not specified, the
advertisement may refer to a rate as ``fixed'' only if the rate will
not increase while the plan is open.

F. Other Disclosures and Protections

``Open-end'' plans comprised of closed-end features. Some creditors
give open-end credit disclosures on credit plans that include closed-
end features, that is, separate loans with fixed repayment periods.
These creditors treat these loans as advances on a revolving credit
line for purposes of Regulation Z even though the consumer's credit
information is separately evaluated, the consumer may have to complete
a separate application for each ``advance,'' and the consumer's
payments on the ``advance'' do not replenish the line. Provisions in
the commentary lend support to this approach.
Proposal. The proposal would have revised these provisions to
indicate

[[Page 5255]]

closed-end disclosures rather than open-end disclosures are appropriate
when advances that are individually approved and underwritten are being
extended, or if payments made on a particular sub-account do not
replenish the credit line available for that sub-account.
Summary of final rule. The final rule generally adopts the proposal
that would clarify that credit is not properly characterized as open-
end credit if individual advances are separately underwritten. The
proposed revision that would have required that payments on a sub-
account of an open-end credit plan replenish that sub-account has been
withdrawn, because of concerns that this revision would have had
unintended consequences for credit cards and HELOCs that the Board
believes are appropriately treated as open-end credit.
Checks that access a credit card account. Many credit card issuers
provide accountholders with checks that can be used to obtain cash, pay
the outstanding balance on another account, or purchase goods and
services directly from merchants. The solicitation letter accompanying
the checks may offer a low promotional APR for transactions that use
the checks. The proposed revisions would require the checks mailed by
card issuers to be accompanied by cost disclosures.
Currently, creditors need not disclose costs associated with using
the checks if the finance charges that would apply (that is, the
interest rate and transaction fees) have been previously disclosed,
such as in the account agreement. If the check is sent 30 days or more
after the account is opened, creditors must refer consumers to their
account agreements for more information about how the rate and fees are
determined.
Consumers may receive these checks throughout the life of the
credit card account. Thus, significant time may elapse between the time
account-opening disclosures are provided and the time a consumer
considers using the check. In addition, consumer testing indicates that
consumers may not notice references to other documents such as the
account-opening disclosures or periodic statements for rate information
because they tend to look for rates and dollar figures when reviewing
the information accompanying access checks.
Proposal. Under the proposal, checks that can access credit card
accounts would have been required to be accompanied by information
about the rates and fees that will apply if the checks are used, about
whether a grace period exists, and any date by which the consumer must
use the checks in order to receive any discounted initial rate offered
on the checks. This information would have been required to be
presented in a table, on the front side of the page containing the
checks.
Summary of final rule. The final rule requires the following key
terms to be disclosed in a summary table on the front of the page
containing checks that access credit card accounts: (1) Any discounted
initial rate, and when that rate will expire, if applicable; (2) the
type of rate that will apply to the checks after expiration of any
discounted initial rate (such as whether the purchase or cash advance
rate applies) and the applicable APR; (3) any transaction fees
applicable to the checks; (4) whether a grace period applies to the
checks, and if one does not apply, that interest will be charged
immediately; and (5) any date by which the consumer must use the checks
in order to receive any discounted initial rate offered on the checks.
The final rule requires that the tabular disclosure accompanying
checks that access a credit card account include a disclosure of the
actual rate or rates applicable to the checks. While the actual post-
promotional rate disclosed at the time the checks are sent to a
consumer may differ from the rate disclosed by the time it becomes
applicable to the consumer's account (if it is a variable rate tied to
an index), disclosure of the actual post-promotional rate in effect at
the time that the checks are sent to the consumer is an important piece
of information for the consumer to use in making an informed decision
about whether to use the checks. Consumer testing suggests that a
disclosure of the actual rate, rather than a toll-free number, also
will help to enhance consumer understanding regarding the rate that
will apply when the promotional rate expires.
Cut-off times and due dates for mailing payments. TILA generally
requires that payments be credited to a consumer's account as of the
date of receipt, provided the payment conforms to the creditor's
instructions. Under Regulation Z, creditors are permitted to specify
reasonable cut-off times for receiving payments on the due date. Some
creditors use different cut-off times depending on the payment method.
Consumer groups and others have raised concerns that the use of certain
cut-off times may effectively result in a due date that is one day
earlier than the due date disclosed. In addition, in response to the
June 2007 Proposal, consumer commenters urged the Board to address
creditors' practice of using due dates on days that the creditor does
not accept payments, such as weekends or holidays.
Proposal. The May 2008 Regulation Z Proposal provided that it would
be unreasonable for a creditor to require that mailed payments be
received earlier than 5 p.m. on the due date in order to be considered
timely. In addition, the proposal would have provided that if a
creditor does not receive and accept mailed payments on the due date
(e.g., a Sunday or holiday), a payment received on the next business
day is timely.
Recommendation. The draft final rule adopts the proposal regarding
weekend and holiday due dates. In addition, the draft final rule adopts
a modified version of the 5 p.m. cut-off time proposal to provide that
a 5 p.m. cut-off time is an example of a reasonable requirement for
payments.
Credit insurance, debt cancellation, and debt suspension coverage.
Under Regulation Z, premiums for credit life, accident, health, or
loss-of-income insurance are considered finance charges if the
insurance is written in connection with a credit transaction. However,
these costs may be excluded from the finance charge and APR (for both
open-end and closed-end credit transactions), if creditors disclose the
cost and the fact that the coverage is not required to obtain credit,
and the consumer signs or initials an affirmative written request for
the insurance. Since 1996, the same rules have applied to creditors'
``debt cancellation'' agreements, in which a creditor agrees to cancel
the debt, or part of it, on the occurrence of specified events.
Proposal and summary of final rule. As proposed, the existing rules
for debt cancellation coverage were applied to ``debt suspension''
coverage (for both open-end credit and closed-end transactions). ``Debt
suspension'' products are related to, but different from, debt
cancellation products. Debt suspension products merely defer consumers'
obligation to make the minimum payment for some period after the
occurrence of a specified event. During the suspension period, interest
may continue to accrue, or it may be suspended as well. Under the
proposal, to exclude the cost of debt suspension coverage from the
finance charge and APR, creditors would have been required to inform
consumers that the coverage suspends, but does not cancel, the debt.
Under the current rules, charges for credit insurance and debt
cancellation coverage are deemed not to be finance charges if a
consumer requests coverage after an open-end credit account is opened
or after a closed-end credit

[[Page 5256]]

transaction is consummated because the coverage is deemed not to be
``written in connection'' with the credit transaction. Since the
charges are defined as non-finance charges in such cases, Regulation Z
does not require a disclosure or written evidence of consent to exclude
them from the finance charge. The proposal would have implemented a
broader interpretation of ``written in connection'' with a credit
transaction and required creditors to provide disclosures, and obtain
evidence of consent, on sales of credit insurance or debt cancellation
or suspension coverage during the life of an open-end account. If a
consumer requests the coverage by telephone, creditors would have been
permitted to provide the disclosures orally, but in that case they
would have been required to mail written disclosures within three days
of the call.\10\ The final rule is unchanged from the proposal.
---------------------------------------------------------------------------

\10\ The revisions to Regulation Z requiring disclosures to be
mailed within three days of a telephone request for these products
are consistent with the rules of the federal banking agencies
governing insured depository institutions' sales of insurance and
with guidance published by the Office of the Comptroller of the
Currency (OCC) concerning national banks' sales of debt cancellation
and debt suspension products.
---------------------------------------------------------------------------

VI. Section-by-Section Analysis

In reviewing the rules affecting open-end credit, the Board
proposed in June 2007 to reorganize some provisions to make the
regulation easier to use. Rules affecting home-equity lines of credit
(HELOCs) subject to Sec. 226.5b would have been separately delineated
in Sec. 226.6 (account-opening disclosures), Sec. 226.7 (periodic
statements), and Sec. 226.9 (subsequent disclosures). Rules contained
in footnotes would have been moved to the text of the regulation or
commentary, as appropriate, and the footnotes designated as reserved.
Commenters generally supported this approach. One commenter questioned
retaining the footnotes as reserved and suggested deleting references
to the footnotes entirely. The final rule is organized, and rules
currently stated in footnotes have been moved, as proposed. These
revisions are identified in a table below. See X. Redesignation Table.
The Board retains footnotes as ``reserved'' to preserve the current
footnote numbers in provisions of Regulation Z that will be the subject
of future rulemakings. When rules contained in all footnotes have been
moved to the regulation or commentary, as appropriate, references to
the footnotes will be removed.

Introduction

The official staff commentary to Regulation Z begins with an
Introduction. Comment I-6 discusses reference materials published at
the end of each section of the commentary adopted in 1981. 46 FR 50288,
Oct. 9, 1981. The references were intended as a compliance aid during
the transition to the 1981 revisions to Regulation Z. In June 2007, the
Board proposed to delete provisions addressing references and
transition rules applicable to 1981 revisions to Regulation Z. No
comments were received. Thus, the Board deletes the references and
comments I-3, I-4(b), I-6, and I-7, as obsolete and renumbers the
remaining comments accordingly.

Section 226.1 Authority, Purpose, Coverage, Organization, Enforcement,
and Liability

Section 226.1(c) generally outlines the persons and transactions
covered by Regulation Z. Comment 1(c)-1 provides, in part, that the
regulation applies to consumer credit extended to residents (including
resident aliens) of a state. In June 2007, technical revisions were
proposed for clarity, and comment was requested if further guidance on
the scope of coverage would be helpful. No comments were received and
the comment is adopted with technical revisions for clarity.
Section 226.1(d)(2), which summarizes the organization of the
regulation's open-end credit rules (Subpart B), is amended to reinsert
text inadvertently deleted in a previous rulemaking, as proposed. See
54 FR 24670, June 9, 1989. Section 226.1(d)(4), which summarizes
miscellaneous provisions in the regulation (Subpart D), is updated to
describe amendments made in 2001 to Subpart D relating to disclosures
made in languages other than English, as proposed. See 66 FR 17339,
Mar. 30, 2001. The substance of Footnote 1 is deleted as unnecessary,
as proposed.
In July 2008, the Board revised Subpart E to address certain
mortgage practices and disclosures. These changes are reflected in
Sec. 226.1(d)(5), as amended in the July 2008 Final HOEPA Rule. In
addition, transition rules for the July 2008 rulemaking are added as
comment 1(d)(5)-1. 73 FR 44522, July 30, 2008.

Section 226.2 Definitions and Rules of Construction

2(a) Definitions
2(a)(2) Advertisement
In the June 2007 Proposal, the Board proposed technical revisions
to the commentary to Sec. 226.2(a)(2), with no intended change in
substance or meaning. No changes were proposed for the regulatory text.
The Board received no comments on the proposed changes, and the changes
are adopted as proposed.
2(a)(4) Billing Cycle or Cycle
Section 226.2(a)(4) defines ``billing cycle'' as the interval
between the days or dates of regular periodic statements, and requires
that billing cycles be equal (with a permitted variance of up to four
days from the regular day or date) and no longer than a quarter of a
year. Comment 2(a)(4)-3 states that the requirement for equal cycles
does not apply to transitional billing cycles that occur when a
creditor occasionally changes its billing cycles to establish a new
statement day or date. The Board proposed in June 2007 to revise
comment 2(a)(4)-3 to clarify that this exception also applies to the
first billing cycle that occurs when a consumer opens an open-end
credit account.
Few commenters addressed this provision. One creditor requested
that the Board clarify that the proposed revision applies to the time
period between the opening of the account and the generation of the
first periodic statement (as opposed to the period between the
generation of the first statement and the generation of the second
statement). The comment has been revised to provide the requested
clarification.
The same commenter also requested clarification that the same
exception would apply when a previously closed account is reopened. The
reopening of a previously closed account is no different, for purposes
of comment 2(a)(4)-3, from the original opening of an account;
therefore, this clarification is unnecessary. A consumer group
suggested that an irregular first billing cycle should be limited to no
longer than twice the length of a regular billing cycle, and that
irregular billing cycles should permitted no more than once per year.
The Board believes that these limitations might unduly restrict
creditors' operations. Although it would be unlikely for a creditor to
utilize a billing cycle more than twice the length of the regular
cycle, or an irregular billing cycle more often than once per year,
such cycles might need to be used on rare occasions for operational
reasons.
2(a)(6) Business Day
Section 226.2(a)(6) and comment 2(a)(6)-2, as reprinted, reflect
revisions adopted in the Board's July 2008 Final HOEPA Rule to address
certain

[[Page 5257]]

mortgage practices and disclosures. 73 FR 44522, 44599, 44605, July 30,
2008.
2(a)(15) Credit Card
TILA defines ``credit card'' as ``any card, plate, coupon book or
other credit device existing for the purpose of obtaining money,
property, labor, or services on credit.'' TILA Section 103(k); 15
U.S.C. 1602(k). In addition, Regulation Z currently provides that a
credit card is a ``card, plate, coupon book, or other single credit
device that may be used from time to time to obtain credit.'' See Sec.
226.2(a)(15).
Checks that access credit card accounts. Credit card issuers
sometimes provide cardholders with checks that access a credit card
account (access checks), which can be used to obtain cash, purchase
goods or services or pay the outstanding balance on another account.
These checks are often mailed to cardholders on an unsolicited basis,
sometimes with their monthly statements. When a consumer uses an access
check, the amount of the check is billed to the consumer's credit card
account.
Historically, checks that access credit card accounts have not been
treated as ``credit cards'' under TILA because each check can be used
only once and not ``from time to time.'' See comment 2(a)(15)-1. As a
result, TILA's protections involving merchant disputes, unauthorized
use of the account, and the prohibition against unsolicited issuance,
which apply only to ``credit cards,'' do not apply to transactions
involving these checks. See Sec. 226.12. Nevertheless, billing error
rights apply with to these check transactions. See Sec. 226.13. In the
June 2007 Proposal, the Board declined to extend TILA's protections for
credit cards to access checks.
While industry commenters generally supported the Board's approach,
consumer groups asserted that excluding access checks from treatment as
credit cards does not adequately protect consumers, particularly
insofar as consumers would not be able to assert unauthorized use
claims under Sec. 226.12(b). Consumer groups thus observed that the
current rules lead to an anomalous result where a consumer would be
protected from unauthorized use under Sec. 226.12(b) if a thief used
the consumer's credit card number to initiate a credit card transaction
by telephone or on-line, but would not be similarly protected if the
thief used the consumer's access check to complete the same
transaction. Consumer groups also observed that consumers would be
unable to assert a merchant claim or defense under Sec. 226.12(c) in
connection with a good or service purchased with an access check, nor
would they be protected by the unsolicited issuance provisions in Sec.
226.12(a).
As stated in the proposal, the Board believes that existing
provisions under state law governing checks, specifically the Uniform
Commercial Code (UCC), coupled with the billing error provisions under
Sec. 226.13, provide consumers with appropriate protections from the
unauthorized use of access checks. For example, a consumer generally
would not have any liability for a forged access check under the UCC,
provided that the consumer complies with certain timing requirements in
reporting the forgery. In addition, in the event the consumer asserts a
timely notice of error for an unauthorized transaction involving an
access check under Sec. 226.13, the consumer would not have any
liability if the creditor's investigation determines that the
transaction was in fact unauthorized. Lastly, the Board understands
that, in most instances, consumers may ask their creditor to stop
sending access checks altogether, and these opt-out requests will be
honored by the creditor.
Coupon books. The Board stated in the supplementary information for
the June 2007 Proposal that it is unaware of devices existing today
that would qualify as a ``coupon book'' for purposes of the definition
of ``credit card'' under Sec. 226.2(a)(15). In addition, the Board
noted that elimination of this obsolete term from the definition of
``credit card'' would help to reduce potential confusion regarding
whether an access check or other single credit device that is used
once, if connected in some way to other checks or devices, becomes a
``coupon book,'' thus becoming a ``credit card'' for purposes of the
regulation. For these reasons, the June 2007 Proposal would have
deleted the reference to the term ``coupon book'' from the definition
of ``credit card'' under Sec. 226.2(a)(15).
Consumer groups opposed the Board's proposal, citing the statutory
reference in TILA Section 103(k) to a ``coupon book,'' and noting that
even if such products were not currently being offered, the proposed
deletion could provide issuers an incentive to develop such products
and in that event, consumers would be unable to avail themselves of the
protections against unauthorized use and unsolicited issuance.
The final rule removes the reference to ``coupon book'' in the
definition of ``credit card,'' as proposed. Commenters did not cite any
examples of products that could potentially qualify as a ``coupon
book.'' Thus, in light of the confusion today regarding whether access
checks are ``credit cards'' as a result of the existing reference to
``coupon books,'' the Board believes removal of the term is appropriate
in the final rule, and that the removal will not limit the availability
of Regulation Z protections overall.
Plans in which no physical device is issued. The June 2007 Proposal
did not explicitly address circumstances where a consumer may conduct a
transaction on an open-end plan that does not have a physical device.
In response, industry commenters agreed that it was premature and
unnecessary to address such open-end plans. Consumer groups in contrast
stated that it was appropriate to amend the regulation at this time to
explicitly cover such plans, particularly in light of the Board's
decision elsewhere to update the commentary to refer to biometric means
of verifying the identity of a cardholder or authorized user. See
comment 12(b)(2)(iii)-1, discussed below. While the final rule does not
explicitly address open-end plans in which no physical device is
issued, the Board will continue to monitor developments in the
marketplace and may update the regulation if and when such products
become common. Of course, to the extent a creditor has issued a device
that meets the definition of a ``credit card'' for an account, the
provisions that require use of a ``credit card,'' could apply even
though a particular transaction itself is not conducted using the
device (for example, in the case of telephone and Internet
transactions; see comments 12(b)(2)(iii)-3 and 12(c)(1)-1).
Charge cards. Comment 2(a)(15)-3 discusses charge cards and
identifies provisions in Regulation Z in which a charge card is
distinguished from a credit card. The June 2007 Proposal would have
updated comment 2(a)(15)-3 to reflect that the new late payment and
minimum payment disclosure requirements set forth by the Bankruptcy Act
do not apply to charge card issuers. As further discussed in more
detail below under Sec. 226.7, comment 2(a)(15)-3 is adopted as
proposed.
2(a)(17) Creditor
In June 2007, the Board proposed to exempt from TILA coverage
credit extended under employee-sponsored retirement plans. For reasons
explained in the section-by-section analysis to Sec. 226.3, this
provision is adopted with modifications, as discussed below. Comment
2(a)(17)(i)-8, which provides guidance on whether such a plan is a

[[Page 5258]]

creditor for purposes of TILA, is deleted as unnecessary, as proposed.
In addition, the substance of footnote 3 is moved to a new Sec.
226.2(a)(17)(v), and references revised, accordingly, as proposed. The
dates used to illustrate numerical tests for determining whether a
creditor ``regularly'' extends consumer credit are updated in comments
2(a)(17)(i)-3 through -6, as proposed. References in Sec.
226.2(a)(17)(iv) to provisions in Sec. 226.6 and Sec. 226.7 are
renumbered consistent with this final rule.
2(a)(20) Open-End Credit
Under TILA Section 103(i), as implemented by Sec. 226.2(a)(20) of
Regulation Z, ``open-end credit'' is consumer credit extended by a
creditor under a plan in which (1) the creditor reasonably contemplates
repeated transactions, (2) the creditor may impose a finance charge
from time to time on an outstanding unpaid balance, and (3) the amount
of credit that may be extended to the consumer during the term of the
plan, up to any limit set by the creditor, generally is made available
to the extent that any outstanding balance is repaid.
``Open-end'' plans comprised of closed-end features. In the June
2007 Proposal, the Board proposed several revisions to the commentary
regarding Sec. 226.2(a)(20) to address the concern that currently some
credit products are treated as open-end plans, with open-end
disclosures given to consumers, when such products would more
appropriately be treated as closed-end transactions. The proposal was
based on the Board's belief that closed-end disclosures are more
appropriate than open-end disclosures when the credit being extended is
individual loans that are individually approved and underwritten. As
stated in the June 2007 Proposal, the Board was particularly concerned
about certain credit plans, where each individual credit transaction is
separately evaluated.
For example, under certain so-called multifeatured open-end plans,
creditors may offer loans to be used for the purchase of an automobile.
These automobile loan transactions are approved and underwritten
separately from other credit made available on the plan. (In addition,
the consumer typically has no right to borrow additional amounts on the
automobile loan ``feature'' as the loan is repaid.) If the consumer
repays the entire automobile loan, he or she may have no right to take
further advances on that ``feature,'' and must separately reapply if he
or she wishes to obtain another automobile loan, or use that aspect of
the plan for similar purchases. Typically, while the consumer may be
able to obtain additional advances under the plan as a whole, the
creditor separately evaluates each request.
In the June 2007 Proposal, the Board proposed, among other things,
two main substantive revisions to the commentary to Sec. 226.2(a)(20).
First, the Board proposed to revise comment 2(a)(20)-2 to clarify that
while a consumer's account may contain different sub-accounts, each
with different minimum payment or other payment options, each sub-
account must meet the self-replenishing criterion. Proposed comment
2(a)(20)-2 would have provided that repayments of an advance for any
sub-account must generally replenish a single credit line for that sub-
account so that the consumer may continue to borrow and take advances
under the plan to the extent that he or she repays outstanding balances
without having to obtain separate approval for each subsequent advance.
Second, the Board proposed in June 2007 to clarify in comment
2(a)(20)-5 that in general, a credit line is self-replenishing if a
consumer can obtain further advances or funds without being required to
separately apply for those additional advances, and without undergoing
a separate review by the creditor of that consumer's credit
information, in order to obtain approval for each such additional
advance. TILA Section 103(i) provides that a plan can be an open-end
credit plan even if the creditor verifies credit information from time
to time. 15 U.S.C. 1602(i). As stated in the June 2007 Proposal,
however, the Board believes this provision is not intended to permit a
creditor to separately underwrite each advance made to a consumer under
an open-end plan or account. Such a process could result in closed-end
credit being deemed open-end credit.
General comments. The Board received approximately 300 comment
letters, mainly from credit unions, on the proposed changes to Sec.
226.2(a)(20). (See below for a discussion of the comments specific to
each portion of the proposed changes to Sec. 226.2(a)(20); more
general comments pertaining to the overall impact of recharacterizing
certain multifeatured plans as closed-end credit are discussed in this
subsection.)
Consumer groups and one credit union supported the proposed
changes. The credit union commenter noted that it currently uses a
multifeatured open-end lending program, but that it believes the
changes would be beneficial to consumers and financial institutions,
and that the benefit to consumers would outweigh any inconvenience and
cost imposed on the credit union. This commenter noted that under a
multifeatured open-end lending program, a consumer signs a master loan
agreement but does not receive meaningful disclosures with each
additional extension of credit. This commenter believes that consumers
often do not realize that subsequent extensions of credit are subject
to the terms of the master loan agreement.
Consumer groups stated that there is no meaningful difference
between a customer who obtains a conventional car loan from a bank
versus one who receives an advance to purchase a car via a sub-account
from an open-end plan. Consumer groups further noted that to the extent
a sub-account has fixed payments, fixed terms, and no replenishing
line, it is functionally indistinguishable from any other closed-end
loan for which closed-end disclosures must be given. The consumer
groups' comments stated that there is no legitimate basis on which to
continue to classify these plans as open-end credit.
Most comment letters opposed the proposed changes to the definition
of ``open-end credit.'' Many credit union commenters questioned the
need for the proposed changes, and stated that the Board had not
identified a specific harm arising out of multifeatured open-end
lending. These commenters stated that there is no evidence of harm to
consumers associated with these plans, such as complaints, information
about credit union members paying higher rates or purchasing
unnecessary products, or evidence of higher default rates. These
commenters noted that such plans have been offered by credit unions for
more than 25 years. These commenters also stated that open-end credit
disclosures are adequate and provide members with the information they
need on a timely basis, and that open-end lending members receive
frequent reminders, via periodic statements, of key financial terms
such as the APR. Also, commenters stated that to the extent credit
unions do not charge fees for advances with fixed repayment periods,
the APR disclosed for purposes of the open-end credit disclosures is
the same as the APR that would be disclosed if the transaction were
characterized as closed-end.
The National Credit Union Administration (NCUA) commented that
there are no problems that appear to be generated by or inherent to the
multifeatured aspect of credit unions' multifeatured open-end plans.
This agency urged the Board not to ignore the identity of the creditor
in considering

[[Page 5259]]

the appropriateness of disclosures because doing so ignores the
circumstances in which the disclosures are made; the comment letter
further noted that multifeatured open-end plans offered by credit
unions involve circumstances where there is an ongoing relationship
between the consumer-member and a regulated financial institution.
Credit union commenters and the NCUA also stated that the proposed
revisions would result in a loss of convenience to consumers because
credit unions generally would not be able to continue to offer
multifeatured open-end lending programs, and consumers would have to
sign additional paperwork in order to obtain closed-end advances.
Several of these commenters specifically noted that loss of convenience
would be a concern with respect to military personnel and other
customers they serve in geographically remote locations. Credit union
commenters stated that the proposed revisions, if adopted, would result
in increased costs of borrowing for consumers. Some comment letters
noted that credit unions' rates would become less competitive and that
consumers would be more likely to obtain financing from more expensive
sources, such as auto dealers, check cashing shops, or payday lenders.
Several credit union commenters discussed the likely cost
associated with providing closed-end disclosures instead of open-end
disclosures. The commenters indicated that such costs would include re-
training personnel, changing lending documents and data-processing
systems, purchasing new lending forms, potentially increased staffing
requirements, updating systems, and additional paperwork. Several
commenters offered estimates of the probable cost to credit unions of
converting multifeatured open-end plans to closed-end credit. Those
comments with regard to small entities are discussed in more detail
below in VIII. Final Regulatory Flexibility Analysis. One major service
provider to credit unions estimated that the conversion in loan
products would cost a credit union approximately $100,000, with total
expenses of at least $350 million for all credit unions and their
members. This commenter further noted that there would be annual
ongoing costs totaling millions of dollars, largely due to additional
staff costs that would arise because more business would take place in
person at the credit union.
One commenter indicated that the proposed changes to the commentary
could give rise to litigation risk, and may create more confusion and
unintended consequences than currently exist under the existing
commentary to Regulation Z. This commenter stated that changing the
definition of open-end credit would jeopardize many legitimate open-end
credit plans.
Comments regarding hybrid disclosure. Several comment letters from
credit unions, one credit union trade association, and the NCUA
suggested that the Board should adopt a hybrid disclosure approach for
multifeatured open-end plans. Under this approach, these commenters
indicated that the Board should continue to permit multifeatured open-
end plans, as they are currently structured, to provide open-end
disclosures to consumers, but should also impose a new subsequent
disclosure requirement. Shortly after obtaining credit, such as for an
auto loan, that is individually underwritten or not self-replenishing,
the creditor would be required to give disclosures that mirror the
disclosures given for closed-end credit.
The Board is not adopting this hybrid disclosure approach. The
Board believes that the statutory framework clearly provides for two
distinct types of credit, open-end and closed-end, for which different
types of disclosures are deemed to be appropriate. Such a hybrid
disclosure regime would be premised on the fact that the closed-end
disclosures are beneficial to consumers in connection with certain
types of advances made under these plans. If this is the case, the
Board believes that consumers should receive the closed-end disclosures
prior to consummation of the transaction, when a consumer is shopping
for credit.
Replenishment. As discussed above, the Board proposed in June 2007
to revise comment 2(a)(20)-2 to clarify that while a consumer's account
may contain different sub-accounts, each with different minimum payment
or other payment options, each sub-account must meet the self-
replenishing criterion.
Several industry commenters specifically objected to the new
requirement in proposed comment 2(a)(20)-2 that open-end credit
replenish on a sub-account by sub-account basis. Some commenters
expressed concern about the applicability of proposed comment 2(a)(20)-
2 to promotional rate offers. The commenters noted that a creditor may
make a balance transfer offer or send out convenience checks at a
promotional APR. As the balance subject to the promotional APR is
repaid, the available credit on the account will be replenished,
although the available credit for the original promotional rate offer
is not replenished. These commenters stated that unless the Board can
define sub-accounts in a manner that excludes balances subject to
special terms, the Board should withdraw the proposed revision to
comment 2(a)(20)-2. Other commenters indicated that the critical
requirement should be that repayment of balances in any sub-account
replenishes the overall account, not that each sub-account itself must
be replenishing.
Similarly, the Board received several industry comment letters
indicating that the proposed changes to comment 2(a)(20)-2 would have
adverse consequences for certain HELOCs. The comments noted that many
creditors use multiple features or sub-accounts in order to provide
consumers with flexibility and choices regarding the terms applicable
to certain portions of an open-end credit balance. They noted as an
example a feature on a HELOC that permits a consumer to convert a
portion of the balance into a fixed-rate, fixed-term sub-account; the
sub-account is never replenished but payments on the sub-account
replenish the master open-end account.
In addition, the Board received a comment from an association of
state regulators of credit unions raising concerns that proposed
comment 2(a)(20)-2 would present a safety and soundness concern for
institutions. These comments noted that a self-replenishing sub-account
for an auto loan, for example, would be a safety and soundness concern
because the value of the collateral would decline and eventually be
less than the credit limit.
In light of the comments received and upon further analysis, the
Board has withdrawn the proposed changes to comment 2(a)(20)-2 from the
final rule. The Board believes that one unintended consequence of the
proposed requirement that payments on each sub-account replenish is
that some sub-accounts (like HELOCs) would be re-characterized as
closed-end credit when they are properly treated as open-end credit.
Generally, the proposed changes to comment 2(a)(20)-2 were intended to
ensure that repayments of advances on an open-end credit plan generally
would replenish the credit available to the consumer. The Board
believes that replenishment of an open-end plan on an overall basis
achieves this purpose and that, as discussed below, the best way to
address loans that are more properly characterized as closed-end credit
being treated as features of open-end plans is through clarifications

[[Page 5260]]

regarding verification of credit information and separate underwriting
of individual advances.
Verification and underwriting of separate advances. As discussed
above, the Board proposed in June 2007 to clarify in comment 2(a)(20)-5
that, in general, a credit line is self-replenishing if a consumer can
obtain further advances or funds without being required to separately
apply for those additional advances, and without undergoing a separate
review by the creditor of that consumer's credit information, in order
to obtain such additional advance.
Notwithstanding this proposed change, the Board noted that a
creditor would be permitted to verify credit information to ensure that
the consumer's creditworthiness has not deteriorated (and could revise
the consumer's credit limit or account terms accordingly). This is
consistent with the statutory definition of ``open end credit plan,''
which provides that a credit plan may be an open end credit plan even
if credit information is verified from time to time. See 15 U.S.C.
1602(i). However, the Board noted in the June 2007 Proposal its belief
that performing a distinct underwriting analysis for each specific
credit request would go beyond the verification contemplated by the
statute and would more closely resemble underwriting of closed-end
credit. For example, assume that based on the initial underwriting of
an open-end plan, a consumer were initially approved for a line of
credit with a $20,000 credit limit. Under the proposal, if that
consumer subsequently took a large advance of $10,000, it would be
inconsistent with the definition of open-end credit for the creditor to
independently evaluate the consumer's creditworthiness in connection
with that advance. However, proposed comment 2(a)(20)-5 would have
stated that a creditor could continue to review, and as appropriate,
decrease the amount of credit available to a consumer from time to time
to address safety and soundness and other concerns.
The NCUA agreed with the Board that the statutory provision
regarding verification is not intended to permit separate underwriting
and applications for each sub-account. The agency encouraged the Board
to focus any commentary changes regarding the definition of open-end
credit on the distinctions between verification versus a credit
evaluation as a more appropriate and less burdensome response to its
concerns than the proposed revisions regarding replenishment.
Several industry commenters indicated that proposed comment
2(a)(20)-5 could have unintended adverse consequences for legitimate
open-end products. One industry trade association and several industry
commenters stated creditors finance purchases that may utilize a
substantial portion of available credit or even exceed the credit line
under pre-established credit criteria. According to these commenters,
creditors may have over-the-limit buffers or strategies in place that
contemplate such purchases, and these transactions should not be
considered a separate underwriting. The commenters further stated that
any legitimate authorization procedures or consideration of a credit
line increase should not exclude a transaction from open-end credit.
One credit card association and one large credit card issuer
commented that some credit cards have no preset spending limits, and
issuers may need to review a cardholder's credit history in connection
with certain transactions on such accounts. These commenters stated
that regardless of how an issuer handles individual transactions on
such accounts, they should be characterized as open-end.
One other industry commenter stated that a creditor should be able
to verify the consumer's creditworthiness in connection with a request
for an advance on an open-end credit account. This creditor noted that
the statute does not impose any limitation on the frequency with which
verification is made, nor does it indicate that verification can be
made only as part of an account review, and not also when a consumer
requests an advance. The commenter stated that the most important time
to conduct verification is when an advance is requested.
This commenter further suggested that the concept of
``verification'' is, by itself, distinguishable from a de novo credit
decision on an application for a new loan. This commenter posited that
comment 2(a)(20)-5 recognizes this insofar as it contemplates a
determination of whether the consumer continues to meet the lender's
credit standards and provides that the consumer should have a
reasonable expectation of obtaining additional credit as long as the
consumer continues to meet those credit standards. An application for a
new extension of credit contemplates a de novo credit determination,
while verification involves a determination of whether a borrower
continues to meet the lender's credit standards.
The changes to comment 2(a)(20)-5 are adopted as proposed, with one
revision discussed below in the subsection titled Credit cards. Under
revised comment 2(a)(20)-5, verification of a consumer's
creditworthiness consistent with the statute continues to be permitted
in connection with an open-end plan; however, underwriting of specific
advances is not permitted for an open-end plan. The Board believes that
underwriting of individual advances exceeds the scope of the
verification contemplated by the statute and is inconsistent with the
definition of open-end credit. The Board believes that the rule does
not undermine safe and sound lending practices, but simply clarifies
that certain types of advances for which underwriting is done must be
treated as closed-end credit with closed-end disclosures provided to
the consumer.
The revisions to comment 2(a)(20)-5 are intended only to have
prospective application to advances made after the effective date of
the final rule. A creditor may continue to give open-end disclosures in
connection with an advance that met the definition of ``open-end
credit'' under current Sec. 226.2(a)(20) and the associated
commentary, if that advance was made prior to the effective date of the
final rule. However, a creditor that makes a new advance under an
existing credit plan after the effective date of the final rule will
need to determine whether that advance is properly characterized as
open-end or closed-end credit under the revised definition, and give
the appropriate disclosures.
One commenter asked the Board to clarify the ``reasonable
expectation'' language in comment 2(a)(20)-5. This commenter noted that
a consumer should not expect to obtain additional advances if the
consumer is in default in any provision of the loan agreement (it is
not enough to merely be ``current'' in their payments), and otherwise
does not comply with the requirements for advances in the loan
agreement (such as minimum advance requirements or the method for
requesting advances). The Board believes that under the current rule a
creditor may suspend a consumer's credit privileges or reduce a
consumer's credit limit if the consumer is in default under his or her
loan agreement. Thus, the Board does not believe that this
clarification is necessary and has not adopted it in the final rule.
Verification of collateral. Several commenters stated that comment
2(a)(20)-5 should expressly permit routine collateral valuation and
verification procedures at any time, including as a condition of
approving an advance. One of these commenters

[[Page 5261]]

stated that Regulation U (Credit by Banks and Persons Other than
Brokers or Dealers for the Purpose of Purchasing or Carrying Margin
Stock) requires a bank in connection with margin lending, to not
advance funds in excess of a certain collateral value. 12 CFR part 221.
The commenter also pointed out that for some accounts, a borrower's
credit limit is determined from time to time based on the market value
of the collateral securing the account.
In response to commenters' concerns, new comment 2(a)(20)-(6) is
added to clarify that creditors that otherwise meet the requirements of
Sec. 226.2(a)(20) extend open-end credit notwithstanding the fact that
the creditor must verify collateral values to comply with federal,
state, or other applicable laws or verifies the value of collateral in
connection with a particular advance under the plan. Current comment
2(a)(20)-6 is renumbered as comment 2(a)(20)-7.
Credit cards. Several credit and charge card issuers commented that
the proposal could have adverse effects on those products. One credit
card issuer indicated that the proposed changes could have unintended
adverse consequences for certain credit card securitizations. This
commenter noted that securitization documentation for credit cards
typically provides that an account must be a revolving credit card
account for the receivables arising in that account to be eligible for
inclusion in the securitization. If the proposal were to recharacterize
accounts that are currently included in securitizations as closed-end
credit, this commenter stated that it could require restructuring of
existing and future securitization transactions.
As discussed above, several industry commenters noted other
circumstances in which proposed comment 2(a)(20)-5 could have adverse
consequences for credit cards. Several commenters stated that creditors
may have over-the-limit buffers or strategies in place that contemplate
purchases utilizing a substantial portion of, or even exceed, the
credit line, and these transactions should not be considered a separate
underwriting. Commenters also stated that any legitimate authorization
procedures or consideration of a credit line increase should not
exclude a transaction from open-end credit. Finally, one credit card
association and one large credit card issuer commented that some credit
cards have no preset spending limits, and issuers may need to review a
cardholder's credit history in connection with certain transactions on
such accounts. These commenters stated that regardless of how an issuer
handles individual transactions on such accounts, they should be
characterized as open-end.
The Board has addressed credit card issuers' concerns about
emergency underwriting and underwriting of amounts that may exceed the
consumer's credit limit by expressly providing in comment 2(a)(20)-5
that a credit card account where the plan as a whole replenishes meets
the self-replenishing criterion, notwithstanding the fact that a credit
card issuer may verify credit information from time to time in
connection with specific transactions. The Board did not intend in the
June 2007 Proposal and does not intend in the final rule to exclude
credit cards from the definition of open-end credit and believes that
the revised final rule gives certainty to creditors offering credit
cards. The Board believes that the strategies identified by commenters,
such as over-the-limit buffers, treatment of certain advances for cards
without preset spending limits, and consideration of credit line
increases generally do not constitute separate underwriting of
advances, and that open-end disclosures are appropriate for credit
cards for which the plan as a whole replenishes. The Board also
believes that this clarification will help to promote uniformity in
credit card disclosures by clarifying that all credit cards are subject
to the open-end disclosure rules. The Board notes that charge card
accounts may not meet the definition of open-end credit but pursuant to
Sec. 226.2(a)(17)(iii) are subject to the rules that apply to open-end
credit.
Examples regarding repeated transactions. Due to the concerns noted
above regarding closed-end automobile loans being characterized as
features of so-called open-end plans, the Board also proposed in June
2007 to delete comment 2(a)(20)-3.ii., which states that it would be
more reasonable for a financial institution to make advances from a
line of credit for the purchase of an automobile than it would be for
an automobile dealer to sell a car under an open-end plan. As stated in
the proposal, the Board was concerned that the current example placed
inappropriate emphasis on the identity of the creditor rather than the
type of credit being extended by that creditor. Similarly, the Board
proposed to revise current comment 2(a)(20)-3.i., which referred to a
thrift institution, to refer more generally to a bank or financial
institution and to move the example into the body of comment 2(a)(20)-
3. The Board received no comments opposing the revisions to these
examples, and the changes are adopted as proposed.
Technical amendments. The Board also proposed in the June 2007
Proposal a technical update to comment 2(a)(20)-4 to delete, without
intended substantive change, a reference to ``china club plans,'' which
may no longer be very common. No comments were received on this aspect
of the proposal, and the update to comment 2(a)(20)-4 is adopted as
proposed.
Comment 2(a)(20)-5.ii. currently notes that a creditor may reduce a
credit limit or refuse to extend new credit due to changes in the
economy, the creditor's financial condition, or the consumer's
creditworthiness. The Board's proposal would have deleted the reference
to changes in the economy to simplify this provision. No comments were
received on this change, which is adopted as proposed.
Implementation date. Many credit union commenters on the June 2007
Proposal expressed concern about the effect of successive regulatory
changes. These commenters stated that the June 2007 Proposal, if
adopted, would require them to give closed-end disclosures in
connection with certain advances, such as the purchase of an
automobile, for which they currently give open-end disclosures. The
commenters noted that because the Board is also considering regulatory
changes to closed-end lending, it could require such creditors to make
two sets of major systematic changes in close succession. These
commenters stated that such successive regulatory changes could impose
a significant burden that would impair the ability of credit unions to
serve their members effectively. The Board expects all creditors to
provide closed-end or open-end disclosures, as appropriate in light of
revised Sec. 226.2(a)(20) and the associated commentary, as of the
effective date of the final rule. The Board has not delayed the
effectiveness of the changes to the definition of ``open-end credit.''
The Board is mindful that the changes to the definition may impose
costs on certain credit unions and other creditors, and that any future
changes to the provisions of Regulation Z dealing with closed-end
credit may impose further costs. However, the Board believes that it is
important that consumers receive the appropriate type of disclosures
for a given extension of credit, and that it is not appropriate to
delay effectiveness of these changes pending the Board's review of the
rules pertaining to closed-end credit.

[[Page 5262]]

2(a)(24) Residential Mortgage Transaction
Comment 2(a)(24)-1, which identifies key provisions affected by the
term ``residential mortgage transaction,'' and comment 2(a)(24)-5.ii.,
which provides guidance on transactions financing the acquisition of a
consumer's principal dwelling, are revised from the June 2007 Proposal
to conform to changes adopted by the Board in the July 2008 Final HOEPA
Rule to address certain mortgage practices and disclosures. 73 FR
44522, 44605, July 30, 2008.

Section 226.3 Exempt Transactions

Section 226.3 implements TILA Section 104 and provides exemptions
for certain classes of transactions specified in the statute. 15 U.S.C.
1603.
In June 2007, the Board proposed several substantive and technical
revisions to Sec. 226.3 as described below. The Board also proposed to
move the substance of footnote 4 to the commentary. See comment 3-1. No
comments were received on moving footnote 4 to the commentary, and that
change is adopted in the final rule.
3(a) Business, Commercial, Agricultural, or Organizational Credit
Section 226.3(a) provides, in part, that the regulation does not
apply to extensions of credit primarily for business, commercial or
agricultural purposes. As the Board noted in the supplementary
information to the June 2007 Proposal, questions have arisen from time
to time regarding whether transactions made for business purposes on a
consumer-purpose credit card are exempt from TILA. The Board proposed
to add a new comment 3(a)-2 to clarify transactions made for business
purposes on a consumer-purpose credit card are covered by TILA (and,
conversely, that purchases made for consumer purposes on a business-
purpose credit card are exempt from TILA). The Board received several
comments on proposed comment 3(a)-2. One consumer group and one large
financial institution commented in support of the change. One industry
trade association stated that the proposed clarification was anomalous
given the general exclusion of business credit from TILA coverage. The
Board acknowledges that this clarification will result in certain
business purpose transactions being subject to TILA, and certain
consumer purpose transactions being exempt from TILA. However, the
Board believes that the determination as to whether a credit card
account is primarily for consumer purposes or business purposes is best
made when an account is opened (or when an account is reclassified as a
business-purpose or consumer-purpose account) and that comment 3(a)-2
provides important clarification and certainty to consumers and
creditors. In addition, determining whether specific transactions
charged to the credit card account are for consumer or business
purposes could be operationally difficult and burdensome for issuers.
Accordingly, the Board adopts new comment 3(a)-2 as proposed with
several technical revisions described below. Other sections of the
commentary regarding Sec. 226.3(a) are renumbered accordingly. The
Board also adopts new comment 3(a)-7, which provides guidance on credit
card renewals consistent with new comment 3(a)-2, as proposed.
The examples in proposed comment 3(a)-2 contained several
references to credit plans, which are deleted from the final rule as
unnecessary because comment 3(a)-2 was intended to address only credit
cards. Credit plans are addressed by the examples in redesignated
comment 3(a)-3, which is unaffected by this rulemaking.
3(g) Employer-Sponsored Retirement Plans
The Board has received questions from time to time regarding the
applicability of TILA to loans taken against employer-sponsored
retirement plans. Pursuant to TILA Section 104(5), the Board has the
authority to exempt transactions for which it determines that coverage
is not necessary in order to carry out the purposes of TILA. 15 U.S.C.
1603(5). The Board also has the authority pursuant to TILA Section
105(a) to provide adjustments and exceptions for any class of
transactions, as in the judgment of the Board are necessary or proper
to effectuate the purposes of TILA. 15 U.S.C. 1604(a).
The June 2007 Proposal included a new Sec. 226.3(g), which would
have exempted loans taken by employees against their employer-sponsored
retirement plans qualified under Section 401(a) of the Internal Revenue
Code and tax-sheltered annuities under Section 403(b) of the Internal
Revenue Code, provided that the extension of credit is comprised of
fully-vested funds from such participant's account and is made in
compliance with the Internal Revenue Code. 26 U.S.C. 1 et seq.; 26
U.S.C. 401(a); 26 U.S.C. 403(b). The Board stated several reasons for
this proposed exemption in the supplementary information to the June
2007 Proposal, including the fact that the consumer's interest and
principal payments on such a loan are reinvested in the consumer's own
account and there is no third-party creditor imposing finance charges
on the consumer. In addition, the costs of a loan taken against assets
invested in a 401(k) plan, for example, are not comparable to the costs
of a third-party loan product, because a consumer pays the interest on
a 401(k) loan to himself or herself rather than to a third party.
The Board received several comments regarding proposed Sec.
226.3(g), which generally supported the proposed exemption for loans
taken by employees against their employer-sponsored retirement plans.
Two commenters asked the Board to expand the proposed exemption to
include loans taken against governmental 457(b) plans, which are a type
of retirement plan offered by certain state and local government
employers. 26 U.S.C. 457(b). The comments noted that governmental
457(b) plans may permit participant loans, subject to the requirements
of section 72(p) of the Internal Revenue Code (26 U.S.C. 1 et seq.),
which are the same requirements that are applicable to qualified 401(a)
plans and 403(b) plans. The comments also stated that the Board's
reasons for proposing the exemption apply equally to governmental
457(b) plans. The final rule expands the scope of the exemption to
include loans taken against governmental 457(b) plans. The exemption
for loans taken against employer-sponsored retirement plans was
intended to cover all such similar plans, and the omission of
governmental 457(b) plans from the proposed exemption was
unintentional. The Board believes the rationales stated above and in
the June 2007 Proposal for the proposed exemption for qualified 401(a)
plans and 403(b) plans apply equally to governmental 457(b) plans.
In addition to the rationales stated above, another reason given
for the proposed exception in the June 2007 Proposal was a statement
that plan administration fees must be disclosed under applicable
Department of Labor regulations. One commenter noted that the
Department of Labor regulations cited in the supplementary information
to the June 2007 Proposal do not apply to governmental 403(b) plans,
governmental 457(b) plans, and certain other 403(b) programs that are
not subject to the Employee Retirement Income Security Act of 1974
(ERISA). 29 U.S.C. 1001 et seq. The commenter asked for clarification
regarding whether the exemption will apply to loans taken from plans
and programs which are not subject to ERISA. Section 226.3(g) itself
does not contain a reference to ERISA or the Department of Labor
regulations pertaining to ERISA, and, accordingly,

[[Page 5263]]

the exemption applies even if the particular plan is not subject to
ERISA. For the other reasons stated above and in the June 2007
Proposal, the Board believes that the exemption for the plans specified
in new Sec. 226.3(g) is appropriate even for those plans to which
ERISA disclosure requirements do not apply.

Section 226.4 Finance Charge

Various provisions of TILA and Regulation Z specify how and when
the cost of consumer credit expressed as a dollar amount, the ``finance
charge,'' is to be disclosed. The rules for determining which charges
make up the finance charge are set forth in TILA Section 106 and
Regulation Z Sec. 226.4. 15 U.S.C. 1605. Some rules apply only to
open-end credit and others apply only to closed-end credit, while some
apply to both. With limited exceptions, the Board did not propose in
June 2007 to change Sec. 226.4 for either closed-end credit or open-
end credit. The areas in which the Board did propose to revise Sec.
226.4 and related commentary relate to (1) transaction charges imposed
by credit card issuers, such as charges for obtaining cash advances
from automated teller machines (ATMs) and for making purchases in
foreign currencies or foreign countries, and (2) charges for credit
insurance, debt cancellation coverage, and debt suspension coverage.
4(a) Definition
Transaction charges. Under the definition of ``finance charge'' in
TILA Section 106 and Regulation Z Sec. 226.4(a), a charge specific to
a credit transaction is ordinarily a finance charge. 15 U.S.C. 1605.
See also Sec. 226.4(b)(2). However, under current comment 4(a)-4, a
fee charged by a card issuer for using an ATM to obtain a cash advance
on a credit card account is not a finance charge to the extent that it
does not exceed the charge imposed by the card issuer on its
cardholders for using the ATM to withdraw cash from a consumer asset
account, such as a checking or savings account. Another comment
indicates that the fee is an ``other charge.'' See current comment
6(b)-1.vi. Accordingly, the fee must be disclosed at account opening
and on the periodic statement, but it is not labeled as a ``finance
charge'' nor is it included in the effective APR.
In the June 2007 Proposal, the Board proposed new comment 4(a)-4 to
address questions that have been raised about the scope and application
of the existing comment. For example, assume the issuer assesses an ATM
fee for one kind of deposit account (for example, an account with a low
minimum balance) but not for another. The existing comment does not
indicate which account is the proper basis for comparison, nor is it
clear in all cases which account should be the appropriate one to use.
Questions have also been raised about whether disclosure of an ATM
cash advance fee pursuant to comments 4(a)-4 and 6(b)-1.vi. is
meaningful to consumers. Under the comments, the disclosure a consumer
receives after incurring a fee for taking a cash advance through an ATM
depends on whether the credit card issuer provides asset accounts and
offers debit cards on those accounts and whether the fee for using the
ATM for the cash advance exceeds the fee for using the ATM for a cash
withdrawal from an asset account. It is not clear that these
distinctions are meaningful to consumers.
In addition, questions have arisen about the proper disclosure of
fees that cardholders are assessed for making purchases in a foreign
currency or outside the United States--for example, when the cardholder
travels abroad. The question has arisen in litigation between consumers
and major card issuers.\11\ Some card issuers have reasoned by analogy
to comment 4(a)-4 that a foreign transaction fee is not a finance
charge if the fee does not exceed the issuer's fee for using a debit
card for the same purchase. Some card issuers disclose the foreign
transaction fee as a finance charge and include it in the effective
APR, but others do not.
---------------------------------------------------------------------------

\11\ See, e.g., Third Consolidated Amended Class Action
Complaint at 47-48, In re Currency Conversion Fee Antitrust
Litigation, MDL Docket No. 1409 (S.D.N.Y.). The court approved a
settlement on a preliminary basis on November 8, 2006. See also,
e.g., LiPuma v. American Express Company, 406 F. Supp. 2d 1298
(S.D.Fla. 2005).
---------------------------------------------------------------------------

The uncertainty about proper disclosure of charges for foreign
transactions and for cash advances from ATMs reflects the inherent
complexity of seeking to distinguish transactions that are ``comparable
cash transactions'' to credit card transactions from transactions that
are not. In June 2007, the Board proposed to replace comment 4(a)-4
with a new comment of the same number stating a simple interpretive
rule that any transaction fee on a credit card plan is a finance
charge, regardless of whether the issuer imposes the same or lesser
charge on withdrawals of funds from an asset account, such as a
checking or savings account. The proposed comment would have provided
as examples of such finance charges a fee imposed by the issuer for
taking a cash advance at an ATM,\12\ as well as a fee imposed by the
issuer for foreign transactions. The Board stated its belief that
clearer guidance might result from a new and simpler approach that
treats as a finance charge any fee charged by credit card issuers for
transactions on their credit card plans, and accordingly proposed new
comment 4(a)-4.
---------------------------------------------------------------------------

\12\ The change to comment 4(a)-4 does not affect disclosure of
ATM fees assessed by institutions other than the credit card issuer.
See proposed Sec. 226.6(b)(1)(ii)(A), adopted in the final rule as
Sec. 226.6(b)(3)(iii)(A).
---------------------------------------------------------------------------

Few commenters addressed proposed comment 4(a)-4. Some commenters
supported the proposed comment, including a financial institution
(although the commenter noted that its support of the proposal was
predicated on the effective APR disclosure requirements being
eliminated, as the Board proposed under one alternative). Other
commenters opposed the proposed comment, some expressing concern that
including all transaction fees as finance charges might cause the
effective APR to exceed statutory interest rate limits contained in
other laws (for example, the 18 percent statutory interest rate ceiling
applicable to federal credit unions).
One commenter stated particular concerns about the proposed
inclusion of foreign transaction fees as finance charges. The commenter
stated that the settlements in the litigation referenced above have
already resolved the issues involved and that adopting the proposal
would cause disruption to disclosure practices established under the
settlements. A consumer group that supported including all transaction
fees in the finance charge noted its concern that the positive effect
of the proposal would be nullified by specifying a limited list of fees
that must be disclosed in writing at account opening (see the section-
by-section analysis to Sec. 226.6(b)(2) and (b)(3), below), and by
eliminating the effective APR assuming the Board adopted that
alternative. The commenter urged the Board to go further and include a
number of other types of fees in the finance charge.
The Board is adopting proposed comment 4(a)-4 with some changes for
clarification. As adopted in final form, comment 4(a)-4 includes
language clarifying that foreign transaction fees include charges
imposed when transactions are made in foreign currencies and converted
to U.S. dollars, as well as charges imposed when transactions are made
in U.S. dollars outside the United States and charges imposed when
transactions are made (whether in a foreign currency or

[[Page 5264]]

in U.S. dollars) with a foreign merchant, such as via a merchant's Web
site. For example, a consumer may use a credit card to make a purchase
in Bermuda, in U.S. dollars, and the card issuer may impose a fee
because the transaction took place outside the United States. The
comment also clarifies that foreign transaction fees include charges
imposed by the card issuer and charges imposed by a third party that
performs the conversion, such as a credit card network or the card
issuer's corporate parent. (For example, in a transaction processed
through a credit card network, the network may impose a 1 percent
charge and the card-issuing bank may impose an additional 2 percent
charge, for a total of a 3 percentage point foreign transaction fee
being imposed on the consumer.)
However, the comment also clarifies that charges imposed by a third
party are included only if they are directly passed on to the consumer.
For example, if a credit card network imposes a 1 percent fee on the
card issuer, but the card issuer absorbs the fee as a cost of doing
business (and only passes it on to consumers in the general sense that
the interest and fees are imposed on all its customers to recover its
costs), then the fee is not a foreign transaction fee that must be
disclosed. In another example, if the credit card network imposes a 1
percent fee for a foreign transaction on the card issuer, and the card
issuer imposes this same fee on the consumer who engaged in the foreign
transaction, then the fee is a foreign transaction fee and must be
included in finance charges to be disclosed. The comment also makes
clear that a card issuer is not required to disclose a charge imposed
by a merchant. For example, if the merchant itself performs the
currency conversion and adds a fee, this would be not be a foreign
transaction fee that card issuers must disclose. Under Sec. 226.9(d),
the card issuer is not required to disclose finance charges imposed by
a party honoring a credit card, such as a merchant, although the
merchant itself is required to disclose such a finance charge (assuming
the merchant is covered by TILA and Regulation Z generally).
The foreign transaction fee is determined by first calculating the
dollar amount of the transaction, using a currency conversion rate
outside the card issuer's and third party's control. Any amount in
excess of that dollar amount is a foreign transaction fee. The comment
provides examples of conversion rates outside the card issuer's and
third party's control. (Such a rate is deemed to be outside the card
issuer's and third party's control, even if the card issuer or third
party could arguably in fact have some degree of control over the rate
used, by selecting the rate from among a number of rates available.)
With regard to the conversion rate, the comment also clarifies that
the rate used for a particular transaction need not be the same rate
that the card issuer (or third party) itself obtains in its currency
conversion operations. The card issuer or third party may convert
currency in bulk amounts, as opposed to performing a conversion for
each individual transaction. The comment also clarifies that the rate
used for a particular transaction need not be the rate in effect on the
date of the transaction (purchase or cash advance), because the
conversion calculation may take place on a later date.
Concerns of some commenters that inclusion of all transaction
charges in the finance charge would cause the effective APR to exceed
permissible ceilings are moot due to the fact that the final rule
eliminates the effective APR requirements as to open-end (not home-
secured) credit, as discussed in the general discussion on the
effective APR in the section-by-section analysis to Sec. 226.7(b). As
to the consumer group comment that eliminating the effective APR would
negate the beneficial impact of the proposed comment for consumers, the
Board believes that adoption of the comment will nevertheless result in
better and more meaningful disclosures to consumers. Transaction fees
such as ATM cash advance fees and foreign transaction fees will be
disclosed more consistently. The Board also believes that the comment
will provide clearer guidance to card issuers, as discussed above.
With regard to foreign transaction fees, the Board believes that
although the settlements in the litigation mentioned above may have led
to some standardization of disclosure practices, the proposed comment
is appropriate because it will bring a uniform disclosure approach to
foreign transaction fees (as opposed to possibly differing approaches
under the different settlement terms), and will be a continuing federal
regulatory requirement (whereas settlements can be modified or expire).
Existing comment 4(b)(2)-1 (which is not revised in the final rule)
states that if a checking or transaction account charge imposed on an
account with a credit feature does not exceed the charge for an account
without a credit feature, the charge is not a finance charge. Comment
4(b)(2)-1 and revised comment 4(a)-4 address different situations.
Charges in comparable cash transactions. Comment 4(a)-1 provides
examples of charges in comparable cash transactions that are not
finance charges. Among the examples are discounts available to a
particular group of consumers because they meet certain criteria, such
as being members of an organization or having accounts at a particular
institution. In the June 2007 Proposal, the Board solicited comment on
whether the example is still useful, or should be deleted as
unnecessary or obsolete. No comments were received on this issue.
Nonetheless, because many of the examples provide guidance to creditors
offering closed-end credit, comment 4(a)-1 is retained in the final
rule and the examples will be reviewed in a future rulemaking
addressing closed-end credit.
4(b) Examples of Finance Charges
Charges for credit insurance or debt cancellation or suspension
coverage. Premiums or other charges for credit life, accident, health,
or loss-of-income insurance are finance charges if the insurance or
coverage is ``written in connection with'' a credit transaction. 15
U.S.C. 1605(b); Sec. 226.4(b)(7). Creditors may exclude from the
finance charge premiums for credit insurance if they disclose the cost
of the insurance and the fact that the insurance is not required to
obtain credit. In addition, the statute requires creditors to obtain an
affirmative written indication of the consumer's desire to obtain the
insurance, which, as implemented in Sec. 226.4(d)(1)(iii), requires
creditors to obtain the consumer's initials or signature. 15 U.S.C.
1605(b). In 1996, the Board expanded the scope of the rule to include
plans involving charges or premiums for debt cancellation coverage. See
Sec. 226.4(b)(10) and (d)(3). See also 61 FR 49237, Sept. 19, 1996.
Currently, however, insurance or coverage sold after consummation of a
closed-end credit transaction or after the opening of an open-end plan
and upon a consumer's request is considered not to be ``written in
connection with the credit transaction,'' and, therefore, a charge for
such insurance or coverage is not a finance charge. See comment 4(b)(7)
and (8)-2.
In June 2007, the Board proposed a number of revisions to these
rules:
(1) The same rules that apply to debt cancellation coverage would
have been applied explicitly to debt suspension coverage. However, to
exclude the cost of debt suspension coverage from the finance charge,
creditors would have been required to inform consumers, as

[[Page 5265]]

applicable, that the obligation to pay loan principal and interest is
only suspended, and that interest will continue to accrue during the
period of suspension. These proposed revisions would have applied to
all open-end plans and closed-end credit transactions.
(2) Creditors could exclude from the finance charge the cost of
debt cancellation and suspension coverage for events in addition to
those permitted today, namely, life, accident, health, or loss-of-
income. This proposed revision would also have applied to all open-end
plans and closed-end credit transactions.
(3) The meaning of insurance or coverage ``written in connection
with'' an open-end plan would have been expanded to cover sales made
throughout the life of an open-end (not home-secured) plan. Under the
proposal, for example, consumers solicited for the purchase of optional
insurance or debt cancellation or suspension coverage for existing
credit card accounts would have received disclosures about the cost and
optional nature of the product at the time of the consumer's request to
purchase the insurance or coverage. HELOCs subject to Sec. 226.5b and
closed-end transactions would not have been affected by this proposed
revision.
(4) For telephone sales, creditors offering open-end (not home-
secured) plans would have been provided with flexibility in evidencing
consumers' requests for optional insurance or debt cancellation or
suspension coverage, consistent with rules published by federal banking
agencies to implement Section 305 of the Gramm-Leach-Bliley Act
regarding the sale of insurance products by depository institutions and
guidance published by the Office of the Comptroller of the Currency
(OCC) regarding the sale of debt cancellation and suspension products.
See 12 CFR Sec. 208.81 et seq. regarding insurance sales; 12 CFR part
37 regarding debt cancellation and debt suspension products. For
telephone sales, creditors could have provided disclosures orally, and
consumers could have requested the insurance or coverage orally, if the
creditor maintained evidence of compliance with the requirements, and
mailed written information within three days after the sale. HELOCs
subject to Sec. 226.5b and closed-end transactions would not have been
affected by this proposed revision.
All of these products serve similar functions but some are
considered insurance under state law and others are not. Taken
together, the proposed revisions were intended to provide consistency
in how creditors deliver, and consumers receive, information about the
cost and optional nature of similar products. The revisions are
discussed in detail below.
4(b)(7) and (8) Insurance Written in Connection With Credit Transaction
Premiums or other charges for insurance for credit life, accident,
health, or loss-of-income, loss of or damage to property or against
liability arising out of the ownership or use of property are finance
charges if the insurance or coverage is written in connection with a
credit transaction. 15 U.S.C. 1605(b) and (c); Sec. 226.4(b)(7) and
(b)(8). Comment 4(b)(7) and (8)-2 provides that insurance is not
written in connection with a credit transaction if the insurance is
sold after consummation on a closed-end transaction or after an open-
end plan is opened and the consumer requests the insurance. As stated
in the June 2007 Proposal, the Board believes this approach remains
sound for closed-end transactions, which typically consist of a single
transaction with a single advance of funds. Consumers with open-end
plans, however, retain the ability to obtain advances of funds long
after account opening, so long as they pay down the principal balance.
That is, a consumer can engage in credit transactions throughout the
life of a plan.
Accordingly, in June 2007 the Board proposed revisions to comment
4(b)(7) and (8)-2, to state that insurance purchased after an open-end
(not home-secured) plan was opened would be considered to be written
``in connection with a credit transaction.'' Proposed new comment
4(b)(10)-2 would have given the same treatment to purchases of debt
cancellation or suspension coverage. As proposed, therefore, purchases
of voluntary insurance or debt cancellation or suspension coverage
after account opening would trigger disclosure and consent
requirements.
Few commenters addressed this issue. One financial institution
trade association supported the proposed revisions to comments 4(b)(7)
and (8)-2 and 4(b)(10)-2, while two other commenters (a financial
institution and a trade association) opposed them, arguing that the
rules for open-end (not home-secured) plans should remain consistent
with the rules for home-equity and closed-end credit, that there is no
demonstrable harm to consumers from the existing rule, and that other
state and federal law provides adequate protection.
The revisions to comments 4(b)(7) and (8)-2 and 4(b)(10)-2 are
adopted as proposed. In an open-end plan, where consumers can engage in
credit transactions after the opening of the plan, a creditor may have
a greater opportunity to influence a consumer's decision whether or not
to purchase credit insurance or debt cancellation or suspension
coverage than in the case of closed-end credit. Accordingly, the
disclosure and consent requirements are important in open-end plans,
even after the opening of the plan, to ensure that the consumer is
fully informed about the offer of insurance or coverage and that the
decision to purchase it is voluntary. In addition, under the final
rule, creditors will be permitted to provide disclosures and obtain
consent by telephone (provided they mail written disclosures to the
consumer after the purchase), so long as they meet requirements
intended to ensure the purchase is voluntary. See the section-by-
section analysis to Sec. 226.4(d)(4) below. As to consistency between
the rules for open-end (not home-secured) plans and home-equity plans,
the Board intends to consider this issue when the home-equity credit
plan rules are reviewed in the future.
4(b)(9) Discounts
Comment 4(b)(9)-2, which addresses cash discounts to induce
consumers to use cash or other payment means instead of credit cards or
other open-end plans is revised for clarity, as proposed in June 2007.
No substantive change is intended. No comments were received on this
change.
4(b)(10) Debt Cancellation and Debt Suspension Fees
As discussed above, premiums or other charges for credit life,
accident, health, or loss-of-income insurance are finance charges if
the insurance or coverage is written in connection with a credit
transaction. This same rule applies to charges for debt cancellation
coverage. See Sec. 226.4(b)(10). Although debt cancellation fees meet
the definition of ``finance charge,'' they may be excluded from the
finance charge on the same conditions as credit insurance premiums. See
Sec. 226.4(d)(3).
The Board proposed in June 2007 to revise the regulation to provide
the same treatment to debt suspension coverage as to credit insurance
and debt cancellation coverage. Thus, under proposed Sec.
226.4(b)(10), charges for debt suspension coverage would be finance
charges. (The conditions under which debt suspension charges may be
excluded from the finance charge are discussed in the section-by-
section

[[Page 5266]]

analysis to Sec. 226.4(d)(3), below.) Debt suspension is the
creditor's agreement to suspend, on the occurrence of a specified
event, the consumer's obligation to make the minimum payment(s) that
would otherwise be due. During the suspension period, interest may
continue to accrue or it may be suspended as well, depending on the
plan. The borrower may be prohibited from using the credit plan during
the suspension period. In addition, debt suspension may cover events
other than loss of life, health, or income, such as a wedding, a
divorce, the birth of child, or a medical emergency.
In the June 2007 Proposal, debt suspension coverage would have been
defined as coverage that suspends the consumer's obligation to make one
or more payments on the date(s) otherwise required by the credit
agreement, when a specified event occurs. See proposed comment
4(b)(10)-1. The comment would have clarified that the term debt
suspension coverage as used in Sec. 226.4(b)(10) does not include
``skip payment'' arrangements in which the triggering event is the
borrower's unilateral election to defer repayment, or the bank's
unilateral decision to allow a deferral of payment.
This aspect of the proposal would have applied to closed-end as
well as open-end credit transactions. As discussed in the supplementary
information to the June 2007 Proposal, it appears appropriate to
consider charges for debt suspension products to be finance charges,
because these products operate in a similar manner to debt
cancellation, and reallocate the risk of nonpayment between the
borrower and the creditor.
Industry commenters supported the proposed approach of including
charges for debt suspension coverage as finance charges generally, but
permitting exclusion of such charges if the coverage is voluntary and
meets the other conditions contained in the proposal. Consumer group
commenters did not address this issue. Comment 4(b)(10)-1 is adopted as
proposed with some minor changes for clarification. Exclusion of
charges for debt suspension coverage from the definition of finance
charge is discussed in the section-by-section analysis to Sec.
226.4(d)(3) below.
4(d) Insurance and Debt Cancellation Coverage
4(d)(3) Voluntary Debt Cancellation or Debt Suspension Fees
As explained in the section-by-section analysis to Sec.
226.4(b)(10), debt cancellation fees and, as clarified in the final
rule, debt suspension fees meet the definition of ``finance charge.''
Under current Sec. 226.4(d)(3), debt cancellation fees may be excluded
from the finance charge on the same conditions as credit insurance
premiums. These conditions are: the coverage is not required and this
fact is disclosed in writing, and the consumer affirmatively indicates
in writing a desire to obtain the coverage after the consumer receives
written disclosure of the cost. Debt cancellation coverage that may be
excluded from the finance charge is limited to coverage that provides
for cancellation of all or part of a debtor's liability (1) in case of
accident or loss of life, health, or income; or (2) for amounts
exceeding the value of collateral securing the debt (commonly referred
to as ``gap'' coverage, frequently sold in connection with motor
vehicle loans).
Debt cancellation coverage and debt suspension coverage are
fundamentally similar to the extent they offer a consumer the ability
to pay in advance for the right to reduce the consumer's obligations
under the plan on the occurrence of specified events that could impair
the consumer's ability to satisfy those obligations. The two types of
coverage are, however, different in a key respect. One cancels debt, at
least up to a certain agreed limit, while the other merely suspends the
payment obligation while the debt remains constant or increases,
depending on coverage terms.
In June 2007, the Board proposed to revise Sec. 226.4(d)(3) to
expressly permit creditors to exclude charges for voluntary debt
suspension coverage from the finance charge when, after receiving
certain disclosures, the consumer affirmatively requests such a
product. The Board also proposed to add a disclosure (Sec.
226.4(d)(3)(iii)), to be provided as applicable, that the obligation to
pay loan principal and interest is only suspended, and that interest
will continue to accrue during the period of suspension. These proposed
revisions would have applied to closed-end as well as open-end credit
transactions. Model clauses and samples were proposed at Appendix G-
16(A) and G-16(B) and Appendix H-17(A) and H-17(B) to part 226.
In addition, the Board proposed in the June 2007 Proposal to
continue to limit the exclusion permitted by Sec. 226.4(d)(3) to
charges for coverage for accident or loss of life, health, or income or
for gap coverage. The Board also proposed, however, to add comment
4(d)(3)-3 to clarify that, if debt cancellation or debt suspension
coverage for two or more events is sold at a single charge, the entire
charge may be excluded from the finance charge if at least one of the
events is accident or loss of life, health, or income. The proposal is
adopted in the final rule, with a few modifications discussed below.
A few industry commenters suggested that the exclusion of debt
cancellation or debt suspension coverage from the finance charge should
not be limited to instances where one of the triggering events is
accident or loss of life, health, or income. The commenters contended
that such a rule would lead to an inconsistent result; for example, if
debt cancellation or suspension coverage has only divorce as a
triggering event, the charge could not be excluded from the finance
charge, while if the coverage applied to divorce and loss of income,
the charge could be excluded. The proposal is adopted without change in
this regard. The identification of accident or loss of life, health, or
income in current Sec. 226.4(d)(3)(ii) (renumbered Sec. 226.4(d)(3)
in the final rule) with respect to debt cancellation coverage is based
on TILA Section 106(b), which addresses credit insurance for accident
or loss of life or health. 15 U.S.C. 1605(b). That statutory provision
reflects the regulation of credit insurance by the states, which may
limit the types of insurance that insurers may sell. The approach in
the final rule is consistent with the purpose of Section 106(b), but
also recognizes that debt cancellation and suspension coverage often
are not limited by applicable law to the events allowed for insurance.
A few commenters addressed the proposed disclosure for debt
suspension programs that the obligation to pay loan principal and
interest is only suspended, and that interest will continue to accrue
during the period of suspension. A commenter suggested that in programs
combining elements of debt cancellation and debt suspension, the
disclosure should not be required. The final rule retains the
disclosure requirement in Sec. 226.4(d)(3)(iii). However, comment
4(d)(3)-4 has been added stating that if the debt can be cancelled
under certain circumstances, the disclosure may be modified to reflect
that fact. The disclosure could, for example, state (in addition to the
language required by Sec. 226.4(d)(3)(iii)) that ``in some
circumstances, my debt may be cancelled.'' However, the disclosure
would not be permitted to list the specific events that would result in
debt cancellation, to avoid ``information overload.''
Another commenter noted that the model disclosures proposed at
Appendix G-16(A), G-16(B), H-17(A),

[[Page 5267]]

and H-17(B) to part 226 were phrased assuming interest continues to
accrue in all cases of debt suspension programs. The commenter
contended that interest does not continue to accrue during the period
of suspension in all cases, and suggested revising the forms. However,
the disclosures under Sec. 226.4(d)(3)(iii) are only required as
applicable; thus, if the disclosure that interest will continue to
accrue during the period of suspension is not applicable, it need not
be provided.
A commenter noted that proposed model and sample forms G-16(A) and
G-16(B), for open-end credit, and H-17(A) and H-17(B), for closed-end
credit are virtually identical, but that the model language regarding
cost of coverage is more appropriate for open-end credit. Model Clause
H-17(A) and Sample H-17(B) have been revised in the final rule to
include language regarding cost of coverage that is appropriate for
closed-end credit.
A consumer group suggested that in debt suspension programs where
interest continues to accrue during the suspension period, periodic
statements should be required to include a disclosure of the amount of
the accrued interest. The Board believes that the requirement under
Sec. 226.7, as adopted in the final rule, for each periodic statement
to disclose total interest for the billing cycle as well as total year-
to-date interest on the account adequately addresses this concern.
The Board noted in the June 2007 Proposal that the regulation
provides guidance on how to disclose the cost of debt cancellation
coverage (in proposed Sec. 226.4(d)(3)(ii)), and sought comment on
whether additional guidance was needed for debt suspension coverage,
particularly for closed-end loans. No commenters addressed this issue
except for one industry commenter that responded that no additional
guidance was needed.
In a technical revision, as proposed in June 2007, the substance of
footnotes 5 and 6 is moved to the text of Sec. 226.4(d)(3).
4(d)(4) Telephone Purchases
Under Sec. 226.4(d)(1) and (d)(3), creditors may exclude from the
finance charge premiums for credit insurance and debt cancellation or
(as provided in revisions in the final rule) debt suspension coverage
if, among other conditions, the consumer signs or initials an
affirmative written request for the insurance or coverage. In the June
2007 Proposal, the Board proposed an exception to the requirement to
obtain a written signature or initials for telephone purchases of
credit insurance or debt cancellation and debt suspension coverage on
an open-end (not home-secured) plan. Under proposed new Sec.
226.4(d)(4), for telephone purchases, the creditor would have been
permitted to make the disclosures orally and the consumer could
affirmatively request the insurance or coverage orally, provided that
the creditor (1) maintained reasonable procedures to provide the
consumer with the oral disclosures and maintains evidence that
demonstrates the consumer then affirmatively elected to purchase the
insurance or coverage; and (2) mailed the disclosures under Sec.
226.4(d)(1) or (d)(3) within three business days after the telephone
purchase. Comment 4(d)(4)-1 would have provided that a creditor does
not satisfy the requirement to obtain an affirmative request if the
creditor uses a script with leading questions or negative consent.
Commenters supported proposed Sec. 226.4(d)(4), with some
suggested modifications, and it is adopted in final form with a few
modifications discussed below. A few commenters requested that the
Board expand the proposed telephone purchase rule to home-equity plans
and closed-end credit for consistency. HELOCs and closed-end credit are
largely separate product lines from credit card and other open-end (not
home-secured) plans, and the Board anticipates reviewing the rules
applying to these types of credit separately; the issue of telephone
sales of credit insurance and debt cancellation or suspension coverage
can better be addressed in the course of those reviews. In addition, as
discussed above, comment 4(b)(7) and (8)-2, as amended in the final
rule, provides that insurance is not written in connection with a
credit transaction if the insurance is sold after consummation of a
closed-end transaction, or after a home-equity plan is opened, and the
consumer requests the insurance. Accordingly, the requirements for
disclosure and affirmative written consent to purchase the insurance or
coverage do not apply in these situations, and thus the relief that
would be afforded by the telephone purchase rule appears less
necessary.
A commenter stated that the requirement (in Sec. 226.4(d)(4)(ii))
to mail the disclosures under Sec. 226.4(d)(1) or (d)(3) within three
business days after the telephone purchase would be difficult
operationally, and recommended that the rule allow five business days
instead of three. The Board believes that three business days should
provide adequate time to creditors to mail the written disclosures. In
addition, the three-business-day period for mailing written disclosures
is consistent with the rules published by the federal banking agencies
to implement Section 305 of the Gramm-Leach-Bliley Act regarding the
sale of insurance products by depository institutions, as well as with
the OCC rules regarding the sale of debt cancellation and suspension
products.
A few commenters expressed concern about proposed comment 4(d)(4)-
1, prohibiting the use of leading questions or negative consent in
telephone sales. The commenters stated that the leading questions rule
would be difficult to comply with, because the distinction between a
leading question and routine marketing language may not be apparent in
many cases. The commenters were particularly concerned about being able
to ensure that the enrollment question itself not be considered
leading. The final comment includes an example of an enrollment
question (``Do you want to enroll in this optional debt cancellation
plan?'') that would not be considered leading.
Section 226.4(d)(4)(i) in the June 2007 Proposal would have
required that the creditor must, in addition to providing the required
disclosures orally and maintaining evidence that the consumer
affirmatively elected to purchase the insurance or coverage, also
maintain reasonable procedures to provide the disclosures orally. The
final rule does not contain the requirement to maintain procedures to
provide the disclosures orally; this requirement is unnecessary because
creditors must actually provide the disclosures orally in each case.
The Board proposed this approach pursuant to its exception and
exemption authorities under TILA Section 105. Section 105(a) authorizes
the Board to make exceptions to TILA to effectuate the statute's
purposes, which include facilitating consumers' ability to compare
credit terms and helping consumers avoid the uniformed use of credit.
15 U.S.C. 1601(a), 1604(a). Section 105(f) authorizes the Board to
exempt any class of transactions (with an exception not relevant here)
from coverage under any part of TILA if the Board determines that
coverage under that part does not provide a meaningful benefit to
consumers in the form of useful information or protection. 15 U.S.C.
1604(f)(1). Section 105(f) directs the Board to make this determination
in light of specific factors. 15 U.S.C. 1604(f)(2). These factors are
(1) the amount of the loan and whether the disclosure provides a
benefit to consumers who are parties to the transaction involving a
loan of such amount; (2) the extent to which the requirement
complicates, hinders, or

[[Page 5268]]

makes more expensive the credit process; (3) the status of the
borrower, including any related financial arrangements of the borrower,
the financial sophistication of the borrower relative to the type of
transaction, and the importance to the borrower of the credit, related
supporting property, and coverage under TILA; (4) whether the loan is
secured by the principal residence of the borrower; and (5) whether the
exemption would undermine the goal of consumer protection.
As stated in the June 2007 Proposal, the Board has considered each
of these factors carefully, and based on that review, believes it is
appropriate to exempt, for open-end (not home-secured) plans, telephone
sales of credit insurance or debt cancellation or debt suspension plans
from the requirement to obtain a written signature or initials from the
consumer. Requiring a consumer's written signature or initials is
intended to evidence that the consumer is purchasing the product
voluntarily; the proposal contained safeguards intended to insure that
oral purchases are voluntary. Under the proposal and as adopted in the
final rule, creditors must maintain tapes or other evidence that the
consumer received required disclosures orally and affirmatively
requested the product. Comment 4(d)(4)-1 indicates that a creditor does
not satisfy the requirement to obtain an affirmative request if the
creditor uses a script with leading questions or negative consent. In
addition to oral disclosures, under the proposal consumers will receive
written disclosures shortly after the transaction.
The fee for the credit insurance or debt cancellation or debt
suspension coverage will also appear on the first monthly periodic
statement after the purchase, and, as applicable, thereafter. Consumer
testing conducted for the Board suggests that consumers review the
transactions on their statements carefully. Moreover, as discussed in
the section-by-section analysis under Sec. 226.7, under the final rule
fees, including insurance and debt cancellation or suspension coverage
charges, will be better highlighted on statements. Consumers who are
billed for insurance or coverage they did not purchase may dispute the
charge as a billing error. These safeguards are expected to ensure that
purchases of credit insurance or debt cancellation or suspension
coverage by telephone are voluntary.
At the same time, the amendments should facilitate the convenience
to both consumers and creditors of conducting transactions by
telephone. The amendments, therefore, have the potential to better
inform consumers and further the goals of consumer protection and the
informed use of credit for open-end (not home-secured) credit.

Section 226.5 General Disclosure Requirements

Section 226.5 contains format and timing requirements for open-end
credit disclosures. In the June 2007 Proposal, the Board proposed,
among other changes to Sec. 226.5, to reform the rules governing the
disclosure of charges before they are imposed in open-end (not home-
secured) credit. Under the proposal, all charges imposed as part of the
plan would have had to be disclosed before they were imposed; however,
while certain specified charges would have continued to be disclosed in
writing in the account-opening disclosures, other charges imposed as
part of the plan could have been disclosed orally or in writing at any
time before the consumer becomes obligated to pay the charge.
5(a) Form of Disclosures
In the June 2007 Proposal, the Board proposed changes to Sec.
226.5(a) and the associated commentary regarding the standard to
provide ``clear and conspicuous'' disclosures. In addition, in both the
June 2007 Proposal and the May 2008 Proposal, the Board proposed
changes to Sec. 226.5(a) and the associated commentary with respect to
terminology. To improve clarity, the Board also proposed technical
revisions to Sec. 226.5(a) in the June 2007 Proposal.
5(a)(1) General
Clear and conspicuous standard. Under TILA Section 122(a), all
required disclosures must be ``clear and conspicuous.'' 15 U.S.C.
1632(a). The Board has interpreted ``clear and conspicuous'' for most
open-end disclosures to mean that they must be in a reasonably
understandable form. Comment 5(a)(1)-1. In most cases, this standard
does not require that disclosures be segregated from other material or
located in any particular place on the disclosure statement, nor that
disclosures be in any particular type size. Certain disclosures in
credit and charge card applications and solicitations subject to Sec.
226.5a, however, must meet a higher standard of clear and conspicuous
due to the importance of the disclosures and the context in which they
are given. For these disclosures, the Board has required that they be
both in a reasonably understandable form and readily noticeable to the
consumer. Comment 5(a)(1)-1. In the June 2007 Proposal, the Board
proposed to amend comment 5(a)(1)-1 to expand the list of disclosures
that must be both in a reasonably understandable form and readily
noticeable to the consumer.
Readily noticeable standard. Certain disclosures in credit and
charge card applications and solicitations subject to Sec. 226.5a are
currently required to be in a tabular format. In the June 2007
Proposal, the Board proposed to require information be highlighted in a
tabular format in additional circumstances, including: In the account-
opening disclosures pursuant to Sec. 226.6(b)(4) (adopted as Sec.
226.6(b)(1) below); with checks that access a credit card account
pursuant to Sec. 226.9(b)(3); in change-in-terms notices pursuant to
Sec. 226.9(c)(2)(iii)(B); and in disclosures when a rate is increased
due to delinquency, default or as a penalty pursuant to Sec.
226.9(g)(3)(ii). Because these disclosures would be highlighted in a
tabular format similar to the table required with respect to credit
card applications and solicitations under Sec. 226.5a, the Board
proposed that these disclosures also be in a reasonably understandable
form and readily noticeable to the consumer.
As discussed in further detail in the section-by-section analysis
to Sec. Sec. 226.6(b), 226.9(b), 226.9(c), and 226.9(g), many
commenters supported the Board's proposal to require certain
information to be presented in a tabular format, and consumer testing
showed that tabular presentation of disclosures improved consumer
attention to, and understanding of, the disclosures. As a result, the
Board adopts the proposal to require a tabular format for certain
information required by these sections as well as the proposal to amend
comment 5(a)(1)-1. Technical amendments proposed under the June 2007
Proposal, including moving the guidance on the meaning of ``reasonably
understandable form'' to comment 5(a)(1)-2, and moving guidance on what
constitutes an ``integrated document'' to comment 5(a)(1)-4, are also
adopted.
In the June 2007 Proposal, the Board also proposed to add comment
5(a)(1)-3 to provide guidance on the meaning of the readily noticeable
standard. Specifically, the Board proposed that to meet the readily
noticeable standard, the following disclosures must be given in a
minimum of 10-point font: Disclosures for credit card applications and
solicitations under Sec. 226.5a, highlighted account-opening
disclosures under Sec. 226.6(b)(4) (adopted as Sec. 226.6(b)(1)
below), highlighted disclosures accompanying checks that access a
credit card account under

[[Page 5269]]

Sec. 226.9(b)(3), highlighted change-in-terms disclosures under Sec.
226.9(c)(2)(iii)(B), and highlighted disclosures when a rate is
increased due to delinquency, default or as a penalty under Sec.
226.9(g)(3)(ii).
The Board received numerous consumer comments that credit card
disclosures are in fine print and that disclosures should be given in a
larger font. Many consumer and consumer group commenters suggested that
disclosures should be given in a minimum 12-point font. Several of
these comments also suggested that the 12-point font minimum be applied
to disclosures other than the highlighted disclosures proposed to be
subjected to the readily noticeable standard as proposed in comment
5(a)(1)-1. Industry commenters suggested that there be no minimum font
size or that the minimum should be 9-point font. One industry commenter
stated that the 10-point font minimum should not apply to any
disclosures on a periodic statement.
The Board adopts comment 5(a)(1)-3 as proposed. As discussed in the
June 2007 Proposal, the Board believes that for certain disclosures,
special formatting requirements, such as a tabular format and font size
requirements, are needed to highlight for consumers the importance and
significance of the disclosures. The Board does not believe, however,
that all TILA-required disclosures should be subject to this same
standard. For certain disclosures, such as periodic statements,
requiring all TILA-required disclosures to be highlighted in the same
way could be burdensome for creditors because it would cause the
disclosures to be longer and more expensive to provide to consumers. In
addition, the benefits to consumers would not outweigh such costs. The
Board believes that a more balanced approach is to require such
highlighting only for certain important disclosures. The Board, thus,
declines to extend the minimum font size requirement to disclosures
other than those listed in proposed comment 5(a)(1)-3. Similarly, for
disclosures that may appear on periodic statements, such as the
highlighted change-in-terms disclosures under Sec. 226.9(c)(2)(iii)(B)
and highlighted disclosures when a rate is increased due to
delinquency, default or as a penalty under Sec. 226.9(g)(3)(ii), the
Board believes that the minimum 10-point font size for these
disclosures is appropriate because these are disclosures that consumers
do not expect to see each billing cycle. Therefore, the Board believes
that it is especially important to highlight these disclosures.
As discussed in the June 2007 Proposal, the Board proposed a
minimum of 10-point font for these disclosures to be consistent with
the approach taken by eight federal agencies (including the Board) in
issuing a proposed model form that financial institutions may use to
comply with the privacy notice requirements under Section 503 of the
Gramm-Leach-Bliley Act. 15 U.S.C. 6803(e); 72 FR 14940, Mar. 29, 2007.
Furthermore, in consumer testing conducted for the Board, participants
were able to read and notice information in a 10-point font. Therefore,
the Board adopts the comment as proposed.
Disclosures subject to the clear and conspicuous standard. The
Board proposed comment 5(a)(1)-5 in the June 2007 Proposal to address
questions on the types of communications that are subject to the clear
and conspicuous standard. The comment would have clarified that all
required disclosures and other communications under subpart B of
Regulation Z are considered disclosures required to be clear and
conspicuous, including the disclosure by a person other than the
creditor of a finance charge imposed at the time of honoring a
consumer's credit card under Sec. 226.9(d) and any correction notice
required to be sent to the consumer under Sec. 226.13(e). No comments
were received regarding the proposed comment, and the comment is
adopted as proposed.
Oral disclosure. In order to give guidance about the meaning of
``clear and conspicuous'' for oral disclosures, the Board proposed in
the June 2007 Proposal to amend the guidance on what constitutes a
``reasonably understandable form,'' in proposed comment 5(a)(1)-2.
Specifically, the Board proposed that oral disclosures be considered to
be in a reasonably understandable form when they are given at a volume
and speed sufficient for a consumer to hear and comprehend the
disclosures. No comments were received on the Board's proposed guidance
concerning clear and conspicuous oral disclosures. Comment 5(a)(1)-2 is
adopted as proposed. The Board believes the comment provides necessary
guidance not only for the oral disclosure of certain charges under
Sec. 226.5(a)(1)(ii), but also for other oral disclosure, such as
radio and television advertisements.
5(a)(1)(ii)
Section 226.5(a)(1)(ii) provides that in general, disclosures for
open-end plans must be provided in writing and in a retainable form.
Oral disclosures. As discussed in the June 2007 Proposal, the Board
proposed that certain charges may be disclosed after account opening
and that disclosure of those charges may be provided orally or in
writing before the cost is imposed. Many industry commenters supported
the Board's proposal to permit oral disclosure of certain charges while
consumer group commenters opposed the Board's proposal. Some of these
consumer group commenters acknowledged the usefulness of oral
disclosure of fees at a time when the consumer is about to incur the
fee but suggested that it should be in addition to, but not take the
place of, written disclosure.
As the Board discussed in the June 2007 Proposal, in proposing to
permit certain charges to be disclosed after account opening, the
Board's goal was to better ensure that consumers receive disclosures at
a time and in a manner that they would be likely to notice them. As
discussed in the June 2007 Proposal, at account opening, written
disclosure has obvious merit because it is a time when a consumer must
assimilate information that may influence major decisions by the
consumer about how, or even whether, to use the account. During the
life of an account, however, a consumer will sometimes need to decide
whether to purchase a single service from the creditor that may not be
central to the consumer's use of the account (for example, the service
of providing documentary evidence of transactions). The consumer may
become accustomed to purchasing such services by telephone, and will,
accordingly, expect to receive an oral disclosure of the charge for the
service during the same telephone call. Permitting oral disclosure of
charges that are not central to the consumer's use of the account would
be consistent with consumer expectations and with the business
practices of creditors. For these reasons, the Board adopts its
proposal to permit creditors to disclose orally charges not
specifically identified in the account-opening table in Sec.
226.6(b)(2) (proposed as Sec. 226.6(b)(4)). Further, the Board adopts
its proposal that creditors be provided with the same flexibility when
the cost of such a charge changes or is newly introduced, as discussed
in the section-by-section analysis to Sec. 226.9(c).
One industry commenter stated its concerns that oral disclosure may
make it difficult for creditors to demonstrate compliance with TILA. As
the Board discussed in the June 2007 Proposal, creditors may continue
to comply with

[[Page 5270]]

TILA by providing written disclosures at account opening for all fees.
The Board anticipates that creditors will likely continue to identify
fees in the account agreement for contract and other reasons even if
the regulation does not specifically require creditors to do so.
In technical revisions, as proposed in the June 2007 Proposal, the
final rule moves to Sec. 226.5(a)(1)(ii)(A) the current exemption in
footnote 7 under Sec. 226.5(a)(1) that disclosures required by Sec.
226.9(d) need not be in writing. Section 226.9(d) requires disclosure
when a finance charge is imposed by a person other than the card issuer
at the time of a transaction. Specific wording in Sec.
226.5(a)(1)(ii)(A) also has been amended from the proposal in order to
provide greater clarity, with no intended substantive change from the
June 2007 Proposal. In another technical revision, the substance of
footnote 8, regarding disclosures that do not need to be in a
retainable form the consumer may keep, is moved to Sec.
226.5(a)(1)(ii)(B) as proposed.
Electronic communication. Commenters on the June 2007 Proposal
suggested that for disclosures that need not be provided in writing at
account opening, creditors should be permitted to provide disclosures
in electronic form, without having to comply with the consumer notice
and consent procedures of the Electronic Signatures in Global and
National Commerce Act (E-Sign Act), 15 U.S.C. 7001 et seq., at the time
an on-line or other electronic service is used. For example, commenters
suggested, if a consumer wishes to make an on-line payment on the
account, for which the creditor imposes a fee (which has not previously
been disclosed), the creditor should be allowed to disclose the fee
electronically, without E-Sign notice and consent, at the time the on-
line payment service is requested. Commenters contended that such a
provision would not harm consumers and would expedite transactions, and
also that it would be consistent with the Board's proposal to permit
oral disclosure of such fees.
Under section 101(c) of the E-Sign Act, if a statute or regulation
requires that consumer disclosures be provided in writing, certain
notice and consent procedures must be followed in order to provide the
disclosures in electronic form. Accordingly because the disclosures
under Sec. 226.5(a)(1)(ii)(A) are not required to be provided in
writing, the Board proposed to add comment 5(a)(1)(ii)(A)-1 in May 2008
to clarify that disclosures not required to be in writing may be
provided in writing, orally, or in electronic form without regard to
the consumer consent or other provisions of the E-Sign Act.
Most commenters supported the Board's proposal. Some consumer group
commenters, however, suggested that the Board require that any
electronic disclosure be in a format that can be printed and retained.
The Board declines to impose such a requirement. Disclosures that the
Board permits to be made orally are not required to be in written or
retainable form. The Board believes that the same standard should apply
if such disclosures are made electronically. In order to clarify this
point, the Board has amended Sec. 226.5(a)(1)(ii)(B) to specify that
disclosures that need not be in writing also do not need to be in
retainable form. This would encompass both oral and electronic
disclosures.
5(a)(1)(iii)
In a final rule addressing electronic disclosures published in
November 2007 (November 2007 Final Electronic Disclosure Rule), the
Board adopted amendments to Sec. 226.5(a)(1) to clarify that creditors
may provide open-end disclosures to consumers in electronic form,
subject to compliance with the consumer consent and other applicable
provisions of the E-Sign Act. 72 FR 63462, Nov. 9, 2007; 72 FR 71058,
Dec. 14, 2007. These amendments also provide that the disclosures
required by Sec. Sec. 226.5a, 226.5b, and 226.16 may be provided to
the consumer in electronic form, under the circumstances set forth in
those sections, without regard to the consumer consent or other
provisions in the E-Sign Act. These amendments have been moved to Sec.
226.5(a)(1)(iii) for organizational purposes.
Furthermore, in May 2008, the Board proposed comment 5(a)(1)(iii)-1
to clarify that the disclosures specified in Sec. 226.5(a)(1)(ii)(A)
also may be provided in electronic form without regard to the E-Sign
Act when the consumer requests the service in electronic form, such as
on a creditor's Web site. Consistent with the Board's decision to adopt
comment 5(a)(1)(ii)(A)-1, as discussed above, the Board adopts comment
5(a)(1)(iii)-1.
5(a)(2) Terminology
Consistent terminology. As proposed in June 2007, disclosures
required by the open-end provisions of Regulation Z (Subpart B) would
have been required to use consistent terminology under proposed Sec.
226.5(a)(2)(i). The Board also proposed comment 5(a)(2)-4 to clarify
that terms do not need to be identical but must be close enough in
meaning to enable the consumer to relate the disclosures to one
another.
The Board received no comments objecting to this proposal.
Accordingly, the Board adopts Sec. 226.5(a)(2)(i) and comment 5(a)(2)-
4 as proposed. The Board, however, received one comment requesting
clarification on the implementation of this provision. Specifically,
the commenter pointed out that creditors will likely phase in changes
during a transitional period, and as a result, may not be able to align
terminology in all their disclosures to consumers during this
transitional period. The Board agrees; thus, some disclosures may
contain existing terminology required currently under Regulation Z
while other disclosures may contain new terminology required in this
final rule or the final rules issued by the Board and other federal
banking agencies published elsewhere in today's Federal Register.
Therefore, during this transitional period, terminology need not be
consistent across all disclosures. By the effective date of this rule,
however, all disclosures must have consistent terminology.
Terms required to be more conspicuous than others. TILA Section
122(a) requires that the terms ``annual percentage rate'' and ``finance
charge'' be disclosed more conspicuously than other terms, data, or
information. 15 U.S.C. 1632(a). The Board has implemented this
provision in current Sec. 226.5(a)(2) by requiring that the terms
``finance charge'' and ``annual percentage rate,'' when disclosed with
a corresponding amount or percentage rate, be disclosed more
conspicuously than any other required disclosure. Currently, the terms
do not need to be more conspicuous when used under Sec. Sec. 226.5a,
226.7(d), 226.9(e), and 226.16. In June 2007, the Board proposed to
expand this list to include the account-opening disclosures that would
be highlighted under proposed Sec. 226.6(b)(4) (adopted as Sec.
226.6(b)(1) and (b)(2) below), the disclosure of the effective APR
under proposed Sec. 226.7(b)(7) under one approach, disclosures on
checks that access a credit card account under proposed Sec.
226.9(b)(3), the information on change-in-terms notices that would be
highlighted under proposed Sec. 226.9(c)(2)(iii)(B), and the
disclosures given when a rate is increased due to delinquency, default
or as a penalty under proposed Sec. 226.9(g)(3)(ii). In addition, the
Board sought comment in the June 2007 Proposal on ways to address
criticism by the United States Government Accountability Office (GAO)
that credit card disclosure

[[Page 5271]]

documents ``unnecessarily emphasized specific terms.'' \13\
---------------------------------------------------------------------------

\13\ United States Government Accountability Office, Credit
Cards: Increased Complexity in Rates and Fees Heightens Need for
More Effective Disclosures to Consumers, 06-929 (September 2006).
---------------------------------------------------------------------------

As discussed in the June 2007 Proposal, the Board agreed with the
GAO's assessment that overemphasis of these terms may make disclosures
more difficult for consumers to read. One approach the Board had
considered to remedy this problem was to prohibit the terms ``finance
charge'' and ``annual percentage rate'' from being disclosed more
conspicuously than other required disclosures except when the
regulation so requires. However, the Board acknowledged in the June
2007 Proposal that this approach could produce unintended consequences.
Commenters agreed with the Board.
Many industry commenters suggested that in light of the Board's
requirement to disclose APRs and certain other finance charges at
account-opening and at other times in the life of the account in a
tabular format with a minimum 10-point font size pursuant to comment
5(a)(1)-3 (or 16-point font size as required for the APR for purchases
under Sec. Sec. 226.5a(b)(1) and 226.6(b)(2)), requiring the terms
``annual percentage rate'' and ``finance charge'' to be more
conspicuous than other disclosures to draw attention to the terms was
not necessary. Furthermore, commenters pointed out that the Board is no
longer requiring use of the term ``finance charge'' in TILA disclosures
to consumers for open-end (not home-secured) plans, and in fact, is
requiring creditors to disclose finance charges as either ``fees'' or
``interest'' on periodic statements. As a result, creditors would, in
many cases, no longer have the term ``finance charge'' to make more
conspicuous than other terms.
For the reasons discussed above, the Board is eliminating for open-
end (not home-secured) plans the requirement to disclose ``annual
percentage rate'' and ``finance charge'' more conspicuously, using its
authority under Section 105(a) of TILA to make ``such adjustments and
exceptions for any class of transaction as in the judgment of the Board
are necessary or proper to effectuate the purposes of the title, to
prevent circumvention or evasion thereof, or to facilitate compliance
therewith.'' 15 U.S.C. 1604(a). Therefore, the requirement in Sec.
226.5(a)(2)(ii) that ``annual percentage rate'' and ``finance charge''
be disclosed more conspicuously than any other required disclosures
when disclosed with a corresponding amount or percentage rate applies
only to home-equity plans subject to Sec. 226.5b. As is currently the
case, even for home-equity plans subject to Sec. 226.5b, these terms
need not be more conspicuous when used under Sec. 226.7(a)(4) on
periodic statements and under section Sec. 226.16 in advertisements.
Other exceptions currently in footnote 9 to Sec. 226.5(a)(2), which
reference Sec. Sec. 226.5a and 226.9(e), have been deleted as
unnecessary since these disclosures do not apply to home-equity plans
subject to Sec. 226.5b. The requirement, as it applies to home-equity
plans subject to Sec. 226.5b, may be re-evaluated when the Board
conducts its review of the regulations related to home-equity plans.
Use of the term ``grace period''. In the June 2007 Proposal, the
Board proposed Sec. 226.5(a)(2)(iii) to require that the term ``grace
period'' be used, as applicable, in any disclosure that must be in a
tabular format under proposed Sec. 226.5(a)(3). The Board's proposal
was meant to make other disclosures consistent with credit card
applications and solicitations where use of the term ``grace period''
is required by TILA Section 122(c)(2)(C) and Sec. 226.5a(a)(2)(iii).
15 U.S.C. 1632(c)(2)(C). Based on comments received as part of the June
2007 Proposal and further consumer testing, the Board proposed in the
May 2008 Proposal to delete Sec. 226.5a(a)(2)(ii) and withdraw the
requirement to use the term ``grace period'' in proposed Sec.
226.5(a)(2)(iii).
As discussed in the section-by-section analysis to Sec.
226.5a(b)(5), the Board is exercising its authority under TILA Sections
105(a) and (f), and TILA Section 127(c)(5) to delete the requirement to
use the term ``grace period'' in the table required by Sec. 226.5a. 15
U.S.C. 1604(a) and (f), 1637(c)(5). The purpose of the proposed
requirement was to provide consistency for headings in a tabular
summary. Accordingly, the Board withdraws the requirement to use the
term ``grace period'' in proposed Sec. 226.5(a)(2)(iii).
Other required terminology. The Board proposed Sec.
226.5(a)(2)(iii) in the June 2007 Proposal to provide that if
disclosures are required to be presented in a tabular format, the term
``penalty APR'' shall be used to describe an increased rate that may
result because of the occurrence of one or more specific events
specified in the account agreement, such as a late payment or an
extension of credit that exceeds the credit limit. Therefore, the term
``penalty APR'' would have been required when creditors provide
information about penalty rates in the table given with credit card
applications and solicitations under Sec. 226.5a, in the summary table
given at account opening under Sec. 226.6(b)(1) and (b)(2) (proposed
as Sec. 226.6(b)(4)), if the penalty rate is changing, in the summary
table given on or with a change-in-terms notice under Sec.
226.9(c)(2)(iii)(B), or if a penalty rate is triggered, in the table
given under Sec. 226.9(g)(3)(ii).
Commenters were generally supportive of the Board's efforts to
develop some common terminology and the Board's proposal to require use
of the term ``penalty APR'' to describe an increased rate resulting
from the occurrence of one or more specific events. Some industry
commenters, however, urged the Board to reconsider requiring use of the
term ``penalty APR,'' especially when used to describe the loss of an
introductory rate or promotional rate. As discussed in the June 2007
Proposal, the term ``penalty APR'' proved the most successful of the
terms tested with participants in the Board's consumer testing efforts.
In the interest of uniformity, the Board adopts the provision as
proposed, with one exception for promotional rates. To prevent consumer
confusion over use of the term ``penalty rate'' to describe the loss of
a promotional rate where the rate applied is the same or is calculated
in the same way as the rate that would have applied at the end of the
promotional period, the Board is amending proposed Sec.
226.5(a)(2)(iii) to provide that the term ``penalty APR'' need not be
used in reference to the APR that applies with the loss of a
promotional rate, provided the APR that applies is no greater than the
APR that would have applied at the end of the promotional period; or if
the APR that applies is a variable rate, the APR is calculated using
the same index and margin as would have been used to calculate the APR
that would have applied at the end of the promotional period. In
addition, the Board is also modifying the required disclosure related
to the loss of an introductory rate as discussed below in the section-
by-section analysis to Sec. 226.5a, which should also address these
concerns.
Under the June 2007 Proposal, proposed Sec. 226.5(a)(2)(iii) also
would have provided that if credit insurance or debt cancellation or
debt suspension coverage is required as part of the plan and
information about that coverage is required to be disclosed in a
tabular format, the term ``required'' shall be used in describing the
coverage and the program shall be identified by its name. No comments
were received on this provision, and the provision is adopted as
proposed.

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Consistent with the Board's proposal under the advertising rules in
the June 2007 Proposal, proposed Sec. 226.5(a)(2)(iii), would have
provided that if required to be disclosed in a tabular format, an APR
may be described as ``fixed,'' or using any similar term, only if that
rate will remain in effect unconditionally until the expiration of a
specified time period. If no time period is specified, then the term
``fixed,'' or any similar term, may not be used to describe the rate
unless the rate remains in effect unconditionally until the plan is
closed. The final rule adopts Sec. 226.5(a)(2)(iii) as proposed,
consistent with the Board's decision with respect to use of the term
``fixed'' in describing an APR stated in an advertisement, as further
discussed in the section-by-section analysis to Sec. 226.16(f) below.
5(a)(3) Specific Formats
As proposed in June 2007, for clarity, the special rules regarding
the specific format for disclosures under Sec. 226.5a for credit and
charge card applications and solicitations and Sec. 226.5b for home-
equity plans have been consolidated in Sec. 226.5(a)(3) as proposed.
In addition, as discussed below, the Board is requiring certain
account-opening disclosures, periodic statement disclosures and
subsequent disclosures, such as change-in-terms disclosures, to be
provided in specific formats under Sec. 226.6(b)(1); Sec. 226.7(b)(6)
and (b)(13); and Sec. 226.9(b), (c) and (g). The final rule includes
these special format rules in Sec. 226.5(a)(3), as proposed in the
June 2007 Proposal, with one exception. Because the Board is not
requiring disclosure of the effective APR pursuant to Sec.
226.7(b)(7), as discussed further in the general discussion on the
effective APR in the section-by-section analysis to Sec. 226.7(b), the
proposed special format rule relating to the effective APR is not
contained in the final rule.
5(b) Time of Disclosures
5(b)(1) Account-opening Disclosures
Creditors are required to make certain disclosures to consumers
``before opening any account.'' TILA Section 127(a) (15 U.S.C.
1637(a)). Under Sec. 226.5(b)(1), these disclosures, as identified in
Sec. 226.6, must be furnished ``before the first transaction is made
under the plan,'' which the Board has interpreted as ``before the
consumer becomes obligated on the plan.'' Comment 5(b)(1)-1. There are
limited circumstances under which creditors may provide the disclosures
required by Sec. 226.6 after the first transaction, and the Board
proposed in the June 2007 Proposal to move this guidance from comment
5(b)(1)-1 to proposed Sec. 226.5(b)(1)(iii)-(v). In the May 2008
Proposal, the Board proposed additional revisions to Sec.
226.5(b)(1)(iv) regarding membership fees.
The Board also proposed revisions in the June 2007 Proposal to the
timing rules for disclosing certain costs imposed on an open-end (not
home-secured) plan and in connection with certain transactions
conducted by telephone. Furthermore, the Board proposed additional
guidance on providing timely disclosures when the first transaction is
a balance transfer. Finally, technical revisions were proposed to
change references from ``initial'' disclosures required by Sec. 226.6
to ``account-opening'' disclosures, without any intended substantive
change.
5(b)(1)(i) General Rule
Creditors generally must provide the account-opening disclosures
before the first transaction is made under the plan. The renumbering of
this rule as Sec. 226.5(b)(1)(i) is adopted as proposed in the June
2007 Proposal.
Balance transfers. Under existing commentary and consistent with
the general rule on account-opening disclosures, creditors must provide
account-opening disclosures before a balance transfer occurs. In the
June 2007 Proposal, the Board proposed to update this commentary to
reflect current business practices. As the Board discussed in the June
2007 Proposal, some creditors offer balance transfers for which the
APRs that may apply are disclosed as a range, depending on the
consumer's creditworthiness. Consumers who respond to such an offer,
and are approved for the transfer later receive account-opening
disclosures, including the actual APR that will apply to the
transferred balance. The Board proposed to clarify in comment
5(b)(1)(i)-5 that a creditor must provide disclosures sufficiently in
advance of the balance transfer to allow the consumer to review and
respond to the terms that will apply to the transfer, including to
contact the creditor before the balance is transferred and decline the
transfer. The Board, however, did not propose a specific time period
that would be considered ``sufficiently in advance.''
Industry commenters indicated that following the Board's guidance
would cause delays in making transfers, which would be contrary to
consumer expectations that these transfers be effected quickly. A
consumer group commenter suggested that requiring the APR that will
apply, as opposed to allowing a range, to be disclosed on the
application or solicitation would be simpler. The Board notes that
creditors may, at their option, provide account-opening disclosures,
including the specific APRs, along with the balance transfer offer and
account application to avoid delaying the transfer.
The Board believes that, consistent with the general rule,
consumers should receive account-opening information, including the APR
that will apply, before the first transaction, which is the balance
transfer. Comment 5(b)(1)(i)-5 is adopted as proposed, and states that
a creditor must provide the consumer with the annual percentage rate
(along with the fees and other required disclosures) that would apply
to the balance transfer in time for the consumer to contact the
creditor and withdraw the request. The Board has made one revision to
comment 5(b)(1)(i)-5 as adopted. In response to commenters' requests
for additional guidance, comment 5(b)(1)(i)-5 provides a safe harbor
that may be used by creditors that permit a consumer to decline the
balance transfer by telephone. In such cases, a creditor has provided
sufficient time to the consumer to contact the creditor and withdraw
the request if the creditor does not effect the balance transfer until
10 days after the creditor has sent out information, assuming the
consumer has not canceled the transaction.
Disclosure before the first transaction. Comment 5(b)(1)-1,
renumbered as comment 5(b)(1)(i)-1 in the June 2007 Proposal, addresses
a creditor's general duty to provide account-opening disclosures
``before the first transaction.'' In the May 2008 Proposal, the comment
was proposed to be reorganized for clarity to provide existing examples
of ``first transactions'' related to purchases and cash advances. Other
guidance in current comment 5(b)(1)-1 was proposed to be amended and
moved to proposed Sec. 226.5(b)(1)(iv) and associated commentary in
the June 2007 and May 2008 Proposals, as discussed below in the
section-by-section analysis to Sec. 226.5(b)(1)(iv).
The Board did not receive comment on the proposed reorganization
but received many comments on the guidance that was amended and moved
to proposed Sec. 226.5(b)(1)(iv). These comments are discussed below
in the section-by-section analysis to Sec. 226.5(b)(1)(iv). Some
consumer group commenters noted that the Board's reorganization of this
comment made them realize that they opposed current guidance on cash
advances in comment 5(b)(1)-1 (now renumbered as comment 5(b)(1)(i)-1),
which permits creditors to

[[Page 5273]]

provide account-opening disclosures along with the first cash advance
check as long as the consumer can return the cash advance without
obligation. The Board continues to believe that this approach is
appropriate because of the lack of harm to consumers. Therefore, the
Board declines to amend its current guidance on cash advances in
comment 5(b)(1)(i)-1, which is renumbered as proposed without
substantive change.
5(b)(1)(ii) Charges Imposed as Part of an Open-End (Not Home-Secured)
Plan
Under the June 2007 Proposal, the Board proposed in new Sec.
226.5(b)(1)(ii) and comment 5(b)(1)(ii)-1 to except charges imposed as
part of an open-end (not home-secured) plan, other than those specified
in proposed Sec. 226.6(b)(4)(iii) (adopted as Sec. 226.6(b)(2)), from
the requirement to disclose charges before the first transaction.
Creditors would have been permitted, at their option, to disclose those
charges either before the first transaction or later, so long as they
were disclosed before the cost was imposed. The current rule requiring
the disclosure of costs before the first transaction (in writing and in
a retainable form) would have continued to apply to certain specified
costs. These costs are fees of which consumers should be aware before
using the account, such as annual or late payment fees, or fees that
the creditor would not otherwise have an opportunity to disclose before
the fee is triggered, such as a fee for using a cash advance check
during the first billing cycle.
Numerous industry commenters supported the Board's proposal.
Consumer group commenters, on the other hand, opposed the Board's
proposal, arguing that all charges should be required to be disclosed
at account opening before the first transaction. While consumer group
commenters acknowledged that disclosure of the amount of the fee at a
time when the consumer is about to incur it is a good business
practice, the commenters indicated that the Board's proposal would
encourage creditors to create new fees that are not specified to be
given in writing at account-opening. The final rule adopts Sec.
226.5(b)(1)(ii) and comment 5(b)(1)(ii)-1 largely as proposed with some
clarifying amendments and additional illustrative examples.
As the Board discussed in the June 2007 Proposal, the charges
covered by the proposed exception from disclosure at account opening
are triggered by events or transactions that may take place months, or
even years, into the life of the account, when the consumer may not
reasonably be expected to recall the amount of the charge from the
account-opening disclosure, nor readily to find or obtain a copy of the
account-opening disclosure or most recent change-in-terms notice.
Requiring such charges to be disclosed before account opening may not
provide a meaningful benefit to consumers in the form of useful
information or protection. The rule would allow flexibility in the
timing of certain cost disclosures by permitting creditors to disclose
such charges--orally or in writing--before the fee is imposed. As a
result, creditors would be disclosing the charge when the consumer is
deciding whether to take the action that would trigger the charge, such
as purchasing a service, which is a time at which consumers would
likely notice the charge. The Board intends to continue monitoring
credit card fees and practices, and could add additional fees to the
specified costs that must be disclosed in the account-opening table
before the first transaction, as appropriate.
In addition, as discussed in the June 2007 Proposal, the Board
believes the exception may facilitate compliance by creditors.
Determining whether charges are a finance charge or an other charge or
not covered by TILA (and thus whether advance notice is required) can
be challenging, and the rule reduces these uncertainties and risks. The
creditor will not have to determine whether a charge is a finance
charge or other charge or not covered by TILA, so long as the creditor
discloses the charge, orally or in writing, before the consumer becomes
obligated to pay it, which creditors, in general, already do for
business and other legal reasons.
Electronic Disclosures. In the May 2008 Proposal, the Board
proposed to revise comment 5(b)(1)(ii)-1 to clarify that for
disclosures not required to be provided in writing at account opening,
electronic disclosure, without regard to the E-Sign Act notice and
consent requirements, is a permissible alternative to oral or written
disclosure, when a consumer requests a service in electronic form, such
as on a creditor's Web site. As discussed in the section-by-section
analysis to comment 5(a)(1)(ii)(A)-1 above, the Board received many
comments in support of permitting electronic disclosure, without regard
to the E-Sign Act notice and consent requirements, for disclosures that
are not required to be provided in writing at account opening. Some
consumer group commenters objected to allowing any electronic
disclosure without the protections of the E-Sign Act. As discussed in
the May 2008 Proposal, since the disclosure of charges imposed as part
of an open-end (not home-secured) plan, other than those specified in
Sec. 226.6(b)(2), are not required to be provided in writing, the
Board believes that E-Sign notice and consent requirements do not apply
when the consumer requests the service in electronic form. The revision
to comment 5(b)(1)(ii)-1 proposed in May 2008 is adopted as proposed.
5(b)(1)(iii) Telephone Purchases
In the June 2007 Proposal, the Board proposed Sec.
226.5(b)(1)(iii) to address situations where a consumer calls a
merchant to order goods by telephone and concurrently establishes a new
open-end credit plan to finance that purchase. Because TILA account-
opening disclosures must be provided before the first transaction under
the current timing rule, merchants must delay the shipment of goods
until a consumer has received the disclosures. Consumers who want goods
shipped immediately may use another method to finance the purchase, but
they may lose any incentives the merchant may offer with opening a new
plan, such as discounted purchase prices or promotional payment plans.
The Board's proposal was meant to provide additional flexibility to
merchants and consumers in such cases.
Under proposed Sec. 226.5(b)(1)(iii), merchants that established
an open-end plan in connection with a telephone purchase of goods
initiated by the consumer would have been able to provide account-
opening disclosures as soon as reasonably practicable after the first
transaction if the merchant (1) permits consumers to return any goods
financed under the plan at the time the plan is opened and provides the
consumer sufficient time to reject the plan and return the items free
of cost after receiving the written disclosures required by Sec.
226.6, and (2) informs the consumer about the return policy as a part
of the offer to finance the purchase. Alternatively, the merchant would
have been able to delay shipping the goods until after the account
disclosures have been provided.
The Board also proposed comment 5(b)(1)(iii)-1 to provide that a
return policy is of sufficient duration if the consumer is likely to
receive the disclosures and have sufficient time to decide about the
financing plan. A return policy includes returns via the United States
Postal Service for goods delivered by private couriers. The proposed
commentary also clarified that retailers' policies regarding the return
of merchandise need not provide a right to return goods if the consumer
consumes or damages the goods. As discussed in

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the June 2007 Proposal, the regulation and commentary would not have
affected merchandise purchased after the plan was initially established
or purchased by another means of financing, such as a credit card
issued by another creditor.
Consumer group commenters opposed the proposal arguing that
providing a right to cancel is much less protective of consumers'
rights than requiring that a consumer receive disclosures before goods
are shipped. As discussed above and in the June 2007 Proposal, the
Board believes proposed Sec. 226.5(b)(1)(iii) would provide consumers
with greater flexibility. Consumers may have their goods shipped
immediately, and in some cases, take advantage of merchant incentives,
such as discounted purchase prices or promotional payment plans, but
still retain the right to reject the plan, without cost, after
receiving account-opening disclosures.
Industry commenters were supportive of the Board's proposal, but
several commenters asked for additional extensions or clarifications to
the policy. First, commenters requested clarification that the
exception is available for third-party creditors that are not
retailers, arguing that few merchants are themselves creditors and that
the same flexibility should be available to creditors offering private
label or co-brand credit arrangements in connection with the purchase
of a merchant's goods. The Board agrees, and revisions have been made
to Sec. 226.5(b)(1)(iii) accordingly. Industry commenters also
suggested that the provision in Sec. 226.5(b)(1)(iii) be available not
only for telephone purchases ``initiated by the consumer,'' but also
telephone purchases where the merchant contacts the consumer. Outbound
calls to a consumer may raise many telemarketing issues and concerns
about questionable marketing tactics. As a result, the Board declines
to extend Sec. 226.5(b)(1)(iii) to telephone purchases that have not
been initiated by the consumer.
A few industry commenters also suggested that this exception be
available for all creditors opening an account by telephone, regardless
of whether it is in connection with the purchase of goods or not. These
commenters stated that for certain consumers, such as active duty
military members, immediate use of the account after it is opened may
be necessary to take care of personal or family needs. The Board notes
that the exception under Sec. 226.5(b)(1)(iii) turns on the ability of
consumers to return any goods financed under the plan free of cost
after receiving the written disclosures required by Sec. 226.6. In the
case of an account opened by telephone that is not in connection with
the purchase of goods from the creditor or an affiliated third party, a
creditor would likely have no way to reverse any purchases or other
transactions made before the disclosures required by Sec. 226.6 are
received by the consumer should the consumer wish to reject the plan if
the purchase was made with an unaffiliated third party. Thus, the Board
declines to extend Sec. 226.5(b)(1)(iii) to accounts opened by
telephone that are not in connection with the contemporaneous purchase
of goods.
The Board also received comments requesting that Sec.
226.5(b)(1)(iii) be made applicable to the on-line purchase of goods or
that merchants have the option to refer consumers purchasing by
telephone to a Web site to obtain disclosures required by Sec. 226.6.
This issue has been addressed in the November 2007 Final Electronic
Disclosure Rule. The E-Sign Act clearly states that any consumer to
whom written disclosures are required to be given must affirmatively
consent to the use of electronic disclosures before such disclosures
can be used in place of paper disclosures. The November 2007 Final
Electronic Disclosure Rule created certain instances where E-Sign
consent does not need to be obtained before disclosures may be provided
electronically. Specifically, open-end credit disclosures required by
Sec. Sec. 226.5a (credit card applications and solicitations), 226.5b
(HELOC applications), and 226.16 (open-end credit advertising) may be
provided to the consumer in electronic form, under the circumstances
set forth in those sections, without regard to the consumer consent or
other provisions of the E-Sign Act. Disclosures required by Sec.
226.6, however, may only be provided electronically if the creditor
obtains consumer consent consistent with the E-Sign Act. 72 FR 63462,
Nov. 9, 2007; 72 FR 71058, Dec. 14, 2007.
The Board also received comments requesting clarification of the
return policy; in particular, whether this would cause creditors to
provide those consumers who open a new credit plan concurrently with
the purchase of goods over the telephone with a different return policy
from other customers. For example, assume a merchant's customers are
normally charged a restocking fee for returning goods, and the merchant
does not wish to wait until the disclosures under Sec. 226.6 are sent
out before shipping the goods. A commenter asked whether this means
that a customer opening a new credit plan concurrently with the
purchase of goods over the telephone is exempted from paying that
restocking fee if the goods are returned. As proposed in the June 2007
Proposal, the final rule requires that in order to use the exception
from providing disclosures under Sec. 226.6 before the consumer
becomes obligated on the account, the consumer must have sufficient
time to reject the plan and return the items free of cost after
receiving the written disclosures required by Sec. 226.6. This means
that there can be no cost to the consumer for returning the goods even
if for the merchant's other customers, a fee is normally charged. As
the Board discussed in the June 2007 Proposal, merchants always have
the option to delay shipping of the goods until after the disclosures
are given if the merchant does not want to maintain a potentially
different return policy for consumers opening a new credit plan
concurrently with the purchase of goods over the telephone.
Commenters also requested guidance on what would be considered
``sufficient time'' for the consumer to reject the plan and return the
goods. Because the amount of time that would be deemed to be sufficient
would depend on the nature of the goods and the transaction, and the
locations of the various parties to the transaction, the Board does not
believe that it is appropriate to specify a particular time period
applicable to all transactions.
The Board also received requests for other clarifications. One
commenter suggested that the Board expressly acknowledge that if the
consumer rejects the credit plan, the consumer may substitute another
reasonable form of payment acceptable to the merchant other than the
credit plan to pay for the goods in full. This clarification has been
included in comment 5(b)(1)(iii)-1. Furthermore, this commenter also
suggested that the exception in comment 5(b)(1)(iii)-1 allowing for no
return policy for consumed or damaged goods should be revised to
expressly cover installed appliances or fixtures, provided a reasonable
repair or replacement policy covers defective goods or installations.
The Board concurs and changes have been made to comment 5(b)(1)(iii)-1
accordingly.
5(b)(1)(iv) Membership Fees
TILA Section 127(a) requires creditors to provide specified
disclosures ``before opening any account.'' 15 U.S.C. 1637(a). Section
226.5(b)(1) requires these disclosures (identified in Sec. 226.6) to
be furnished before the first transaction is made under the plan.
Currently and under the June 2007 and

[[Page 5275]]

May 2008 Proposals, creditors may collect or obtain the consumer's
promise to pay a membership fee before the account-opening disclosures
are provided, if the consumer can reject the plan after receiving the
disclosures. If a consumer rejects the plan, the creditor must promptly
refund the fee if it has been paid or take other action necessary to
ensure the consumer is not obligated to pay the fee. In the June 2007
Proposal, guidance currently in comment 5(b)(1)-1 about creditors'
ability to assess certain membership fees before consumers receive the
account-opening disclosures was moved to Sec. 226.5(b)(1)(iv).
In the June 2007 and May 2008 Proposals, the Board proposed
clarifications to the consumer's right not to pay membership fees that
were assessed or agreed to be paid before the consumer received
account-opening disclosures, if a consumer rejects a plan after
receiving the account-opening disclosures. In the May 2008 Proposal,
the Board proposed in revised Sec. 226.5(b)(1)(iv) and new comment
5(b)(1)(iv)-1 that ``membership fee'' has the same meaning as fees for
issuance or availability of a credit or charge card under Sec.
226.5a(b)(2), including annual or other periodic fees, or ``start-up''
fees, such as account-opening fees. The Board also proposed in the May
2008 Proposal under revised Sec. 226.5(b)(1)(iv) to clarify that if a
consumer rejects an open-end (not home-secured) plan as permitted under
that provision, consumers are not obligated to pay any membership fee,
or any other fee or charge (other than an application fee that is
charged to all applicants whether or not they receive the credit).
Some consumer group commenters opposed the Board's clarification on
the term ``membership fee'' and argued that the definition could expand
the ability of creditors to charge additional types of fees prior to
sending out account-opening disclosures. These consumer group
commenters, however, supported that the Board's clarification could
allow for a greater number of fees that consumers would not be
obligated to pay should they reject the plan. One industry commenter
opposed the Board's reference to annual fees as ``membership fees.''
The Board notes that the term ``membership fee'' is not currently
defined, and, therefore, there is little guidance as to what fees would
be covered by that term. As discussed in the May 2008 Proposal, the
Board proposed that ``membership fee'' have the same meaning as fees
for issuance or availability under Sec. 226.5a(b)(2) for consistency
and ease of compliance. The Board continues to believe this
clarification is warranted, and Sec. 226.5(b)(1)(iv) is adopted
generally as proposed, with one change discussed below.
The final rule expands the types of fees for which consumers must
not be obligated if they reject an open-end (not home-secured) plan as
permitted under Sec. 226.5(b)(1)(iv) to include application fees
charged to all applicants. The Board believes that it is important that
consumers have the opportunity, after receiving the account-opening
disclosures which set forth the fees and other charges that will be
applicable to the account, to reject the plan without being obligated
for any charges. It is the Board's understanding that some creditors
may debit application fees to the account, and thus these fees should
be treated in the same manner as other fees debited at account opening.
Conforming changes have been made to Sec. 226.5a(d)(2).
Furthermore, in May 2008, the Board proposed to revise and move to
comment 5(b)(1)(iv)-2, guidance in current comment 5(b)(1)-1
(renumbered as comment 5(b)(1)(i)-1 in the June 2007 Proposal)
regarding instances when a creditor may consider an account not
rejected. In the May 2008 Proposal, the Board proposed to revise the
guidance to provide that a consumer who has received the disclosures
and uses the account, or makes a payment on the account after receiving
a billing statement, is deemed not to have rejected the plan. In the
May 2008 Proposal, the Board also proposed to provide a ``safe harbor''
that a creditor may deem the plan to be rejected if, 60 days after the
creditor mailed the account-opening disclosures, the consumer has not
used the account or made a payment on the account.
The Board received mixed comments on the 60 day ``safe harbor''
proposal. Some industry commenters opposed the ``safe harbor'' citing
operational complexity and uncertainty in account administration
procedures. Some consumer group commenters and an industry trade group
commenter supported the Board's proposal. These commenters also
suggested that the Board either require or encourage as a ``best
practice'' a notice to be given to consumers stating that inactivity
for 60 days will cause an account to be closed. After considering
comments on the proposal, the Board is amending comment 5(b)(1)(iv)-2
to delete the 60 day ``safe harbor'' because the Board believes the
potential confusion this guidance may cause and the operational
difficulties the guidance could impose outweigh the benefits of the
guidance.
In the June 2007 Proposal, the Board proposed to provide guidance
in comment 5(b)(1)(i)-1 on what it means to ``use'' the account. The
June 2007 proposed clarification was intended to address concerns about
some subprime card accounts that assess a large number of fees at
account opening. In the May 2008 Proposal, this provision was moved to
new proposed comment 5(b)(1)(iv)-3 and revised to clarify that a
consumer does not ``use'' an account when the creditor assesses fees to
the account (such as start-up fees or fees associated with credit
insurance or debt cancellation or suspension programs agreed to as a
part of the application and before the consumer receives account-
opening disclosures). The May 2008 Proposal also clarified in comment
5(b)(1)(iv)-3 that the consumer does not ``use'' an account when, for
example, a creditor sends a billing statement with start-up fees, there
is no other activity on the account, the consumer does not pay the
fees, and the creditor subsequently assesses a late fee or interest on
the unpaid fee balances. In the May 2008 Proposal, the Board also
proposed to add that a consumer is not considered to ``use'' an account
when, for example, a consumer receives a credit card in the mail and
calls to activate the card for security purposes.
The Board received several comments regarding the guidance on
whether activation of the card constitutes ``use'' of the account. Some
commenters supported the Board's proposed guidance. Other commenters
opposed the proposal noting that a consumer will have received account-
opening disclosures at the time the consumer activates the card. These
commenters also stated that when a consumer affirmatively activates a
card, it should constitute acceptance of the account. Some consumer
group commenters suggested that the Board also include guidance that
payment of fees on the first billing statement should not constitute
acceptance of the account and that consumers should only be considered
to have used an account by affirmatively using the credit, such as by
making a purchase or obtaining a cash advance.
The Board is adopting comment 5(b)(1)(iv)-3 as proposed with one
modification. The Board believes that what constitutes ``use'' of the
account should be consistent with consumer understanding of the term. A
consumer is likely to think he or she has not ``used'' the account if
the only action he or she has taken is to activate the account.
Conversely, a consumer who has made a purchase or a payment on the
account would likely believe that he

[[Page 5276]]

or she is ``using'' the account. The Board, however, is amending the
comment to delete the phrase ``such as for security purposes'' in
relation to the discussion about card activation. One industry
commenter, while supportive of the Board's general guidance that
activation alone does not indicate a consumer's acceptance of a credit
plan, was concerned about any suggestion that a customer should
activate, for security purposes, an account that a consumer does not
intend to use.
In technical revisions, comment 5(b)(1)-1, renumbered as comment
5(b)(1)(i)-1 in the June 2007 Proposal, currently addresses a
creditor's general duty to provide account-opening disclosures ``before
the first transaction'' and provides that HELOCs are not subject to the
prohibition on the payment of fees other than application or refundable
membership fees before account-opening disclosures are provided. See
Sec. 226.5b(h) regarding limitations on the collection of fees. In the
May 2008 Proposal, the existing guidance about HELOCs was moved to
revised Sec. 226.5(b)(1)(iv) and a new comment 5(b)(1)(iv)-4 for
clarity. The Board received no comment on the proposed reorganization,
and the reorganization of the guidance regarding HELOCs is adopted as
proposed.
5(b)(2) Periodic Statements
TILA Sections 127(b) and 163 set forth the timing requirements for
providing periodic statements for open-end credit accounts. 15 U.S.C.
1637(b) and 1666b. In the June 2007 Proposal, the Board proposed to
retain the existing regulation and commentary related to the timing
requirements for providing periodic statements for open-end credit
accounts, with a few changes and clarifications as discussed below.
5(b)(2)(i)
TILA Section 127(b) establishes that creditors generally must send
periodic statements at the end of billing cycles in which there is an
outstanding balance or a finance charge is imposed. 15 U.S.C. 1637(b).
Section 226.5(b)(2)(i) provides for a number of exceptions to a
creditor's duty to send periodic statements.
De minimis amounts. Under the current regulation, creditors need
not send periodic statements if an account balance, whether debit or
credit, is $1 or less and no finance charge is imposed. The Board
proposed no changes to and received no comments on this provision. As a
result, the Board retains this provision as currently written.
Uncollectible accounts. Creditors are not required to send periodic
statements on accounts the creditor has deemed ``uncollectible,'' which
is not specifically defined. In the June 2007 Proposal, the Board
sought comment on whether guidance on the term ``uncollectible'' would
be helpful.
Commenters to the June 2007 Proposal stated that guidance would be
helpful but differed on what that guidance should be. Several consumer
group commenters suggested that an account should be deemed
``uncollectible'' only when a creditor has ceased collection efforts,
either directly or through a third party. These commenters stated that
for a consumer whose account is delinquent but still subject to
collection, a periodic statement is important to show the consumer when
and how much interest is accruing and whether the consumer's payments
have been credited. Industry commenters suggested instead that an
account should be deemed ``uncollectible'' once the account is charged
off in accordance with loan-loss provisions.
Based on the plain language of the term ``uncollectible'' and the
importance of periodic statements to show consumers when interest
accrues or fees are assessed on the account, the Board is adopting new
comment 5(b)(2)(i)-3 (accordingly, as discussed below comment
5(b)(2)(i)-3 as proposed in the June 2007 Proposal is adopted as
5(b)(2)(i)-4). The comment clarifies that an account is
``uncollectible'' when a creditor has ceased collection efforts, either
directly or through a third party.
In addition, if an account has been charged off in accordance with
loan-loss provisions and the creditor no longer accrues new interest or
charges new fees on the account, the Board believes that the value of a
periodic statement does not justify the cost of providing the
disclosure because the amount of a consumer's obligation will not be
increasing. As a result, the Board is modifying Sec. 226.5(b)(2)(i) to
state that in such cases, the creditor also need not provide a periodic
statement. However, this provision does not apply if a creditor has
charged off the account but continues to accrue new interest or charge
new fees.
Instituting collection proceedings. Creditors need not send
statements if ``delinquency collection proceedings have been
instituted'' under Sec. 226.5(b)(2)(i). In the June 2007 Proposal, the
Board proposed to add comment 5(b)(2)(i)-3 to clarify that a collection
proceeding entails a filing of a court action or other adjudicatory
process with a third party, and not merely assigning the debt to a debt
collector. Several consumer groups strongly supported the Board's
proposal while industry commenters recommended that the Board provide
greater flexibility in interpreting when delinquency collection
proceedings have been instituted. In particular, an industry commenter
stated that the minimum payment warning could conflict with the
creditor's collection demand and create consumer confusion.
Nonetheless, as discussed in more detail in the section-by-section
analysis to Sec. 226.7(b)(12), the minimum payment disclosure is not
required where a fixed repayment period has been specified in the
account agreement, such as where the account has been closed due to
delinquency and the required monthly payment has been reduced or the
balance decreased to accommodate a fixed payment for a fixed period of
time designed to pay off the outstanding balance.
The Board believes that clarifying that a collection proceeding
entails the filing of a court action or other adjudicatory process with
a third party provides clear and uniform guidance to creditors as to
when periodic statements are no longer required. Accordingly, the Board
adopts the comment as proposed, though for organizational purposes, the
comment is renumbered as comment 5(b)(2)(i)-4.
Workout arrangements. Comment 5(b)(2)(i)-2 provides that creditors
must continue to comply with all the rules for open-end credit,
including sending a periodic statement, when credit privileges end,
such as when a consumer stops taking draws and pays off the outstanding
balance over time. Another comment provides that ``if an open-end
credit account is converted to a closed-end transaction under a written
agreement with the consumer, the creditor must provide a set of closed-
end credit disclosures before consummation of the closed-end
transaction.'' Comment 17(b)-2.
To provide flexibility and reduce burden and uncertainty, the Board
proposed to clarify in the June 2007 Proposal that creditors entering
into workout agreements for delinquent open-end plans without
converting the debt to a closed-end transaction comply with the
regulation if creditors continue to comply with the open-end provisions
for the work-out period. The Board received only one comment concerning
workout arrangements, which supported the Board's proposal. Therefore,
amendments to comment 5(b)(2)(i)-2 are adopted as proposed.
5(b)(2)(ii)
TILA Section 163(a) requires creditors that provide a grace period
to send statements at least 14 days before the

[[Page 5277]]

grace period ends. 15 U.S.C. 1666b(a). The 14-day period runs from the
date creditors mail their statements, not from the end of the statement
period nor from the date consumers receive their statements. As
discussed in the June 2007 Proposal, the Board has anecdotal evidence
that some consumers receive statements relatively close to the payment
due date, which leaves consumers with little time to review the
statement before payment must be mailed to meet the due date. As a
result, the Board requested comment on (1) whether it should recommend
to Congress that the 14-day period be increased to a longer time
period, so that consumers will have additional time to receive their
statements and mail their payments to ensure that payments will be
received by the due date, and (2) if so, what time period the Board
should recommend to Congress.
The Board received numerous comments on this issue. Consumer and
consumer group commenters complained that the time period from when
consumers received their statements to the payment due date was too
short, causing consumers often to incur late fees and lose the benefit
of the grace period, and creditors to raise consumers' rates to the
penalty rate. Industry commenters, on the other hand, stated that the
14-day period under TILA Section 163(a) was appropriate and that the
Board should not recommend a longer time frame to Congress.
Based in part on these comments, the Board and other federal
banking agencies proposed in May 2008 to prohibit 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. Treating a
payment as late for any purpose includes increasing the APR as a
penalty, reporting the consumer as delinquent to a credit reporting
agency, or assessing a late or any other fee based on the consumer's
failure to make payment within the amount of time provided. 73 FR
28904, May 19, 2008. The Board is opting not to address the 14-day
period under TILA Section 163(a) and is retaining Sec. 226.5(b)(2)(ii)
as currently written. Consumer comment letters mainly focused on the
due date with respect to having their payments credited in time to
avoid a late fee and an increase in their APR to the penalty rate and
not with the loss of a grace period. Therefore, the Board has chosen to
address these concerns in final rules issued by the Board and other
federal banking agencies published elsewhere in today's Federal
Register.
Technical Revisions. Changes conforming with final rules issued by
the Board and other federal banking agencies published elsewhere in
today's Federal Register have been made to comment 5(b)(2)(ii)-1. In
addition, the substance of comment 5(c)-4, which was inadvertently
placed as commentary to Sec. 226.5(c), has been moved and renumbered
as comment 5(b)(2)(ii)-2.
5(b)(2)(iii)
As proposed in the June 2007 Proposal, the substance of footnote 10
is moved to the regulatory text.
5(c) Through 5(e)
Sections 226.5(c), (d), and (e) address, respectively: The basis of
disclosures and the use of estimates; multiple creditors and multiple
consumers; and the effect of subsequent events.
In the June 2007 Proposal, the Board did not propose any changes to
these provisions, except the addition of new comment 5(d)-3,
referencing the statutory provisions pertaining to charge cards with
plans that allow access to an open-end credit plan maintained by a
person other than the charge card issuer. TILA 127(c)(4)(D); 15 U.S.C.
1637(c)(4)(D). (See the section-by-section analysis to Sec.
226.5a(f).) No comments were received on comment 5(d)-3. The Board
adopts this comment as proposed. In addition, comment 5(c)-4 is
redesignated as comment 5(b)(2)(ii)-2 to correct a technical error in
placement.

Section 226.5a Credit and Charge Card Applications and Solicitations

TILA Section 127(c), implemented by Sec. 226.5a, requires card
issuers to provide certain cost disclosures on or with an application
or solicitation to open a credit or charge card account.\14\ 15 U.S.C.
1637(c). The format and content requirements differ for cost
disclosures in card applications or solicitations, depending on whether
the applications or solicitations are given through direct mail,
provided electronically, provided orally, or made available to the
general public such as in ``take-one'' applications and in catalogs or
magazines. Disclosures in applications and solicitations provided by
direct mail or electronically must be presented in a table. For oral
applications and solicitations, certain cost disclosures must be
provided orally, except that issuers in some cases are allowed to
provide the disclosures later in a written form. Applications and
solicitations made available to the general public, such as in a take-
one application, must contain one of the following: (1) The same
disclosures as for direct mail presented in a table; (2) a narrative
description of how finance charges and other charges are assessed; or
(3) a statement that costs are involved, along with a toll-free
telephone number to call for further information.
---------------------------------------------------------------------------

\14\ Charge cards are a type of credit card for which full
payment is typically expected upon receipt of the billing statement.
To ease discussion, this section of the supplementary information
will refer to ``credit cards'' which includes charge cards.
---------------------------------------------------------------------------

5a(a) General Rules
Combining disclosures. Currently, comment 5a-2 states that account-
opening disclosures required by Sec. 226.6 do not substitute for the
disclosures required by Sec. 226.5a; however, a card issuer may
establish procedures so that a single disclosure document meets the
requirements of both sections. In the June 2007 Proposal, the Board
proposed to retain this comment, but to revise it to account for
proposed revisions to Sec. 226.6. Specifically, the Board proposed to
revise comment 5a-2 to provide that a card issuer may satisfy Sec.
226.5a by providing the account-opening summary table on or with a card
application or solicitation, in lieu of the Sec. 226.5a table. See
proposed Sec. 226.6(b)(4). The account-opening table is substantially
similar to the table required by Sec. 226.5a, but the content required
is not identical. The account-opening table requires information that
is not required in the Sec. 226.5a table, such as a reference to
billing error rights. The Board adopts this comment provision as
proposed, except for one technical edit which is discussed in the
section-by-section analysis to Sec. 226.5a(d)(2). Commenters on the
June 2007 Proposal generally supported the proposed comment allowing
the account-opening summary table to substitute for the table required
by Sec. 226.5a. For various reasons, card issuers may want to provide
the account-opening disclosures with the card application or
solicitation. To ease compliance burden on issuers, this comment allows
them to provide the account-opening summary table in lieu of the table
containing the Sec. 226.5a disclosures. Otherwise, issuers in these
circumstances would be required to provide the table required by Sec.
226.5a and the account-opening table. In addition, allowing issuers to
substitute the account-opening table for the table required by Sec.
226.5a would not undercut consumers' ability to compare the terms of
two credit card accounts where one issuer provides the account-opening
table and the other issuer provides the table required by Sec. 226.5a,

[[Page 5278]]

because the two tables are substantially similar.
Clear and conspicuous standard. Section 226.5(a) requires that
disclosures made under subpart B (including disclosures required by
Sec. 226.5a) must be clear and conspicuous. Currently, comment
5a(a)(2)-1 provides guidance on the clear and conspicuous standard for
the Sec. 226.5a disclosures. In the June 2007 Proposal, the Board
proposed to provide guidance on applying the clear and conspicuous
standard to the Sec. 226.5a disclosures in comment 5(a)(1)-1. Thus,
guidance currently in comment 5a(a)(2)-1 would have been deleted as
unnecessary. The Board proposed to add comment 5a-3 to cross reference
the clear and conspicuous guidance in comment 5(a)(1)-1. The final rule
deletes current comment 5a(a)(2)-1 and adds comment 5a-3 as proposed.
5a(a)(1) Definition of Solicitation
Firm offers of credit. The term ``solicitation'' is defined in
Sec. 226.5a(a)(1) of Regulation Z to mean ``an offer by the card
issuer to open a credit or charge card account that does not require
the consumer to complete an application.'' 15 U.S.C. 1637(c). Board
staff has received questions about whether card issuers making ``firm
offers of credit'' as defined in the Fair Credit Reporting Act (FCRA)
are considered to be making solicitations for purposes of Sec. 226.5a.
15 U.S.C. 1681 et seq. In June 2007, the Board proposed to amend the
definition of ``solicitation'' in Sec. 226.5a(a)(1) to clarify that
such ``firm offers of credit'' for credit cards are solicitations for
purposes of Sec. 226.5a. The final rule adopts the amendment to Sec.
226.5a(a)(1) as proposed. Because consumers who receive ``firm offers
of credit'' have been preapproved to receive a credit card and may be
turned down for credit only under limited circumstances, the Board
believes that these preapproved offers are of the type intended to be
captured as a ``solicitation,'' even though consumers are asked to
provide some additional information in connection with accepting the
offer.
Invitations to apply. In the June 2007 Proposal, the Board also
proposed to add comment 5a(a)(1)-1 to distinguish solicitations from
``invitations to apply,'' which are not covered by Sec. 226.5a. An
``invitation to apply'' occurs when a card issuer contacts a consumer
who has not been preapproved for a card account about opening an
account (whether by direct mail, telephone, or other means) and invites
the consumer to complete an application, but the contact itself does
not include an application. The Board adopts comment 5a(a)(1)-1 as
proposed. The Board believes that these ``invitations to apply'' do not
meet the definition of ``solicitation'' because the consumer must still
submit an application in order to obtain the offered card. Thus,
comment 5a(a)(1)-1 clarifies that this ``invitation to apply'' is not
covered by Sec. 226.5a unless the contact itself includes (1) an
application form in a direct mailing, electronic communication or
``take-one''; (2) an oral application in a telephone contact initiated
by the card issuer; or (3) an application in an in-person contact
initiated by the card issuer.
5a(a)(2) Form of Disclosures and Tabular Format
Table must be substantially similar to model and sample forms in
Appendix G-10. Currently and under the June 2007 Proposal, Sec.
226.5a(a)(2)(i) provides that when making disclosures that are required
to be disclosed in a table, issuers must use headings, content and
format for the table substantially similar to any of the applicable
tables found in Appendix G-10 to part 226. In response to the June 2007
Proposal, several consumer groups suggested that the Board explicitly
require that the disclosures be made in the order shown on the proposed
model and sample forms in Appendix G-10 to part 226. These consumer
groups also suggested that the Board require issuers to use the
headings for the rows provided in the proposed model and sample form in
Appendix G to part 226, and not allow issuers to use headings that are
``substantially similar'' to the ones in the model and sample forms.
The final rule adopts Sec. 226.5a(a)(2)(i), as proposed. The Board
believes that issuers may need flexibility to change the order of the
disclosures or the headings for the row provided in the table, such as
to accommodate differences in account terms that may be offered on
products and different terminology used by the issuer to describe those
account terms. In addition, as discussed elsewhere in the section-by-
section analysis to Appendix G, the Board is permitting creditors in
some circumstances to combine rows for APRs or fees, when the amount of
the fee or rate is the same for two or more types of transactions. The
Board believes that the ``substantially similar'' standard is
sufficient to ensure uniformity of the tables used by different
issuers.
In response to the June 2007 Proposal, several commenters suggested
changes to the formatting of the proposed model and sample forms in
Appendix G-10 to part 226. These comments are discussed in the section-
by-section analysis to Appendix G.
Fees for late payment, over-the-limit, balance transfers and cash
advances. Currently, Sec. 226.5a(a)(2)(ii) and comment 5a(a)(2)-5,
which implement TILA Section 127(c)(1)(B), provide that card issuers
may disclose late-payment fees, over-the-limit fees, balance transfer
fees, and cash advance fees in the table or outside the table. 15
U.S.C. 1637(c)(1)(B).
In the June 2007 Proposal, the Board proposed to amend Sec.
226.5a(a)(2)(i) to require that these fees be disclosed in the table.
In addition, the Board proposed to delete current Sec.
226.5a(a)(2)(ii) and comment 5a(a)(2)-5, which currently allow issuers
to place the fees outside the table.
The Board adopts Sec. 226.5a(a)(2)(i) and deletes current Sec.
226.5a(a)(2)(ii) and comment 5a(a)(2)-5 as proposed. The final rule
amends Sec. 226.5a(a)(2)(i) to require these fees to be disclosed in
the table, so that consumers can easily identify them. In the consumer
testing conducted for the Board prior to the June 2007 Proposal,
participants consistently identified these fees as among the most
important pieces of information they consider as part of the credit
card offer. With respect to the disclosure of these fees, the Board
tested placement of these fees in the table and immediately below the
table. Participants who were shown forms where the fees were disclosed
below the table tended not to notice these fees compared to
participants who were shown forms where the fees were presented in the
table. These final revisions are adopted in part pursuant to TILA
Section 127(c)(5), which authorizes the Board to add or modify Sec.
226.5a disclosures as necessary to carry out the purposes of TILA. 15
U.S.C. 1637(c)(5).
Highlighting APRs and fee amounts in the table. Section 226.5a
generally requires that certain information about rates and fees
applicable to the card offer be disclosed to the consumer in card
applications and solicitations. This information includes not only the
APRs and fee amounts that will apply, but also explanatory information
that gives context to these figures. The Board seeks to enable
consumers to identify easily the rates and fees disclosed in the table.
Thus, in the June 2007 Proposal, the Board proposed to add Sec.
226.5a(a)(2)(iv) to require that when a tabular format is required,
issuers must disclose in bold text any APRs required to be disclosed,
any discounted initial rate permitted to be disclosed, and most fee
amounts or percentages required to be disclosed.

[[Page 5279]]

The Board also proposed to add comment 5a(a)(2)-5 to explain that
proposed Samples G-10(B) and G-10(C) provide guidance on how to show
the rates and fees described in bold text. In addition, proposed
comment 5a(a)(2)-5 also would have explained that proposed Samples G-
10(B) and G-10(C) provide guidance to issuers on how to disclose the
percentages and fees described above in a clear and conspicuous manner,
by including these percentages and fees generally as the first text in
the applicable rows of the table so that the highlighted rates and fees
generally are aligned vertically. In consumer testing conducted for the
Board prior to the June 2007 Proposal, participants who saw a table
with the APRs and fees in bold and generally before any text in the
table were more likely to identify the APRs and fees quickly and
accurately than participants who saw other forms in which the APRs and
fees were not highlighted in such a fashion.
The final rule adopts Sec. 226.5a(a)(2)(iv) and comment 5a(a)(2)-5
with several technical revisions. Section 226.5a(a)(2)(iv) is amended
to provide that maximum limits on fee amounts disclosed in the table
that do not relate to fees that vary by state must not be disclosed in
bold text. Comment 5a(a)(2)-5 provides guidance on when maximum limits
must be disclosed in bold text. For example, assume an issuer will
charge a cash advance fee of $5 or 3 percent of the cash advance
transaction amount, whichever is greater, but the fee will not exceed
$100. The maximum limit of $100 for the cash advance fee must not be
highlighted in bold text. In contrast, assume that the amount of the
late fee varies by state, and the range of amount of late fees
disclosed is $15-$25. In this case, the maximum limit of $25 on the
late fee amount must be highlighted in bold text. In both cases, the
minimum fee amount (e.g., $5 or $15) must be disclosed in bold text.
Comment 5a(a)(2)-5 also provides guidance on highlighting periodic
fees. Section 226.5a(a)(2)(iv) provides that any periodic fee disclosed
pursuant to Sec. 226.5a(b)(2) that is not an annualized amount must
not be disclosed in bold. For example, if an issuer imposes a $10
monthly maintenance fee for a card account, the issuer must disclose in
the table that there is a $10 monthly maintenance fee, and that the fee
is $120 on an annual basis. In this example, the $10 fee disclosure
would not be disclosed in bold, but the $120 annualized amount must be
disclosed in bold. In addition, if an issuer must disclose any annual
fee in the table, the amount of the annual fee must be disclosed in
bold.
Section 226.5a(a)(2)(iv) is amended to refer to discounted initial
rates as ``introductory'' rates, as that term is defined in Sec.
226.16(g)(2)(ii), for consistency, and to clarify that introductory
rates that are disclosed in the table under new Sec. 226.5a(b)(1)(vii)
must be in bold text. Similarly, rates that apply after a premium
initial rate expires that are disclosed in the table must also be in
bold text.
Electronic applications and solicitations. Section 1304 of the
Bankruptcy Act amends TILA Section 127(c) to require solicitations to
open a card account using the Internet or other interactive computer
service to contain the same disclosures as those made for applications
or solicitations sent by direct mail. Regarding format, the Bankruptcy
Act specifies that disclosures provided using the Internet or other
interactive computer service must be ``readily accessible to consumers
in close proximity'' to the solicitation. 15 U.S.C. 1637(c)(7).
In September 2000, the Board revised Sec. 226.5a, and as part of
these revisions, provided guidance on how card issuers using electronic
disclosures may comply with the Sec. 226.5a requirement that certain
disclosures be ``prominently located'' on or with the application or
solicitation. 65 FR 58903, Oct. 3, 2000. In March 2001, the Board
issued interim final rules containing additional guidance for the
electronic delivery of disclosures under Regulation Z. 66 FR 17329,
Mar. 30, 2001. In November 2007, the Board adopted the November 2007
Final Electronic Disclosure Rule, which withdrew portions of the 2001
interim final rules and issued final rules containing additional
guidance for the electronic delivery of disclosures under Regulation Z.
72 FR 63462, Nov. 9, 2007; 72 FR 71058, Dec. 14, 2007.
The Bankruptcy Act provision applies to solicitations to open a
card account ``using the Internet or other interactive computer
service.'' The term ``Internet'' is defined as the international
computer network of both Federal and non-Federal interoperable packet-
switched data networks. The term ``interactive computer service'' is
defined as any information service, system or access software provider
that provides or enables computer access by multiple users to a
computer server, including specifically a service or system that
provides access to the Internet and such systems operated or services
offered by libraries or educational institutions. 15 U.S.C. 1637(c)(7).
Based on the definitions of ``Internet'' and ``interactive computer
service,'' the Board believes that Congress intended to cover all card
offers that are provided to consumers in electronic form, such as via
e-mail or a Web site.
In addition, although this Bankruptcy Act provision refers to
credit card solicitations (where no application is required), in the
June 2007 Proposal, the Board proposed to apply the Bankruptcy Act
provision relating to electronic offers to both electronic
solicitations and applications pursuant to the Board's authority under
TILA Section 105(a) to make adjustments that are necessary to
effectuate the purposes of TILA. 15 U.S.C. 1601(a), 1604(a).
Specifically, the Board proposed to amend Sec. 226.5a(c) to require
that applications and solicitations that are provided in electronic
form contain the same disclosures as applications and solicitations
sent by direct mail. With respect to both electronic applications and
solicitations, it is important for consumers who are shopping for
credit to receive accurate cost information before submitting an
electronic application or responding to an electronic solicitation. The
final rule adopts this change to Sec. 226.5a(c), as proposed.
With respect to the form of disclosures required under Sec.
226.5a, in the June 2007 Proposal, the Board proposed to amend Sec.
226.5a(a)(2) by adding a new paragraph (v) to provide that if a
consumer accesses an application or solicitation for a credit card in
electronic form, the disclosures required on or with an application or
solicitation for a credit card must be provided to the consumer in
electronic form on or with the application or solicitation. The Board
also proposed to add comment 5a(a)(2)-6 to clarify this point and also
to make clear that if a consumer is provided with a paper application
or solicitation, the required disclosures must be provided in paper
form on or with the application or solicitation (and not, for example,
by including a reference in the paper application or solicitation to
the Web site where the disclosures are located).
In the November 2007 Final Electronic Disclosure Rule, the Board
adopted the proposed changes to Sec. 226.5a(a)(2)(v) and comment
5a(a)(2)-6 with several revisions. 72 FR 63462, Nov. 9, 2007; 72 FR
71058, Dec. 14, 2007. In the November 2007 Final Electronic Disclosure
Rule, the guidance in proposed comment 5a(a)(2)-6 was contained in
comment 5a(a)(2)-9. In this final rule, the guidance in comment
5a(a)(2)-9 added by the November 2007 Final Electronic Disclosure Rule
is moved to comment 5a(a)(2)-6.

[[Page 5280]]

In the June 2007 Proposal, the Board also proposed to revise
existing comment 5a(a)(2)-8 added by the 2001 interim final rule on
electronic disclosures, which states that a consumer must be able to
access the electronic disclosures at the time the application form or
solicitation reply form is made available by electronic communication.
The Board proposed to revise this comment to describe alternative
methods for presenting electronic disclosures. This comment was
intended to provide examples of the methods rather than an exhaustive
list. In the November 2007 Final Electronic Disclosure Rule, the Board
adopted the proposed changes to comment 5a(a)(2)-8 with several
revisions. 72 FR 63462, Nov. 9, 2007; 72 FR 71058, Dec. 14, 2007.
In the June 2007 Proposal, the Board proposed to incorporate the
``close proximity'' standard for electronic applications and
solicitations in Sec. 226.5a(a)(2)(vi)(B), and the guidance regarding
the location of the Sec. 226.5a disclosures in electronic applications
and solicitations in comment 5a(a)(2)-1.ii. This guidance, contained in
proposed comment 5a(a)(2)-1.ii, was consistent with proposed changes to
comment 5a(a)(2)-8, that provides guidance to issuers on providing
access to electronic disclosures at the time the application form or
solicitation reply form is made available in electronic form.
The final rule adopts Sec. 226.5a(a)(2)(vi)(B) and comment
5a(a)(2)-1.ii as proposed, with several revisions. Specifically,
comment 5a(a)(2)-1.ii is revised to be consistent with the revisions to
comment 5a(a)(2)-8 made in the November 2007 Final Electronic
Disclosure Rule. Comment 5a(a)(2)-1.ii provides that if the table
required by Sec. 226.5a is provided electronically, the table must be
provided in close proximity to the application or solicitation. Card
issuers have flexibility in satisfying this requirement. Methods card
issuers could use to satisfy the requirement include, but are not
limited to, the following examples: (1) The disclosures could
automatically appear on the screen when the application or reply form
appears; (2) the disclosures could be located on the same Web page as
the application or reply form (whether or not they appear on the
initial screen), if the application or reply form contains a clear and
conspicuous reference to the location of the disclosures and indicates
that the disclosures contain rate, fee, and other cost information, as
applicable; (3) card issuers could provide a link to the electronic
disclosures on or with the application (or reply form) as long as
consumers cannot bypass the disclosures before submitting the
application or reply form. The link would take the consumer to the
disclosures, but the consumer need not be required to scroll completely
through the disclosures; or (4) the disclosures could be located on the
same Web page as the application or reply form without necessarily
appearing on the initial screen, immediately preceding the button that
the consumer will click to submit the application or reply. Whatever
method is used, a card issuer need not confirm that the consumer has
read the disclosures. Comment 5a(a)(2)-8 is deleted as unnecessary.
As discussed in the June 2007 Proposal, the Board believes that the
``close proximity'' standard is designed to ensure that the disclosures
are easily noticeable to consumers, and this standard is not met when
consumers are only given a link to the disclosures on the Web page
containing the application (or reply form), but not the disclosures
themselves. Thus, the Board retains the requirement that if an
electronic link to the disclosures is used, the consumer must not be
able to bypass the link before submitting an application or a reply
form.
Terminology. Section 226.5a currently requires terminology in
describing the disclosures required by Sec. 226.5a to be consistent
with terminology used in the account-opening disclosures (Sec. 226.6)
and the periodic statement disclosures (Sec. 226.7). TILA and Sec.
226.5a also require that the term ``grace period'' be used to describe
the date by which or the period within which any credit extended for
purchases may be repaid without incurring a finance charge. 15 U.S.C.
1632(c)(2)(C). In the June 2007 Proposal, the Board proposed that all
guidance for terminology requirements for Sec. 226.5a disclosures be
placed in proposed Sec. 226.5(a)(2)(iii). See section-by-section
analysis to Sec. 226.5(a)(2). The Board also proposed to add comment
5a(a)(2)-7 to cross reference the guidance in Sec. 226.5(a)(2). The
Board adopts comment 5a(a)(2)-7 as proposed.
5a(a)(4) Fees That Vary by State
Currently, under Sec. 226.5a, if the amount of a late-payment fee,
over-the-limit fee, cash advance fee or balance transfer fee varies by
state, a card issuer may either disclose in the table (1) the amount of
the fee for all states; or (2) a range of fees and a statement that the
amount of the fee varies by state. See current Sec. 226.5a(a)(5),
renumbered as proposed Sec. 226.5a(a)(4); see also TILA Section
127(f). As discussed below, in the June 2007 Proposal, the Board
proposed to require card issuers to disclose in the table any fee
imposed when a payment is returned. See proposed Sec. 226.5a(b)(12).
The Board proposed to amend new Sec. 226.5a(a)(4) to add returned-
payment fees to the list of fees for which an issuer may disclose a
range of fees.
The final rule adopts proposed Sec. 226.5a(a)(4) with several
modifications. The Board is revising proposed Sec. 226.5a(a)(4) to
provide that card issuers that impose a late-payment fee, over-the-
limit fee, cash advance fee, balance transfer fee or returned-payment
fee where the amount of those fees vary by state may, at the issuer's
option, disclose in the table required by Sec. 226.5a either (1) the
specific fee applicable to the consumer's account, or (2) the range of
the fees, if the disclosure includes a statement that the amount of the
fee varies by state and refers the consumer to a disclosure provided
with the Sec. 226.5a table where the amount of the fee applicable to
the consumer's account is disclosed, for example in a list of fees for
all states. Listing fees for multiple states in the table is not
permissible. For example, a card issuer may not list fees for all
states in the table. Similarly, a card issuer that does business in six
states may not list fees for all six of those states in the table.
(Conforming changes are also made to comment 5a(a)(4)-1.)
As discussed in the section-by-section analysis to Sec.
226.6(b)(1)(iii), the Board is adopting a similar rule for account-
opening disclosures, with one notable exception discussed below. In
general, a creditor must disclose the fee applicable to the consumer's
account; listing all fees for all states in the account-opening summary
table is not permissible. The Board is concerned in each case that an
approach of listing all fees for all states would detract from the
purpose of the table: to provide key information in a simplified way.
One difference between the fee disclosure requirement in Sec.
226.5a(a)(4) and the similar requirement in Sec. 226.6(b)(1)(iii) is
that Sec. 226.6(b)(1)(iii) limits use of the range of fees to point-
of-sale situations while Sec. 226.5a contains no similar limitation.
As discussed further in the section-by-section analysis to Sec.
226.6(b)(1)(iii), for creditors with retail stores in a number of
states, it is not practicable to require fee-specific disclosures to be
provided when an open-end (not home-secured) plan is established in
person in connection with the purchase of goods or services. Thus, the
final rule in Sec. 226.6(b)(1)(iii) provides that creditors imposing
fees such as late-payment fees

[[Page 5281]]

or returned-payment fees that vary by state and providing the
disclosures required by Sec. 226.6(b) in person at the time the open-
end (not home-secured) plan is established in connection with financing
the purchase of goods or services may, at the creditor's option,
disclose in the account-opening table either (1) the specific fee
applicable to the consumer's account, or (2) the range of the fees, if
the disclosure includes a statement that the amount of the fee varies
by state and refers the consumer to the account agreement or other
disclosure provided with the account-opening summary table where the
amount of the fee applicable to the consumer's account is disclosed.
As with the account-opening table, the Board is concerned that
including all fees for all states in the table required by Sec. 226.5a
would detract from the purpose of the table: to provide key information
in a simplified way. Nonetheless, unlike with the account-opening
table, the final rule does not limit the use of the range of fees for
the table required by Sec. 226.5a only to point-of-sale situations.
With respect to the application and solicitation disclosures, there may
be many situations in which it is impractical to provide the fee-
specific disclosures with the application or solicitation, such as when
the application is provided on the Internet or in ``take-one''
materials. For Internet or ``take-one'' applications or solicitations,
a creditor will in most cases not be aware in which state the consumer
resides and, consequently, will not be able to determine the amount of
fees that would be charged to that consumer under applicable state law.
The changes to Sec. 226.5a(a)(4) are adopted in part pursuant to TILA
Section 127(c)(5), which authorizes the Board to add or modify Sec.
226.5a disclosures as necessary to carry out the purposes of TILA. 15
U.S.C. 1637(c)(5).
5a(a)(5) Exceptions
Section 226.5a currently contains several exceptions to the
disclosure requirements. Some of these exceptions are in the regulation
itself, while others are contained in the commentary. For clarity, in
the June 2007 Proposal, the Board proposed to place all exceptions in
new Sec. 226.5a(a)(5). The final rule adopts new Sec. 226.5a(a)(5) as
proposed.
5a(b) Required Disclosures
Section 226.5a(b) specifies the disclosures that are required to be
included on or with certain credit card applications and solicitations.
5a(b)(1) Annual Percentage Rate
Section 226.5a requires card issuers to disclose the rates
applicable to the account, for purchases, cash advances, and balance
transfers. 15 U.S.C. 1637(c)(1)(A)(i)(I).
16-point font for disclosure of purchase APRs. Currently, under
Sec. 226.5a(b)(1), the purchase rate must be disclosed in the table in
at least 18-point font. This font requirement does not apply to (1) a
temporary initial rate for purchases that is lower than the rate that
will apply after the temporary rate expires; or (2) a penalty rate that
will apply upon the occurrence of one or more specified events. In the
June 2007 Proposal, the Board proposed to amend Sec. 226.5a(b)(1) to
reduce the 18-point font requirement to a 16-point font. Commenters
generally did not object to the proposal to reduce the font size for
the purchase APR. Several consumer groups suggested that the Board
explicitly prohibit issuers from disclosing any discounted initial rate
in 16-point font.
The final rule adopts the 16-point font requirement in Sec.
226.5a(b)(1) as proposed, with several revisions as described below.
The purchase rate is one of the most important terms disclosed in the
table, and it is essential that consumers be able to identify that rate
easily. A 16-point font size requirement for the purchase APR appears
to be sufficient to highlight the purchase APR. In consumer testing
conducted for the Board prior to June 2007, versions of the table in
which the purchase rate was the same font as other rates included in
the table were reviewed. In other versions, the purchase rate was in
16-point type while other disclosures were in 10-point type.
Participants tended to notice the purchase rate more often when it was
in a font larger than the font used for other rates. Nonetheless, there
was no evidence from consumer testing that it was necessary to use a
font size of 18-point in order for the purchase APR to be noticeable to
participants. Given that the Board is requiring a minimum of 10-point
type for the disclosure of other terms in the table, based on document
design principles, the Board believes that a 16-point font size for the
purchase APR is effective in highlighting the purchase APR in the
table.
The final rule requires that discounted initial rates for purchases
must be in 16-point font. Section 226.5a(b)(1), as proposed, did not
specifically prohibit disclosing any discounted initial rate in 16-
point font but did not require such formatting. New Sec.
226.5a(b)(1)(vii), discussed below, requires disclosure of the
discounted initial rate in the table for issuers subject to final rules
issued by the Board and other federal banking agencies published
elsewhere in today's Federal Register. As a result, the Board believes
that all rates that could apply to a purchase balance, other than a
penalty rate, should be highlighted in 16-point font. For the same
reasons, Sec. 226.5a(b)(1)(iii) also has been amended to clarify that
both the premium initial rate for purchases and any rate that applies
after the premium initial rate for purchases expires must be disclosed
in 16-point font.
The final rule in Sec. 226.5a(b)(1) has also been revised to refer
to discounted initial rates as ``introductory'' rates, as that term is
defined in Sec. 226.16(g)(2)(ii), for consistency.
Periodic rate. Currently, comment 5a(b)(1)-1 allows card issuers to
disclose the periodic rate in the table in addition to the required
disclosure of the corresponding APR. In the June 2007 Proposal, the
Board proposed to delete comment 5a(b)(1)-1, and thus, prohibit
disclosure of the periodic rate in the table. Based on consumer testing
conducted for the Board prior to June 2007, consumers do not appear to
shop using the periodic rate, nor is it clear that this information is
important to understanding a credit card offer. Allowing the periodic
rate to be disclosed in the table may distract from more important
information in the table, and contribute to ``information overload.''
In an effort to streamline the information that appears in the table,
the Board proposed to prohibit disclosure of the periodic rate in the
table. Commenters generally did not oppose the Board's proposal to
prohibit disclosure of the periodic rate in the table. Thus, the Board
is deleting current comment 5a(b)(1)-1 as proposed. In addition, new
comment 5a(b)(1)-8 is added to state that periodic rates must not be
disclosed in the table. The Board notes that card issuers may disclose
the periodic rate outside of the table. See Sec. 226.5a(a)(2)(ii).
Variable rate information. Section 226.5a(b)(1)(i), which
implements TILA Section 127(c)(1)(A)(i)(II), currently requires for
variable-rate accounts, that the card issuer must disclose the fact
that the rate may vary and how the rate is determined. 15 U.S.C.
1637(c)(1)(A)(i)(II). Under current comment 5a(b)(1)-4, in disclosing
how the applicable rate will be determined, the card issuer is required
to provide the index or formula used and disclose any margin or spread
added to the index or formula in setting the rate. The card issuer may
disclose the margin or

[[Page 5282]]

spread as a range of the highest and lowest margins that may be
applicable to the account. A disclosure of any applicable limitations
on rate increases or decreases may also be included in the table.
1. Index and margins. Currently, the variable rate information is
required to be disclosed separately from the applicable APR, in a row
of the table with the heading ``Variable Rate Information.'' Some card
issuers include the phrase ``variable rate'' with the disclosure of the
applicable APR and include the details about the index and margin under
the ``Variable Rate Information'' heading. In the consumer testing
conducted for the Board prior to the June 2007 Proposal, many
participants who saw the variable rate information as described above
understood that the label ``variable'' meant that a rate could change,
but could not locate information on the tested form regarding how or
why these rates could change. This was true even if the index and
margin information was taken out of the row of the table with the
heading ``Variable Rate Information'' and placed in a footnote to the
phrase ``variable rate.'' Many participants who did find the variable
rate information were confused by the variable-rate margins, often
interpreting them erroneously as the actual rate being charged. In
addition, very few participants indicated that they would use the
margins in shopping for a credit card account.
Accordingly, in the June 2007 Proposal, the Board proposed to amend
Sec. 226.5a(b)(1)(i) to specify that issuers may not disclose the
amount of the index or margins in the table. Specifically, card issuers
would not have been allowed to disclose in the table the current value
of the index (for example, that the prime rate currently is 7.5
percent) or the amount of the margin that is used to calculate the
variable rate. Card issuers would have been allowed to indicate only
that the rate varies and the type of index used to determine the rate
(such as the ``prime rate,'' for example). In describing the type of
index, the issuer would have been precluded from including details
about the index in the table. For example, if the issuer uses a prime
rate, the issuer would have been allowed to describe the rate as tied
to a ``prime rate'' and would not have been allowed to disclose in the
table that the prime rate used is the highest prime rate published in
the Wall Street Journal two business days before the closing date of
the statement for each billing period. See proposed comment 5a(b)(1)-2.
Also, the proposal would have required that the disclosure about a
variable rate (the fact that the rate varies and the type of index used
to determine the rate) must be disclosed with the applicable APRs, so
that consumers can more easily locate this information. See proposed
Model Form G-10(A), Samples G-10(B) and G-10(C). Proposed Samples G-
10(B) and G-10(C) would have provided guidance to issuers on how to
disclose the fact that the applicable rate varies and how it is
determined.
Commenters generally supported the Board's proposal to amend Sec.
226.5a(b)(1)(i) to specify that issuers may not disclose the amount of
the index or margins in the table. Several commenters asked the Board
to clarify that issuers may include the index and margin outside of the
table, given that some consumers are interested in knowing the index
and margin. One commenter suggested that issuers be allowed to disclose
in the table additional information about the index used, such as the
publication source of the index used to calculate the rate (e.g.,.
describing that the prime rate used is the highest prime rate published
in the Wall Street Journal two business days before the closing date of
the statement for each billing period.) One commenter suggested that
issuers be allowed to refer to an index as a ``prime rate'' only if it
is a bank prime loan rate posted by the majority of the top 25 U.S.
chartered commercial banks, as published by the Board.
The final rule amends Sec. 226.5a(b)(1)(i) as proposed to specify
that issuers may not disclose the amount of the index or margins in the
table. Section 226.5a(b)(1)(i) is not amended to allow issuers to
disclose in the table additional information about the index used, such
as the publication source of the index. See comment 5a(b)(1)-2. The
Board is concerned that allowing such information in the table could
contribute to ``information overload'' for consumers, and may distract
from more important information in the table. The Board notes that
additional information about the variable rate, such as the amount of
the index and margins and the publication source of the index used to
calculate the rate, may be included outside of the table. See Sec.
226.5a(a)(2)(ii).
In addition, the Board did not amend the rule to provide that
issuers only be allowed to refer to an index as a ``prime rate'' if it
is a bank prime loan rate posted by the majority of the top 25 U.S.
chartered commercial banks, as published by the Board. The Board
believes that this rule is unnecessary at this time. Credit card
issuers typically use a prime rate that is published in the Wall Street
Journal, where that published prime rate is based on prime rates
offered by the 30 largest U.S. banks, and is a widely accepted measure
of prime rate.
2. Rate floors and ceilings. Currently, card issuers may disclose
in the table, at their option, any limitations on how high (i.e.,. a
rate ceiling) or low (i.e., a rate floor) a particular rate may go. For
example, assume that the purchase rate on an account could not go below
12 percent or above 24 percent. An issuer would be required to disclose
in the table the current rate offered on the credit card (for example,
18 percent), but could also disclose in the table that the rate would
not go below 12 percent and above 24 percent. See current comment
5a(b)(1)-4. In the June 2007 Proposal, the Board proposed to revise the
commentary to prohibit the disclosure of the rate floors and ceilings
in the table.
Several consumer group commenters suggested that the Board require
floors and ceilings to be disclosed in the table because such
information has a significant effect on consumers' economic risk.
Several industry commenters suggested that the Board permit (but not
require) issuers to include the floors and ceiling of the variable rate
in the table so that consumers are aware of the potential variations in
the rate. Section 226.5a(b)(1)(i) is revised to prohibit explicitly the
disclosure of the rate floors and ceilings in the table, as proposed.
See also comment 5a(b)(1)-2. Based on consumer testing conducted for
the Board prior to June 2007 and in March 2008, consumers do not appear
to shop based on these rate floors and ceilings, and allowing them to
be disclosed in the table may distract from more important information
in the table, and contribute to ``information overload.'' Card issuers
may, however, disclose this information outside of the table. See Sec.
226.5a(a)(2)(ii).
Discounted initial rates. Currently, comment 5a(b)(1)-5 specifies
that if the initial rate is temporary and is lower than the rate that
will apply after the temporary rate expires, a card issuer must
disclose the rate that will otherwise apply to the account. A
discounted initial rate may be provided in the table along with the
rate required to be disclosed if the card issuer also discloses the
time period during which the discounted initial rate will remain in
effect. In the June 2007 Proposal, the Board proposed to move comment
5a(b)(1)-5 to new Sec. 226.5a(b)(1)(ii). The Board also proposed to
add new comment 5a(b)(1)-3 to specify that if a card issuer discloses
the discounted

[[Page 5283]]

initial rate and expiration date in the table, the issuer is deemed to
comply with the standard to provide this information clearly and
conspicuously if the issuer uses the format specified in proposed
Samples G-10(B) and G-10(C).
In addition, under TILA Sections 127(c)(6)(A) and 127(c)(7), as
added by Sections 1303(a) and 1304 of the Bankruptcy Act, the term
``introductory'' must be used in immediate proximity to each listing of
a discounted initial rate in a direct mail or electronic application or
solicitation; or promotional materials accompanying such application or
solicitation. In the June 2007 Proposal, the Board proposed to expand
the requirement to other applications or solicitations where a table
under Sec. 226.5a is given, to promote the informed use of credit by
consumers, pursuant to the Board's authority under TILA Section 105(a)
to make adjustments that are necessary to effectuate the purposes of
TILA. 15 U.S.C. 1604(a). Thus, the Board proposed to add new Sec.
226.5a(b)(1)(ii) to specify that if an issuer provides a discounted
initial rate in the table along with the rate required to be disclosed,
the card issuer must use the term ``introductory'' in immediate
proximity to the listing of the initial discounted rate. Because
``intro'' is a commonly understood abbreviation of the term
``introductory,'' and consumer testing indicates that consumers
understand this term, the Board proposed to allow creditors to use
``intro'' as an alternative to the requirement to use the term
``introductory'' and proposed to clarify this approach in new Sec.
226.5a(b)(1)(ii). Also, to give card issuers guidance on the meaning of
``immediate proximity,'' the Board proposed to provide a safe harbor
for card issuers that place the word ``introductory'' or ``intro''
within the same phrase as each listing of the discounted initial rate.
This guidance was set forth in proposed comment 5a(b)(1)-3.
The Board adopts new Sec. 226.5a(b)(1)(ii) and comment 5a(b)(1)-3,
as proposed, with several modifications. Discounted initial rates are
referred to as ``introductory'' rates, as that term is defined in Sec.
226.16(g)(2)(ii), for consistency. In addition, as discussed below with
respect to disclosing penalty rates, an issuer is required to disclose
directly beneath the table the circumstances under which any discounted
initial rate may be revoked and the rate that will apply after the
discounted initial rate is revoked, if the issuer discloses the
discounted initial rate in the table or in any written or electronic
promotional materials accompanying a direct mail, electronic or take-
one application or solicitation. See Sec. 226.5a(b)(1)(iv)(B).
Comment 5a(b)(1)-3 has been amended to provide additional
clarifications on discounted initial rates. Comment 5a(b)(1)-3.ii. has
been added to clarify that an issuer's reservation of the right to
change a rate after account opening, subject to the requirements of
Sec. 226.9(c), does not by itself make that rate an introductory rate,
even if the issuer subsequently increases the rate after providing a
change-in-terms notice. The comment notes, however, that issuers
subject to the final rules issued by the Board and other federal
banking agencies published elsewhere in today's Federal Register are
subject to limitations on such rate increases. In addition, comment
5a(b)(1)-3.iii. has been added to clarify that if more than one
introductory rate may apply to a particular balance in succeeding
periods, the term ``introductory'' need only be used to describe the
first introductory rate.
Section 226.5a(b)(1)(ii) in the final rule has been revised, and a
new Sec. 226.5a(b)(1)(vii) has been added as discussed below, to
provide that certain issuers must disclose any introductory rate
applicable to the account in the table. Creditors that are subject to
the final rules issued by the Board and other federal banking agencies
published elsewhere in today's Federal Register are required to state
at account opening the annual percentage rates that will apply to each
category of transactions on a consumer credit card account, and
generally may not increase those rates, except as expressly permitted
pursuant to those rules. This requirement is intended, among other
things, to promote fairness in the pricing of consumer credit card
accounts by enabling consumers to rely on the rates disclosed at
account opening for at least the first year that an account is open.
Consistent with those final rules, for such issuers, the Board
believes that disclosure of introductory rates should be as prominent
as other rates disclosed in the tabular summary given at account
opening. Therefore, as discussed in the section-by-section analysis to
Sec. 226.6(b)(2)(i), the Board is requiring that a creditor subject to
those rules must disclose any introductory rate in the account-opening
table provided pursuant to Sec. 226.6.
For consistency, the Board also is requiring in the final rule that
such issuers also disclose any introductory rate in the table provided
with applications and solicitations. The Board believes that this will
promote consistency throughout the life of an account and will enable
consumers to better compare the terms that the consumer receives at
account opening with the terms that were offered. Thus, Sec.
226.5a(b)(1)(vii) has been added to the final rule to clarify that an
issuer subject to 12 CFR 227.24 or similar law must disclose in the
tabular disclosures given pursuant to Sec. 226.5a any introductory
rate that will apply to a consumer's account. The Board believes that
it is important that any issuer required to disclose an introductory
rate applicable to a consumer's account highlights that introductory
rate or rates by disclosing it in the Sec. 226.5a table.
Similarly, and for the same reasons stated above, Sec.
226.5a(b)(1)(vii) also requires that card issuers subject to the final
rules issued by the Board and other federal banking agencies published
elsewhere in today's Federal Register disclose in the table any rate
that will apply after a premium initial rate (as described in Sec.
226.5a(b)(1)(iii)) expires. A conforming change has been made to Sec.
226.5a(b)(1)(iii). Consistent with comment 5a(b)(1)-3.ii., discussed
above, a new comment 5a(b)(1)-4 has been added to the final rule to
clarify that an issuer's reservation of the right to change rates after
account-opening does not by itself make an initial rate a premium
initial rate, even if the issuer subsequently decreases the rate. The
comment notes, however, that issuers subject to the final rules issued
by the Board and other federal banking agencies published elsewhere in
today's Federal Register may be subject to limitations on rate
decreases.
Penalty rates. Currently, comment 5a(b)(1)-7 requires that if a
rate may increase upon the occurrence of one or more specific events,
such as a late payment or an extension of credit that exceeds the
credit limit, the card issuer must disclose the increased penalty rate
that may apply and the specific event or events that may result in the
increased rate. If a tabular format is required, the issuer must
disclose the penalty rate in the table under the heading ``Other
APRs,'' along with any balance transfer or cash advance rates.
Currently, the specific event or events must be described outside
the table with a reference (an asterisk or other means) included with
the penalty APR in the table to direct the consumer to the additional
information. At its option, the issuer may include outside the table an
explanation of the period for which the increased rate will remain in
effect, such as ``until you make three timely payments.'' The issuer
need not disclose an increased rate that is imposed if credit
privileges are permanently terminated.

[[Page 5284]]

In the consumer testing conducted for the Board prior to June 2007,
when reviewing forms in which the specific events that trigger the
penalty rate were disclosed outside the table, many participants did
not readily notice the penalty rate triggers when they initially read
through the document or when asked follow-up questions. In addition,
many participants did not readily notice the penalty rate when it was
included in the ``Other APRs'' row along with other rates. The GAO also
found that consumers had difficulty identifying the default rate and
circumstances that would trigger rate increases. See GAO Report on
Credit Card Rates and Fees, at page 49. In the testing conducted for
the Board prior to June 2007, when the penalty rate was placed in a
separate row in the table, participants tended to notice the rate more
often. Moreover, participants tended to notice the specific events that
trigger the penalty rate more often when these events were included
with the penalty rate in a single row in the table. For example, two
types of forms related to placement of the events that could trigger
the penalty rate were tested--several versions showed the penalty rate
in one row of the table and the description of the events that could
trigger the penalty rate in another row of the table. Several other
versions showed the penalty rate and the triggering events in the same
row. Participants who saw the versions of the table with the penalty
rate in a separate row from the description of the triggering events
tended to skip over the row that specified the triggering events when
reading the table. In contrast, participants who saw the versions of
the table in which the penalty rate and the triggering events were in
the same row tended to notice the triggering events when they reviewed
the table.
As a result of this testing, in the June 2007 Proposal, the Board
proposed to add Sec. 226.5a(b)(1)(iv) and amend new comment 5a(b)(1)-4
(previously comment 5a(b)(1)-7) to require card issuers to briefly
disclose in the table the specific event or events that may result in
the imposition of a penalty rate. In addition, the Board proposed that
the penalty rate and the specific events that cause the penalty rate to
be imposed must be disclosed in the same row of the table. See proposed
Model Form G-10(A). In describing the specific event or events that may
result in an increased rate, the Board proposed to amend new comment
5a(b)(1)-4 to provide that the descriptions of the triggering events in
the table should be brief. For example, if an issuer may increase a
rate to the penalty rate because the consumer does not make the minimum
payment by 5 p.m., Eastern time, on its payment due date, the proposal
would have indicated that the issuer should describe this circumstance
in the table as ``make a late payment.'' Proposed Samples G-10(B) and
G-10(C) would have provided additional guidance on the level of detail
that issuers should use in describing the specific events can trigger
the penalty rate.
The Board also proposed to specify in new Sec. 226.5a(b)(1)(iv)
that in disclosing a penalty rate, a card issuer also must specify the
balances to which the increased rate will apply. This proposal was
based on the Board's understanding that, currently, card issuers
typically apply the increased rate to all balances on the account. The
Board believed that this information would help consumers better
understand the consequences of triggering the penalty rate.
In addition, the Board proposed to specify in new Sec.
226.5a(b)(1)(iv) that in disclosing the penalty rate, a card issuer
must describe how long the increased rate will apply. The Board
proposed to amend proposed comment 5a(b)(1)-4 to provide that in
describing how long the increased rate will remain in effect, the
description should be brief, and referred issuers to Samples G-10(B)
and G-10(C) for guidance on the level of detail that issuer should use
to describe how long the increased rate will remain in effect. Also,
proposed comment 5a(b)(1)-4 would have provided that if a card issuer
reserves the right to apply the increased rate indefinitely, that fact
should be stated. The Board stated its belief that this information may
help consumers better understand the consequences of triggering the
penalty rate.
Also, the Board proposed to add language to new Sec.
226.5a(b)(1)(iv) to specify that in disclosing a penalty rate, card
issuers must include a brief description of the circumstances under
which any discounted initial rates may be revoked and the rate that
will apply after the discounted initial rate is revoked. Sections
1303(a) and 1304 of the Bankruptcy Act require that for a direct mail
or electronic credit card application or solicitation, a clear and
conspicuous description of the circumstances that may result in
revocation of a discounted initial rate offered with the card and the
rate that will apply after the discounted initial rate is revoked must
be disclosed in a prominent location on or with the application or
solicitation. 15 U.S.C. 1637(c)(6)(C). The Board proposed that this
information be disclosed in the table along with other penalty rate
information for all applications and solicitations where a table under
Sec. 226.5a is given, to promote the informed use of credit by
consumers, pursuant to the Board's authority under TILA Section 105(a)
to make adjustments that are necessary to effectuate the purposes of
TILA. 15 U.S.C. 1604(a).
In response to the June 2007 Proposal, some consumer group
commenters requested that the Board delete the statement that the card
issuer need not disclose the increased rate that would be imposed if
credit privileges are permanently terminated. They viewed this
provision as inconsistent with the Board's other efforts to ensure that
consumers are aware of penalty rates. They believed card issuers should
be required to disclose this information in the table if the rate is
different than the penalty rate that otherwise applies.
In the May 2008 Proposal, the Board proposed to delete the current
provision that an issuer need not disclose in the table an increased
rate that would be imposed if credit privileges are permanently
terminated. Most consumer groups and industry commenters supported this
aspect of the proposal.
The final rule adopts new Sec. 226.5a(b)(1)(iv) and comment
5a(b)(1)-5 (proposed as comment 5a(b)(1)-4) as proposed in the May 2008
Proposal with several revisions. Section 226.5a(b)(1)(iv)(A) sets forth
the disclosures that are required when rates that are not introductory
rates may be increased as a penalty for one or more events specified in
the account agreement. The final rule specifies that for rates that are
not introductory rates, if a rate may increase as a penalty for one or
more events specified in the account agreement, such as a late payment
or an extension of credit that exceeds the credit limit, the card
issuer must disclose the increased rate that would apply, a brief
description of the event or events that may result in the increased
rate, and a brief description of how long the increased rate will
remain in effect. Samples G-10(B) and G-10(C) (in the row labeled
``Penalty APR and When it Applies'') provide guidance to card issuers
on how to meet the requirements in Sec. 226.5a(b)(1)(iv)(A) and
accompanying comment 5a(b)(1)-5. An issuer may use phrasing similar to
either Sample G-10(B) or G-10(C) to disclose how long the increased
rate will remain in effect, modified as appropriate to accurately
reflect the terms offered by that issuer.
The proposed requirement that issuers must disclose a description
of the types of balances to which the

[[Page 5285]]

increased penalty rate will apply is not included in the final rule.
When the Board proposed this requirement in June 2007, most issuers
typically applied the increased penalty rate to all balances on the
account. Nonetheless, under final rules issued by the Board and other
federal banking agencies published elsewhere in today's Federal
Register, most credit card issuers are precluded from applying an
increased rate to existing balances, except in limited
circumstances.\15\ In particular, most issuers may not increase the
interest rate on existing credit card balances to the penalty rate
unless the consumer is more than 30 days late on the account. Because
most issuers are restricted from applying the increased penalty rate to
existing balances, except in limited circumstances, the Board is
withdrawing the proposed requirement to disclose in the table a
description of the types of balances to which the increased penalty
rate will apply. Requiring issuers to explain in the table the types of
balances to which the increased penalty rate will apply--such as
disclosing that the increased penalty rate will apply to new
transactions, except if the consumer is more than 30 days late on the
account, then the increased penalty rate will apply to all balances--
could lead to ``information overload'' for consumers. The Board notes
if a penalty rate is triggered on an account, the issuer must provide
the consumer with a notice under Sec. 226.9(g) prior to the imposition
of the penalty rate, and this notice must include an explanation of the
balances to which the increased penalty rate would apply.
---------------------------------------------------------------------------

\15\ The final rules published elsewhere in today's Federal
Register do not apply to all issuers, such as state-chartered credit
unions that are not subject to the National Credit Union
Administration's final rules.
---------------------------------------------------------------------------

Similarly, issuers that apply penalty pricing only to some balances
on the account, specifically issuers subject to the final rules issued
by the Board and other federal banking agencies published elsewhere in
today's Federal Register may not distinguish, in the disclosures
required by Sec. 226.5a(b)(1)(iv), between the events that may result
in an increased rate for one type of balances and the events that may
result in an increased rate for other types of balances. Such issuers
may provide a consolidated list of the event or events that may result
in an increased rate for any balance.
The Board has amended comment 5a(b)(1)-5.i. (proposed as comment
5a(b)(1)-4) to provide specific guidance to issuers that are subject to
the final rules issued by the Board and other federal banking agencies
published elsewhere in today's Federal Register. Such an issuer may
have penalty rate triggers that apply to new transactions that differ
from the penalty rate triggers applicable to outstanding balances. For
example, an issuer might apply the penalty rate to new transactions,
subject to the notice requirements in Sec. 226.9(g), based on a
consumer making a payment three days late, but may increase the rate
applicable to outstanding balances only if the consumer pays more than
30 days late. Comment 5a(b)(1)-5.i., as adopted, includes guidance
stating that if an issuer may increase a rate that applies to a
particular balance because the account is more than 30 days late, the
issuer should describe this circumstance in the table as ``make a late
payment.'' The comment has also been amended to clarify that the issuer
may not distinguish between the events that may result in an increased
rate for existing balances and the events that may result in an
increased rate for new transactions.
In addition, as proposed in May 2008, the final rule deletes the
current provision that an issuer need not disclose an increased rate
that would be imposed if credit privileges were permanently
terminated.\16\ Thus, to the extent an issuer is charging an increased
rate different from the penalty rate when credit privileges are
permanently terminated, this different rate must be disclosed along
with the penalty rate. The Board agrees with consumer group commenters
that requiring the disclosure of the rate when credit privileges are
permanently terminated is consistent with the Board's efforts to ensure
that consumers are aware of the potential for increased rates.
---------------------------------------------------------------------------

\16\ The Board notes that final rules published elsewhere in
today's Federal Register would generally prohibit increases in rates
applicable to outstanding balances, even if credit privileges have
been terminated. However, if the consumer's account is 30 days late,
those rules would permit a creditor to impose a rate increase on
such balances.
---------------------------------------------------------------------------

A commenter in response to the May 2008 Proposal asked for
clarification of the interplay between the requirement to disclose an
increased rate when credit privileges are permanently terminated and
the restriction on issuers' ability to apply increased rates to
existing balances, proposed by the Board and other federal banking
agencies. See 73 FR 28904, May 19, 2008. As discussed above, under
final rules issued by the Board and other federal banking agencies
published elsewhere in today's Federal Register, most credit card
issuers are precluded from applying an increased rate to existing
balances, unless an exception applies, such as if the account is more
than 30 days late. Nonetheless, for issuers subject to these
restrictions, there still are cases where an issuer could impose on
existing balances an increased rate when credit privileges are
permanently terminated, for example when the account is more than 30
days late.
Section 226.5a(b)(1)(iv)(B) sets forth the disclosures that are
required when discounted initial rates may be increased as a penalty
for one or more events specified in the account agreement. (In Sec.
226.5a(b)(1)(iv)(B), discounted initial rates are referred to as
``introductory'' rates, as that term is defined in Sec.
226.16(g)(2)(ii), for consistency.) Specifically, Sec.
226.5a(b)(1)(iv)(B) of the final rule states that an issuer is required
to disclose directly beneath the table the circumstances under which
any discounted initial rate may be revoked and the rate that will apply
after the discounted initial rate is revoked only if the issuer
discloses the discounted initial rate in the table, or in any written
or electronic promotional materials accompanying a direct mail,
electronic or take-one application or solicitation. As revised, this
provision is consistent with the Bankruptcy Act requirement that a
credit card application or solicitation must clearly and conspicuously
disclose in a prominent location on or with the application or
solicitation a general description of the circumstances that may result
in revocation of a discounted initial rate offered with the card.
Therefore, to the extent that an issuer is promoting the discounted
initial rate in the disclosure table provided with the application or
solicitation or in the promotional materials accompanying the
application or solicitation, the issuer must also disclose directly
beneath the table the circumstances that may result in revocation of
the discounted initial rate, and the rate that will apply after the
discounted initial rate is revoked. Requiring issuers to disclose that
information directly beneath the table will help consumers better
understand the terms under which the discounted initial rate is being
offered on the account.
The final rule requires that the circumstances under which a
discounted initial rate may be revoked be disclosed directly beneath
the table, rather than in the table. Credit card issuers subject to the
final rules issued by the Board and other federal banking agencies
published elsewhere in today's Federal Register will be prohibited from
increasing an introductory rate unless the consumer's account becomes
more

[[Page 5286]]

than 30 days late. Accordingly, for most issuers subject to Sec.
226.5a, the disclosure provided under this paragraph will be identical,
because an introductory rate may be increased only if the account
becomes more than 30 days late. As a result, the Board does not believe
that most consumers will use the information about the revocation of a
discounted initial rate in shopping for a credit card, since it will
not vary from product to product. Therefore, while this information
should be disclosed clearly and conspicuously with the table, the Board
believes it should not be included in the table, where it may
contribute to ``information overload'' and detract from the disclosure
of other terms that may be of more use to consumers in shopping for
credit.
Comment 5a(b)(1)-5 (proposed as comment 5a(b)(1)-4) is restructured
to be consistent with new Sec. 226.5a(b)(1)(iv). In addition, comment
5a(b)(1)-5.ii. is revised to clarify that the information about
revocation of a discounted initial rate and the rate that will apply
after revocation must be provided even if the rate that will apply
after the discounted initial rate is revoked is the rate that would
have applied at the end of the promotional period, and not a higher
``penalty rate.'' Also, comment 5a(b)(1)-5.ii. clarifies that in
describing the rate that will apply after revocation of the discounted
initial rate, if the rate that will apply after revocation of the
discounted initial rate is already disclosed in the table, the issuer
is not required to repeat the rate, but may refer to that rate in a
clear and conspicuous manner. For example, if the rate that will apply
after revocation of a discounted initial rate is the standard rate that
applies to that type of transaction (such as a purchase or balance
transfer transaction), and the standard rates are labeled in the table
as ``standard APRs,'' the issuer may refer to the ``standard APR'' when
describing the rate that will apply after revocation of a discounted
initial rate.
In addition, comment 5a(b)(1)-5.ii. is revised to specify that the
description of the circumstances in which a discounted initial rate
could be revoked should be brief. For example, if an issuer may
increase a discounted initial rate because the consumer does not make
the minimum payment within 30 days of the due date, the issuer should
describe this circumstance directly beneath the table as ``make a late
payment.'' In addition, if the circumstances in which a discounted
initial rate could be revoked are already listed elsewhere in the
table, the issuer is not required to repeat the circumstances again,
but may refer to those circumstances in a clear and conspicuous manner.
For example, if the circumstances in which an initial discounted rate
could be revoked are the same as the event or events that may trigger a
``penalty rate'' as described in Sec. 226.5a(b)(1)(iv)(A), the issuer
may refer to the actions listed in the Penalty APR row, in describing
the circumstances in which the introductory rate could be revoked.
Sample G-10(C) sets forth a disclosure labeled ``Loss of Introductory
APR'' directly below the table to provide guidance to card issuers on
how to meet the requirements in Sec. 226.5a(b)(1)(iv)(B) and
accompanying comment 5a(b)(1)-5.
Comment 5a(b)(1)-5.iii. also has been included in the final rule to
expressly note that issuers subject to the final rules issued by the
Board and other federal banking agencies published elsewhere in today's
Federal Register are prohibited by those rules from increasing or
revoking an introductory rate prior to its expiration, unless the
account is more than 30 days late. The comment gives guidance on how
such an issuer should comply with Sec. 226.5a(b)(1)(iv)(B).
Rates that depend on consumers' creditworthiness. Credit card
issuers often engage in risk-based pricing such that the rates offered
on a credit card will depend on later determinations of a consumer's
creditworthiness. For example, an issuer may use information collected
in a consumer's application or solicitation reply form (e.g., income
information) or obtained through a credit report from a consumer
reporting agency to determine the rate for which a consumer qualifies.
Issuers that use risk-based pricing may not be able to disclose the
specific rate that would apply to a consumer, because issuers may not
have sufficient information about a consumer's creditworthiness at the
time the application is given or made available to the consumer.
In the June 2007 Proposal, the Board proposed to add Sec.
226.5(b)(1)(v) and comment 5a(b)(1)-5 to address the circumstances in
which an issuer is not required to state a single specific rate being
offered at the time disclosures are given because the rate will depend
on a later determination of the consumer's creditworthiness. In this
situation, issuers would have been required to disclose the possible
rates that might apply, and a statement that the rate for which the
consumer may qualify at account opening depends on the consumer's
creditworthiness. Under the proposal, a card issuer would have been
allowed to disclose the possible rates as either specific rates or a
range of rates. For example, if there are three possible rates that may
apply (e.g., 9.99, 12.99 or 17.99 percent), an issuer would have been
allowed to disclose specific rates (9.99, 12.99 or 17.99 percent) or a
range of rates (9.99 to 17.99 percent). Proposed Samples G-10(B) and G-
10(C) would have provided guidance for issuers on how to meet these
requirements. In addition, the Board solicited comment on whether card
issuers should alternatively be permitted to list only the highest
possible rate that may apply instead of a range of rates (e.g., up to
17.99 percent).
In response to the June 2007 Proposal, several consumer group
commenters suggested that the Board should not allow issuers to
disclose a range of possible rates. Instead, issuers should be required
to disclose the actual APR that the issuer is offering the consumer,
because otherwise, consumers do not know the rate for which they are
applying. Industry commenters generally supported the proposal
clarifying that issuers may disclose the specific rates or range of
possible rates, with an explanation that the rate obtained by the
consumer is based on the consumer's creditworthiness. Several
commenters suggested that the Board also allow issuers to disclose the
highest APR that may apply instead of a range of rates, because they
believed that this approach might be less confusing to consumers than
seeing a range of rates. For example, a consumer may focus on the
lowest rate in a range and be surprised when the final rate is higher
than this lowest rate. Also, if the highest rate was the only rate
disclosed, a consumer would not be upset by obtaining a lower rate than
the rate initially disclosed. Other commenters indicated that
disclosing only the highest APR should not be allowed, because
consumers may believe this would be the APR that applied to them even
though the highest APR may apply only to a small group of consumers
solicited.
In addition, one commenter indicated that for some issuers,
especially in the private label market, the actual rate for which a
consumer qualifies may be determined using multiple factors, including
the consumer's creditworthiness, whether the consumer is contemplating
a purchase with the retailer named on the private label card, and other
factors.
The Board adopts Sec. 226.5a(b)(1)(v) and comment 5a(b)(1)-6
(proposed as comment 5a(b)(1)-5) with several revisions. Consistent
with the proposal, Sec. 226.5a(b)(1)(v) specifies that if a rate
cannot be determined at the time disclosures are given because the rate

[[Page 5287]]

depends at least in part on a later determination of the consumer's
creditworthiness, the card issuer must disclose the specific rates or
the range of rates that could apply and a statement that the rate for
which the consumer may qualify at account opening will depend on the
consumer's creditworthiness, and other factors if applicable.
Generally, issuers are not allowed to disclose only the lowest rate,
the median rate or the highest rate that could apply. See comment
5a(b)(1)-6 (proposed as comment 5a(b)(1)-5). The Board believes that
requiring card issuers to disclose all the possible rates (as either
specific rates, or as a range of rates) provides more useful
information to consumers than allowing issuers to disclose only the
lowest, median or highest APR. If a consumer sees a range or several
specific rates, the consumer may be better able to understand the
possible rates that may apply to the account.
Nonetheless, if the rate is a penalty rate, the card issuer at its
option may disclose the highest rate that could apply, instead of
disclosing the specific rates or the range of rates that could apply.
See Sec. 226.5a(b)(1)(v). With respect to penalty rates, issuers may
set a highest rate for the penalty rate (such as 28 percent) but may
either decide not to increase a consumer's rates based on a violation
of a penalty rate trigger or may impose a penalty rate that is less
than that highest rate, depending on factors at the time the penalty
rate is imposed. It would be difficult for the issuer to disclose a
range of possible rates for the penalty rate that is meaningful because
the issuer might decide not to increase a consumer's rates based on a
violation of a penalty rate trigger. In the penalty rate context, a
range of possible penalty rates would likely be more confusing to
consumers than only disclosing the highest penalty rate.
Comment 5a(b)(1)-6 (proposed as comment 5a(b)(1)-5) also is revised
to clarify that Sec. 226.5a(b)(1)(v) applies even if other factors are
used in combination with a consumer's creditworthiness to determine the
rate for which a consumer may qualify at account opening. For example,
Sec. 226.5a(b)(1)(v) would apply if the issuer considers the type of
purchase the consumer is making at the time the consumer opens the
account, in combination with the consumer's creditworthiness, to
determine the rate for which the consumer may qualify at account
opening. If other factors are considered, the issuer must amend the
statement about creditworthiness, to indicate that the rate for which
the consumer may qualify at account opening will depend on the
consumer's creditworthiness and other factors. Nonetheless, if a
consumer's creditworthiness is not one of the factors that will
determine the rate for which the consumer may qualify at account
opening (for example, if the rate is based solely on the type of
purchase that the consumer is making at the time the consumer opens the
account, or is based solely on whether the consumer has other banking
relationships with the card issuer), Sec. 226.5a(b)(1)(v) does not
apply.
The Board is not requiring an issuer to provide the actual rate
that the issuer is offering the consumer if that rate is not known. As
explained above, issuers that use risk-based pricing may not be able to
disclose the specific rate that would apply to a consumer because
issuers may not have sufficient information about a consumer's
creditworthiness at the time the application is given.
Proposed Samples G-10(B) and G-10(C) would have provided guidance
for issuers on how to meet the requirements to provide the specific
rates or the range of rates that could apply and a statement that the
rate for which the consumer may qualify at account opening will depend
on the consumer's creditworthiness. Specifically, proposed Samples G-
10(B) and G-10(C) would have provided that issuers may meet these
requirements by providing the specific rates or the range of rates and
stating that the rate for which the consumer qualifies would be ``based
on your creditworthiness.'' As discussed above, in response to the June
2007 Proposal, one commenter indicated that for some issuers,
especially in the private label market, the actual rate for which a
consumer qualifies may be determined using multiple factors, including
the consumer's creditworthiness, whether the consumer is contemplating
a purchase with the retailer named on the private label card and other
factors. Samples G-10(B) and G-10(C) as adopted contain the phrase
``based on your creditworthiness,'' but pursuant to Sec.
226.5a(b)(1)(v) discussed above, a creditor that considers other
factors in addition to a consumer's creditworthiness in determining the
APR applicable to a consumer's account would use language such as
``based on your creditworthiness and other factors.''
Transactions with both rate and fee. When a consumer initiates a
balance transfer or cash advance, card issuers typically charge
consumers both interest on the outstanding balance of the transaction
and a fee to complete the transaction. It is important that consumers
understand when both a rate and a fee apply to specific transactions.
In the June 2007 Proposal, the Board proposed to add a new Sec.
226.5a(b)(1)(vi) to require that if both a rate and fee apply to a
balance transfer or cash advance transaction, a card issuer must
disclose that a fee also applies when disclosing the rate, and provide
a cross reference to the fee. In consumer testing conducted for the
Board prior to the June 2007 Proposal, some participants were more
aware that an interest rate applies to cash advances and balance
transfers than they were aware of the fee component, so the Board
believed that a cross reference between the rate and the fee may help
those consumers notice both the rate and the fee components.
In response to the June 2007 Proposal, several industry commenters
suggested that the cross reference be eliminated, as unnecessary and
leading to ``information overload.'' In addition, one industry
commenter suggested that the Board also require a cross reference from
the purchase APR to any transaction fee on purchases. One industry
commenter suggested that issuers be allowed to modify the cross
reference to state when the cash advance fee or balance transfer fee
will not apply, such as ``Cash advance fees will apply to cash advances
except for convenience checks and fund transfers to other accounts with
us.'' In addition, one industry commenter asked the Board for
clarification on whether a 0 percent APR required the cross reference
between the rate and the fee.
In quantitative consumer testing conducted for the Board after the
May 2008 Proposal, the Board investigated whether the presence of a
cross reference from the balance transfer APR to the balance transfer
fee improved consumers' awareness of and ability to identify the
balance transfer fee. The results of the testing indicate that there
was no statistically significant improvement in consumers' ability to
identify the balance transfer fee if the cross reference was present.
Given the results of the consumer testing and concerns about
``information overload,'' the Board has withdrawn proposed Sec.
226.5a(b)(1)(vi). Proposed comment 5a(b)(1)-6, which would have given
guidance on how to present a cross reference between a rate and fee,
also is withdrawn.
APRs that vary by state. Currently, Sec. 226.5a(b) requires card
issuers to disclose the rates applicable to the account, for purchases,
cash advances, and balance transfers. For disclosures required to be
provided with credit card applications and solicitations, if the rate

[[Page 5288]]

varies by state, card issuers must disclose in the table the rates for
all states. Specifically, comment 5a(a)(2)-2 currently provides, in
relevant part, that if rates or other terms vary by state, card issuers
may list the states and the various disclosures in a single table or in
separate tables.
The Board is concerned that such an approach of disclosing the
rates for all states in the table (or having a table for each state)
would detract from the purpose of the table: To provide key information
in a simplified way. Thus, consistent with the reasons discussed in the
section-by-section analysis to Sec. 226.5a(a)(4) with respect to fees
that vary by state, the final rule adds Sec. 226.5a(b)(1)(vi) to
provide that card issuers imposing APRs that vary by state may, at the
issuer's option, disclose in the table required by Sec. 226.5a either
(1) the specific APR applicable to the consumer's account, or (2) the
range of APRs, if the disclosure includes a statement that the APR
varies by state and refers the consumer to a disclosure provided with
the Sec. 226.5a table where the APR applicable to the consumer's
account is disclosed, for example in a list of APRs for all states.
Listing APRs for multiple states in the table (or having a table for
each state) is not permissible. In addition, as discussed above,
comment 5a(a)(2)-2 currently provides, in relevant part, that if rates
or other terms vary by state, card issuers may list the states and the
various disclosures in a single table or in a separate table. Because
under the final rule, an issuer would no longer be allowed to list fees
or rates for multiple states in the table (or have a table for each
state), this provision in comment 5a(a)(2)-2 is deleted as obsolete.
These changes to Sec. 226.5a and comment 5a(a)(2)-2 are adopted in
part pursuant to TILA Section 127(c)(5), which authorizes the Board to
add or modify Sec. 226.5a disclosures as necessary to carry out the
purposes of TILA. 15 U.S.C. 1637(c)(5).
Rate based on another rate on the account. In response to the June
2007 Proposal, one commenter asked the Board to clarify how a rate
should be disclosed if that rate is based on another rate on the
account. For example, assume that a penalty rate as described in Sec.
226.5a(b)(1)(iv)(A) is determined by adding 5 percentage points to the
current purchase rate, which is 10 percent. The Board adopts new
comment 5a(b)(1)-7 to clarify how such a rate should be disclosed.
Pursuant to comment 5a(b)(1)-7, a card issuer, in this example, must
disclose 15 percent as the current penalty rate. If the purchase rate
is a variable rate, then the penalty rate also is a variable rate. In
that case, the card issuer also must disclose the fact that the penalty
rate may vary and how the rate is determined, such as ``This APR may
vary with the market based on the Prime Rate.'' In describing the
penalty rate, the issuer may not disclose in the table the amount of
the margin or spread added to the current purchase rate to determine
the penalty rate, such as describing, in this example, that the penalty
rate is determined by adding 5 percentage points to the purchase rate.
Typical APR. Several consumer groups have indicated that the
current disclosure requirements in Sec. 226.5a allow card issuers to
promote low APRs, that include interest but not fees, while charging
high penalty fees and penalty rates when consumers, for example, pay
late or exceed the credit limit. As a result, these consumer groups
suggested that the Board require credit card issuers to disclose in the
table a ``typical rate'' that would include fees and charges that
consumers pay for a particular open-end credit product. This rate would
be calculated as the average effective rate disclosed on periodic
statements over the last three years for customers with the same or
similar credit card product. These consumer groups believe that this
``typical rate'' would reflect the real rate that consumers pay for the
credit card product.
In the June 2007 Proposal, the Board did not propose that card
issuers disclose the ``typical rate'' as part of the Sec. 226.5a
disclosures because the Board did not believe that the proposed typical
APR would be helpful to consumers that seek credit cards. There are
many different ways consumers may use their credit cards, such as the
features they use, what fees they incur, and whether a balance is
carried from month to month. For example, some consumers use their
cards only for purchases, always pay off the bill in full, and never
incur fees. Other consumers may use their cards for purchases, balance
transfers or cash advances, but never incur late-payment fees, over-
the-limit fees or other penalty fees. Still others may incur penalty
fees and penalty rates. A ``typical rate,'' however, would be based on
average fees and average balances that may not be typical for many
consumers. Moreover, such a rate may confuse consumers about the actual
rate that may apply to their account.
In response to the June 2007 Proposal, several consumers groups
again suggested that the Board reconsider the issue of disclosing a
``typical rate'' in the table required by Sec. 226.5a. The Board
continues to believe that the proposed typical APR would not be helpful
to consumers that seek credit cards for the reasons stated above. Thus,
a requirement to disclose a ``typical rate'' is not included in the
final rule.
5a(b)(2) Fees for Issuance or Availability
Section 226.5a(b)(2), which implements TILA Section
127(c)(1)(A)(ii)(I), requires card issuers to disclose any annual or
other periodic fee, expressed as an annualized amount, that is imposed
for the issuance or availability of a credit card, including any fee
based on account activity or inactivity. 15 U.S.C.
1637(c)(1)(A)(ii)(I). In 1989, the Board used its authority under TILA
Section 127(c)(5) to require that issuers also disclose non-periodic
fees related to opening the account, such as one-time membership or
participation fees. 15 U.S.C. 1637(c)(5); 54 FR 13855, Apr. 6, 1989.
Fees for issuance or availability of credit card products targeted
to subprime borrowers. Often, subprime credit cards will have
substantial fees related to the issuance and availability of credit.
For example, these cards may impose an annual fee and a monthly
maintenance fee for the card. In addition, these cards may impose
multiple one-time fees when the consumer opens the card account, such
as an application fee and a program fee. The Board believes that these
fees should be clearly explained to consumers at the time of the offer
so that consumers better understand when these fees will be imposed.
In the June 2007 Proposal, the Board proposed to amend Sec.
226.5a(b)(2) to require additional information about periodic fees. 15
U.S.C. 1637(c)(5). Currently, issuers are required to disclose only the
annualized amount of the fee. The Board proposed to amend Sec.
226.5a(b)(2) to require issuers also to disclose the amount of the
periodic fee, and how frequently it will be imposed. For example, if an
issuer imposes a $10 monthly maintenance fee for a card account, the
issuer must disclose in the table that there is a $10 monthly
maintenance fee, and that the fee is $120 on an annual basis.
In addition, the Board proposed to amend Sec. 226.5a(b)(2) to
require additional information about non-periodic fees related to
opening the account. Currently, issuers are required to disclose the
amount of the non-periodic fee, but not that it is a one-time fee. The
Board proposed to amend Sec. 226.5a(b)(2) to require card issuers to
disclose the amount of the fee and that it is a one-time fee. The final
rule adopts Sec. 226.5a(b)(2) as proposed. The Board believes that
this additional information

[[Page 5289]]

will allow consumers to better understand set-up and maintenance fees
that are often imposed in connection with subprime credit cards. For
example, the changes will provide consumers with additional information
about how often the fees will be imposed by identifying which fees are
one-time fees, which fees are periodic fees (such as monthly fees), and
which fees are annual fees.
In addition, application fees that are charged regardless of
whether the consumer receives credit currently are not considered fees
as imposed for the issuance or availability of a credit card, and thus
are not disclosed in the table. See current comment 5a(b)(2)-3 and
Sec. 226.4(c)(1). The Board proposed to delete the exception for these
application fees and require that they be disclosed in the table as
fees imposed for the issuance or availability of a credit card. Comment
5a(b)(2)-3 is adopted as proposed with stylistic changes. The Board
believes that consumers should be aware of these fees when they are
shopping for a credit card.
Currently, and under the June 2007 and May 2008 Proposals, comment
5a(b)(2)-2 provides that 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) shall not be
disclosed in the table if the basic account may be opened without
paying such fees. The Board is aware that some subprime cards may
charge a fee for an additional card on the account, beyond the first
card on the account. For example, if there were two primary cardholders
listed on the account, only one card on the account would be issued,
and the cardholders would be charged a fee for another card if the
cardholders request an additional card, so that each cardholder would
have his or her own card. The Board is amending comment 5a(b)(2)-2 to
clarify that issuing a card to each primary cardholder (not authorized
users) is considered a basic membership privilege and fees for
additional cards, beyond the first card on the account, must be
disclosed as a fee for issuance or availability. Thus, a fee to obtain
an additional card on the account beyond the first card (so that each
primary cardholder would have his or her own card) must be disclosed in
the table as a fee for issuance or availability under Sec.
226.5a(b)(2). This fee must be disclosed even if the fee is optional in
that the fee is charged only if the cardholder requests one or more
additional cards.
5a(b)(3) Fixed Finance Charge; Minimum Interest Charge
Currently, Sec. 226.5a(b)(3), which implements TILA Section
127(c)(1)(A)(ii)(II), requires that card issuers must disclose any
minimum or fixed finance charge that could be imposed during a billing
cycle. Card issuers typically impose a minimum charge (e.g., $0.50) in
lieu of interest in those months where a consumer would otherwise incur
an interest charge that is less than the minimum charge (a so-called
``minimum interest charge'').
In the June 2007 Proposal, the Board proposed to retain the minimum
finance charge disclosure in the table but refer to the charge as a
``minimum interest charge'' or ``minimum charge'' in the table, as
discussed in the section-by-section analysis to Appendix G. Although
minimum charges currently may be small, the Board was concerned that
card issuers may increase these charges in the future. Also, the Board
noted that it was aware of at least one credit card product for which
no APR is charged, but each month a fixed charge is imposed based on
the outstanding balance (for example, $6 charge per $1,000 balance). If
the minimum finance charge disclosure were eliminated from the table,
card issuers that offer this type of pricing would no longer be
required to disclose the fixed charge in the table and consumers would
not receive important information about the cost of the credit card.
The Board also did not propose a de minimis minimum finance charge
threshold. The Board was concerned that this approach could undercut
the uniformity of the table, and could be misleading to consumers. The
Board also proposed to amend Sec. 226.5a(b)(3) to require card issuers
to disclose in the table a brief description of the minimum finance
charge, to give consumers context for when this charge will be imposed.
See also proposed comment 5a(b)(3)-1.
In response to the June 2007 Proposal, several industry commenters
recommended that the Board delete this disclosure from the table unless
the minimum finance charge is over a certain nominal amount. They
indicated that in most cases, the minimum finance charge is so small as
to be irrelevant to consumers. They believed that it should only be in
the table if the minimum finance charge is a significant amount.
Consumer groups agreed with the Board's proposal to require the
disclosure of the minimum finance charge in all cases and not to allow
issuers to exclude the minimum finance charge from the table if the
charge was under a certain specific amount.
In consumer testing conducted by the Board in March 2008,
participants were asked to compare disclosure tables for two credit
card accounts and decide which account they would choose. In one of the
disclosure tables, a small minimum finance charge, labeled as a
``minimum interest charge,'' was disclosed. In the other disclosure
table, no minimum finance charge was disclosed. None of the
participants indicated that the small minimum finance charge on one
card but not on the other would impact their decision to choose one
card over the other.
Based on this consumer testing, the Board proposed in May 2008 to
revise proposed Sec. 226.5a(b)(3) to provide that an issuer must
disclose in the table any minimum or fixed finance charge in excess of
$1.00 that could be imposed during a billing cycle and a brief
description of the charge, pursuant to the Board's authority under TILA
Section 127(c)(5) which authorizes the Board to add or modify Sec.
226.5a disclosures as necessary to carry out the purposes of TILA. 15
U.S.C. 1637(c)(5). The proposed rule would have continued to require
disclosure in the table if any minimum or fixed finance charge was over
this de minimis amount to ensure that consumers are aware of larger
minimum or fixed finance charges that might impact them. Under the
proposal, the $1.00 amount would have been adjusted to the next whole
dollar amount when the sum of annual percentage changes in the Consumer
Price Index in effect on June 1 of previous years equals or exceeds
$1.00. See proposed comment 5a(b)(3)-2. This approach in adjusting the
dollar amount that triggers the disclosure of a minimum or fixed
finance charge is similar to TILA's rules for adjusting a dollar amount
of fees that trigger additional protections for certain home-secured
loans. TILA Section 103(aa), 15 U.S.C. 1602(aa). Under the proposal, at
the issuer's option, the issuer would have been allowed to disclose in
the table any minimum or fixed finance charge below the threshold. This
flexibility was intended to facilitate compliance when adjustments are
made to the dollar threshold. For example, if an issuer has disclosed a
$1.50 minimum finance charge in its application and solicitation table
at the time the threshold is increased to $2.00, the issuer could
continue to use forms with the minimum finance charge disclosed, even
though the issuer would no longer be required to do so.
In response to the May 2008 Proposal, industry commenters generally
supported this aspect of the proposal. One industry commenter suggested
a

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$5.00 threshold, because with the proposed $1.00 threshold, when
operational costs are considered, for most banks it will be simpler to
disclose any and all minimum or fixed finance charges. Another industry
commenter suggested eliminating the minimum or fixed finance charge
disclosure altogether, and adding a disclosure for cards that charge a
monthly fee in lieu of the APR. In addition, one industry commenter
suggested that the Board eliminate the minimum or fixed finance charge
disclosure and monitor if issuers change their minimum or fixed finance
charge calculations as a result. Consumer group commenters generally
opposed the proposal because issuers would no longer be required to
disclose an important cost to consumers (especially subprime consumers,
where the fee might be significant in relation to the small initial
available credit on subprime cards).
The minimum interest charge was also tested in the Board's
qualitative consumer testing. In the two rounds of consumer testing
conducted by the Board after the May 2008 Proposal, participants were
asked to compare disclosure tables for two credit card accounts. In one
of the disclosure tables, a small minimum interest charge was
disclosed. In the other disclosure table, no minimum interest charge
was disclosed. Participants were specifically asked whether the minimum
interest charge would influence which card they would choose. Of the
participants who understood what a minimum interest charge was, almost
all said that the minimum interest charge would not play a significant
role in their decision whether or not to apply for the card that
disclosed the minimum interest charge because of the small amount of
the fee.
The final rule retains the $1.00 threshold, as proposed, in Sec.
226.5a(b)(3) with several modifications. Pursuant to the Board's
authority under TILA Section 127(c)(5), the final rule retains the
$1.00 threshold for minimum interest charges because the Board believes
that when the minimum interest charge is a de minimis amount (i.e.,
$1.00 or less, as adjusted for inflation), disclosure of the minimum
interest charge is not information that consumers will use to shop for
a card. 15 U.S.C. 1637(c)(5). The final rule limits the $1.00 threshold
to apply only to minimum interest charges, which are charges in lieu of
interest in those months where a consumer would otherwise incur an
interest charge that is less than the minimum charge. Fixed finance
charges must be disclosed regardless of whether they are equal to or
less than $1.00. For example, for credit card products described above
where no APR is charged, but each month a fixed charge is imposed based
on the outstanding balance (e.g., $6 charge per $1,000 balance), this
fixed charge must be disclosed regardless of whether the charge is
equal to or less than $1.00. The Board is limiting the $1.00 threshold
to minimum interest charges because the Board believes that minimum
interest charges are imposed infrequently, and most likely are not
imposed month after month on an account, unlike fixed finance charges.
In addition, in a technical edit, the final rule is amended to
specify that the $1.00 amount would be adjusted periodically by the
Board to reflect changes in the Consumer Price Index. The final rule
specifies that the Board shall calculate each year a price level
adjusted minimum interest charge using the Consumer Price Index in
effect on the June 1 of that year. When the cumulative change in the
adjusted minimum value derived from applying the annual Consumer Price
level to the current minimum interest charge threshold has risen by a
whole dollar, the minimum interest charge will be increased by $1.00.
Comments 5a(b)(3)-1 and -2 are also adopted with technical
modifications.
5a(b)(4) Transaction Charges
Section 226.5a(b)(4), which implements TILA Section
127(c)(1)(A)(ii)(III), requires that card issuers disclose any
transaction charge imposed on purchases. In the June 2007 Proposal, the
Board proposed to amend Sec. 226.5a(b)(4) to explicitly exclude from
the table fees charged for transactions in a foreign currency or that
take place in a foreign country. In an effort to streamline the
contents of the table, the Board proposed to highlight only those fees
that may be important for a significant number of consumers. In
consumer testing for the Board prior to the June 2007 Proposal,
participants did not mention foreign transaction fees as important fees
they use to shop. In addition, there are few consumers who may pay
these fees with any frequency. Thus, in the June 2007 Proposal, the
Board proposed to except foreign transaction fees from disclosure of
transaction fees in an application or solicitation, but to include such
fees in the proposed account-opening summary table to ensure that
interested consumers can learn of the fees before using the card. See
proposed Sec. 226.6(b)(4).
In response to the June 2007 Proposal, some consumer group
commenters recommended that the Board mandate disclosure of foreign
transaction fees in the table required under Sec. 226.5a. They
questioned the utility of the Board requiring foreign transaction fees
in the account-opening table required under Sec. 226.6, but
prohibiting those fees to be disclosed in the table under Sec. 226.5a.
They believed that consumers as well as the industry would be better
served by eliminating the few differences between the disclosures
required at the two stages. In addition, one industry commenter
recommended that the table required under Sec. 226.5a include foreign
transaction fees. This commenter believed that the foreign transaction
fee is relevant to any consumer who travels in other countries, and the
ability to choose a credit card based on the presence of the fee is
important. In addition, the commenter noted that the large amount of
press attention that the issue has received suggests that the presence
or absence of the fee is now of interest to a significant number of
consumers.
In the May 2008 Proposal, the Board proposed to require that
foreign transaction fees imposed by the card issuer must be disclosed
in the table required under Sec. 226.5a. Specifically, the Board
proposed to withdraw proposed Sec. 226.5a(b)(4)(ii), which would have
precluded a card issuer from disclosing a foreign transaction fee in
the table required by Sec. 226.5a. In addition, the Board proposed to
add comment 5a(b)(4)-2 to indicate that foreign transaction fees
charged by the card issuer are considered transaction charges for the
use of a card for purchases, and thus must be disclosed in the table
required under Sec. 226.5a.
In the May 2008 Proposal, the Board noted its concern about the
inconsistency in requiring foreign transaction fees in the account-
opening table required by Sec. 226.6, but prohibiting that fee in the
table required by Sec. 226.5a. In the June 2007 Proposal, the Board
proposed that issuers may substitute the account-opening table for the
table required by Sec. 226.5a. See proposed comment 5a-2. Under the
June 2007 Proposal, circumstances could have arisen where one issuer
substitutes the account-opening table for the table required under
Sec. 226.5a (and thus is required to disclose the foreign transaction
fee) but another issuer provides the table required under Sec. 226.5a
(and thus is prohibited from disclosing the foreign transaction fee).
If a consumer was comparing the disclosures for these two offers, it
may appear to the consumer that the issuer providing the account-
opening table charges a foreign transaction fee and the issuer
providing the table required under Sec. 226.5a does not, even though

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the second issuer may charge the same or a higher foreign transaction
fee than the first issuer. Thus, to promote uniformity, the Board
proposed in May 2008 to require issuers to disclose the foreign
transaction fee in both the account-opening table required by Sec.
226.6 and the table required by Sec. 226.5a. See proposed comment
5a(b)(4)-2. The Board also proposed that foreign transaction fees would
be disclosed in the table required by Sec. 226.5a similar to how those
fees are disclosed in the proposed account-opening tables published in
the June 2007 Proposal. See proposed Model Forms and Samples G-17(A),
(B) and (C).
In response to the May 2008 Proposal, most consumer group and
industry commenters supported the Board's proposal to require issuers
to disclose foreign transaction fees in the table required by Sec.
226.5a. Nonetheless, some industry commenters opposed the proposal
because they believed that consumers would not shop on these fees. One
industry commenter indicated that disclosing the foreign transaction
fee in the table only in connection with purchases may be misleading to
consumers as some issuers also charge this fee on cash advances in
foreign currencies or in foreign countries. This commenter noted that
in the June 2007 Proposal, the Board identified this fee in proposed
Sec. 226.5a(b)(4)(ii) as ``a fee imposed by the issuer for
transactions made in a foreign currency or that take place in a foreign
country.'' This commenter encouraged the Board to adopt similar
``transaction'' language in the final rule for Sec. 226.5a(b)(4).
Comment 5a(b)(4)-2 is adopted as proposed in the May 2008 Proposal
with several modifications. As discussed above, the final rule requires
issuers to disclose foreign transaction fees in the table required by
Sec. 226.5a, to be consistent with the requirement to disclose that
fee in the account-opening table required by Sec. 226.6. In addition,
foreign transaction fees could be relevant to consumers who travel in
other countries or conduct transactions in foreign currencies, and the
ability to choose a credit card based on the presence of the fee may be
important to those consumers.
The Board notes that Sec. 226.5a(b)(4) requires issuers to
disclose any transaction charge imposed by the card issuer for the use
of the card for purchases. Thus, comment 5a(b)(4)-2 clarifies that a
transaction charge imposed by the card issuer for the use of the card
for purchases includes any fee imposed by the issuer for purchases in a
foreign currency or that take place outside the United States or with a
foreign merchant. As noted by one commenter on the May 2008 Proposal,
some issuers also charge a foreign transaction fee on cash advances in
foreign currencies or in foreign countries. Issuers that charge a
foreign transaction fee on cash advances in foreign currencies or in
foreign countries are required to disclose that fee under Sec.
226.5a(b)(8), which requires the issuer to disclose in the table any
fee imposed for an extension of credit in the form of cash or its
equivalent. Comment 5a(b)(8)-2 is added to clarify that cash advance
fees include any charge imposed by the card issuer for cash advances in
a foreign currency or that take place in a foreign country. In
addition, both comments 5a(b)(4)-2 and 5a(b)(8)-2 clarify that if an
issuer charges the same foreign transaction fee for purchases and cash
advances in a foreign currency or in a foreign country, the issuer may
disclose this foreign transaction fee as shown in Samples G-10(B) and
G-10(C). Otherwise, the issuer will need to revise the foreign
transaction fee language shown in Samples G-10(B) and G-10(C) to
disclose clearly and conspicuously the amount of the foreign
transaction fee that applies to purchases and the amount of the foreign
transaction fee that applies to cash advances. Moreover, both comments
5a(b)(4)-2 and 5a(b)(8)-2 include a cross reference to comment 4(a)-4
for guidance on when a foreign transaction fee is considered charged by
the card issuer.
5a(b)(5) Grace Period
Currently, Sec. 226.5a(b)(5), which implements TILA Section
127(c)(A)(iii)(I), requires that card issuers disclose in the Sec.
226.5a table the date by which or the period within which any credit
extended for purchases may be repaid without incurring a finance
charge. Section 226.5a(a)(2)(iii), which implements TILA Section
122(c)(2)(C), requires credit card applications and solicitations under
Sec. 226.5a to use the term ``grace period'' to describe the date by
which or the period within which any credit extended for purchases may
be repaid without incurring a finance charge. 15 U.S.C. 1632(c)(2)(C).
In the June 2007 Proposal, the Board proposed new Sec.
226.5(a)(2)(iii) to extend this requirement to use the term ``grace
period'' to all references to such a term for the disclosures required
to be in the form of a table, such as the account-opening table.
In response to the June 2007 Proposal, one industry commenter
recommended that the Board no longer mandate the use of the term
``grace period'' in the table. Although TILA specifically requires use
of the term ``grace period'' in the Sec. 226.5a table, this commenter
urged the Board to use its exception authority to choose a term that is
more understandable to consumers. This commenter pointed out that its
research as well as that conducted by the Board and the GAO had
demonstrated that the term is confusing as a descriptor of the
interest-free period between the purchase and the due date for
customers who pay their balances in full. This commenter suggested that
the Board revise the disclosure of the grace period in the table to use
the heading ``interest-free period'' instead of ``grace period.''
In the May 2008 Proposal, the Board proposed to use its exemption
authority to delete the requirement to use the term ``grace period'' in
the table required by Sec. 226.5a. 15 U.S.C. 1604(a) and (f) and
1637(c)(5). As the Board discussed in the June 2007 Proposal, consumer
testing conducted for the Board prior to the June 2007 Proposal
indicated that some participants misunderstood the term ``grace
period'' to mean the time after the payment due date that an issuer may
give the consumer to pay the bill without charging a late-payment fee.
The GAO in its Report on Credit Card Rates and Fees found similar
misunderstandings by consumers in its consumer testing. See page 50 of
GAO Report. Furthermore, many participants in the GAO testing
incorrectly indicated that the grace period was the period of time
promotional interest rates applied. Nonetheless, in consumer testing
conducted for the Board prior to the June 2007 Proposal, the Board
found that participants tended to understand the term ``grace period''
more clearly when additional context was added to the language of the
grace period disclosure, such as describing that if the consumer paid
the bill in full each month, the consumer would have some period of
time (e.g., 25 days) to pay the new purchase balance in full to avoid
interest. Thus, the Board proposed to retain the term ``grace period.''
As discussed above, in response to the June 2007 Proposal, one
commenter performed its own testing with consumers on the grace period
disclosure proposed by the Board. This commenter found that the term
``grace period'' was still confusing to the participants in its
testing, even with the additional context given in the grace period
disclosure proposed by the Board. The commenter found that consumers
understood the term ``interest-free period'' to more accurately
describe the interest-free period between the purchase and the due date

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for customers who pay their balances in full.
In consumer testing conducted by the Board prior to the June 2007
Proposal, the Board tested the phrase ``interest-free period.'' The
Board found that some consumers believed the phase ``interest-free
period'' referred to the period of time that a zero percent
introductory rate would be in effect, instead of the grace period.
Subsequently, in consumer testing conducted by the Board in March 2008,
the Board tested disclosure tables for a credit card solicitation that
used the phrase ``How to Avoid Paying Interest on Purchases'' as the
heading for the row containing the information on the grace period.
Participants in this testing generally seemed to understand this phrase
to describe the grace period. In addition, in the March 2008 consumer
testing, the Board also tested the phrase ``Paying Interest'' in the
context of a disclosure relating to a check that accesses a credit card
account, where a grace period was not offered on this access check.
Specifically, the phrase ``Paying Interest'' was used as the heading
for the row containing information that no grace period was offered on
the access check. Participants seemed to understand this phrase to mean
that no grace period was being offered on the use of the access check.
Thus, in the May 2008 Proposal the Board proposed to revise proposed
Sec. 226.5a(b)(5) to require that issuers use the phrase ``How to
Avoid Paying Interest on Purchases,'' or a substantially similar
phrase, as the heading for the row describing the grace period. If no
grace period on purchases is offered, when an issuer is disclosing this
fact in the table, the issuer would have been required to use the
phrase ``Paying Interest,'' or a substantially similar phrase, as the
heading for the row describing that no grace period is offered.
Comments on this aspect of the May 2008 Proposal were mixed. Some
consumer group and industry commenters supported the new headings. Some
of these commenters suggested that the new headings be mandated, that
is, the Board should not allow ``substantially similar'' phrases to be
used. Other industry and consumer group commenters suggested that the
Board retain the use of the term ``grace period'' because they claimed
that consumers generally understand the ``grace period'' phrase. In
addition, other industry commenters suggested that the Board mandate
one row heading (regardless of whether there is a grace period or not)
and that heading should be ``interest-free period.'' These commenters
believed that the phrase ``interest-free period'' would help consumers
better understand the ``grace period'' concept generally and would
reinforce for consumers that they pay interest from the date of the
transaction for transactions other than purchases.
In one of the rounds of consumer testing conducted by the Board
after the May 2008 Proposal, the following three headings were tested
for describing the ``grace period'' concept: ``How to Avoid Paying
Interest on Purchases,'' ``Grace Period'' and ``Interest-free Period.''
Participants in this round of testing were asked which of the three
headings most clearly communicates the information contained in that
row of the table. Most of the participants selected the heading ``How
to Avoid Paying Interest on Purchases.'' A few of the participants
selected the heading ``Interest-Free Period.'' None of the participants
selected ``Grace Period'' as the best heading. A few participants
commented that the term ``grace period'' was misleading because some
people might think of a ``grace period'' as a period of time after the
due date that a consumer could pay without being considered late. In
addition, the Board believes that the heading ``How to Avoid Paying
Interest on Purchases'' communicates in plain language the concept of
the ``grace period,'' without requiring consumers to understand a
specific phrase like ``grace period'' or ``interest-free period'' to
represent that concept.
In addition, in the consumer testing conducted after the May 2008
Proposal, the Board continued to test the phrase ``Paying Interest'' as
a disclosure heading in the context of a check that accesses a credit
card account, where no grace period was offered on this access check.
When asked whether there was any way to avoid paying interest on
transactions made with the access check, most participants in these
rounds of testing understood the ``Paying Interest'' phrase to mean
that no grace period was being offered on the use of the access check.
Thus, the final rule in Sec. 226.5a(b)(5) adopts the new headings as
proposed in May 2008, pursuant to the Board's authority in TILA Section
105(a) to provide exceptions necessary or proper to effectuate the
purposes of TILA. 15 U.S.C. 1604(a).
Although the heading of the row will change depending on whether or
not a grace period for all purchases is offered on the account, the
Board does not believe that different headings will significantly
undercut a consumer's ability to compare terms of credit card accounts.
Most issuers offer a grace period on all purchases; thus, most issuers
will use the term ``How to Avoid Paying Interest on Purchases.''
Nonetheless, in those cases where a consumer is reviewing the tables
for two credit card offers--one which has a row with the heading ``How
to Avoid Paying Interest on Purchases'' and one with a row ``Paying
Interest''--the Board believes that consumers will recognize that the
information in those two rows relate to the same concept of when
consumers will pay interest on the account.
As discussed above, some commenters suggested that the new headings
be mandated to promote uniformity of the table, that is, the Board
should not allow ``substantially similar'' phrases to be used. The
Board agrees that consistent headings are important to enable consumers
to better compare grace periods for different offers. Section
226.5a(b)(5) specifies that in disclosing a grace period that applies
to all types of purchases in the table, the phrase ``How to Avoid
Paying Interest on Purchases'' must be used as the heading for the row
describing the grace period. If a grace period is not offered on all
types of purchases or is not offered on any purchases, in describing
this fact in the table, the phrase ``Paying Interest'' must be used as
the heading for the row describing this fact.
As discussed above, Sec. 226.5a(b)(5) currently requires that card
issuers disclose in the Sec. 226.5a table the date by which or the
period within which any credit extended for purchases may be repaid
without incurring a finance charge. Comment 5a(b)(5)-1 provides that a
card issuer may, but need not, refer to the beginning or ending point
of any grace period and briefly state any conditions on the
applicability of the grace period. For example, the grace period
disclosure might read ``30 days'' or ``30 days from the date of the
periodic statement (provided you have paid your previous balance in
full by the due date).''
In the June 2007 Proposal, the Board proposed to amend Sec.
226.5a(b)(5) to require card issuers to disclose briefly any conditions
on the applicability of the grace period. The Board also proposed to
amend comment 5a(b)(5)-1 to provide guidance for how issuers may meet
the requirements in proposed Sec. 226.5a(b)(5). Specifically, proposed
comment 5a(b)(5)-1 would have provided that an issuer that conditions
the grace period on the consumer paying his or her balance in full by
the due date each month, or on the consumer paying the previous balance
in full by the due date the prior month will be deemed to meet
requirements to disclose conditions on the applicability of the grace
period by providing the

[[Page 5293]]

following disclosure: ``If you pay your entire balance in full each
month, you have [at least] ---- days after the close of each period to
pay your balance on purchases without being charged interest.''
In response to the June 2007 Proposal, several commenters suggested
that the Board revise the model language provided in proposed comment
5a(b)(5)-1 to describe the grace period. One commenter suggested the
following language: ``Your due date is [at least] 25 days after your
bill is totaled each month. If you don't pay your bill in full by your
due date, you will be charged interest on the remaining balance.''
Other commenters also recommended that the Board revise the disclosure
of the grace period to make clearer that the consumer must pay the
total balance in full each month by the due date to avoid paying
interest on purchases. In addition, some consumer groups commented that
if the issuer does not provide a grace period, the Board should mandate
specific language that draws the consumer's attention to this fact.
Two industry commenters to the June 2007 Proposal noted that the
``grace period'' description in proposed sample forms was conditioned
on ``if you pay your entire balance in full each month.'' One commenter
suggested deleting the phrase as unnecessary; another asked the Board
to provide flexibility in the description for creditors that offer a
grace period on purchases if the purchase (not the entire) balance is
paid in full.
In the March 2008 consumer testing, the Board tested the following
language to describe a grace period: ``Your due date is [at least] ----
days after the close of each billing cycle. We will not charge you
interest on purchases if you pay your entire balance (excluding
promotional balances) by the due date each month.'' Participants that
read this language appeared to understand it correctly. That is, they
understood that they could avoid paying interest on purchases is they
paid their bill by the due date each month. Thus, in May 2008, the
Board proposed to amend comment 5a(b)(5)-1 to provide this language as
guidance to issuers on how to disclose a grace period. The Board noted
that currently issuers typically require consumers to pay their entire
balance in full each month to qualify for a grace period on purchases.
However, in May 2008, the Board and other federal banking agencies
proposed to prohibit most issuers from requiring consumers to pay off
promotional balances in order to receive any grace period offered on
non-promotional purchases. See 73 FR 28904, May 19, 2008. Thus,
consistent with this proposed prohibition, the language in proposed
comment 5a(b)(5)-1 would have indicated that the entire balance
(excluding promotional balances) must be paid each month to avoid
interest charges on purchases.
Also, in the March 2008 consumer testing, the Board tested language
to describe that no grace period was being offered. Specifically, in
the context of testing a disclosure related to an access check for
which a grace period was not offered, the Board tested the following
language: ``We will begin charging interest on these check transactions
on the transaction date.'' Most participants that read this language
understood they could not avoid paying interest on this check
transaction, and therefore, that no grace period was being offered on
this check transaction. Thus, in May 2008, the Board proposed to add
comment 5a(b)(5)-2 to provide guidance on how to disclose the fact that
no grace period on purchases is offered on the account. Specifically,
proposed comment 5a(b)(5)-2 would have provided that issuers may use
the following language to describe that no grace period on purchases is
offered, as applicable: ``We will begin charging interest on purchases
on the transaction date.''
In response to the May 2008 Proposal, several industry commenters
urged the Board to provide flexibility for card issuers to amend the
``grace period'' language to allow for a more accurate description of
the grace period as may be appropriate or necessary. For example, these
commenters indicated that this flexibility is needed since promotional
balances may be described with more particularity (or using different
terminology) on billing statements and elsewhere, and also since there
may be circumstances in which the grace period could be conditioned on
additional factors, aside from payment of a balance in full. In
addition, several industry commenters noted that if the interagency
proposal to prohibit most issuers from treating a payment as late
unless consumers have been provided a reasonable amount of time to make
that payment is adopted, issuers may have two due dates each month--one
for the grace period end date and one for when payments will be
considered late. Issuers would need flexibility to amend the grace
period language to reference clearly the grace period end date. Also,
several consumer group commenters suggested that the Board not adopt
the proposed model language when a grace period is not offered on
purchases, namely ``We will begin charging interest on purchases on the
transaction date.'' These commenters suggested instead that the Board
mandate the following language: ``No grace period.''
In consumer testing conducted by the Board after the May 2008
Proposal, the Board tested the following language describing the grace
period: ``Your due date is [at least] ---- days after the close of each
billing cycle. We will not charge you interest on purchases if you pay
your entire outstanding balance (excluding promotional balances) by the
due date each month.'' When asked whether there was any way not to pay
interest on purchase, most participants noticed the language describing
the grace period and appeared generally to understand that they could
avoid paying interest on purchases by paying their balance in full each
month. Nonetheless, most participants did not understand the phrase
``(excluding promotional balances).'' In the context of testing a
disclosure related to an access check for which a grace period was not
offered, the Board tested the following language: ``We will begin
charging interest on these check transactions on the transaction
date.'' When asked where there was any way to avoid paying interest on
these check transactions, most participants saw the above language and
understood that there was no grace period for these check transactions.
Based on this testing, the Board adopts in comment 5a(b)(5)-1 the
model language proposed in May 2008 for describing a grace period that
is offered on all types of purchases, with one modification.
Specifically, the phrase ``(excluding promotional balances)'' is
deleted from the model language. Thus, the model language is revised to
read: ``Your due date is [at least] ---- days after the close of each
billing cycle. We will not charge you interest on purchases if you pay
your entire balance by the due date each month.'' As discussed in
supplemental information to final rules issued by the Board and other
federal banking agencies published elsewhere in today's Federal
Register, the Board and the other federal banking agencies have
withdrawn the proposal that would have prohibited most issuers from
requiring consumers to pay off promotional balances in order to receive
any grace period offered on non-promotional purchases. Thus, the phrase
``(excluding promotional balances)'' is deleted as unnecessary. In
addition, other technical edits have been made to comment 5a(b)(5)-1.
The final rule adopts in comment 5a(b)(5)-2 the following model
language proposed in May 2008 to describe that no grace period on any
purchases is

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offered, as applicable: ``We will begin charging interest on purchases
on the transaction date.'' Comment 5a(b)(5)-3 is added to clarify that
if an issuer provides a grace period on some types of purchases but no
grace period on others, the issuer, as appropriate, may combine and
revise the model language in comments 5a(b)(5)-1 and -2 to describe to
which types of purchases a grace period applies and to which types of
purchases no grace period is offered.
The Board's language in 5a(b)(5)-1 for describing a grace period on
all purchases, and in 5a(b)(5)-2 for describing that no grace period
exists on any purchases is not mandatory. This model language is meant
as a safe harbor for issuers. Credit card issuers may amend this
language as necessary or appropriate to describe accurately the grace
period (or lack of grace period) offered on purchases on the account.
5a(b)(6) Balance Computation Method
TILA Section 127(c)(1)(A)(iv) requires the Board to name not more
than five of the most common balance computation methods used by credit
card issuers to calculate the balance for purchases on which finance
charges are computed. 15 U.S.C. 1637(c)(1)(A)(iv). If issuers use one
of the balance computation methods named by the Board, Sec.
226.5a(b)(6) requires that issuers must disclose the name of that
balance computation method in the table as part of the disclosures
required by Sec. 226.5a, but issuers are not required to provide a
description of the balance computation method. If the issuer uses a
balance computation method that is not named by the Board, however, the
issuer must disclose a detailed explanation of the balance computation
method. See current Sec. 226.5a(b)(6); Sec. 226.5a(a)(2)(i). In the
June 2007 Proposal, the Board proposed to retain a brief reference to
the balance computation method, but move the disclosure from the table
to directly below the table. See proposed Sec. 226.5a(a)(2)(iii).
Commenters generally supported the proposal. Many consumers urged
the Board to ban the use of a computation method commonly called ``two-
cycle'' as unfair. A federal banking agency urged the Board to require
``cautionary disclosures'' where technical explanations were
insufficient, such as a for a description of two-cycle billing. Two
commenters suggested expanding the list of commonly-used methods in
Sec. 226.5a(g) to include the daily balance method. One industry
commenter suggested eliminating the requirement to provide the name of
the balance computation method, and requiring a toll-free telephone
number or an optional reference to the creditor's Web site instead.
Currently, the Board in Sec. 226.5a(g) has named four balance
computation methods: (1) Average daily balance (including new
purchases) or (excluding new purchases); (2) two-cycle average daily
balance (including new purchases) or (excluding new purchases); (3)
adjusted balance; and (4) previous balance. In the June 2007 Proposal,
the Board proposed to retain these four balance computation methods.
In May 2008, the Board and other federal banking agencies proposed
to prohibit most issuers from using a balance computation method
commonly referred to as the ``two-cycle'' balance method. See 73 FR
28904, May 19, 2008. Nonetheless, in the May 2008 Regulation Z
Proposal, the Board did not propose deleting the two-cycle average
daily balance method from the list in Sec. 226.5(g) because the
prohibition would not have applied to all issuers, such as state-
chartered credit unions that would not have been subject to the
National Credit Union Administration's proposed rules.
In response to the May 2008 Proposal, several consumer groups
suggested that the Board consider requiring issuers that use the two-
cycle method to disclose that ``this method is the most expensive
balance computation method and is prohibited for most credit card
issuers,'' assuming that the banking agencies' proposed rules
prohibiting most issuers from using the ``two cycle'' method goes
forward. In addition, these consumer groups continued to advocate use
of an ``Energy Star'' approach in describing the balance calculation
methods, where each balance computation method would be rated on how
expensive it is, and that rating would be disclosed.
The Board is adopting the requirement to disclose the name of the
balance computation method used by the creditor beneath the table, as
proposed. In consumer testing conducted for the Board prior to the June
2007 Proposal, virtually no participants understood the two balance
computation methods used by most card issuers--the average daily
balance method and the two-cycle average daily balance method--when
those methods were just described by name. The GAO found similar
results in its consumer testing. See GAO Report on Credit Card Rates
and Fees, at pages 50-51. In the consumer testing conducted for the
Board prior to the June 2007 Proposal, a version of the table was used
which attempted to explain briefly that the ``two-cycle average daily
balance method'' would be more expensive than the ``average daily
balance method'' for those consumers that sometimes pay their bill in
full and sometimes do not. Participants' answers suggested they did not
understand this disclosure. They appeared to need more information
about how balances are calculated.
In consumer testing conducted for the Board in March 2008, a
version of the table was used which attempted to explain in more detail
the ``average daily balance method'' and the ``two-cycle average daily
balance method'' and the situation in which the two-cycle method
results in higher interest charges--namely, in those months where a
consumer paid his or her entire outstanding balance in full in one
billing cycle but then does not pay the entire balance in full the
following cycle. While participants that saw the table understood that
under two-cycle billing, interest would be charged on balances during
both the current and previous billing cycles, most participants did not
understand that they would only be charged interest in the previous
billing cycle if they had paid the outstanding balance in full for the
previous cycle but not for the current cycle. Thus, most participants
did not understand that two-cycle billing would not lead to higher
interest charges than the ``average daily balance method'' if a
consumer never paid in full.
TILA Section 122(c)(2) states that for certain disclosures set
forth in Section TILA 127(c)(1)(A), including the balance computation
method, the Board shall require that the disclosure of such
information, to the extent the Board determines to be practicable and
appropriate, be in the form of a table. 15 U.S.C. 1632(c)(2). The Board
believes that it is no longer appropriate to continue to require
issuers to disclose the balance computation method in the table,
because the name of the balance computation method used by issuers does
not appear to be meaningful to consumers and may distract from more
important information contained in the table. Thus, the final rule
retains a brief reference to the balance computation method, but moves
the disclosure from the table to directly below the table. See Sec.
226.5a(a)(2)(iii).
The final rule continues to require that issuers disclose the name
of the balance computation method beneath the table because this
disclosure is required by TILA Section 127(c)(1)(A)(iv). Consumers and
others will have access to information about the balance calculation
method used on the credit card account if they find it useful. Under
final rules issued by the Board and other federal banking agencies
published elsewhere in today's

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Federal Register, most credit card issuers are prohibited from using
the ``two cycle'' balance computation method. Nonetheless, this final
rule retains the ``two-cycle'' disclosure because not all issuers are
covered by the final rules published elsewhere in today's Federal
Register which preclude use of the two-cycle balance computation
method.
The Board is not requiring issuers that are permitted to and choose
to use the two-cycle method to disclose that ``this method is the most
expensive balance computation method and is prohibited for most credit
card issuers.'' As discussed above, a statement that the two-cycle
method is the most expensive balance computation method would be
accurate only for those consumers who sometimes pay their bill in full
and sometime do not. For consumers that never pay their bill in full,
or always pay their bill in full, the interest paid under the two-cycle
method is the same as paid under the one-cycle average daily balance
method. For the same reasons, the Board is not requiring an ``Energy
Star'' approach in describing the balance calculation methods, which
would require each balance computation method to be rated on how
expensive it is, and require that rating to be disclosed. Whether one
balance computation method is more expensive than another would depend
on how a consumer uses his or her account.
5a(b)(8) Cash Advance Fee
Currently, comment 5a(b)(8)-1 provides that a card issuer must
disclose only those fees it imposes for a cash advance that are finance
charges under Sec. 226.4. For example, a charge for a cash advance at
an ATM would be disclosed under Sec. 226.5a(b)(8) unless a similar
charge is imposed for ATM transactions not involving an extension of
credit. In the June 2007 Proposal, the Board proposed to provide that
all transaction fees on credit cards would be considered finance
charges. Thus, the Board proposed to delete the current guidance
discussed in comment 5a(b)(8)-1 as obsolete. As discussed in the
section-by-section analysis to Sec. 226.4, the final rule adopts the
proposal that all transaction fees imposed by a card issuer on a
cardholder are considered finance charges. Thus, the Board also deletes
current comment 5a(b)(8)-1 as proposed.
A new comment 5a(b)(8)-1 is added to refer issuers to Samples G-
10(B) and G-10(C) for guidance on how to disclose clearly and
conspicuously the cash advance fee. In addition, as discussed in the
section-by-section analysis to Sec. 226.5a(b)(4), new comment
5a(b)(8)-2 is added to clarify that cash advance fees includes any
charge imposed by the card issuer for cash advances in a foreign
currency or that take place outside the United States or with a foreign
merchant. In addition, comment 5a(b)(8)-2 clarifies that if an issuer
charges the same foreign transaction fee for purchases and cash
advances in a foreign currency or that take place outside the United
States or with a foreign merchant, the issuer may disclose this foreign
transaction fee as shown in Samples G-10(B) and (C). Otherwise, the
issuer will need to revise the foreign transaction fee shown in Samples
G-10(B) and (C) to disclose clearly and conspicuously the amount of the
foreign transaction fee that applies to purchases and the amount of the
foreign transaction fee that applies to cash advances. Moreover,
comment 5a(b)(8)-2 provides a cross reference to comment 4(a)-4 for
guidance on when a foreign transaction fee is considered charged by the
card issuer.
In addition, consistent with the account-opening disclosures
required in Sec. 226.6, comment 5a(b)(8)-3 is added to clarify that
any charge imposed on a cardholder by an institution other than the
card issuer for the use of the other institution's ATM in a shared or
interchange system is not a cash advance fee that must be disclosed in
the table pursuant to Sec. 226.5a(b)(8).
5a(b)(12) Returned-Payment Fee
Currently, Sec. 226.5a does not require a card issuer to disclose
a fee imposed when a payment is returned. In the June 2007 Proposal,
the Board proposed to add Sec. 226.5a(b)(12) to require issuers to
disclose this fee in the table. Typically, card issuers will impose a
fee and a penalty rate if a cardholder's payment is returned. As
discussed above, the final rule adopts the Board's proposal to require
card issuers to disclose in the table the reasons that a penalty rate
may be imposed. See Sec. 226.5a(b)(1)(iv). The final rule also
requires card issuers to disclose the returned-payment fee, pursuant to
the Board's authority under TILA Section 127(c)(5), so that consumers
are told both consequences of returned payments. 15 U.S.C. 1637(c)(5).
In addition, returned-payment fees are similar to late-payment fees in
that returned-payment fees also can relate to a consumer not paying on
time; if the only payment made by a consumer during a given billing
cycle is returned, the return of the payment also could result in the
consumer being deemed to have paid late. Late-payment fees are
disclosed in the table and the Board believes that consumers also
should be aware of returned-payment fees when shopping for a credit
card. See section-by-section analysis to Sec. 226.5a(a)(2).
Cross References to Penalty Rate
Card issuers often impose both a fee and penalty rate for the same
behavior--such as a consumer paying late, exceeding the credit limit,
or having a payment returned. In consumer testing conducted for the
Board prior to the June 2007 Proposal, participants tended to associate
paying penalty fees with certain behaviors (such as paying late or
going over the credit limit), but they did not tend to associate rate
increases with these same behaviors. By linking the penalty fees with
the penalty rate, participants more easily understood that if they
engage in certain behaviors, such as paying late, their rates may
increase in addition to incurring a fee. Thus, in the June 2007
Proposal, the Board proposed to add Sec. 226.5a(b)(13) to provide that
if a card issuer may impose a penalty rate for any of the reasons that
a penalty fee would be imposed (such as a late payment, going over the
credit limit, or a returned payment), the issuer in disclosing the fee
also must disclose that the penalty rate may apply, and must provide a
cross reference to the penalty rate. Proposed Samples G-10(B) and G-
10(C) would have provided guidance on how to provide these disclosures.
In response to the June 2007 Proposal, several industry commenters
suggested that the cross reference be eliminated, as unnecessary and
leading to ``information overload.'' In addition, one commenter
suggested that the cross reference not be required if one late payment
cannot cause the APR to increase. Alternatively, this commenter
suggested that the conditions be disclosed with the cross reference,
for example, ``If two consecutive payments are late, your APRs may also
be increased; see Penalty APR section above.''
In quantitative consumer testing conducted for the Board after the
May 2008 Proposal, the Board investigated whether the presence of a
cross reference from a penalty fee, specifically the over-the-limit
fee, to the penalty APR improved consumers' awareness of the fact that
a penalty rate could be applied to their accounts if they went over the
credit limit. The results of the testing indicate that there was no
statistically significant improvement in consumers' awareness that
going over the limit could trigger penalty pricing when a cross
reference was included. Because the testing suggests that cross-
references from penalty fees to the

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penalty rate disclosure does not improve consumer understanding of the
circumstances in which penalty pricing can be applied to their
accounts, and due to concerns about ``information overload,'' proposed
Sec. 226.5a(b)(13) and comment 5a(b)(13)-1 have been withdrawn from
the final rule. Thus, the final rule does not require cross-references
from penalty fees to penalty rates in the Sec. 226.5a table.
5a(b)(13) Required Insurance, Debt Cancellation or Debt Suspension
Coverage
Credit card issuers often offer optional insurance or debt
cancellation or suspension coverage with the credit card. Under the
current rules, costs associated with the insurance or debt cancellation
or suspension coverage are not considered ``finance charges'' if the
coverage is optional, the issuer provides certain disclosures to the
consumer about the coverage, and the issuer obtains an affirmative
written request for coverage after the consumer has received the
required disclosures. Card issuers frequently provide the disclosures
discussed above on the application form with a space to sign or initial
an affirmative written request for the coverage. Currently, issuers are
not required to provide any information about the insurance or debt
cancellation or suspension coverage in the table that contains the
Sec. 226.5a disclosures.
In the event that a card issuer requires the insurance or debt
cancellation or debt suspension coverage (to the extent permitted by
state or other applicable law), the Board proposed new Sec.
226.5a(b)(14) in the June 2007 Proposal to require that the issuer
disclose any fee for this coverage in the table. In addition, proposed
Sec. 226.5a(b)(14) would have required that the card issuer also
disclose a cross reference to where the consumer may find more
information about the insurance or debt cancellation or debt suspension
coverage, if additional information is included on or with the
application or solicitation. Proposed Sample G-10(B) would have
provided guidance on how to provide the fee information and the cross
reference in the table. The final rule adopts new Sec. 226.5a(b)(13)
(renumbered from Sec. 226.5a(b)(14)) as proposed. If insurance or debt
cancellation or suspension coverage is required in order to obtain a
credit card, the Board believes that fees required for this coverage
should be highlighted in the table so that consumers are aware of these
fees when considering an offer, because they will be required to pay
the fee for this coverage every month in order to have the credit card.
5a(b)(14) Available Credit
Subprime credit cards often have substantial fees assessed when the
account is opened. Those fees will be billed to the consumer as part of
the first statement, and will substantially reduce the amount of credit
that the consumer initially has available with which to make purchases
or other transactions on the account. For example, for cards where a
consumer is given a minimum credit line of $250, after the start-up
fees have been billed to the account, the consumer may have less than
$100 of available credit with which to make purchases or other
transactions in the first month. In addition, consumers will pay
interest on these fees until they are paid in full.
The federal banking agencies have received a number of complaints
from consumers with respect to cards of this type. Complainants often
claim that they were not aware of how little available credit they
would have after all the fees were assessed. Thus, in the June 2007
Proposal, the Board proposed to add Sec. 226.5a(b)(16) to inform
consumers about the impact of these fees on their initial available
credit. Specifically, proposed Sec. 226.5a(b)(16) would have provided
that if (1) a card issuer imposes required fees for the issuance or
availability of credit, or a security deposit, that will be charged
against the card when the account is opened, and (2) the total of those
fees and/or security deposit equal 25 percent or more of the minimum
credit limit applicable to the card, a card issuer must disclose in the
table an example of the amount of the available credit that a consumer
would have remaining after these fees or security deposit are debited
to the account, assuming that the consumer receives the minimum credit
limit offered on the relevant account. In determining whether the 25
percent threshold test is met, the issuer would have been required to
consider only fees for issuance or availability of credit, or a
security deposit, that are required. If certain fees for issuance or
availability are optional, these fees would not have been required to
be considered in determining whether the disclosure must be given.
Nonetheless, if the 25 percent threshold test is met in connection with
the required fees or security deposit, the issuer would have been
required to disclose two figures--the available credit after excluding
any optional fees from the amounts debited to the account, and the
available credit after including any optional fees in the amounts
debited to the account.
In addition, the Board proposed comment 5a(b)(16)-1 to clarify that
in calculating the amount of available credit that must be disclosed in
the table, an issuer must consider all fees for the issuance or
availability of credit described in Sec. 226.5a(b)(2), and any
security deposit, that will be imposed and charged to the account when
the account is opened, such as one-time issuance and set-up fees. For
example, in calculating the available credit, issuers would have been
required to consider the first year's annual fee and the first month's
maintenance fee (if applicable) if they are charged to the account
immediately at account opening. Proposed Sample G-10(C) would have
provided guidance to issuers on how to provide this disclosure. (See
proposed comment 5a(b)(16)-2).
As described above, a card issuer would have been required to
consider only required fees for issuance or availability of credit, or
a security deposit, that will be charged against the card when the
account is opened in determining whether the 25 percent threshold test
is met. A card issuer would not have been required to consider other
kinds of fees, such as late fees or over-the-limit fees when evaluating
whether the 25 percent threshold test is met. The Board solicited
comment on whether there are other fees (other than fees required for
issuance or availability of credit) that are typically imposed on these
types of accounts when the account is opened, and should be included in
determining whether the 25 percent threshold test is met.
In response to the June 2007 Proposal, several commenters suggested
start-up fees should be banned in some instances. Several consumer
groups and one member of Congress suggested that start-up fees that
equal 25 percent or more of the available credit line be banned.
Another consumer group suggested that start-up fees exceeding 5 percent
of the available credit line be banned. In addition, several consumer
groups suggested that the Board should prohibit security deposits from
being charged to the account as an unfair practice.
Assuming the Board did not ban start-up fees, several consumer
groups suggested that the threshold for the available credit disclosure
be lowered to 5 percent instead of 25 percent. In contrast, several
industry commenters suggested that the threshold be lowered to 10
percent or 15 percent. In addition, while some commenters supported the
Board's proposal to consider only required start-up fees (and not
optional

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fees) in deciding whether the 25 percent threshold is met, some
consumer groups suggested that the threshold test be based on required
and optional fees. Several consumer groups also recommended that the
language of the available credit disclosure be shortened and a
percentage be disclosed, as follows: ``AVAILABLE CREDIT: The fees
charged when you open this account will be $25 (or $40 with an
additional card), which is 10% (or 16% with an additional card) of the
minimum credit limit of $250. If you receive a $250 credit limit, you
will have $225 in available credit (or $210 with an additional card).''
These consumer groups also suggested that the available credit
disclosure be required in advertisements as well, especially in the
solicitation letter for direct mail and Internet applications and
solicitations.
In May 2008, the Board and other federal banking agencies proposed
to address concerns regarding subprime credit cards by prohibiting
institutions from financing security deposits and fees for credit
availability (such as account-opening fees or membership fees) if those
charges would exceed 50 percent of the credit limit during the first
twelve months and from collecting at account opening fees that are in
excess of 25 percent of the credit limit in effect on the consumer's
account when opened. See 73 FR 28904, May 19, 2008. In the
supplementary information to the May 2008 Regulation Z Proposal, the
Board indicated that if such an approach is adopted as proposed,
appropriate revisions would be made to ensure consistency among the
regulatory requirements and to facilitate compliance when the Board
adopted revisions to the Regulation Z rules for open-end (not home-
secured) credit.
In response to the May 2008 Regulation Z Proposal, several
commenters again suggested that the threshold for the available credit
disclosure be reduced to 5 percent or 10 percent. Another consumer
group commenter suggested that the Board always require the available
credit disclosure if there are start-up fees on the account, including
annual fees. In addition, several consumer group commenters reiterated
their comments on the June 2007 Proposal that the threshold test for
when the available credit disclosure must be given should be based on
required and optional fees.
Under final rules issued by the Board and other federal banking
agencies published elsewhere in today's Federal Register, most credit
card issuers are precluded from financing security deposits and fees
for credit availability if those charges would exceed 50 percent of the
credit limit during the first six months and from collecting at account
opening, fees that are in excess of 25 percent of the credit line in
effect on the consumer's account when opened. Notwithstanding these
substantive provisions, the Board believes that for subprime cards, a
disclosure of available credit is needed in the table to inform
consumers about the impact of start-up fees on the initial available
credit.
The final rule adopts Sec. 226.5a(b)(16) with several
modifications, and renumbers the provision as Sec. 226.5a(b)(14).
Specifically, the final rule amends the proposal to provide that fees
or security deposits that are not charged to the account are not
subject to the disclosure requirements in Sec. 226.5a(b)(14). In
addition, comment 5a(b)(14)-1 (proposed as comment 5a(b)(16)-1) is
revised from the proposal to clarify that in calculating the amount of
the available credit including optional fees, if optional fees could be
charged multiple times, the issuer shall assume that the optional fee
is only imposed once. For example, if an issuer charges a fee for each
additional card issued on the account, the issuer in calculating the
amount of the available credit including optional fees must assume that
the cardholder requests only one additional card. Also, comment
5a(b)(14)-1 is revised to specify that in disclosing the available
credit, an issuer must round down the available credit amount to the
nearest whole dollar.
The final rule also differs from the proposal in that it contains a
15 percent threshold for when the credit availability disclosure must
be given, namely, when required fees for issuance or availability of
credit, or a security deposit, that will be charged against the card
when the account is opened equal 15 percent or more of the minimum
credit limit applicable to the card. The Board lowered the threshold to
15 percent to address commenters' concerns that a lower threshold would
better inform consumers about offers of credit where large portions of
the available credit on a new account are taken up by fees before the
consumer has the opportunity to use the account. The Board has not
lowered the threshold to 5 percent or 10 percent as suggested by some
other commenters. The Board believes that a 15 percent threshold will
ensure that consumers will receive the disclosure in connection with
subprime credit card products, but that the disclosure will generally
not be required in connection with a prime credit card account, for
which credit limits are higher and less fees are charged when the
account is opened. The Board believes that the disclosure is most
useful to consumers when a substantial portion of the minimum credit
line is not available because required start-up fees (or a required
security deposit) are charged to the account. The available credit
disclosure may not be as meaningful to consumers, when those consumers
are receiving 90 to 95 percent of the minimum credit line in available
credit at account opening.
In addition, the Board retained in the final rule that the
available credit disclosure must be given if required start-up fees (or
a required security deposit) charged against the account at account-
opening equal 15 percent or more of the minimum credit line. Optional
start-up fees are not considered when determining whether the 15
percent threshold is met. Nonetheless, if the 15 percent threshold is
met in connection with the required fees or security deposit, the
issuer must disclose two figures--the available credit after excluding
any optional fees from the amounts debited to the account, and the
available credit after including any optional fees in the amounts
debited to the account (assuming that each optional fee is only charged
once). The Board believes that it is appropriate not to consider
optional fees when determining whether the 15 percent threshold is
initially met because consumers are not required to incur these fees to
obtain the credit card account. Consistent with the proposal, the final
rule also requires an issuer to consider only fees for the issuance or
availability of credit when determining whether the 15 percent
threshold is met; other types of fees such as late-payment fees or
over-the-limit fees are not required to be considered.
Moreover, the final rule does not adopt the language for the
available credit disclosure suggested by several consumer groups. The
Board believes that including percentages in the disclosure, as
suggested by those consumer groups, would be confusing to consumers.
The final rule also does not require that issuers provide the available
credit disclosure in the solicitation letter for direct mail and
Internet applications and solicitations, as suggested by several
consumer group commenters. In consumer testing conducted by the Board,
participants generally noticed and understood the available credit
disclosure in the table required by Sec. 226.5a. Thus, the Board does
not believe that repeating that disclosure in the solicitation letter
for direct mail and Internet applications and solicitations is needed.
Sample

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G-10(C) sets forth an example of how the available credit disclosure
may be made.
5a(b)(15) Web Site Reference
In June 2007, the Board proposed to revise Sec. 226.5a to require
that credit card issuers must disclose in the table a reference to a
Board Web site and a statement that consumers can find on this Web site
educational materials on shopping for and using credit card accounts.
See proposed Sec. 226.5a(b)(17). Such materials would expand those
already available on choosing a credit card at the Board's Web
site.\17\ The Board recognized that some consumers may need general
education about how credit cards work and an explanation of typical
account terms that apply to credit cards. In the consumer testing
conducted for the Board, participants showed a wide range of
understanding about how credit cards work generally, with some
participants showing a firm understanding of terms that relate to
credit card accounts, while others had difficulty expressing basic
financial concepts, such as how the interest rate differs from a one-
time fee. The Board's current Web site explains some basic financial
concepts--such as what an APR is--as well as terms that typically apply
to credit card accounts. Through the Web site, the Board may continue
to expand the explanation of other credit card terms, such as grace
periods, that may be difficult to explain concisely in the disclosures
given with applications and solicitations.
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\17\ The materials can be found at http://www.federalreserve.gov/pubs/shop/default.htm.
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In response to the June 2007 Proposal, several industry commenters
questioned whether consumers would use the Web site resource, and
suggested that the Board either not require the Web site disclosure or
place the disclosure outside of the table to avoid ``information
overload.'' Consumer groups generally supported placing the Web site
disclosure in the table, and requested that the Board provide an
alternative information source for those consumers who lack Internet
access, such as a toll-free telephone number at which consumers can
obtain a free copy of similar information.
The final rule adopts Sec. 226.5a(b)(15) (proposed as Sec.
226.5a(b)(17)). As part of consumer testing, participants were asked
whether they would use a Board Web site to obtain additional
information about credit cards generally. Some participants indicated
they might use the Web site, while others indicated that it was
unlikely they would use such a Web site. Although it is hard to predict
from the results of the testing how many consumers might use the
Board's Web site, and recognizing that not all consumers have access to
the Internet, the Board believes that this Web site may be helpful to
some consumers as they shop for a credit card and manage their account
once they obtain a credit card. Thus, the final rule requires a
reference to a Board Web site to be included in the table because this
is a cost-effective way to provide consumers with additional
information on credit cards. The Board is not requiring creditors to
also disclose a toll-free telephone number at which consumers can
obtain a free copy of similar information from the Board. The Board
anticipates that consumers are not likely to use a toll-free telephone
number to request educational materials in these instances because they
will not want to delay applying for a credit card until the materials
are delivered. Thus, such a requirement would not significantly benefit
consumers on the whole.
Payment Allocation and Other Suggested Disclosures Under Sec.
226.5a(b)
Payment allocation. Currently, many credit card issuers allocate
payments in excess of the minimum payment first to balances that are
subject to the lowest APR. For example, if a cardholder made purchases
using a credit card account and then initiated a balance transfer, the
card issuer might allocate a payment (less than the amount of the
balances) to the transferred balance portion of the account if that
balance was subject to a lower APR than the purchases. Card issuers
often will offer a discounted initial rate on balance transfers (such
as 0 percent for an introductory period) with a credit card
solicitation, but not offer the same discounted rate for purchases. In
addition, the Board is aware of at least one issuer that offers the
same discounted initial rate for balance transfers and purchases for a
specified period of time, where the discounted rate for balance
transfers (but not the discounted rate for purchases) may be extended
until the balance transfer is paid off if the consumer makes a certain
number of purchases each billing cycle. At the same time, issuers
typically offer a grace period for purchases if a consumer pays his or
her bill in full each month. Card issuers, however, do not typically
offer a grace period on balance transfers or cash advances. Thus, on
the offers described above, a consumer cannot take advantage of both
the grace period on purchases and the discounted rate on balance
transfers. The only way for a consumer to avoid paying interest on
purchases--and thus have the benefit of the grace period--is to pay off
the entire balance, including the balance transfer subject to the
discounted rate.
In the consumer testing conducted for the Board prior to the June
2007 Proposal, many participants did not understand how payments would
be allocated and 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 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 disclosure 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.
In the June 2007 Proposal, the Board proposed to add Sec.
226.5a(b)(15) to require card issuers to explain payment allocation to
consumers. Specifically, the Board proposed that issuers explain how
payment allocation would affect consumers, if an initial discounted
rate were offered on balance transfers or cash advances but not
purchases. The Board proposed that issuers must disclose to consumers
(1) that 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.
In response to the June 2007 Proposal, several commenters
recommended the Board test a simplified payment allocation disclosure
that covers cases other than low rate balance transfers offered with a
credit card. In consumer testing conducted for the Board in March 2008,
the Board tested the following payment allocation disclosure:
``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

[[Page 5299]]

(including balance transfers you make at the introductory rate).'' Some
participants understood from prior experience that issuers typically
will apply payments to lower APR balances first and the fact that this
method causes them to incur higher interest charges. For those
participants that did not know about payment allocation methods from
prior experience, the disclosure tested was not effective in explaining
payment allocation to them.
In May 2008, the Board and other federal banking agencies proposed
substantive provisions on how issuers may allocate payments. 73 FR
28904, May 19, 2008. Specifically, under that proposal, when different
annual percentage rates apply to different balances, most issuers would
have been required to allocate amounts paid in excess of the minimum
payment using one of three specified methods or a method that is no
less beneficial to consumers. Furthermore, when an account has a
discounted promotional rate balance or a balance on which interest is
deferred, most issuers would have been 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). Most issuers also
would have been prohibited from denying consumers a grace period on
non-promotional 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.
In the supplementary information to the May 2008 Regulation Z
Proposal, the Board indicated it would withdraw the proposal to require
a card issuer to explain payment allocation to consumers in the table,
if the substantive provisions on payment allocation proposed by the
Board and other federal banking agencies in May 2008 were adopted.
In response to the May 2008 Regulation Z Proposal, several consumer
group commenters suggested that the Board retain a payment allocation
disclosure, even if the substantive provisions on payment allocation
were adopted. Specifically, these commenters suggested that the Board
require issuers to disclose which of the three proposed payment
allocation methods they will use when there is no promotional rate on
the account. Also, these commenters indicated that issuers should be
required to disclose how they apply the minimum payment. These
commenters suggested that the payment allocation disclosures could
appear outside the table required by Sec. 226.5a. Furthermore, these
commenters suggested that some consumers might understand these
disclosures and use them. In addition, these commenters indicated that
disclosure of the payment allocation method would allow consumer groups
to know which method an issuer is using and the consumer groups could
rate the methods, to help consumers understand which card is better for
the consumer.
In consumer testing conducted for the Board after May 2008,
different versions of disclosures explaining payment allocation were
tested, including language adapted from current credit card
disclosures. Before participants were shown any disclosures explaining
payment allocation, they were asked a series of questions designed to
determine whether they had prior knowledge of payment allocation
methods. This portion of the testing consisted of showing a
hypothetical example to participants and asking them, based on their
prior experience, (i) how they believed the card issuer would allocate
the payment and (ii) how the participant would want the payment
allocated. Participants were then shown language explaining how a
hypothetical card issuer would allocate payments. Each disclosure that
was used in testing indicated that the issuer would apply payments to
balances with lower APRs before balances with higher APRs. Consumers
were then shown the same hypothetical example and asked the same series
of questions. More information about the specific disclosures tested
and the results of the testing are available in the December 2008 Macro
Report on Quantitative Testing.
Most participants who answered both questions correctly before
being shown the disclosure, suggesting that they had prior knowledge of
payment allocation, answered the questions correctly after reviewing
the disclosure. Some of these participants, however, gave incorrect
responses to questions that they had answered correctly before
reviewing the disclosures, suggesting that the disclosure was
detrimental to these participants' understanding of payment allocation
practices. Only a small percentage of consumers who did not understand
payment allocation prior to reviewing the disclosure, gave the correct
responses after reviewing the disclosure. None of the versions of the
disclosure that were tested performed significantly better than any of
the others.
The final rule does not require a disclosure regarding payment
allocation in the table. As described above, the consumer testing
conducted on behalf of the Board suggests that disclosures of payment
allocation practices have only a minor positive impact on consumer
comprehension. In addition, the Board and other federal banking
agencies are substantively addressing payment allocation practices in
rules published elsewhere in today's Federal Register. Specifically,
the Board and other federal banking agencies are requiring issuers to
allocate amounts paid in excess of the minimum payment using one of two
specified methods. These substantive rules regarding payment allocation
would permit issuers to use payment allocation methods that may be more
complicated to disclose than the relatively simple example used in
consumer testing, i.e., application of payments to balances with lower
APRs before balances with higher APRs. Consequently, the Board does not
believe that disclosure requirements would be helpful as a supplement
to the substantive rules. Finally, even if consumers were able to
understand payment allocation disclosures, it is unclear whether they
would be able to evaluate whether one payment allocation method is
better than another at the time they are shopping for a credit card
because which payment allocation method is the most beneficial to a
given consumer would depend on how that consumer uses the account.
Additional disclosures. In response to the June 2007 Proposal,
several commenters suggested that the Board require in the table
information about the minimum payment formula, credit limit, any
security interest, reasons terms on the account may change, and all
fees imposed on the account.
1. Minimum payment formula. In response to the June 2007 Proposal,
several consumer groups urged the Board to require issuers to disclose
in the table the minimum payment formula. They believed that this would
allow consumers to understand what portion of principal balance
repayment is being included in the minimum payment. Several industry
commenters supported the Board's proposal not to require the minimum
payment formula in the table. The final rule does not require the
minimum payment formula in the table. In the consumer testing conducted
for the Board, participants did not tend to mention the minimum payment
formula as one of the terms on which they shop for a card. In addition,
minimum payment formulas used by card issuers can be complicated and

[[Page 5300]]

would be hard to describe concisely in the table.
2. Credit limit. Card issuers often state a credit limit in a cover
letter sent with an application or solicitation. Frequently, this
credit limit is not disclosed as a specific amount but, instead, is
stated as an ``up to'' amount, indicating the maximum credit limit for
which a consumer may qualify. The actual credit limit for which a
consumer qualifies depends on the consumer's creditworthiness and other
factors such as income, which is evaluated after the consumer submits
the application or solicitation. As explained in the supplementary
information to the June 2007 Proposal, the Board did not propose to
include the credit limit in the table. As explained above, in most
cases, the credit limit for which a consumer qualifies depends on the
consumer's creditworthiness, which is fully evaluated after the
consumer submits the application or solicitation. In addition, in
consumer testing conducted for the Board prior to the June 2007
Proposal, participants were not generally confused by the ``up to''
credit limit. Most participants understood that the ``up to'' amount on
the solicitation letter was a maximum amount, rather than the amount
the issuer was promising them. Almost all participants tested
understood that the credit limit for which they would qualify depended
on their creditworthiness, such as credit history.
In response to the June 2007 Proposal, several consumer group
commenters suggested that the Board require issuers to disclose the
credit limit in the table required by Sec. 226.5a. Several consumer
groups suggested that the Board include the credit limit in the table
because it is a key factor for many consumers in shopping for a credit
card. These groups also suggested that the Board require issuers to
state a specific credit limit, and not an ``up to'' amount. One
industry commenter also suggested that the Board require issuers to
disclose in the table the range of credit limits that are being
offered. This commenter pointed out that currently credit card issuers
generally have a range of credit limits in mind when marketing a card,
and while the range is often disclosed in the marketing materials, the
maximum and minimum credit lines are not necessarily found in the same
place in the marketing materials or disclosed with the same prominence.
In May 2008, the Board and other federal banking agencies proposed
that financial institutions that make ``firm offers of credit'' as
defined in the FCRA and that advertise multiple APRs or ``up to''
credit limits would be required to disclose in the solicitation the
factors that determine whether a consumer will qualify for the lowest
APR and highest credit limit advertised. See 73 FR 28904, May 19, 2008.
As discussed elsewhere in today's Federal Register, the Board and other
federal banking agencies have not adopted a requirement that creditors
disclose in the solicitation the factors that determine whether a
consumer will qualify for the lowest APR and highest credit limit
advertised.
Similarly, the Board has not included in the final rule a
requirement that issuers disclose the credit limit in either the table
required by Sec. 226.5a or the solicitation. The Board's consumer
testing indicates that consumers generally understand from prior
experience that their credit limits will depend on their credit
histories. Thus, the final rule does not require a disclosure of the
credit limit in the Sec. 226.5a table or the solicitation.
3. Security interest. In response to the June 2007 Proposal,
several consumer group commenters suggested that any required security
interest should be disclosed in the table. These commenters suggest
that if a security interest is required, the disclosure in the table
should describe it briefly, such as ``in items purchased with card'' or
``required $200 deposit.'' These commenters indicated that a security
deposit is a very important consideration in credit shopping,
especially for low-income consumers. In addition, they stated that many
credit cards issued by merchants are secured by the goods that the
consumer purchases, but consumers are often unaware of the security
interest.
The final rule does not require issuers to disclose in the table
any required security interest. Credit card-issuing merchants may
include in their account agreements a security interest in the goods
that are purchased with the card. Any such security interest must be
disclosed at account-opening pursuant to Sec. 226.6(b)(5), as
discussed below. It is not apparent that consumers would shop on
whether a retail card has this type of security interest. Requiring or
allowing this type of security interest to be disclosed in the table
may distract from important information in the table, and contribute to
``information overload.'' Thus, in an effort to streamline the
information that may appear in the table, the final rule does not
include this disclosure in the table.
With respect to security deposits, if a consumer is required to pay
a security deposit prior to obtaining a credit card and that security
deposit is not charged to the account but is paid by the consumer from
separate funds, a card issuer must necessarily disclose to the consumer
that a security deposit is required, so that the consumer knows to
submit the deposit in order to obtain the card. A security deposit in
these instances is likely to be sufficiently highlighted in the
materials accompanying the application or solicitation, and does need
to appear in the table. Nonetheless, the Board recognizes that a
security deposit may need to be highlighted when the deposit is not
paid from separate funds but is charged to the account when the account
is opened, particularly when the security deposit may significantly
decrease consumers' available credit when the account is opened. Thus,
as described above, the final rule provides that if (1) a card
agreement requires payment of a fee for issuance or availability of
credit, or a security deposit, (2) the fee or security deposit will be
charged to the account when it is opened, and (3) the total of those
fees and security deposit equal 15 percent or more of the minimum
credit limit offered with the card, the card issuer must disclose in
the table an example of the amount of the available credit that a
consumer would have remaining after these fees or security deposit are
debited to the account, assuming that the consumer receives the minimum
credit limit offered on the card.
4. Reasons terms may change. In response to the June 2007 Proposal,
several commenters suggested that the Board should require in the table
a disclosure of the reasons issuers may change terms on the account.
Typically, a credit card issuer will reserve the right to change terms
on the account at any time for any reason. These commenters believed
that a disclosure of the issuer's ability to change terms for any
reason at any time would alert consumers to the practice at the outset
of the relationship and could promote competition among issuers
regarding use of the practice.
The Board is not requiring in the table a disclosure of the reasons
issuers may change terms on the account. In consumer testing conducted
by the Board in March 2008, participants were asked to compare two
credit card offers where the offers contained different account terms,
such as APRs and fees. In addition, one of these offers included a
disclosure in the table that the card issuer could change APRs ``at any
time for any reason,'' while the other offer did not include this
disclosure. While about half of the participants indicated they
considered it a positive factor that one of the offers did not include
a disclosure that APRs could change at any time for any reason, this
fact did not

[[Page 5301]]

ultimately impact which offer they chose.
Thus, it does not appear consumers would shop for a credit card
based on this disclosure, and allowing this disclosure in the table may
distract from more important information in the table, and contribute
to ``information overload.'' Nonetheless, the Board believes that it is
important for consumers to be properly informed when terms on their
accounts are changing, and the final rule contains provisions relating
to change-in-terms notices and penalty rate notices that are designed
to achieve this goal. See section-by-section analysis to Sec. 226.9(c)
and (g). In addition, the Board and other federal banking agencies have
issued final rules published elsewhere in today's Federal Register that
generally prohibit the application of increased rates to existing
balances. The Board believes that the substantive protection provided
by these rules mitigates the impact of many rate increases, and
decreases the need for an up-front disclosure of the issuer's
reservation of the right to change terms.
5. Fees. In response to the June 2007 Proposal, several consumer
groups suggested that in addition to the fees that the Board has
proposed to be included in the table, the Board should require that any
fee that a creditor charges to more than 5 percent of its cardholders
be disclosed in the table. In addition, one member of Congress
suggested that issuers be required to disclose in the table fees to pay
by phone or on the Internet.
As described above, under the final rule, issuers will be required
to disclose certain transaction fees and penalty fees, such as cash
advance fees, balance transfer fees, late-payment fees, and over-the-
limit fees, in the table because these fees are frequently paid by
consumers, and consumers in testing and comment letters have indicated
these fees are important for shopping purposes. The Board is not
requiring issuers to disclose other fees in the table, such as fees to
pay by phone or on the Internet, because these fees tend to be imposed
less frequently and are not fees on which consumers tend to shop. In
consumer testing conducted for the Board prior to the June 2007
Proposal, participants tended to mention cash advance fees, balance
transfer fees, late-payment fees, and over-the-limit fees as the most
important fees they would want to know when shopping for a credit card.
In addition, most participants understood that issuers were allowed to
impose additional fees, beyond those disclosed in the table. Thus, the
Board believes it is important to highlight in the table the fees that
most consumers want to know when shopping for a card, rather than
including infrequently-paid fees, to avoid creating ``information
overload'' such that consumers could not easily identify the fees that
are most important to them. In addition, the Board is not imposing a
requirement that issuers disclose in the table any fee that the issuer
charges to more than 5 percent of the cardholders for the card. This
would undercut the uniformity of the table. For example, although most
issuers may charge a certain fee, such as a fee to pay by phone,
requiring issuers to disclose a fee if the issuer charges it to more
than 5 percent of the cardholders for the card, could mean that some
issuers would disclose the fee to pay by phone and some would not, even
though most issuers charge this fee. The Board recognizes that fees can
change over time, and the Board plans to monitor the market and update
the fees required to be disclosed in the table as necessary.
In addition, in response to the June 2007 Proposal, one federal
banking agency suggested that the Board include a disclosure in the
table when an issuer may impose an over-the-limit or other penalty fee
based on circumstances that result solely from the imposition of other
fees or finance charges, or if the contract permits it to impose
penalty fees in consecutive cycles based on a single failure by the
consumer to abide by the terms of the account. The Board is not
requiring this disclosure in the table. The Board believes that
consumers are not likely to consider this information in shopping for a
credit card. Requiring this disclosure in the table may distract from
important information in the table, and contribute to ``information
overload.''
5a(c) Direct Mail and Electronic Applications
5a(c)(1) General
Electronic applications and solicitations. As discussed above, the
Bankruptcy Act amended TILA Section 127(c) to require that
solicitations to open a card account using the Internet or other
interactive computer service must contain the same disclosures as those
made for applications or solicitations sent by direct mail. 15 U.S.C.
1637(c)(7). The interim final rules adopted by the Board in 2001
revised Sec. 226.5a(c) to apply the direct mail rules to electronic
applications and solicitations. In the June 2007 Proposal, the Board
proposed to retain these provisions in Sec. 226.5a(c)(1). (Current
Sec. 226.5a(c) would be revised and renumbered as new Sec.
226.5a(c)(1).) The final rule adopts new Sec. 226.5a(c)(1) as
proposed.
The Bankruptcy Act also requires that the disclosures for
electronic offers must be ``updated regularly to reflect the current
policies, terms, and fee amounts.'' In the June 2007 Proposal, the
Board proposed to revise Sec. 226.5a(c) to implement the ``updated
regularly'' standard in the Bankruptcy Act with regard to the accuracy
of variable rates. As proposed, a new Sec. 226.5a(c)(2) would have
been added to address the accuracy of variable rates in direct mail and
electronic applications and solicitations. This new section would have
required issuers to update variable rates disclosed on mailed
applications and solicitations every 60 days and variable rates
disclosed on applications and solicitations provided in electronic form
every 30 days, and to update other terms when they change. As proposed,
Sec. 226.5a(c)(2) consisted of two subsections.
Section 226.5a(c)(2)(i) would have provided that Sec. 226.5a
disclosures mailed to a consumer must be accurate as of the time the
disclosures are mailed. This section also would have provided that an
accurate variable APR is one that is in effect within 60 days before
mailing. Section 226.5a(c)(2)(ii) would have provided that Sec. 226.5a
disclosures provided in electronic form (except for a variable APR)
must be accurate as of the time they are sent to a consumer's e-mail
address, or as of the time they are viewed by the public on a Web site.
As proposed, this section would have provided that a variable APR is
accurate if it is in effect within 30 days before it is sent, or viewed
by the public. Many of the provisions included in proposed Sec.
226.5a(c)(2) were incorporated from current Sec. 226.5a(b)(1). To
eliminate redundancy, the Board proposed to revise Sec. 226.5a(b)(1)
by deleting Sec. 226.5a(b)(1)(ii), (b)(1)(iii), and comment 5a(c)-1.
In response to the June 2007 Proposal, one commenter suggested that
all variable APR accuracy standards should be simplified to allow for
disclosures to be modified every 60 days. This commenter suggested that
issuers should be able to follow a 60-day standard for accuracy for APR
disclosures no matter how they are delivered to ease the burden of
compliance. This commenter also indicated that issuers often mail a
solicitation for a credit card to a consumer and post the same offer on
a Web site or e-mail it to the consumer. The disclosures for the same
offer could be different, if the rate mailed is 60 days old and the
offer on the Web site is 30

[[Page 5302]]

days old. This commenter also indicated that having to create changes
to the direct mail documents for offers delivered electronically is
inefficient and costly. On the other hand, one consumer group commenter
suggested that all electronic disclosures should be accurate as of the
date when given, including variable rate APRs.
The Board adds Sec. 226.5a(c)(2) and deletes Sec.
226.5a(b)(1)(ii), (b)(1)(iii), and comment 5a(c)-1 as proposed. The
Board believes the 30-day and 60-day accuracy requirements for variable
rates strike an appropriate balance between seeking to ensure consumers
receive updated information and avoiding imposing undue burdens on
creditors. The Board believes it is unnecessary for creditors to
disclose to consumers the exact variable APR in effect on the date the
application or solicitation is accessed by the consumer, because
consumers generally understand that variable rates are subject to
change. Moreover, it would be costly and operationally burdensome for
creditors to comply with a requirement to disclose the exact variable
APR in effect at the time the application or solicitation is accessed.
The obligation to update the other terms when they change ensures that
consumers receive information that is accurate and current, and should
not impose significant burdens on issuers. These terms generally do not
fluctuate with the market like variable rates. In addition, the Board
understands that issuers typically change other terms infrequently,
perhaps once or twice a year.
5a(d) Telephone Applications and Solicitations
5a(d)(1) Oral Disclosure
Section 226.5a(d) specifies rules for providing cost disclosures in
oral applications and solicitations initiated by a card issuer.
Pursuant to TILA Section 127(c)(2), card issuers generally must provide
certain cost disclosures during the oral conversation in which the
application or solicitation is given. Alternatively, an issuer is not
required to give the oral disclosures if the card issuer either does
not impose a fee for the issuance or availability of a credit card (as
described in Sec. 226.5a(b)(2)) or does not impose such a fee unless
the consumer uses the card, provided that the card issuer provides the
disclosures later in a written form. 15 U.S.C. 1637(c)(2).
Consumer-initiated calls. In response to the June 2007 Proposal,
several consumer group commenters suggested that the requirements to
provide oral disclosures in Sec. 226.5a(d)(1) should not be limited to
applications and solicitations initiated by the card issuer. Instead,
the Board should require oral disclosures for all calls resulting in an
application or solicitation for a credit card--even if the consumer
rather than the issuer initiates the telephone call. Consistent with
the statutory requirement in TILA Section 127(c)(2), the final rule in
Sec. 226.5a(d)(1) continues to limit the requirement to provide oral
disclosure to situations where oral applications and solicitations are
initiated by a card issuer. 15 U.S.C. 1637(c)(2).
Written applications. In response to the June 2007 Proposal,
several consumer group commenters suggested that the Board require that
all applications be made in writing. They indicated that while an
issuer could offer the credit card over the phone, the consumer should
be required to sign an application to ensure that he or she actually
applied for the card and not a thief or errant household member. The
final rule does not require all applications for credit cards to be
made in writing. Allowing oral applications and solicitations is
consistent with the statutory provision in TILA Section 127(c)(2). 15
U.S.C. 1637(c)(2).
Available credit disclosure. Currently, under Sec. 226.5a(d)(1),
if the issuer provides the disclosures orally, the issuer must provide
information required to be disclosed under Sec. 226.5a(b)(1) through
(b)(7). This includes information about (1) APRs; (2) fees for issuance
or availability of credit; (3) minimum or fixed finance charges; (4)
transaction charges for purchases; (5) grace period on purchases; (6)
balance computation method; and (7) as applicable, a statement that
charges incurred by use of the charge card are due when the periodic
statement is received.
In the June 2007 Proposal, the Board did not propose to revise
Sec. 226.5a(d)(1). In response to the June 2007 Proposal, some
consumer group commenters urged the Board to revise Sec. 226.5a(d)(1)
to require issuers that are marketing credit cards by telephone to
disclose certain additional information to consumers at the time of the
phone call, such as the cash advance fee, the late-payment fee, the
over-the-limit fee, the balance transfer fee, information about penalty
rates, any fees for required insurance, and the disclosure about
available credit in proposed Sec. 226.5a(b)(16).
In the May 2008 Proposal, the Board proposed to amend Sec.
226.5a(d)(1) to require that if an issuer provides the oral
disclosures, the issuer must also disclose orally, if applicable, the
information about available credit in proposed Sec. 226.5a(b)(16)
pursuant to the Board's authority under TILA Section 127(c)(5) to add
or modify Sec. 226.5a disclosures as necessary to carry out the
purposes of TILA. 15 U.S.C. 1637(c)(5). In response to the May 2008
Proposal, commenters generally supported this aspect of the proposal.
The final rule amends Sec. 226.5a(d)(1), as proposed. Currently,
issuers that provide the oral disclosures must inform consumers about
the fees for issuance and availability of credit that are applicable to
the card. The Board believes that the information about available
credit would complement this disclosure, by disclosing to consumers the
impact of these fees on the available credit.
Other oral disclosures. In response to the June 2007 Proposal,
several consumer groups suggested that issuers should be required to
provide all of the disclosures required by proposed Sec. 226.5a(b)(1)
through (b)(17) orally with respect to an oral application or
solicitation, including cash advance fees, late-payment fees, over-the-
limit fees, balance transfer fees, and fees for required insurance. In
the supplementary information to the May 2008 Proposal, the Board did
not propose to require issuers to provide orally a disclosure of the
fees described above. The Board was concerned that requiring this
information in oral conversations about credit cards would lead to
``information overload'' for consumers. In response to the May 2008
Proposal, consumer groups still believed that consumers should receive
this information when making the decision whether to apply for a card.
They further suggested that the solution to ``information overload''
was to require a written application to be made whenever there is a
telephone credit card application or solicitation. As explained above,
the final rule does not require applications for credit cards to be
made in writing. Allowing oral applications and solicitations is
consistent with the statutory provision in TILA Section 127(c)(2). 15
U.S.C. 1637(c)(2).
5a(d)(2) Alternative Disclosure
Section 226.5a(d) specifies rules for providing cost disclosures in
oral applications and solicitations initiated by a card issuer. Card
issuers generally must provide certain cost disclosures orally during
the conversation in which the application or solicitation is
communicated to the consumer. Alternatively, an issuer is not required
to give the oral disclosures if the card

[[Page 5303]]

issuer either does not impose a fee for the issuance or availability of
a credit card (as described in Sec. 226.5a(b)(2)) or does not impose
such a fee unless the consumer uses the card, provided that the card
issuer provides the disclosures later in a written form. Specifically,
the issuer must provide the disclosures required by Sec. 226.5a(b) in
a tabular format in writing within 30 days after the consumer requests
the card (but in no event later than the delivery of the card), and
disclose the fact that the consumer need not accept the card or pay any
fee disclosed unless the consumer uses the card. In the June 2007
Proposal, the Board proposed to add comment 5a(d)-2 to indicate that an
issuer may disclose in the table that the consumer is not required to
accept the card or pay any fee unless the consumer uses the card.
Account is not approved. In response to the June 2007 Proposal, one
commenter suggested that the Board clarify that the written alternative
disclosures would only be necessary if the application for the account
is approved. The Board notes that current comment 5a(d)-1 indicates
that the oral and alternative written disclosure requirements do not
apply in situations where no card will be issued because, for example,
the consumer indicates that he or she does not want the card, or the
card issuer decides either during the telephone conversation or later
not to issue the card. This comment is retained in the final rule.
Substitution of account-opening table for table required by Sec.
226.5a. In response to the June 2007 Proposal, one commenter suggested
that the Board clarify that the account-opening table may substitute
for the written alternative disclosures set forth in Sec.
226.5a(d)(2). In the June 2007 Proposal, comment 5a-2 provided, in
part, that issuers in complying with Sec. 226.5a(d)(2) may substitute
the account-opening table in lieu of the disclosures required by Sec.
226.5a, if the issuer provides the disclosures required by Sec. 226.6
on or with the application or solicitation. See proposed Sec.
226.6(b)(4). Because the written alternative disclosures are not
provided with the application or solicitation, the Board recognizes
that proposed comment 5a-2 might have led to confusion about whether
the account-opening table described in Sec. 226.6(b)(1) may be
substituted for the written alternative disclosures. In the final rule,
the Board has revised comment 5a-2 to delete the reference to the
alternative written disclosures in Sec. 226.5a(d). Instead, the Board
adds new comment 5a(d)-3 to indicate that issuers may substitute the
account-opening table described in Sec. 226.6(b)(1) in lieu of the
alternative written disclosures described in Sec. 226.5a(d)(2).
Mailing of written alternative disclosures. In response to the June
2007 Proposal, several consumer group commenters suggested that the
Board require issuers to provide the written alternative disclosures in
the mailing that delivers the card, and should impose requirements that
will ensure that the disclosures are prominent. Otherwise, issuers may
make the written alternative disclosures in separate mailings, in an
obscure part of the cover letter with the card, or in other ways that
are designed not to attract consumers' attention. The final rule does
not contain this provision. The Board expects that issuers will
substitute the account-opening table described in Sec. 226.6(b)(1) in
lieu of the written alternative disclosures described in Sec.
226.5a(d)(2). Card issuers typically mail account-opening disclosures
with the card.
Right to reject account. As described above, an issuer is not
required to give the oral disclosures if the card issuer either does
not impose a fee for the issuance or availability of a credit card (as
described in Sec. 226.5a(b)(2)) or does not impose such a fee unless
the consumer uses the card, provided that the card issuer provides the
disclosures later in a written form. 15 U.S.C. 1637(c)(2). In the final
rule, Sec. 226.5a(d)(2) is revised to be consistent with the right to
reject the account given in Sec. 226.5(b)(1)(iv) with respect to
account-opening disclosures. As discussed in the section-by-section
analysis to Sec. 226.5(b)(1)(iv), the final rule amends Sec.
226.5(b)(1)(iv) to provide that creditors may collect or obtain the
consumer's promise to pay a membership fee before the account-opening
disclosures are provided, if the consumer can reject the plan after
receiving the disclosures. In addition, as discussed in the section-by-
section analysis to Sec. 226.6(b)(2)(xiii), the final rule also
requires creditors to disclose in the account-opening table described
in Sec. 226.6(b)(1) the right to reject described in Sec.
226.5(b)(1)(iv) if required fees for the availability or issuance of
credit, or a security deposit, equal 15 percent or more of the actual
credit limit offered on the account at account opening. See Sec.
226.6(b)(2)(xiii).
The Board expects that issuers will provide the account-opening
table described in Sec. 226.6(b)(1) in lieu of the alternative written
disclosures described in Sec. 226.5a(d)(2). The final rule revises
comment 5a(d)-2 to specify that the right to reject the plan referenced
in Sec. 226.5a(d)(2) with respect to the alternative written
disclosures is the same as the right to reject the plan described in
Sec. 226.5(b)(1)(iv) with respect to account-opening disclosures. An
issuer may substitute the account-opening summary table described in
Sec. 226.6(b)(1) in lieu of the written alternative disclosures
specified in Sec. 226.5a(d)(2)(ii). In that case, the disclosure about
the right to reject specified in Sec. 226.5a(d)(2)(ii)(B) must appear
in the table, if the issuer is required to do so pursuant to Sec.
226.6(b)(2)(xiii). Otherwise, the disclosure specified in Sec.
226.5a(d)(2)(ii)(B) may appear either in or outside the table
containing the required credit disclosures.
5a(d)(3) Accuracy
As proposed in June 2007 Proposal, Sec. 226.5a(d)(3) would have
provided guidance on the accuracy of telephone disclosures. Current
comment 5a(b)(1)-3 specifies that for variable-rate disclosures in
telephone applications and solicitations, the card issuer must provide
the rates currently applicable when oral disclosures are provided. For
the alternative disclosures under Sec. 226.5a(d)(2), an accurate
variable APR is one that is: (1) In effect at the time the disclosures
are mailed or delivered; (2) in effect as of a specified date (which
rate is then updated from time to time, for example, each calendar
month); or (3) an estimate in accordance with Sec. 226.5(c). Current
comment 5a(b)(1)-3 was proposed to be moved to Sec. 226.5a(d)(3) under
the June 2007 Proposal, except that the option of estimating a variable
APR would have been eliminated as the least meaningful of the three
options. Proposed Sec. 226.5a(d)(3) also would have specified that if
an issuer discloses a variable APR as of a specified date, the issuer
must update the rate on at least a monthly basis, the frequency with
which variable rates on most credit card products are adjusted. The
Board also proposed to amend Sec. 226.5a(d)(3) to specify that oral
disclosures under Sec. 226.5a(d)(1) must be accurate when given,
consistent with the requirement in Sec. 226.5(c) that disclosures must
reflect the terms of the legal obligation between the parties. For the
alternative disclosures, the proposal would have specified that terms
other than variable APRs must be accurate as of the time they are
mailed or delivered.
In response to the June 2007 Proposal, one commenter indicated that
the accuracy standard for oral disclosures could potentially require an
issuer to update rates on a daily basis. This commenter believed that
this proposed rule would create unnecessary burden

[[Page 5304]]

on creditors and would provide little benefit to consumers since the
rates do not generally vary by much from one day to the next. The Board
understands that issuers typically adjust variable rates for most
credit card products on a monthly basis, so as a practical matter,
issuers will only need to update the oral disclosures on a monthly
basis in order to meet the requirement that oral disclosures be
accurate when given. Section 226.5a(d)(3) is adopted as proposed.
5a(e) Applications and Solicitations Made Available to General Public
TILA Section 127(c)(3) and Sec. 226.5a(e) specify rules for
providing disclosures in applications and solicitations made available
to the general public such as ``take-one'' applications and
applications in catalogs or magazines. 15 U.S.C. 1637(c)(3). These
applications and solicitations must either contain: (1) The disclosures
required for direct mail applications and solicitations, presented in a
table; (2) a narrative that describes how finance charges and other
charges are assessed; or (3) a statement that costs are involved, along
with a toll-free telephone number to call for further information.
Narrative that describes how finance charges and other charges are
assessed. TILA Section 127(c)(3)(D) and Sec. 226.5a(e)(2) allow
issuers to meet the requirements of Sec. 226.5a for take-one
applications and solicitations by giving a narrative description of
certain account-opening disclosures (such as information about how
finance charges and other charges are assessed), a statement that the
consumer should contact the card issuer for any change in the required
information and a toll-free telephone number or a mailing address for
that purpose. 15 U.S.C. 1637(c)(3)(D). Currently, this information does
not need to be in the form of a table, but may be a narrative
description, as is also currently allowed for account-opening
disclosures. In the June 2007 Proposal, the Board proposed to require
that certain account-opening information (such as information about key
rates and fees) must be given in the form of a table. Therefore, the
Board also proposed that card issuers give this same information in a
tabular form in take-one applications and solicitations. Specifically,
the Board proposed to delete Sec. 226.5a(e)(2) and comments 5a(e)(2)-1
and -2 as obsolete. Under the proposal, card issuers that provide cost
disclosures in take-one applications and solicitations would have been
required to provide the disclosures in the form of a table, for which
they could use the account-opening summary table. See Sec.
226.5a(e)(1) and comment 5a-2. As discussed in the section-by-section
analysis to Sec. 226.6(b)(1), the final rule requires creditors to
provide certain account-opening information in the form of a table.
Accordingly, the Board deletes current Sec. 226.5a(e)(2) and current
comments 5a(e)(2)-1 and -2 as proposed, pursuant to the Board's
authority under TILA Section 127(c)(5). 15 U.S.C. 1637(c)(5). Current
Sec. 226.5a(e)(3) and comment 5a(e)(3)-1 are renumbered accordingly.
5a(e)(4) Accuracy
For applications or solicitations that are made available to the
general public, if a creditor chooses to provide the cost disclosures
on the application or solicitation, Sec. 226.5a(b)(1)(ii) currently
requires that any variable APR disclosed must be accurate within 30
days before printing. In the June 2007 Proposal, the Board proposed to
move this provision to Sec. 226.5a(e)(4). In addition, proposed Sec.
226.5a(e)(4) also would have specified that other disclosures must be
accurate as of the date of printing. The final rule adopts Sec.
226.5a(e)(4) and accompanying commentary as proposed.
5a(f) In-Person Applications and Solicitations
Card issuer and person extending credit are not the same. Existing
Sec. 226.5a(f) and its accompanying commentary contain special charge
card rules that address circumstances in which the card issuer and the
person extending credit are not the same person. (These provisions
implement TILA Section 127(c)(4)(D), 15 U.S.C. 1637(c)(4)(D).) The
Board understands that these types of cards are no longer being
offered. Thus, in the June 2007 Proposal, the Board proposed to delete
these provisions and Model Clause G-12 from Regulation Z as obsolete,
recognizing that the statutory provision in TILA Section 127(c)(4)(D)
will remain in effect if these products are offered in the future. The
Board also requested comment on whether these provisions should be
retained in the regulation. Under the June 2007 Proposal, a commentary
provision referencing the statutory provision would have been added to
Sec. 226.5(d), which addresses disclosure requirements for multiple
creditors. See section-by-section analysis to Sec. 226.5(d). The final
rule deletes current Sec. 226.5a(f), accompanying commentary, and
Model Clause G-12 as proposed.
In-person applications and solicitations. In the June 2007
Proposal, the Board proposed a new Sec. 226.5a(f) and accompanying
commentary to address in-person applications and solicitations
initiated by the card issuer. For in-person applications, a card issuer
initiates a conversation with a consumer inviting the consumer to apply
for a card account, and if the consumer responds affirmatively, the
issuer takes application information from the consumer. For example,
in-person applications include instances in which a retail employee, in
the course of processing a sales transaction using the customer's bank
credit card, invites the customer to apply for the retailer's credit
card and the customer submits an application.
For in-person solicitations, a card issuer makes an in-person offer
to a consumer to open an account that does not require an application.
For example, in-person solicitations include instances where a bank
employee offers a preapproved credit card to a consumer who came into
the bank to open a checking account.
Currently, in-person applications in response to an invitation to
apply are exempted from Sec. 226.5a because they are considered
applications initiated by consumers. (See current comments 5a(a)(3)-2
and 5a(e)-2.) On the other hand, in-person solicitations are not
specifically addressed in Sec. 226.5a. Neither in-person applications
nor solicitations are specifically addressed in TILA.
In the June 2007 Proposal, the Board proposed to cover in-person
applications and solicitations under Sec. 226.5a, pursuant to the
Board's authority under TILA Section 105(a) to make adjustments that
are necessary to effectuate the purposes of TILA. 15 U.S.C. 1604(a). In
the June 2007 Proposal, existing comment 5a(a)(3)-2 (which would be
moved to comment 5a(a)(5)-1) and comment 5a(e)-2 would have been
revised to be consistent with Sec. 226.5a(f). No comments were
received on these proposed changes.
Thus, the Board adopts these changes as proposed pursuant to its
TILA Section 105(a) authority. 15 U.S.C. 1604(a). Requiring in-person
applications and solicitations to include credit terms under Sec.
226.5a would help serve TILA's purpose to provide meaningful disclosure
of credit terms so that a consumer will be able to compare more readily
the various credit terms available to him or her, and avoid the
uninformed use of credit. 15 U.S.C. 1601(a). Also, the Board
understands that card issuers routinely provide Sec. 226.5a
disclosures in these circumstances; therefore, any additional
compliance burden would be minimal.
Card issuers must provide the disclosures required by Sec. 226.5a
in the form of a table, and those disclosures

[[Page 5305]]

must be accurate either when given (consistent with the direct mail
rules) or when printed (consistent with one option for the take-one
rules). See Sec. 226.5a(c) and (e)(1). These two alternatives provide
issuers flexibility, while also providing consumers with the
information they need to make informed credit decisions.
5a(g) Balance Computation Methods Defined
TILA Section 127(c)(1)(A)(iv) calls for the Board to name not more
than five of the most common balance computation methods used by credit
card issuers to calculate the balance for purchases on which finance
charges are computed. 15 U.S.C. 1637(c)(1)(A)(iv). If issuers use one
of the balance computation methods named by the Board, the issuer must
disclose that name of the balance computation method as part of the
disclosures required by Sec. 226.5a and is not required to provide a
description of the balance computation method. If the issuer uses a
balance computation method that is not named by the Board, the issuer
must disclose a detailed explanation of the balance computation method.
See current Sec. 226.5a(b)(6). Currently, the Board has named four
balance computation methods: (1) Average daily balance (including new
purchases) or (excluding new purchases); (2) two-cycle average daily
balance (including new purchases) or (excluding new purchases); (3)
adjusted balance; and (4) previous balance. In the June 2007 and May
2008 Proposals, the Board proposed to retain these four balance
computation methods.
In response to the June 2007 Proposal, several industry commenters
suggested that the Board add the ``daily balance method'' to the list
of balance computation methods listed in the regulation. These
commenters indicated that the ``daily balance method'' is one of the
most common balance computation methods used by card issuers.
Currently, comment 5a(g)-1 provides that card issuers using the daily
balance method may disclose it using the name average daily balance
(including new purchases) or average daily balance (excluding new
purchases), as appropriate. Alternatively, such card issuers may
explain the method. The final rule revises Sec. 226.5a(g) to include
daily balance method as one of the balance computation methods named in
the regulation. As a result, card issuers may disclose ``daily balance
method'' as the name of the balance computation method used as part of
the disclosures required by Sec. 226.5a, and are not required to
provide a description of the balance computation method. The Board
deletes current comment 5a(g)-1, which provides that card issuers using
the daily balance method may disclose it using the name average daily
balance (including new purchases) or average daily balance (excluding
new purchases), as appropriate. See also Sec. 226.6(b)(2)(vi) and
Sec. 226.7(b)(5), which allow creditors using balance calculation
methods identified in Sec. 226.5a(g) to provide abbreviated
disclosures at account opening and on periodic statements.
In addition, in response to the May 2008 Proposal, several industry
commenters requested that if the proposal by the Board and other
federal banking agencies to prohibit certain issuers from using the
two-cycle balance computation method was adopted, the Board should
include a cross reference in Sec. 226.5a(g) indicating that some
issuers are not allowed to use the two-cycle balance computation method
described in Sec. 226.5a(g). Under rules issued by the Board and other
federal banking agencies published elsewhere in today's Federal
Register, most credit card issuers are prohibited from using the two-
cycle balance computation method described in Sec. 226.5a(g). Comment
5a(g)-1 is amended to specify that some issuers may be prohibited from
using the two-cycle balance computation method described in Sec.
226.5a(g)(2)(i) and (ii) and to cross reference the rules issued by the
federal banking agencies, as described above.

Section 226.6 Account-Opening Disclosures

TILA Section 127(a), implemented in Sec. 226.6, requires creditors
to provide information about key credit terms before an open-end plan
is opened, such as rates and fees that may be assessed on the account.
Consumers' rights and responsibilities in the case of unauthorized use
or billing disputes are also explained. 15 U.S.C. 1637(a). See also
Model Forms G-2 and G-3 in Appendix G to part 226. For a discussion
about account-opening disclosure rules and format requirements, see the
section-by-section analysis to Sec. 226.6(a) for HELOCs subject to
Sec. 226.5b, and Sec. 226.6(b) for open-end (not home-secured) plans.
6(a) Rules Affecting Home-Equity Plans
Account-opening disclosure and format requirements for HELOCs
subject to Sec. 226.5b were unaffected by the June 2007 Proposal,
consistent with the Board's plan to review Regulation Z's disclosure
rules for home-secured credit in a separate rulemaking. To facilitate
compliance, the substantively unrevised rules applicable only to HELOCs
are grouped together in Sec. 226.6(a), as discussed in this section-
by-section analysis to Sec. 226.6(a). (See redesignation table below.)
Commenters supported the proposed organizational changes to ease
compliance. All disclosure requirements applying exclusively to HELOCs
subject to Sec. 226.5b are set forth in Sec. 226.6(a), as proposed.
Rules relating to the disclosure of finance charges currently in Sec.
226.6(a)(1) through (a)(4) are moved to Sec. 226.6(a)(1)(i) through
(a)(1)(iv); those rules and accompanying official staff interpretations
are substantively unchanged. Rules relating to the disclosure of other
charges are moved from current Sec. 226.6(b) to Sec. 226.6(a)(2), and
specific HELOC-related disclosure requirements are moved from current
Sec. 226.6(e) to Sec. 226.6(a)(3). Rules of general applicability to
open-end credit plans relating to security interests and billing error
disclosure requirements are moved without substantive change from
current Sec. 226.6(c) and (d) (proposed as Sec. 226.6(c)(1) and
(c)(2) in the June 2007 Proposal) to Sec. 226.6(a)(4) and (a)(5), to
ease compliance.
Several technical revisions to commentary provisions described in
the June 2007 Proposal are adopted for clarity and in some cases for
consistency with corresponding comments to Sec. 226.6(b)(4), which
addresses rate disclosures for open-end (not home-secured) plans; these
revisions are not intended to be substantive. See, for example,
comments 6(a)(1)(ii)-1 and 6(b)(4)(i)(B)-1, which address disclosing
ranges of balances. For the reasons set forth in the section-by-section
analysis to Sec. 226.6(b)(3), the Board updates references to ``free-
ride period'' as ``grace period'' in the regulation and commentary to
Sec. 226.6(a), without any intended substantive change.
Also, commentary provisions that currently apply to open-end plans
generally but are inapplicable to HELOCs are not included in the
commentary provisions related to Sec. 226.6(a), as proposed. For
example, guidance in current 6(a)(2)-2 regarding a creditor's general
reservation of the right to change terms is not included in comment
6(a)(1)(ii)-2, because Sec. 226.5b(f)(1) prohibits ``rate-
reservation'' clauses for HELOCs.
Model forms and clauses. Revisions to current forms and a new form
that creditors offering HELOCs may use are adopted as proposed. In
response to comments received on the June 2007 Proposal, the Board
proposed in May 2008 to add a new paragraph to Appendix G-1 (Balance
Computation

[[Page 5306]]

Methods Model Clauses) to part 226 to describe the daily balance
computation method. A new Appendix G-1(A) to part 226 was also proposed
for creditors offering open-end (not home-secured) plans. See section-
by-section analysis to Sec. 226.6(b)(4)(i)(D).
For the reasons set forth in the May 2008 Proposal, the Board is
adopting the revisions to Appendix G-1 to part 226, retitled as Balance
Computation Methods Model Clauses (Home-equity Plans) to ease
compliance, as proposed. Comment App. G-1 is revised to clarify that a
creditor offering HELOCs may use the model clauses in Appendix G-1 or
G-1(A), at the creditor's option.
In addition, for the reasons discussed in the section-by-section
analysis to Sec. Sec. 226.12 and 226.13, model language has been added
to Model Clause G-2 (Liability for Unauthorized Use Model Clause),
Model Form G-3 (Long-form Billing-error Rights Model Form Home-equity
Plans) and Model Form G-4 (Alternative Billing-error Rights Model Form
Home-equity Plans) regarding consumers' use of electronic communication
relating to unauthorized transactions or billing disputes. Like with
Model Clauses G-1 and G-1(A), the Board is adding new forms G-3(A) and
G-4(A) for creditors offering open-end (not home-secured) plans, which
a creditor offering HELOCs may use, at the creditor's option. See
comment app. G-3.
6(b) Rules Affecting Open-end (not Home-secured) Plans
All account-opening disclosure requirements applying to open-end
(not home-secured) plans are set forth in Sec. 226.6(b). The Board is
adopting two significant revisions to account-opening disclosures for
open-end (not home-secured) plans, which are set forth in Sec.
226.6(b), as proposed. The revisions (1) require a tabular summary of
key terms to be provided before an account is opened (see Sec.
226.6(b)(1) and (b)(2)), and (2) reform how and when cost disclosures
must be made (see Sec. 226.6(b)(3) for content, Sec. 226.5(b) and
Sec. 226.9(c) for timing).
In response to comments received on the June 2007 Proposal, Sec.
226.6(b) has been reorganized in the final rule for clarity. Rules
relating to the account-opening tabular summary are set forth in Sec.
226.6(b)(1) and (b)(2) and mirror, to the extent applicable, the
organization and text of disclosure requirements for the tabular
summary required to accompany credit or charge card applications or
solicitations in Sec. 226.5a. General disclosure requirements about
costs imposed as part of the plan are set forth in Sec. 226.6(b)(3),
and additional requirements for disclosing rates are at Sec.
226.6(b)(4). Rules about disclosures for optional credit insurance or
debt cancellation or suspension coverage are set forth at Sec.
226.6(b)(5). Rules of general applicability to open-end credit plans
relating to security interests and billing error disclosure
requirements, also are moved to Sec. 226.6(b)(5) without substantive
change from current Sec. 226.6(c) and (d) (proposed as Sec.
226.6(c)(1) and (c)(2) in the June 2007 Proposal), to ease compliance.
6(b)(1) Format for Open-end (not Home-secured) Plans
As provided by Regulation Z, creditors may, and typically do,
include account-opening disclosures as a part of an account agreement
document that also contains other contract terms and state law
disclosures. The agreement is typically lengthy and in small print. The
June 2007 Proposal would have introduced format requirements for
account-opening disclosures for open-end (not home-secured) plans at
Sec. 226.6(b)(4), based on proposed format and content requirements
for the tabular disclosures provided with direct mail applications for
credit and charge cards under Sec. 226.5a. Proposed forms under G-17
in Appendix G would have illustrated the account-opening tables. The
proposal sought to summarize key information most important to informed
decision-making in a table similar to that required on or with credit
and charge card applications and solicitations. TILA disclosures that
are typically lengthy or complex and less often utilized in determining
how to use an account, such as how variable rates are determined, could
continue to be integrated with the account agreement terms but could
not be placed in the table. Uniformity in the presentation of key
information promotes consumers' ability to compare account terms.
Commenters generally supported format rules that focus on
presenting essential information in a simplified way. Consumer groups
supported the use of a tabular format similar to the summary table
required under Sec. 226.5a, to ease consumers' ability to find
important information in a uniform format, and as a means for consumers
to compare terms that are offered with terms they actually receive. A
state consumer protection body urged the Board to develop a glossary
and, along with some consumer groups, to mandate use of uniform terms
so that creditors use the same term to identify fees.
Industry commenters voiced a number of concerns about the account-
opening summary table. Some suggested the purposes of TILA disclosures
are different at application and account-opening, and a table at
account-opening is redundant since consumers have already made their
credit decisions. Some suggested that other techniques to summarize
information, such as an index or table of contents, should be
permitted. In particular, industry commenters asked for additional
flexibility to disclose risk-based APRs outside the summary table, such
as in a welcome letter or documents accompanying the account agreement,
or on a sales receipt when an open-end plan is established at a retail
store in connection with the purchase of goods or services. Others
believed the information was too simple and could be misleading to
consumers and in any event would quickly become outdated. To combat
out-of-date disclosures, one creditor suggested requiring a ``real
time'' version of account terms on-line, with a paper copy available
upon request.
For the reasons stated in this section-by-section analysis to Sec.
226.6, the Board is adopting the formatting requirements generally as
proposed, with revisions noted below. In response to commenters'
suggestions, the regulatory text (moved from proposed Sec. 226.6(b)(4)
to Sec. 226.6(b)(1) and (b)(2)) more closely tracks the regulatory
text in Sec. 226.5a, to ease compliance.
The Board's revisions to rules affecting open-end (not home-
secured) plans contain a limited number of specific words or phrases
that creditors are required to use. The Board, however, has not adopted
a glossary of terms nor mandated use of terms as defined in such a
glossary, to provide flexibility to creditors. Although the Board is
supportive of creditors that provide real-time account agreements on
their Web sites, the Board believes requiring all creditors to do so
would be overly burdensome at this time, and has not adopted such a
requirement.
Open-end (not home-secured) plans not involving a credit card. The
June 2007 Proposal would have applied the tabular summary requirement
to all open-end credit products, except HELOCs. Such products include
credit card accounts, traditional overdraft credit plans, personal
lines of credit, and revolving plans offered by retailers without a
credit card.
In response to the June 2007 Proposal, some industry commenters
asked the Board to limit any new disclosure rules to credit card
accounts. They acknowledged that credit card accounts typically have
complex terms, and a tabular summary is an effective way to present key
disclosures. In contrast, these commenters noted that other

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open-end (not home-secured) products such as personal lines of credit
or overdraft plans have very few of the cost terms required to be
disclosed. Alternatively, if the Board continued to apply the new
requirements to open-end plans other than HELOCs, commenters asked that
the Board consider publishing model forms to ease compliance.
The Board believes that the benefits to consumers from receiving a
concise and uniform summary of rates and important fees for these other
types of open-end plans outweigh the costs, such as developing the new
disclosures and revising them as needed. In the May 2008 Proposal, the
Board proposed Sample Form 17(D), which would have illustrated
disclosures for an open-end (not home-secured) plan not involving a
credit card, to address commenters' requests for guidance.
Some consumer groups supported the requirement for a summary table
for open-end (not home-secured) plans that are not credit card
accounts. They believe the summary table will help consumers understand
the terms of their credit agreements. An industry commenter also
supported a model form for creditors' use but suggested adding
additional terms to the form such as a fee for returned payment, or
variable-rate disclosures. One industry commenter strongly objected to
the requirement for a summary table. This commenter believes creditors
will incur substantial costs to comply with the requirement and the
commenter was not convinced that a tabular format is the only way
creditors may provide accurate and meaningful disclosures.
For the reasons set forth above, the final rule, pursuant to the
Board's TILA Section 105(a) authority, applies the tabular summary
requirement to all open-end credit products, except HELOCs, as
proposed. Sample Form 17(D) is adopted, with some revisions. The name
of the balance calculation method and billing error summary were
inadvertently omitted in the May 2008 Proposal below the table in the
proposed sample form, and they properly appear in the final form. The
Board notes that Sec. 226.6(b)(2) requires creditors to disclose in
the account-opening table the items in that section, to the extent
applicable. Thus, for example, if a creditor offered an overdraft
protection line of credit with a variable rate, the creditor must
provide the applicable variable-rate disclosures, even though such
disclosures do not appear in Sample Form 17(D).
Comparison to summary table provided with credit card applications.
The summary tables proposed in June 2007 to accompany credit and charge
card applications and solicitations and to be provided at account
opening were similar but not identical. Under the June 2007 Proposal,
at the card issuer's option, a card issuer providing a table that
satisfies the requirements of Sec. 226.6 could satisfy the
requirements of Sec. 226.5a by providing the account-opening table.
In response to the June 2007 Proposal, some commenters urged the
Board to require identical disclosure requirements under Sec. 226.6
and Sec. 226.5a. Others supported greater flexibility. As discussed
below, the disclosure requirements for the two summary tables remain
very similar but are not identical in all respects. The final rule
includes comment 6(b)(1)-1, adopted substantially as proposed as
comment 6(b)(4)-1, which provides guidance on how the summary table for
Sec. 226.5a differs from the table for Sec. 226.6. For clarity, rules
under Sec. 226.5a that do not apply to account-opening disclosures are
specifically noted.
6(b)(1)(iii) Fees that Vary by State
For disclosures required to be provided with credit card
applications and solicitations, if the amount of a fee such as a late-
payment fee or returned-payment fee varies by state, card issuers
currently may disclose a range of fees and a statement that the amount
of the fee varies by state. See Sec. 226.5a(a)(4). In the June 2007
Proposal, the Board noted that a goal of the proposed account-opening
summary table is to provide to a consumer specific key information
about the terms of the account and that permitting creditors to
disclose a range of fees seems not to meet that standard. Thus, the
proposal would have required creditors to disclose the amount of the
fee applicable to the consumer. The Board solicited comment on whether
there are any operational issues presented by the proposal.
One commenter discussed operational issues for creditors that are
licensed to do business under state law and must vary late-payment
fees, for example, according to state law. Although the letter focused
on late-payment fee disclosures on the periodic statement, one
alternative suggested to stating fees applicable to the consumer's
account was to permit such creditors to refer to a disclosure where
fees arranged by applicable states would be identified.
Upon further consideration of the issues related to disclosing fees
in the account-opening table fees that vary by state, the Board is
adopting a rule that requires creditors to disclose specific fees
applicable to the consumer's account in the account-opening table, with
a limited exception. In general, a creditor must disclose the fee
applicable to the consumer's account; listing all fees for multiple
states in the account-opening summary table is not permissible. The
Board is concerned that such an approach would detract from the purpose
of the table: To provide key information in a simplified way.
Currently, creditors licensed to do business under state laws
commonly disclose at account opening as part of the account agreement
or disclosure statement a matrix of fees applicable to residents of
various states. Creditors that provide account-opening disclosures by
mail can more easily generate account-opening summaries with rates and
specific fees that apply to the consumer. However, for creditors with
retail stores in a number of states, it is not practicable to require
fee-specific disclosures to be provided when an open-end (not home-
secured) plan is established in person in connection with the purchase
of goods or services. If the Board were to impose such a requirement,
retail stores may need to keep on hand copies of disclosures for all
states, because consumers from one state can, and commonly do, shop and
obtain credit cards at retail locations in other states. In addition, a
retail store creditor would need to rely on its employees to determine
at the point of sale which state's disclosures should be provided to
each consumer who opens an open-end (not home-secured) plan.
Thus, the final rule provides in Sec. 226.6(b)(1)(iii) that
creditors imposing fees such as late-payment fees or returned-payment
fees that vary by state and providing the disclosures required by Sec.
226.6(b) in person at the time the open-end (not home-secured) plan is
established in connection with financing the purchase of goods or
services may, at the creditor's option, disclose in the account-opening
table either (1) the specific fee applicable to the consumer's account,
or (2) the range of the fees, if the disclosure includes a statement
that the amount of the fee varies by state and refers the consumer to
the account agreement or other disclosure provided with the account-
opening summary table where the amount of the fee applicable to the
consumer's account is disclosed, for example in a list of fees for all
states. Currently, creditors that establish open-end plans at point of
sale provide account-opening disclosures at point of sale before the
first transaction, and commonly provide an additional set of account-
opening disclosures when, for example, a credit card is sent to the

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consumer. The Board believes that this practice would continue and that
the account-opening disclosures provided later, for example with the
credit card, would contain the specific rates and fees applicable to
the consumer's account, as the creditor must provide for consumers who
open accounts other than at the point of sale.
6(b)(2) Required Disclosures for Account-opening Table for Open-end
(not Home-secured) Plans
Fees. Under the June 2007 Proposal, fees to be highlighted in the
account-opening summary were identified in Sec. 226.6(b)(4)(iii). The
proposed list of fees and categories of fees was intended to be
exclusive. The Board noted that it considered these fees, among the
charges that TILA covers, to be the most important fees, at least in
the current marketplace, for consumers to know about before they start
to use an account. The fees identified in proposed Sec.
226.6(b)(4)(iii) included charges that a consumer could incur and which
a creditor likely would not otherwise be able to disclose in advance of
the consumer engaging in the behavior that triggers the cost, such as
fees triggered by a consumer's use of a cash advance check or by a
consumer's late payment. Transaction fees imposed for transactions in a
foreign currency or that take place in a foreign country also would
have been among the fees to be disclosed at account opening.
Industry commenters generally supported the proposal. Some consumer
groups believe it would be a mistake to adopt a static list of fees to
be disclosed in the account-opening table. They stated the credit card
market is dynamic, and a static list would encourage creditors to
establish new fees that would not be disclosed as prominently as those
in the table. These commenters suggested the Board also require
creditors to disclose in the account-opening table any fee that a
creditor charges to more than 5 percent of its cardholders.
The Board is adopting in Sec. 226.6(b)(2) the list of fees
proposed in Sec. 226.4(b)(4)(iii) as the exclusive list of fees and
categories of fees that must be disclosed in the table, although Sec.
226.6(b)(2) has been reorganized to more closely track the requirements
of Sec. 226.5a. Accordingly, the fees required to be disclosed in the
table are those identified in Sec. 226.6(b)(2)(ii) through (b)(2)(iv)
and (b)(2)(vii) through (b)(2)(xii); that is, fees for issuance or
availability of credit, minimum or fixed finance charges, transaction
fees, cash advance fees, late-payment fees, over-the-limit fees,
balance transfer fees, returned-payment fees, and fees for required
insurance, debt cancellation or debt suspension coverage.
The Board intends this list of fees to be exclusive, for two
reasons. An exclusive list eases compliance and reduces the risk of
litigation; creditors have the certainty of knowing that as new
services (and associated fees) develop, fees not required to be
disclosed in the summary table under the final rule need not be
highlighted in the account-opening summary unless and until the Board
requires their disclosure after notice and public comment. And as
discussed in the section-by-section analysis to Sec. 226.5(a)(1) and
(b)(1), charges required to be highlighted in the account-opening table
must be provided in a written and retainable form before the first
transaction and before being increased or newly introduced. Creditors
have more flexibility regarding disclosure of other charges imposed as
part of an open-end (not home-secured) plan.
The exclusive list of fees also benefits consumers. The list
focuses on fees consumer testing conducted for the Board showed to be
most important to consumers. The list is manageable and focuses on key
information rather than attempting to be comprehensive. Since consumers
must be informed of all fees imposed as part of the plan before the
cost is incurred, not all fees need to be included in the account-
opening table provided at account opening.
Payment allocation. Section 226.6(b)(4)(vi) of the June 2007
Proposal would have required creditors to disclose in the account-
opening tabular summary, if applicable, the information regarding how
payments will be allocated if the consumer transfers balances at a low
rate and then makes purchases on the account. The payment allocation
disclosure requirements proposed for the account-opening table mirrored
the proposed requirements in proposed Sec. 226.5a(b)(15) to be
provided in the table given at application or solicitation.
In May 2008, the Board and other federal banking agencies proposed
limitations on how creditors may allocate payments on outstanding
credit card balances. See 73 FR 28904, May 19, 2008. The Board
indicated in the May 2008 Regulation Z Proposal that if the proposed
limitations were adopted, the Board contemplated withdrawing proposed
Sec. 226.6(b)(4)(vi). For the reasons discussed in the section-by-
section analysis to Sec. 226.5a(b), the Board is withdrawing proposed
Sec. 226.6(b)(4)(vi).
6(b)(2)(i) Annual Percentage Rate
Section 226.6(b)(2)(i) (proposed at Sec. 226.6(b)(4)(ii)) sets
forth disclosure requirements for rates that would apply to accounts.
Except as noted below, the disclosure requirements for APRs in the
account-opening table are adopted for the same reasons underlying, and
consistent with, the disclosure requirements adopted for APRs in the
table provided with credit card applications and solicitations. See
section-by-section analysis to Sec. 226.5a(b)(1).
Periodic rates and index and margin values are not permitted to be
disclosed in the table, for the same reasons underlying, and consistent
with, the proposed requirements for the table provided with credit card
applications and solicitations. See comments 5a(b)(1)-2 and -8. The
index and margin must be provided in the credit agreement or other
account-opening disclosures pursuant to Sec. 226.6(b)(4). Creditors
also must continue to disclose periodic rates, as a cost imposed as
part of the plan, before the consumer agrees to pay or becomes
obligated to pay for the charge, and these disclosures could be
provided in the credit agreement or other disclosure, as is likely
currently the case.
The rate disclosures required for the account-opening table differ
from those required for the table provided with credit card
applications and solicitations. For applications and solicitations,
creditors may provide a range of APRs or specific APRs that may apply,
where the APR is based at least in part on a later determination of the
consumer's creditworthiness. At account opening, creditors must
disclose the specific APRs that will apply to the account as proposed,
with a limited exception.
Similar to the discussion in the section-by-section analysis to
Sec. 226.6(b)(1)(iii), the APR that some creditors may charge vary by
state. In general, a creditor must disclose the APR applicable to the
consumer's account. Listing all APRs for multiple states in the
account-opening summary box is not permissible. The Board is concerned
that such an approach would detract from the purpose of the table: to
provide key information in a simplified way. However, for creditors
with retail stores in a number of states, it is not practicable to
require APR-specific disclosures to be provided when an open-end (not
home-secured) plan is established in person in connection with the
purchase of goods or services. Thus, the Board provides in Sec.
226.6(b)(2)(i)(E) that creditors

[[Page 5309]]

imposing APRs that vary by state and providing the disclosures required
by Sec. 226.6(b) in person at the time the open-end (not home-secured)
plan is established in connection with financing the purchase of goods
or services may, at the creditor's option, disclose in the account-
opening table either (1) the specific APR applicable to the consumer's
account, or (2) the range of the APRs, if the disclosure includes a
statement that the APR varies by state and refers the consumer to the
account agreement or other disclosure provided with the account-opening
summary table where the APR applicable to the consumer's account is
disclosed, for example in a list of APRs for all states. Currently,
creditors that establish open-end plans at point of sale provide
account-opening disclosures at point of sale before the first
transaction, and commonly provide an additional set of disclosures
when, for example, a credit card is sent to the consumer. The Board
believes that this practice would continue and that the account-opening
summary provided with the additional set of disclosures would contain
the APRs applicable to the consumer's account, as the creditor must
provide for consumers who open accounts other than at point of sale.
This limited exception does not extend to rates that vary due to
creditors' pricing policies. Creditors that offer risk-based APRs
commonly offer one or two rates, or perhaps three or four, as opposed
to retail creditors that may offer a dozen or more rates, based on
varying state laws. The multiplicity of rates and the training required
for retail sales staff to identify correctly which state law governs
the potential account holder increases these creditors' risk of
inadvertent noncompliance. Creditors that choose to offer risk-based
pricing, however, are better able to manage their potential risk of
noncompliance. The exception is intended to have a limited scope
because the Board believes consumers benefit by knowing, at account-
opening, the actual rates that will apply to their accounts.
Discounted and premium initial rates. Currently, a discounted
initial rate may, but is not required to, be disclosed in the table
accompanying a credit or charge card application or solicitation. Card
issuers that choose to include such a rate must also disclose the time
period during which the discounted initial rate will remain in effect.
See Sec. 226.5a(b)(1)(ii). Creditors, however, must disclose these
terms in account-opening disclosures. The June 2007 Proposal would have
required any initial temporary rate, the circumstances under which that
rate expires, and the rate that will apply after the temporary rate
expires to be disclosed in the account-opening table. See proposed
Sec. 226.6(b)(4)(ii)(B).
The final rule regarding the disclosure of temporary initial rates
differs from the proposal in several ways, two of which are technical.
As discussed above, the text of the disclosure requirements has been
revised to more closely track the regulatory text under Sec. 226.5a.
Therefore, Sec. 226.6(b)(2)(i)(B) and (b)(2)(i)(C), which set forth
disclosure requirements for discounted initial rates and premium
initial rates, replace proposed text in Sec. 226.6(b)(4)(ii)(B)
regarding initial temporary rates and are consistent with Sec.
226.5a(b)(1)(ii) and (b)(1)(iii). For consistency, discounted initial
rates are referred to as ``introductory'' rates as that term in defined
in Sec. 226.16(g)(2)(ii).
Under Sec. 226.6(b)(2)(i)(B) and consistent with Sec. 226.5a,
creditors that offer a temporary discounted initial rate must disclose
in the account-opening table the rate that otherwise would apply after
the temporary rate expires. Also, to be consistent with Sec. 226.5a,
creditors under the final rule may, but generally are not required to
(except as discussed below), disclose discounted initial rates in the
account-opening table. Creditors that choose to include such a rate
must also disclose the time period during which the discounted initial
rate will remain in effect. Under Sec. 226.6(b)(2)(i)(D)(2), if a
creditor discloses discounted initial rates in the account-opening
table, the creditor must also disclose directly beneath the table the
circumstances under which the discounted initial rate may be revoked
and the rate that will apply after revocation.
As discussed in the section-by-section analysis to Sec.
226.5a(b)(1), Sec. 226.6(b)(2)(i) of the final rule has been revised
to provide that issuers subject to the final rules issued by the Board
and other federal banking agencies published elsewhere in today's
Federal Register must disclose any introductory rate applicable to the
account in the table. This requirement is intended to promote
consistency with those final rules, which require issuers to state at
account opening the annual percentage rates that will apply to each
category of transactions on a consumer credit card account. Thus, Sec.
226.6(b)(2)(i)(F) has been added to the final rule to clarify that an
issuer subject to 12 CFR 227.24 or similar law must disclose in the
account-opening table any introductory rate that will apply to a
consumer's account. A conforming change has been made to Sec.
226.6(b)(2)(i)(B).
Similarly, and for the same reasons stated above, Sec.
226.6(b)(2)(i)(F) also requires that card issuers subject to the final
rules issued by the Board and other federal banking agencies published
elsewhere in today's Federal Register disclose in the table any rate
that will apply after a premium initial rate expires. Section
226.6(b)(2)(i)(C) also has been revised for consistency.
If a creditor that is not subject to 12 CFR 227.24 or similar law
does not disclose a discounted initial rate (and thus also does not
disclose the reasons the rate may be revoked and the rate that will
apply after revocation) in the account-opening table, the creditor must
provide these disclosures at any time before the consumer agrees to pay
or becomes obligated to pay for a charge based on the rate, pursuant to
the disclosure timing requirements of Sec. 226.5(b)(1)(ii). Creditors
may provide disclosures of these charges in writing but creditors are
not required to do so; only those charges identified in Sec.
226.6(b)(2) that must appear in the account-opening table must be
provided in writing. The Board expects, however, that for contract law
or other reasons, most creditors as a practical matter will disclose
the discounted initial rate in writing at account-opening. See section-
by-section analysis to Sec. 226.5(a)(1) above.
The Board believes aligning the disclosure requirements for the
account-opening summary table with the requirements for the application
summary table will ease compliance without lessening consumer
protections. Many creditors will continue to disclose discounted
initial rates, including issuers subject to the final rules issued by
the Board and other federal banking agencies published elsewhere in
today's Federal Register, and how an initial rate could be revoked in
the account-opening table or in writing as part of the account-opening
disclosures.
6(b)(2)(iii) Fixed Finance Charge; Minimum Interest Charge
TILA Section 127(a)(3), which is currently implemented in Sec.
226.6(a)(4), requires creditors to disclose in account-opening
disclosures the amount of the finance charge, including any minimum or
fixed amount imposed as a finance charge. 15 U.S.C. 1637(a)(3). In the
June 2007 Proposal, the Board would have required creditors to disclose
in account-opening disclosures the amount of any finance charges in
Sec. 226.6(b)(1)(i)(A), and further required creditors to disclose any
minimum finance charge in the account-opening table in Sec.
226.6(b)(4)(iii)(D). In May 2008, the Board proposed to require

[[Page 5310]]

card issuers to disclose in the table provided with applications or
solicitations minimum or fixed finance charges in excess of $1.00 that
could be imposed during a billing cycle and a brief description of the
charge under the heading ``minimum interest charge'' or ``minimum
charge,'' as discussed in the section-by-section analysis to Appendix
G, for the reasons discussed in the section-by-section analysis to
proposed Sec. 226.5a(b)(3). At the card issuer's option, the card
issuer could disclose in the table any minimum or fixed finance charge
below the threshold. The Board proposed the same disclosure
requirements to apply to the account-opening table for the same
reasons.
For the reasons discussed in the section-by-section analysis to
Sec. 226.5a(b)(3), Sec. 226.6(b)(2)(iii) is revised and new comment
6(b)(2)(iii)-1 is added, consistent with Sec. 226.5a(b)(3). As noted
in the section-by-section analysis to Sec. 226.5a(b)(3), under the
June 2007 Proposal, card issuers may substitute the account-opening
table for the table required by Sec. 226.5a. Conforming the fixed
finance charge and minimum interest charge disclosure requirement for
the two tables promotes consistency and uniformity. Because minimum
interest charges of $1.00 or less would no longer be required to be
disclosed in the account-opening table, these charges could be
disclosed at any time before the consumer agrees to pay or becomes
obligated to pay for the charge, pursuant to the disclosure timing
requirements of Sec. 226.5(b)(1)(ii). Creditors may provide
disclosures of these charges in writing but are not required to do so.
See section-by-section analysis to Sec. 226.5(a)(1) above. The Board
believes creditors will continue to disclose minimum interest charges
of $1.00 or less in writing at account opening, to meet the timing
requirement to disclose the fee before the consumer becomes obligated
for the charge. In addition, creditors that choose to charge more than
$1.00 would be required to include the cost in the account-opening
table. Thus, the Board is adopting Sec. 226.6(b)(2)(iii) (proposed in
May 2008 as Sec. 226.6(b)(4)(iii)(D)) with technical changes described
in the section-by-section analysis to Sec. 226.5a(b)(3).
6(b)(2)(v) Grace Period
Under TILA, creditors providing disclosures with applications and
solicitations must discuss grace periods on purchases; at account
opening, creditors must explain grace periods more generally. 15 U.S.C.
1637(c)(1)(A)(iii); 15 U.S.C. 1637(a)(1). Section 226.6(b)(4)(iv) in
the June 2007 Proposal would have required creditors to state for all
balances on the account, whether or not a period exists in which
consumers may avoid the imposition of finance charges, and if so, the
length of the period.
In May 2008, as discussed in the section-by-section analysis to
Sec. 226.5(a)(2) and to Sec. 226.5a(b)(5), the Board proposed to
revise provisions relating to the description of grace periods. Under
the proposal, Sec. 226.6(b)(4)(iv) would have been revised and comment
6(b)(4)(iv)-1 added, consistent with the proposed revisions to Sec.
226.5a(b)(5) and commentary. The heading ``How to Avoid Paying Interest
[on a particular feature]'' would have been used where a grace period
exists for that feature. The heading ``Paying Interest'' would have
been used if there is no grace period on any feature of the account. A
reference to required use of the phrase ``grace period'' in comment
6(b)(4)-3 of the June 2007 Proposal was proposed to be withdrawn.
Comments received on the proposed text of headings and the results
of consumer testing are discussed in the section-by-section analysis to
Sec. 226.5a(b)(5). For the reasons stated in the section-by-section
analysis to and consistent with Sec. 226.5a(b)(5), the final rule
(moved to Sec. 226.6(b)(2)(v)) requires the heading ``How to Avoid
Paying Interest'' to be used for the row that describes a grace period,
and the heading ``Paying Interest'' to be used for the row that
describes no grace period.
The final rule differs from the proposal in that the heading
``Paying Interest'' must be used for the heading in the account-opening
table if any one feature on the account does not have a grace period.
Comments 6(b)(2)(v)-1 through -3 provide language creditors may use to
describe features that have grace periods and features that do not, and
guidance on complying with Sec. 226.6(b)(2)(v) when some features on
an account have a grace period but others do not. See Samples G-17(B)
and G-17(C).
As stated above under TILA, card issuers must disclose any grace
period for purchases, which most credit cards currently offer, in the
table provided on or with credit card applications or solicitations,
and creditors must disclose at account opening whether or not grace
periods exist for all features of an account. Cash advance and balance
transfer features on credit card accounts typically do not offer grace
periods. Under the final rule, the row heading describing grace periods
in the account-opening table will likely be uniform among creditors,
``Paying Interest.'' The Board recognizes that this row heading may not
be consistent with the row heading describing grace periods for
purchases in the table provided on or with credit card applications and
solicitations. However, the Board does not believe that different
headings will significantly undercut a consumer's ability to compare
the terms of a credit card account to the terms that were offered in
the solicitation. Currently most issuers offer a grace period on all
purchase balances; thus, most issuers will use the term ``How to Avoid
Paying Interest on Purchases'' in the table provided on or with credit
card applications and solicitations. Nonetheless, when a consumer is
reviewing the application and account-opening tables for a credit card
account--the former having a row with the heading ``How to Avoid Paying
Interest on Purchases'' and the latter having a row ``Paying Interest''
because no grace period is offered on balance transfers and cash
advances--the Board believes that consumers will recognize that the
information in those two rows relate to the same concept of when
consumers will pay interest on the account.
6(b)(2)(vi) Balance Computation Methods
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 June 2007, the Board proposed Sec.
226.6(b)(4)(ix), which would have required that the name of the balance
computation method used by the creditor be disclosed beneath the table,
along with a statement that an explanation of the method is provided in
the account agreement or disclosure statement. To determine the name of
the balance computation method to be disclosed, the June 2007 Proposal
would have required creditors to refer to Sec. 226.5a(g) for a list of
commonly-used methods; if the method used was not among those
identified, creditors would be required to provide a brief explanation
in place of the name.
Commenters generally supported the proposal. See section-by-section
analysis to Sec. 226.5a(b)(6) regarding the comments received on
proposed disclosures of the name of balance computation method below
the summary table provided on or with credit card applications or
solicitations. Consistent with the reasons discussed in the section-by-
section analysis to Sec. 226.5a(b)(6), the Board adopts Sec.
226.6(b)(2)(vi) (proposed as Sec. 226.6(b)(4)(ix)) to require that the
name of the balance computation method used by a creditor be disclosed

[[Page 5311]]

beneath the table, along with a statement that an explanation of the
method is provided in the account agreement or disclosure statement.
Unlike Sec. 226.5a(b)(6), creditors are required in Sec.
226.6(b)(2)(vi) to disclose the balance computation method used for
each feature on the account. Samples G-17(B) and G-17(C) provide
guidance on how to disclose the balance computation method where the
same method is used for all features on the account.
6(b)(2)(viii) Late-Payment Fee
Under the June 2007 Proposal, creditors were required to disclose
penalty fees such as late-payment fees in the account-opening summary
table. If the APR may increase due to a late payment, the proposal
required creditors to disclose that fact. Cross references were
proposed to aid consumer understanding. See proposed Sec.
226.6(b)(4)(iii)(C).
In response to the proposal, one federal banking agency suggested
that in addition to the amount of the fee, the Board should consider
additional cautionary disclosures to aid in consumer understanding,
such as that late fees imposed on an account may cause the consumer to
exceed the credit limit on the account. To keep the table manageable in
size, the Board is not adopting a requirement to include cautionary
information about the consequences of paying late beyond the
requirement to provide information about penalty rates.
Cross References to Penalty Rate
For the reasons stated in the supplementary information regarding
proposed Sec. 226.5a(b)(13), the Board has withdrawn a requirement in
proposed Sec. 226.6(b)(4)(iii)(C) which provided that if a creditor
may impose a penalty rate for one or more of the circumstances for
which a late-payment fee, over-the-limit fee, or returned-payment fee
is charged, the creditor must disclose the fact that the penalty rate
also may apply and a cross reference to the penalty rate.
6(b)(2)(xii) Required Insurance, Debt Cancellation or Debt Suspension
Coverage
For the reasons discussed in the section-by-section analysis to
Sec. 226.5a(b)(13), as permitted by applicable law, creditors that
require credit insurance, or debt cancellation or debt suspension
coverage, as part of the plan are required to disclose the cost of the
product and a reference to the location where more information about
the product can be found with the account-opening materials, as
applicable. See Sec. 226.6(b)(2)(xii).
6(b)(2)(xiii) Available Credit
The Board proposed in June 2007 a disclosure targeted at subprime
card accounts that assess substantial fees at account opening and leave
consumers with a limited amount of available credit. Proposed Sec.
226.6(b)(4)(vii) would have applied to creditors that require fees for
the availability or issuance of credit, or a security deposit, that in
the aggregate equal 25 percent or more of the minimum credit limit
offered on the account. If that threshold is met, a creditor would have
been required to disclose in the table an example of the amount of
available credit the consumer would have after the fees or security
deposit are debited to the account, assuming the consumer receives the
minimum credit limit. The account-opening disclosures regarding
available credit also would have been required for credit and charge
card applications or solicitations. See proposed Sec. 226.5a(b)(16).
The requirement in proposed Sec. 226.6(b)(4)(vii) would have applied
to all open-end (not home-secured) credit for which the threshold is
met, unlike Sec. 226.5a(b)(14) (proposed as Sec. 226.5a(b)(16)),
which only applies to card issuers.
Commenters generally supported the proposal, which is generally
adopted as proposed with several revisions noted below. See section-by-
section analysis to Sec. 226.5a(b)(14) regarding comments received on
the proposed disclosure of available credit in the summary table
provided on or with credit card applications or solicitations.
Consistent with Sec. 226.5a(b)(14), Sec. 226.6(b)(2)(xiii) of the
final rule (proposed as Sec. 226.6(b)(4)(vii)) reduces the threshold
for determining whether the available credit disclosure must be given
to 15 percent or more of the minimum credit limit offered on the
account.
Notice of right to reject plan. In May 2008, the Board proposed an
additional disclosure to inform consumers about their right to reject a
plan when set-up fees have been charged before the consumer receives
account-opening disclosures. See section-by-section analysis to Sec.
226.5(b)(1)(iv). Creditors would have been required to provide
consumers with notice about the right to reject the plan in such
circumstances. The Board intended to target the disclosure requirement
to creditors offering subprime credit card accounts. Comment
6(b)(4)(vii)-1 also was proposed to provide creditors with model
language to comply with the disclosure requirement.
Both industry and consumer group commenters that addressed the
provision generally supported the proposed notice. See section-by-
section analysis to Sec. 226.5(b)(1)(iv) for a discussion of comments
received regarding the circumstances under which a consumer could
reject a plan. Regarding the notice itself, one industry commenter
suggested adding to the notice information about how the consumer could
contact the creditor to reject the plan. One commenter suggested
expanding the disclosure requirement to the table provided with credit
and charge card applications and solicitations; another suggested
requiring the notice on the first billing statement.
The final rule adopts the requirement to provide a notice
disclosure in the account-opening table to inform consumers about their
right to reject a plan until the consumer has used the account or made
a payment on the account after receiving a billing statement, when set-
up fees have been charged before the consumer receives account-opening
disclosures. The final rule provides model language creditors may use
to comply with the disclosure requirement, as proposed. The final rule
does not include a requirement that the creditor provide information
about how to contact the creditor to reject the plan; the Board
believes such a requirement would add to the length of the disclosure
and is readily available to consumers in other account-opening
materials. The Board also declines to require the notice on or with an
application or solicitation or on the first billing statement; the
Board believes the most effective time for the notice to be given is
after the consumer has chosen to apply for the card account and before
the consumer has used or had the opportunity to use the card.
Actual credit limit. The available credit disclosure proposed in
June 2007 would have been triggered if start-up fees, or a security
deposit financed by the creditor, in the aggregate equal 25 percent or
more of the minimum credit limit offered on the account, consistent
with the proposed disclosure in the summary table required on or with
credit or charge card applications or solicitations. Some consumer
groups urged the Board to base the disclosure on the actual credit
limit received, rather than the minimum credit limit on the account. As
discussed in the section-by-section analysis to Sec. 226.5a(b)(14),
final rules issued by the Board and other federal banking agencies
published elsewhere in today's Federal Register address card issuers'
ability to finance certain fee amounts.

[[Page 5312]]

The final rule, consistent with the proposal, bases the threshold
for whether the available disclosure is required to be given on the
minimum credit limit offered on the plan. Specifically, the final rule
requires that the available credit disclosure be given in the account-
opening table if the creditor requires fees for the availability or
issuance of credit, or a security deposit, that in the aggregate equal
15 percent or more of the minimum credit limit offered on the plan. The
Board believes that it is important that a consumer receive consistent
disclosures in the table provided with an application or solicitation
and in the account-opening table, regardless of the actual credit limit
for which the consumer is approved. For example, if a creditor offers
an open-end plan with a minimum credit limit of $300 and imposes start-
up fees of $45, that creditor would be required to include the
available credit disclosure in the table provided with applications and
solicitations. If a consumer applies for that account and receives an
initial credit limit of $400, the $45 in start-up fees would be less
than 15% of the consumer's line. However, the Board believes that the
consumer still should receive the available credit disclosure at
account-opening so that the consumer is better able to compare the
terms of the account he or she received with the terms of the offer.
Although, as discussed above, a creditor must determine whether the
15 percent threshold is met with reference to the minimum credit limit
offered on the plan, the final rule requires creditors to base the
available credit disclosure for the account-opening summary table, if
required, on the actual credit limit received. The Board believes a
disclosure of available credit based on the actual credit limit
provides consumers with accurate information that is helpful in
understanding the available credit remaining. Creditors typically state
the credit limit for the account with account-opening materials, and
permitting creditors to disclose in the table the minimum credit limit
offered on the account--likely a different dollar amount than the
actual credit limit--could result in confusion. The Board understands
that creditors offering accounts that would be subject to the available
credit disclosure typically establish a limited number of credit limits
on such accounts. Therefore, for creditors that use pre-printed forms,
the requirement should not be overly burdensome.
6(b)(2)(xiv) Web Site Reference
For the reasons stated under Sec. 226.5a(b)(15), the Board adopts
Sec. 226.6(b)(2)(xiv) (proposed at Sec. 226.6(b)(4)(viii)), which
requires card issuers to provide a reference to the Board's Web site
for additional information about shopping for and using credit card
accounts.
6(b)(2)(xv) Billing Error Rights Reference
All creditors offering open-end plans must provide notices of
billing rights at account opening. See current Sec. 226.6(d). This
information is important, but lengthy. The Board proposed Sec.
226.6(b)(4)(x) in June 2007 to draw consumers' attention to the notices
by requiring a statement that information about billing rights and how
to exercise them is provided in the account-opening disclosures. Under
the proposal, the statement, along with the name of the balance
computation method, would have been required to be located directly
below the table. The Board received no comments on the billing error
rights reference and is adopting the requirement as proposed.
6(b)(3) Disclosure of Charges Imposed as Part of Open-End (Not Home-
Secured) Plans
Currently, the rules for disclosing costs related to open-end plans
create two categories of charges covered by TILA: Finance charges
(Sec. 226.6(a)) and ``other charges'' (Sec. 226.6(b)). According to
TILA, a charge is a finance charge if it is payable directly or
indirectly by the consumer and imposed directly or indirectly by the
creditor ``as an incident to the extension of credit.'' The Board
implemented the definition by including as a finance charge under
Regulation Z, any charge imposed ``as an incident to or a condition of
the extension of credit.'' TILA also requires a creditor to disclose,
before opening an account, ``other charges which may be imposed as part
of the plan * * * in accordance with regulations of the Board.'' The
Board implemented the provision virtually verbatim, and the staff
commentary interprets the provision to cover ``significant charges
related to the plan.'' 15 U.S.C. 1605(a), Sec. 226.4; 15 U.S.C.
1637(a)(5), Sec. 226.6(b), current comment 6(b)-1.
The terms ``finance charge'' and ``other charge'' are given broad
and flexible meanings in the current regulation and commentary. This
ensures that TILA adapts to changing conditions, but it also creates
uncertainty. The distinctions among finance charges, other charges, and
charges that do not fall into either category are not always clear. As
creditors develop new kinds of services, some creditors find it
difficult to determine if associated charges for the new services meet
the standard for a ``finance charge'' or ``other charge'' or are not
covered by TILA at all. This uncertainty can pose legal risks for
creditors that act in good faith to classify fees. Examples of charges
that are included or excluded charges are in the regulation and
commentary, but they cannot provide definitive guidance in all cases.
The June 2007 Proposal would have created a single category of
``charges imposed as part of an open-end (not home-secured) plan'' as
identified in proposed Sec. 226.6(b)(1)(i). These charges include
finance charges under Sec. 226.4(a) and (b), penalty charges, taxes,
and charges for voluntary credit insurance, debt cancellation or debt
suspension coverage.
Under the June 2007 Proposal, charges to be disclosed also would
have included any charge the payment or nonpayment of which affects the
consumer's access to the plan, duration of the plan, the amount of
credit extended, the period for which credit is extended, or the timing
or method of billing or payment. Proposed commentary provided examples
of charges covered by the provision, such as application fees and
participation fees (which affect access to the plan), fees to expedite
card delivery (which also affect access to the plan), and fees to
expedite payment (which affect the timing and method of payment).
Three examples of types of charges that are not imposed as part of
the plan were listed in proposed Sec. 226.6(b)(1)(ii). These examples
would have included charges imposed on a cardholder by an institution
other than the card issuer for the use of the other institution's ATM;
and charges for a package of services that includes an open-end credit
feature, if the fee is required whether or not the open-end credit
feature is included and the non-credit services are not merely
incidental to the credit feature. Proposed comment 6(b)(1)(ii)-1
provided examples of fees for packages of services that would have been
considered to be imposed as part of the plan and fees for packages of
services that would not. This comment is substantively identical to
current comment 6(b)-1.v.
Commenters generally supported deemphasizing the distinction
between finance charges and other charges. One trade association urged
the Board to identify costs as ``interest'' or ``fees,'' the labels
proposed to describe costs on

[[Page 5313]]

periodic statements, rather than ``costs imposed as part of the plan,''
to ease compliance and consumer understanding.
Some industry commenters urged the Board to provide a specific and
finite list of fees that must be disclosed, to avoid litigation risk.
They stated the proposed categories of charges considered to be part of
the plan were not sufficiently precise. They asked for additional
guidance on what fees might be captured as fees for failure to use the
card as agreed (except amounts payable for collection activity after
default), or that affect the consumer's access to the plan, for
example. One industry trade association asked the Board to clarify that
creditors would be deemed to be in compliance with the regulation if
the creditor disclosed a fee that was later deemed to be not a part of
the plan.
The Board is adopting the requirement to disclose costs imposed as
part of the plan as proposed, but renumbered for organizational
clarity. General rules are set forth in Sec. 226.6(b)(3)(i), charges
imposed as part of the plan are identified in Sec. 226.6(b)(3)(ii),
and charges imposed that are not part of the plan are identified in
Sec. 226.6(b)(3)(iii). The final rule continues to use the term
``charges.'' Although the Board's consumer testing indicates that
consumers' understanding of costs incurred during a statement period
improves when labeled as ``fees'' or ``interest'' on periodic
statements, the Board believes the general term ``charges,'' which
encompasses interest and fees, is an efficient description of the
requirement, and eases compliance by not requiring creditors to recite
``fees and interest'' wherever the term ``charges'' otherwise would
appear.
As the Board acknowledged in the June 2007 Proposal, the disclosure
requirements do not completely eliminate ambiguity about what are TILA
charges. The commentary provides examples to ease compliance. To
further mitigate ambiguity the rule provides a complete list in new
Sec. 226.6(b)(2) of which charges and categories of charges must be
disclosed in writing at account opening (or before they are increased
or newly introduced). See Sec. Sec. 226.5(b)(1) and 226.9(c)(2) for
timing rules. Any fees aside from those fees or categories of fees
identified in Sec. 226.6(b)(2) are not required to be disclosed in
writing at account opening. However, if they are not disclosed in
writing at account opening, other charges imposed as part of an open-
end (not home-secured) plan must be disclosed in writing or orally at a
time and in a manner that a consumer would be likely to notice them
before the consumer agrees to or becomes obligated to pay the charge.
This approach is intended in part to reduce creditor burden. For
example when a consumer orders a service by telephone, creditors
presumably disclose fees related to that service at that time for
business reasons and to comply with other state and federal laws.
Moreover, compared to the approach reflected in the current
regulation, the broad application of the statutory standard of fees
``imposed as part of the plan'' should make it easier for a creditor to
determine whether a fee is a charge covered by TILA, and reduce
litigation and liability risks. Comment 6(b)(3)(ii)-3 is added to
provide that if a creditor is unsure whether a particular charge is a
cost imposed as part of the plan, the creditor may, at its option,
consider such charges as a cost imposed as part of the plan for Truth
in Lending purposes. In addition, this approach will help ensure that
consumers receive the information they need when it would be most
helpful to them.
Comment 6(b)(3)(ii)-2 has been revised from the June 2007 Proposal.
The comment, as proposed in June 2007 as comment 6(b)(1)(i)-2, included
a fee to receive paper statements as an example of a fee that affects
the plan. This example is not included in the final rule. Creditors are
required to provide periodic statements in writing in connection with
open-end plans, and the Board did not intend with the inclusion of this
example to express a view on the permissibility of charging consumers a
fee to receive paper statements.
Section 226.6(b)(3) applies to all open-end plans except HELOCs
subject to Sec. 226.5b. It retains TILA's general requirements for
disclosing costs for open-end plans: Creditors are required to continue
to disclose the circumstances under which charges are imposed as part
of the plan, including the amount of the charge (e.g., $3.00) or an
explanation of how the charge is determined (e.g., 3 percent of the
transaction amount). For finance charges, creditors currently must
include a statement of when the finance charge begins to accrue and an
explanation of whether or not a ``grace period'' or ``free-ride
period'' exists (a period within which any credit that has been
extended may be repaid without incurring the charge). Regulation Z has
generally referred to this period as a ``free-ride period.'' To use
consistent terminology to describe the concept, the Board is updating
references to ``free-ride period'' as ``grace period'' in the
regulation and commentary, without any intended substantive change, as
proposed. Comment 6(b)(3)-2 is revised to provide that although the
creditor need not use any particular descriptive phrase or term to
describe a grace period, the descriptive phrase or term must be
sufficiently similar to the disclosures provided pursuant to Sec. Sec.
226.5a and 226.6(b)(2) to satisfy a creditor's duty to provide
consistent terminology under Sec. 226.5(a)(2).
6(b)(4) Disclosure of Rates for Open-End (Not Home-Secured) Plans
Rules for disclosing rates that affect the amount of interest that
will be imposed are consolidated in Sec. 226.6(b)(4) (proposed at
Sec. 226.6(b)(2)). (See redesignation table below.) Headings have been
added for clarity.
6(b)(4)(i)
Currently, creditors must disclose finance charges attributable to
periodic rates. These costs are typically interest charges but may
include other costs such as premiums for required credit insurance. For
clarity, the text of Sec. 226.6(b)(4)(i) uses the term ``interest''
rather than ``finance charge'' and is adopted as proposed.
6(b)(4)(i)(D) Balance Computation Method
Section Sec. 226.6(b)(4)(i) sets forth rules relating to the
disclosure of rates. Section Sec. 226.6(b)(4)(i)(D) (currently Sec.
226.6(a)(3) and proposed in June 2007 as Sec. 226.6(b)(2)(i)(D))
requires creditors to explain the method used to determine the balance
to which rates apply. 15 U.S.C. 1637(a)(2).
The June 2007 Proposal would have required creditors to continue to
explain the balance computation methods in the account-opening
agreement or other disclosure statement. The name of the balance
computation method and a reference to where the explanation can be
found would have been required along with the account-opening summary
table. Commenters generally supported the Board's approach, and the
Board is adopting the requirement to provide an explanation of balance
computation methods in the account agreement or other disclosure
statement, as proposed. See also the section-by-section analysis to
Sec. 226.6(b)(2)(vi).
Model clauses. Model clauses that explain commonly used balance
computation methods, such as the average daily balance method, are at
Appendix G-1 to part 226. In the June 2007 Proposal, the Board
requested comment on whether model clauses for methods such as
``adjusted balance'' and ``previous balance'' should be deleted as
obsolete, and more broadly, whether

[[Page 5314]]

Model Clauses G-1 should be eliminated entirely because creditors no
longer use the model clauses.
One trade association asked that all model clauses be retained. In
response to other comments received on the June 2007 Proposal, the
Board proposed in May 2008 to add a new model clause to Model Clauses
G-1 for the ``daily balance'' method. In addition, the Board proposed
new Model Clauses G-1(A) for open-end (not home-secured) plans. The
clauses in G-1(A) differ from the clauses in G-1 by referring to
``interest charges'' rather than ``finance charges'' to explain balance
computation methods. Commenters did not specifically address this
aspect of the May 2008 Proposal.
Based on the comments received on both proposals, the Board is
adopting Model Clauses G-1(A). See section-by-section analysis to Sec.
226.6(a) regarding Model Clauses G-1.
Current comment 6(a)(3)-2 clarifies that creditors may, but need
not, explain how payments and other credits are allocated to
outstanding balances as part of explaining a balance computation
method. Two examples are deleted from the comment (renumbered in this
final rule as 6(b)(4)(i)(D)-2), to avoid any unintended confusion or
conflict with rules limiting how creditors may allocate payments on
outstanding credit balances, published elsewhere in today's Federal
Register.
6(b)(4)(ii) Variable-Rate Accounts
New Sec. 226.6(b)(4)(ii) sets forth the rules for variable-rate
disclosures now contained in footnote 12. In addition, guidance on the
accuracy of variable rates provided at account opening is moved from
the commentary to the regulation and revised, as proposed. Currently,
comment 6(a)(2)-3 provides that creditors may provide the current rate,
a rate as of a specified date if the rate is updated from time to time,
or an estimated rate under Sec. 226.5(c). In June 2007, the Board
proposed an accuracy standard for variable rates disclosed at account
opening; the rate disclosed would have been accurate if it was in
effect as of a specified date within 30 days before the disclosures are
provided. Creditors' option to provide an estimated rate as the rate in
effect for a variable-rate account would have been eliminated under the
proposal. Current comment 6(a)(2)-10, which addresses discounted
variable-rate plans, was proposed as comment 6(b)(2)(ii)-5, with
technical revisions but no substantive changes.
The June 2007 Proposal also would have required that, in describing
how a variable rate is determined, creditors must disclose the
applicable margin, if any. See proposed Sec. 226.6(b)(2)(ii)(B).
The Board is adopting the rules for variable-rate disclosures
provided at account-opening, as proposed. As to accuracy requirements,
the Board believes 30 days provides sufficient flexibility to creditors
and reasonably current information to consumers. The Board believes
creditors are provided with sufficient flexibility under the proposal
to provide a rate as of a specified date, so the use of an estimate
would not be appropriate.
Comment 6(b)(4)(ii)-5 (proposed as 6(b)(2)(ii)-5) is adopted, with
revisions consistent with the rule adopted under Sec.
226.6(b)(2)(i)(B), which permits but does not require creditors, except
those subject to 12 CFR Sec. 227.24 or similar law, to disclose
temporary initial rates in the account-opening summary table. However,
creditors must comply with the general requirement to disclose charges
imposed as part of the plan before the charge is imposed. The Board
believes creditors not subject to 12 CFR Sec. 227.24 or similar law
will continue to disclose initial rates as part of the account
agreement for contract and other reasons.
Pursuant to its TILA Section 105(a) authority, the Board is also
adopting in Sec. 226.6(b)(4)(ii)(B) the requirement to disclose any
applicable margin when describing how a variable rate is determined.
The Board believes creditors already state the margin for purposes of
contract or other law and are currently required to disclose margins
related to penalty rates, if applicable. No particular format
requirements apply. Thus, the Board does not expect the revision will
add burden.
6(b)(4)(iii) Rate Changes Not Due to Index or Formula
The June 2007 Proposal would have consolidated existing rules for
rate changes that are specifically set forth in the account agreement
but are not due to changes in an index or formula, such as rules for
disclosing introductory and penalty rates. See proposed Sec.
226.6(b)(2)(iii). In addition to requiring creditors to identify the
circumstances under which a rate may change (such as the end of an
introductory period or a late payment), the June 2007 Proposal would
have required creditors to disclose how existing balances would be
affected by the new rate. The change was intended to improve consumer
understanding as to whether a penalty rate triggered by, for example, a
late payment would apply not only to outstanding balances for purchases
but to existing balances that were transferred at a low promotional
rate. If the increase in rate is due to an increased margin, proposed
comment 6(b)(2)(iii)-2 would require creditors to disclose the
increase; the highest margin can be stated if more than one might
apply.
Comment 6(b)(4)(iii)-1 (proposed as comment 6(b)(2)(iii)-1) is
adopted with revisions consistent with the rule adopted under Sec.
226.6(b)(2)(i)(B), which permits but does not require creditors to
disclose temporary initial rates in the account-opening summary table,
except as provided in Sec. 226.6(b)(2)(i)(F). The effect of making the
disclosure permissive is that creditors may disclose initial rates at
any time before those rates are applied. However, the Board believes
creditors will continue to disclose initial rates as part of the
account agreement for contract and other reasons and to comply with the
general requirement to disclose charges imposed as part of the plan
before the charge is imposed.
Balances to which rates apply. The June 2007 Proposal would have
required creditors to inform consumers whether any new rate would apply
to balances outstanding at the time of the rate change. In May 2008,
the Board and other federal banking agencies proposed rules to prohibit
the application of a penalty rate to outstanding balances, with some
exceptions. Elsewhere in today's Federal Register, the Board and other
federal banking agencies are adopting the rule, with some revisions. To
conform the requirements of Sec. 226.6 to the rules addressing the
application of a penalty rate to outstanding balances, creditors are
required under Sec. 226.6(b)(4)(iii)(D) and (b)(4)(iii)(E) to inform
consumers about the balance to which the new rate will apply and the
balance to which the current rate at the time of the change will apply.
Comment 6(b)(4)(iii)-3 is conformed accordingly.
Credit privileges permanently terminated. Under current rules,
comment 6(a)(2)-11 provides that creditors need not disclose increased
rates that may apply if credit privileges are permanently terminated.
That rule was retained in the June 2007 Proposal, but was moved to
Sec. 226.6(b)(4)(ii)(C) and comment 6(b)(2)(iii)-2.iii., to be
consistent with Sec. 226.5a(b)(1)(iv) in the June 2007 Proposal. In
May 2008, the Board proposed to eliminate that exception; accordingly,
references to increased rates upon permanently terminated credit
privileges in paragraph iii. to comment 6(b)(2)(iii)-2 would have been
removed.
For the reasons stated in the section-by-section analysis to Sec.
226.5a(b)(1), the Board is eliminating the exception:

[[Page 5315]]

creditors that increase rates when credit privileges are permanently
terminated must disclose that increased rate in the account-opening
table.
6(b)(5) Additional Disclosures for Open-end (not Home-secured) Plans
6(b)(5)(i) Voluntary Credit Insurance; Debt Cancellation or Suspension
As discussed in the section-by-section analysis to Sec. 226.4, the
Board is adopting revisions to the requirements to exclude charges for
voluntary credit insurance or debt cancellation or debt suspension
coverage from the finance charge. See Sec. 226.4(d). Creditors must
provide information about the voluntary nature and cost of the credit
insurance or debt cancellation or suspension product, and about the
nature of coverage for debt suspension products. Because creditors must
obtain the consumer's affirmative request for the product as a part of
the disclosure requirements, the Board expects the disclosures required
under Sec. 226.4(d) will be provided at the time the product is
offered to the consumer.
In June 2007, the Board proposed Sec. 226.6(b)(3) to require
creditors to provide the disclosures required under Sec. 226.4(d) to
exclude voluntary credit insurance or debt cancellation or debt
suspension coverage from the finance charge. One commenter asked the
Board to clarify that the disclosures are required to be provided only
to those consumers that purchase the product and not to all consumers
to whom the product was made available.
Section 226.6(b)(5)(i) (proposed as Sec. 226.6(b)(3)) is adopted
as proposed, with technical revisions for clarity in response to
commenters' concerns. Comment 6(b)(5)(i)-1 is added to provide that
creditors comply with Sec. 226.6(b)(5)(i) if they provide disclosures
required to exclude the cost of voluntary credit insurance or debt
cancellation or debt suspension coverage from the finance charge in
accordance with Sec. 226.4(d). For example, if the Sec. 226.4(d)
disclosures are given at application, creditors need not repeat those
disclosures when providing other disclosures required to be given at
account opening.
6(b)(5)(ii) Security Interests
Regulatory text regarding the disclosure of security interests
(currently at Sec. 226.6(c) and proposed at Sec. 226.6(c)(1)) is
retained without change. Comments to Sec. 226.6(b)(5)(ii) (currently
at Sec. 226.6(c) and proposed as Sec. 226.6(c)(1)) are revised for
clarity, without any substantive change.
6(b)(5)(iii) Statement of Billing Rights
Creditors offering open-end plans must provide information to
consumers at account opening about consumers' billing rights under
TILA, in the form prescribed by the Board. 15 U.S.C. 1637(a)(7). This
requirement is implemented in the Board's Model Form G-3. In June 2007,
the Board revised Model Form G-3 to improve its readability, proposed
as Model Form G-3(A). The proposed revisions were not based on consumer
testing, although design techniques and changes in terminology were
used to facilitate improved consumer understanding of TILA's billing
rights. Under the June 2007 Proposal, creditors offering HELOCs subject
to Sec. 226.5b could continue to use current Model Form G-3 or G-3(A),
at the creditor's option.
Model Form G-3 is retained and Model Form G-3(A) is adopted, with
some revisions. As discussed in the section-by-section analysis to
Sec. Sec. 226.12(b) and 226.13(b), the Board clarified that creditors
may choose to permit a consumer, at the consumer's option, to
communicate with the creditor electronically when notifying the
creditor about possible unauthorized transactions or other billing
disputes. The use of electronic communication in these circumstances
applies to all open-end credit plans; thus, additional text that
provides instructions for a consumer, at the consumer's option, to
communicate with the creditor electronically has been added to Model
Forms G-3 and G-3(A). In addition, technical changes have also been
made to Model Form G-3(A) for clarity without intended substantive
change, in response to comments received.
Technical revisions. The final rule adopts several technical
revisions, as proposed in the June 2007 Proposal. The section is
retitled ``Account-opening disclosures'' from the current title
``Initial disclosures'' to reflect more accurately the timing of the
disclosures, as proposed. In today's marketplace, there are few open-
end products for which consumers receive the disclosures required under
Sec. 226.6 as their ``initial'' Truth in Lending disclosure. See
Sec. Sec. 226.5a and 226.5b. The substance of footnotes 11 and 12 is
moved to the regulation; the substance of footnote 13 is moved to the
commentary. (See redesignation table below.)
In other technical revisions, as proposed, comments 6-1 and 6-2 are
deleted. The substance of comment 6-1, which requires consistent
terminology, is discussed more generally in Sec. 226.5(a)(2). Comment
6-2 addresses certain open-end plans involving more than one creditor,
and is deleted as obsolete. See section-by-section analysis to Sec.
226.5a(f).
Section 226.7 Periodic Statement
TILA Section 127(b), implemented in Sec. 226.7, identifies
information about an open-end account that must be disclosed when a
creditor is required to provide periodic statements. 15 U.S.C. 1637(b).
For a discussion about periodic statement disclosure rules and format
requirements, see the section-by-section analysis to Sec. 226.7(a) for
HELOCs subject to Sec. 226.5b, and Sec. 226.7(b) for open-end (not
home-secured) plans.
7(a) Rules Affecting Home-Equity Plans
Periodic statement disclosure and format requirements for HELOCs
subject to Sec. 226.5b were unaffected by the June 2007 Proposal,
consistent with the Board's plan to review Regulation Z's disclosure
rules for home-secured credit in a future rulemaking. To facilitate
compliance, the substantively unrevised requirements applicable only to
HELOCs are grouped together in Sec. 226.7(a). (See redesignation table
below.)
For HELOCs, creditors are required to comply with the disclosure
requirements under Sec. 226.7(a)(1) through (a)(10). Except for the
addition of an exception that HELOC creditors may utilize at their
option (further discussed below), these rules and accompanying
commentary are substantively unchanged from current Sec. 226.7(a)
through (k) and the June 2007 Proposal. As proposed, Sec. 226.7(a)
also provides that at their option, creditors offering HELOCs may
comply with the requirements of Sec. 226.7(b). The Board understands
that some creditors may use a single processing system to generate
periodic statements for all open-end products they offer, including
HELOCs. These creditors would have the option to generate statements
according to a single set of rules.
In technical revisions, the substance of footnotes referenced in
current Sec. 226.7(d) is moved to Sec. 226.7(a)(4) and comment
7(a)(4)-6, as proposed.
7(a)(4) Periodic Rates
TILA Section 127(b)(5) and current Sec. 226.7(d) require creditors
to disclose all periodic rates that may be used to compute the finance
charge, and an APR that corresponds to the periodic rate multiplied by
the number of periods in a year. 15 U.S.C. 1637(b)(5); Sec. 226.14(b).
Currently, comment 7(d)-1 interprets the requirement to disclose all
periodic rates that ``may be used'' to mean ``whether or not [the rate]
is applied

[[Page 5316]]

during the billing cycle.'' In June 2007, the Board proposed for open-
end (not home-secured) plans a limited exception to TILA Section
127(b)(5) regarding promotional rates that were offered but not
actually applied, to effectuate the purposes of TILA to require
disclosures that are meaningful and to facilitate compliance.
For the reasons discussed in the section-by-section analysis to
Sec. 226.7(b)(4)(ii), under the June 2007 Proposal, creditors would
have been required to disclose promotional rates only if the rate
actually applied during the billing period. The Board noted that
interpreting TILA to require the disclosure of all promotional rates
would be operationally burdensome for creditors and result in
information overload for consumers. The proposed exception did not
apply to HELOCs covered by Sec. 226.5b, and the Board requested
comment on whether the class of transactions under the proposed
exceptions should apply more broadly to include HELOCs subject to Sec.
226.5b, and if so, why.
Commenters generally supported the proposal under Sec.
226.7(b)(4). Although few commenters addressed the issue of whether the
exception should also apply to HELOCs subject to Sec. 226.5b, these
commenters favored extending the exception to HELOCs because concerns
about information overload on consumers and operational burdens on
creditors apply equally in the context of HELOC disclosures. The Board
is adopting the exception as it applies to open-end (not home-secured)
plans as proposed, with minor changes to the description of the time
period to which the promotional rate applies. For the reasons stated
above and in the section-by-section analysis to Sec. 226.7(b)(4), the
Board also extends the exception to HELOCs subject to Sec. 226.5b.
Section 226.7(a)(4) and comment 7(a)(4)-1 are revised accordingly.
Extending this exception to HELOCs does not require creditors offering
HELOCs to revise any forms or procedures. Therefore, no additional
burden is associated with revising the rules governing HELOC
disclosures. Comment 7(a)(4)-5, which provides guidance when the
corresponding APR and effective APR are the same, is revised to be
consistent with a creditor's option, rather than a requirement, to
disclose an effective APR, as discussed below.
7(a)(7) Annual Percentage Rate
The June 2007 Proposal included two alternative approaches to
address concerns about the effective APR. The section-by-section
analysis to Sec. 226.7(b) discusses in detail the proposed approaches
and the reasons for the Board's determination to adopt the proposed
approach that eliminates the requirement to disclose the effective APR.
Thus, under this approach, the effective APR is optional for creditors
offering HELOCs. Section 226.7(a) expressly provides, however, that a
HELOC creditor must provide disclosures of fee and interest in
accordance with Sec. 226.7(b)(6) if the creditor chooses not to
disclose an effective APR. Comment 7(a)(7)-1 is revised to provide that
creditors stating an annualized rate on periodic statements in addition
to the corresponding APR required by Sec. 226.7(a)(4) must calculate
that additional rate in accordance with Sec. 226.14(c), to avoid the
disclosure of rates that may be calculated in different ways.
Currently and under the June 2007 Proposal, HELOC creditors
disclosing the effective APR must label it as ``annual percentage
rate.'' The final rule adds comment 7(a)(7)-2 to provide HELOC
creditors with additional guidance in labeling the APR as calculated
under Sec. 226.14(c) and the periodic rate expressed as an annualized
rate. HELOC creditors that choose to disclose an effective APR may
continue to label the figure as ``annual percentage rate,'' and label
the periodic rate expressed as an annualized rate as the
``corresponding APR,'' ``nominal APR,'' or a similar term, as is
currently the practice. Comment 7(a)(7)-2 further provides that it is
permissible to label the APR calculated under Sec. 226.14(c) as the
``effective APR'' or a similar term. For those creditors, the periodic
rate expressed as an annualized rate could be labeled ``annual
percentage rate,'' consistent with the requirement under Sec.
226.7(b)(4). If the two rates are different values, creditors must
label the rates differently to comply with the regulation's standard to
provide clear disclosures.
7(b) Rules Affecting Open-End (Not Home-Secured) Plans
The June 2007 Proposal contained a number of significant revisions
to periodic statement disclosures for open-end (not home-secured)
plans, grouped together in proposed Sec. 226.7(b). The Board proposed
for comment two alternative approaches to disclose the effective APR:
The first approach attempted to improve consumer understanding of this
rate and reduce creditor uncertainty about its computation. The second
approach eliminated the requirement altogether. In addition, the Board
proposed to add new paragraphs Sec. 226.7(b)(11) and (b)(12) to
implement disclosures regarding late-payment fees and the effects of
making minimum payments in Section 1305(a) and 1301(a) of the
Bankruptcy Act. TILA Section 127(b)(11) and (12); 15 U.S.C. 1637(b)(11)
and (12).
Effective annual percentage rate.
Background on effective APR. TILA Section 127(b)(6) requires
disclosure of an APR calculated as the quotient of the total finance
charge for the period to which the charge relates divided by the amount
on which the finance charge is based, multiplied by the number of
periods in the year. 15 U.S.C. 1637(b)(6). This rate has come to be
known as the ``historical APR'' or ``effective APR.'' TILA Section
127(b)(6) exempts a creditor from disclosing an effective APR when the
total finance charge does not exceed 50 cents for a monthly or longer
billing cycle, or the pro rata share of 50 cents for a shorter cycle.
In such a case, TILA Section 127(b)(5) requires the creditor to
disclose only the periodic rate and the annualized rate that
corresponds to the periodic rate (the ``corresponding APR''). 15 U.S.C.
1637(b)(5). When the finance charge exceeds 50 cents, the act requires
creditors to disclose the periodic rate but not the corresponding APR.
Since 1970, however, Regulation Z has required disclosure of the
corresponding APR in all cases. See current Sec. 226.7(d). Current
Sec. 226.7(g) implements TILA Section 127(b)(6)'s requirement to
disclose an effective APR.
The effective APR and corresponding APR for any given plan feature
are the same when the finance charge in a period arises only from
application of the periodic rate to the applicable balance (the balance
calculated according to the creditor's chosen method, such as average
daily balance method). When the two APRs are the same, Regulation Z
requires that the APR be stated just once. The effective and
corresponding APRs diverge when the finance charge in a period arises
(at least in part) from a charge not determined by application of a
periodic rate and the total finance charge exceeds 50 cents. When they
diverge, Regulation Z currently requires that both be stated.
The statutory requirement of an effective APR is intended to
provide the consumer with an annual rate that reflects the total
finance charge, including both the finance charge due to application of
a periodic rate (interest) and finance charges that take the form of
fees. This rate, like other APRs required by TILA, presumably was
intended to provide consumers information about the cost of credit that
would help consumers compare credit

[[Page 5317]]

costs and make informed credit decisions and, more broadly, strengthen
competition in the market for consumer credit. 15 U.S.C. 1601(a). There
is, however, a longstanding controversy about the extent to which the
requirement to disclose an effective APR advances TILA's purposes or,
as some argue, undermines them.
As discussed in greater detail in the Board's June 2007 Proposal,
industry and consumer groups disagree as to whether the effective APR
conveys meaningful information. Creditors argue that the cost of a
transaction is rarely, if ever, as high as the effective APR makes it
appear, and that this tendency of the rate to exaggerate the cost of
credit makes this APR misleading. Consumer groups contend that the
information the rate provides about the cost of credit, even if
limited, is meaningful. The effective APR for a specific transaction or
set of transactions in a given cycle may provide the consumer a rough
indication that the cost of repeating such transactions is high in some
sense or, at least, higher than the corresponding APR alone conveys.
Consumer advocates and industry representatives also disagree as to
whether the effective APR promotes credit shopping. Industry and
consumer group representatives find some common ground in their
observations that consumers do not understand the effective APR well.
Industry representatives also claim that the effective APR imposes
direct costs on creditors that consumers pay indirectly. They represent
that the effective APR raises compliance costs when they introduce new
services, including costs of: (1) Conducting legal analysis of
Regulation Z to determine whether the fee for the new service is a
finance charge and must be included in the effective APR; (2)
reprogramming software if the fee must be included; and (3) responding
to telephone inquiries from confused customers and accommodating them
(e.g., with fee waivers or rebates).
Consumer research conducted for the Board prior to the June 2007
Proposal. As discussed in the June 2007 Proposal, the Board undertook
research through a consultant on consumer awareness and understanding
of the effective APR, and on whether changes to the presentation of the
disclosure could increase awareness and understanding. The consultant
used one-on-one cognitive interviews with consumers; consumers were
provided mock disclosures of periodic statements that included
effective APRs and asked questions about the disclosure designed to
elicit their understanding of the rate. In the first round the
statements were copied from examples in the market. For subsequent
testing rounds, the language and design of the statements were modified
to better convey how the effective APR differs from the corresponding
APR. Several different approaches and many variations on those
approaches were tested.
In most of the rounds, a minority of participants correctly
explained that the effective APR for cash advances was higher than the
corresponding APR for cash advances because a cash advance fee had been
imposed. A smaller minority correctly explained that the effective APR
for purchases was the same as the corresponding APR for purchases
because no transaction fee had been imposed on purchases. A majority
offered incorrect explanations or did not offer any explanation.
Results changed at the final testing site, however, when a majority of
participants evidenced an understanding that the effective APR for cash
advances would be elevated for the statement period when a cash advance
fee was imposed during that period, that the effective APR would not be
as elevated for periods where a cash advance balance remained
outstanding but no fee had been imposed, and that the effective APR for
purchases was the same as the corresponding APR for purchases because
no transaction fee had been imposed on purchases.
The form in the final round of testing prior to the June 2007
Proposal labeled the rate ``Fee-Inclusive APR'' and placed it in a
table separate from the corresponding APR. The ``Fee-Inclusive APR''
table included the amount of interest and the amount of transaction
fees. An adjacent sentence stated that the ``Fee-Inclusive APR''
represented the cost of transaction fees as well as interest. Similar
approaches had been tried in some of the earlier rounds, except that
the effective APR had been labeled ``Effective APR.''
The Board's proposed two alternative approaches. After considering
the concerns and issues raised by industry and consumer groups about
the effective APR, as well as the results of the consumer testing, the
Board proposed in June 2007 two alternative approaches for addressing
the effective APR. The first approach attempted to improve consumer
understanding of this rate and reduce creditor uncertainty about its
computation. The second approach proposed to eliminate the requirement
to disclose the effective APR.
1. First alternative proposal. Under the first alternative, the
Board proposed to impose uniform terminology and formatting on
disclosure of the effective APR and the fees included in its
computation. See proposed Sec. 226.7(b)(6)(iv) and (b)(7)(i). This
proposal was based largely on a form developed through several rounds
of one-on-one interviews with consumers. The Board also proposed under
this alternative to revise Sec. 226.14, which governs computation of
the effective APR, in an effort to increase certainty about which fees
the rate must include.
Under proposed Sec. 226.7(b)(7)(i) and Sample G-18(B), creditors
would have disclosed an effective APR for each feature, such as
purchases and cash advances, in a table with the heading ``Fee-
Inclusive APR.'' Creditors would also have indicated that the Fee-
Inclusive APRs are ``APRs that you paid this period when transactions
or fixed fees are taken into account as well as interest.'' A composite
effective APR for two or more features would no longer have been
permitted, as it is more difficult to explain to consumers. In addition
to the effective APR(s) for each feature, the table would have
included, by feature, the total of interest, labeled as ``interest
charges,'' and the total of the fees included in the effective APR,
labeled as ``transaction and fixed charges.'' To facilitate
understanding, proposed Sec. 226.7(b)(6)(iii) would have required
creditors to label the specific fees used to calculate the effective
APR either as ``transaction'' or ``fixed'' fees, depending on whether
the fee relates to a specific transaction. Such fees would also have
been disclosed in the list of transactions. If the only finance charges
in a billing cycle are interest charges, the corresponding and
effective APRs are identical. In those cases, creditors would have
disclosed only the corresponding APRs and would not have been required
to label fees as ``transaction'' or ``fixed'' fees since there would be
no fees that are finance charges in such cases. These requirements
would have been illustrated in forms under G-18 in Appendix G to part
226, and creditors would have been required to use the model form or a
substantially similar form.
The proposal also sought to simplify computation of the effective
APR, both to increase consumer understanding of the disclosure and
facilitate creditor compliance. Proposed Sec. 226.14(e) would have
included a specific and exclusive list of finance charges that would be
included in calculating the effective APR.\18\
---------------------------------------------------------------------------

\18\ Under the statute, the numerator of the quotient used to
determine the historical APR is the total finance charge. See TILA
Section 107(a)(2), 15 U.S.C. 1606(a)(2). The Board has authority to
make exceptions and adjustments to this calculation method to serve
TILA's purposes and facilitate compliance. See TILA Section 105(a),
15 U.S.C. 1604(a). The Board has used this authority before to
exclude certain kinds of finance charges from the effective APR. See
Sec. 226.14(c)(2) and (c)(3).

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

[[Page 5318]]

2. Second alternative proposal. Under the second alternative
proposal, disclosure of the effective APR would no longer have been
required. The Board proposed this approach pursuant to its exception
and exemption authorities under TILA Section 105. Section 105(a)
authorizes the Board to make exceptions to TILA to effectuate the
statute's purposes, which include facilitating consumers' ability to
compare credit terms and helping consumers avoid the uninformed use of
credit. 15 U.S.C. 1601(a), 1604(a). Section 105(f) authorizes the Board
to exempt any class of transactions (with an exception not relevant
here) from coverage under any part of TILA if the Board determines that
coverage under that part does not provide a meaningful benefit to
consumers in the form of useful information or protection. 15 U.S.C.
1604(f)(1).
Under the second alternative proposal, disclosure of an effective
APR would have been optional for creditors offering HELOCs, as
discussed above in the section-by-section analysis to Sec.
226.7(a)(7). For creditors offering open-end (not home-secured) plans,
the regulation would have included no effective APR provision, and
Sec. 226.7(b)(7) would have been reserved.
Comments on the proposal. Many industry commenters supported the
Board's second alternative proposal to eliminate the requirement to
disclose the effective APR. Commenters supporting this alternative
generally echoed the reasons given by the Board for this alternative in
the June 2007 Proposal. For example, they contended that the effective
APR cannot be used for shopping purposes because it is backward-looking
and only purports to represent the cost of credit for a particular
cycle; the effective APR confuses and misleads consumers; and the
effective APR requirement imposes compliance costs and risks on
creditors (for example, cost of legal analysis to determine whether new
fees must be included in the effective APR, litigation risk, and costs
of responding to inquiries from confused consumers).
Another argument commenters made in support of eliminating the
effective APR was that the disclosure would be unnecessary, in light of
the Board's proposal for disclosure of interest and fees totaled by
period and year to date (see the section-by-section analysis to Sec.
226.7(b)(6)). Some commenters also indicated that retaining the
effective APR, in combination with the proposal to include all
transaction fees in the finance charge, might result in a creditor
violating restrictions on interest rates. Some commenters contended
that the Board's proposal to rename the effective APR the ``Fee-
Inclusive APR'' would not solve the problems of consumer
misunderstanding and might in fact exacerbate such problems, although
one industry commenter stated that if the Board decided to retain the
effective APR requirement (which this commenter did not favor), the
term ``Fee-Inclusive APR'' might represent an improvement.
Industry commenters also expressed concern about the Board's
proposal to specify precisely the fees that are to be included in the
effective APR calculation (in proposed Sec. 226.14(e), as discussed
above). One commenter said that if the effective APR requirement were
to be retained, the Board would need to better clarify in Sec.
226.14(e) which fees must be included. Another commenter stated that
the proposed approach would not solve the problem of creditor
uncertainty about which fees are to be included in the effective APR,
because new types of fees will arise and create further uncertainty.
Other commenters, including consumer groups and government
agencies, supported the Board's first alternative proposal to retain
the effective APR requirement. Commenters supporting this alternative
believe that consumers need the effective APR in order to be able to
properly evaluate and compare costs of card programs; commenters also
contended that if the effective APR were eliminated, creditors could
impose additional fees that would escape effective disclosure. Many of
these commenters urged not only that the effective APR requirement
should be retained, but in addition that all fees, or at least more
fees than under the current regulation (for example, late-payment fees
and over-the-limit fees) should be included in its calculation.
Some commenters noted that even if the effective APR were retained,
if the proposed approach (in proposed Sec. 226.14(e)) of specifying
the fees to be included in the effective APR were followed, creditors
could introduce new fees that might qualify as finance charges, but
might not be included in the effective APR. One commenter supporting
retention suggested that the Board try further consumer testing of an
improved disclosure format for the effective APR, but that if the
testing showed that consumers still did not understand the effective
APR, then it should be eliminated.
Consumer group commenters also expressed concern about the proposal
to require disclosure of separate effective APRs for each feature on a
credit card account. Commenters stated that such an approach would
understate the true cost of credit, and would ``dilute'' the effect of
multiple fees, because the fees would be shared among several different
APRs. One creditor commenter also expressed concern about this
proposal, stating that it would increase programming costs.
Additional consumer research. In March 2008, and again after the
May 2008 Proposal, the Board conducted further consumer research using
one-on-one interviews in the same manner as in the consumer research
prior to the June 2007 Proposal, discussed above. Three rounds of
testing were conducted. A majority of participants in all rounds did
not offer a correct explanation of the effective APR; instead, they
offered a variety of incorrect explanations, including that the
effective APR represented: the interest rate paid on fee amounts; the
interest rate if the consumer paid late (the penalty rate); the APR
after the introductory period ends; or the year-to-date interest
charges expressed as a percentage. Two different labels were used for
the effective APR in the statements shown to participants: the ``Fee-
Inclusive APR'' and the ``APR including Interest and Fees''. The label
that was used did not have a noticeable effect on participant
comprehension.
In addition, in September 2008 the Board conducted additional
consumer research using quantitative methods for the purpose of
validating the qualitative research (one-on-one interviews) conducted
previously. The quantitative consumer research involved surveys of
1,022 consumers at shopping malls in seven locations around the
country. Two research questions were investigated; the first was
designed to determine what percentage of consumers understand the
significance of the effective APR. The interviewer pointed out the
effective APR disclosure for a month in which a cash advance occurred,
triggering a transaction fee and thus making the effective APR higher
than the nominal APR (interest rate). The interviewer then asked what
the effective APR would be in the next month, in which the cash advance
balance was not paid off but no new cash advances occurred. A very
small percentage of respondents gave the correct answer (that the
effective APR would be the same as the nominal APR). Some consumers
stated that the effective APR would be the same in the

[[Page 5319]]

next month as in the current month, others indicated that they did not
know, and the remainder gave other incorrect answers.
The second research question was designed to determine whether the
disclosure of the effective APR adversely affects consumers' ability to
correctly identify the current nominal APR on cash advances. Some
consumers were shown a periodic statement disclosing an effective APR,
while other consumers were shown a statement without an effective APR
disclosure. Consumers were then asked to identify the nominal APR on
cash advances. A greater percentage of consumers who were shown a
statement without an effective APR than of those shown a statement with
an effective APR correctly identified the rate on cash advances. This
finding was statistically significant, as discussed in the December
2008 Macro Report on Quantitative Testing. Some of the consumers who
did not correctly identify the rate on cash advances instead identified
the effective APR as that rate.
The quantitative consumer research conducted by the Board validated
the results of the qualitative testing conducted both before and after
the June 2007 proposal; it indicates that most consumers do not
understand the effective APR, and that for some consumers the effective
APR is confusing and detracts from the effectiveness of other
disclosures.
Final rule. After considering the comments on the proposed
alternatives and the results of the consumer testing, the Board has
determined that it is appropriate to eliminate the requirement to
disclose an effective APR. The Board takes this action pursuant to its
exception and exemption authorities under TILA Section 105.
Section 105(f) directs the Board to make an exemption determination
in light of specific factors. 15 U.S.C. 1604(f)(2). These factors are:
(1) The amount of the loan and whether the disclosure provides a
benefit to consumers who are parties to the transaction involving a
loan of such amount; (2) the extent to which the requirement
complicates, hinders, or makes more expensive the credit process; (3)
the status of the borrower, including any related financial
arrangements of the borrower, the financial sophistication of the
borrower relative to the type of transaction, and the importance to the
borrower of the credit, related supporting property, and coverage under
TILA; (4) whether the loan is secured by the principal residence of the
borrower; and (5) whether the exemption would undermine the goal of
consumer protection.
The Board has considered each of these factors carefully, and based
on that review, has concluded that it has satisfied the criteria for
the exemption determination. Consumer testing conducted prior to the
June 2007 Proposal, in March 2008, and after the May 2008 Proposal
indicates that consumers find the current disclosure of an APR that
combines rates and fees to be confusing. The June 2007 Proposal would
have required disclosure of the nominal interest rate and fees in a
manner that is more readily understandable and comparable across
institutions. The Board believes that this approach can better inform
consumers and further the goals of consumer protection and the informed
use of credit for all types of open-end credit.
The Board also considered whether there were potentially competing
considerations that would suggest retention of the requirement to
disclose an effective APR. First, the Board considered the extent to
which ``sticker shock'' from the effective APR benefits consumers, even
if the disclosure does not enable consumers to meaningfully compare
costs from month to month or for different products. A second
consideration is whether the effective APR may be a hedge against fee-
intensive pricing by creditors, and if so, the extent to which it
promotes transparency. On balance, however, the Board believes that the
benefits of eliminating the requirement to disclose the effective APR
outweigh these considerations.
The consumer testing conducted for the Board supports this
determination. With the exception of one round of testing conducted
prior to the June 2007 Proposal, the overall results of the testing
demonstrated that most consumers do not correctly understand the
effective APR. Some consumers in the testing offered no explanation of
the difference between the corresponding and effective APR, and others
appeared to have an incorrect understanding. The results were similar
in the consumer testing conducted in March 2008 and in the qualitative
and quantitative testing conducted after the May 2008 proposal; in all
rounds of the testing, a majority of participants did not offer a
correct explanation of the effective APR.
Even if some consumers have some understanding of the effective
APR, the Board believes sound reasons support eliminating the
requirement for its disclosure. Disclosure of the effective APR on
periodic statements does not significantly assist consumers in credit
shopping, because the effective APR disclosed on a statement on one
credit card account cannot be compared to the nominal APR disclosed on
a solicitation or application for another credit card account. In
addition, even within the same account, the effective APR for a given
cycle is unlikely to accurately indicate the cost of credit in a future
cycle, because if any of several factors (such as the timing of
transactions and payments and the amount carried over from the prior
cycle) is different in the future cycle, the effective APR will be
different even if the amounts of the transaction and the fee are the
same in both cycles. As to contentions that the effective APR for a
particular billing cycle provides the consumer a rough indication that
the cost of repeating transactions triggering transaction fees is high
in some sense, the Board believes the requirements adopted in the final
rule to disclose interest and fee totals for the cycle and year-to-date
will serve the same purpose. In addition, the interest and fee total
disclosure requirements should address concerns that elimination of the
effective APR would remove disincentives for creditors to introduce new
fees.
The Board is adopting its second alternative proposal under which
disclosure of an effective APR is not required. Under the second
alternative proposal, Sec. 226.7(b)(7) would have been reserved. In
the final rule, proposed Sec. 226.7(b)(14) (change-in-terms and
increased penalty rate summary) is renumbered as Sec. 226.7(b)(7). In
addition, Sample G-18(B), as proposed in June 2007 as part of the first
alternative proposal, is not adopted.
Format requirements for periodic statements. TILA and Regulation Z
currently contain few formatting requirements for periodic statement
disclosures. The Board proposed several proximity requirements in June
2007, based on consumer testing that showed targeted proximity
requirements on periodic statements tended to improve the effectiveness
of disclosures for consumers. Under the June 2007 Proposal, interest
and fees imposed as part of the plan during the statement period would
have been disclosed in a simpler manner and in a consistent location.
Transactions would have been grouped by type, and fee and interest
charge totals would have been required to be located with the
transactions. If an advance notice of changed rates or terms is
provided on or with a periodic statement, the June 2007 Proposal would
have required a summary of the change beginning on the front of the
first page of the periodic statement. The proposal would have linked by

[[Page 5320]]

proximity the payment due date with the late payment fee and penalty
rate that could be triggered by an untimely payment. The minimum
payment amount also would have been linked by proximity with the new
warning required by the Bankruptcy Act about the effects of making only
minimum payments on the account. Grouping these disclosures together
was intended to enhance consumers' informed use of credit.
Model clauses were proposed to illustrate the revisions, to
facilitate compliance. The Board published for the first time proposed
forms illustrating front sides of a periodic statement, as a compliance
aid. The Board published Forms G-18(G) and G-18(H) to illustrate how a
periodic statement might be designed to comply with the requirements of
Sec. 226.7. Proposed Forms G-18(G) and G-18(H) would have contained
some additional disclosures that are not required by Regulation Z. The
forms also would have presented information in some additional formats
that are not required by Regulation Z.
Some consumer groups applauded the Board's prescriptive approach
for periodic statement disclosures, to give effect to the Board's
findings about presenting information in a manner that makes it easier
for consumers to understand. A federal banking agency noted that
standardized periodic statement disclosures may reduce consumer
confusion that may result from variations among creditors.
Most industry commenters strongly opposed the Board's approach as
being overly prescriptive and costly to implement. They strongly urged
the Board to permit additional flexibility, or simply to retain the
current requirement to provide ``clear and conspicuous'' disclosures.
For example, these commenters asked the Board to eliminate any
requirement that dictated the order or proximity of disclosures, along
with any requirement that creditors' disclosures be substantially
similar to model forms or samples. Although the Board's testing
suggested certain formatting may be helpful to consumers, many
commenters believe other formats might be as helpful. They stated that
not all consumers place the same value on a certain piece of
information, and creditors should be free to tailor periodic statements
to the needs of their customers. Further, although participants in the
Board's consumer testing may have indicated they preferred one format
over another, commenters believe consumers are not confused by other
formats, and the cost to reformat paper-based and electronic statements
is not justified by the possible benefits. For example, commenters said
the proposed requirements will require lengthier periodic statements,
which is an additional ongoing expense independent of the significant
one-time cost to redesign statements.
The final rule retains many of the formatting changes the Board
proposed. In response to further consumer testing results and comments,
however, the Board is providing flexibility to creditors where the
changes proposed by the Board have not demonstrated consumer benefit
sufficient to justify the expense to creditors of reformatting the
periodic statement. For example, while the Board is adopting the
proposal to group interest and fees, the Board is not adopting the
requirement to group transactions (including credits) by transaction
type. See the section-by-section analysis to Sec. 226.7(b)(2), (b)(3),
and (b)(6) below. Furthermore, if an advance notice of a change in
rates or terms is provided on or with a periodic statement, the final
rule requires that a summary of the change appear on the front of the
periodic statement, but unlike the proposal, the summary is not
required to begin on the front of the first page of the statement. See
the section-by-section analysis to Sec. 226.7(b)(7). Moreover,
proximity requirements for certain information in the periodic
statement have been retained, but the information does not need to be
presented substantially similar to the Board's model forms. See the
section-by-section analysis to Sec. 226.7(b)(13).
Deferred interest plans. Current comment 7-3 provides guidance on
various periodic statement disclosures for deferred-payment
transactions, such as when a consumer may avoid interest charges if a
purchase balance is paid in full by a certain date. The substance of
comment 7-3, revised to conform to other proposed revisions in Sec.
226.7(b), was proposed in June 2007 as comment 7(b)-1, which applies to
open-end (not home-secured) plans. The comment permits, but does not
require, creditors to disclose during the promotional period
information about accruing interest, balances, interest rates, and the
date in a future cycle when the balance must be paid in full to avoid
interest.
Some industry commenters asked the Board to provide additional
guidance about how and where this optional information may be disclosed
if the Board adopts proposed formatting requirements for periodic
statements. Some consumer commenters urged the Board to require
creditors to disclose on each periodic statement the date when any
promotional offer ends.
Comment 7(b)-1 is adopted as proposed, with technical revisions for
clarity without any intended substantive change. For example, the
transactions described in the comment are now referred to as ``deferred
interest'' rather than ``deferred-payment.'' The comment also has been
revised to note that it does not apply to card issuers that are subject
to 12 CFR 227.24 or similar law which does not permit the assessment of
deferred interest.
The Board believes the formatting requirements for periodic
statements do not interfere with creditors' ability to provide
information about deferred interest transactions or other promotions.
Comment 7(b)-1, retained as proposed, clarifies that creditors are
permitted, but not required, to disclose on each periodic statement the
date in a future cycle when the balance on the deferred interest
transaction must be paid in full to avoid interest charges. Similarly,
subject to the requirement to provide clear and conspicuous
disclosures, creditors may, but are not required to, disclose when
promotional offers end. The final rule does not require creditors to
disclose on each periodic statement the date when any promotional offer
ends. The Board believes that many creditors currently provide such
information prior to the end of the promotional period.
7(b)(2) Identification of Transactions
Under the June 2007 Proposal, Sec. 226.7(b)(2) would have required
creditors to identify transactions in accordance with rules set forth
in Sec. 226.8. This provision implements TILA Section 127(b)(2),
currently at Sec. 226.7(b). The section-by-section analysis to Sec.
226.8 discusses the Board's proposal to revise and significantly
simplify the rules for identifying transactions, which the Board adopts
as proposed.
Under the June 2007 Proposal, the Board introduced a format
requirement to group transactions by type, such as purchases and cash
advances, based on consumer testing conducted for the Board. In
consumer testing conducted prior to the June 2007 Proposal,
participants in the Board's consumer testing found such groupings
helpful. Moreover, participants noticed fees and interest charges more
readily when transactions were grouped together, the fees imposed for
the statement period were not interspersed among the transactions, and
the interest and fees were disclosed in proximity to the transactions.
Proposed Sample G-18(A) would have illustrated the proposal.
Most industry commenters opposed the proposed requirement to group

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transactions by type. Overall, commenters opposing this aspect of the
proposal believe the cost to implement the change exceeds the benefit
consumers might receive. Some commenters reported that their customers
or consumer focus groups preferred chronological listings. Similarly,
some commenters believe consumer understanding is enhanced by a
chronological listing that permits fees related to a transaction, such
as foreign transaction fees, to appear immediately below the
transaction. Other commenters were concerned that under the proposal,
creditors would no longer be able to disclose transactions grouped by
authorized user, or by other sub-accounts such as for promotions.
In quantitative consumer testing conducted in the fall of 2008, the
Board tested consumers' ability to identify specific transactions and
fees on periodic statements that grouped transactions by transaction
type versus those that listed transactions in chronological order.
After they were shown either a grouped periodic statement or a
chronological periodic statement, consumer testing participants were
asked to identify the dollar amount of the first cash advance in the
statement period. In order to test the effect of grouping fees,
participants also were asked to identify the number of fees charged
during the statement period. While testing evidence showed that the
grouped periodic statement performed better among participants with
respect to both questions, the improved performance of the grouped
periodic statement was more significant with regard to consumers'
ability to identify fees.
Based on these testing results and comments the Board received on
the proposal to require transactions to be grouped by transaction type
on periodic statements, the final rule requires creditors to group fees
and interest together into a separate category but permits flexibility
in how transactions may be listed. The Board believes that it is
especially important for consumers to be able to identify fees and
interest in order to assess the overall cost of credit. As further
discussed below in the section-by-section analysis to Sec.
226.7(b)(6), because testing evidence suggests that consumers can more
easily find fees when they are grouped together under a separate
heading rather than when they are combined with a consumer's
transactions in a chronological list, the Board is adopting the
proposal that would require the grouping of fees and interest on the
statement.
With respect to grouping of transactions, such as purchases and
cash advances, the Board believes that the modest improvement in
consumers' ability to identify specific transactions in a grouped
periodic statement may not justify the high cost to many creditors of
reformatting periodic statements and coding transactions in order to
group transactions by type. Furthermore, providing flexibility in how
transactions may be presented would allow creditors to disclose
transactions grouped by authorized user or by other sub-accounts, which
consumers may find useful. In addition, in consumer testing conducted
for the Board prior to the fall of 2008, most consumers indicated that
they already review the transactions on their periodic statements. The
Board expects that consumers will continue to review their
transactions, and that consumers generally are aware of the
transactions in which they have engaged during the billing period.
Accordingly, the Board has withdrawn the requirement to group
transactions by type in proposed Sec. 226.7(b)(2). Comment 7(b)(2)-1
has been revised from the proposal to permit, but not require,
creditors to group transactions by type. Therefore, creditors may list
transactions chronologically, group transactions by type, or organize
transactions in any other way that would be clear and conspicuous to
consumers. However, consistent with Sec. 226.7(b)(6), all fees and
interest must be grouped together under a separate heading and may not
be interspersed with transactions.
7(b)(3) Credits
Creditors are required to disclose any credits to the account
during the billing cycle. Creditors typically disclose credits among
other transactions. The Board did not propose substantive changes to
the disclosure requirements for credits in June 2007. However,
consistent with the format requirements proposed in Sec. 226.7(b)(2),
the June 2007 Proposal would have required credits and payments to be
grouped together. Proposed Sample G-18(A) would have illustrated the
proposal.
Few commenters directly addressed issues related to disclosing
credits on periodic statements, although many industry commenters
opposed format requirements to group transactions (thus, credits) by
type rather than in a chronological listing. In response to a request
for guidance on the issue, comment 7(b)(3)-1 is modified from the
proposal to clarify that credits may be distinguished from transactions
in any way that is clear and conspicuous, for example, by use of debit
and credit columns or by use of plus signs and/or minus signs.
As discussed in the section-by-section analysis to Sec.
226.7(b)(2) above, the Board is not requiring creditors to group
transactions by type. For the reasons discussed in that section and in
the section-by-section analysis to Sec. 226.7(b)(6) below, the Board
is only requiring creditors to group fees and interest into a separate
category, while credits, like transactions, may be presented in any
manner that is clear and conspicuous to consumers.
Combined deposit account and credit account statements. Currently,
comment 7(c)-2 permits creditors to commingle credits related to
extensions of credit and credits related to non-credit accounts, such
as for a deposit account. In June 2007, the Board solicited comment on
the need for alternatives to the proposed format requirements to
segregate transactions and credits, such as when a depository
institution provides on a single periodic statement account activity
for a consumer's checking account and an overdraft line of credit.
As discussed above in the section-by-section analysis to Sec.
226.7(b)(2) above, the Board is not requiring creditors to segregate
transactions and credits. Therefore, formatting alternatives for
combined deposit account and credit account statements are no longer
necessary. Comment 7(b)(3)-3, as renumbered in the June 2007 Proposal,
is revised for clarity and is adopted as proposed.
7(b)(4) Periodic Rates
Periodic rates. TILA Section 127(b)(5) and current Sec. 226.7(d)
require creditors to disclose all periodic rates that may be used to
compute the finance charge, and an APR that corresponds to the periodic
rate multiplied by the number of periods in a year. 15 U.S.C.
1637(b)(5); Sec. 226.14(b). In the June 2007 Proposal, the Board
proposed to eliminate, for open-end (not home-secured) plans, the
requirement to disclose periodic rates on periodic statements.
Most industry commenters supported the proposal, believing that
periodic rates are not important to consumers. Some consumer groups
opposed eliminating the periodic rate as a disclosure requirement,
stating that it is easier for consumers to check the calculation of
their interest charges when the rate appears on the statement. One
industry commenter asked the Board to clarify that the rule would not
prohibit creditors from providing, at their option, the periodic rate
close to the APR and balance to which the rates relate.

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The final rule eliminates the requirement to disclose periodic
rates on periodic statements, as proposed, pursuant to the Board's
exception and exemption authorities under TILA Section 105. Section
105(a) authorizes the Board to make exceptions to TILA to effectuate
the statute's purposes, which include facilitating consumers' ability
to compare credit terms and helping consumers avoid the uninformed use
of credit. 15 U.S.C. 1601(a), 1604(a). Section 105(f) authorizes the
Board to exempt any class of transactions (with an exception not
relevant here) from coverage under any part of TILA if the Board
determines that coverage under that part does not provide a meaningful
benefit to consumers in the form of useful information or protection.
15 U.S.C. 1604(f)(1). Section 105(f) directs the Board to make this
determination in light of specific factors. 15 U.S.C. 1604(f)(2). These
factors are (1) the amount of the loan and whether the disclosure
provides a benefit to consumers who are parties to the transaction
involving a loan of such amount; (2) the extent to which the
requirement complicates, hinders, or makes more expensive the credit
process; (3) the status of the borrower, including any related
financial arrangements of the borrower, the financial sophistication of
the borrower relative to the type of transaction, and the importance to
the borrower of the credit, related supporting property, and coverage
under TILA; (4) whether the loan is secured by the principal residence
of the borrower; and (5) whether the exemption would undermine the goal
of consumer protection.
The Board considered each of these factors carefully, and based on
that review and the comments received, determined that the exemption is
appropriate. In consumer testing conducted for the Board prior to the
June 2007 Proposal, consumers indicated they do not use periodic rates
to verify interest charges. Consistent with the Board's June 2007
Proposal not to allow periodic rates to be disclosed in the tabular
summary on or with credit card applications and disclosures, requiring
periodic rates to be disclosed on periodic statements may detract from
more important information on the statement, and contribute to
information overload. Eliminating periodic rates from the periodic
statement has the potential to better inform consumers and further the
goals of consumer protection and the informed use of credit for open-
end (not home-secured) credit.
The Board notes that under the final rule, creditors may continue
to disclose the periodic rate, so long as the additional information is
presented in a way that is consistent with creditors' duty to provide
required disclosures clearly and conspicuously. See comment app. G-10.
Labeling APRs. Currently creditors are provided with considerable
flexibility in identifying the APR that corresponds to the periodic
rate. Current comment 7(d)-4 permits labels such as ``corresponding
annual percentage rate,'' ``nominal annual percentage rate,'' or
``corresponding nominal annual percentage rate.'' The June 2007
Proposal would have required creditors offering open-end (not home-
secured) plans to label the APR disclosed under proposed Sec.
226.7(b)(4) as ``annual percentage rate.'' The proposal was intended to
promote uniformity and to distinguish between this ``interest only''
APR and the effective APR that includes interest and fees, as proposed
to be enhanced under one alternative in the June 2007 Proposal.
Commenters generally supported the proposal, and the labeling
requirement is adopted as proposed. Forms G-18(F) and G-18(G)
illustrate periodic statements that disclose an APR but no periodic
rates.
Rates that ``may be used.'' Currently, comment 7(d)-1 interprets
the requirement to disclose all periodic rates that ``may be used'' to
mean ``whether or not [the rate] is applied during the cycle.'' For
example, rates on cash advances must be disclosed on all periodic
statements, even for billing periods with no cash advance activity or
cash advance balances. The regulation and commentary do not clearly
state whether promotional rates, such as those offered for using checks
accessing credit card accounts, that ``may be used'' should be
disclosed under current Sec. 226.7(d) regardless of whether they are
imposed during the period. See current comment 7(d)-2. The June 2007
Proposal included a limited exception to TILA Section 127(b)(5) to
effectuate the purposes of TILA to require disclosures that are
meaningful and to facilitate compliance.
Under Sec. 226.7(b)(4)(ii) of the June 2007 Proposal, creditors
would have been required to disclose promotional rates only if the rate
actually applied during the billing period. For example, a card issuer
may impose a 22 percent APR for cash advances but offer for a limited
time a 1.99 percent promotional APR for advances obtained through the
use of a check accessing a credit card account. Creditors are currently
required to disclose, in this example, the 22 percent cash advance APR
on periodic statements whether or not the consumer obtains a cash
advance during the previous statement period. The proposal clarified
that creditors are not required to disclose the 1.99 percent
promotional APR unless the consumer used the check during the statement
period. In the June 2007 Proposal, the Board noted its belief that
interpreting TILA to require the disclosure of all promotional rates
would be operationally burdensome for creditors and result in
information overload for consumers. The proposed exception did not
apply to HELOCs covered by Sec. 226.5b.
Industry and consumer group commenters generally supported the
proposal that requires promotional rates to be disclosed only if the
rate actually applied during the billing period. Some consumer groups
urged the Board to go further and prohibit creditors from disclosing a
promotional rate that has not actually been applied, to avoid possible
consumer confusion over a multiplicity of rates. For the reasons stated
in the June 2007 Proposal and discussed above, the Board is adopting
Sec. 226.7(b)(4)(ii) as proposed, with minor changes to the
description of the rate and time period, consistent with Sec.
226.16(g). See also section-by-section analysis to Sec. 226.7(a)(4),
which discusses extending the exception to HELOCs subject to Sec.
226.5b.
Combining interest and other charges. Currently, creditors must
disclose finance charges attributable to periodic rates. These costs
are typically interest charges but may include other costs such as
premiums for required credit insurance. If applied to the same balance,
creditors may disclose each rate, or a combined rate. See current
comment 7(d)-3. As discussed below, consumer testing for the Board
conducted prior to the June 2007 Proposal indicated that participants
appeared to understand credit costs in terms of ``interest'' and
``fees,'' and the June 2007 Proposal would have required disclosures to
distinguish between interest and fees. To the extent consumers
associate periodic rates with ``interest,'' it seems unhelpful to
consumers' understanding to permit creditors to include periodic rate
charges other than interest in the dollar cost disclosed. Thus, in the
June 2007 Proposal guidance permitting periodic rates attributable to
interest and other finance charges to be combined would have been
eliminated for open-end (not home-secured) plans.

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Few comments were received on this aspect of the proposal. Some
consumer groups strongly opposed the proposal if the Board determined
to eliminate the effective APR, as proposed under one alternative in
the June 2007 Proposal. They believe that because the required credit
insurance premium is calculated as a percentage of the outstanding
balance, creditors could understate the percentage consumers must pay
for carrying a balance, which would conceal the true cost of credit.
The final rule provides that creditors offering open-end (not home-
secured) plans that impose finance charges attributable to periodic
rates (other than interest) must disclose the amount in dollars, as a
fee, as proposed. See section-by-section analysis to Sec. 226.7(b)(6)
below. Many fees associated with credit card accounts or other open-end
plans are a percentage of the transaction or balance, such as balance
transfer or cash advance fees. The Board believes that disclosing fees
such as for credit insurance premiums as a separate dollar amount
rather than as part of a percentage provides consistency and, based on
the Board's consumer testing, may be more helpful to many consumers.
In addition, a new comment 7(b)(4)-4 (proposed in June 2007 as
comment 7(b)(4)-7) is added to provide guidance to creditors when a fee
is imposed, remains unpaid, and interest accrues on the unpaid balance.
The comment, adopted as proposed, provides that creditors disclosing
fees in accordance with the format requirements of Sec. 226.7(b)(6)
need not separately disclose which periodic rate applies to the unpaid
fee balance.
In technical revisions, the substance of footnotes referenced in
Sec. 226.7(d) is moved to the regulation and comment 7(b)(4)-5, as
proposed.
7(b)(5) Balance on Which Finance Charge Is Computed
Creditors must disclose the amount of the balance to which a
periodic rate was applied and an explanation of how the balance was
determined. The Board provides model clauses creditors may use to
explain common balance computation methods. 15 U.S.C. 1637(b)(7);
current Sec. 226.7(e); and Model Clauses G-1. The staff commentary to
current Sec. 226.7(e) interprets how creditors may comply with TILA in
disclosing the ``balance,'' which typically changes in amount
throughout the cycle, on periodic statements.
Amount of balance. The June 2007 Proposal did not change how
creditors are required to disclose the amount of the balance on which
finance charges are computed. Proposed comment 7(b)(5)-4 would have
permitted creditors, at their option, not to include an explanation of
how the finance charge may be verified for creditors that use a daily
balance method. Currently, creditors that use a daily balance method
are permitted to disclose an average daily balance for the period,
provided they explain that the amount of the finance charge can be
verified by multiplying the average daily balance by the number of days
in the statement period, and then applying the periodic rate. The Board
proposed to retain the rule permitting creditors to disclose an average
daily balance but would have eliminated the requirement to provide the
explanation. Consumer testing conducted for the Board prior to the June
2007 Proposal suggested that the explanation may not be used by
consumers as an aid to calculate their interest charges. Participants
suggested that if they attempted without satisfaction to calculate
balances and verify interest charges based on information on the
periodic statement, they would call the creditor for assistance. Thus,
the final rule adopts comment 7(b)(5)-4, as proposed, which permits
creditors, at their option, not to include an explanation of how the
finance charge may be verified for creditors that use a daily balance
method.
The June 2007 Proposal would have required creditors to refer to
the balance as ``balances subject to interest rate,'' to complement
proposed revisions intended to further consumers' understanding of
interest charges, as distinguished from fees. The final rule adopts the
required description as proposed. See section-by-section analysis to
Sec. 226.7(b)(6). Forms G-18(F) and 18(G) (proposed as Forms G-18(G)
and G-18(H)) illustrate this format requirement.
Explanation of balance computation method. The June 2007 Proposal
would have contained an alternative to providing an explanation of how
the balance was determined. Under proposed Sec. 226.7(b)(5), a
creditor that uses a balance computation method identified in Sec.
226.5a(g) would have two options. The creditor could: (1) Provide an
explanation, as the rule currently requires, or (2) identify the name
of the balance computation method and provide a toll-free telephone
number where consumers may obtain more information from the creditor
about how the balance is computed and resulting interest charges are
determined. If the creditor uses a balance computation method that is
not identified in Sec. 226.5a(g), the creditor would have been
required to provide a brief explanation of the method. The Board's
proposal was guided by the following factors.
Calculating balances on open-end plans can be complex, and requires
an understanding of how creditors allocate payments, assess fees, and
record transactions as they occur during the cycle. Currently, neither
TILA nor Regulation Z requires creditors to disclose on periodic
statements all the information necessary to compute a balance, and
requiring that level of detail appears not to be warranted. Although
the Board's model clauses are intended to assist creditors in
explaining common methods, consumers continue to find these
explanations lengthy and complex. As stated earlier, consumer testing
conducted prior to the June 2007 Proposal indicated that consumers call
the creditor for assistance when they attempt without success to
calculate balances and verify interest charges.
Providing the name of the balance computation method (or a brief
explanation, if the name is not identified in Sec. 226.5a(g)), along
with a reference to where additional information may be obtained
provides important information in a simplified way, and in a manner
consistent with how consumers obtain further balance computation
information.
Some consumer groups urged the Board to continue to require
creditors to disclose the balance computation method on the periodic
statement. They believe that the information is important for consumers
that check creditors' interest calculations. Consumers, a federal
banking agency and a member of Congress were among those who suggested
banning a computation method commonly called ``two-cycle.'' As an
alternative, the agency suggested requiring a cautionary disclosure on
the periodic statement about the two-cycle balance computation method
for those creditors that use the method.
Industry commenters generally favored the proposal, although one
commenter would eliminate identifying the name of the balance
computation method. Some commenters urged the Board to add ``daily
balance'' method to Sec. 226.5a(g), to enable creditors that use that
balance computation method to take advantage of the alternative
disclosure.
Some consumer groups further urged the Board to require creditors,
when responding to a consumer who has called the creditor's toll-free
number established pursuant to the proposed rules, to offer to mail
consumers a

[[Page 5324]]

document that provides a complete set of rules for calculating the
balances and applying the periodic rate, and to post this information
on creditors' Web sites. An industry commenter asked the Board to
permit a creditor, in lieu of a reference to a toll-free telephone
number, to reference the Board's Web site address that will be provided
with the application and account-opening summary tables, or the
creditor's Web site address, because a Web site can better provide
accurate, clear, and consistent information about balance computation
methods. The Board is adopting Sec. 226.7(b)(5), as proposed for the
reasons stated above. See also Sec. 226.5a(g), which is revised to
include the daily balance method as a common balance computation
method. The Board is not requiring creditors also to refer to the
creditor's Web site for an explanation of the balance computation
method, or to mail written explanations upon consumers' request, to
ease compliance. Consumers who do not understand the written or Web-
based explanation will likely call the creditor in any event. However,
a creditor could choose to disclose a reference to its Web site or
provide a written explanation to consumers, at the creditor's option.
Current comment 7(e)-6, which refers creditors to guidance in comment
6(a)(3)-1 about disclosing balance computation methods is deleted as
unnecessary, as proposed. Elsewhere in today's Federal Register, the
Board is adopting a rule that prohibits the two-cycle balance
computation method as unfair for consumer credit card accounts.
Therefore any cautionary disclosure is largely unnecessary.
7(b)(6) Charges Imposed
As discussed in the section-by-section analysis to Sec. 226.6, the
Board proposed in June 2007 to reform cost disclosure rules for open-
end (not home-secured) plans, in part, to ensure that all charges
assessed as part of an open-end (not home-secured) plan are disclosed
before they are imposed and to simplify the rules for creditors to
identify such charges. Consistent with the proposed revisions at
account opening, the proposed revisions to cost disclosures on periodic
statements were intended to simplify how creditors identify the dollar
amount of charges imposed during the statement period.
Consumer testing conducted for the Board prior to the June 2007
Proposal indicated that most participants reviewing mock periodic
statements could not correctly explain the term ``finance charge.'' The
revisions proposed in June 2007 were intended to conform labels of
charges more closely to common understanding, ``interest'' and
``fees.'' Format requirements were intended to help ensure that
consumers notice charges imposed during the statement period.
Two alternatives were proposed: One addressed interest and fees in
the context of an effective APR disclosure, the second assumed no
effective APR is required to be disclosed.
Charges imposed as part of the plan. Proposed Sec. 226.7(b)(6)
would have required creditors to disclose the amount of any charge
imposed as part of an open-end (not home-secured) plan, as stated in
Sec. 226.6(b)(3) (proposed as Sec. 226.6(b)(1)). Guidance on which
charges are deemed to be imposed as part of the plan is in Sec.
226.6(b)(3) and accompanying commentary. Although coverage of charges
was broader under the proposed standard of ``charges imposed as part of
the plan'' than under current standards for finance charges and other
charges, the Board stated its understanding that creditors have been
disclosing on the statement all charges debited to the account
regardless of whether they are now defined as ``finance charges,''
``other charges,'' or charges that do not fall into either category.
Accordingly, the Board did not expect the proposed change to affect
significantly the disclosure of charges on the periodic statement.
Interest charges and fees. For creditors complying with the new
cost disclosure requirements proposed in June 2007, the current
requirement in Sec. 226.7(f) to label finance charges as such would
have been eliminated. See current Sec. 226.7(f). Testing of this term
with consumers conducted prior to the June 2007 Proposal found that it
did not help them to understand charges. Instead, charges imposed as
part of an open-end (not home-secured) plan would have been disclosed
under the labels of ``interest charges'' or ``fees.'' Consumer testing
also supplied evidence that consumers may generally understand interest
as the cost of borrowing money over time and view other costs--
regardless of their characterization under TILA and Regulation Z--as
fees (other than interest). The Board's June 2007 Proposal was
consistent with this evidence.
TILA Section 127(b)(4) requires creditors to disclose on periodic
statements the amount of any finance charge added to the account during
the period, itemized to show amounts due to the application of periodic
rates and the amount imposed as a fixed or minimum charge. 15 U.S.C.
1637(b)(4). This requirement is currently implemented in Sec.
226.7(f), and creditors are given considerable flexibility regarding
totaling or subtotaling finance charges attributable to periodic rates
and other fees. See current Sec. 226.7(f) and comments 7(f)-1, -2, and
-3. To improve uniformity and promote the informed use of credit, Sec.
226.7(b)(6)(ii) of the June 2007 Proposal would have required creditors
to itemize finance charges attributable to interest, by type of
transaction, labeled as such, and would have required creditors to
disclose, for the statement period, a total interest charge, labeled as
such. Although creditors are not currently required to itemize interest
charges by transaction type, creditors often do so. For example,
creditors may separately disclose the dollar interest costs associated
with cash advance and purchase balances. Based on consumer testing
conducted prior to the June 2007 Proposal, the Board stated its belief
that consumers' ability to make informed decisions about the future use
of their open-end plans--primarily credit card accounts--may be
promoted by a simply-labeled breakdown of the current interest cost of
carrying a purchase or cash advance balance. The breakdown enables
consumers to better understand the cost for using each type of
transaction, and uniformity among periodic statements allows consumers
to compare one account with other open-end plans the consumer may have.
Because the Board believes that consumers benefit when interest
charges are itemized by transaction type, which many creditors do
currently, the Board is adopting Sec. 226.6(b)(6)(ii) as generally
proposed, with one clarification that all interest charges be grouped
together. As a result, all interest charges on an account, whether they
are attributable to different authorized users or sub-accounts, must be
disclosed together.
Under the June 2007 Proposal, finance charges attributable to
periodic rates other than interest charges, such as required credit
insurance premiums, would have been required to be identified as fees
and would not have been permitted to be combined with interest costs.
See proposed comment 7(b)(4)-3. The Board did not receive comment on
this provision, and the comment is adopted as proposed.
Current Sec. 226.7(h) requires the disclosure of ``other charges''
parallel to the requirement in TILA Section 127(a)(5) and current Sec.
226.6(b) to disclose such charges at account opening. 15 U.S.C.
1637(a)(5). Consistent with current rules to disclose ``other
charges,'' proposed Sec. 226.7(b)(6)(iii) required that other costs be
identified consistent with the feature or type, and itemized. The

[[Page 5325]]

proposal differed from current requirements in the following respect:
Fees were required to be grouped together and a total of all fees for
the statement period were required. Currently, creditors typically
include fees among other transactions identified under Sec. 226.7(b).
In consumer testing conducted prior to the June 2007 Proposal,
consumers were able to more accurately and easily determine the total
cost of non-interest charges when fees were grouped together and a
total of fees was given than when fees were interspersed among the
transactions without a total. (Proposed Sec. 226.7(b)(6)(iii) also
would have required that certain fees included in the computation of
the effective APR pursuant to Sec. 226.14 must be labeled either as
``transaction fees'' or ``fixed fees,'' under one proposed approach.
This proposed requirement is discussed in further detail in the general
discussion on the effective APR in the section-by-section analysis to
Sec. 226.7(b).)
To highlight the overall cost of the credit account to consumers,
under the June 2007 Proposal, creditors would have been required to
disclose the total amount of interest charges and fees for the
statement period and calendar year to date. Comment 7(b)(6)-3 would
have provided guidance on how creditors may disclose the year-to-date
totals at the end of a calendar year. This aspect of the proposal was
based on consumer testing that indicated that participants noticed
year-to-date cost figures and would find the numbers helpful in making
future financial decisions. The proposal was intended to provide
consumers with information about the cumulative cost of their credit
plans over a significant period of time. This requirement is discussed
further below.
Format requirements. In consumer testing conducted for the Board
prior to the June 2007 Proposal, consumers consistently reviewed
transactions identified on their periodic statements and noticed fees
and interest charges, itemized and totaled, when they were grouped
together with the transactions on the statement. Some creditors also
disclose these costs in account summaries or in a progression of
figures associated with disclosing finance charges attributable to
periodic rates. The June 2007 Proposal did not affect creditors'
flexibility to provide this information in such summaries. See Proposed
Forms G-18(G) and G-18(H), which would have illustrated, but not
required, such summaries. However, the Board stated in the June 2007
Proposal its belief that TILA's purpose to promote the informed use of
credit would be furthered significantly if consumers are uniformly
provided, in a location they routinely review, basic cost information--
interest and fees--that enables consumers to compare costs among their
open-end plans. The Board proposed that charges required to be
disclosed under Sec. 226.7(b)(6)(i) would be grouped together with the
transactions identified under Sec. 226.7(b)(2), substantially similar
to Sample G-18(A) in Appendix G to part 226. Proposed Sec.
226.7(b)(6)(iii) would have required non-interest fees to be itemized
and grouped together, and a total of fees to be disclosed for the
statement period and calendar year to date. Interest charges would have
been required to be itemized by type of transaction, grouped together,
and a total of interest charges disclosed for the statement period and
year to date. Proposed Sample G-18(A) in Appendix G to part 226 would
have illustrated the proposal.
Labeling costs imposed as part of the plan as fees or interest.
Commenters generally supported the Board's approach to label costs as
either ``fees'' or ``interest charge'' rather than ``finance charge''
as aligning more closely with consumers' understanding.
For the reasons stated above, the requirement in Sec. 226.7(b)(6)
to label costs imposed as part of the plan as either fees or interest
charge is adopted as proposed. Because the Board is adopting the
alternative to eliminate the requirement to disclose an effective APR,
the proposed requirement to label fees as ``transaction'' or ``fixed''
fees as a part of the proposed alternative to improve consumers'
understanding of the effective APR is not included in the final rule.
Grouping fees together, identified by feature or type, and
itemized. Some consumer groups supported the proposal to group fees
together, and to identify and itemize them by feature or type. They
believe that segregating and highlighting fees is likely to make
consumers more aware of fees, and in turn, to assist consumers in
avoiding them.
Most industry commenters opposed this aspect of the proposal, as
overly prescriptive. As discussed in the section-by-section analysis to
Sec. 226.7(b)(2) regarding the requirement to group transactions
together, many commenters believe the proposal would hinder rather than
help consumer understanding if transaction-related fees are disclosed
in a separate location from the transaction itself. They assert that
consumers prefer a chronological listing of debits and credits to the
account, and even if consumers prefer groupings, chronological listings
are not confusing and consumer preference does not justify the cost to
the industry to redesign periodic statements.
Other industry commenters stated that currently they separately
display account activity in a variety of ways, such as by user,
feature, or promotion. They believe consumers find these distinctions
to be helpful in managing their accounts, and urged the Board to allow
creditors to continue to display information in this manner.
As discussed in the section-by-section analysis to Sec.
226.7(b)(2) above, in the fall of 2008, the Board tested consumers'
ability to identify specific transactions and fees on periodic
statements where transactions were grouped by transaction type and on
periodic statements that listed transactions in chronological order.
Testing evidence showed that the grouped periodic statement performed
better among participants with respect to identifying specific
transactions and fees, though the improved performance of the grouped
periodic statement was more significant with regard to the
identification of fees.
Moreover, consumers' ability to match a transaction fee to the
transaction giving rise to the fee was also tested. Among participants
who correctly identified the transaction to which they were asked to
find the corresponding fee, a larger percentage of consumers who saw a
statement on which account activity was arranged chronologically were
able to match the fee to the transaction than when the statement was
grouped. However, out of the participants who were able to identify the
transaction to which they were asked to find the corresponding fee, the
percentage of participants able to find the corresponding fee was very
high for both types of listings.
The Board believes that the ability to identify all fees is
important for consumers to assess their cost of credit. As discussed
above, since the vast majority of consumers do not appear to comprehend
the effective APR, the Board believes highlighting fees and interest
for consumers will more effectively inform consumers of their costs of
credit. Because consumer testing results indicate that grouping fees
together helped consumers find them more easily, the Board is adopting
the proposal under Sec. 226.7(b)(6)(iii) to require creditors to group
fees together. All fees assessed on the account must be grouped
together under one heading even if fees may be attributable to
different users of the account or to different sub-accounts.

[[Page 5326]]

Cost totals for the statement period and year to date. Consumer
group commenters supported the proposal to disclose cost totals for the
statement period, as well as a year-to-date total. One commenter urged
the Board to disclose total fees and interest charged for the cycle,
regardless of the Board's decision regarding the effective APR. The
commenter also stated that year-to-date totals in dollars provide
consumers with the overall cost of the credit on an annualized basis.
In general, industry commenters opposed the requirement for year-
to-date totals as unnecessary and costly to implement. Some trade
associations urged the Board to discuss with data processors potential
costs to implement the year-to-date totals, and to provide sufficient
implementation time if the requirement is adopted. Suggested
alternatives to the proposal included providing the information on the
first or last statement of the year, at the end of the year to
consumers who request it, or to provide access to year-to-date
information on-line.
The Board believes that providing consumers with the total of
interest and fee costs, expressed in dollars, for the statement period
and year to date is a significant enhancement to consumers' ability to
understand the overall cost of credit for the account, and has adopted
the requirement as proposed. The Board's testing indicates consumers
notice and understand credit costs expressed in dollars. Aggregated
cost information enables consumers to evaluate how the use of an
account may impact the amount of interest and fees charged over the
year and thus promotes the informed use of credit. Discussions with
processors indicated that programming costs to capture year-to-date
information are not material.
Comment 7(b)(6)-3 has been added to provide additional flexibility
to creditors in providing year-to-date totals, in response to a
commenter's request. Under the revised comment, creditors sending
monthly statements may comply with the requirement to provide a year-to
date total using a January 1 through December 31 time period, or the
period representing 12 monthly cycles beginning in November and ending
in December of the following year or beginning in December and ending
in January of the following year. This guidance also applies when
creditors send quarterly statements.
Some commenters asked the Board to provide guidance on creditors'
duty to reflect refunded fees or interest in year-to-date totals.
Comment 7(b)(6)-5 has been added to reflect that creditors may, but are
not required to, reflect the adjustment in the year-to-date totals,
nor, if an adjustment is made, to provide an explanation about the
reason for the adjustment, to ease compliance. Such adjustments should
not affect the total fees or interest charges imposed for the current
statement period.
7(b)(7) Change-in-terms and Increased Penalty Rate Summary for Open-end
(not Home-secured) Plans
A major goal of the Board's review of Regulation Z's open-end
credit rules is to address consumers' surprise at increased rates (and/
or fees). In the June 2007 Proposal, the Board sought to address the
issue in Sec. 226.9(c)(2) and (g) to give more time before new rates
and changes to significant costs become effective. The Board and other
federal banking agencies further proposed in May 2008, subject to
certain exceptions, a prohibition on increasing the APR applicable to
balances outstanding at the end of the fourteenth day after a notice
disclosing the change in the APR is provided to the consumer.
As part of the June 2007 Proposal, the Board also proposed new
Sec. 226.7(b)(14), which would have required a summary of key changes
to precede transactions when a change-in-terms notice or a notice of a
rate increase due to delinquency or default or as a penalty is provided
on or with a periodic statement. Samples G-20 and G-21 in Appendix G to
part 226 illustrated the proposed format requirement under Sec.
226.7(b)(14) and the level of detail required for the notice under
Sec. 226.9(c)(2)(iii) and (g)(3). Proposed Sample Forms G-18(G) and G-
18(H) would have illustrated the placement of these notices on a
periodic statement. The summary would have been required to be
displayed in a table, in no less than 10-point font. See Sec.
226.9(c)(2)(iii)(B) and (g)(3)(ii), Sec. 226.5(a)(3). The proposed
format rule was intended to enable consumers to notice more easily
changes in their account terms. Increasing the time period to act is
ineffective if consumers do not see the change-in-terms notice. In
consumer testing conducted prior to the June 2007 Proposal, consumers
who participated in testing conducted for the Board consistently set
aside change-in-terms notices in inserts that accompanied periodic
statements. Research conducted for the Board indicated that consumers
do look at the front side of periodic statements and do look at
transactions.
Consumer groups supported the proposed format requirements, as
being more readable and pertinent than current change-in-term notices
provided with periodic statements. Industry commenters opposed the
proposal for a number of reasons. Many commenters stated that creditors
use pre-printed forms and have limited space to place non-recurring
messages on the front of the statement. These commenters asserted that
the proposed requirement to place a change-in-term notice or a penalty
rate increase notice preceding the transactions would be costly to
implement. Some commenters asked the Board to permit creditors to refer
consumers to an insert where the change-in-term or penalty increase
could be described, if the requirement for a summary table was adopted.
Others asked for more flexibility, such as by requiring the disclosures
to precede transactions, without a further requirement to provide
disclosures in a form substantially similar to proposed Forms G-18(G)
and G-18(H), and Samples G-20 and G-21. One commenter urged the Board
to require that the summary table be printed in a font size that is
consistent with TILA's general ``clear and conspicuous'' standard,
rather than require a 10-point font. Others noted that proposed Forms
G-18(G) and G-18(H) were designed in a portrait format, with the
summary table directly above the transactions, and asked that the Board
clarify whether creditors could provide the table in a landscape
format, with the summary table to the right or left of the
transactions. One commenter asked the Board to provide guidance in the
event both a change-in-terms notice and a penalty rate increase notice
are included in a periodic statement. One commenter suggested the
effect of the proposal will be to drive creditors to use separate
mailings, to reduce redesign costs.
As discussed in more detail in the section-by-section analysis to
Sec. 226.9(c) and 226.9(g), the final rule requires that a creditor
include on the front of the periodic statement a tabular summary of
changes to certain key terms, when a change-in-terms notice or notice
of the imposition of a penalty rate is included with the periodic
statement. However, consistent with the results of the consumer testing
conducted on behalf of the Board, this tabular summary is not required
to appear on the front of the first page of the statement prior to the
list of transactions, but rather may appear anywhere on the front of
the periodic statement. Conforming changes have been made to Sec.
226.7(b)(7) in the final rule. The summary table on the model forms
continues to be disclosed on the front of the first page of the
periodic statement; however, this is not required under the final rule.
See Forms

[[Page 5327]]

G-18(F) and G-18(G) (proposed as Forms G-18(G) and G-18(H)). In a
technical change, proposed Sec. 226.7(b)(14) has been renumbered as
Sec. 226.7(b)(7) in the final rule.
7(b)(9) Address for Notice of Billing Errors
Consumers who allege billing errors must do so in writing. 15
U.S.C. 1666; Sec. 226.13(b). Creditors must provide on or with
periodic statements an address for this purpose. See current Sec.
226.7(k). Currently, comment 7(k)-2 provides that creditors may also
provide a telephone number along with the mailing address as long as
the creditor makes clear a telephone call to the creditor will not
preserve consumers' billing error rights. In many cases, an inquiry or
question can be resolved in a phone conversation, without requiring the
consumer and creditor to engage in a formal error resolution procedure.
In June 2007, the Board proposed to update comment 7(k)-2,
renumbered as comment 7(b)(9)-2, to address notification by e-mail or
via a Web site. The proposed comment would have provided that the
address is deemed to be clear and conspicuous if a precautionary
instruction is included that telephoning or notifying the creditor by
e-mail or via a Web site will not preserve the consumer's billing
rights, unless the creditor has agreed to treat billing error notices
provided by electronic means as written notices, in which case the
precautionary instruction is required only for telephoning. See also
comment 13(b)-2, which addresses circumstances under which electronic
notices are deemed to satisfy the written billing error requirement.
Commenters generally supported the proposal. Some consumer groups urged
the Board to discourage creditors' policies not to accept electronic
delivery of dispute notices, and that if a creditor accepts electronic
dispute notices, the creditor should be required to accept these
electronic submissions as preserving billing rights. The final rule
adopts comment 7(b)(9)-2, as proposed. The rule provides consumers with
flexibility to attempt to resolve inquiries or questions about billing
statements informally, while advising them that if the matter is not
resolved in a telephone call or via e-mail, the consumer must submit a
written inquiry to preserve billing error rights.
7(b)(10) Closing Date of Billing Cycle; New Balance
Creditors must disclose the closing date of the billing cycle and
the account balance outstanding on that date. As a part of the June
2007 Proposal to implement TILA amendments in the Bankruptcy Act
regarding late payments and the effect of making minimum payments, the
Board proposed to require creditors to group together, as applicable,
disclosures of related information about due dates and payment amounts,
including the new balance. The comments received on these proposed
formatting requirements are discussed in the section-by-section
analysis to Sec. 226.7(b)(11) and (b)(13) below.
Some consumer commenters urged the Board to require credit card
issuers to disclose the amount required to pay off the account in full
(the ``payoff balance'') on each periodic statement and pursuant to a
consumer's request by telephone or through the issuer's Web site. The
Board's final rule does not contain such a requirement. At the time the
payoff balance would be disclosed, the issuer may not be aware of some
transactions that are still being processed and that have not yet been
posted to the account. In addition, finance charges can continue to
accrue after the payoff balance is disclosed. If a consumer relies on
the disclosure to submit a payment for that amount, the account still
may not be paid off in full.
7(b)(11) Due Date; Late Payment Costs
TILA Section 127(b)(12), added by Section 1305(a) of the Bankruptcy
Act, requires creditors that charge a late-payment fee to disclose on
the periodic statement (1) the payment due date or, if different, the
earliest date on which the late-payment fee may be charged, and (2) the
amount of the late-payment fee. 15 U.S.C. 1637(b)(12). The June 2007
Proposal would have implemented those requirements in Sec.
226.7(b)(11) by requiring creditors to disclose the payment due date on
the front side of the first page of the periodic statement and, closely
proximate to the due date, any cut-off time if the time is before 5
p.m. Further, the amount of any late-payment fee and any penalty APR
that could be triggered by a late payment would have been required to
be in close proximity to the due date.
Home-equity plans. The Board stated in the June 2007 Proposal its
intent to implement the late payment disclosure for HELOCs as a part of
its review of rules affecting home-secured credit. Creditors offering
HELOCs may comply with Sec. 226.7(b)(11), at their option.
Charge card issuers. TILA Section 127(b)(12) applies to
``creditors.'' TILA's definition of ``creditor'' includes card issuers
and other persons that offer consumer open-end credit. Issuers of
``charge cards'' (which are typically products where outstanding
balances cannot be carried over from one billing period to the next and
are payable when a periodic statement is received) are ``creditors''
for purposes of specifically enumerated TILA disclosure requirements.
15 U.S.C. 1602(f); Sec. 226.2(a)(17). The new disclosure requirement
in TILA Section 127(b)(12) is not among those specifically enumerated.
The Board proposed in June 2007 that the late payment disclosure
requirements contained in the Bankruptcy Act and to be implemented in
new Sec. 226.7(b)(11) would not apply to charge card issuers because
the new requirement is not specifically enumerated to apply to charge
card issuers. The Board noted that for some charge card issuers,
payments are not considered ``late'' for purposes of imposing a fee
until a consumer fails to make payments in two consecutive billing
cycles. It would be undesirable to encourage consumers who in January
receive a statement with the balance due upon receipt, for example, to
avoid paying the balance when due because a late-payment fee may not be
assessed until mid-February; if consumers routinely avoided paying a
charge card balance by the due date, it could cause issuers to change
their practice with respect to charge cards.
One industry commenter that offers a charge card account with a
revolving feature supported the proposal. The commenter further asked
the Board to clarify how card issuers with such products may comply
with the late payment disclosure requirement.
Creditors are required to provide the disclosures set forth in
Sec. 226.7 as applicable. Section Sec. 226.7(b)(11)(ii) has been
revised to make clear the exemption is for periodic statements provided
solely for charge card accounts; periodic statements provided for
accounts with charge card and revolving features must comply with the
late fee disclosure provision as to the revolving feature. Comment app.
G-9 has been added to provide that creditors offering card accounts
with a charge card feature and a revolving feature may revise the late
payment (and minimum payment) disclosure to make clear the feature to
which the disclosures apply. For creditors subject to Sec.
226.7(b)(11), the late payment disclosure is not required to be made on
a statement where no payment is due (and no late payment could be
triggered), because the disclosure would not apply.
Payment due date. Under the June 2007 Proposal, creditors must
disclose the due date for a payment if a late-payment fee or penalty
rate could be

[[Page 5328]]

imposed under the credit agreement, as discussed in more detail as
follows. This rule is adopted, as proposed.
Courtesy periods. In the June 2007 Proposal, the Board interpreted
the due date to be a date that is required by the legal obligation.
This would not encompass informal ``courtesy periods'' that are not
part of the legal obligation and that creditors may observe for a short
period after the stated due date before a late-payment fee is imposed,
to account for minor delays in payments such as mail delays. Proposed
comment 7(b)(11)-1 would have provided that creditors need not disclose
informal ``courtesy periods'' not part of the legal obligation.
Commenters generally supported this aspect of the proposal, which
is adopted as proposed.
Laws affecting assessment of late fees. Under the Bankruptcy Act,
creditors must disclose on periodic statements the payment due date or,
if different, the earliest date on which the late-payment fee may be
charged. Some state laws require that a certain number of days must
elapse following a due date before a late-payment fee may be imposed.
Under such a state law, the later date arguably would be required to be
disclosed on periodic statements. The Board was concerned, however,
that such a disclosure would not provide a meaningful benefit to
consumers in the form of useful information or protection and would
result in consumer confusion. For example, assume a payment is due on
March 10 and state law provides that a late-payment fee cannot be
assessed before March 21. Highlighting March 20 as the last date to
avoid a late-payment fee may mislead consumers into thinking that a
payment made any time on or before March 20 would have no adverse
financial consequences. However, failure to make a payment when due is
considered an act of default under most credit contracts, and can
trigger higher costs due to interest accrual and perhaps penalty APRs.
The Board considered additional disclosures on the periodic
statement that would more fully explain the consequences of paying
after the due date and before the date triggering the late-payment fee,
but such an approach appeared cumbersome and overly complicated. For
those reasons, under the June 2007 Proposal, creditors would have been
required to disclose the due date under the terms of the legal
obligation, and not a later date, such as when creditors are required
by state or other law to delay imposing a late-payment fee for a
specified period when a payment is received after the due date.
Consumers' rights under state laws to avoid the imposition of late-
payment fees during a specified period following a due date were
unaffected by the proposal; that is, in the above example, the creditor
would disclose March 10 as the due date for purposes of Sec.
226.7(b)(11), but could not, under state law, assess a late-payment fee
before March 21.
Commenters supported the Board's interpretation, and for the
reasons stated above, the proposal is adopted. In response to a request
for guidance, the substance of the above discussion regarding the due
date disclosure when state or other laws affect the assessment of a
late-payment fee is added in a new comment 7(b)(11)-2.
Cut-off time for making payments. As discussed in the section-by-
section analysis to Sec. 226.10(b) to the June 2007 Proposal,
creditors would have been required to disclose any cut-off time for
receiving payments closely proximate to each reference of the due date,
if the cut-off time is before 5 p.m. on the due date. If cut-off times
prior to 5 p.m. differ depending on the method of payment (such as by
check or via the Internet), the proposal would have required creditors
to state the earliest time without specifying the method to which it
applies, to avoid information overload. Cut-off hours of 5 p.m. or
later could continue to be disclosed under the existing rule (including
on the reverse side of periodic statements).
Comments were divided on the proposed cut-off hour disclosure for
periodic statements. Industry representatives that have a cut-off hour
earlier than 5 p.m. for an infrequently used payment means expressed
concern about consumer confusion if the more commonly used payment
method is later than 5 p.m. Consumer groups urged the Board also to
adopt a ``postmark'' date on which consumers could rely to demonstrate
their payment was mailed sufficiently in advance for the payment to be
timely received, or to eliminate cut-off hours altogether. Both
consumer groups and industry representatives asked the Board to clarify
by which time zone the cut-off hour should be measured.
As discussed in the section-by-section analysis to Sec. 226.10(b)
to the May 2008 Proposal, the Board proposed that to comply with the
requirement in Sec. 226.10 to provide reasonable payment instructions,
a creditor's cut-off hour for receiving payments by mail can be no
earlier than 5 p.m. in the location where the creditor has designated
the payment to be sent. The Board requested comment on whether there
would continue to be a need for creditors to disclose cut-off hours
before 5 p.m. for payments made by telephone or electronically.
Consumer groups suggested the Board should require a cut-off hour
no earlier than 5 p.m. for all methods of payment. They stated that
different cut-off hours are confusing for consumers. Moreover, they
argue that consumers have no control over the time electronic payments
are posted. They suggested having a uniform cut-off hour would not
require creditors to process and post payments on the same day or to
change processing systems; such a rule would merely prohibit the
creditor from imposing a late fee.
Industry commenters generally opposed a requirement to disclose any
cut-off hour for receiving payments made other than by mail closely
proximate to each reference of the due date. They stated that such a
disclosure is unnecessary because creditors disclose cut-off times with
other payment channels, such as the telephone or Internet. If a cut-off
hour were to be required on the front side of periodic statements, one
trade association suggested permitting a reference to cut-off hours on
the back of the statement, to avoid cluttering the statement with
information that, in their view, would not be helpful to many consumers
in any event. Others suggested moving the timing and location of cut-
off hour disclosures to account-opening, below the account-opening box,
or disclosing the cut-off time for each payment channel on the periodic
statement. One service provider suggested as an alternative to a cut-
off hour disclosure, a substantive rule requiring a one-day period
following the due date before the payment could be considered late.
In the two rounds of testing following the May 2008 Proposal, the
Board conducted additional testing on cut-off hour disclosures for
receiving payments other than by mail. Consumers were shown mock
periodic statements which disclosed near the due date a 2 p.m. cut-off
time for electronic payments and a reference to the back of the
statement for cut-off times for other payment methods. The disclosure
on the back of the statement stated that mailed payments must be
received by 5 p.m. on the due date. When asked what time a mailed
payment would be due, about two-thirds of the participants incorrectly
named 2 p.m., the cut-off hour identified for electronic payments.
Although the mock statement referred the reader to the back of the
statement for more information about cut-off hours, only one
participant in each round was able to locate the

[[Page 5329]]

information. Most other participants understood that cut-off hours may
differ for various payment channels, but they were unable to locate
more specific information on the statement.
Based on the comments received and on the Board's consumer testing,
the Board is not adopting an additional requirement to disclose any
cut-off hour for receiving payments made other than by mail closely
proximate to each reference of the due date. Testing showed that
abbreviated disclosures were not effective. The Board believes that
fully explaining each cut-off hour is too cumbersome for the front of
the first side of the periodic statement. Creditors currently disclose
relevant cut-off hours when consumers use the Internet or telephone to
make a payment, and the Board expects creditors will continue to do so.
See section-by-section analysis to Sec. 226.10 regarding substantive
rules regarding cut-off hours, generally.
Fee or rate triggered by multiple events. Some industry commenters
asked for guidance on complying with the late payment disclosure if a
late fee or penalty rate is triggered after multiple events, such as
two late payments in six months. Comment 7(b)(11)-3 has been added to
provide that in such cases, the creditor may, but is not required to,
disclose the late payment and penalty rate disclosure each month. The
disclosures must be included on any periodic statement for which a late
payment could trigger the late payment fee or penalty rate, such as
after the consumer made one late payment in this example.
Amount of late payment fee; penalty APR. Creditors must disclose
the amount of the late-payment fee and the payment-due date on periodic
statements, under TILA amendments contained in the Bankruptcy Act. The
purpose of the new late payment disclosure requirement is to ensure
consumers know the consequences of paying late. To fulfill that
purpose, the June 2007 Proposal would have required that the amount of
the late-payment fee be disclosed in close proximity to the due date.
If the amount of the late-payment fee is based on outstanding balances,
the proposal would have required the creditor to disclose the highest
fee in the range.
In addition, the Board proposed to require creditors to disclose
any increased rate that may apply if consumers' payments are received
after the due date. The proposal was intended to address the Board's
concern about a potential increase in APRs as a consequence of paying
late. If, under the terms of the account agreement, a late payment
could result in the loss of a promotional rate, the imposition of a
penalty rate, or both, the proposal would have required the creditor to
disclose the highest rate that could apply, to avoid information
overload. The June 2007 Proposal would have required creditors to
disclose the increased APR closely proximate to the fee and due date to
fulfill Congress's intent to warn consumers about the effects of paying
late. See proposed Sec. 226.7(b)(13).
Some consumer groups and a member of Congress generally supported
the Board's proposal to require creditors to disclose any penalty rate,
as well as a late payment fee, that could be imposed if a consumer
makes an untimely payment. One trade association and a number of
industry commenters noted that under the proposal, consumers are warned
about the consequences of paying late on or with the application or
solicitation for a credit or charge card and at account-opening, and
thus repeating disclosures each month was unnecessary. As an
alternative, the trade association suggested requiring an annual
reminder about triggers for penalty pricing or a preprinted statement
on the back of the periodic statement. Some industry commenters opposed
the proposal as overly burdensome.
The Board continues to believe that the late-payment warning should
include a disclosure of any penalty rate that may apply if the consumer
makes a late payment. For some consumers, the increase in rate
associated with a late payment may be more costly than the imposition
of a fee. Disclosing only the fee to these consumers would not inform
them of one of the primary costs of making late payment. Accordingly,
the Board believes that disclosure of both the penalty rate and fee
should be required. For the reasons stated above, the proposal is
adopted.
Scope of penalties disclosed. Some consumer groups urged the Board
also to require disclosure of the earliest date after which a creditor
could impose ``any negative consequence,'' as a catch-all to address
new fees and terms that are not specifically addressed in the proposal.
The Board is concerned that a requirement to disclose the amount of
``any other negative consequence'' is overly broad and unclear and
would increase creditors' risk of litigation and thus is not included
in the final rule.
Many consumers, consumer groups, and others also urged the Board to
ban ``excessive'' late fees and penalty rates. Elsewhere in today's
Federal Register, the Board is adopting a rule that prohibits
institutions from increasing the APR on outstanding balances, with some
exceptions. The Board is also adopting a rule that requires
institutions to provide consumers with a reasonable amount of time to
make their payments, which should help consumers avoid late fees and
penalty rates resulting from late payment. No action is taken under
this rulemaking that affects the amount of fees or rates creditors may
impose.
Range of fees and rates. An industry commenter asked for more
flexibility in disclosing late-payment fees and penalty rates that
could be imposed under the account terms but could vary, for example,
based on the outstanding balance. In other cases, the creditor may have
the contractual right to impose a specified penalty rate but may choose
to impose a lower rate based on the consumer's overall behavior. The
commenter suggested permitting creditors to disclose the range of fees
or rates, or ``up to'' the maximum late-payment fee or rate that may be
imposed on the account. In the commenter's view, this approach would
provide more accurate disclosures and provide consumers with a better
understanding of the possible outcome of a late payment. Modified from
the proposal, Sec. 226.7(b)(11)(i)(B) provides that if a range of
late-payment fees or penalty rates could be imposed on the account,
creditors may disclose the highest late-payment fee and rate and at
creditors' option, an indication (such as using the phrase ``up to'')
that lower fees or rates may be imposed. Comment 7(b)(11)-4 has been
added to illustrate the requirement. The final rule also permits
creditors to disclose a range of fees or rates. This approach
recognizes the space constraints on periodic statements about which
industry commenters express concern, but gives creditors more
flexibility in disclosing possible late-payment fees and penalty rates.
Some creditors are subject to state law limitations on the amount
of late-payment fees or interest rates that may be assessed. Currently,
where disclosures are required but the amount is determined by state
law, such creditors typically disclose a matrix disclosing which rates
and fees are applicable to residents of various states. Under the June
2007 Proposal, creditors would have been required to disclose the late-
payment fee applicable to the consumer's account. To ease burden, one
commenter urged the Board to permit these creditors to disclose the
highest late-payment fee (or penalty rate) that could apply in any
state. The Board is mindful of compliance costs associated with
customizing the disclosure to reflect disclosure requirements of
various states; however, the Board believes the purposes of TILA

[[Page 5330]]

would not be served if a consumer received a late-payment fee
disclosure for an amount that exceeded, perhaps substantially, the
amount the consumer could be assessed under the terms of the legal
obligation of the account. For that reason, Sec. 226.7(b)(11)(i)(B)
provides that ranges or the highest fee must be those applicable to the
consumer's account. Accordingly, a creditor may state a range only if
all fee amounts in that range would be permitted to be imposed on the
consumer's account under applicable state law, for example if the state
law permits a range of late fees that vary depending on the outstanding
account balance.
Penalty rate in effect. Industry commenters asked the Board to
clarify the penalty rate disclosure requirements when a consumer's
untimely payment has already triggered the penalty APR. Comment
7(b)(11)-5 is added to provide that if the highest penalty rate has
previously been triggered on an account, the creditor may, but is not
required to, delete as part of the late payment disclosure the amount
of the penalty rate and the warning that the rate may be imposed for an
untimely payment, as not applicable. Alternatively, the creditor may,
but is not required to, modify the language to indicate that the
penalty rate has been increased due to previous late payments, if
applicable.
7(b)(12) Minimum Payment
The Bankruptcy Act amends TILA Section 127(b) to require creditors
that extend open-end credit to provide a disclosure on the front of
each periodic statement in a prominent location about the effects of
making only minimum payments. 15 U.S.C. 1637(b)(11). This disclosure
must include: (1) A ``warning'' statement indicating that making only
the minimum payment will increase the interest the consumer pays and
the time it takes to repay the consumer's balance; (2) a hypothetical
example of how long it would take to pay off a specified balance if
only minimum payments are made; and (3) a toll-free telephone number
that the consumer may call to obtain an estimate of the time it would
take to repay his or her actual account balance.
Under the Bankruptcy Act, depository institutions may establish and
maintain their own toll-free telephone numbers or use a third party. In
order to standardize the information provided to consumers through the
toll-free telephone numbers, the Bankruptcy Act directs the Board to
prepare a ``table'' illustrating the approximate number of months it
would take to repay an outstanding balance if the consumer pays only
the required minimum monthly payments and if no other advances are
made. The Board is directed to create the table by assuming a
significant number of different APRs, account balances, and minimum
payment amounts; instructional guidance must be provided on how the
information contained in the table should be used to respond to
consumers' requests. The Board is also required to establish and
maintain, for two years, a toll-free telephone number for use by
customers of creditors that are depository institutions having assets
of $250 million or less.\19\ The Federal Trade Commission (FTC) must
maintain a toll-free telephone number for creditors that are subject to
the FTC's authority to enforce TILA and Regulation Z as to the card
issuer. 15 U.S.C. 1637(b)(11)(A)-(C).\20\
---------------------------------------------------------------------------

\19\ The Board expects to activate its toll-free telephone
number for use by small depository institutions by April 1, 2009,
even though institutions are not required to include a telephone
number on periodic statements issued before the rule's mandatory
compliance date. The Board will subsequently issue a press release
announcing the toll-free number and its activation date.
\20\ The FTC also expects to activate its toll-free telephone
number for use by entities under its jurisdiction by April 1, 2009,
even though these entities are not required to include a telephone
number on periodic statements issued before the rule's mandatory
compliance date. The FTC also expects to subsequently issue a press
release announcing the toll-free number and the exact date on which
it will be activated.
---------------------------------------------------------------------------

The Bankruptcy Act provides that creditors, the Board and the FTC
may use a toll-free telephone number that connects consumers to an
automated device through which they can obtain repayment information by
providing information using a touch-tone telephone or similar device.
The Bankruptcy Act also provides that consumers who are unable to use
the automated device must have the opportunity to speak with an
individual from whom the repayment information may be obtained.
Creditors, the Board and the FTC may not use the toll-free telephone
number to provide consumers with repayment information other than the
repayment information set forth in the ``table'' issued by the Board.
15 U.S.C. 1637(b)(11)(F)-(H).
Alternatively, a creditor may use a toll-free telephone number to
provide the actual number of months that it will take consumers to
repay their outstanding balance instead of providing an estimate based
on the Board-created table. A creditor that does so need not include a
hypothetical example on its periodic statements, but must disclose the
warning statement and the toll-free telephone number on its periodic
statements. 15 U.S.C. 1637(b)(11)(J)-(K).
For ease of reference, this supplementary information will refer to
the above disclosures about the effects of making only the minimum
payment as ``the minimum payment disclosures.''
Proposal to limit the minimum payment disclosure requirements to
credit card accounts. Under the Bankruptcy Act, the minimum payment
disclosure requirements apply to all open-end accounts (such as credit
card accounts, HELOCs, and general purpose credit lines). The Act
expressly states that these disclosure requirements do not apply,
however, to any ``charge card'' account, the primary aspect of which is
to require payment of charges in full each month.
In the June 2007 Proposal, the Board proposed to exempt open-end
credit plans other than credit card accounts from the minimum payment
disclosure requirements. This would have exempted, for example, HELOCs
(including open-end reverse mortgages), overdraft lines of credit and
other general purpose personal lines of credit. In response to the June
2007 Proposal, industry commenters generally supported exempting open-
end credit plans other than credit card accounts from the minimum
payment disclosure requirements. Several consumer group commenters
urged the Board to require the minimum payment disclosures for HELOCs,
as well as credit card accounts.
The final rule limits the minimum payment disclosures to credit
card accounts, as proposed pursuant to the Board's authority under TILA
Section 105(a) to make adjustments that are necessary to effectuate the
purposes of TILA. 15 U.S.C. 1604(a). The Congressional debate on the
minimum payment disclosures indicates that the principal concern of
Congress was that consumers may not be fully aware of the length of
time it takes to pay off their credit card accounts if only minimum
monthly payments are made. For example, Senator Grassley, a primary
sponsor of the Bankruptcy Act, in discussing the minimum payment
disclosures, stated:

[The Bankruptcy Act] contains significant new disclosures for
consumers, mandating that credit card companies provide key
information about how much [consumers] owe and how long it will take
to pay off their credit card debts by only making the minimum
payment. That is very important consumer education for every one of
us.
Consumers will also be given a toll-free number to call where
they can get information about how long it will take to pay off
their own credit card balances if they only pay the minimum payment.
This will educate consumers and improve consumers'

[[Page 5331]]

understanding of what their financial situation is.

Remarks of Senator Grassley (2005), Congressional Record (daily
edition), vol. 151, March 1, p. S 1856.

With respect to HELOCs, the Board understands that most HELOCs have
a fixed repayment period. Thus, for those HELOCs, consumers could learn
from the current disclosures the length of the draw period and the
repayment period. See current Sec. 226.6(e)(2). The minimum payment
disclosures would not appear to provide additional information to
consumers that is not already disclosed to them. The cost of providing
this information a second time, including the costs to reprogram
periodic statement systems and to establish and maintain a toll-free
telephone number, appears not to be justified by the limited benefit to
consumers. Thus, the final rule exempts HELOCs from the minimum payment
disclosure requirements as not necessary to effectuate the purposes of
TILA, using the Board's TILA Section 105(a) authority.
As proposed, the final rule also exempts overdraft lines of credit
and other general purpose credit lines from the minimum payment
disclosure requirements for several reasons. First, these lines of
credit are not in wide use. The 2004 Survey of Consumer Finances data
indicates that few families--1.6 percent--had a balance on lines of
credit other than a home-equity line or credit card at the time of the
interview. (In terms of comparison, 74.9 percent of families had a
credit card, and 58 percent of these families had a credit card balance
at the time of the interview.)\21\ Second, these lines of credit
typically are neither promoted, nor used, as long-term credit options
of the kind for which the minimum payment disclosures are intended.
Third, the Board is concerned that the operational costs of requiring
creditors to comply with the minimum payment disclosure requirements
with respect to overdraft lines of credit and other general purpose
lines of credit may cause some institutions to no longer provide these
products as accommodations to consumers, to the detriment of consumers
who currently use these products. For these reasons, the Board is using
its TILA Section 105(a) authority to exempt overdraft lines of credit
and other general purpose credit lines from the minimum payment
disclosure requirements, because in this context the Board believes the
minimum payment disclosures are not necessary to effectuate the
purposes of TILA.
---------------------------------------------------------------------------

\21\ Brian Bucks, et al., Recent Changes in U.S. Family
Finances: Evidence from the 2001 and 2004 Survey of Consumer
Finances, Federal Reserve Bulletin (March 2006).
---------------------------------------------------------------------------

7(b)(12)(i) General Disclosure Requirements
In response to the June 2007 Proposal, several commenters suggested
revisions to the structure of the regulatory text in Sec. 226.7(b)(12)
to make the regulatory text in this section easier to read and
understand. In the final rule, Sec. 226.7(b)(12) is restructured to
accomplish these goals. The final rule in Sec. 226.7(b)(12)(i)
clarifies that issuers can choose one of three ways to comply with the
minimum payment disclosure requirements: (1) Provide on the periodic
statement a warning about making only minimum payments, a hypothetical
example, and a toll-free telephone number where consumers may obtain
generic repayment estimates as described in Appendix M1 to part 226;
(2) provide on the periodic statement a warning about making only
minimum payments, and a toll-free telephone number where consumers may
obtain actual repayment disclosures as described in Appendix M2 to part
226; or (3) provide on the periodic statement the actual repayment
disclosure as described in Appendix M2 to part 226.
7(b)(12)(ii) Generic Repayment Example and Establishment of a Toll-Free
Telephone Number
The final rule in Sec. 226.7(b)(12)(ii) sets forth requirements
that credit card issuers must follow if they choose to comply with the
minimum payment disclosure provisions by providing on the periodic
statement a warning about making only minimum payments, a hypothetical
example, and a toll-free telephone number where consumers may obtain
generic repayment estimates. Under the Bankruptcy Act, the hypothetical
example that creditors must disclose on periodic statements varies
depending on the creditor's minimum payment requirement. Generally,
creditors that require minimum payments equal to 4 percent or less of
the account balance must disclose on each statement that it takes 88
months to pay off a $1000 balance at an interest rate of 17 percent if
the consumer makes a ``typical'' 2 percent minimum monthly payment.
Creditors that require minimum payments exceeding 4 percent of the
account balance must disclose that it takes 24 months to pay off a
balance of $300 at an interest rate of 17 percent if the consumer makes
a ``typical'' 5 percent minimum monthly payment (but a creditor may opt
instead to disclose the statutory example for 2 percent minimum
payments). The 5 percent minimum payment example must be disclosed by
creditors for which the FTC has the authority under TILA to enforce the
act and this regulation. Creditors also have the option to substitute
an example based on an APR that is greater than 17 percent. The
Bankruptcy Act authorizes the Board to periodically adjust the APR used
in the hypothetical example and to recalculate the repayment period
accordingly. 15 U.S.C. 1637(b)(11)(A)-(E).
Wording of the examples. The Bankruptcy Act sets forth specific
language for issuers to use in disclosing the applicable hypothetical
example on the periodic statement. In the June 2007 Proposal, the Board
proposed to modify the statutory language to facilitate consumers' use
and understanding of the disclosures, pursuant to its authority under
TILA Section 105(a) to make adjustments that are necessary to
effectuate the purposes of TILA. 15 U.S.C. 1604(a). First, the Board
proposed to require that issuers disclose the payoff periods in the
hypothetical examples in years, rounding fractional years to the
nearest whole year, rather than in months as provided in the statute.
Thus, issuers would have disclosed that it would take over 7 years to
pay off the $1,000 hypothetical balance, and about 2 years for the $300
hypothetical balance. The Board believes that the modification of the
examples will further TILA's purpose to assure a meaningful disclosure
of credit terms. 15 U.S.C. 1601(a). The final rule adopts the examples
as proposed. The Board believes that disclosing the payoff period in
years allows consumers to better comprehend the repayment period
without having to convert it themselves from months to years.
Participants in the consumer testing conducted for the Board reviewed
disclosures with the estimated payoff period in years, and they
indicated they understood the length of time it would take to repay the
balance if only minimum payments were made.
Second, the statute requires that issuers disclose in the examples
the minimum payment formula used to calculate the payoff period. In the
$1,000 example above, the statute would require issuers to indicate
that a ``typical'' 2 percent minimum monthly payment was used to
calculate the repayment period. In the $300 example above, the statute
would require issuers to indicate that a 5 percent minimum monthly
payment was used to calculate the repayment period. In June 2007, the
Board proposed to eliminate the specific minimum payment formulas from
the

[[Page 5332]]

examples. The references to the 2 percent minimum payment in the $1,000
example, and a 5 percent minimum payment in the $300 example, are
incomplete descriptions of the minimum payment requirement. In the
$1,000 example, the minimum payment formula used to calculate the
repayment period is the greater of 2 percent of the outstanding
balance, or $20. In the $300 example, the minimum payment formula used
to calculate the repayment period is the greater of 5 percent of the
outstanding balance, or $15. In fact, in each example, the hypothetical
consumer always pays the absolute minimum ($20 or $15, depending on the
example).
In response to the June 2007 Proposal, several consumer group
commenters suggested that the Board include in the example the
statutory reference to the ``typical'' minimum payment formula (either
2 percent or 5 percent as described above), because without this
reference, the example implies that minimum payment formulas do not
vary from creditor to creditor.
Like the proposal, the final rule does not include in the examples
a reference to the minimum payment formula used to calculate the
repayment period given in the examples. The Board believes that
including the entire minimum payment formula, including the floor
amount, in the disclosure could make the example too complicated. Also,
the Board did not revise the disclosures to indicate that the repayment
period in the $1,000 balance was calculated based on a $20 payment, and
the repayment period in the $300 balance was calculated based on a $15
payment. The Board believes that revising the statutory requirement in
this way would change the disclosure to focus consumers on the effects
of making a fixed payment each month as opposed to the effects of
making minimum payments. Moreover, disclosing the minimum payment
formula is not necessary for consumers to understand the essential
point of the examples--that it can take a significant amount of time to
pay off a balance if only minimum payments are made. In testing
conducted for the Board, the $1,000 balance example was tested without
including the 2 percent minimum payment disclosure required by the
statute. Consumers appeared to understand the purpose of the
disclosure--that it would take a significant amount of time to repay a
$1,000 balance if only minimum payments were made. For these reasons,
the final rule requires the hypothetical examples without specifying
the minimum payment formulas used to calculate repayment periods in the
examples. The Board believes that the modification of the examples will
further TILA's purpose to assure a meaningful disclosure of credit
terms. 15 U.S.C. 1601(a).
In response to the June 2007 Proposal, one industry commenter
suggested that if an issuer already includes on the first page of the
periodic statement a toll-free customer service telephone number, the
Board should permit the issuer to reference that telephone number
within the minimum payment disclosure, rather than having to repeat
that number again in the minimum payment disclosure. The final rule
requires issuers to state the toll-free telephone number in the minimum
payment disclosure itself, even if the same toll-free telephone number
is listed in other places on the first page of the periodic statement.
The Board believes that listing the toll-free telephone number in the
minimum payment disclosure itself makes the disclosure easier for
consumers to use.
The final regulatory language for the examples is set forth in new
Sec. 226.7(b)(12)(ii). As proposed in June 2007, in addition to the
revisions mentioned above, the final rule also adopts several stylistic
revisions to the statutory language, based on plain language
principles, in an attempt to make the language of the examples more
understandable to consumers. Furthermore, the language has been revised
to reflect comments from the Board's consultation with the other
federal banking agencies, the NCUA, and the FTC, pursuant to Section
1309 of the Bankruptcy Act, as discussed immediately below.
Clear and conspicuous disclosure of examples. The Bankruptcy Act
requires the Board, in consultation with the other federal banking
agencies, the NCUA, and the FTC, to provide guidance on clear and
conspicuous disclosure of the examples the Board is requiring under
Sec. 226.7(b)(12)(ii)(A)(1), (b)(12)(ii)(A)(2), and (b)(12)(ii)(B) to
ensure that they are reasonably understandable and designed to call
attention to the nature and significance of the information in the
notice. 15 U.S.C. 1637 note (Regulations). In the June 2007 Proposal,
the Board set forth exact wording for creditors to use for the examples
based on language provided in the Bankruptcy Act, as discussed
immediately above. The Board also proposed that the headings for the
notice be in bold text and that the notice be placed closely proximate
to the minimum payment due on the periodic statement, as discussed
below in the supplementary information to Sec. 226.7(b)(13).
The other federal banking agencies, the NCUA, and the FTC generally
agreed with the Board's approach. These agencies, however, suggested
that the heading be changed from ``Notice about Minimum Payments'' to
``Minimum Payment Warning,'' consistent with the heading provided in
the Bankruptcy Act. The agencies the Board consulted were concerned
that without the term ``warning'' in the heading, the Board's proposed
heading would not sufficiently call attention to the nature and
significance of the information contained in the notice. The Board
agrees with the agencies, and the final rule adopts the ``Minimum
Payment Warning'' heading.
One of the agencies the Board consulted also suggested that the
wording in the examples be modified to refer to the example balance
amount a second time in order to clarify to which balance the time
period to repay refers. Thus, in the example under Sec.
226.7(b)(12)(ii)(A)(1), the agency suggested that the phrase ``of
$1,000'' be added to the end of the sentence in the notice that states,
``For example, if you had a balance of $1,000 at an interest rate of
17% and always paid only the minimum required, it would take over 7
years to repay this balance.'' The agency suggested similar amendments
to the examples under Sec. 226.7(b)(12)(ii)(A)(2) and (b)(12)(ii)(B).
The Board believes that including a second reference to the example
balance in the notice would be redundant and would unnecessarily extend
the length of the notice. Therefore, the Board declines to amend the
notice to add the second reference.
Adjustments to the APR used in the examples. The Bankruptcy Act
specifically authorizes the Board to periodically adjust the APR used
in the hypothetical example and to recalculate the repayment period
accordingly. In the June 2007 Proposal, the Board proposed not to
adjust the APR used in the hypothetical examples. The final rule adopts
this approach. The Board recognizes that the examples are intended to
provide consumers with an indication that it can take a long time to
pay off a balance if only minimum payments are made. Revising the APR
used in the example to reflect the average APR paid by consumers would
not significantly improve the disclosure, because for many consumers an
average APR would not be the APR that applies to the consumer's
account. Moreover, consumers will be able to obtain a more tailored
disclosure of a repayment period based on the APR applicable to their
accounts by calling the toll-free

[[Page 5333]]

telephone number provided as part of the minimum payment disclosure.
Small depository institutions. Under the Bankruptcy Act, the Board
is required to establish and maintain, for two years, a toll-free
telephone number for use by customers of creditors that are depository
institutions having assets of $250 million or less. The FTC must
maintain a toll-free telephone number for creditors that are subject to
the FTC's authority to enforce TILA and Regulation Z as to the card
issuer. 15 U.S.C. 1637(b)(11)(F). Like the proposal, the final rule
defines ``small depository institution issuers'' as card issuers that
are depository institutions (as defined by section 3 of the Federal
Deposit Insurance Act), including federal credit unions or state-
chartered credit unions (as defined in section 101 of the Federal
Credit Union Act), with total assets not exceeding $250 million. The
final rule clarifies the determination whether an institution's assets
exceed $250 million should be made as of December 31, 2009. 15 U.S.C.
1637(b)(11)(F)(ii). Generally, small depository institution issuers may
disclose the Board's toll-free telephone number on their periodic
statements. Nonetheless, some card issuers may fall within the
definition of ``small depository institution issuers'' and be subject
to the FTC's enforcement authority, such as small state-chartered
credit unions. New comment 7(b)(12)(ii)(A)(3)-1 clarifies that those
card issuers must disclose the FTC's toll-free telephone number on
their periodic statements.
Web site address. In response to the June 2007 Proposal, one
industry commenter suggested that the Board provide the option to
include in the minimum payment disclosure a Web site address (in
addition to the toll-free telephone number) where consumers may obtain
the generic repayment estimates or actual repayment disclosures, as
applicable. New comment 7(b)(12)-4 is added to allow issuers at their
option to include a reference to a Web site address (in addition to the
toll-free telephone number) where its customers may obtain generic
repayment estimates or actual repayment disclosures as applicable, so
long as the information provided on the Web site complies with Sec.
226.7(b)(12), and Appendix M1 or M2 to part 226, as applicable. The Web
site link disclosed must take consumers directly to the Web page where
generic repayment estimates or actual repayment disclosures may be
obtained. The Board believes that some consumers may find it more
convenient to obtain the repayment estimate through a Web site rather
than calling a toll-free telephone number.
New Sec. 226.7(b)(12)(ii)(A)(3) sets forth the disclosure that
small depository institution issuers must provide on their periodic
statements if the issuers use the Board's toll-free telephone number.
New Sec. 226.7(b)(12)(ii)(B) sets forth the disclosure that card
issuers subject to the FTC's enforcement authority must provide on
their periodic statements. These disclosure statements include two
toll-free telephone numbers: one that is accessible to hearing-impaired
consumers and one that is accessible to other consumers. In addition,
the disclosures include a reference to the Board's Web site, or the
FTC's Web site as appropriate, where generic repayment estimates may be
obtained.
Toll-free telephone numbers. Under Section 1301(a) of the
Bankruptcy Act, depository institutions generally must establish and
maintain their own toll-free telephone numbers or use a third party to
disclose the repayment estimates based on the ``table'' issued by the
Board. 15 U.S.C. 1637(b)(11)(F)(i). At the issuer's option, the issuer
may disclose the actual repayment disclosure through the toll-free
telephone number.
The Bankruptcy Act also provides that creditors, the Board and the
FTC may use a toll-free telephone number that connects consumers to an
automated device through which they can obtain repayment information by
providing information using a touch-tone telephone or similar device,
but consumers who are unable to use the automated device must have the
opportunity to speak with an individual from whom the repayment
information may be obtained. Unless the issuer is providing an actual
repayment disclosure, the issuer may not provide through the toll-free
telephone number a repayment estimate other than estimates based on the
``table'' issued by the Board. 15 U.S.C. 1637(b)(11)(F). These same
provisions apply to the FTC's and the Board's toll-free telephone
numbers as well.
In the June 2007 Proposal, the Board proposed to add new Sec.
226.7(b)(12)(iv) and accompanying commentary to implement the above
statutory provisions related to the toll-free telephone numbers. In
addition, proposed comment 7(b)(12)(iv)-3 would have provided that once
a consumer has indicated that he or she is requesting the generic
repayment estimate or the actual repayment disclosure, as applicable,
card issuers may not provide advertisements or marketing information to
the consumer prior to providing the repayment information required or
permitted by Appendix M1 or M2 to part 226, as applicable.
The final rule moves these provisions to Sec. 226.7(b)(12)(ii) and
comments 7(b)(12)-1, 2 and 5, with several revisions. In addition,
comment 7(b)(12)-3 is added to clarify that an issuer may provide as
part of the minimum payment disclosure a toll-free telephone number
that is designed to handle customer service calls generally, so long as
the option to select to receive the generic repayment estimate or
actual repayment disclosure, as applicable, through that toll-free
telephone number is prominently disclosed to the consumer. For
automated systems, the option to select to receive the generic
repayment estimate or actual repayment disclosure is prominently
disclosed if it is listed as one of the options in the first menu of
options given to the consumer, such as ``Press or say `3' if you would
like an estimate of how long it will take you to repay your balance if
you make only the minimum payment each month.'' If the automated system
permits callers to select the language in which the call is conducted
and in which information is provided, the Board has amended comment
7(b)(12)-3 to state that the menu to select the language may precede
the menu with the option to receive the repayment disclosure.
In addition, proposed comment 7(b)(12)(iv)-3 dealing with
advertisements and marketing information has been moved to comment
7(b)(12)-5. This comment is revised to specify that once a consumer has
indicated that he or she is requesting the generic repayment estimate
or the actual repayment disclosure, as applicable, card issuers may not
provide advertisements or marketing information (except for providing
the name of the issuer) to the consumer prior to providing the
repayment information required or permitted by Appendix M1 or M2 to
part 226, as applicable. Furthermore, new comment 7(b)(12)-5 clarifies
that educational materials that do not solicit business are not
considered advertisements or marketing materials for purposes of Sec.
226.7(b)(12). Also, comment 7(b)(12)-5 contains examples of how the
prohibition on providing advertisements and marketing information
applies in two contexts. In particular, comment 7(b)(12)-5 provides an
example where the issuer is using a toll-free telephone number that is
designed to handle customer service calls generally and the option to
select to receive the generic repayment estimate or actual repayment
disclosure is given as one of the options in the first

[[Page 5334]]

menu of options given to the consumer. Comment 7(b)(12)-5 clarifies in
that context that once the consumer selects the option to receive the
generic repayment estimate or the actual repayment disclosure, the
issuer may not provide advertisements or marketing materials to the
consumer (except for providing the name of the issuer) prior to
providing the information required or permitted by Appendix M1 or M2 to
part 226, as applicable. In addition, if an issuer discloses a link to
a Web site as part of the minimum payment disclosure on the periodic
statement, the issuer may not provide advertisements or marketing
materials (except for providing the name of the issuer) on the Web page
accessed by the link, including pop-up marketing materials or banner
marketing materials, prior to providing the information required or
permitted by Appendix M1 or M2 to part 226, as applicable.
In response to the June 2007 Proposal, several consumer groups
suggested that the Board prohibit issuers from providing advertisements
or marketing materials even after the repayment information has been
given, if the issuer is providing generic repayment estimates through
the toll-free telephone number. Nonetheless, if the issuer is providing
actual repayment disclosures through the toll-free telephone number,
these commenters suggested that the Board allow the issuer to provide
advertisements or marketing materials after the repayment information
is given, to encourage creditors to provide actual repayment
disclosures instead of generic repayment estimates. The final rule does
not adopt this approach. The Board believes that allowing
advertisements or marketing materials after the repayment information
is given is appropriate regardless of whether the repayment information
provided are generic repayment estimates or actual repayment
disclosures, because consumers could end the telephone call (or exit
the Web page) if they were not interested in listening to or reviewing
the advertisements or marketing materials given.
7(b)(12)(iii) Actual Repayment Disclosure Through Toll-free Telephone
Number
Under the Bankruptcy Act, a creditor may use a toll-free telephone
number to provide consumers with the actual number of months that it
will take consumers to repay their outstanding balance instead of
providing an estimate based on the Board-created table. Creditors that
choose to give the actual number via the telephone number need not
include a hypothetical example on their periodic statements. Instead,
they must disclose on periodic statements a warning statement that
making the minimum payment will increase the interest the consumer pays
and the time it takes to repay the consumer's balance, along with a
toll-free telephone number that consumers may use to obtain the actual
repayment disclosure. 15 U.S.C. 1637(b)(11)(I) and (K). In the June
2007 Proposal, the Board proposed to implement this statutory provision
in new Sec. 226.7(b)(12)(ii)(A). The final rule moves this provision
to Sec. 226.7(b)(12)(iii), with one revision described below.
Wording of disclosure on periodic statement. Under the Bankruptcy
Act, if a creditor chooses to provide the actual repayment disclosure
through the toll-free telephone number, the statute provides specific
language that issuers must disclose on the periodic statement. In
particular, this statutory language reads: ``Making only the minimum
payment will increase the interest you pay and the time it takes to
repay your balance. For more information, call this toll-free number:
----------.'' In the June 2007 Proposal, the Board proposed that
issuers use this statutory disclosure language. See proposed Sec.
226.7(b)(12)(ii)(A). In response to the June 2007 Proposal, several
consumer groups suggested that the Board revise the disclosure language
to communicate more clearly to consumers the type of information that
consumers will receive through the toll-free telephone number. The
final rule in Sec. 226.7(b)(12)(iii) revises the disclosure language
to read: ``For an estimate of how long it will take to repay your
balance making only minimum payments, call this toll-free telephone
number: ----------.'' The Board adopts this change to the disclosure
language pursuant to its authority under TILA Section 105(a) to make
adjustments that are necessary to effectuate the purposes of TILA. 15
U.S.C. 1604(a). The Board believes that this change will further TILA's
purpose of assuring a meaningful disclosure of credit terms. 15 U.S.C.
1601(a).
7(b)(12)(iv) Actual Repayment Disclosure on the Periodic Statement
In the June 2007 Proposal, the Board proposed to provide that if
card issuers provide the actual repayment disclosure on the periodic
statement, they need not disclose the warning, the hypothetical example
or a toll-free telephone number on the periodic statement, nor need
they maintain a toll-free telephone number to provide the actual
repayment disclosure. See proposed Sec. 226.7(b)(12)(ii)(B). In the
supplementary information to the June 2007 Proposal, the Board strongly
encouraged card issuers to provide the actual repayment disclosure on
periodic statements, and solicited comments on whether the Board could
take other steps to provide incentives to card issuers to use this
approach.
In response to the June 2007 Proposal, several consumer group
commenters suggested that the Board should require issuers to disclose
the actual repayment disclosure on the periodic statement in all cases.
Industry commenters generally supported the option to provide the
actual repayment disclosure on the periodic statement.
As proposed in June 2007, the final rule in new Sec.
226.7(b)(12)(iv) provides that an issuer may comply with the minimum
payment requirements by providing the actual repayment disclosure on
the periodic statement. Consistent with the statutory requirements, the
Board is not requiring that issuers provide the actual repayment
disclosure on the periodic statement.
The Board is adopting an exemption from the requirement to provide
on periodic statements a warning about the effects of making minimum
payments, a hypothetical example, and a toll-free telephone number
consumers may call to obtain repayment periods, and to maintain a toll-
free telephone number for responding to consumers' requests, if the
card issuer instead provides the actual repayment disclosure on the
periodic statement.
The Board adopts this approach pursuant to its exception and
exemption authorities under TILA Section 105. Section 105(a) authorizes
the Board to make exceptions to TILA to effectuate the statute's
purposes, which include facilitating consumers' ability to compare
credit terms and helping consumers avoid the uniformed use of credit.
15 U.S.C. 1601(a), 1604(a). Section 105(f) authorizes the Board to
exempt any class of transactions (with an exception not relevant here)
from coverage under any part of TILA if the Board determines that
coverage under that part does not provide a meaningful benefit to
consumers in the form of useful information or protection. 15 U.S.C.
1604(f)(1). Section 105(f) directs the Board to make this determination
in light of specific factors. 15 U.S.C. 1604(f)(2). These factors are
(1) the amount of the loan and whether the disclosure provides a
benefit to consumers who are parties to the transaction involving a
loan of such amount; (2) the extent to which the requirement
complicates, hinders, or makes more expensive the credit process; (3)
the status of the borrower,

[[Page 5335]]

including any related financial arrangements of the borrower, the
financial sophistication of the borrower relative to the type of
transaction, and the importance to the borrower of the credit, related
supporting property, and coverage under TILA; (4) whether the loan is
secured by the principal residence of the borrower; and (5) whether the
exemption would undermine the goal of consumer protection. The Board
has considered each of these factors carefully, and based on that
review, believes it is appropriate to provide this exemption for card
issuers that provide the actual repayment disclosure on the periodic
statement.
As discussed in the supplementary information to the June 2007
Proposal, the Board believes that certain cardholders would find the
actual repayment disclosures more helpful than the generic repayment
estimates, as suggested by a recent study conducted by the GAO on
minimum payments. For this study, the GAO interviewed 112 consumers and
collected data on whether these consumers preferred to receive on the
periodic statement (1) customized minimum payment disclosures that are
based on the consumers' actual account terms (such as the actual
repayment disclosure), (2) generic disclosures such as the warning
statement and the hypothetical example required by the Bankruptcy Act;
or (3) no disclosure.\22\ According to the GAO's report, in the
interviews with the 112 consumers, most consumers who typically carry
credit card balances (revolvers) found customized disclosures very
useful and would prefer to receive them in their billing statements.
Specifically, 57 percent of the revolvers preferred the customized
disclosures, 30 percent preferred the generic disclosures, and 14
percent preferred no disclosure. In addition, 68 percent of the
revolvers found the customized disclosure extremely useful or very
useful, 9 percent found the disclosure moderately useful, and 23
percent found the disclosure slightly useful or not useful. According
to the GAO, the consumers that expressed a preference for the
customized disclosures preferred them because such disclosures: would
be specific to their accounts; would change based on their
transactions; and would provide more information than generic
disclosures. GAO Report on Minimum Payments, pages 25, 27.
---------------------------------------------------------------------------

\22\ United States Government Accountability Office, Customized
Minimum Payment Disclosures Would Provide More Information to
Consumers, but Impact Could Vary, 06-434 (April 2006). (The GAO
indicated that the sample of 112 consumers was not designed to be
statistically representative of all cardholders, and thus the
results cannot be generalized to the population of all U.S.
cardholders.)
---------------------------------------------------------------------------

In addition, the Board believes that disclosing the actual
repayment disclosure on the periodic statement would simplify the
process for consumers and creditors. Consumers would not need to take
the extra step to call the toll-free telephone number to receive the
actual repayment disclosure, but instead would have that disclosure
each month on their periodic statements. Card issuers (other than
issuers that may use the Board or the FTC toll-free telephone number)
would not have the operational burden of establishing a toll-free
telephone number to receive requests for the actual repayment
disclosure and the operational burden of linking the toll-free
telephone number to consumer account data in order to calculate the
actual repayment disclosure. Thus, the final rule has the potential to
better inform consumers and further the goals of consumer protection
and the informed use of credit for credit card accounts.
7(b)(12)(v) Exemptions
As explained above, the final rule requires the minimum payment
disclosures only for credit card accounts. See Sec. 226.7(b)(12)(i).
Thus, creditors would not need to provide the minimum payment
disclosures for HELOCs (including open-end reverse mortgages),
overdraft lines of credit or other general purpose personal lines of
credit. For the same reasons as discussed above, the final rule exempts
these products even if they can be accessed by a credit card device as
discussed in the June 2007 Proposal, pursuant to the Board's authority
under TILA Section 105(a) to make adjustments that are necessary to
effectuate the purposes of TILA. 15 U.S.C. 1604(a). Specifically, new
Sec. 226.7(b)(12)(v) would exempt the following types of credit card
accounts: (1) HELOCs that are subject to Sec. 226.5b, even if the
HELOC is accessible by credit cards; (2) overdraft lines of credit tied
to asset accounts accessed by check-guarantee cards or by debit cards;
and (3) lines of credit accessed by check-guarantee cards or by debit
cards that can be used only at automated teller machines. See new Sec.
226.7(b)(12)(v)(A)-(C). The final rule also exempts charge cards from
the minimum payment disclosure requirements, to implement TILA Section
127(b)(11)(I). 15 U.S.C. 1637(b)(11)(I); see new Sec.
226.7(b)(12)(v)(D).
Exemption for credit card accounts with a fixed repayment period.
In the June 2007 Proposal, the Board proposed to exempt credit card
accounts where a fixed repayment period for the account is specified in
the account agreement and the required minimum payments will amortize
the outstanding balance within the fixed repayment period. See proposed
Sec. 226.7(b)(12)(iii)(E).
In response to the June 2007 Proposal, several consumer group
commenters urged the Board not to provide an exemption for credit with
a defined fixed repayment period. These commenters believed that the
Board should develop a special warning for these types of loans,
indicating that paying more than the required minimum payment will
result in paying off the loan earlier than the date of final payment
and will save the consumer interest charges. Industry commenters
generally supported the exemption for credit card accounts with a
specific repayment period.
The final rule in Sec. 226.7(b)(12)(v)(E) adopts the exemption for
credit card accounts with a specific repayment period as proposed, with
several technical edits, pursuant to the Board's authority under TILA
Section 105(a) to make adjustments that are necessary to effectuate the
purposes of TILA. 15 U.S.C. 1604(a). The minimum payment disclosure
does not appear to provide additional information to consumers that
they do not already have in their account agreements. In addition, as
discussed below, this exemption will typically be used with respect to
accounts that have been closed due to delinquency and the required
monthly payment has been reduced or the balance decreased to
accommodate a fixed payment for a fixed period of time designed to pay
off the outstanding balance. In these cases, consumers will likely be
aware of the fixed period of time to repay because it has been
specifically negotiated with the card issuer.
In order for this proposed exemption to apply, a fixed repayment
period must be specified in the account agreement. As discussed above,
this exemption would be applicable to, for example, accounts that have
been closed due to delinquency and the required monthly payment has
been reduced or the balance decreased to accommodate a fixed payment
for a fixed period of time designed to pay off the outstanding balance.
See comment 7(b)(12)(v)-1. This exemption would not apply where the
credit card may have a fixed repayment period for one credit feature,
but an indefinite repayment period on another feature. For example,
some

[[Page 5336]]

retail credit cards have several credit features associated with the
account. One of the features may be a general revolving feature, where
the required minimum payment for this feature does not pay off the
balance in a specific period of time. The card also may have another
feature that allows consumers to make specific types of purchases (such
as furniture purchases, or other large purchases), and the required
minimum payments for that feature will pay off the purchase within a
fixed period of time, such as one year. Comment 7(b)(12)(v)-1 makes
clear that the exemption relating to a fixed repayment period for the
entire account does not apply to the above situation, because the
retail card account as a whole does not have a fixed repayment period,
although the exemption under Sec. 226.7(b)(12)(v)(F) might apply as
discussed below.
Exemption where balance has fixed repayment period. In the June
2007 Proposal, the Board proposed to exempt credit card issuers from
providing the minimum payment disclosures on periodic statements in a
billing cycle where the entire outstanding balance held by consumers in
that billing cycle is subject to a fixed repayment period specified in
the account agreement and the required minimum payments applicable to
that balance will amortize the outstanding balance within the fixed
repayment period. See proposed Sec. 226.7(b)(12)(iii)(G). This
exemption was meant to cover the retail cards described above in those
cases where the entire outstanding balance held by a consumer in a
particular billing cycle is subject to a fixed repayment period
specified in the account agreement. On the other hand, this exemption
would not have applied in those cases where all or part of the
consumer's balance for a particular billing cycle is held in a general
revolving feature, where the required minimum payment for this feature
does not pay off the balance in a specific period of time set forth in
the account agreement. The final rule in Sec. 226.7(b)(12)(v)(F)
adopts this exemption as proposed, with one technical edit, pursuant to
the Board's authority under TILA Section 105(a) to make adjustments
that are necessary to effectuate the purposes of TILA. 15 U.S.C.
1604(a). See also comment 7(b)(12)(v)-2. The minimum payment
disclosures would not appear to provide additional information to
consumers in this context because consumers would be able to determine
from their account agreements how long it would take to repay the
balance. In addition, these fixed repayment features are often promoted
in advertisements by retail card issuers, so consumers will typically
be aware of the fixed repayment period when using these features.
Exemption where cardholders have paid their accounts in full for
two consecutive billing cycles. In the June 2007 Proposal, the Board
proposed to provide that card issuers are not required to include the
minimum payment disclosure in the periodic statement for a particular
billing cycle if a consumer has paid the entire balance in full in that
billing cycle and the previous billing cycle. See proposed Sec.
226.7(b)(12)(iii)(F).
In response to the June 2007 Proposal, several consumer groups
suggested that the Board not adopt this exemption and not provide any
exemption based on consumers' payment habits. Several industry
commenters suggested that the Board broaden this exemption. Some
industry commenters suggested that issuers should only be required to
comply with minimum payment disclosure requirements for a particular
billing cycle if the consumer has made minimum payments for the past
three consecutive billing cycles. Other industry commenters suggested
that issuers should only by required to comply with the minimum payment
disclosure requirements for a particular billing cycle if the consumer
has made at least three minimum payments in the past 12 months. Another
industry commenter suggested that there should be an exemption for any
consumer who has paid his or her account in full during the past 12
months, or has promotional balances that equal 50 percent or more of
his or her total account balance.
The final rule adopts in Sec. 226.7(b)(12)(v)(G) the exemption as
proposed, with one technical edit, pursuant to the Board's authority
under TILA Section 105(a) to make adjustments that are necessary to
effectuate the purposes of TILA. 15 U.S.C. 1604(a). The final rule
exempts card issuers from the requirement to provide the minimum
payment disclosures in the periodic statement for a particular billing
cycle immediately following two consecutive billing cycles in which the
consumer paid the entire balance in full, had a zero balance or had a
credit balance. The Board believes this approach strikes an appropriate
balance between benefits to consumers of the disclosures, and
compliance burdens on issuers in providing the disclosures. Consumers
who might benefit from the disclosures will receive them. Consumers who
carry a balance each month will always receive the disclosure, and
consumers who pay in full each month will not. Consumers who sometimes
pay their bill in full and sometimes do not will receive the minimum
payment disclosures if they do not pay in full two consecutive months
(cycles). Also, if a consumer's typical payment behavior changes from
paying in full to revolving, the consumer will begin receiving the
minimum payment disclosures after not paying in full one billing cycle,
when the disclosures would appear to be useful to the consumer. In
addition, creditors typically provide a grace period on new purchases
to consumers (that is, creditors do not charge interest to consumers on
new purchases) if consumers paid both the current balance and the
previous balance in full. Thus, creditors already currently capture
payment history for consumers for two consecutive months (or cycles).
The Board notes that card issuers are not required to use this
exemption. A card issuer may provide the minimum payment disclosures to
all of its cardholders, even to those cardholders that fall within this
exemption. If issuers choose to provide voluntarily the minimum payment
disclosures to those cardholders that fall within this exemption, the
Board encourages issuers to follow the disclosures rules set forth in
Sec. 226.7(b)(12), the accompanying commentary, and Appendices M1-M3
to part 226 (as appropriate) for those cardholders.
Exemption where minimum payment would pay off the entire balance
for a particular billing cycle. In response to the June 2007 Proposal,
several commenters requested that the Board add an exemption where
issuers would not be required to comply with the minimum payment
disclosure requirements for a particular billing cycle where paying the
minimum payment due for that billing cycle will pay the outstanding
balance on the account for that billing cycle. For example, if the
entire outstanding balance on an account for a particular billing cycle
is $20 and the minimum payment is $20, an issuer would not need to
comply with the minimum payment disclosure requirements for that
particular billing cycle. The final rule contains this exemption in new
Sec. 226.7(b)(12)(v)(H), pursuant to the Board's authority under TILA
Section 105(a) to make adjustments that are necessary to effectuate the
purposes of TILA. 15 U.S.C. 1604(a).
Other exemptions. In response to the June 2007 Proposal, several
commenters suggested other exemptions to the minimum payment
requirements, as discussed below. For the reasons discussed below, the
final rule does not include these exemptions.

[[Page 5337]]

1. Exemption for discontinued credit card products. In response to
the June 2007 Proposal, one industry commenter asked the Board to
provide an exemption for discontinued products for which no new
accounts are being opened, and for which existing accounts are closed
to new transactions. The commenter indicated that the number of
accounts that are discontinued are usually very small and the computer
systems used to produce the statements for the closed accounts are
being phased out. The Board does not believe that this exception is
warranted. Issuers will need to make changes to their periodic
statement systems as a result of changes to other periodic statement
requirements in this final rule and issuers could make changes to the
periodic statement system to incorporate the minimum payment disclosure
on the periodic statement at the same time they make other changes
required by the final rule.
2. Exemption for credit card accounts purchased within the last 18
months. In response to the June 2007 Proposal, several commenters urged
the Board to provide an exemption for accounts purchased by a credit
card issuer. With respect to these purchased accounts, one commenter
urged the Board to exempt issuers from providing the minimum payment
disclosures during a transitional period (up to 18 months) while the
purchasing issuer converts the new accounts to its statement system. In
this situation, the commenters indicated that the purchase of credit
card accounts is often followed by a change-in-terms notice, which may
include a change in the minimum payment formula. If this occurs,
disclosing one estimated repayment period immediately after the account
is purchased and then disclosing a different repayment period for the
same balance after the change in terms becomes effective would be
confusing to many consumers. The Board does not believe that such an
exemption is warranted. A consumer may be alerted that his or her
minimum payment has changed, either through reading the change-in-terms
notice, or seeing different minimum payment amounts disclosed on his or
her periodic statement. Thus, consumers may be aware that their minimum
payment has changed, and as a result, may not be confused about
receiving a different repayment period for the same or similar balance.
3. Promotional plans. One industry commenter suggested that the
Board exempt any account where there is a balance in a promotional
credit plan, such as a deferred interest plan, until expiration of the
promotional plan. Another industry commenter suggested that the Board
not require an issuer to provide the minimum payment disclosures to any
consumer that has promotional balances that equal 50 percent or more of
his or her total account balance. The final rule does not include these
exemptions for promotional plans. Not all consumers will necessarily
pay off the promotional balances by the end of the promotional periods.
Thus, the Board believes that some consumers that have taken advantage
of promotional plans may still find the minimum payment disclosures
useful.
4. General purpose lines of credit. One commenter suggested that
the final rule include an exemption for general purpose lines of
credit. This commenter indicated that general purpose lines can be
accessed by check or credit union share draft, by personal request at a
branch, or via telephone or Internet. The Board notes that Sec.
226.7(b)(12)(i) makes clear that the minimum payment disclosure
requirements only apply to credit card accounts. Thus, to the extent
that a general purpose line of credit is not accessed by a credit card,
it is not subject to the requirements in Sec. 226.7(b)(12).
7(b)(13) Format Requirements
Under the June 2007 Proposal, creditors would have been required to
group together disclosures regarding when a payment is due (due date
and cut-off time if before 5 p.m.), how much is owed (minimum payment
and ending balance), the potential costs for paying late (late-payment
fee, and penalty APR if triggered by a late payment), and the potential
costs for making only minimum payments. Proposed Samples G-18(E) and G-
18(F) in Appendix G to part 226 would have illustrated the proposed
requirements. The proposed format requirements were intended to fulfill
Congress's intent to have the new late payment and minimum payment
disclosures enhance consumer understanding of the consequences of
paying late or making only minimum payments, and were based on consumer
testing conducted for the Board that indicated improved understanding
when related information is grouped together.
Consumer group commenters, a member of Congress and one trade
association supported the format requirements, as being helpful to
consumers.
Industry commenters generally opposed the requirements as being
overly prescriptive. They urged the Board to permit additional
flexibility, or instead to retain the current requirement to provide
``clear and conspicuous'' disclosures. They asked the Board to require
a ``closely proximate'' standard that would allow additional
flexibility in how creditors design their statements, and to eliminate
any requirement that creditors' disclosures be substantially similar to
model forms or samples. They stated that there is no evidence that
under the current ``clear and conspicuous'' standard consumers are
unable to locate or understand the due date, balances, and minimum
payment amount.
Some industry commenters opposed the requirement to place the late
payment disclosures on the front of the first page. Some commenters
asserted that locating that disclosure on the top of the first page
places a disproportionate emphasis on the disclosure.
The Board tested the formatting of information regarding payments
in two rounds of consumer testing conducted after May 2008.
Participants were presented with two different versions of the periodic
statement, in which the information was grouped, but the formatting was
varied. These changes had no noticeable impact on how easily
participants could locate the warning regarding the potential costs for
paying late and the potential costs for making only minimum payments.
The Board also tested different formats for the grouped information
in the quantitative testing conducted in September and October 2008.
Participants were shown versions of the periodic statement in which the
information was grouped, but formatted in three different ways. In
order to assess whether formatting had an impact on consumers' ability
to locate these disclosures, the Board's testing consultant focused on
whether the format in which payment information was provided impacted
consumer awareness of the late payment warning. Participants were asked
whether there was any information on the statement about what would
happen if they made a late payment. Participants who noticed the late
payment warning were then asked a series of questions about what would
happen if they made a late payment. Consistent with the prior rounds of
consumer testing, the results of the quantitative testing demonstrated
that the formatting of the grouped payment information does not have a
statistically significant impact on consumers' ability to locate or
understand the late payment warning.
Because the Board's consumer testing demonstrated that formatting
of the information about payments does not have an impact on consumer
awareness

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of these disclosures if the information is grouped together, Sec.
226.7(b)(13) as adopted does not require that disclosures regarding
when a payment is due, how much is owed, the potential costs for paying
late, and the potential costs for making only minimum payments be
``substantially similar'' to Sample G-18(D) or G-18(E) (proposed as
Samples G-18(E) and G-18(F)). The final rule does require, however,
that these terms be grouped together, in close proximity, consistent
with the proposal. For the reasons discussed in the supplementary
information to Sec. 226.7(b)(11), the final rule does not require a
disclosure of the cut-off time on the front of the periodic statement,
and the reference to a cut-off time disclosure that was included in
proposed Sec. 226.7(b)(13) has been deleted.
In response to a request for guidance, comment app. G-10 is added
to clarify that although the payment disclosures appear in the upper
right-hand corner of Forms G-18(F) and G-18(G) (proposed as Forms G-
18(G) and G-18(H)), the disclosures may be located elsewhere, as long
as they appear on the front side of the first page.
Combined deposit account and credit account statements. Some
financial institutions provide information about deposit account and
open-end credit account activity on one periodic statement. Industry
commenters asked for guidance on how to comply with format requirements
requiring disclosures to appear on the ``front of the first page'' for
these combined statements. Comment 7(b)(13)-1 is added to clarify that
for purposes of providing disclosures on the front of the first page of
the periodic statement pursuant to Sec. 226.7(b)(13), the first page
of such a combined statement shall be deemed to be the page on which
credit transactions first appear. For example, assume a combined
statement where credit transactions begin on the third page and deposit
account information appears on pages one and two. For purposes of
providing disclosures on the front of the first page of the periodic
statement under Regulation Z, this comment clarifies that page three is
deemed to be the first page of the periodic statement.
Technical revisions. A number of technical revisions are made for
clarity, as proposed. For the reasons set forth in the section-by-
section analysis to Sec. 226.6(b)(2)(v), the Board is updating
references to ``free-ride period'' as ``grace period'' in the
regulation and commentary, without any intended substantive change.
Current comment 7-2, which addresses open-end plans involving more than
one creditor, is deleted as obsolete and unnecessary.

Section 226.8 Identifying Transactions on Periodic Statements

TILA Section 127(b)(2) requires creditors to identify on periodic
statements credit extensions that occurred during a billing cycle. 15
U.S.C. 1637(b)(2). The statute calls for the Board to implement
requirements that are sufficient to identify the transaction or to
relate the credit extension to sales vouchers or similar instruments
previously furnished. The rules for identifying transactions are
implemented in Sec. 226.8, and vary depending on whether: (1) The
sales receipt or similar credit document is included with the periodic
statement, (2) the transaction is sale credit (purchases) or nonsale
credit (cash advances, for example), and (3) the creditor and seller
are the ``same or related.'' TILA's billing error protections include
consumers' requests for additional clarification about transactions
listed on a periodic statement. 15 U.S.C. 1666(b)(2); Sec.
226.13(a)(6).
``Descriptive billing'' statements. In June 2007, the Board
proposed revisions to the rules for identifying sales transactions when
the sales receipt or similar document is not provided with the periodic
statement (so called ``descriptive billing''), which is typical today.
The proposed revisions reflect current business practices and consumer
experience, and were intended to ease compliance. Currently, creditors
that use descriptive billing are required to include on periodic
statements an amount and date as a means to identify transactions. As
an additional means to identify transactions, current rules contain
description requirements that differ depending on whether the seller
and creditor are ``same or related.'' For example, a retail department
store with its own credit plan (seller and creditor are same or
related) sufficiently identifies purchases on periodic statements by
providing the department such as ``jewelry'' or ``sporting goods'';
item-by-item descriptions are not required. Periodic statements
provided by issuers of general purpose credit cards, where the seller
and creditor are not the same or related, identify transactions by the
seller's name and location.
The June 2007 Proposal would have permitted all creditors to
identify sales transactions (in addition to the amount and date) by the
seller's name and location. Thus, creditors and sellers that are the
same or related could, at their option, identify transactions by a
brief identification of goods or services, which they are currently
required to do in all cases, or they could provide the seller's name
and location for each transaction. Guidance on the level of detail
required to describe amounts, dates, the identification of goods, or
the seller's name and location would have remained unchanged under the
proposal.
Commenters addressing this aspect of the June 2007 Proposal
generally supported the proposed revisions. For the reasons stated
below, the final rule provides additional flexibility to creditors that
use descriptive billing to identify transactions on periodic
statements.
The Board's revisions are guided by several factors. The standard
set forth by TILA for identifying transactions on periodic statements
is quite broad. 15 U.S.C. 1637(b)(2). Whether a general description
such as ``sporting goods'' or the store name and location would be more
helpful to a consumer can depend on the situation. Many retailers
permit consumers to purchase in a single transaction items from a
number of departments; in that case, the seller's name and location may
be as helpful as the description of a single department from which
several dissimilar items were purchased. Also, the seller's name and
location has become the more common means of identifying transactions,
as the use of general purpose cards increases and the number of store-
only cards decreases. Thus, retailers that commonly accept general
purpose credit cards but also offer a credit card account or other
open-end plan for use only at their store would not be required to
maintain separate systems that enable different descriptions to be
provided, depending on the type of card used. Moreover, consumers are
likely to carefully review transactions on periodic statements and
inquire about transactions they do not recognize, such as when a
retailer is identified by its parent company on sales slips which the
consumer may not have noticed at the time of the transaction. Moreover,
consumers are protected under TILA with the ability to assert a billing
error to seek clarification about transactions listed on periodic
statements, and are not required to pay the disputed amount while the
card issuer obtains the necessary clarification. Maintaining rules that
require more standardization and detail would be costly, and likely
without significant corresponding consumer benefit. Thus, the revisions
are intended to provide flexibility for card issuers without reducing
consumer protection.

[[Page 5339]]

The Board notes, however, that some retailers offering their own
open-end credit plans tie their inventory control systems to their
systems for generating sales receipts and periodic statements. In these
cases, purchases listed on periodic statements may be described item by
item, for example, to indicate brand names such as ``XYZ Sweater.''
This item-by-item description, while not required under current or
revised rules, remains permissible.
To implement the approach described above, Sec. 226.8 is revised,
as proposed, as follows. Section 226.8(a)(1) sets forth the rule
providing flexibility in identifying sales transactions, as discussed
above as well as the content of footnote 19. Section 226.8(a)(2)
contains the existing rules for identifying transactions when sales
receipts or similar documents accompany the periodic statement. Section
226.8(b) is revised for clarity. A new Sec. 226.8(c) is added to set
forth rules now contained in footnote 16; and, without references to
``same or related'' parties, footnotes 17 and 20. The substance of
footnote 18, based on a statutory exception where the creditor and
seller are the same person, is deleted as unnecessary. The title of the
section is revised for clarity.
The commentary to Sec. 226.8 is reorganized and consolidated but
is not substantively changed, as proposed. Comments 8-1, 8(a)(1)-1, and
8(a)(2)-4 are deleted as duplicative. Similarly, comments 8-6 through
8-8, which provide creditors with flexibility in describing certain
specific classes of transactions regardless of whether they are
``related'' or ``nonrelated'' sellers or creditors, are deleted as
unnecessary. Revised Sec. 226.8(a)(1)(ii) and comments 8(a)-3 and
8(a)-7, which provide guidance for identifying mail or telephone
transactions, are updated to refer to Internet transactions.
Examples of sale credit. Proposed comment 8(a)-1 republished an
existing example of sales credit--a funds transfer service (such as a
telegram) from an intermediary-- and proposed a new example--expedited
payment service from a creditor. One commenter addressed the proposed
comment, suggesting that the entire comment be deleted. The commenter
asserted creditors should have the flexibility to post a funds transfer
service as a cash advance but that the comment forces creditors to post
the transaction as a purchase, and, similarly, creditors should have
discretion in how to post fees for creditors' services.
The requirements of Sec. 226.8 are limited to how creditors must
identify transactions on periodic statements and do not impact how
creditors may otherwise characterize transactions, such as for purposes
of pricing. The Board believes a consumer's purchase of a funds
transfer service from a third party is properly characterized as sales
credit for purposes of identifying transactions on a card issuer's
periodic statement. Consumers are likely to recognize the name of the
funds transfer merchant, as would be the typical case where the card
issuer and funds transfer merchant are not the same or related. Thus,
the example is retained although a more current illustration (wire
transfer) replaces the existing illustration (telegram).
Additional guidance is added to comment 8(a)-1 regarding
permissible identification of creditors' services that are purchased by
the consumer and are ``costs imposed as part of the plan,'' in response
to the commenter's concerns. The comment provides that for the purchase
of such services (for example, a fee to expedite a payment), card
issuers and creditors comply with the requirements for identifying
transactions under Sec. 226.8 by disclosing the fees in accordance
with the requirements of Sec. 226.7(b)(6)(iii). The example of
voluntary credit insurance premiums as ``sale credit'' is deleted,
because such premiums are costs imposed as part of the plan under Sec.
226.6(b)(3)(ii)(F). To ease compliance, the comment further provides
that for purchases of services that are not costs imposed as part of
the plan, card issuers and creditors may, at their option, identify
transactions under this section or in accordance with the requirements
of Sec. 226.7(b)(6)(iii). This flexibility is intended to avoid
technical compliance violations.
Aggregating small dollar purchases. One commenter urged the Board
to permit card issuers to aggregate, for billing purposes, small dollar
purchases at the same merchant. Aggregating such purchases, in the view
of the commenter, could enhance consumers' ability to track small
dollar spending at particular merchants in a more meaningful way.
The Board believes further study is desirable to consider the
potential ramifications of permitting card issuers to aggregate small
dollar transactions on periodic statements. Furthermore, consistent
rules should be considered under Regulation E (Electronic Fund
Transfer). 12 CFR part 205. Thus, the final revisions do not include
rules permitting aggregation of small dollar purchases.
Receipts accompany statements. Rules for identifying transactions
where receipts accompany the periodic statement were not affected by
the June 2007 Proposal, and are retained. Comments 8-4 and 8(a)(2)-3,
which provide guidance when copies of credit or sales slips accompany
the statement, are deleted, as proposed. The Board believes this
practice is no longer common, and to the extent sales or similar credit
documents accompany billing statements, additional guidance seems
unnecessary.

Section 226.9 Subsequent Disclosure Requirements

Section 226.9 currently sets forth a number of disclosure
requirements that apply after an account is opened, including a
requirement to provide billing rights statements annually, a
requirement to provide at least 15 days' advance notice whenever a term
required to be disclosed in the account-opening disclosures is changed,
and a requirement to provide finance charge disclosures whenever credit
devices or features are added on terms different from those previously
disclosed.
9(a) Furnishing Statement of Billing Rights
Section 226.9(a) requires creditors to mail or deliver a billing
error rights statement annually, either to all consumers or to each
consumer entitled to receive a periodic statement. See 15 U.S.C.
1637(a)(7). Alternatively, creditors may provide a shorter billing
rights statement on each periodic statement. Regulation Z contains
model forms creditors may use to satisfy the notice requirements under
Sec. 226.9(a). See Model Forms G-3 and G-4.
The June 2007 Proposal would have revised both the regulation and
commentary under Sec. 226.9(a) to conform to other changes elsewhere
in the proposal, but otherwise would have left the provision unchanged
substantively. In addition, the Board proposed new Model Forms G-3(A)
(long form billing rights notice) and G-4(A) (short form alternative
billing rights notice) in the June 2007 Proposal to improve the
readability of the current notices. For HELOCs subject to the
requirements of Sec. 226.5b, the June 2007 Proposal would have given
creditors the option of using the current Model Forms G-3 and G-4, or
the revised forms.
One industry commenter opposed the proposed changes in Model Forms
G-3(A) and G-4(A), largely due to the increased compliance burden from
having separate forms for HELOCs and for other open-end plans. This
commenter further noted that the Board did not conduct consumer
research on the readability of the proposed notices. Another industry
commenter opposed

[[Page 5340]]

the revised language in Model Forms G-3(A) and G-4(A) regarding the
merchant claims and defenses under Sec. 226.12(c), stating that mere
dissatisfaction with the good or service would not be enough to trigger
the consumer's rights. Consumer groups generally supported the revised
forms, but urged the Board to add additional language in the short form
billing rights notice (Model Form G-4(A)) to note that a consumer need
not pay any interest if the error is resolved in the consumer's favor,
consistent with language in the long-form notice (Model Form G-3(A)).
Consumer groups also suggested that the Board add optional language in
the event a creditor allows a cardholder to provide billing error
notices electronically.
The final rule retains Model Forms G-3(A) and G-4(A), largely as
proposed. To address concerns about potential compliance burdens from
using multiple forms, the final rule permits creditors to use Model
Forms G-3(A) and G-4(A) in all cases to comply with their disclosure
obligations for all open-end products. Thus, for open-end (not home-
secured) plans, creditors may use Model Forms G-3(A) and G-4(A). For
HELOCs subject to the requirements of Sec. 226.5b, creditors may use
the revised forms, or continue to use Model Forms G-3 and G-4. In
addition, while the new model forms were not tested with individual
consumers, the forms were reviewed by the Board's testing consultant
which enabled the Board to draw upon the consultant's experience, both
from the insights obtained through the testing of other notices in
connection with this rulemaking, as well as from working with plain
language disclosures in other contexts.
To address consumer group concerns, language has been added to
Model Form G-4(A) (the short form alternative billing rights notice for
open-end (not home-secured) plans) to inform the consumer that he or
she need not pay any interest if the error is resolved in the
consumer's favor, consistent with identical language used in the long
form (Model Form G-3(A)). In addition, each of the model forms has been
revised to include optional language a creditor may use if it permits a
cardholder to provide billing error notices electronically. As
discussed below in the section-by-section analysis to Sec. 226.13, if
a creditor indicates that it will accept notices submitted
electronically, it must treat notices received in such manner as
preserving billing error rights. See Sec. 226.13(b); comment 13(b)-2,
discussed below. Lastly, both Model Forms G-3(A) and G-4(A) have been
revised in the final rule to clarify that for merchant claims (see
Sec. 226.12(c)), the consumer must first attempt in good faith to
correct the problem with the merchant before asserting the claim with
the issuer.
9(b) Disclosures for Supplemental Credit Access Devices and Additional
Features
Section 226.9(b) currently requires certain disclosures when a
creditor adds a credit device or feature to an existing open-end plan.
When a creditor adds a credit feature or delivers a credit device to
the consumer within 30 days of mailing or delivering the account-
opening disclosures under current Sec. 226.6(a), and the device or
feature is subject to the same finance charge terms previously
disclosed, the creditor is not required to provide additional
disclosures. If the credit feature or credit device is added more than
30 days after mailing or delivering the account-opening disclosures,
and is subject to the same finance charge terms previously disclosed in
the account-opening agreement, the creditor must disclose that the
feature or device is for use in obtaining credit under the terms
previously disclosed. However, if the added credit device or feature
has finance charge terms that differ from the disclosures previously
given under Sec. 226.6(a), then the disclosures required by Sec.
226.6(a) that are applicable to the added feature or device must be
given before the consumer uses the new feature or device.
In June 2007, the Board proposed to retain the current rules set
forth in Sec. Sec. 226.9(b)(1) and (b)(2) for all credit devices and
credit features except checks that access a credit card account. With
respect to checks that access a credit card account, the Board proposed
to create a new Sec. 226.9(b)(3) that would require certain
information to be disclosed each time checks that access a credit card
account are mailed to a consumer, for checks mailed more than 30 days
following the delivery of the account-opening disclosures.
The June 2007 Proposal would have required the following key terms
to be disclosed on the front of the page containing the checks: (1) Any
discounted initial rate, and when that rate will expire, if applicable;
(2) the type of rate that will apply to the checks after expiration of
any discounted initial rate (such as whether the purchase or cash
advance rate applies) and the applicable APR; (3) any transaction fees
applicable to the checks; and (4) whether a grace period applies to the
checks, and if one does not apply, that interest will be charged
immediately. The disclosures would have been required to be accurate as
of the time the disclosures are given. The June 2007 Proposal provided
that a variable APR is accurate if it was in effect within 30 days of
when the disclosures are given. Proposed Sec. 226.9(b)(3) would have
required that these key terms be disclosed in a tabular format
substantially similar to Sample G-19 in Appendix G to part 226. The
Board solicited comment on the operational burden associated with
customizing the checks to disclose the actual APR, and on alternatives,
such as whether providing a reference to the type of rate that will
apply, accompanied by a toll-free telephone number that a consumer
could call to receive additional information, would provide sufficient
benefit to consumers while limiting the burden on creditors.
In the May 2008 Proposal, the Board proposed to add to the summary
table in Sec. 226.9(b)(3) another disclosure that would have required
additional information regarding the expiration date of any offer of a
discounted initial rate. The additional disclosure was set forth in
proposed Sec. 226.9(b)(3)(i)(C), pursuant to the Board's authority
under TILA Section 105(a). 15 U.S.C. 1604(a). Specifically, the
disclosure would have been required to include any date by which the
consumer must use the checks in order to receive the discounted initial
rate. Furthermore, if the creditor will honor the checks if they are
used after the disclosed date but will apply to the advance a rate
other than the discounted rate, proposed Sec. 226.9(b)(3)(i)(C) would
have required the creditor to disclose that fact and the type of rate
that will apply under those circumstances. The Board also proposed to
revise proposed Sec. 226.9(b)(3)(i)(E) (proposed in June 2007 as Sec.
226.9(b)(3)(i)(D)) regarding disclosure of any grace period applicable
to the checks and to add a new comment 9(b)(3)(i)(E)-1 which set forth
language that creditors could have used to describe in the tabular
disclosure any grace period (or lack of a grace period) offered on
check transactions.
APRs. The Board received several comments on the proposal to
require disclosure of the actual APR or APRs applicable to the checks.
Several industry commenters noted that there would be operational
burdens associated with disclosing the actual rate applicable to the
checks that access a credit card account. These commenters encouraged
the Board to consider alternatives, such as providing a reference to
the type of rate that will apply or providing a toll-free number that
consumers can use to get customized information. One issuer noted that
all cardholders do not receive

[[Page 5341]]

the same rate and/or fees even if they receive checks at the same time
and stated that convenience check printing would have to be done in
batches, raising the production costs. Another issuer noted that it has
only one rate that applies to all features (purchases, cash advances,
and balance transfers) under a given pricing plan, so its cardholders
were unlikely to be confused about the rate that will apply after the
expiration of a promotional rate. That commenter stated that
redisclosing the rate applicable to the account on the page containing
the checks would require customization by pricing plan. One issuer
commented that the burden of customizing checks would fall
disproportionately on smaller issuers because they would not be able to
obtain efficiencies of scale if customization was required. Finally,
one commenter also stated that, in addition to being operationally
burdensome, the disclosure of the actual ``go-to'' rate could be
confusing for consumers, because it may be inaccurate by the time any
promotional offer expires.
Consumer groups, a trade association for community banks, and a
credit union trade association supported the disclosure of the actual
rate applicable to the checks. These commenters stated that it is
important that consumers be aware of the costs associated with using
checks that access a credit card account and that consumers should not
have to use a toll-free number to receive the information. One
commenter pointed out that the testing conducted on behalf of the Board
indicated that consumers generally did not notice or pay attention to a
cross reference contained in the convenience check disclosure.
The final rule requires that the tabular disclosure accompanying
checks that access a credit card account include a disclosure of the
actual rate or rates applicable to the checks, consistent with the June
2007 Proposal. The Board believes that disclosing the actual rate that
will apply to checks once any promotional rate expires is a crucial
piece of information necessary to assist consumers in deciding whether,
and in what manner, to use the checks. While the actual post-
promotional rate disclosed at the time the checks are sent to a
consumer may be inaccurate by the time the promotional offer expires,
due, for example, to fluctuations in the index used to determine a
variable rate, the Board notes that this is not materially different
from the situation where a post-promotional rate is disclosed in the
disclosures provided to a consumer with an application or solicitation
under Sec. 226.5a or with the account-opening disclosures given
pursuant to Sec. 226.6. In either case, the exact post-promotional
rate may differ from the rate disclosed by the time it becomes
applicable to the consumer's account; however, the Board believes that
disclosure of the actual post-promotional rate in effect at the time
that the checks are sent to the consumer is an important piece of
information for the consumer to use in making an informed decision
about whether to use the checks.
The requirement to disclose the actual rate applicable to the
checks also is consistent with the policy considerations underlying
TILA Section 127(c)(6)(A), as added by Section 1303(a) of the
Bankruptcy Act. 15 U.S.C. 1637(c)(6)(A). As discussed in the
supplementary information to Sec. 226.16(g), TILA Section 127(c)(6)(A)
requires in connection with credit card direct mail applications and
solicitations or accompanying promotional materials that a creditor
disclose the time period in which the introductory period will end and
the APR that will apply after the end of the introductory period. The
requirements in TILA Section 127(c)(6)(A) do not apply to checks that
access a credit card account because such checks are generally provided
in connection with an existing account, not in connection with an
application or solicitation for a new credit card account. However, the
Board believes, consistent with the intent of TILA Section
127(c)(6)(A), that requiring creditors to disclose with access checks
the actual rate that will apply upon expiration of any promotional rate
will ensure that consumers to whom an initial discounted rate is being
promoted also receive, with the materials promoting the initial
discounted rate, a disclosure of the actual rate that will apply after
that promotional rate expires.
Testing conducted on behalf of the Board also suggests that a
disclosure of the actual rate, rather than a toll-free telephone
number, will help to enhance consumer understanding of the rate that
will apply when the promotional rate expires. Consumer testing
conducted after the June 2007 Proposal supports the notion that
consumers tend to look for a rate rather than a narrative disclosure
when identifying the APR applicable to the checks. In March 2008, the
form of access check disclosures tested contained a disclosure of the
actual APR that would apply upon expiration of the promotional rate.
All of the participants who noticed the disclosures \23\ in the March
2008 interviews successfully identified the rate that would apply after
the promotional rate expired. In July and August 2008, however,
participants were presented with disclosures on the front of the page
containing the checks that did not disclose the actual APR, but rather
stated the type of rate that would apply (the cash advance rate) and a
toll-free number that the consumer could call to learn the current APR.
Almost all of the participants in the July and August 2008 testing were
able to identify either the type of rate that would apply or the toll-
free number. However, several consumers in the July and August 2008
testing who looked for a rate rather than a narrative disclosure
mistakenly identified the fee for use of the checks, which was
presented as a numerical rate, as the rate that would apply after
expiration of the promotional rate. In addition, several participants
who were presented with forms that did not provide an actual rate
commented that this information could be obtained only by calling the
creditor.
---------------------------------------------------------------------------

\23\ As discussed below, in the March 2008 testing, some
consumers did not notice the disclosures that accompanied the checks
that access a credit card account when they were included on an
insert with the periodic statement and not on the front of the page
containing the checks.
---------------------------------------------------------------------------

Finally, the Board also has reduced the operational burden
associated with printing the disclosure of the actual rate applicable
to the checks by adopting a 60-day accuracy requirement for the
disclosure of a variable rate rather than the 30-day accuracy
requirement that was proposed in June 2007. The June 2007 Proposal
would have provided in Sec. 226.9(b)(3)(ii) that a variable APR
disclosed pursuant to Sec. 226.9(b)(3)(i) is accurate if it was in
effect within 30 days of when the disclosures are given. Several
commenters stated that mailed convenience checks should be subject to
the same 60-day accuracy requirement that applies to other mailed
offers as contemplated in Sec. 226.5a(c)(2)(i) for direct mail
applications and solicitations. The commenters stated that card issuers
may have trouble complying with the 30-day requirement, because the APR
applicable to transactions in a given billing cycle sometimes is not
determined until the end of a billing cycle, for example, if an issuer
defines its index as of the last day of the cycle. Consequently, for
those issuers, if the checks are printed several days before the checks
are mailed, the APR obtained from the issuer's system may not be one in
effect within 30 days of the mail date for some subset of that issuer's
customers. The final rule in Sec. 226.9(b)(3)(ii) incorporates the 60-
day accuracy provisions requested by these commenters. The Board
believes that it

[[Page 5342]]

is appropriate to have the same timing provision for convenience checks
as for direct mail credit card applications and solicitations, and that
a 60-day period will effectively balance consumer benefit against the
burden on issuers.
One commenter noted that the proposed wording in Sec.
226.9(b)(3)(ii) that refers to when the account-opening disclosures
``are given'' creates confusion in the context of mailed disclosures,
because it is unclear when a mailed disclosure is ``given'' even though
it may be known when it is mailed. Sections 226.9(b)(3)(i) and (ii) of
the final rule refer to when the account-opening disclosures ``are
mailed or delivered.'' The Board believes that this will provide useful
clarification to issuers, and is consistent with the existing provision
for other supplemental credit access devices, which is retained in the
final rule as Sec. 226.9(b)(1) and (b)(2).
Location and format. Many industry commenters on the June 2007
Proposal urged the Board to provide flexibility regarding the required
location of the tabular disclosure for checks that access a credit card
account. Several commenters asked the Board to relax the location
requirement for the Sec. 226.9(b)(3) disclosures. One commenter stated
that a creditor should be permitted to provide the table on the first
page of a multiple-page advertising offer, even if the checks are
printed on the second page. Another commenter stated that creditors
should be permitted to provide a cross reference to the disclosures
when the checks are included with a periodic statement. Finally,
another commenter asked that the location requirements be relaxed for
single checks inserted as standalone inserts in mailings. Several
commenters opposed prescriptive location requirements more generally
and advocated that the Board adopt only a clear and conspicuous
standard, as opposed to the more specific standard proposed, for
location of the tabular disclosures.
Proposed Sec. 226.9(b)(3) stated that the disclosures were
required on the front of the page containing the checks. Consumer
testing conducted on behalf of the Board prior to the issuance of the
June 2007 Proposal showed that consumers were more aware of the
information included in the tabular disclosure when it was located on
the front of the page containing the checks rather than on the back. In
addition, approximately half of the participants in a round of testing
conducted in March 2008 failed to notice the tabular disclosure when it
was included as an insert with the periodic statement rather than on
the page containing the checks. With several clarifications discussed
below for multiple-page check offers, the final rule retains the
location requirement as proposed because testing has shown that
consumers are more likely to notice and pay attention to the
disclosures when they are located on the front of the page containing
the checks.
Several commenters asked the Board to clarify how the location
requirement would apply in situations where checks are printed on
multiple pages rather than a single page. For example, one commenter
asked the Board to clarify that redundant disclosures are not required
when the offer contains checks on multiple pages. A second commenter
asked the Board to provide flexibility for checks printed in a mini-
book or accordion-fold multi-panel booklet containing checks. New
comment 9(b)(3)(i)-1 is adopted to clarify that for an offer with
checks on multiple pages, the tabular disclosure need only be provided
on the front of the first page containing checks. Similarly, for a
mini-book or accordion-fold multi-panel booklet, comment 9(b)(3)(i)-1
clarifies that the tabular disclosures need only be provided on the
front of the mini-book or accordion-fold booklet. The proposed
requirement that disclosures be provided on the front of the page
containing the checks was intended to draw a consumer's attention to
the disclosures. The Board believes that the clarifications for
multiple-page offers and mini-books included in the commentary will
achieve the goal of attracting consumer attention while mitigating
burden on creditors that would be associated with providing the
disclosures on each page containing checks.
One commenter requested clarification that the tabular disclosure
could be printed on the solicitation letter if the checks were on the
same page as the letter, separated only by perforations. Comment
9(b)(3)(i)-1 provides the requested clarification.
Another commenter stated that a creditor should be permitted to
disclose the required terms within the same table with respect to
multiple APRs applying to different checks within the same offer. Such
a situation would arise, for example, where a consumer receives a
single offer that gives the consumer a choice between checks with a
higher APR for a longer promotional period or a lower APR for a shorter
promotional period. The Board believes that Sec. 226.9(b)(3) as
proposed would have permitted a single tabular disclosure of multiple
APRs applicable to checks within the same offer, provided that the
disclosure is provided on the front of the page containing the checks;
therefore, such a single disclosure as described by the commenter also
is permitted by the final rule. The Board believes that no additional
clarification is necessary in the regulation or the commentary.
Use-by date. As discussed above, the May 2008 Proposal included a
new Sec. 226.9(b)(3)(i)(C), which would have required additional
disclosures regarding the date by which the consumer must use the
checks in order to receive any discounted initial rate offered on the
checks. This requirement is adopted as proposed, renumbered as Sec.
226.9(b)(3)(i)(A)(3) in the final rule, as discussed below. Both
industry and consumer commenters generally supported this proposal, and
several large issuers indicated that they already provide a disclosure
of a date by which access checks must be used. In addition, consumer
testing conducted on behalf of the Board suggests that consumers who
see the disclosure tend to understand the use-by date, while consumers
who do not see the disclosure are unaware that there may be a use-by
date. More than half of the participants in consumer testing conducted
after the May 2008 Proposal noticed the use-by date disclosure and
understood from the disclosure that if they used the check after the
``use-by'' date the introductory rate would not apply. Most
participants that did not see the use-by date disclosure assumed that
no use-by date existed, and they could use the check, and obtain the
discounted initial rate, until the end of the promotional period. The
results of this testing suggest that consumers are not generally aware
from their own experience that the offer of a promotional rate for
access checks might be subject to a use-by date.
One industry commenter stated that its checks often are offered
through a seasonal program, and that checks are pre-printed with a
disclosure that the checks are ``good for only 90 days'' rather than
with a disclosure of a date certain by which the checks must be used to
qualify for a promotional rate. The commenter indicated that the
proposed changes could increase the costs associated with check
printing. New Sec. 226.9(b)(3)(i)(A)(3), consistent with the proposal,
requires however that the creditor disclose the date on which the offer
of the discounted initial rate expires. A consumer may have no way of
knowing on exactly what date the checks were mailed and the Board
believes, therefore, that a general statement such as ``good for only
90 days'' is not sufficient to inform a consumer of when the
promotional rate

[[Page 5343]]

offer expires. A creditor would still be free to specify a number of
days for which the promotional rate will be in effect (e.g., 90 days
from the date of use) rather than a particular calendar date on which
the promotional rate will end.
Grace period disclosure. In the May 2008 Proposal, the Board
proposed to revise proposed Sec. 226.9(b)(3)(i)(E) (proposed in June
2007 as Sec. 226.9(b)(3)(i)(D)) and to add a new comment
9(b)(3)(i)(E)-1 which set forth language that creditors could have used
to describe in the tabular disclosure any grace period (or lack of
grace period) offered on check transactions, consistent with the grace
period disclosures proposed under Sec. 226.5a. For the reasons
discussed in the supplementary information to Sec. 226.5a(b)(5), Sec.
226.9(b)(3)(i)(D) and comment 9(b)(3)(i)(D)-1 (proposed as Sec.
226.9(b)(3)(i)(E) and comment 9(b)(3)(i)(E)-1) are adopted as proposed.
New comment app. G-11 is added to provide guidance on the headings that
must be used when describing in the tabular disclosure a grace period
(or lack of a grace period) offered on check transactions that access a
credit card account.
Terminology. In June 2007, the Board proposed in new Sec.
226.9(b)(3)(i)(A) to require creditors to use the term ``introductory''
or ``intro'' in immediate proximity to the listing of any discounted
initial rate in the access check disclosures. The May 2008 Proposal
would have deleted this requirement, consistent with changes to
terminology in proposed Sec. 226.16(e)(2), and would have revised
Sample G-19 accordingly. Consistent with the May 2008 Proposal, the
final rule does not require creditors to use the term ``introductory''
or ``intro'' in access check disclosures, and Sample G-19 is adopted as
proposed. See Sec. 226.16(g)(2) and (g)(3) (proposed as Sec.
226.16(e)(2) and (e)(3)).
Additional disclosures. One commenter asked that the Board include
an additional disclosure in the table describing the payment allocation
applicable to the checks. As noted in the supplementary information to
the proposal published in May 2008 and in the supplementary information
to the final rule issued by the Board and other federal banking
agencies published elsewhere in today's Federal Register, the Board and
other agencies originally sought to address payment allocation issues
by developing disclosures explaining payment allocation and the impact
of payment allocation on accounts with multiple balances at different
APRs. However, despite extensive consumer testing conducted for the
Board, a significant percentage of consumers still did not comprehend
how payment allocation can affect the amount of interest assessed. As a
result, the Board and other agencies are addressing payment allocation
through a substantive rule, and no disclosure regarding payment
allocation has been added to the tabular disclosure provided with
checks that access a credit card account.
One consumer group commenter suggested that the Board require
creditors to disclose on each check that accesses a credit card account
the following statement: ``The use of this check will trigger immediate
interest and fees.'' The final rule does not require this disclosure on
the checks. The Board believes that the final rule already addresses
fees and the possible lack of a grace period by means of the
disclosures under Sec. 226.9(b)(3)(i)(C) and (b)(3)(i)(D). In consumer
testing conducted for the Board, most consumers saw these disclosures
presented on the front of the page containing the checks and understood
them.
A federal banking agency stated that the Board should require a
disclosure with checks that access a credit card account that certain
substantive protections that apply to credit cards do not apply to the
checks. The final rule does not require such a disclosure. As discussed
above with regard to Sec. 226.2(a)(15), the Board believes that
existing provisions under state UCC law governing checks, coupled with
the billing error provisions under Sec. 226.13, provide consumers with
sufficient protections from the unauthorized use of access checks.
Thus, the Board has declined to extend TILA's protections for credit
cards to such checks. Similarly, the Board believes that a disclosure
that certain substantive protections applicable to credit cards do not
apply to the checks is not necessary and may contribute to
``information overload.''
Exceptions. Some commenters asked the Board to require the tabular
disclosure only if the checks were not specifically requested by the
customer. These commenters indicated that customers may, and do,
request checks, and that these checks may be supplied through third-
party check printers that do not have access to the information
required to be included in the new Sec. 226.9(b)(3) tabular
disclosure. The final rule, as proposed, requires that the tabular
disclosure accompany the checks that access a credit card account, even
if those checks were specifically requested by the consumer. The Board
believes that consumer requests for access checks are uncommon for most
credit card accounts. The Board believes that regardless of whether a
consumer requests the checks that access a credit card account, the
consumer should receive disclosures of the costs of using the checks,
to better enable the consumer to make an informed decision regarding
usage of the checks. Furthermore, it is the Board's understanding that
any third-party processor must already receive from the issuer some
personalized information, such as the consumer's name and address or a
special routing number to link the checks to the consumer's account,
that is used in the preparation and printing of the checks. The Board
anticipates that creditors can build on their existing processes for
providing personalized information to a third party processor in order
to comply with the requirement to disclose account-specific information
about rates and fees with the checks.
Other industry commenters requested exceptions to the disclosure
requirements when checks are sent within a certain period of time after
full disclosures are provided, such as full disclosures sent upon
automatic card renewal, or when checks accompanied by the required
disclosures were sent previously within a given time frame. The Board
has not included either of these exceptions in the final rule. The
Board believes that the tabular disclosures accompanying the checks are
important to enable consumers to make informed decisions regarding
check usage. For example, a consumer may receive a set of checks in the
mail and may discard them because, at that time, he or she has no
intention of using the checks. If that consumer receives a second set
of checks, even a short time later, the consumer should receive a
disclosure of the terms applicable to the second set of checks, which
he or she may have interest in using, without having to retain and
refer back to the disclosure accompanying the first set of checks. The
Board believes that consumers generally will benefit from receiving the
required disclosures each time they receive checks that access a credit
card account, but has retained, for consistency with existing language
in Sec. 226.9(b)(1), an exception for checks provided during the first
30 days after the account-opening disclosures are mailed or delivered
to that consumer.
In the June 2007 Proposal, the Board sought comment as to whether
there are other credit devices or additional features that creditors
add to consumers' accounts to which this proposed rule should apply.
The Board received no comments advocating that the new

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Sec. 226.9(b)(3) disclosures be required for products other than
checks that access a credit card account. Accordingly, the final rule
is limited to access checks.
Technical amendments. The Board also made several technical
revisions to Sec. 226.9(b) in the final rule. First, Sec. 226.9(b)(3)
has been reorganized for clarity without substantive change. Second,
Sec. 226.9(b)(3)(i)(A) has been amended to clarify that the term
``promotional rate'' has the meaning set forth in Sec.
226.16(g)(2)(i). Finally, the Board also proposed in the June 2007
Proposal several technical revisions to improve the clarity of Sec.
226.9(b) and the associated commentary. The Board received no comments
on these technical revisions, and they are included in the final rule.
9(c) Change in Terms
The June 2007 Proposal included several revisions to the regulation
and commentary designed to improve consumers' awareness about changes
in their account terms or increased rates due to delinquency or default
or as a penalty. The proposed revisions generally would have applied
when a creditor changes terms that must be disclosed in the account-
opening summary table under proposed Sec. 226.6(b)(4), or increases a
rate due to delinquency or default or as a penalty. First, the Board
proposed to give consumers earlier notice of a change in terms, or for
increased rates due to delinquency or default or as a penalty. Second,
the Board proposed to expand the circumstances under which consumers
receive advance notice of changed terms, or increased rates due to
delinquency, or for default or as a penalty. Third, the Board proposed
to introduce format requirements to make the disclosures about changes
in terms or for increased rates due to delinquency, default or as a
penalty more effective.
Timing. Currently, Sec. 226.9(c)(1) provides that whenever any
term required to be disclosed under Sec. 226.6 is changed or the
required minimum payment is increased, a written notice must be mailed
or delivered to the consumer at least 15 days before that change
becomes effective. Proposed Sec. 226.9(c)(2)(i) would have extended
the notice period from 15 days to 45 days.
In response to the June 2007 Proposal, individual consumers and
consumer group commenters were generally supportive of the extension of
the notice period for a change in terms to 45 days. These commenters
agreed with the Board's observation that an extended notice period
would give consumers the opportunity to transfer or pay off their
balances, in order to potentially avoid or mitigate the cost associated
with the change in terms. Some consumer and consumer group commenters
urged the Board to consider extending the notice period even further,
to as many as 90 or 180 days.
A federal banking agency that commented on the June 2007 Proposal
supported the proposed 45-day change-in-terms notice period. This
commenter suggested, however, that the notice requirement should be
supplemented with a consumer right to opt out of certain changes,
including changes that are made unilaterally by the creditor or changes
in the consumer's rate under a universal default clause.
A number of industry commenters indicated that 45 days is too long
and would not provide financial institutions with the ability to
respond promptly to changes in market conditions. Some commenters
suggested that the increased period of advanced notice would undermine
the effectiveness of risk-based pricing and would lead to higher
pricing at the outset to hedge for the risk associated with more risky
borrowers. Some industry commenters stated that a 45-day advance notice
requirement would, in practice, result in many consumers receiving 60
to 90 days advance notice, particularly when a change-in-terms notice
is included with a periodic statement that is sent out on a monthly
cycle. Some industry commenters stated that the notice period should
remain at 15 days, while others advocated a 30-day or one billing cycle
notice period. These commenters indicated that 15 or 30 days is ample
time for consumers to act to transfer or pay off balances in advance of
the effective date of any changed term. Finally, some commenters stated
that a 45-day requirement might create an incentive for issuers to send
change-in-terms notices separately from the periodic statement, which
these commenters believe consumers are less likely to read.
Consistent with the proposal, the final rule requires 45 days'
advance notice for changes to terms required to be disclosed pursuant
to Sec. 226.9(c)(2)(i). The Board believes that the shorter notice
periods suggested by some commenters, such as 30 days or one billing
cycle, would not provide consumers with sufficient time to shop for and
possibly obtain alternative financing. The 45-day advance notice
requirement refers to when the change-in-terms notice must be sent, but
as discussed in the June 2007 Proposal it may take several days for the
consumer to receive the notice. As a result, the Board believes that
the 45-day advance notice requirement will give consumers, in most
cases, at least one calendar month after receiving a change-in-terms
notice to seek alternative financing or otherwise to mitigate the
impact of an unexpected change in terms.
As discussed above, some commenters raised concerns about whether
creditors would be able to respond promptly to changes in market
conditions in light of the proposed 45-day notice period.
Notwithstanding the 45-day advance notice requirement, the Board
believes that creditors still have the ability to respond appropriately
to changes in market conditions. First, a creditor may choose to offer
products with variable rates, which vary with the market in accordance
with a designated index. If the annual percentage rate applicable to a
consumer's account changes due to fluctuations in an index value as set
forth in the consumer's credit agreement, such changes can take effect
immediately without any notice required under Sec. 226.9(c)(2). If a
creditor chooses to offer a product with a rate that does not vary in
accordance with an index, that creditor will be required to wait 30
days longer than the current rule requiring 15 days' notice before
imposing a new, increased rate to a consumer's account.
The Board has declined to adopt a longer period, such as 90 or 180
days, as suggested by some commenters. The Board believes that such an
extended advance notice period would inappropriately restrict
creditors' ability to respond to market or other conditions and is not
necessary for consumers to have a reasonable opportunity to seek
alternative financing. The intent of extending the advance notice
period to 45 days is for consumers to have time to avoid costly
surprises; the Board believes that a consumer having at least one
calendar month to seek alternate financing appropriately balances
burden on creditors against benefit to consumers. In addition, the
Board notes that final rules issued by the Board and other federal
banking agencies published elsewhere in today's Federal Register
provide additional substantive protections for consumers regarding rate
increases.
The Board is aware that operational issues associated with
including change-in-terms notices with periodic statements may lead to
certain consumers receiving more than 45 days' notice. As noted above,
some industry commenters specifically indicated that a 45 day notice
requirement could in practice result in consumers receiving 60 or 90
days' notice, if the notice is included with the periodic statement.
While the Board encourages creditors to

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include change-in-terms notices with periodic statements, Sec.
226.9(c) also permits change-in-terms notices to be sent in a separate
mailing. A creditor that does not wish to wait a longer period before
changing terms on a consumer's account could send the change-in-terms
notice separately from the statement to avoid delays in changes in
terms in excess of the 45 day period.
As discussed in the supplementary information to Sec. 226.9(g),
the Board has adopted examples in comment 9(g)-1 to illustrate the
interaction between the requirements of the final rules issued by the
Board and other federal banking agencies published elsewhere in today's
Federal Register and the subsequent disclosure requirements under
Regulation Z. Some of those examples also provide guidance to an issuer
providing a notice pursuant to Sec. 226.9(c)(2)(i); the Board also has
adopted a new comment 9(c)(2)(i)-6 which cross references those
examples.
As discussed in the June 2007 Proposal, the 45-day notice period
was only proposed for those changes in terms that affect charges
required to be disclosed as a part of the account-opening table under
proposed Sec. 226.6(b)(4) or for increases in the required minimum
periodic payment. A different disclosure requirement would have applied
when a creditor increases any component of a charge, or introduces a
new charge, that is imposed as part of the plan under proposed Sec.
226.6(b)(1) but is not required to be disclosed as part of the account-
opening summary table under proposed Sec. 226.6(b)(4). Under those
circumstances, the proposal would have required the creditor to either,
at its option (1) provide at least 45 days' written advance notice
before the change becomes effective, or (2) provide notice orally or in
writing of the amount of the charge to an affected consumer at a
relevant time before the consumer agrees to or becomes obligated to pay
the charge.
Consumer groups expressed concern that allowing any oral notice may
provide insufficient information or time for a consumer's consideration
and that even written notice with no advance disclosure would be
insufficient. The comments also suggested that the proposed disclosure
regime, which limits the 45-day advance written notice of a change in
terms to a specific, finite list of terms, presents the possibility
that card issuers could generate new fees or terms not in the list that
will not be subject to the advance notice requirement.
Consistent with the proposal, and as discussed in the supplementary
information for Sec. 226.5, the final rule permits notice of the
amount of a charge that is not required to be disclosed under Sec.
226.6(b)(1) and (b)(2) (proposed as Sec. 226.6(b)(4)) to be given
orally or in writing at a relevant time before the consumer agrees to
or becomes obligated to pay the charge, at a time and in a manner that
a consumer would be likely to notice the disclosure of the charge. As
discussed above, the Board intends to continue monitoring credit card
products for the introduction of new types of fees and costs on those
accounts. If new costs are introduced that the Board believes are fees
of which consumers should be aware when the account is opened, the
Board would likely add such fees to the specified costs in Sec.
226.6(b)(2). The Board notes that a change-in-terms notice would be
required, however, in connection with a change in any fee of a type
that must be disclosed in the account-opening table.
Changes in type of applicable rate. The final rule includes new
comments 9(c)(2)(iv)-3 and 9(c)(2)(iv)-4 to clarify that if a creditor
changes a rate applicable to a consumer's account from a non-variable
rate to a variable rate, or from a variable rate to a non-variable
rate, a change-in-terms notice is required under Sec. 226.9(c), even
if the current rate at the time of the change is higher than the new
rate at the time of the change. The Board believes that this
clarification is appropriate to clarify the relationship between
comments 9(c)(2)(iii)(A)-3 and 9(c)(2)(iii)(A)-4 and Sec.
226.9(c)(2)(iv), which were proposed in June 2007 and have been adopted
in the final rule. Comments 9(c)(2)(iii)(A)-3 and 9(c)(2)(iii)(A)-4 set
forth guidance as to how a creditor should disclose a change from one
type of rate to another type of rate. Section 226.9(c)(2)(iv) states,
in part, consistent with the current rule, that a notice is not
required when a change involves the reduction of any component of a
finance or other charge. The Board recognizes that changing from one
type of rate (e.g., variable or non-variable) to another type of rate
might result in a temporary reduction in a finance charge. For example,
a creditor might change the rate from a variable rate that is currently
16.99% to a non-variable rate of 15%. However, over time as the value
of the index used to determine the variable rate fluctuates, the new
rate may in some cases ultimately be higher than the value of the rate
that applied prior to the change. In the example above, this could
occur if the value of the index used to compute the variable rate
effective before the change decreases by two percentage points, so that
the variable rate that would have been calculated using the formula
effective before the change in terms is 14.99%.
The Board notes that an issuer that is subject to final rules
issued by the Board and other federal banking agencies published
elsewhere in today's Federal Register may only change rates as
permitted pursuant to those rules. For example, those rules limit, in
some circumstances, a card issuer's ability to change a rate applicable
to a consumer's credit card account from a non-variable rate to a
variable rate.
Changes in late-payment fees and over-the-limit fees. Creditors
currently are not required to provide notice of changes to late-payment
fees and over-the-limit fees, pursuant to current Sec. 226.9(c)(2).
The June 2007 Proposal would have required 45 days' advance notice for
changes involving late-payment fees or over-the-limit fees, other than
a reduction in the amount of the charges, which is consistent with the
inclusion of late-payment fees and over-the-limit fees in the tabular
disclosure provided at account-opening under proposed Sec. 226.6(b)(4)
for open-end (not home-secured) plans. The proposed amendment would
have required that 45 days' advance notice be given only when a card
issuer changes the amount of a late-payment fee or over-the-limit fee
that it can impose, not when such a fee is actually applied to a
consumer's account.
Several commenters asked the Board to reduce or eliminate the
advance notice requirement for prospective changes to fees, such as
late-payment fees or over-the-limit fees, and for other changes in
terms that do not affect an existing balance (such as a change in
interest rates that will apply only prospectively to new transactions).
These commenters indicated that transaction-based fees, which are based
on account usage, and the assessment of additional interest charges or
fees based on changes in terms that do not affect an existing balance,
are in the control of the consumer and should not be afforded a lengthy
prior notice period. Notwithstanding these comments, the final rule
requires 45 days' advance notice of a change in terms, even if that
change is a prospective change to fees, or otherwise does not affect an
existing balance. The Board believes that a consumer still may want to
seek an alternative form of financing in anticipation of a change in
terms, even if that change only affects fees or does not affect
existing balances. Accordingly, the final rule is designed to give a
consumer enough notice so that the consumer has the opportunity to
avoid incurring additional interest

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charges or fees as a result of that change in terms. For example, an
increase in the annual fee applicable to a consumer's account does not
affect existing balances; however, a consumer may wish to transfer his
or her balance to a different card in order to avoid incurring an
increased annual fee on his or her account.
Changes initially disclosed. The final rule contains several
revisions to comment 9(c)(2)-1, which was modeled after current comment
9(c)-1 and was included in the June 2007 Proposal. The comment sets
forth guidance on when change-in-terms notices are not required if a
change has been initially disclosed. Proposed comment 9(c)(2)-1,
consistent with current comment 9(c)-1, included examples of terms
deemed to be initially disclosed. Among these examples were a rate
increase that occurs when an employee has been under a preferential
rate agreement and terminates employment or an increase that occurs
when the consumer has been under an agreement to maintain a certain
balance in a savings account in order to keep a particular rate and the
account balance falls below the specified minimum. The final rule
deletes these two examples from the comment.
The Board believes that an increase in rate due to the termination
of a consumer's employment with a particular company or due to the
consumer's account balance falling below a certain level is a type of
rate increase as a penalty that must be disclosed in advance under
Sec. 226.9(g), even if the circumstances under which the change may
occur are set forth in the account agreement. Accordingly, the Board
believes that retaining these examples in comment 9(c)(2)-1 could be
inconsistent with the rules for penalty rate increases set forth in
Sec. 226.9(g). A creditor may, by contract, designate many types of
consumer behavior, or changes in a consumer's circumstances, as events
upon the occurrence of which the consumer's rate may increase as a
penalty. Some of these events, such as the termination of an employment
contract, may not be typically considered events of delinquency or
default; nonetheless, in each case the creditor reserves the
contractual right to increase the rate applicable to the consumer's
account, and that rate increase is triggered by certain actions by, or
changes in the circumstances of, the consumer. The Board believes that
the changes to comment 9(c)(2)-1 are consistent with the requirements
of Sec. 226.9(g) As a result, and for the reasons stated in the
section-by-section analysis to Sec. 226.9(g) below, the final rule
provides that a consumer must receive advance notice prior to the
imposition of such rate increases so that a consumer may seek
alternative financing or otherwise respond to the change.
In addition, as noted below in the section-by-section analysis to
Sec. 226.9(g), one commenter on the proposal asked for clarification
regarding the difference between a consumer's ``default or
delinquency'' and a ``penalty.'' The Board believes that the revisions
to proposed comment 9(c)(2)-1 will help to eliminate ambiguity as to
when a rate is increased as a ``penalty.''
Format and content. Section 226.9 currently contains no
restrictions or requirements for how change-in-terms notices are
presented or formatted. For open-end (not home-secured) plans, the
Board's June 2007 Proposal would have required that creditors provide a
summary table of a limited number of key terms on the front of the
first page of the change-in-terms notice, or segregated on a separate
sheet of paper. Creditors would have been required to utilize the same
headings as in the account-opening tables in proposed model forms
contained in Appendix G to part 226. If the change-in-terms notice were
included with a periodic statement, the summary table would have been
required to appear on the front of the first page of the periodic
statement, preceding the list of transactions for the period. Based on
consumer testing conducted for the Board prior to the June 2007
Proposal, when a summary of key terms was included on change-in-terms
notices tested, consumers tended to read the notice and appeared to
understand better what key terms were being changed than when a summary
was not included.
The June 2007 Proposal would have required that creditors provide
specific information in the change-in-terms notice, namely (1) a
statement that changes are being made to the account; (2) a statement
indicating the consumer has the right to opt out of these changes, if
applicable, and a reference to additional information describing the
opt out right provided in the notice, if applicable; (3) the date the
changes described in the summary table will become effective; (4) if
applicable, an indication that the consumer may find additional
information about the summarized changes, and other changes to the
account, in the notice; and (5) if the creditor is changing a rate on
the account, other than a penalty rate, a statement that if a penalty
rate currently applies to the consumer's account, the new rate
described in the notice does not apply to the consumer's account until
the consumer's account balances are no longer subject to the penalty
rate. The June 2007 Proposal specified that this information must be
placed directly above the summary of key changes described above. The
minimum font size requirements in proposed comment 5(a)(1)-3 also would
have applied to any tabular disclosure required to be given pursuant to
proposed Sec. 226.9(c)(2)(iii)(B).
In May 2008, the Board proposed to add an additional disclosure
requirement to the summary table described above. For consistency with
the substantive restrictions regarding the application of increased
APRs to preexisting balances proposed by the Board and other federal
banking agencies in May 2008, the Board would have required the change-
in-terms notice to disclose the balances to which the increased rate
will be applied. If the rate increase will not apply to all balances,
the creditor would have been required to identify the balances to which
the current rate will continue to apply.
In response to the June 2007 Proposal, consumers and consumer
groups suggested a number of new formatting requirements, as well as
additional content for the summary box. For example, some consumers
requested that changes in terms be specifically highlighted, such as by
printing the original contract term in black and the new term in red.
Other consumers requested that change-in-terms notices always include a
complete, updated account agreement. Some comments focused on the mode
of delivery of the notice, with one commenter requesting that change-
in-terms notices always be mailed as a first-class letter and others
urging that notices of changes in terms should be delivered both by
regular mail and electronic mail. The Board has not incorporated any of
these formatting suggestions as requirements in the final rule. The
Board believes that some of these suggestions, such as sending a
complete, updated account agreement with each change in terms or
highlighting the changed term in a different color than the original
text, would impose operational burdens and/or significant costs on
creditors that would not be outweighed by a benefit to consumers.
Consumer testing conducted on behalf of the Board has indicated that
including a summary table either on the first page of the periodic
statement or the first page of the change-in-terms notice (if the
notice is sent separately from the statement) is an effective way to
enhance consumer attention regarding, and comprehension of, change-in-
terms notices, which is the

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approach proposed by the Board and adopted in the final rule.
Several consumers who commented on the June 2007 Proposal said that
the change-in-terms notice should state the reasons for the change in
terms and should state what, if anything, the consumer can do to
reverse the increase to the penalty rate and have the standard rate
reinstated. For several reasons, the final rule does not include a
requirement that a change in terms notice state the reasons for the
change. In some circumstances, the reasons may have nothing to do with
consumer behavior, and there may be no mechanism for the consumer to
reverse the increase. For example, if a creditor raises interest rates
generally due to a change in market conditions, such action is
independent of the consumer's behavior on the account and the consumer
can only mitigate the cost of the increase by reducing use of the card,
transferring a balance, or paying off the balance. Under these
circumstances, the Board believes the burden for issuers to customize
the notice to refer to the reason for the increase may exceed the
potential benefit of such a disclosure to consumers. In addition, if
the increase in rate is due to the imposition of a penalty rate, the
consumer will receive a disclosure indicating that the penalty rate has
been triggered, and the circumstances, if any, under which the
delinquency or default rate or penalty rate will cease to apply to the
consumer's account, as discussed below with regard to Sec. 226.9(g).
Consumer group commenters on the May 2008 Proposal stated that a
change-in-terms notice given in connection with a rate increase should
be required to state the current rate so that consumers will have an
indication of the magnitude of the change in terms. The final rule does
not require a creditor to disclose the current rate. The main purpose
of the change-in-terms notice is to inform consumers of the new rates
that will apply to their accounts. If several rates are being changed
and are being disclosed in a single change-in-terms notice, the Board
is concerned that disclosure of each of the current rates in the
change-in-terms notice could contribute to information overload.
Finally, several consumer commenters urged that issuers be required
to disclose the effect or magnitude of a change in terms in dollar
terms. The Board has not included this disclosure in the final rule,
because it would be difficult and likely misleading to try to estimate
in advance how a changed term will affect the cost of credit for any
individual consumer. For some types of changes in terms, such as a
change in a transaction fee or penalty fee, whether or not the fee will
be assessed with respect to a particular consumer's account depends to
some extent on that consumer's behavior on the account. For example, if
the change in terms being disclosed is an increase in the late fee, it
will never be assessed if a consumer does not make a late payment.
However, for a consumer who makes multiple late payments, the fee could
be assessed multiple times. Therefore, it is difficult to predict in
advance the dollar cost of the change for any given consumer.
Similarly, the dollar cost of an increased interest rate depends on the
extent to which the consumer engages in transactions to which that
increased interest rate applies, as well as whether the consumer is
able to take advantage of a grace period and avoid interest on those
transactions.
In response to the June 2007 Proposal, many industry commenters
asked for more flexibility in the formatting requirements for the
summary table regarding a change in terms. Some commenters stated that
an issuer should be able to include a clear and conspicuous change-in-
terms notice on or with a periodic statement without a requirement to
summarize it in a box on the front of the statement. Other commenters
asked the Board to allow issuers to include with the periodic statement
a separate change-in-terms notice as a statement stuffer or insert,
rather than including the tabular disclosure on the front of the first
page of the statement. These commenters stated that the requirement to
include a tabular disclosure on the front of the first page of a
periodic statement would substantially increase the cost of providing
change-in-terms notices. Other commenters stated that if the final rule
contained an alert on the front of the statement, it should at most be
a simplified cross reference stating that the statement includes
important information regarding a change in terms and referring the
consumer to the end of the statement. One commenter asked that the
strict front-of-the-first page location requirement be replaced by a
more general requirement that the change-in-terms disclosure appear
before the transaction details. Finally, one credit union asked that
the Board permit institutions to provide the tabular disclosure of
changed terms on a newsletter mailed with the periodic statement.
One credit union trade association that commented on the May 2008
Proposal stated that it supported the tabular requirement for
disclosure of changes in terms. This commenter noted that while the
requirement would impose a burden on credit unions, a consumer's need
for clarity outweighs this inconvenience or expense.
The final rule requires that the tabular summary appear on the
front of the periodic statement, consistent with the proposal. Consumer
testing conducted on behalf of the Board suggests that consumers tend
to set aside change-in-terms notices when they are presented as a
separate pamphlet inserted in the periodic statement. In addition,
testing prior to the June 2007 Proposal also revealed that consumers
are more likely to correctly identify the changes to their account if
the changes in terms are summarized in a tabular format. Quantitative
consumer testing conducted in the fall of 2008 demonstrated that
disclosing a change in terms in a tabular summary on the statement led
to a small improvement in the percentage of consumers who were able to
correctly identify the new rate that would apply to the account
following the change, versus a disclosure on the statement indicating
that changes were being made to the account and referring to a separate
change-in-terms insert. The Board believes that as consumers become
more familiar with the new format for the change-in-terms summary,
which was new to all testing participants, they may become better able
to recognize and understand the information presented. It is the
Board's understanding, which was supported by observations in consumer
testing prior to the June 2007 Proposal, that consumers are familiar
with the tabular formatting for the disclosures given with applications
and solicitations under Sec. 226.5a and that they find this consistent
formatting to be useful. Presentation of key information regarding
changes in terms in a tabular format also is consistent with the
Board's approach to disclosure of terms applicable to open-end (not
home-secured) accounts, where important information is provided to
consumers throughout the life of an account in a consistent tabular
format.
The Board also believes that as consumers become more familiar
generally with all new disclosures and formatting changes to the
periodic statement required by the final rule, consumers will become
better able to distinguish between information presented in a change-
in-terms summary table and other terms regularly disclosed on each
statement. The Board's consumer testing in the fall of 2008 indicated
that when a change-in-terms summary disclosing a change in an APR is
included on the periodic

[[Page 5348]]

statement, it can contribute to ``information overload'' and, for some
consumers, may make it more difficult to locate other APRs set forth on
the periodic statement. However, the Board believes that this finding
likely reflected the fact that consumers were unaccustomed to the
periodic statement form that they saw during the testing, which may
have been formatted differently and included different content than the
periodic statements that testing participants currently receive. The
Board believes that as consumers become more familiar with all new
Regulation Z disclosures on their periodic statements, they will become
less likely to mistake any new APR set forth in a change-in-terms
summary for another rate applicable to their account.
The Board recognizes that there will be operational costs
associated with printing the change-in-terms summary on the front of
the periodic statement, but believes that the location requirements are
warranted to facilitate consumer attention to, and understanding of,
the disclosures. As discussed above, under the final rule the minimum
font size requirements of 10-point font set forth in comment 5(a)(1)-3
also apply to any tabular disclosure given under Sec.
226.9(c)(2)(iii)(B).
The Board has not, however, adopted the requirement that a change-
in-terms summary appear on the first page of the periodic statement.
Quantitative consumer testing conducted for the Board in the fall of
2008 indicated that consumers were as likely to notice a change-in-
terms summary or reference if it was presented on the second page of
the statement as they were to notice it on the first page. Given that
many industry commenters noted that there would be substantial cost and
burden associated with reformatting the statement to include the
summary on the first page, and consumer testing did not show that
locating the notice on the first page of the statement improved its
noticeability, the Board believes that such a formatting requirement is
not warranted.
One industry commenter on the June 2007 Proposal asked for
clarification whether it would be permissible to move the table
disclosing the changes in terms to the top right corner of the periodic
statement instead of the center, as it is presented in Model Form G-
18(F) (proposed as Form G-18(G)). The Board believes that this would
have been permissible pursuant to the proposed rules, and that it also
is permissible under the final rule, particularly given that creditors
are not required to include the change-in-terms summary on the first
page of the statement. Form G-18(F) as adopted in the final rule
presents the change-in-terms summary on the front of the first page of
the periodic statement prior to the transactions list, consistent with
the proposal. However, there is no requirement that a creditor's
periodic statement must be ``substantially similar'' to Form G-18(F),
and provided that the periodic statement complies with other applicable
formatting requirements, relocating the change-in-terms tabular
disclosure to other locations on the front of the statement would be
permissible.
One industry commenter on the June 2007 Proposal stated that the
change-in-terms formatting requirements would force creditors to send
statements to consumers even if there is a zero balance, when terms are
changed on their accounts. The final rule, like the June 2007 Proposal,
does not require a creditor to send a change-in-terms notice with the
periodic statement. Therefore, for a consumer with a zero or a positive
balance, it is permissible to send a standalone change-in-terms notice
that meets the requirements of Sec. 226.9(c)(2)(iii)(B)(3) rather than
a periodic statement including a change-in-terms notice.
For creditors that choose to send change-in-terms notices
separately from the periodic statement, consistent with the proposal
the final rule requires that the change-in-terms summary appear on the
front of the first page of the notice. The Board believes that locating
the summary on the first page of such a standalone notice does not
impose the same level of burden and cost as would formatting changes to
the periodic statement. The results of the Board's quantitative
consumer testing do not directly bear on the formatting of separate
notices, but the Board believes based on testing conducted prior to the
June 2007 Proposal that including the tabular summary on the first page
of a standalone notice is important to improve consumer understanding
of, and attention to, the disclosure. Participants indicated in focus
groups and interviews conducted for the Board prior to June 2007 that
they often do not carefully read change-in-terms notices that they
receive from their bank in the mail, in part because the text is dense
prose and they have difficulty identifying the information in the
document that they consider important. The Board believes that
including a tabular summary of key changes on the first page of a
standalone notice may make consumers more likely to read the notice and
to understand what terms are being changed.
Several industry commenters remarked that change-in-terms notices
required pursuant to Sec. 226.9(c) would be confusing to consumers in
light of the complexity of the interaction between the requirements of
Sec. 226.9(c) and additional substantive requirements regarding rate
increases proposed by the Board and other federal banking agencies in
May 2008. See 73 FR 28904, May 19, 2008. One industry commenter
specifically stated that proposed Sec. 226.9(c)(2)(iii)(A)(7), which
would require a change-in-terms notice to disclose the balances to
which any increased rate will be applied, is a material change to the
45 day change-in-terms notice proposed in the June 2007 Proposal, and
would result in a notice that is confusing to consumers. One commenter
stated that the rule forces the use of disclosures that provide
specific dates within billing cycles to describe when current or
increased APRs apply and which account transactions and balances are
affected and that it would be simpler and more understandable if
transactions and balances affected by a change in rates applied for the
entire billing cycle or billing statement in which they appear, rather
than in reference to a specific date.
The Board acknowledges that the substantive restrictions on rate
increases set forth in final rules adopted by the Board and other
federal banking agencies published elsewhere in this Federal Register
introduce additional complexity into disclosure of changes in terms,
because rate increases may apply only to certain balances on a
consumer's account and not to others. In two rounds of consumer testing
conducted for the Board after the May 2008 Proposal, participants were
shown change-in-terms notices that disclosed an impending change to the
interest rate on purchases applicable to the account. These notices
formatted the information in two different ways, but both forms
disclosed the effective date of the change and disclosed that the rate
applicable to outstanding balances as of a specified date earlier than
the effective date would remain at the current rate. The notices also
indicated that, if the penalty APR was currently being applied to the
account, the change would not go into effect at the present time.
In the first of these two rounds, about half of participants
understood that the new rate on purchases would apply only to
transactions made after the specified date shown. In addition, about
half of participants also understood that if the penalty rate was
already applicable to the account, the new rate

[[Page 5349]]

on purchases would not immediately apply. However, none of the
participants could correctly identify the date when the changes would
begin to apply.
Based on the results of this consumer testing, changes were made to
the form which were tested in a subsequent round of testing. These
formatting changes generally improved consumer understanding of the
impending changes. In this second round, all but one participant
understood that the new APR on purchases would only apply to
transactions made after the date specified, and that the current APR
would continue to apply to transactions made before that date. In
addition, all but one participant also understood that if the penalty
rate was in effect, the new APR on purchases would not immediately
apply. Consumers still had the most difficulty identifying the
effective date of the changes. Approximately half of participants
correctly identified the effective date of the changes, while the other
participants mistakenly thought that the changes would apply as of the
earliest date disclosed in the notice, which was the cut-off date for
determining which transactions would be impacted by the changes
disclosed.
Form G-18(F) (proposed as Form G-18(G)) and Sample G-20 have
accordingly been revised to reflect the formatting changes introduced
in this second round of testing, because they improved consumer
comprehension of the notice.
The Board also proposed in May 2008 a clarification to comment
9(c)(2)(ii)-1 (which applies to changes in fees not required to be
disclosed in the summary table) to clarify that electronic notice may
be provided without regard to the notice and consent requirements of
the E-Sign Act when a consumer requests a service in electronic form
(for example, requests the service on-line via the creditor's Web
site). The Board received no comments addressing the changes to comment
9(c)(2)(ii)-1, which are adopted as proposed.
Reduction in credit limit. The June 2007 Proposal included a new
Sec. 226.9(c)(2)(v), for open-end (not home-secured) plans, providing
that if a creditor decreases the credit limit on an account, advance
notice of the decrease would be required to be provided before an over-
the-limit fee or a penalty rate can be imposed solely as a result of
the consumer exceeding the newly decreased credit limit. Under the
proposal, notice would have been required to be provided in writing or
orally at least 45 days prior to imposing an over-the-limit fee or
penalty rate and to state that the credit limit on the account has been
or will be decreased. The June 2007 Proposal stated that this
requirement would apply only when the over-the-limit fee or penalty
rate is imposed solely as a result of a reduction in the credit limit;
if the over-the-limit fee or penalty rate would have been charged
notwithstanding the reduction in a credit limit, no advance notice
would have been required. Under the June 2007 Proposal, the reduction
in the credit limit could have taken effect immediately, but 45 days'
notice would have been required before an over-the-limit fee or penalty
rate could be applied based solely on exceeding the newly decreased
credit limit.
The final rule adopts Sec. 226.9(c)(2)(v) as proposed. One
industry commenter on the June 2007 Proposal asked the Board to clarify
whether an adverse action letter under Regulation B would constitute
sufficient notice to the consumer, or whether the reduced credit limit
appearing on the periodic statement would be sufficient notice. The new
Sec. 226.9(c)(2)(v) does not contain any format requirements for the
notice informing the consumer that his or her credit limit has or will
be decreased. Any written or oral notification that contains the
content specified in Sec. 226.9(c)(2)(v) would be permissible. A
creditor could combine a notice required pursuant to Sec.
226.9(c)(2)(v) with an adverse action notice under Regulation B
provided that the requirements of both rules are met. Simply showing a
reduced credit limit on the periodic statement, however, without a
statement that the credit limit has been or will be decreased, would
not meet the requirements of Sec. 226.9(c)(2)(v).
The same commenter asked the Board to consider permitting written
notice on one statement and permitting the imposition of over-the-limit
fees after the next account cycle. The final rule, consistent with the
proposal, continues to require 45 days advance notice. The Board
believes that 45 days is the appropriate length of time, for the same
reasons discussed above in connection with change-in-terms notices more
generally. Sending the notice 45 days in advance gives a consumer, in
most cases, at least one month to bring his or her balance under the
new, reduced credit limit, either by paying down the balance or by
transferring all or a portion of it to another card.
In addition, as discussed in the supplementary information to Sec.
226.9(g)(4)(ii), the Board is adopting additional guidance to clarify
how to comply with Sec. 226.9(g) when a creditor also is providing a
notice pursuant to Sec. 226.9(c)(2)(v).
Rules affecting home-equity plans. The final rule retains in Sec.
226.9(c)(1), without intended substantive change, the current
provisions regarding the circumstances, timing, and content of change-
in-terms notices for HELOCs. These provisions will be reviewed when the
Board reviews the provisions of Regulation Z addressing open-end (home-
secured) credit.
The Board proposed in June 2007 to make several deletions in
proposed Sec. 226.9(c)(1) and the related commentary with respect to
HELOCs in order to promote consistency between Sec. 226.9(c)(1) and
the substantive restrictions imposed by Sec. 226.5b. The Board
solicited comment on whether there were any remaining references in
Sec. 226.9(c)(1) and the related commentary to changes in terms that
would be impermissible for open-end (home-secured) credit pursuant to
Sec. 226.5b. The Board received no comment on the proposed deletions
or on any additional references that should be deleted; accordingly,
the changes to Sec. 226.9(c)(1) are adopted as proposed.
Substantive restrictions on changes in terms. Several consumer and
consumer group commenters urged the Board to adopt substantive
restrictions on changes in terms in connection with credit card
accounts in addition to the disclosure-related requirements described
above. For example, some commenters stated that credit agreements
should remain in force, without any changed terms, for the life of the
credit account, until the expiration of the card, or for a fixed period
such as 24 months. Other comments suggested that the Board should ban
``any time, any reason'' repricing or universal default clauses.
Finally, other commenters advocated the creation of a federal opt-out
right for certain increases in interest rates applicable to a
consumer's account. The Board has not included any such substantive
restrictions in Sec. 226.9(c) or (g) of the final rule. With regard to
changes in terms, Regulation Z and TILA primarily address how and when
those changes should be disclosed to consumers. The final rule issued
by the Board and federal banking agencies and published elsewhere in
today's Federal Register addresses substantive restrictions on certain
types of changes in credit card terms.
Technical correction. One commenter noted that a cross reference in
Sec. 226.9(c)(2)(iii)(B)(2) referred to the wrong paragraph. That
technical error has been corrected in the final rule.

[[Page 5350]]

9(e) Disclosures Upon Renewal of Credit or Charge Card
TILA Section 127(d), which is implemented in Sec. 226.9(e),
requires card issuers that assess an annual or other periodic fee,
including a fee based on activity or inactivity, on a credit card
account of the type subject to Sec. 226.5a to provide a renewal notice
before the fee is imposed. 15 U.S.C. 1637(d). The creditor must provide
disclosures required for credit card applications and solicitations
(although not in a tabular format) and must inform the consumer that
the renewal fee can be avoided by terminating the account by a certain
date. The notice must generally be provided at least 30 days or one
billing cycle, whichever is less, before the renewal fee is assessed on
the account. However, there is an alternative delayed notice procedure
where the fee can be assessed provided the fee is reversed if the
consumer is given notice and chooses to terminate the account.
Creditors are given considerable flexibility in the placement of
the disclosures required under Sec. 226.9(e). For example, the notice
can be preprinted on the periodic statement, such as on the back of the
statement. See Sec. 226.9(e)(3) and comment 9(e)(3)-2. However,
creditors that place any of the disclosures on the back of the periodic
statement must include on the front of the statement a reference to
those disclosures. See Sec. 226.9(e)(3). In June 2007, the Board
proposed a model clause that creditors could, but would not have been
required to, use to comply with the delayed notice method. See comment
9(e)(3)-1. The final rule adopts this model clause as proposed.
The Board also proposed in June 2007 comment 9(e)-4, which
addresses accuracy standards for disclosing rates on variable rate
plans. The comment provides that if the card issuer cannot determine
the rate that will be in effect if the cardholder chooses to renew a
variable-rate account, the card issuer may disclose the rate in effect
at the time of mailing or delivery of the renewal notice or may use the
rate as of a specified date within the last 30 days before the
disclosure is provided. The final rule adopts this comment as proposed,
for the same reasons and consistent with the accuracy standard for
account-opening disclosures. See section-by-section analysis to Sec.
226.6(b)(4)(ii)(G). Other minor changes to Sec. 226.9(e), with no
intended substantive change, are adopted as proposed. For example,
footnote 20a, dealing with format, is deleted as unnecessary, while
comment 9(e)-2, which generally repeats the substance of footnote 20a,
is retained.
Comment 9(e)(3)-1 contains guidance that if a single disclosure is
used to comply with both Sec. Sec. 226.9(e) and 226.7, the periodic
statement must comply with the rules in Sec. Sec. 226.5a and 226.7.
One example listed in the comment is the current requirement to use the
words ``grace period.'' That guidance is revised in the final rule to
conform to the Board's new terminology requirements with respect to any
grace period (or lack of grace period) in connection with disclosures
required under Sec. 226.5a.
9(f) Change in Credit Card Account Insurance Provider
Section 226.9(f) requires card issuers to provide notices if the
issuer changes the provider of insurance (such as credit life
insurance) for a credit card account. The June 2007 Proposal did not
include any changes to Sec. 226.9(f). A commenter suggested that the
Board provide, by amending either the regulation or the commentary to
Sec. 226.9(f), that a conversion of credit insurance coverage to debt
cancellation coverage or debt suspension coverage may be treated the
same as a change from one credit insurance provider to another. The
result would be that the card issuer would not be required to comply
with Sec. 226.4(d)(3) (in particular, the requirement that the
consumer sign or initial an affirmative written request for the debt
cancellation or debt suspension coverage), provided the issuer notified
the consumer of the conversion following the procedures set forth in
Sec. 226.9(f). The commenter stated that credit insurance and debt
cancellation coverage are essentially functionally equivalent from the
consumer's perspective, and that if an affirmative written request from
the consumer were required, many consumers might unintentionally lose
coverage because they might neglect to sign and return the request
form.
The final rule does not include any amendments to Sec. 226.9(f)
(other than minor technical changes to correct grammatical errors). The
Board believes that the current rule provides better consumer
protection than would be afforded under the approach suggested by the
commenter, in that consumers are given an opportunity to decide whether
they wish to have credit insurance converted to debt cancellation or
debt suspension coverage, rather than having the conversion occur
automatically unless the consumer takes affirmative action to reject
it. In addition, under the new provision in Sec. 226.4(d)(4)
permitting telephone sales of credit insurance and debt cancellation or
debt suspension coverage, creditors would not have to obtain an
affirmative written request from the consumer for debt cancellation or
suspension coverage to replace credit insurance, but could instead
obtain an affirmative oral request by telephone. (See the section-by-
section analysis to Sec. 226.4(d)(4) for a discussion of the telephone
sales rule with respect to credit insurance and debt cancellation or
debt suspension coverage.)
9(g) Increase in Rates Due to Delinquency or Default or Penalty Pricing
In the June 2007 Proposal, the Board proposed that disclosures be
provided prior to the imposition of penalty pricing on a consumer's
account balances. With respect to open-end (not home-secured) plans,
the Board proposed a new Sec. 226.9(g)(1) to require creditors to
provide 45 days' advance notice when a rate is increased due to a
consumer's delinquency or default, or if a rate is increased as a
penalty for one or more events specified in the account agreement, such
as a late payment or an extension of credit that exceeds the credit
limit. This notice would be required even if, as is currently the case,
the creditor specifies the penalty rate and the specific events that
may trigger the penalty rate in the account-opening disclosures.
In the supplementary information to its June 2007 Proposal, the
Board expressed concern that the imposition of penalty pricing may come
as a costly surprise to consumers who are not aware of, or do not
understand, what behavior constitutes a ``default'' under their
agreement. One way in which the June 2007 Proposal addressed penalty
pricing was through improved disclosures regarding the conditions under
which penalty pricing may be imposed. The Board proposed, in connection
with the disclosures given with credit card applications and
solicitations and at account opening, to enhance disclosures about
penalty pricing and revise terminology to address consumer confusion
regarding the meaning of ``default.'' In addition, in light of the fact
that rates may be increased for relatively minor contractual breaches,
such as a payment late by one day, the Board also proposed to require
advance notice of such rate increases, which consumers otherwise may
not expect. The Board proposed that the notice be provided at least 45
days before the increase takes effect.
In response to the June 2007 Proposal, some credit card issuers
advocated a shorter notice period, such as 30 or 15

[[Page 5351]]

days. These commenters noted that, unlike other changes in terms, an
increase in a consumer's rate to the penalty rate is driven by the
consumer's failure to meet the account terms. In addition, the comments
noted that a consumer will have received prior notice in the account-
opening disclosures that such a rate increase could occur. Another
commenter stated that the notice period prior to the imposition of a
penalty rate should vary from 15 to 45 days depending on the length of
grace period offered by the issuer. Commenters also stated that 45
days' advance notice might confuse consumers, because it would come so
far in advance that consumers will not be able to relate their behavior
to the increase in rate, when that increase eventually takes effect.
Industry commenters, however, opposed more generally any additional
prior notice before imposition of a penalty rate, when the penalty APR
has already been disclosed to the consumer at account-opening and
constitutes part of the consumer's account terms. These commenters
indicated that consumers will not forget about the penalty APR and the
circumstances under which the penalty rate might be imposed, because
they will be reminded of it each month by the new late payment warning
required to be included on the periodic statement pursuant to Sec.
226.7(b)(11). In addition, these comments noted that the penalty APR
will be disclosed in the revised application and solicitation table and
new account-opening table more clearly than it is currently. Other
comments indicated that the proposed advance notice was effectively a
price control that goes beyond TILA's main purpose of assuring
meaningful disclosure of credit terms.
Some commenters suggested that a requirement to give advance notice
before raising a consumer's rate to the penalty rate would cause
issuers to change their pricing practices in ways that might be
detrimental to consumers. First, the commenters indicated that
creditors will have an incentive to remove penalty APRs from
advertising, account-opening disclosures, and billing statement
disclosures, because they will in effect be required to treat the
imposition of penalty pricing as a change in terms anyway. Second,
commenters indicated that if creditors are prevented from promptly
imposing penalty pricing, they may be forced to consider other means to
price for risk such as setting a higher penalty APR, reducing credit
limits, charging higher fees, closing accounts, imposing tighter
underwriting standards, or raising non-penalty APRs for lower-risk
customers to compensate for the delay in changing rates for higher-risk
customers.
Some commenters distinguished between ``on us'' defaults, where the
consumer's act of default under the contract pertains directly to the
account being repriced (e.g., a late payment on the credit card for
which the interest rate is being increased) and ``off us'' defaults,
where the consumer's act of default pertains to an account with a
different creditor. These commenters noted that consumers will be well
aware of the circumstances that may cause an account to be repriced
based on ``on us'' behaviors, because, as discussed above, those
triggers will be disclosed in the application and solicitation
disclosures, the account-opening disclosures, and in the case of late
payments as a trigger, on the periodic statement itself. The comments
indicated that consumers may have different expectations between ``on
us'' and ``off us'' repricing, with the latter having more potential
for surprise and a sense of perceived unfairness. Industry commenters
differed as to whether an act of default pertaining to a different
account held by the same issuer constituted an ``on us'' or ``off us''
default.
Several commenters suggested that the Board introduce a disclosure
on each periodic statement reminding the consumer of the circumstances
in which penalty pricing may be applied, rather than requiring 45 days'
advance notice of a rate increase. One issuer suggested an exception
for issuers with penalty APRs and triggers that meet five conditions,
namely: (1) Triggers are limited to actions on the specific credit card
account; (2) triggers are within the consumer's knowledge and control;
(3) triggers are specifically disclosed in the application and
solicitation and account-opening disclosure tables; (4) triggers are
clearly and conspicuously disclosed on each periodic statement; and (5)
the penalty APR is specifically disclosed, along with the index and
margin used to calculate the penalty APR. This issuer stated that this
exception will avoid costly surprise to consumers arising from the
imposition of penalty APRs by encouraging issuers to use sharply-
defined, ``on us'' penalty rate triggers. The commenter also indicated
that the monthly disclosure would be more effective in enhancing
awareness of penalty APRs and their triggers than the proposed after-
the-fact penalty APR notice.
Consumers and consumer groups were supportive of the proposal's
requirement to give 45 days' advance notice of the imposition of a
penalty rate, noting that the proposal represented a substantial
improvement over the current rule. Some, however, urged the Board to
increase the notice period to 60 days or 90 days. The Board also
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 expense caused
by rate increases.
The final rule adopts Sec. 226.9(g)(1) generally as proposed,
although as discussed below the Board has created several exceptions to
the notice requirement in Sec. 226.9(g) to address concerns raised by
commenters and to clarify the relationship between Sec. 226.9(g) and
final rules adopted by the Board and other federal banking agencies
published elsewhere in today's Federal Register.
The final rule generally requires creditors to provide 45 days'
advance notice before rate increases due to the consumer's delinquency
or default or as a penalty, as proposed. Notwithstanding the fact that
final rules adopted by the Board and other federal banking agencies
published elsewhere in today's Federal Register will prohibit, in most
cases, the application of penalty rates to existing balances, the Board
believes that allowing creditors to apply the penalty rate, even if
only to new transactions, immediately upon the consumer triggering the
rate would nonetheless lead to undue surprise and insufficient time for
the consumer to consider alternative options regarding use of the card.
The final rule elsewhere enhances the disclosure of the
circumstances under which the penalty rate may apply in the
solicitation and application table as well as at account opening. Such
improved up-front disclosure of the circumstances in which penalty
pricing may be imposed on a consumer's account may enable some
consumers to avoid engaging in certain behavior that would give rise to
penalty pricing. However, the Board believes generally that consumers
will be the most likely to notice and be motivated to act if they
receive a specific notice alerting them of an imminent rate increase,
rather than a general disclosure stating the circumstances when a rate
might increase.
In focus groups conducted for the Board prior to the June 2007
Proposal, consumers were asked to identify the terms that they looked
for when shopping for a credit card or at account-opening. The terms
most often identified by consumers were the interest rate on purchases,
interest rate on balance transfers, credit limit, fees, and incentives
or rewards such as frequent flier miles or cash back.

[[Page 5352]]

Consumers did not frequently mention the penalty rate or penalty rate
triggers. It is possible that some consumers do not find this
information relevant when shopping for or opening an account because
they do not anticipate that they will trigger penalty pricing. Because
many consumers are looking for terms other than the penalty rate and
penalty triggers, they may not recall this information later, after
they have begun using the account, and may be surprised when penalty
pricing is subsequently imposed.
For similar reasons, the Board also believes that a notice
appearing on each monthly statement informing a consumer of the ``on
us'' behaviors that can trigger a penalty rate would not be as
effective as a more specific notice provided after a rate increase has
been triggered but before it has been imposed. Consumers already will
receive a notice under new Sec. 226.7(b)(11) on the periodic statement
generally informing them that they may be subject to a late fee and/or
penalty rate if they make a late payment. This will alert consumers
generally that making a late payment may have adverse consequences, but
that Board does not believe that a general notice about the
circumstances in which penalty pricing may be applied is as effective
as a more specific notice that a penalty rate is in fact about to be
imposed.
In addition, the Board believes that the notice required by Sec.
226.9(g) is the most effective time to inform consumers of the
circumstances under which penalty rates can be applied to their
existing balances consistent with final rules adopted by the Board and
other federal banking agencies published elsewhere in today's Federal
Register. Pursuant to those rules, under limited circumstances a
penalty rate can be applied to all of a consumer's balances,
specifically if the consumer fails to make a required minimum periodic
payment within 30 days after the due date for the payment.
As discussed elsewhere in the section-by-section analysis to Sec.
226.5a, due to concerns about ``information overload,'' the final rule
does not require a creditor to distinguish, in the disclosures given
with an application or solicitation or at account-opening, between
those penalty rate triggers that apply to existing balances and more
general contractual penalty triggers that may apply only to new
balances. While the Board anticipates that creditors will disclose in
the account agreement for contractual reasons the distinction between
triggers applicable to existing balances and new balances, those
disclosures will not be highlighted in a tabular format. The notice
given under Sec. 226.9(g) will, therefore, be for many consumers, the
best opportunity for disclosure that penalty pricing may apply only to
new balances and that, if the consumer pays late once by more than 30
days, the penalty rate may be applied to all of his or her balances.
Disclosure content and format. With respect to open-end (not home-
secured) plans, under the Board's June 2007 Proposal, which was amended
by the May 2008 Proposal for consistency with proposal by the Board and
other federal banking agencies published in May 2008 (See 73 FR 28904,
May 19, 2008), if a creditor is increasing the rate due to delinquency
or default or as a penalty, the creditor would have been required to
provide a notice with the following information: (1) A statement that
the delinquency or default rate or penalty rate has been triggered, as
applicable; (2) the date as of which the delinquency or default rate or
penalty rate will be applied to the account, as applicable; (3) the
circumstances under which the delinquency or default rate or penalty
rate, as applicable, will cease to apply to the consumer's account, or
that the delinquency or default rate or penalty rate will remain in
effect for a potentially indefinite time period; and (4) a statement
indicating to which balances on the account the delinquency or default
rate or penalty rate will be applied, including, if applicable, the
balances that would be affected if a consumer fails to make a required
minimum periodic payment within 30 days from the due date for that
payment; and (5) if applicable, a description of any balances to which
the current rate will continue to apply as of the effective date of the
rate increase, unless a consumer fails to make a required minimum
periodic payment within 30 days from the due date for that payment.
If the notice regarding increases in rates due to delinquency,
default or penalty pricing were included on or with a periodic
statement, the June 2007 Proposal would have required the notice to be
in a tabular format. Under the proposal, the notice also would have
been required to appear on the front of the first page of the periodic
statement, directly above the list of transactions for the period. If
the notice were not included on or with a periodic statement, the
information described above would have been required to be disclosed on
the front of the first page of the notice. As discussed above, the
minimum font size requirements of 10-point font set forth in proposed
comment 5(a)(1)-3 also would have applied to any tabular disclosure
given under Sec. 226.9(g)(3).
One consumer group commenter on the May 2008 Proposal supported the
requirements in proposed Sec. 226.9(g)(3)(i)(D) and (g)(3)(i)(E),
which were added for consistency with the proposal by the Board and
other federal banking agencies published in May 2008 (see 73 FR 28904,
May 19, 2008), to disclose the balances to which a delinquency or
default rate or penalty rate would be applied and to describe, if
applicable, any balances to which the current rate would continue to
apply as of the effective date of the rate increase (unless the
consumer's account becomes more than 30 days late). This commenter
believes that disclosure does not alter the unfairness of applying
penalty, delinquency, or default rates to existing balances, but that
the additional information would be useful to consumers.
Commenters on the content and formatting of penalty rate notices
generally raised the same or similar issues as commenters on the
content and formatting of change-in-terms notices required under Sec.
226.9(c). See section-by-section analysis to Sec. 226.9(c) for a
discussion of these comments. For the reasons described in the section-
by-section analysis to Sec. 226.9(c), the content and formatting
requirements for notices of penalty rate increases in Sec. 226.9(g)(3)
are adopted generally as proposed, except that if the notice is
included with a periodic statement, the summary table is required to
appear on the front of the periodic statement, but is not required to
appear on the first page. In addition, a technical change has been made
to Sec. 226.9(g)(3)(i)(D) to delete a substantively duplicative
requirement included in both proposed Sec. 226.9(g)(3)(i)(D) and (E).
The final rule also contains a technical amendment to clarify that
a notice given under Sec. 226.9(g)(1) may be combined with a notice
given pursuant to new Sec. 226.9(g)(4)(ii), described below.
Form G-18(G) (proposed as Form G-18(H)) and Sample G-21 have been
revised to reflect formatting changes designed to make these notices
more understandable to consumers. Similar to the testing conducted for
change-in-terms notices described above in the section-by-section
analysis to Sec. 226.9(c), the Board also conducted two rounds of
consumer testing of notices of penalty rate increases. Consumers
generally understood the key dates disclosed in these notices.
Specifically, of participants who saw statements that indicated that
the penalty rate would be applied to the account, all participants in
both rounds of testing understood

[[Page 5353]]

that the penalty rate would only apply to transactions made after the
specified date shown. All participants also understood that if they
became 30 days late on their account the penalty rate would apply to
earlier transactions as well.
Sample G-21 also has been revised to conform with substantive
restrictions on rate increases applicable to promotional rate balances
included in final rules issued by the Board and other federal banking
agencies published elsewhere in today's Federal Register. As proposed
in May 2008, Sample G-21 would have contained a disclosure indicating
that the consumer's promotional rate balances would be subject to the
standard rate on the effective date of the penalty rate increase. The
final rules published elsewhere in today's Federal Register regarding
the applicability of rate increases to outstanding balances prohibit a
creditor from repricing a consumer's outstanding balances from a
promotional rate to a higher rate, unless the consumer's account is
more than 30 days late. Accordingly, the disclosure regarding loss of a
promotional rate has been deleted from final Sample G-21. The dates
used in the example in Sample G-21 also have been amended for
consistency with the definition of ``outstanding balance'' in the final
rules published elsewhere in today's Federal Register. In addition, a
technical correction also has been made to final Sample G-21 to clarify
that a consumer must make a payment that is more than 30 days late in
order for the penalty rate to apply to outstanding balances; as
proposed, Sample G-21 referred to a payment that is 30 days late. These
changes to Sample G-21 also are reflected in final Model Form G-18(G).
Examples. In order to facilitate compliance with the advance notice
requirements set forth in Sec. 226.9(g), the Board's May 2008 Proposal
included a new comment 9(g)-1.ii that set forth several illustrations
of how the advance notice requirement would have applied in light of
the substantive rules regarding rate increases proposed by the Board
and other federal banking agencies published in May 2008 (See 73 FR
28904, May 19, 2008). Several industry commenters remarked on these
illustrations, particularly on proposed comment 9(g)-1.ii.D. Proposed
comment 9(g)-1.ii.D indicated that an issuer would be required, in some
circumstances, to give a second advance notice, after the consumer's
account became more than 30 days late, 45 days prior to imposing a
penalty rate to outstanding balances as permitted under the Board's and
agencies' proposed substantive rule. Many of these industry commenters
stated that the creditor should not be required to provide an
additional 45 days' notice to the consumer if: (i) A creditor has
already provided 45 days' advance notice regarding the imposition of a
penalty rate that applies only to new balances; and (ii) that notice
states that such rate will apply to outstanding balances if the
consumer becomes more than 30 days delinquent while the increased rate
is in effect. Other commenters stated that an additional 45 days'
notice should not be required if the consumer has already received
within the last 12 months a notice regarding the consequences of making
a payment more than 30 days late. One commenter indicated that if the
Board retains the requirement to send a second notice in these
circumstances, proposed comment 9(g)-1, in particular, 9(g)-1.ii.D
should be revised to clarify that if a second trigger event occurs
after the initial penalty rate notice is provided, the creditor should
not be required to wait until the consumer is more than 30 days
delinquent to provide the second penalty APR notice.
The Board has adopted a set of revised examples in comment 9(g)-1
that have been modified to conform with the final rules adopted by the
Board and other federal banking agencies published elsewhere in today's
Federal Register. These examples, among other things, clarify that a
creditor is not required to provide a consumer with a second notice
when the creditor has already sent a notice pursuant to Sec. 226.9(g)
and during the period between when that notice is sent and the
effective date of the change, the consumer pays more than 30 days late.
A second notice would, however, be required if the consumer were to pay
more than 30 days late, if such a subsequent default by the consumer
occurred after the effective date of the first notice sent by the
creditor pursuant to Sec. 226.9(g). The Board believes that a second
notice is appropriate in these circumstances because the subsequent
late payment or payments may occur months or years after the first
notice pursuant to Sec. 226.9(g) has been sent. At such a later date,
the consumer may not recall the events that will cause the penalty rate
to be applied to his or her existing balances; because such repricing
may come as a surprise to the consumer, the Board believes that the
consumer should receive advance notice in order to have an opportunity
to seek alternative financing or to pay off his or her balances.
In addition to amending the examples, the Board also has clarified
in new Sec. 226.9(g)(4)(iii), discussed below, that a creditor need
not send a second notice pursuant to Sec. 226.9(g) prior to increasing
the rate applicable to outstanding balances, in the limited
circumstances where the creditor has already sent a notice disclosing a
rate increase applicable to new transactions and during the period
between when that notice is sent and the effective date of the change,
if the consumer pays more than 30 days late. This exception is
consistent with the examples described above.
Multiple triggers for penalty rate. In response to the June 2007
Proposal, several industry commenters requested a limited exception to
the 45-day notice requirement for increases to penalty or default rates
that are clearly disclosed in the account-opening disclosures and that
involve behavior by the consumer that must occur in two or more billing
cycles before the default rate is triggered. Under these circumstances,
these commenters suggested that issuers should be permitted to provide
the required notice after the first of the multiple triggering events
has occurred, rather than waiting until the final trigger event. For
example, if a creditor were to impose penalty pricing but only upon two
late payments, the comments suggest that the creditor should be
permitted to send the notice upon the consumer's first late payment.
The creditor would then be free to impose the penalty rate immediately
upon the consumer's second late payment, provided that 45 days has
elapsed since the notice was provided. The commenters suggest that,
under these circumstances, the consumer will have 45 days of advance
notice to avoid the second triggering event.
Some commenters also suggested that creditors should be permitted
to include on each periodic statement after the first triggering event
a notice informing the consumer of the circumstances under which
penalty pricing will be imposed. If the consumer engages in the
behavior disclosed on the periodic statement, these creditors suggested
that a creditor should be permitted to impose penalty pricing
immediately, without additional advance notice given to the consumer.
For penalty pricing with multiple triggering events, the final rule
continues to require 45 days' notice after the occurrence of the final
triggering event. The Board believes that a notice of an impending rate
increase may have the most utility to a consumer immediately prior to
when the rate is increased. Depending on the particular triggers used
by a creditor, the period of time between the first triggering event
and the final triggering event could be

[[Page 5354]]

quite long, and a consumer may have forgotten about the notice he or
she received many months earlier. For example, if a creditor imposed
penalty pricing based on the consumer exceeding his or her credit limit
twice in a twelve-month period, a consumer might exceed the credit
limit in January, and pursuant to the exception requested by
commenters, would receive a notice of the possible imposition of
penalty pricing shortly thereafter. If the consumer subsequently
exceeded the credit limit again in December, that consumer's account
could immediately be subject to penalty pricing with no additional
advance notice given specifically informing that the consumer that he
or she has, in fact, triggered the penalty rate. The Board believes
that many consumers may not retain or recall the specific details set
forth on a notice delivered in January, when penalty pricing is
eventually imposed in December, particularly because different
creditors' practices can vary. In addition, a notice given in January
could in many cases state only that the consumer's account may be
repriced upon the occurrence of subsequent events. The Board believes
that a notice that states clearly that the interest rate applicable to
a consumer's account is in fact being increased is important in order
to avoid costly surprise in these circumstances.
The Board also believes that a notice included on each periodic
statement after the first triggering event informing the consumer of
the circumstances under which penalty pricing will be imposed would not
be as effective as a notice informing the consumer of a specific
impending rate increase. An institution may choose to provide a
statement on each periodic informing the consumer of the circumstances
under which penalty pricing will be imposed, but the institution still
would be required to provide a notice prior to actually imposing the
penalty rate pursuant to Sec. 226.9(g).
Promotional rate increased as a penalty. In response to both the
June 2007 and May 2008 Proposals, a number of industry commenters
advocated an exception to the 45-day advance notice requirement when
the rate is being changed from a promotional rate to a higher rate,
such as a standard rate, as a penalty triggered by an event such as a
late payment. These commenters suggested that a standard rate is not a
true penalty rate and that consumers are aware that a promotional rate
is temporary in nature. The comment letters also questioned whether
creditors would continue to make promotional rates available if they
were required to give notice 45 days in advance of repricing a
consumer's account. Commenters also noted that the proposed rules
regarding rate increases issued by the Board and other federal banking
agencies in May 2008 contained an exception for repricing from a
promotional rate to a standard rate. See 73 FR 28904, May 19, 2008.
The final rule does not contain an exception to the 45-day advance
notice requirement for repricing from a promotional rate to any higher
rate upon an event of default by the consumer. The Board believes that
the rationales discussed above for the 45-day advance notice apply
equally when a consumer's account is repriced from a promotional rate
to a higher rate, prior to the end of the term for which the
promotional rate was offered. The loss of a promotional rate before the
end of a promotional period can be a costly surprise to the consumer,
and in some cases even more costly than other types of interest rate
increases. A consumer may have an expectation that a zero percent or
other promotional rate will apply to transactions made for a certain
fixed period, for example one year, and may purchase large ticket items
or transfer a significant balance to that account during the period in
reliance on the promotional rate. Under these circumstances, the Board
believes that the consumer should have the opportunity to seek
alternative sources of financing before the account is repriced to the
higher rate. This outcome is consistent with final rules issued by the
Board and other federal banking agencies and published elsewhere in
this Federal Register, which do not contain an exception for repricing
from a promotional rate to a standard rate prior to the expiration of
the promotional period.
There is no obligation to provide a notice under Sec. 226.9(g) if
the increase from a promotional rate to the standard rate occurs at the
end of the term for which the promotional rate was offered, not based
on any event of default by the consumer. One industry commenter asked
for guidance as to what a creditor must do under Sec. 226.9(g) when
the promotional rate is set to expire in less than 45 days and the
consumer triggers penalty pricing. Under those circumstances, the Board
anticipates that a creditor would not send a notice under Sec.
226.9(g), but rather would let the promotional rate expire under its
original terms. At the end of the promotional period, the rate would
revert to the standard rate and no notice need be given to the consumer
because a rate increase from the promotional rate to the standard rate
upon the expiration of the period set forth in the original agreement
would not constitute a change in terms or penalty repricing.
Raise in rate due to violation of terms of a workout plan. Industry
commenters on the June 2007 Proposal also requested an exception for
the situation where a rate is increased due to a violation of the terms
of a special collection plan or workout plan. Some creditors may offer
payment relief or a temporary reduction in a consumer's interest rate
for a consumer who is having difficulty making payments, with the
understanding that the consumer will return to standard contract terms
if he or she does not make timely payments. For example, a consumer
might be having difficulty making payments on an account to which a
penalty rate of 30 percent applies. Under the terms of a workout
arrangement, a creditor might reduce the rate to 20 percent, provided
that if the consumer fails to make timely minimum payments, the 30
percent rate will be reimposed. One commenter noted that workout
arrangements are generally offered to consumers who are so delinquent
on their accounts that other or better financing options may not be
available to them. Commenters also noted that the availability of
workout programs was likely to be limited or reduced if a creditor were
required to give 45 days' advance notice prior to reinstating a
consumer's pre-existing contract terms if that consumer fails to abide
by the terms of the workout arrangement.
The final rule contains a new Sec. 226.9(g)(4)(i), which generally
provides that a creditor is not required to give advance notice
pursuant to Sec. 226.9(g)(1) if a rate applicable to a consumer's
account is increased as a result of the consumer's default,
delinquency, or as a penalty, in each case for failure to comply with
the terms of a workout arrangement between the creditor and the
consumer. The exception is only applicable if the new rate being
applied to the category of transactions does not exceed the rate that
applied to that category of transactions prior to commencement of the
workout arrangement, or is a variable rate determined by the same
formula (index and margin) that applied to the category of transactions
prior to commencement of the workout arrangement. The Board believes
that workout arrangements provide a clear benefit to consumers who are
otherwise having difficulty making payments and that the rule should
not limit the continued availability of such arrangements. A consumer
who is otherwise in default on his or her

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account and is offered a reduced interest rate for a period of time in
order to facilitate the making of payments, and who has recently been
in contact with his or her creditor regarding the terms of the workout
arrangement, generally should not be surprised by the revocation of the
reduced rate if he or she defaults under that workout arrangement.
Decrease in credit limit. The final rule contains a new exception
in Sec. 226.9(g)(4)(ii) that clarifies the relationship between the
notice requirements in Sec. Sec. 226.9(c)(2)(v) and 226.9(g)(1)(ii)
when the creditor decreases a consumer's credit limit and under the
terms of the credit agreement a penalty rate may be imposed for
extensions of credit that exceed that newly decreased limit.
As discussed above, Sec. 226.9(c)(2)(v) requires that a creditor
give advance notice of a decrease in a consumer's credit limit in
writing or orally at least 45 days before an over-the-limit fee or
penalty rate can be imposed solely as a result of the consumer
exceeding the newly decreased credit limit. The purpose of this
provision is to give the consumer an opportunity to reduce outstanding
balances to below the newly-decreased credit limit before penalty fees
or rates can be imposed. In addition, Sec. 226.9(g)(1)(ii) requires a
creditor to give 45 days' advance written notice prior to increasing a
rate as a penalty for one or more events specified in the account
agreement, including for obtaining an extension of credit that exceeds
the credit limit.
Without clarification, the Board is concerned that Sec.
226.9(c)(2)(v) and (g)(1)(ii) could be read together to require 90
days' notice prior to imposing a penalty rate for a consumer exceeding
a newly-decreased credit limit (i.e., that the 45-day cure period
contemplated in Sec. 226.9(c)(2)(v) would need to elapse before a
consumer could be deemed to have triggered a penalty rate, only after
which point the notice under Sec. 226.9(g)(1)(ii) could be given). It
was not the Board's intent for Sec. 226.9(c)(2)(v) to extend the
notice period prior to imposing a penalty rate for a consumer's having
exceeded the credit limit to 90 days, but rather only to ensure that a
consumer had a reasonable opportunity to avoid penalties for exceeding
a newly decreased credit limit.
In order to clarify the relationship between Sec. 226.9(c)(2)(v)
and (g)(1)(ii), the final rule contains new Sec. 226.9(g)(4)(ii),
which permits a creditor to send, at the time that the creditor
decreases the consumer's credit limit, a single notice (in writing)
that would satisfy both the requirements of Sec. Sec. 226.9(c)(2)(v)
and (g)(1). The combined notice would be required to be sent at least
45 days in advance of imposing the penalty rate and would be required
to contain the content set forth in Sec. 226.9(c)(2)(v), as well as
additional content that generally tracks the requirements in Sec.
226.9(g)(3)(i). The content of the notice would differ from the
requirements in Sec. 226.9(g)(3)(i) in order to accurately reflect the
fact that a consumer may avoid imposition of the penalty rate by
reducing his or her balance below the newly decreased credit limit by
the date specified in the notice.
Consistent with the intent of Sec. 226.9(c)(2)(v), new Sec.
226.9(g)(4)(ii) provides that a creditor is not permitted to impose the
penalty rate if the consumer's balance does not exceed the newly
decreased credit limit on the date set forth in the notice for the
imposition of the penalty rate (which date must be at least 45 days
from when the notice is sent). However, if the consumer's balance does
exceed the credit limit on the date specified in the notice, the
creditor would be permitted to impose the penalty rate on that date,
with no additional advance notice required. For example, assume that a
creditor decreased the credit limit applicable to a consumer's account
and sent a notice pursuant to Sec. 226.9(g)(4)(ii) on January 1,
stating among other things that the penalty rate would apply if the
consumer's balance exceeded the new credit limit as of February 16. If
the consumer's balance exceeded the credit limit on February 16, the
creditor could impose the penalty rate on that date. However, a
creditor could not apply the penalty rate if the consumer's balance did
not exceed the new credit limit on February 16, even if the consumer's
balance had exceeded the new credit limit on several dates between
January 1 and February 15. If the consumer's balance did not exceed the
new credit limit on February 16 but the consumer conducted a
transaction on February 17 that caused the balance to exceed the new
credit limit, the general rule in Sec. 226.9(g)(1)(ii) would apply and
the creditor would be required to give an additional 45 days' notice
prior to imposition of the penalty rate (but under these circumstances
the consumer would have no ability to cure the over-the-limit balance
in order to avoid penalty pricing).
New Sec. 226.9(g)(4)(ii)(C) sets forth the formatting requirements
for notices given pursuant to Sec. 226.9(g)(4)(ii), which conform with
the formatting requirements for notices provided under Sec.
226.9(g)(1).
Certain rate increases applicable to outstanding balances. The
final rule contains a new exception in Sec. 226.9(g)(4)(iii) intended
to clarify the relationship between the notice requirements under Sec.
226.9(g) and rules regarding the application of rate increases to
outstanding balances issued by the Board and other federal banking
agencies published elsewhere in today's Federal Register. Under the
exception, a creditor is not required, under certain conditions, to
provide an additional notice pursuant to paragraph Sec. 226.9(g) prior
to increasing the rate applicable to an outstanding balance, if the
creditor previously provided a notice under Sec. 226.9(g) disclosing
that the rate applicable to new transactions was going to be increased.
The exception only applies if, after the Sec. 226.9(g) notice
disclosing the rate increase for new transactions is provided but prior
to the effective date of the rate increase or rate increases disclosed
in the notice pursuant, the consumer pays more than 30 days late. Under
those circumstances, a creditor may increase the rate applicable to
both new and outstanding balances on the effective date set forth in
the notice that was previously provided to the consumer.
This exception is meant to conform the requirements of the rule to
the examples set forth in comment 9(g)-1, which clarify the interaction
between the notice requirements of Sec. 226.9(g) and rules regarding
the application of rate increases to outstanding balances issued by the
Board and other federal banking agencies published elsewhere in today's
Federal Register. The Board believes that a limited exception to the
notice requirements of Sec. 226.9(g) is appropriate in these
circumstances because the consumer will have received a notice
disclosing the rate increase applicable to new transactions, which also
will disclose the circumstances under which the rate increase will
apply to outstanding balances if the consumer fails to make timely
payments prior to the effective date of the change.
Terminology. One commenter commented that the use of the terms
``delinquency or default rate,'' and ``penalty rate'' is confusing and
not necessarily consistent with industry usage. The commenter asked for
clarification regarding the meaning of ``delinquency or default rate''
versus ``penalty rate.'' The Board included both terms in the proposed
rules, and has retained both terms in the final rule, in order to
capture any situation in which a consumer's rate is increased in
response to a violation or breach by the consumer of any term set forth
in the

[[Page 5356]]

contract. The term ``delinquency or default rate'' has historically
appeared in Regulation Z, and the Board has added ``penalty rate'' in
recognition that there may be contractual provisions that permit an
increase in the rate applicable to a consumer's account for behavior
that falls short of being a delinquency or default.

Section 226.10 Prompt Crediting of Payments

Section 226.10, which implements TILA Section 164, generally
requires a creditor to credit to a consumer's account a payment that
conforms to the creditor's instructions (also known as a conforming
payment) as of the date of receipt, except when a delay in crediting
the account will not result in a finance or other charge. 15 U.S.C.
1666c; Sec. 226.10(a). Section 226.10 also requires a creditor that
accepts a non-conforming payment to credit the payment within five days
of receipt. See Sec. 226.10(b). The Board has interpreted Sec. 226.10
to permit creditors to specify cut-off times indicating the time when a
payment is due, provided that the requirements for making payments are
reasonable, to allow most consumers to make conforming payments without
difficulty. See current comments 10(b)-1 and -2. Pursuant to Sec.
226.10(b) and current comment 10(b)-1, if a creditor imposes a cut-off
time, it must be disclosed on the periodic statement; many creditors
put the cut-off time on the back of statements.
10(b) Specific Requirements for Payments
Reasonable requirements for cut-off times. In the June 2007
Proposal, the Board sought to address concerns that cut-off times may
effectively result in a due date that is one day earlier in practice
than the due date disclosed. The Board did not propose in June 2007 to
require a minimum cut-off time. Rather, the Board proposed a
disclosure-based approach, which would have created a new Sec.
226.7(b)(11) to require that for open-end (not home-secured) plans,
creditors must disclose the earliest of their cut-off times for
payments in close proximity to the due date on the front page of the
periodic statement, if that earliest cut-off time is before 5 p.m. on
the due date. In recognition of the fact that creditors may have
different cut-off times depending on the type of payment (e.g., mail,
Internet, or telephone), the Board's proposal would have required that
creditors disclose only the earliest cut-off time, if earlier than 5
p.m. on the due date.
Although some consumer commenters on the June 2007 Proposal
supported the proposed cut-off time disclosure, other consumers and
consumer groups thought that the proposed disclosure would provide only
a minimal benefit to consumers. These commenters recommended that the
Board consider other approaches to more effectively address cut-off
times. Consumer groups recommended that the Board adopt a postmark
rule, under which the timeliness of a consumer's payment would be
evaluated based on the date on which the payment was postmarked. Some
consumers commented that cut-off times are unfair and should be
abolished, while other consumers suggested that the Board establish
minimum cut-off times.
Industry commenters expressed concern that the proposed disclosure
would be confusing to consumers. They noted that many creditors vary
their cut-off times by payment channel and that disclosure of only the
earliest cut-off hour would be inaccurate and misleading. They
suggested that, if the Board were to adopt this requirement, a creditor
should be permitted to identify to which payment method the cut-off
time relates, disclose the cut-off hours for all payment channels, or
disclose the cut-off hour for the payment method used by the consumer,
if known. Industry commenters also asked that the Board relax the
location requirement for the cut-off time disclosure on the periodic
statement.
Both consumer groups and industry commenters urged the Board to
clarify which time zone should be considered when determining if the
cut-off time is prior to 5 p.m.
In light of comments received on the June 2007 Proposal, the Board
proposed in May 2008 to address cut-off times for mailed payments by
providing guidance as to the types of requirements that would be
reasonable for creditors to impose for payments received by mail. In
part, the Board proposed to move guidance currently contained in the
commentary to the regulation. Current comment 10(b)-1 provides examples
of specific payment requirements creditors may impose and current
comment 10(b)-2 states that payment requirements must be reasonable, in
particular that it should not be difficult for most consumers to make
conforming payments. The Board proposed in May 2008 to move the
substance of comments 10(b)-1 and 10(b)-2 to Sec. 226.10(b)(1) and
(b)(2) of the regulation. Under the May 2008 Proposal, Sec.
226.10(b)(1) would have stated the general rule, namely that a creditor
may specify reasonable requirements that enable most consumers to make
conforming payments. The Board would have expanded upon the example in
comment 10(b)-1.i.B as proposed in June 2007 in new proposed Sec.
226.10(b)(2)(ii), which would have stated that it would not be
reasonable for a creditor to set a cut-off time for payments by mail
that is earlier than 5:00 p.m. at the location specified by the
creditor for receipt of such payments.
The language in current comment 10(b)-2 stating that it should not
be difficult for most consumers to make conforming payments would not
have been included in the regulatory text under the May 2008 Proposal.
As noted in the May 2008 Proposal, the Board believes that this
language is in substance duplicative of the requirement that any
payment requirements be reasonable and enable most consumers to make
conforming payments.
The Board did not propose a postmark rule as suggested by consumer
group commenters on the June 2007 Proposal. In part, this is because
the Board and other federal banking agencies proposed in May 2008 a
rule that would have required a creditor to provide consumers with a
reasonable time to make payments. As discussed in the May 2008
Proposal, the Board also believes that it would be difficult for
consumers to retain proof of when their payments were postmarked, in
order to challenge the prompt crediting of payments under such a rule.
In addition, a mailed payment may not have a legible postmark date when
it reaches the creditor or creditor's service provider. Finally, the
Board believes there would be significant operational costs and burdens
associated with capturing and recording the postmark dates for
payments.
Consumer groups, one state treasurer, one federal banking agency,
several industry commenters and several industry trade associations
supported the proposal that it would not be reasonable to set a cut-off
time for payments received by mail prior to 5 p.m. on the due date at
the location specified by the creditor for the receipt of mailed
payments. Several consumer groups, credit unions, and two members of
Congress suggested that the Board expand the proposed rule to apply to
all forms of payment, including payments made by telephone and on-line.
Several consumer groups urged that the rule should be dependent on the
local time of the consumer's billing address, not the local time of the
issuer's payment facility. Several consumer groups suggested that the
Board establish a

[[Page 5357]]

uniform rule establishing a cut-off time of either 5 p.m. or the close
of business, if it is later than 5 p.m. One of these commenters noted
that a uniform, minimum 5 p.m. cut-off time would not require creditors
to process and post the payments on the same day, or to change their
systems, but would only require that creditors not treat payments
received before 5 p.m. as late.
One industry commenter that supported the 5 p.m. rule stated that
it should only apply to mailed payments. This commenter stated that a
consumer who makes payments on-line, by telephone, or at a bank branch
controls and is aware of the exact time a payment is made. An industry
trade association noted that its support of the 5 p.m. cut-off time was
conditioned on the understanding that there would be no requirement for
creditors to process payments within certain time frames. This
commenter indicated its understanding that the May 2008 Proposal would
only prohibit assessing a late fee, or otherwise considering the
payment late, if it is received on or before the due date, and would
not dictate when the payment actually needed to be processed.
The majority of industry commenters opposed the proposed rule that
would have provided that cut-off times prior to 5 p.m. for mailed
payments are not reasonable. Many of these commenters raised
operational issues with the proposed rule. One industry trade
association stated that banks need sufficient time after retrieving
mail to update accounts and produce accurate periodic statements. This
commenter indicated that remittance processing requires time to confirm
transactions and detect and remedy errors. This commenter noted that if
a bank is unable to complete any necessary updates prior to generation
of the consumer's statement, the payment may be subsequently revised
and backdated, but the payment will not be reflected in the statement
sent to the consumer, which would make the statement inaccurate. Other
industry commenters noted that they use a lockbox to process payments.
These commenters indicated that currently their lockbox personnel
cannot open, process, and credit payments on the date received unless
they are received by a time certain that may be in the morning, or at
the latest, midday.
Several industry commenters stated that the proposed 5 p.m. cut-off
time rule in effect would impose a requirement for all open-end
creditors to adopt a 5 p.m. post office run or to do a ``last mail
call'' at 4:59 p.m. One commenter noted that 5 p.m. is rush hour, which
could lead to significant delays in delivering the payments in
metropolitan areas. Several industry commenters further noted that some
post offices may officially close prior to 5 p.m. but continue to
process mail and insert mail into mail boxes.
One trade association for credit unions noted that some smaller
credit unions may only be open several days a week and may have limited
business hours, for example, a faith-based credit union chartered to
serve the members of a church congregation that is only open on Sundays
or weekends for several hours. This commenter indicated that for such a
creditor, it should be reasonable to impose a cut-off time that is
consistent with that particular institution's closing time.
One large bank and one industry trade association suggested that a
deadline of 2 p.m. for mailed payments should be considered reasonable,
due to operational and logistical challenges that make a 5 p.m. cut-off
time too early. Several industry commenters noted that Regulation CC
(Availability of Funds and Collections of Checks) permits earlier cut-
offs for access to deposits of 2 p.m. or later, or 12 p.m. or later if
the deposit is received at an ATM. 12 CFR 229.19(a)(5)(ii) Several
other industry commenters stated that the Board had not articulated its
reasons for selecting a 5 p.m. cut-off time, and that there is no
evidence that consumers expect a 5 p.m. deadline.
Other industry commenters stated that it is consistent with
consumer expectations that a customer needs to provide the bank with a
reasonable time to process a transaction. These commenters noted that
it is especially important that open-end creditors have a reasonable
time to process payments received by mail in light of the fact that
such creditors are required to credit a borrower's account as of the
day the payment is received, even if the creditor does not receive
funds after depositing the check for one or more days.
Finally, two industry commenters expressed concern about the
proposal's classification of cut-off times prior to 5 p.m. as
``unreasonable.'' These commenters indicated that the characterization
of certain cut-off times as ``unreasonable'' might give rise to
litigation risk for creditors that used earlier cut-off times prior to
this rule that were permissible under the Regulation Z requirements at
that time.
In light of comments received, the Board is adopting in the final
rule a modified version of proposed Sec. 226.10(b)(2)(ii), which
describes a 5 p.m. cut-off time for mailed payments as an example of a
reasonable requirement for payments, but does not state that earlier
cut-off times would be unreasonable in all circumstances. The Board
believes that the establishment of a safe harbor for a 5 p.m. cut-off
time for mailed payments, rather than declaring earlier cut-off times
to be per se unreasonable, should help to alleviate commenters'
concerns about litigation risk while helping to ensure that consumers
receive a reasonable period of time to pay on the due date. The Board
intends for this rule to apply only prospectively, and believes that
providing a safe harbor rather than defining certain cut-off times as
unreasonable reinforces the fact that the rule does not apply to past
practices.
The Board notes that if a creditor adopts a 5 p.m. cut-off time for
payments received by mail, neither the current rule nor the revised
rule would mandate that the creditor pick up its mail at 5 p.m. on the
payment due date. Section 10(a) addresses only the date as of which a
creditor is required to credit a payment to a consumer's account, but
does not impose any requirements as to when the creditor actually must
process or post the payment. It would be permissible under the final
rule for a creditor that has a 5 p.m. cut-off time on the due date for
payments by mail to, for example, backdate and credit payments received
in its first pick-up of the following morning as of the due date,
assuming that its previous pick-up was not made at or after 5 p.m. on
the due date. The Board understands that backdating of payments is
relatively common and that some servicers have platforms that provide
for automated backdating. A creditor that prefers not to backdate its
payments for operational reasons could, however, arrange for a 5 p.m.
mail pick-up.
The final rule adopts the 5 p.m. safe harbor only for mailed
payments and does not address other payment channels. Payments made by
other methods, such as electronic payments or payments by telephone,
are however subject to the general rule that requirements for payments
must be reasonable. The Board will continue to monitor cut-off times
for non-mailed payments in the future in order to determine whether a
safe harbor or similar guidance for such payments is necessary. The
Board believes that a safe harbor for payments by mail is important
because it is the payment mechanism over which consumers have the least
direct control. A consumer is more aware of, and better able to
control, the time at which he or she makes an electronic, telephone, or
in-person payment, but is not able to

[[Page 5358]]

control or monitor the exact time at which mail is received by a
creditor.
The safe harbor, consistent with the proposal, refers to the time
zone of the location specified by the creditor for the receipt of
payments. The Board believes that this clarification is necessary to
provide creditors with certainty regarding compliance with the safe
harbor, and that a rule requiring a creditor to process payments
differently based on the time zone at the consumer's billing address
could impose significant operational burdens on creditors. The safe
harbor also refers to 5 p.m., consistent with the proposal. The Board
believes that many consumers expect that payments received by the
creditor by 5 p.m., which corresponds to the end of a standard business
day, will be credited on that day. This also is consistent with the
results of consumer testing conducted prior to the June 2007 Proposal,
which showed that most consumers assume payment is due by midnight or
by the close of business on the due date.
Under the June 2007 Proposal, Sec. 226.10(b) contained a cross
reference to Sec. 226.7(b)(11), regarding the disclosure of cut-off
hours on periodic statements. In the May 2008 Proposal, the Board
solicited comment on whether disclosure of cut-off hours near the due
date for payment methods other than mail (e.g., telephone or Internet)
should be retained. As discussed in the section-by-section analysis to
Sec. 226.7(b)(11), the final rule does not adopt the formatting
requirements for disclosing the cut-off time on the periodic statement
that were proposed in the June 2007 Proposal. A creditor must, however,
continue to specify on or with the periodic statement any applicable
cut-off times pursuant to Sec. 226.10(b)(3) (formerly Sec.
226.10(b)), as renumbered in the final rule.
Receipt of electronic payments made through a creditor's Web site.
The Board also proposed in the June 2007 Proposal to add an example to
comment 10(a)-2 that states that for payments made through a creditor's
Web site, the date of receipt is the date as of which the consumer
authorizes the creditor to debit that consumer's account
electronically. The proposed comment would have referred to the date on
which the consumer authorizes the creditor to effect the electronic
payment, not the date on which the consumer gives the instruction. The
consumer may give an advance instruction to make a payment and some
days may elapse before the payment is actually made; accordingly, the
Board's proposed comment 10(a)-2 would have referred to the date on
which the creditor is authorized to debit the consumer's account. If
the consumer authorized an immediate payment, but provided the
instruction after a creditor's cut-off time, the relevant date would
have been the following business day. For example, a consumer may go
on-line on a Sunday evening and instruct that a payment be made;
however, the creditor might not transmit the request for the debit to
the consumer's account until the next day, Monday. Under proposed
comment 10(a)-2 the date on which the creditor was authorized to effect
the electronic payment would have been deemed to be Monday, not Sunday.
Proposed comment 10(b)-1.i.B would have clarified that the creditor
may, as with other means of payment, specify a cut-off time for an
electronic payment to be received on the due date in order to be
credited on that date. As discussed in the June 2007 Proposal, the
Board's proposed clarification of comment 10(a)-2 is limited to
electronic payments made through the creditor's own Web site, over
which the creditor has control.
Two industry commenters supported the proposed changes to comments
10(a)-2 and 10(b)-1.i.B regarding electronic payments made via the
creditor's Web site. One of these commenters noted that the proposed
changes were consistent with consumer expectations, and stated that it
was appropriate that the changes were limited to electronic payments
made at the creditor's own Web site, over which the creditor has
control, rather than being expanded to include all types of electronic
payments. Several individual consumers also commented that electronic
payments should be credited on the day on which they are authorized.
Comment 10(a)-2 is adopted as proposed. The clarification to comment
10(b)-1.i.B proposed in June 2007 has been adopted in Sec.
226.10(b)(2)(ii).
Promotion of payment via the creditor's Web site. In the June 2007
Proposal, the Board proposed to update the commentary to clarify that
if a creditor promotes electronic payments via its Web site, then
payments made through the creditor's Web site would be considered
conforming payments for purposes of Sec. 226.10(b). Many creditors now
permit consumers to make payments via their Web site. Payment on the
creditor's Web site may not be specified on or with the periodic
statement as conforming payments, but it may be promoted in other ways,
such as in the account-opening agreement, via e-mail, in promotional
material, or on the Web site itself. As discussed in the June 2007
Proposal, the Board believes it would be reasonable for a consumer who
receives materials from the creditor promoting payment on the
creditor's Web site to believe that it would be a conforming payment
and credited on the date of receipt. For these reasons, the Board also
proposed in June 2007 to amend comment 10(b)-2 to clarify that if a
creditor promotes that it accepts payments via its Web site (such as
disclosing on the Web site itself or on the periodic statement that
payments can be made via the Web site), such a payment is considered a
conforming payment for purposes of Sec. 226.10(b).
One industry commenter noted that there could be operational issues
associated with treating payments made via the creditor's Web site as
conforming, because most banks use third-party processors to process
their electronic payments. This commenter stated that an issuer may not
be in control of its processing system and may not be able to credit
its payments on the same day they are authorized. This commenter
further stated that a creditor may have one Web site that offers
several different means of making payments, for example a portal solely
for making credit card payments as well as a portal for making bill
payments through a third-party bill payment processor, and that
payments could be sent either way by the consumer. This commenter noted
that there may be additional delay in processing the payment depending
on which electronic payment mechanism the consumer uses.
The Board believes that consumer expectation is that a payment made
via the creditor's Web site is a conforming payment, and that a
creditor that promotes and accepts payment via its Web site should
treat such payment as conforming. As noted above, individual consumers
who commented on the June 2007 Proposal stated that electronic payments
should receive same-day crediting. The Board notes that creditors may
use third-party processors not just for electronic payments, but also
for mailed payments that are treated as conforming. Thus, the use of a
third-party processor may give rise to delays in processing payments
regardless of the payment mechanism used. The Board notes that a
creditor need not post a payment made via its Web site on the same day
for which the consumer authorized payment, but need only credit the
payment as of that date. Comment 10(b)-2 is adopted as proposed.

[[Page 5359]]

10(d) Crediting of Payments When Creditor Does Not Receive or Accept
Payments on Due Date
Holiday and weekend due dates. The Board's June 2007 Proposal did
not address the practice of setting due dates on dates on which a
creditor does not accept payments, such as weekends or holidays. A
weekend or holiday due date might occur, for example, if a creditor
sets its payment due date on the same day (the 25th, for example) of
each month. While in most months the 25th would fall on a business day,
in other months the 25th might be a weekend day or holiday, due to
fluctuations in the calendar. The Board received a number of comments
in response to the June 2007 Proposal from consumer groups, individual
consumers, and a member of Congress criticizing weekend or holiday due
dates. The comment letters expressed concern that a consumer whose due
date falls on a date on which the creditor does not accept payments
must pay one or several days early in order to avoid the imposition of
fees or other penalties that are associated with a late payment.
Comment letters from consumers indicated that, for many consumers,
weekend and holiday due dates are a common occurrence. Some of these
commenters suggested that the Board mandate an automatic grace period
until the next business day for any such weekend or holiday due dates.
Other commenters recommended that the Board prohibit weekend or holiday
due dates.
In response to these comments, the Board proposed in May 2008 a new
Sec. 226.10(d) that would have required a creditor to treat a payment
received by mail the next business day as timely, if the due date for
the payment is a day on which the creditor does not receive or accept
payment by mail, such as a day on which the U.S. Postal Service does
not deliver mail. Thus, if a due date falls on a Sunday on which a
creditor does not receive or accept payment by mail, the payment could
not have been subjected to late payment fees or increases in the
interest rate applicable to the account due to late payment if the
payment were received by mail on the next day that the creditor does
receive or accept payment by mail. The Board proposed this rule using
its authority to regulate the prompt posting of payments under TILA
Section 164, which states that ``[p]ayments received from an obligor
under an open end consumer credit plan by the creditor shall be posted
promptly to the obligor's account as specified in regulations of the
Board.'' 15 U.S.C. 1666c.
The proposed rule in Sec. 226.10(d) was limited to payments made
by mail. The Board noted its particular concern about payments by mail
because the consumer's time to pay, as a practical matter, is the most
limited for those payments, since a consumer paying by mail must
account for the time that it takes the payment to reach the creditor.
The Board solicited comment in the May 2008 Proposal as to whether this
rule also should address payments made by other means, such as
telephone payments or payments made via the Internet.
Consumer groups, several industry commenters, one industry trade
group, a state treasurer, several credit union trade associations, and
several state consumer protection agencies supported the Board's
proposed rule regarding weekend or holiday due dates. Several industry
commenters indicated that they were already in compliance with the
proposed rule. Consumer groups stated that the proposed rule should be
expanded to all forms of payment, including payments made
electronically, by personal delivery, and by telephone.
Several other industry trade groups and industry commenters
objected to the proposed rule regarding weekend or holiday due dates,
stating that it would impose operational challenges and costs for
banks, including additional systems processing. These commenters
questioned the necessity of the proposed rule, in light of the proposal
by the Board and other federal banking agencies in May 2008, which
would have prohibited institutions from treating a payment as late for
any purpose unless the consumer has been provided a reasonable amount
of time to make payment. See 73 FR 28904, May 19, 2008. One industry
commenter supported prohibiting creditors from charging a late payment
fee if the due date falls on a weekend or holiday and the payment is
received on the next business day, but indicated that creditors should
not be required to backdate interest associated with the payment. One
industry commenter that opposed the proposal stated that the Board
should require a creditor to disclose in the account-opening table the
dates that are considered business days for purposes of payments.
Several commenters commented on the example offered by the Board,
``for example if the U.S. Postal Service does not deliver mail on that
date,'' to describe a day on which the creditor does not receive or
accept payments by mail. One industry commenter indicated that it
accepts and receives mail from the U.S. Postal Service every hour, 365
days a year, and indicated that the example may be misleading in light
of its actual practices. Another industry commenter commented more
generally that issuers who receive and process mail on Sundays and
holidays should be permitted to rely on payment due dates that fall on
those days.
The final rule adopts Sec. 226.10(d) as proposed, with one minor
clarification discussed below. The Board believes that it is important
for consumers to have adequate time to make payment on their accounts,
and that it is reasonable for consumers to expect that their mailed
payments actually can be received and processed on the due date.
Consumers should not be required to account for the fact that the due
date for a mailed payment in practice is in effect one day earlier than
the due date disclosed due to a weekend or holiday. While the rule may
impose operational burden on some issuers, the Board believes that this
burden is outweighed by the benefit to consumers of having their
payments posted in accordance with their expectations that payments
need not be delivered prior to the due date in order to be timely. The
Board also notes that several industry commenters indicated that they
were already in compliance with the rule and that it would impose no
additional operational burden on those institutions.
The example in proposed Sec. 226.10(d) regarding a date on which
the U.S. Postal Service does not deliver mail has been moved to a new
comment 10(d)-1, to emphasize that it is an example only. A creditor
that accepts and receives mail on weekends and holidays may rely on
payment due dates that fall on those days.
The final rule adopts the rule regarding weekend or holiday due
dates only for mailed payments and does not address other payment
mechanisms. The Board will continue to monitor due dates for non-mailed
payments in the future in order to determine whether a similar rule for
such payments is necessary.
One commenter stated that Sec. 226.10(d) should refer to dates on
which a creditor does not ``receive or process'' payments rather than
dates on which a creditor does not ``receive or accept'' payments. The
creditor stated that receipt or acceptance, absent actual processing,
could create the appearance of prompt crediting of payments where there
is none. The final rule does not adopt this change. The rules in Sec.
226.10 do not address when a creditor must process payments, only the
date as of which a creditor must credit the payment to a consumer's
account.

[[Page 5360]]

Crediting a payment to a consumer's account as of the date of receipt
does not require that the creditor actually process the payment on that
date; a creditor that does not process and post the payment on the date
of receipt could comply with Sec. 226.10(a) by backdating the payment
and computing all charges applicable to the consumer's account
accordingly.
The Board believes that its final rule under Regulation Z regarding
weekend or holiday due dates will complement the final rule issued by
the Board and other federal banking agencies published elsewhere in
today's Federal Register to require banks to provide a consumer with a
reasonable amount of time to make payments.

Section 226.11 Treatment of Credit Balances; Account Termination

11(a) Credit Balances
TILA Section 165, implemented in Sec. 226.11, sets forth specific
steps that a creditor must take to return any credit balance in excess
of $1 on a credit account, including refunding any remaining credit
balance within seven business days after receiving a written request
from the consumer or making a good faith effort to refund any credit
balance that remains in the consumer's account for more than six
months. 15 U.S.C. 1666d. Although the substance of these provisions
remains unchanged, the final rule implements a number of amendments
proposed in June 2007.
In June 2007, the Board proposed moving the provisions in Sec.
226.11 regarding credit balances to a new paragraph (a) and renumbering
the commentary accordingly. The Board also proposed adding a new
paragraph (b) implementing the prohibition in Section 1306 of the
Bankruptcy Act on terminating accounts under certain circumstances
(further discussed below). See TILA Section 127(h); 15 U.S.C. 1637(h).
Furthermore, the Board proposed amending the section title to reflect
the new subject matter. Finally, the Board proposed revising the
commentary to provide that a creditor may comply with Sec. 226.11(a)
by refunding any credit balance upon receipt of a consumer's oral or
electronic request. See proposed comment 11(a)-1.
In response to proposed comment 11(a)-1, some consumer groups
requested that creditors be required to inform consumers that, unlike
compliance with a written refund request under Sec. 226.11(a)(2),
compliance with an oral or electronic refund request is not mandatory.
The Board believes that this disclosure is not necessary. A creditor
that requires requests for refund of a credit balance to be in writing
is unlikely to accept an oral or electronic request for such a refund
of a credit balance and then refuse to comply without notifying the
consumer that a written request is required. Furthermore, Sec.
226.11(a)(3) requires creditors to refund credit balances in excess of
$1 after six months even if no request is made.
The Board is amending the credit balance provisions in Sec. 226.11
as proposed in June 2007, with minor technical and clarifying
revisions.
11(b) Account Termination
TILA Section 127(h), added by the Bankruptcy Act, prohibits
creditors that offer open-end consumer credit plans from terminating an
account prior to its expiration date solely because the consumer has
not incurred finance charges on the account. 15 U.S.C. 1637(h). A
creditor is not, however, prohibited from terminating an account for
inactivity in three or more consecutive months.
In June 2007, the Board proposed to implement TILA Section 127(h)
in the new Sec. 226.11(b). The general prohibition in TILA Section
127(h) was stated in proposed Sec. 226.11(b)(1). The proposed
commentary to Sec. 226.11(b)(1) would have clarified that the
underlying credit agreement, not the credit card, determines if there
is a stated expiration (maturity) date. Thus, creditors offering
accounts without a stated expiration date would not be permitted to
terminate those accounts solely because the consumer uses the account
and does not incur a finance charge. See proposed comment 11(b)(1)-1.
Proposed Sec. 226.11(b)(2) provided that, consistent with TILA
Section 127(h), the prohibition in proposed Sec. 226.11(b)(1) would
not have prevented creditors from terminating an account that is
inactive for three consecutive months. Under proposed Sec.
226.11(b)(2), an account would have been inactive if there had been no
extension of credit (such as by purchase, cash advance, or balance
transfer) and if the account had no outstanding balance.
One comment on proposed comment 11(b)(1)-1 requested that the
phrase ``uses the account'' be removed because it does not appear in
TILA Section 127(h) or proposed Sec. 226.11(b). The June 2007 Proposal
included this phrase because, under proposed Sec. 226.11(b)(2), a
creditor would be permitted to terminate an account for inactivity. To
clarify this point, the Board has revised comment 226.11(b)(1)-1 to
reference Sec. 226.11(b)(2) explicitly. Otherwise, Sec. 226.11(b) is
adopted as proposed in June 2007, with minor technical and clarifying
revisions.

Section 226.12 Special Credit Card Provisions

Section 226.12 contains special rules applicable to credit cards
and credit card accounts, including conditions under which a credit
card may be issued, liability of cardholders for unauthorized use, and
cardholder rights to assert merchant claims and defenses against the
card issuer.
12(a) Issuance of Credit Card
TILA Section 132, which is implemented by Sec. 226.12(a) of
Regulation Z, generally prohibits creditors from issuing credit cards
except in response to a request or application. Section 132 explicitly
exempts from this prohibition credit cards issued as renewals of or
substitutes for previously accepted credit cards. 15 U.S.C. 1642. While
the June 2007 Proposal did not propose changes to the current renewal
and substitution rules, the May 2008 Proposal set forth certain
limitations on a card issuer's ability to issue a new card as a
substitute for an accepted card for card accounts that have been
inactive for a significant period of time. Specifically, a card issuer
would not have been permitted to substitute a new card for a previously
accepted card if the merchant base would be changed (for example, from
a card that is honored by a single merchant to a general purpose card)
and if the account has been inactive for a 24-month period preceding
the issuance of the substitute card. See proposed comment 12(a)(2)-2.v.
Consumer groups supported the proposal but urged the Board to
expand the scope of the proposed revision, to prohibit any replacement
of a retail card by a general-purpose credit card if the substitution
was not specifically requested by the consumer. In contrast, the
majority of industry commenters commenting on the issue stated that the
proposed revision would inappropriately restrict an issuer's ability to
upgrade cards for consumers who want a product that provides greater
merchant acceptance than their existing retail card. These commenters
also generally believed that any potential concerns about cardholder
security or identity theft are already adequately addressed through
market practices designed to prevent fraud (such as card activation
requirements) and other regulatory requirements (for example, change-
in-terms notice requirements under Regulation Z and identity theft
``Red Flag'' requirements

[[Page 5361]]

under the FCRA). See e.g. 12 CFR part 222. One industry commenter urged
the Board to consider adding exceptions where the general-purpose
credit card carries similar branding as the retail card (for example,
where ``Department store X retail card'' is replaced with ``Department
store X general-purpose card''), or where the retailer goes out of
business.
Industry commenters also urged the Board to extend the time period
for inactivity from 24 to 36 months after which a general purpose
credit card could no longer be substituted for a retail card on an
unsolicited basis. These industry commenters stated that private label
credit cards, particularly those used to make major purchases, tend to
have long life-cycles and sporadic usage patterns. One industry
commenter also noted that 36 months aligned with current card
expiration and renewal time frames. Consumer groups in contrast
believed that 24 months was excessive, because a consumer may no longer
remember having the particular retail card, or may have moved during
that time period. Instead, consumer groups urged the Board to adopt a
time frame of 180 days. Alternatively, consumer groups suggested that
the Board could permit substitutions only if the creditor has sent a
periodic statement within the prior three-month period.
The final rule adopts the revisions to comment 12(a)(2)-2.v, as
proposed. While some consumers may benefit from receiving a card that
could be used at a wider number of merchants compared to their current
retail card, other consumers may have only signed up for the retail
card to receive a benefit unique to that retailer or group of
retailers, such as an initial purchase discount, and may not want a
card with greater merchant acceptance. Although consumers in some cases
can elect not to activate the substitute card and to destroy the
unwanted device, others may have moved in the interim period, leading
to potential card fraud and identity theft concerns as the cards will
be sent to an invalid address. Some consumers may not remember having
opened the retail card account in the first place, leading to possible
consumer confusion when the new card arrives in the mail.
Accordingly, the Board believes that the revised comment as
adopted, including the 24-month period, strikes a reasonable balance
between the potential benefits to consumers of using an accepted card
at a wider number of merchants and consumer concerns arising from an
unsolicited card being sent for an account that has been inactive for a
significant period of time, particularly when the card is issued by a
creditor with whom the consumer may have no prior relationship. The
final comment also deletes as unnecessary the reference to situations
where ``the consumer has not obtained credit with the existing merchant
base within 24 months prior to the issuance of the new card'' because,
as noted by one commenter, this concept is already incorporated into
the definition of ``inactive account'' in the comment.
In light of the revised comment's narrow scope, the Board also
believes it is unnecessary to add any exceptions to the provision as
adopted. The final rule does not affect creditors' ability to send a
general-purpose card to replace a retail card that has been inactive
for more than 24 months if the consumer specifically requests or
applies for the general-purpose card.
12(b) Liability of Cardholder for Unauthorized Use
TILA and Regulation Z provide protections to consumers against
losses due to unauthorized transactions on an open-end plan. See TILA
Section 133(a); 15 U.S.C. 1643, Sec. 226.12(b); TILA Section
161(b)(1); 15 U.S.C. 1666(b)(1), Sec. 226.13(a)(1). Significantly,
under Sec. 226.12(b), a cardholder's liability for an unauthorized use
of a credit card is limited to no more than $50 for transactions that
occur prior to notification of the card issuer that an unauthorized use
has occurred or may occur as the result of loss, theft or otherwise. 15
U.S.C. 1643. Before a card issuer may impose liability for an
unauthorized use of a credit card, it must satisfy certain conditions:
(1) The card must be an accepted credit card; (2) the issuer must have
provided adequate notice of the cardholder's maximum liability and of
the means by which the issuer may be notified in the event of loss or
theft of the card; and (3) the issuer must have provided a means to
identify the cardholder on the account or the authorized user of the
card. The June 2007 and May 2008 Proposals set forth a number of
revisions that would have clarified the scope of Sec. 226.12(b) and
updated the regulation to address current business practices. In
addition, the Board proposed to move the guidance that is currently set
forth in footnotes to the regulation or commentary, as appropriate.
Scope. As proposed in the June 2007 Proposal, the definition of
``unauthorized use'' currently found in footnote 22 is moved to the
regulation. See Sec. 226.12(b)(1)(i). This definition provides that
unauthorized use is use of a credit card by a person who lacks
``actual, implied, or apparent authority'' to use the credit card. In
the June 2007 Proposal, the Board proposed two new commentary
provisions, comments 12(b)(1)(ii)-3 and -4, to parallel existing
commentary provisions under Regulation E (Electronic Fund Transfers)
regarding unauthorized electronic fund transfers.
Comment 12(b)(1)(ii)-3, as proposed, would have clarified that if a
cardholder furnishes a credit card to another person and that person
exceeds the authority given, the cardholder is liable for that credit
transaction unless the cardholder has notified the creditor (in
writing, orally, or otherwise) that use of the credit card by that
person is no longer authorized. See also comment 205.2(m)-2 of the
Official Staff Commentary to Regulation E. Two industry commenters, one
card issuer and one trade association, supported the proposed comment,
stating that it provided helpful guidance on an issue that frequently
arises in disputes between card issuers and cardholders. Consumer
groups, however, asserted that the scope of the proposed comment should
be limited to misuse by persons that a cardholder has added as an
authorized user on the account.
The Board adopts the comment as proposed. The Board believes that
limiting the comment to authorized users would be too narrow as it
would potentially allow cardholders to avoid liability for certain
transactions simply because the cardholder did not undertake the
procedural steps necessary to add an authorized user. In addition, as
noted by one commenter in support of the proposed comment, the
cardholder is in the best position to control the persons to whom they
have provided a card for use. Lastly, the Board believes that to the
extent feasible, it is appropriate to have consistent rules under
Regulation Z and Regulation E, particularly where the underlying
statutory requirements are similar.
The June 2007 Proposal also would have added comment 12(b)(1)(ii)-4
to provide that unauthorized use includes circumstances where a person
has obtained a credit card, or otherwise has initiated a credit card
transaction, through robbery or fraud (for example, if the person holds
the consumer at gunpoint and forces the consumer to initiate a
transaction). See also comments 205.2(m)-3 and -4 of the Official Staff
Commentary to Regulation E. Because ``unauthorized use'' under
Regulation Z includes the use of a credit card by a person other than
the cardholder who does not have ``actual,

[[Page 5362]]

implied, or apparent authority,'' \24\ some commenters agreed with the
Board's observation in the supplementary information to the June 2007
Proposal that cases of robbery or fraud were likely to be adequately
addressed under the existing regulation. Nonetheless, these commenters
welcomed the additional guidance as it provided certainty to the issue.
Consumer groups expressed concern that the proposed comment was too
narrow and could leave consumers vulnerable to liability for
unauthorized use in other similar circumstances, such as theft,
burglary and identity theft. Consequently, these groups urged the Board
to expand the scope of the proposed comment to cover additional
circumstances. The Board adopts comment 12(b)(1)(ii)-4 generally as
proposed, with a minor revision to clarify that unauthorized use is not
limited to instances of robbery or fraud.
---------------------------------------------------------------------------

\24\ By contrast, ``unauthorized electronic fund transfer''
under Regulation E is defined as an electronic fund transfer from a
consumer's account initiated by a person other than a consumer
``without actual authority'' to initiate the transfer and from which
the consumer receives no benefit, but excludes a transfer initiated
by a person who was furnished the access device by the consumer. See
12 CFR 205.2(m).
---------------------------------------------------------------------------

As discussed previously under Sec. 226.2(a)(15), the term ``credit
card'' does not include a check that accesses a credit card account.
Thus, in June 2007, the Board proposed to add comment 12(b)-4 to
provide that the liability limits established in Sec. 226.12(b) do not
apply to unauthorized transactions involving the use of these checks.
Consumer groups in response asserted that even if the Board declined to
expand the definition of ``credit card'' to include access checks, it
should not necessarily follow that any unauthorized transactions
involving the use of these checks should be exempt from the protections
afforded by Sec. 226.12(b). In particular, consumer groups observed
that this outcome would lead to the anomalous result that the
consumer's use of the credit card number alone would receive the
protections of Sec. 226.12(b), but the consumer's use of an access
check would not, even though in both cases, the transaction is
ultimately charged to the consumer's credit card account.
The Board adopts comment 12(b)-4 as proposed, and thus does not
extend application of Sec. 226.12(b) to access checks in light of the
statutory language in TILA Section 133 requiring that the unauthorized
use involve the use of a credit card. Nonetheless, as noted in the June
2007 Proposal, the consumer may still assert the billing error
protections under Sec. 226.13 with respect to any unauthorized
transaction using an access check. Comment 12(b)-4 in the final rule
contains this clarification as proposed.
Some industry commenters urged the Board to adopt a time period
within which consumers must make claims for unauthorized transactions
made through use of a credit card. The Board declines to adopt such a
time period. As noted in the June 2007 Proposal, in contrast to TILA
Section 161 which requires consumers to assert a billing error claim
within 60 days after a periodic statement reflecting the error has been
sent, TILA Section 133 does not prescribe a time frame for asserting an
unauthorized use claim. See 15 U.S.C. 1643.
Conditions for imposing liability. Before a card issuer may impose
any liability for an unauthorized use of a credit card, Sec. 226.12(b)
requires, among other things, that the card issuer first provide a
means to identify the cardholder on the account or the authorized user
of the card, such as a signature, photograph, or fingerprint on the
card. As proposed in the June 2007 Proposal, comment 12(b)(2)(iii)-1
would have updated the examples of the means that a card issuer may
provide for identifying the cardholder on the account or the authorized
user of the card to include additional biometric means of
identification. See Sec. 226.12(b)(2). No commenters opposed this
proposed comment, and it is adopted as proposed.
In addition, the June 2007 Proposal would have revised comment
12(b)(2)(iii)-3 to clarify that a card issuer may not impose liability
for an unauthorized use when merchandise is ordered by telephone or
Internet if the person using the card without the cardholder's
authority provides the credit card number by itself or with other
information that appears on the card. For example, in many instances, a
credit card will bear a separate 3- or 4-digit number, which is
typically printed on the back of the card on the signature block or in
some cases on the front of the card above the card number. Other
information on the card that may be provided is the card expiration
date. While the provision of such information may suggest that the
person providing the number is in possession of the card, it does not
enable the issuer to determine that the person providing the number is
in fact the cardholder or the authorized user. Consumer groups
supported this proposal, and no commenter opposed the proposed
revision. Accordingly, comment 12(b)(2)(iii)-3 is adopted as proposed.
As noted above, a creditor must provide adequate notice of the
consumer's maximum liability before it may impose liability for an
unauthorized use of a credit card. In the June 2007 Proposal, the Board
proposed Model Clause G-2(A), which can be used to explain the
consumer's liability for unauthorized use. No commenters addressed the
proposed model clause. The final rule revises the language of Model
Clause G-2(A) to incorporate optional language that an issuer may
provide in the event it allows a consumer to provide notice of the
unauthorized use electronically. For HELOCs subject to Sec. 226.5b, at
the creditor's option, the creditor may use either Model Clause G-2 or
G-2(A).
Reasonable investigation. Comment 12(b)-3 provides that a card
issuer may not automatically deny an unauthorized use claim based
solely on the consumer's failure or refusal to comply with a particular
request. In the May 2008 Proposal, the Board proposed to amend the
comment to specifically provide that the issuer may not require the
cardholder to submit an affidavit or to file a police report as a
condition of investigating an unauthorized use claim. The proposed
addition reflected the Board's concerns that such card issuer requests
could cause a chilling effect on a cardholder's ability to assert his
or her right to avoid liability for an unauthorized transaction. The
proposed addition also would have codified in the commentary guidance
that had previously only been stated in the supplementary information
accompanying prior Board rulemakings. See 59 FR 64351, 64352, December
14, 1994; 60 FR 16771, 16774, April 3, 1995.
While a few industry commenters supported the proposal, most
industry commenters asserted that card issuer requirements for
affidavits or police reports served a useful purpose in deterring false
or fraudulent assertions of unauthorized use. In addition, industry
commenters also noted that such documentation may be necessary to help
validate and appropriately resolve a dispute, as well as to convince
local authorities to prosecute the person responsible for the
unauthorized transaction. At a minimum, industry commenters asked the
Board to permit card issuers to require cardholders to provide a signed
statement regarding the unauthorized use.
Consumer groups strongly supported the proposed provision, stating
that paperwork requirements and notary fees could deter consumers from
filing legitimate unauthorized use claims. In addition, consumer groups
noted that

[[Page 5363]]

some consumers continue to have difficulty obtaining police reports in
connection with identity theft claims, making it impossible to comply
with creditor requirements for police reports. In such cases, consumer
groups asserted that a creditor should not be permitted to impose
liability on a victim of fraud or identity theft because of the
police's reluctance to take the report.
The final rule adopts the comment, generally as proposed. As stated
in prior rulemakings and in the May 2008 Proposal, the Board is
concerned that certain card issuer requests could cause a chilling
effect on a cardholder's ability to assert his or her right to avoid
liability for an unauthorized transaction. However, the Board
recognizes that in some cases, a card issuer may need to provide some
form of certification indicating that the cardholder's claim is
legitimate, for example, to obtain documentation from a merchant
relevant to the claim or to pursue chargeback rights. Accordingly, the
Board is revising the final comment to clarify that a card issuer may
require the cardholder to provide a signed statement supporting the
asserted claim, provided that the act of providing the signed statement
would not subject the cardholder to potential criminal penalty. For
example, the card issuer may include a signature line on the billing
error rights form that the cardholder may send in to provide notice of
the claim, so long as the signature is not accompanied by a statement
that the cardholder is providing the notice under penalty of perjury
(or the equivalent). See comment 12(b)-3.vi. The Board further notes
that notwithstanding the prohibition on requiring an affidavit or the
filing of a police report as a condition of investigating a claim of
unauthorized use, if the cardholder otherwise does not provide
sufficient information to allow a card issuer to investigate the
matter, the card issuer may reasonably terminate the investigation as a
result of the lack of information.
Business use of credit cards. Section 226.12(b)(5) generally
provides that a card issuer and a business may agree to liability for
unauthorized use beyond the limits established by the regulation if 10
or more credit cards are issued for use by the employees of that
business. Liability on an individual cardholder, however, may only be
imposed subject to the $50 limitation established by TILA and the
regulation. The Board did not propose guidance on this issue in either
the June 2007 or the May 2008 Proposal.
One commenter in response to the June 2007 Proposal urged the Board
to clarify the meaning of the term ``employee'' to include temporary
employees, independent contractors, and any other individuals permitted
by an organization to participate in its corporate card program, in
addition to traditional employees. The final rule leaves Sec.
226.12(b)(5) unchanged. The Board notes that to the extent such persons
meet the definition of ``employee'' under state law, they could be
permissibly included in determining whether an organization meets the
10 or more employee threshold for imposing additional liability.
12(c) Right of Cardholder To Assert Claims or Defenses Against Card
Issuer
Under TILA Section 170, as implemented in Sec. 226.12(c) of
Regulation Z, a cardholder may assert against the card issuer a claim
or defense for defective goods or services purchased with a credit
card. The claim or defense applies only as to unpaid balances for the
goods or services, and if the merchant honoring the card fails to
resolve the dispute. The right is further limited to disputes exceeding
$50 for purchases made in the consumer's home state or within 100 miles
of the cardholder's address. See 15 U.S.C. 1666i.\25\ In the June 2007
Proposal, the Board proposed to update the regulation to address
current business practices and move guidance currently in the footnotes
to the regulation or commentary as appropriate.
---------------------------------------------------------------------------

\25\ Certain merchandise disputes, such as the non-delivery of
goods, may also be separately asserted as a ``billing error'' under
Sec. 226.13(a)(3). See comment 12(c)-1.
---------------------------------------------------------------------------

In order to assert a claim under Sec. 226.12(c), a cardholder must
have used a credit card to purchase the goods or services associated
with the dispute. In the June 2007 Proposal, the Board proposed to
update the examples in comment 12(c)(1)-1 of circumstances that are
covered by Sec. 226.12(c) to include Internet transactions charged to
the credit card account. No commenters opposed this revision, which is
adopted as proposed.
Comment 12(c)(1)-1 also provides examples of circumstances for
which the protections under Sec. 226.12(c) do not apply. In the June
2007 Proposal, the Board proposed to delete the reference to ``paper-
based debit cards'' in comment 12(c)(1)-1.iv. However, the final rule
retains this example of a type of transaction excluded from Sec.
226.12(c) to address circumstances in which a debit card transaction is
submitted by paper-based means, such as when a merchant takes an
imprint of a debit card and submits the sales slip in paper to obtain
payment.
Currently, footnote 24 and comment 12(c)(1)-1 provide that
purchases effected by a debit card when used to draw upon an overdraft
credit line are exempt from coverage under Sec. 226.12(c). In the June
2007 Proposal, the Board proposed to move the substance of footnote 24
to comment 12(c)-3 and to make a technical revision to comment
12(c)(1)-1. Consumer groups opposed the substance of these provisions,
asserting that any debit card transaction that accesses some form of
credit should be accorded the protections under Regulation Z, whether
the debit card transaction accesses a traditional overdraft line of
credit covered by Regulation Z or an overdraft service covered instead
by Regulation DD (Truth in Savings). In their view, the protections
under Regulation Z are stronger than those provided under Regulation E
(Electronic Funds Transfer), which generally governs rights and
responsibilities for debit card transactions. See 12 CFR parts 230 and
205. The Board continues to believe that given potential operational
difficulties in applying the merchant claims and defense provisions
under Sec. 226.12(c) to what are predominantly electronic fund
transfers covered by Regulation E and the Electronic Fund Transfer Act,
an exemption for such transactions from Regulation Z coverage remains
appropriate. See 46 FR 20848, 20865 (Apr. 7, 1981). Accordingly, the
language previously contained in footnote 24 is moved to comments
12(c)-3 and 12(c)(1)-1, as proposed.
As stated above, a disputed transaction must meet certain
requirements before the consumer may assert a claim or defense under
Sec. 226.12(c), including that the cardholder first make a good faith
attempt to seek resolution with the person honoring the credit card,
and that the transaction has occurred in the same state as the
cardholder's current designated address, or, if different, within 100
miles from that address. See Sec. 226.12(c)(3); TILA Section 170. The
Board proposed in June 2007 to redesignate these conditions to Sec.
226.12(c)(3)(i)(A) and (c)(3)(i)(B). No comments were received on the
proposed change, and it is adopted as proposed. Section
226.12(c)(3)(ii), which sets forth the provision previously contained
in footnote 26 regarding the applicability of some of the conditions,
is also adopted as proposed in the June 2007 Proposal.

[[Page 5364]]

Because many telephone and Internet transactions may involve
merchants that are based far from a cardholder's residence, consumer
groups urged the Board to amend the regulation to explicitly provide
that telephone and Internet transactions are deemed to have been made
in the consumer's home state for purposes of the 100-mile geographic
limitation. The Board believes, however, that the location where a
telephone or Internet transaction takes place remains a matter best
left to state law. Moreover, the Board is not aware of widespread
incidences in which a merchant claim asserted under Sec. 226.12(c) has
been denied due to the merchant's location. Thus, if applicable state
law provides that a mail, telephone, or Internet transaction occurs at
the cardholder's address, such transactions would be covered under
Sec. 226.12(c), even if the merchant is physically located more than
100 miles from the cardholder's address.
Guidance regarding how to calculate the amount of the claim or
defense that may be asserted by the cardholder under Sec. 226.12(c),
formerly found in footnote 25, is moved to the commentary in comment
12(c)-4 as proposed in the June 2007 Proposal.
12(d) Offsets by Card Issuer Prohibited
TILA Section 169 prohibits card issuers from taking any action to
offset a cardholder's credit card indebtedness against funds of the
cardholder held on deposit with the card issuer. 15 U.S.C. 1666h. The
statutory provision is implemented by Sec. 226.12(d) of the
regulation. Section 226.12(d)(2) currently provides that card issuers
are permitted to ``obtain or enforce a consensual security interest in
the funds'' held on deposit. Comment 12(d)(2)-1 provides guidance on
the security interest provision. For example, the security interest
must be affirmatively agreed to by the consumer, and must be disclosed
as part of the account-opening disclosures under Sec. 226.6. In
addition, the comment provides that the security interest must not be
``the functional equivalent of a right of offset.'' The comment states
that the consumer ``must be aware that granting a security interest is
a condition for the credit card account (or for more favorable account
terms) and must specifically intend to grant a security interest in a
deposit account.'' The comment gives some examples of how this
requirement can be met, such as use of separate signature or initials
to authorize the security interest, placement of the security agreement
on a separate page, or reference to a specific amount or account number
for the deposit account. The comment also states that the security
interest must be ``obtainable and enforceable by creditors generally.
If other creditors could not obtain a security interest in the
consumer's deposit accounts to the same extent as the card issuer, the
security interest is prohibited by Sec. 226.12(d)(2).''
In the June 2007 Proposal, the Board requested comment on whether
additional guidance was needed and, if so, the specific issues the
guidance should address. Several consumer groups commented that any
guidance should explicitly require strong measures to manifest a
consumer's consent to grant a security interest, specifically a
separate written document that must be independently signed by the
consumer and that references a specific account. These commenters also
suggested that issuers should be required to show that they are not
routinely taking security interests in deposit accounts as the
functional equivalent of an offset, for example, by either falling
under a numerical threshold (only a small percentage of accounts have a
security interest) or by establishing a special program for accounts
with a security interest.
The Board is not aware of evidence that would suggest that
creditors are routinely taking security interests in deposit accounts
as the functional equivalent of offsets, and therefore believes that it
is unnecessary to require measures such as numerical thresholds or
special programs. However, comment 12(d)(2)-1 is amended to state that
indicia of the consumer's intent to grant a security interest in a
deposit account include at least one of the procedures listed in the
comment (i.e., separate signature or initials to authorize the security
interest, placement of the security agreement on a separate page, and
reference to a specific amount of funds or to a specific account
number), or a procedure that is substantially similar in evidencing the
consumer's intent. As stated in the June 2007 Proposal, questions have
been raised with the Board whether creditors must follow all of the
procedures specified in the comment; while the Board believes it is
unnecessary to require creditors to use all of these procedures to
ensure the consumer's awareness of and intent to create a security
interest, it is reasonable to expect creditors to follow at least one
of them.
No other changes to Sec. 226.12(d) and associated commentary were
proposed, and no other comments were received. Therefore, other than
the change to comment 12(d)(2)-1 discussed above, Sec. 226.12(d) and
the associated commentary remain unchanged in the final rule.
12(e) Through 12(g)
Sections Sec. 226.12(e), (f), and (g) address, respectively: The
prompt notification of returns and crediting of refunds; discounts and
tie-in arrangements; and guidance on the applicable regulation
(Regulation Z or Regulation E) in instances involving both credit and
electronic fund transfer aspects. The Board did not propose any changes
to these provisions or the associated commentary, and no comments were
received on them. These provisions and the associated commentary remain
unchanged in the final rule.

Section 226.13 Billing Error Resolution

TILA Section 161, as implemented in Sec. 226.13 of the regulation,
sets forth error resolution procedures for billing errors, and requires
a consumer to provide written notice of an error within 60 days after
the first periodic statement reflecting the alleged error is sent. 15
U.S.C. 1666. The written notice triggers a creditor's duty to
investigate the claim within prescribed time limits. In contrast to the
consumer protections in Sec. 226.12 of the regulation, which are
limited to transactions involving the use of a credit card, the billing
error procedures apply to any extension of credit that is made in
connection with an open-end account.
13(a) Definition of Billing Error
Section 226.13(a) defines a ``billing error'' for purposes of the
error resolution procedures. Under Sec. 226.13(a)(3), the term
``billing error'' includes disputes about property or services that are
not delivered to the consumer as agreed. See Sec. 226.13(a)(3). As
originally proposed in June 2007, comment 13(a)(3)-2 would have
provided that a consumer may assert a billing error under Sec.
226.13(a)(3) with respect to property or services obtained through any
extension of credit made in connection with a consumer's use of a
third-party payment service.
In some cases, a consumer might pay for merchandise purchased
through an Internet site using an Internet payment service, with the
funds being provided through an extension of credit from the consumer's
credit card or other open-end account. For example, the consumer may
purchase an item from an Internet auction site and use the payment
service to fund the transaction, designating the consumer's credit card
account as the funding source. As in the case of purchases made using a
check that accesses a consumer's credit card

[[Page 5365]]

account, there may not be a direct relationship between the merchant
selling the merchandise and the card issuer when an Internet payment
service is used. Because a consumer has billing error rights with
respect to purchases made with access checks, the June 2007 Proposal
would have provided that the billing error provisions would similarly
apply when a consumer makes a purchase using a third-party payment
intermediary funded using the same credit card account.
Consumer groups strongly supported the Board's proposal, stating
that it would help to resolve a number of problems involving
transactions processed by third-party intermediary payment services in
which goods are not received. Industry commenters largely opposed the
proposed comment, however, urging the Board to treat extensions of
credit involving third-party payment intermediaries similarly to
transactions in which a consumer uses an access check or credit card to
obtain a cash advance, and then uses that cash to pay for a good or
service. Under such circumstances, a consumer would be able to assert a
billing error if the wrong amount was funded, but not if the good
purchased with the funds was not delivered as agreed.
Industry commenters also stated that the proposed comment
inappropriately puts the burden of investigating billing errors
involving third-party payment services on the card issuer, rather than
on the third-party payment intermediary itself, even though the
intermediary will have more direct access to information about the
transaction. Industry commenters were particularly concerned about the
lack of privity between the card issuer and the end merchant because in
many cases the merchant in a third-party intermediary arrangement will
not have agreed to meet the requirements of participating in the credit
card network. Thus, a card issuer would be unable to contact the
merchant or to charge back a transaction in the event the consumer
asserts a billing error, thereby exposing the issuer to considerably
more risk for the transaction. In this regard, some industry commenters
drew a contrast between the use of third-party payment services and the
use of access checks, noting that creditors are able to control for
risks for access check transactions by either pricing those
transactions differently or by restricting the checks that may be
issued to the cardholder.
Industry commenters also raised a number of operational
considerations. For example, commenters stated that some consumers may
use their credit cards to fund their third-party intermediary accounts,
but then not use those funds for some time. In those circumstances,
issuers would be unable to trace a disputed transaction back to the
purchased good or service because the issuer would not receive any
information about that subsequent transaction. Consequently, while they
opposed the proposed comment in principle, a few industry commenters
suggested that the proposed comment might be workable only if it were
limited to circumstances in which the credit card account is used
specifically for a particular purchase that can be identified (for
example, where funds from the card are used contemporaneously, the
amount of the purchase and ``funding'' are the same, and they can be
traced and tracked). Another industry commenter asked for guidance on
how the proposed comment would apply where the purchase of a good or
service results from the commingling of funds, only a portion of which
can be attributed to an extension of credit from a credit card account.
The Board continues to believe that it is appropriate to apply the
billing error provisions to transactions made through a third-party
intermediary using a credit card account \26\ just as they would apply
to purchases made with checks that access the same credit card account.
However, in light of certain operational issues raised by commenters,
the final rule limits the applicability of comment 13(a)(3)-2 to
extensions of credit that (1) are obtained at the time the consumer
purchases the good or service through the third-party payment
intermediary; and (2) match the amount of the purchase transaction for
the good or service including any ancillary taxes and fees (such as
shipping and handling costs and/or taxes).
---------------------------------------------------------------------------

\26\ Although the billing error provisions apply to extensions
of credit made through open-end credit plans more generally, the
Board is not aware of any circumstances in which a transaction made
to fund a third-party intermediary transaction is initiated with any
open-end credit plan other than a credit card.
---------------------------------------------------------------------------

From the consumer's perspective, there is likely to be little
difference between his or her use of a credit card to make a payment
directly to the merchant on a merchant's Internet Web site or to make a
payment to the merchant through a third-party intermediary. Indeed, in
some cases, the merchant may not otherwise accept credit cards, making
the use of the third-party intermediary service the consumer's most
viable option of paying for the good or service. In other cases, the
consumer may not want to provide his or her credit card number or other
information to the merchant for security reasons. Nonetheless, the
consumer may reasonably expect that transactions made using his or her
credit card account would be afforded the billing error protections
just as if the consumer used an access check to purchase the good or
service. To the extent that such transactions may pose additional risk
to the creditor due to the lack of privity between the creditor and the
merchant, nothing in the rule would prohibit the creditor from pricing
the transaction differently, just as access check transactions are
often priced differently from other purchases made using a credit card.
As noted above, comment 13(a)(3)-2 is limited to extensions of
credit that are obtained in connection with the consumer's purchase of
a good or service using the third-party payment intermediary and where
the purchase amount of the transaction including any ancillary taxes
and fees (such as shipping and handling costs and/or taxes) matches the
amount of the extension of credit. In those circumstances, the Board
understands that credit card network rules generally require that
specific information about the extension of credit, including the name
of the merchant from whom the consumer has purchased the good or
service and the purchase amount, be passed through to the creditor,
which would allow the creditor to identify the particular purchase. The
final rule does not extend billing error rights to extensions of credit
that are made to fund an account held by a third-party payment
intermediary if the consumer does not contemporaneously use those funds
to purchase a good or service at that time. For example, a consumer may
use his or her credit card to fund the consumer's account held at a
third-party payment intermediary for $100, but then some time later
purchase a good or service using some or all of the $100 in funds in
that account. Under those circumstances, the creditor would not have
any information about subsequent transactions made using the funds from
the $100 extension of credit to enable the creditor to investigate the
claim. The Board considers the $100 extension of credit in that
scenario to be equivalent to a cash advance, which would allow the
consumer to assert a billing error if the wrong amount is funded, but
any problems with the delivery of that good or service would not be
considered a billing error for purposes of Sec. 226.13(a)(3).
The revised comment also does not cover extensions of credit that
are made to fund only a portion of the purchase amount, where the
consumer may use

[[Page 5366]]

another source of funds to fund the remaining amount. For example, the
consumer may make a $50 purchase using a third-party payment
intermediary service, but have $20 in his or her account held by the
payment intermediary. The consumer may in this case use a credit card
account to cover the remaining $30 of the purchase. In this ``split
tender'' example where the purchase is funded by a commingling of
multiple payment sources, including a credit card account, the Board
believes that the operational challenges in resolving any disputes
arising from the purchased good or service, including how to credit the
purchase amount back to the consumer, outweigh any resulting benefits
to the consumer in treating any disputes regarding the delivery of the
good purchased as a billing error under Sec. 225.13(a)(3).
The Board's adoption of a final rule providing consumers error
resolution rights when they use their credit card account in connection
with third-party payment intermediary services in some circumstances
does not preclude a future possible change to the regulation extending
these rights to additional circumstances in which purchases made
through a third-party payment intermediary service are funded in whole
or in part using a credit card account. The Board intends to continue
to study this issue, and other issues related to third-party payment
intermediaries more generally, and may consider in the future whether
additional protections under Regulation Z and other consumer financial
services regulations are necessary with respect to consumer usage of
these services.
The June 2007 Proposal also proposed a new comment 13(a)(3)-3 to
clarify that prior notice to the merchant is not required before the
consumer can assert a billing error that the good or service was not
accepted or delivered as agreed. One industry commenter urged the Board
to reconsider the proposed comment, stating that in many cases, such as
in the event of non-delivery, a dispute might be more efficiently
resolved if the consumer contacted the merchant first before asserting
a billing error claim with the creditor. Consumer groups supported the
proposed comment. In adopting the comment as proposed, the Board notes
that in contrast to claims or defenses asserted under TILA Section 170
and Sec. 226.12(c) of the regulation, which require that the
cardholder first make a good faith attempt to resolve a disagreement or
problem with the person honoring the credit card, the billing error
provisions under TILA do not require the consumer to first notify and
attempt to resolve the dispute with the person honoring the credit card
before asserting a billing error directly with the creditor. See 15
U.S.C. 1666i.
13(b) Billing Error Notice
To assert a billing error, a consumer must provide a written notice
of the error to the creditor no later than 60 days after the creditor
transmitted the first periodic statement that reflects the alleged
error. See Sec. 226.13(b). The June 2007 Proposal would have revised
comment 13(b)-1 to incorporate guidance currently in footnote 28
stating that a creditor need not comply with the requirements of Sec.
226.13(c) through (g) if the consumer voluntarily withdraws the billing
error notice. In addition, the June 2007 Proposal would have added new
comment 13(b)-2 to incorporate guidance currently in footnote 29
stating that the creditor may require that the written billing error
notice not be made on the payment coupon or other material accompanying
the periodic statement if the creditor so states in the billing rights
statement on the account-opening disclosure and annual billing rights
statement. Proposed comment 13(b)-2 further would have provided that
billing error notices submitted electronically would be deemed to
satisfy the requirement that billing error notices be provided in
writing, provided that the creditor has stated in its billing rights
statement that it will accept notices submitted electronically,
including how the consumer can submit billing error notices in this
manner.
No commenters opposed the proposed revisions to the commentary
under Sec. 226.13(b), and these comments are adopted as proposed. In
addition, the Board is revising Model Forms G-2, G-2(A), G-3, G-3(A),
G-4 and G-4(A) to add optional language creditors can use if they elect
to accept billing error notices (or notices of loss or theft of credit
cards) electronically.
13(c) Time for Resolution; General Procedures
Section 226.13(c) generally requires a creditor to mail or deliver
written acknowledgement to the consumer within 30 days of receiving a
billing error notice, and to complete the billing error investigation
procedures within two billing cycles (but no later than 90 days) after
receiving a billing error notice. To ensure that creditors complete
their investigations in the time period set forth under TILA, in June
2007 the Board proposed to add new comment 13(c)(2)-2 which would have
provided that a creditor must complete its investigation and
conclusively determine whether an error occurred within the error
resolution timeframes. Once this period has expired, the proposed
comment further provided that the creditor may not reverse any
corrections it has made related to the asserted billing error,
including any previously credited amounts, even if the creditor
subsequently obtains evidence indicating that the billing error did not
occur as asserted.
In response to the June 2007 Proposal, consumer groups urged the
Board to adopt the comment to prevent unwelcome consumer surprise when
a creditor reverses an error finding months later. Industry commenters
in contrast asserted that the proposed comment unreasonably prevented
creditors from considering evidence that is presented after the error
timeframes. Industry commenters noted, moreover, that disputes today
are much more numerous and complex to investigate and resolve, thus
supporting the case for a longer, rather than shorter, timeframe. In
this regard, industry commenters urged the Board, at a minimum, to
provide exceptions for instances of consumer fraud or bad faith in
asserting a billing error.
Industry commenters also stated that the proposed comment would
effectively nullify the statutory forfeiture penalty provision under
TILA Section 161(e) which, they stated, caps the amount that may be
forfeited by a creditor for failure to comply with the billing error
provisions at $50. 15 U.S.C. 1666(e). In their view, TILA Section
161(e) reflects the intent of Congress to balance the need for timely
investigations against potential unjust enrichment to consumers. Thus,
commenters stated that if a creditor receives information about a
disputed transaction after the two-billing-cycle investigation period
which indicates that an error did not occur as alleged, TILA Section
161(e) would permit the creditor to reverse the credit, minus the
statutory $50 penalty.
Comment 13(c)(2)-2 as adopted states that the creditor must comply
with the error resolution procedures and complete its error
investigation within the time period under Sec. 226.13(c)(2). For
example, if the creditor determines that an error did not occur as
asserted after the error resolution time frame has expired, it
generally may not reverse funds that were previously credited to the
consumer's account. Similarly, if a creditor fails to comply with a
billing error requirement, such as mailing or delivering a written
explanation stating why an error did not occur as asserted, within the
billing error period, the creditor generally must credit the consumer's
account in the amount of

[[Page 5367]]

the disputed error as well as related finance or other charges, as
applicable. Like the proposal, the final comment does not reflect the
statutory forfeiture provision in TILA Sec. 161(c).
The purpose of the billing error resolution time frame set forth in
TILA Section 161 is to enable consumers to have their error claims
investigated and resolved promptly. In short, TILA Section 161, as
implemented by Sec. 226.13, is intended to bring finality to the
billing error resolution process, and avoid the potential of undue
surprise for consumers caused by the reversal of previously credited
funds when a creditor fails to complete their investigation in a timely
manner. Thus, the Board does not interpret the statutory forfeiture
penalty under TILA Section 161(e) as being intended to override Section
161's overall protections. In this regard, the Board notes that TILA's
administrative and civil liability provisions in TILA Sections 108 and
130, respectively, support this reading of Section 161. That is, if a
creditor does not comply with the substantive requirements of TILA
Section 161 and complete their investigation in the established
timeframe (i.e., two complete billing cycles), the creditor also may be
subject to administrative or civil penalties. These provisions serve to
facilitate finality in the billing error process by ensuring that the
investigation is closed within the time period set forth in the
statute.
The final comment is also revised to clarify that creditors have
two complete billing cycles to investigate after receiving a consumer's
notice of a billing error. Thus, if a creditor receives a billing error
notice mid-cycle, it would have the remainder of that cycle plus the
next two full billing cycles to resolve the error. See comment
13(c)(2)-1. Comment 13(e)-3, which cross references comment 13(c)(2)-2,
is also adopted as proposed in the June 2007 Proposal.
13(d) Rules Pending Resolution
Once a consumer asserts a billing error, the creditor is prohibited
under Sec. 226.13(d) from taking certain actions with respect to the
dispute in order to ensure that the consumer is not otherwise
discouraged from exercising his or her billing error rights. For
example, the creditor may not take action to collect any disputed
amounts, including related finance or other charges, or make or
threaten to make an adverse report, including reporting that the amount
or account is delinquent, to any person about the consumer's credit
standing arising from the consumer's failure to pay the disputed amount
or related finance or other charges.
Currently, Sec. 226.13(d) prohibits a card issuer from deducting
through an automated payment plan, any part of the disputed amount or
related charges from a cardholder's deposit account if the deposit
account is also held by the card issuer, provided that the cardholder
has provided a billing error notice at least three business days before
the scheduled payment date. To reflect current payment processing
practices, the Board proposed in June 2007 to extend the prohibition to
all automatic deductions from any consumer deposit account where the
deduction is pursuant to the consumer's enrollment in a card issuer's
automatic payment plan. See proposed Sec. 226.13(d)(1) and comment
13(d)(1)-4. The intent of the proposal was to ensure that a cardholder
whose payments are automatically debited (via the card issuer's
automatic payment service) from a deposit account maintained at a
different financial institution would have the same protections
afforded to a cardholder whose deposit account is maintained by the
card issuer. For example, if the cardholder has agreed to pay a
predetermined amount each month and subsequently disputes one or more
transactions that appear on a statement, the card issuer must ensure
that it does not debit the consumer's deposit account for any part of
the amount in dispute, provided that the card issuer has received
sufficient notice.
In response to the June 2007 Proposal, some industry commenters
stated that the proposal reflected a reasonable balance. Other industry
commenters stated that the proposal introduced operational challenges
which could result in significant inconvenience for the customer and
the creditor. For example, once a dispute related to a transaction is
received, a creditor would have to recalculate the required payment
amount to exclude the disputed charges and cause the next automatic
debit of the customer's deposit account to include only that
recalculated payment amount. Industry commenters stated that the
process of analyzing the dispute and communicating this information to
the area which manages payments could delay the receipt of the payment
to the detriment of the consumer. Consumer groups supported the
proposal, stating that the change would ensure that all consumers who
use automatic payment plans offered by their card issuer to pay their
credit card bills have a meaningful ability to invoke their billing
error rights.
The revisions to Sec. 226.13(d)(1) are adopted, as proposed.
Although a few industry commenters raised certain operational issues,
these concerns would also appear to apply to automatic debits from
accounts held by the card issuer itself. Accordingly, the Board is not
persuaded there is a need to distinguish automatic payment plans that
debit a cardholder's deposit account held at the card issuer from plans
that debit a cardholder's deposit account held at a different financial
institution. Cardholders should not have different billing error rights
as a consequence of enrolling in an automated payment plan offered by
the card issuer based on where their deposit accounts are held. Section
226.13(d)(1) as revised applies whether the card issuer operates the
automatic payment plan itself or outsources the service to a third-
party service provider, but would not apply where the cardholder has
enrolled in a third-party bill payment service that is not offered by
the card issuer. Thus, for example, the revised rule does not apply
where the consumer uses his or her deposit account-holding
institution's bill-payment service to pay his or her credit card bill
(unless the deposit account-holding institution has also issued the
credit card). Comment 13(d)(1)-4 is also revised to reflect the adopted
change as proposed.
Section 226.13(d)(3) is adopted as proposed in the June 2007
Proposal to incorporate the text of footnote 27 prohibiting a creditor
from accelerating a consumer's debt or restricting or closing the
account because the consumer has exercised billing error rights. In
addition, the Board is retaining portions of comment 13-1, which it had
proposed to delete, to retain the reference to the statutory forfeiture
penalty under TILA Section 161(e) in the event a creditor fails to
comply with any of the billing error requirements under Sec. 226.13.
Accordingly, comment 13-2, which was proposed to be redesignated as
comment 13-1, is retained in place in the commentary. No comments were
received on these provisions.
13(f) Procedures if Different Billing Error or not Billing Error
Occurred
Section 226.13(f) sets forth procedures for resolving billing error
claims if the creditor determines that no error or a different error
occurred. A creditor must first conduct a reasonable investigation
before a creditor may deny a consumer's claim or conclude that the
billing error occurred differently than as asserted by the consumer.
See TILA Section 161(a)(3)(B)(ii); 15 U.S.C.

[[Page 5368]]

1666(a)(3)(B)(ii). Footnote 31 currently provides that to resolve
allegations of nondelivery of property or services, creditors must
determine whether property or services were actually delivered, mailed,
or sent as agreed. To resolve allegations of incorrect information on a
periodic statement due to an incorrect report, creditors must determine
that the information was correct.
The June 2007 Proposal proposed to delete footnote 31 as
unnecessary in light of the general creditor obligation under Sec.
226.13(f) to conduct a reasonable investigation. Consumer advocates,
however, urged the Board to retain the substance of the footnote,
noting that it requires issuers to take concrete steps for resolving
claims of non-delivery such as obtaining delivery records or contacting
merchants. Without this guidance, advocates expressed concern that
issuers would conduct more perfunctory investigations, which, in their
view, has been the case with respect to some creditors applying the
same ``reasonable investigation'' standard in investigations into
allegations of errors on credit reports under the FCRA. 15 U.S.C. 1681
et seq.
In light of these concerns, the Board proposed in May 2008 to add
comment 13(f)-3 which would have contained the substance of footnote
31. The proposed comment also would have included guidance on
conducting a reasonable investigation of a claim of an unauthorized
transaction to harmonize the standards under both Sec. 226.12(b) and
Sec. 226.13(a)(1). Specifically, the Board proposed to include
applicable guidance currently provided for unauthorized transaction
claims under Sec. 226.12(b) in proposed comment 13(f)-3. See comment
12(b)-3. The proposed comment also would have paralleled proposed
guidance under comment 12(b)-3 to provide that a creditor may not
automatically deny a claim based solely on the consumer's failure or
refusal to comply with a particular request, including a requirement
that the consumer submit an affidavit or file a police report. Lastly,
the proposed comment included illustrations on the procedures that may
be followed in investigating different types of alleged billing errors.
Both industry and consumer group commenters generally supported the
proposed comment. Consumer groups stated that retaining the text of
footnote 31 in the proposed comment would help to ensure that creditors
conduct substantive investigations of billing disputes, and urged the
Board to provide guidance for all types of billing error disputes,
including specified steps that a creditor should take to conduct a
reasonable investigation. One trade association urged the Board to
revise the commentary language requiring creditors to confirm that
services or property were actually delivered when there is a claim of
non-performance because the merchant, and not the creditor, is in the
best place to make this determination. This commenter also urged the
Board to provide additional guidance to outline the parameters of what
constitutes a ``reasonable investigation'' to avoid potential disputes
between issuers, consumers, and examiners.
Industry commenters opposing the proposed comment primarily raised
the same concerns they had previously raised with respect to the
proposed commentary revisions to Sec. 226.12(b) which explicitly
stated that a card issuer could not require a consumer to provide an
affidavit or file a police report as a condition of investigating a
claim of unauthorized use.
The final rule adopts comment 13(f)-3 generally as proposed, with
revisions to conform to the parallel comment adopted under Sec.
226.12(b) with respect to unauthorized use, which would prohibit a card
issuer from requiring an affidavit or the filing of a police report.
See comment 12(b)-3, discussed above. The Board believes that
incorporating all of the prior guidance pertaining to the investigation
of billing errors in a single place would facilitate compliance for
creditors. In addition, as stated in the supplementary information
accompanying the May 2008 Proposal, adoption of the guidance currently
set forth under Sec. 226.12(b) with respect to unauthorized
transactions under Sec. 226.13 would harmonize the standards under the
two provisions. However, because what might constitute a ``reasonable
investigation'' is necessarily a case-by-case determination, the Board
declines to prescribe a specific series of steps or measures that a
creditor must undertake in investigating a particular billing error
claim.
13(g) Creditor's Rights and Duties After Resolution
Section 226.13(g) specifies the creditor's rights and duties once
it has determined, after a reasonable investigation under Sec.
226.13(f), that a consumer owes all or a portion of the disputed amount
and related finance or other charges. In the June 2007 Proposal, the
Board proposed guidance to clarify the length of time the consumer
would have to repay the amount determined still to be owed without
incurring additional finance charges (i.e., the grace period) that
would apply under these circumstances. Specifically, the Board proposed
to revise comment 13(g)(2)-1 to provide that before a creditor may
collect any amounts owed related to a disputed charge that is
determined to be proper, the creditor must provide the consumer a
period of time equivalent to any grace period disclosed under proposed
Sec. Sec. 226.6 or 226.7, as applicable, to pay the disputed amount as
well as related finance or other charges (assuming that the consumer
was entitled to a grace period at the time the consumer asserted the
alleged error). As explained in the supplementary information to the
June 2007 Proposal, this interpretation was necessary to ensure that
consumers are not discouraged from asserting their statutory billing
rights by putting the consumer in the same position (that is, with the
same grace period) as if the consumer had not disputed the transaction
in the first place. No comments were received on the proposed change,
and comment 13(g)(2)-1 is adopted as proposed.
13(i) Relation to Electronic Fund Transfer Act and Regulation E
Section 226.13(i) is designed to facilitate compliance when
financial institutions extend credit incident to electronic fund
transfers that are subject to the Board's Regulation E, for example,
when the credit card account is used to advance funds to prevent a
consumer's deposit account from becoming overdrawn or to maintain a
specified minimum balance in the consumer's account. See 12 CFR part
205. The provision provides that under these circumstances, the
creditor should comply with the error resolution procedures of
Regulation E, rather than those in Regulation Z (except that the
creditor must still comply with Sec. 226.13(d) and (g)). In the June
2007 Proposal, the Board proposed to revise the examples in comment
13(i)-2 of incidental credit that is governed solely by the error
resolution procedures in Regulation E to specifically refer to
overdraft protection services that are not subject to the Board's
Regulation Z when there is no agreement between the creditor and the
consumer to extend credit when the consumer's account is overdrawn.
No industry commenters addressed this provision. However, consumer
groups asserted that the Board should reconsider its prior
determination not to cover overdraft loan products under Regulation Z
and remove the example entirely. The Board has determined that it
remains appropriate to exclude overdraft services under Regulation Z,

[[Page 5369]]

and instead address concerns about this product under Regulations DD
and E. Consistent with this determination, the Board is adopting
comment 13(i)-2 generally as proposed, with a minor revision to amend
the example to refer to overdraft services, instead of overdraft
protection plans.
In the June 2007 Proposal, the Board also solicited comment as to
whether it should include any additional examples of incidental credit
that should be addressed under the error resolution procedures of
Regulation E, rather than those of Regulation Z. See comment 13(i)-2.
Consumer groups opposed the addition of new examples, asserting that
Regulation E provides less protection than Regulation Z with respect to
error resolution. No other commenters provided any additional examples,
and the provision is unchanged.
Technical revisions. In addition to moving the substance of
footnotes 27 and 31 as discussed above, the Board is also adopting
technical revisions which move the substance of footnotes 28-30 in the
current rule to the regulation or commentary, as appropriate. (See
redesignation table below.) References to ``free-ride period'' in the
regulation and commentary are replaced with ``grace period,'' without
any intended substantive change, for the reasons set forth in the
section-by-section analysis to Sec. 226.6(b)(3).

Section 226.14 Determination of Annual Percentage Rate

As discussed in the section-by-section analysis to Sec. 226.7
above, Regulation Z currently requires disclosure on periodic
statements of both the effective APR and the corresponding APR. The
regulation also requires disclosure of the corresponding APR in
account-opening disclosures, change-in-terms notices, advertisements,
and other documents. The computation methods for both the corresponding
APR and the effective APR are implemented in Sec. 226.14 of Regulation
Z. Section 226.14 also provides tolerances for accuracy in APR
disclosures.
As also discussed in the section-by-section analysis to Sec.
226.7, the June 2007 Proposal contained two alternative approaches
regarding the computation and disclosure of the effective APR. Under
the first alternative, the Board proposed to retain the requirement
that the effective APR be disclosed on periodic statements, with
modifications to the rules for computing and disclosing the effective
APR to reflect an approach tested with consumers. See proposed
Sec. Sec. 226.7(b)(7) and 226.14(d). For home-equity plans subject to
Sec. 226.5b, the Board proposed to allow a creditor to comply with the
current rules applicable to the effective APR; thus, creditors offering
home-equity plans would not be required to make changes in their
periodic statement systems for such plans at this time. See proposed
Sec. Sec. 226.7(a)(7) and 226.14(c). Alternatively, the Board proposed
that at the creditor's option, it could instead calculate and disclose
an effective APR for its home-equity plans under any revised rules
adopted for disclosure of the effective APR for open-end (not home-
secured) credit.
The second alternative proposed by the Board was to eliminate the
requirement to disclose the effective APR on the periodic statement.
Under the second alternative, for a home-equity plan subject to Sec.
226.5b, the Board proposed that a creditor would have the option to
disclose the effective APR according to current rules or not to
disclose an effective APR. The Board's proposed alternative versions of
Sec. 226.14 reflected these two proposed alternatives.
Under either alternative, the Board did not propose to revise
substantively the current provisions in Sec. 226.14(a) (dealing with
APR tolerances) and (b) (guidance on calculating the APR for certain
disclosures other than the periodic statement), but minor technical
changes were proposed to reflect changes in terminology and to
eliminate footnotes, moving their substance into the text of the
regulation. No comments were received on these changes, and they are
adopted in the final rule as proposed.
For the reasons discussed in the section-by-section analysis to
Sec. 226.7, the Board is eliminating the requirement to disclose the
effective APR on periodic statements. Consistent with the proposal, for
a home-equity plan subject to Sec. 226.5b, a creditor has the option
to disclose an effective APR (according to the current rules in
Regulation Z for computing and disclosing the effective APR, set forth
in Sec. 226.14(c)), or not to disclose an effective APR. The option to
continue to disclose the effective APR allows creditors offering home-
equity plans to avoid making changes in their periodic statement
systems at this time. As discussed earlier, the Board is undertaking a
review of home-secured credit, including HELOCs; the rules for
computing and disclosing the APR for HELOCs could be the subject of
comment during the review of rules affecting HELOCs.
As stated in the June 2007 Proposal, no guidance is given for
disclosing the effective APR on open-end (not home-secured) plans,
since the requirement to provide the effective APR on such plans is
eliminated. Proposed Sec. Sec. 226.14(d) and (e), which would have set
forth the revised rules for calculating an effective APR for open-end
(not home-secured) credit, are withdrawn. Section 226.14(d) is retained
in its current form, rather than being redesignated as Sec.
226.14(c)(5) as proposed. Minor technical changes are made to Sec.
226.14(c) and the accompanying commentary as proposed, including
redesignation of comments to assist users in locating comments relevant
to the applicable regulatory provisions.

Section 226.16 Advertising

TILA Section 143, implemented by the Board in Sec. 226.16, governs
advertisements of open-end credit plans. 15 U.S.C. 1663. The statutory
provisions apply to the advertisement itself, and therefore, the
statutory and regulatory requirements apply to any person advertising
an open-end credit plan, whether or not such person meets the
definition of creditor. See comment 2(a)(2)-2. The Board proposed
several changes to the advertising rules in Sec. 226.16 in the June
2007 Proposal. Changes were proposed in order to ensure meaningful
disclosure of advertised credit terms, alleviate compliance burden for
certain advertisements, and implement provisions of the Bankruptcy Act.
The Board's proposals related to trigger term disclosures generally and
additional disclosures for minimum monthly payment advertising,
introductory rates, alternative disclosures for television and radio
advertisements, and guidance on use of the word ``fixed'' in connection
with an APR. Based in part on comments to the June 2007 Proposal, the
Board proposed additional changes to the advertising rules in the May
2008 Proposal related to promotional rates (referred to as introductory
rates in the June 2007 Proposal) and deferred interest offers.
Deferred interest offers. Many creditors offer deferred interest
plans where consumers may avoid paying interest on purchases if the
outstanding balance is paid in full by the end of the deferred interest
period. If the outstanding 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. Moreover, these plans typically also require
the consumer to pay interest accrued from the date of purchase if the
consumer defaults on the credit agreement. Some deferred interest plans
define default under the card agreement to include failure to make a
minimum payment during the

[[Page 5370]]

deferred interest period while other plans do not. Advertisements often
prominently disclose the possibility of financing the purchase of goods
or services at no interest.
In May 2008, the Board proposed to use its authority under TILA
Section 143(3) to add a new Sec. 226.16(h) to address the Board's
concern that the disclosures currently required under Regulation Z may
not adequately inform consumers of the terms of deferred interest
offers. 15 U.S.C. 1663(3). Specifically, the Board proposed to require
that the deferred interest period be disclosed in immediate proximity
to each statement regarding interest or payments during the deferred
interest period. The Board also proposed that certain information about
the terms of the deferred interest offer be disclosed in close
proximity to the first statement regarding interest or payments during
the deferred interest period.
The final rules adopted by the Board and other federal banking
agencies published elsewhere in today's Federal Register do not permit
issuers subject to those rules to establish deferred interest plans in
which creditors can retroactively charge interest on prior
transactions. Accordingly, the Board is withdrawing proposed Sec.
226.16(h).
Clear and conspicuous standard. In June 2007, the Board proposed to
implement Section 1309 of the Bankruptcy Act, which requires the Board
to provide guidance on the meaning of ``clear and conspicuous'' as it
applies to certain disclosures required by Section 1303(a) of the
Bankruptcy Act. Under Section 1303(a) of the Bankruptcy Act, when an
introductory rate is stated in a direct mail application or
solicitation for credit cards or accompanying promotional materials,
the time period in which the introductory period will end and the rate
that will apply after the end of the introductory period must be stated
``in a clear and conspicuous manner'' in a prominent location closely
proximate to the first listing of the introductory rate. The statute
requires these disclosures to be ``reasonably understandable and
designed to call attention to the nature and significance of the
information in the notice.''
The Board proposed in the June 2007 Proposal that creditors clearly
and conspicuously disclose when the introductory period will end and
the rate that will apply after the end of the introductory period if
the information is equally prominent to the first listing of the
introductory rate to which it relates. The Board also proposed in
comment 16-2 that if these disclosures are the same type size as the
first listing of the introductory rate, they will be deemed to be
equally prominent.
As discussed more fully below in the section-by-section analysis to
Sec. 226.16(g), the Board amended proposed comment 16-2 in the May
2008 Proposal to apply the standard to ``promotional rates.''
Furthermore, in the May 2008 Proposal, the Board proposed additional
requirements for deferred interest offers. As part of these
requirements, the Board proposed to apply the same clear and
conspicuous standard for certain disclosures related to deferred
interest offers as the Board proposed to require for promotional rate
advertisements.
The Board received a few comments on the June 2007 proposed comment
16-2. In addition, the Board consulted with the other federal banking
agencies, the NCUA, and the FTC, consistent with Section 1309 of the
Bankruptcy Act. Consumer group commenters and one of the federal
banking agencies the Board consulted suggested that the safe harbor for
complying with the ``equally prominent'' requirement be amended to
require terms to have the same ``highlighting.'' The consumer group
commenters further suggested that the equal prominence safe harbor be a
requirement that applied to all advertising terms and not just
promotional rate information. Presumably, the commenters believed that
the equal prominence standard should be applied to all requirements in
Sec. 226.16 where a term triggers some additional disclosures; that
is, the additional disclosures would be required to be equally
prominent to the term that triggered such disclosures.
The Board is adopting proposed comment 16-2, renumbered as comment
16-2.ii., as proposed in May 2008, except references to provisions
related to deferred interest offers have been deleted due to the
Board's decision to withdraw the advertising disclosure requirements
related to deferred interest plans. As discussed in the June 2007
Proposal, the Board believes that requiring equal prominence for
certain information calls attention to the nature and significance of
such information by ensuring that the information is at least as
significant as the terms to which it relates. In the June 2007
Proposal, the Board noted that an equally prominent standard currently
applies to advertisements for HELOCs under Sec. 226.16(d)(2) with
respect to certain information related to an initial APR. Consequently,
the Board believes this is the appropriate standard for information
related to promotional rates and deferred interest offers as well. In
terms of the safe harbor, the Board believes that type size provides a
bright line standard to determine whether terms are equally prominent.
To require similar ``highlighting'' would be an ambiguous standard.
Furthermore, requiring the text of the terms to be identical may be
overly prescriptive and may not provide sufficient flexibility to
advertisers. For example, if an advertiser presented a promotional rate
in 16-point font in green text and disclosed a promotional period in
16-point font in blue text closely proximate to the rate, the terms
would not be identical, but the promotional period may be equally
prominent to the promotional rate.
Furthermore, comment 16-2.ii. (proposed as comment 16-2 in the May
2008 Proposal) clarifies that the equally prominent standard will apply
only to written and electronic advertisements. As discussed in more
detail in the section-by-section analysis to Sec. 226.16(g)(1) below,
the Board is expanding the types of advertisements to which the
requirements of Sec. 226.16(g) would apply to include non-written,
non-electronic advertisements, such as telephone marketing, radio and
television advertisements. However, because equal prominence is a
difficult standard to measure outside the context of written and
electronic advertisements, the Board believes that the guidance on
clear and conspicuous disclosures, as set forth in comment 16-2.ii.
(proposed as comment 16-2 in the May 2008 Proposal), should apply
solely to written and electronic advertisements. Disclosures required
under Sec. 226.16(g)(4) for non-written, non-electronic
advertisements, while not required to meet the clear and conspicuous
standard in comment 16-2.ii. (proposed as comment 16-2 in the May 2008
Proposal), are required to meet the general clear and conspicuous
standard as set forth in comment 16-1.
Other Technical Changes. Comment 16-2, as adopted in the July 2008
Final HOEPA Rule, has been renumbered as comment 16-2.i. Moreover,
technical changes proposed to comment 16-1 are adopted as proposed in
the May 2008 Proposal. Comments 16-3 through 16-7, as adopted in the
July 2008 Final HOEPA Rule, remain unchanged. 73 FR 44522, 44605, July
30, 2008.
16(b) Advertisement of Terms That Require Additional Disclosures
Under Sec. 226.16(b), certain terms stated in an advertisement
require additional disclosures. In the June 2007 Proposal, the Board
proposed to move the substance currently in Sec. 226.16(b) to Sec.
226.16(b)(1), with some amendments, and proposed a new requirement for
additional disclosures when a minimum

[[Page 5371]]

monthly payment is stated in an advertisement.
Paragraph 16(b)(1)
Negative terms as triggering terms. Triggering terms are specific
terms that, if disclosed in an advertisement, ``trigger'' the
disclosure under Sec. 226.16(b) (which is renumbered as Sec.
226.16(b)(1) in the final rule for organizational purposes) of (1) any
minimum, fixed, transaction, activity or similar charge that could be
imposed; (2) any periodic rate that may be applied expressed as an APR;
and (3) any membership or participation fee that could be imposed. The
June 2007 Proposal would have made triggering terms consistent for all
open-end credit advertisements by expanding Sec. 226.16(b) to include
terms stated negatively (for example, ``no interest'') for
advertisements of open-end (not home-secured) plans. Under TILA Section
147(a) (15 U.S.C. 1665b(a)), triggering terms for advertisements of
HELOCs include both positive and negative terms while under current
comment 16(b)-2, triggering terms for advertisements of open-end (not
home-secured) plans only include terms that are expressed as a positive
number.
The Board received few comments on the proposal. Consumer groups
supported the Board's proposal. One industry commenter opposed the
proposal stating that advertisements of ``no annual fee'' should not
trigger additional disclosures. As discussed in the June 2007 Proposal,
the Board believes that including negative terms as triggering terms
for open-end (not home-secured) plans is necessary in order to provide
consumers with a more accurate picture of possible costs that may apply
to plans that advertise negative terms, such as ``no interest'' or ``no
annual fee.'' In addition, the requirement ensures similar treatment of
advertisements of all open-end plans. For these reasons and pursuant to
its authority under TILA Section 143(3), the Board adopts proposed
comment 16(b)-1 as proposed, and renumbers the comment as comment
16(b)(1)-1. As proposed, current comment 16(b)-7 is consolidated in the
new comment for organizational purposes and for clarity, without
substantive change.
Membership fees. Membership and participation fees that could be
imposed are among the additional information that must be disclosed if
a creditor states a triggering term in an advertisement. For
consistency, new comment 16(b)(1)-6 is added to provide that for open-
end (not home-secured) plans, ``membership fee'' shall have the same
meaning as in Sec. 226.5a(b)(2).
Other changes to Sec. 226.16(b)(1). In the June 2007 Proposal, the
Board proposed certain technical amendments to Sec. 226.16(b) and
associated commentary. These changes are adopted largely as proposed in
the June 2007 Proposal. Specifically, Sec. 226.16(b) (renumbered as
Sec. 226.16(b)(1)) is revised to reflect the new cost disclosure rules
for open-end (not home-secured) plans while preserving existing cost
disclosure rules for HELOCs. Footnote 36d (stating that disclosures
given in accordance with Sec. 226.5a do not constitute advertising
terms) is deleted as unnecessary since ``advertisements'' do not
include notices required under federal law, including disclosures
required under Sec. 226.5a. See comment 2(a)(2)-1.ii. Guidance in
current comments 16(b)-1 and 16(b)-8 has been moved to Sec.
226.16(b)(1), with some revisions. Current comment 16(b)-6 is
eliminated as duplicative of the requirements under Sec. 226.16(g), as
discussed below.
Paragraph 16(b)(2)
The Board proposed in June 2007 to require additional disclosures
for advertisements that state a minimum monthly payment for an open-end
credit plan that would be established to finance the purchase of goods
or services. Under the Board's proposal, if a minimum monthly payment
is advertised, the advertisement would be required to state, in equal
prominence to the minimum payment, the time period required to pay the
balance and the total dollar amount of payments assuming only minimum
payments are made.
Consumer group and consumer commenters, a state regulatory
association commenter, and a member of Congress were supportive of the
proposal. Several industry commenters opposed the Board's proposal
regarding minimum payment advertising and suggested that the Board not
adopt the provision. Industry commenters indicated that the disclosure
is inherently speculative because determining how long it would take a
consumer to pay off the balance and the total dollar amount of payments
would depend on a particular consumer's other purchases and use of the
account in general as well as other external factors that may affect
the account. To illustrate their point, some industry commenters gave
examples of promotional programs in which a minimum payment amount
advertised relates to a promotional rate that is in effect for a
certain period of time (e.g., ``$49 for 2 years''). If paying the
minimum payment amount advertised does not fully amortize the purchase
price over the period of time in which the promotional rate is in
effect, the balance is then transferred to the general account and
combined with other non-promotional balances. Depending on other
promotional and non-promotional balances the consumer may have on the
account, calculating the total of payments and time period to repay
could prove difficult. Another commenter noted that any APR changes
could affect the balance and hence alter the total of payments and time
period to repay.
Other industry commenters offered suggestions to address these
concerns with minimum payment advertising. One industry commenter
suggested that a table be disclosed with sample payments and repayment
periods. That commenter also suggested an alternative of providing a
telephone number for consumers to call to obtain that information. A
few other industry commenters suggested that the Board specify a set of
assumptions that advertisers may make in providing the disclosure. One
of these industry commenters also suggested that the Board provide
model language to include in the advertisement to disclose these
assumptions to consumers.
As the Board stated in the June 2007 Proposal, the Board believes
that for advertisements stating a minimum monthly payment, requiring
the advertisement to disclose the total dollar amount of payments the
consumer would make and the amount of time needed to pay the balance if
only the minimum payments are made will provide consumers with a
clearer picture of the costs of financing the purchase of a good or
service than if only the minimum monthly payment amount is advertised.
While the Board acknowledges that a disclosure of the total of payments
and time period to repay the purchase cannot be calculated with
certainty without knowing how a particular consumer may use the account
in the future or what other changes may affect the account, the Board
believes the additional information would be helpful to consumers. Even
if the disclosure may not reflect the actual total costs and time
period to repay for a particular consumer, the disclosure provides
useful information to the consumer in evaluating the offer. This will
help ensure that consumers are not surprised later by the amount of
time it may take to pay the debt and how much the credit could cost
them over that time period by only making the payments advertised.
Therefore, the Board is adopting Sec. 226.16(b)(2) as proposed
with minor modifications, as discussed below. In response to industry
concerns, the Board is also adopting comment

[[Page 5372]]

16(b)(2)-1 to provide a list of assumptions advertisers may make in
providing these disclosures. Advertisers may assume that: (i) Payments
are made timely so as not to be considered late by the creditor; (ii)
payments are made each period, and no debt cancellation or suspension
agreement, or skip payment feature applies to the account; (iii) no
interest rate changes will affect the account; (iv) no other balances
are currently carried or will be carried on the account; (v) no taxes
or ancillary charges are or will be added to the obligation; (vi) goods
or services are delivered on a single date; and (vii) the consumer is
not currently and will not become delinquent on the account. The Board,
however, declines to adopt model language concerning these assumptions.
The Board believes advertisers should have flexibility to determine if,
and how, they may want to convey these assumptions to consumers. In
addition, advertisers may make further assumptions in making the
disclosures required by Sec. 226.16(b)(2) beyond those specified in
comment 16(b)(2)-1. If the Board were to provide model language, such
assumptions may not be sufficiently captured by that language.
Industry commenters also pointed out that the minimum monthly
payment advertised may not always be the same as the minimum payment
amount on a consumer's billing statement. Furthermore, a consumer group
commenter stated that the word ``minimum'' should be deleted so that
any time a payment amount is advertised, the disclosure should be
provided. In response to these concerns, the Board is replacing the
term ``minimum monthly payment'' with ``periodic payment amount.''
Therefore, an advertisement that states any periodic payment amount
(e.g., $45 per month, $20 per week) would be required to provide the
disclosures in Sec. 226.16(b)(2). Furthermore, using the term
``periodic payment amount'' instead of ``minimum monthly payment''
disassociates the term from the concept of ``minimum payment,'' and
makes clear that the amount advertised need not be the same amount as
the minimum payment on a consumer's billing statement to trigger the
disclosures.
Several industry commenters also suggested that advertisements of
``no payment'' for a specified period of time should be excluded from
the requirements of Sec. 226.16(b)(2). The Board agrees, assuming
there is no other periodic payment amount advertised. Because
advertisers would not know the periodic payment amount a consumer would
pay after the ``no payment'' period passes (and are not otherwise
suggesting a specific periodic payment amount by advertising one), they
would be unable to determine the total of payments and time period to
repay the obligation. To address this concern, the final rule adds
comment 16(b)(2)-2 to provide that a periodic payment amount must be a
positive number to trigger the disclosure requirements under Sec.
226.16(b)(2).
16(c) Catalogs or Other Multiple-Page Advertisements; Electronic
Advertisements
Technical amendments to Sec. 226.16(c) and comments 16(c)(1)-1 and
16(c)(1)-2 were previously adopted in the November 2007 Final
Electronic Disclosure Rule, and are republished as a part of this final
rule. 72 FR 63462, Nov. 9, 2007; 72 FR 71058, Dec. 14, 2007.
16(d) Additional Requirements for Home-equity Plans
Revisions to the advertising rules under Sec. 226.16(d) were
adopted in the July 2008 Final HOEPA Rule, and are republished as a
part of this final rule. 73 FR 44522, 44599, July 30, 2008. Technical
amendments to comments 16(d)-1 and 16(d)-8 to conform citations and
other descriptions to revisions being adopted today have been made,
without intended substantive change.
16(e) Alternative Disclosures--Television or Radio Advertisements
For radio and television advertisements, the June 2007 Proposal
would have allowed alternative disclosures to those required by Sec.
226.16(b) if a triggering term is stated in the advertisement. Radio
and television advertisements would still have been required to
disclose any APR applicable to the plan; however, instead of requiring
creditors also to describe minimum or fixed payments, and annual or
membership fees, an advertisement would have been able to provide a
toll-free telephone number that the consumer may call to receive more
information.
Industry commenters were supportive of this proposal. Consumer
groups opposed the proposal arguing that consumers tend to miss cross
references and that creditors may use the toll-free number to engage in
``hard-sell'' marketing tactics. As the Board discussed in the June
2007 Proposal, given the space and time constraints on radio and
television advertisements, disclosing information such as minimum or
fixed payments may go unnoticed by consumers or be difficult for them
to retain and would therefore not provide a meaningful benefit to
consumers. In the Board's view, given the nature of television and
radio media, an alternative means of disclosure may be more effective
in many cases than requiring all the information currently required to
be included in the advertisement. As noted in the June 2007 Proposal,
this approach is consistent with the approach taken in the advertising
rules for Regulation M. See 12 CFR Sec. 213.7(f). Furthermore, a
consumer who is interested in the credit product advertised in a radio
or television advertisement would likely call for information
regardless of whether additional required disclosures (minimum or fixed
payments, and annual or membership fees) appear or are stated in the
advertisement. Therefore ``hard sell'' marketing tactics could arguably
be present whether or not the alternative disclosures are used and may
be addressed in some cases by the FTC Telemarketing Sales Rule. 16 CFR
part 310.
A similar rule to the one proposed by the Board in the June 2007
Proposal to provide alternative disclosures for television and radio
advertisements was adopted in the July 2008 Final HOEPA Rule for home-
equity plans as Sec. 226.16(e). 73 FR 44522, July 30, 2008. Therefore,
the Board amends Sec. 226.16(e), as adopted under the July 2008 HOEPA
Rule, to apply to all other open-end plans. Comments 16(e)-1 and 16(e)-
2, as adopted in the July 2008 Final HOEPA Rule, have remained
unchanged.
16(f) Misleading Terms
In order to avoid consumer confusion and the uninformed use of
credit, the Board proposed Sec. 226.16(g) in June 2007 to restrict use
of the term ``fixed'' in advertisements to instances where the rate
will not change for any reason. 15 U.S.C. 1601(a), 1604(a). Under the
proposal, advertisements would have been prohibited from using the term
``fixed'' or any similar term to describe an APR unless that rate will
remain in effect unconditionally until the expiration of any advertised
time period. If no time period was advertised, then the term ``fixed''
or any similar term would not have been able to be used unless the rate
would remain in effect unconditionally until the plan is closed.
Consumer and consumer group commenters overwhelmingly supported the
Board's proposal. Industry commenters that addressed the issue opposed
the Board's proposal stating that using the word ``fixed'' when a rate

[[Page 5373]]

could change is not misleading if all the conditions of the APR are
clearly disclosed.
The Board has found through consumer testing conducted prior to the
June 2007 Proposal that consumers generally believe a ``fixed'' rate
does not change, such as with ``fixed-rate'' mortgage loans. Numerous
consumer commenters have also supported this finding. In the consumer
testing conducted for the Board prior to the June 2007 Proposal, a
significant number of participants did not appear to understand that
creditors often reserve the right to increase a ``fixed'' rate upon the
occurrence of certain events (such as when a consumer pays late or goes
over the credit limit) or for other reasons. Therefore, although
creditors often use the term ``fixed'' to describe an APR that is not
tied to an index, consumers do not understand the term in this manner.
For these reasons, the Board adopts the provision as proposed; however,
for organizational purposes, the provision is adopted as Sec.
226.16(f).
One retail industry commenter requested that the restriction on the
term ``fixed'' under Sec. 226.16(f) not apply to oral disclosures. The
commenter indicated that in a retail environment, a sales associate
could, in response to a consumer inquiry about whether a rate is
variable, respond that a rate is ``fixed,'' despite the retailer's
efforts to train the sales associate not to use the word. The Board
declines to provide an exception for oral disclosures to the
restriction on the use of the term ``fixed.'' The Board notes, however,
that in the situation described by the retail industry commenter above,
the sales associate's conversation with the consumer is likely not
considered an ``advertisement'' subject to the provisions of Sec.
226.16. Under existing comment 2(a)(2)-1.ii.A., the term
``advertisement'' does not include ``direct personal contacts, * * * or
oral or written communication relating to the negotiation of a specific
transaction.''
16(g) Promotional Rates
In the June 2007 Proposal, the Board proposed to implement TILA
Sections 127(c)(6) and 127(c)(7), as added by Sections 1303(a) and
1304(a) of the Bankruptcy Act, respectively, in Sec. 226.16(e) (which
the Board is moving to Sec. 226.16(g) in the final rule for
organizational purposes). TILA Section 127(c)(6) requires that if a
credit card issuer states an introductory rate in a direct mail credit
card application, solicitation, or any of the accompanying promotional
materials, the issuer must use the term ``introductory'' clearly and
conspicuously in immediate proximity to each mention of the
introductory rate. 15 U.S.C. 1637(c)(6). In addition, TILA Section
127(c)(6) requires credit card issuers to disclose, in a prominent
location closely proximate to the first mention of the introductory
rate, other than the listing of the rate in the table required for
credit card applications and solicitations, the time period when the
introductory rate expires and the rate that will apply after the
introductory rate expires. TILA Section 127(c)(7) further applies these
requirements to ``any solicitation to open a credit card account for
any person under an open-end consumer credit plan using the Internet or
other interactive computer service.'' 15 U.S.C. 1637(c)(7). The Board
proposed in the June 2007 Proposal to expand the types of disclosures
to which these rules would apply. Among other things, the Board
proposed to extend these requirements for the presentation of
introductory rates to other written or electronic advertisements for
open-end credit plans that may not accompany an application or
solicitation (other than advertisements of home-equity plans subject to
Sec. 226.5b, which were addressed in the Board's July 2008 Final HOEPA
Rule; see Sec. 226.16(d)(6)).
In response to concerns from industry commenters that the Board's
proposed use of the term ``introductory rate'' and required use of the
word ``introductory'' or ``intro'' was overly broad in some cases, the
Board proposed in the May 2008 Proposal to revise Sec. 226.16(e)(2) to
define ``promotional'' and ``introductory'' rates separately.
Conforming revisions to Sec. 226.16(e)(4) and to commentary provisions
to Sec. 226.16(e) were also proposed in the May 2008 Proposal. The
Board adopts proposed Sec. 226.16(e), with revisions discussed below,
and renumbers this paragraph as Sec. 226.16(g) for organizational
purposes.
16(g)(1) Scope
The Bankruptcy Act amendments regarding ``introductory'' rates
apply to direct mail credit card applications and solicitations, and
accompanying promotional materials. 15 U.S.C. 1637(c)(6). The Board
proposed to expand these requirements to applications or solicitations
to open a credit card account, and all accompanying promotional
materials, that are publicly available (``take-ones''). 15 U.S.C.
1601(a); 15 U.S.C. 1604(a); 15 U.S.C. 1637(c)(3)(A). In the June 2007
Proposal, the Board proposed to expand the requirements to electronic
applications even though the Bankruptcy Act amendments applied these
requirements only to electronic solicitations. 15 U.S.C. 1637(c)(7).
Pursuant to its authority under TILA Section 143, the Board also
proposed in the June 2007 Proposal to extend some of the introductory
rate requirements in Section 1303 of the Bankruptcy Act to other
written advertisements for open-end credit plans that may not accompany
an application or solicitation, other than advertisements of home-
equity plans subject to Sec. 226.5b, in order to promote the informed
use of credit. Therefore, the Board proposed that the requirements
under Sec. 226.16(g) (proposed as Sec. 226.16(e)) apply to all
written or electronic advertisements.
The Board received few comments on expanding the scope of the rules
regarding promotional rates in the manner proposed in the June 2007
Proposal, and the comments received supported the proposal. As
discussed in the June 2007 Proposal, the Board believes consumers will
benefit from these enhanced disclosures and advertisers will benefit
from the consistent application of promotional rate requirements for
all written and electronic open-end advertisements.
In the May 2008 Proposal, the Board solicited comment on whether
all or any of the information required under Sec. 226.16(g) (proposed
as Sec. 226.16(e)) to be provided with the disclosure of a promotional
rate would be helpful in a non-written, non-electronic context, such as
telephone marketing, or radio or television advertisements. The
guidance originally proposed in June 2007 on complying with Sec.
226.16(g) (proposed as Sec. 226.16(e)) had addressed written and
electronic advertisements.
Consumer group commenters urged the Board to apply the requirements
under Sec. 226.16(g) (proposed as Sec. 226.16(e)) to non-written,
non-electronic advertisements. Many industry commenters opposed
expanding the requirements to non-written, non-electronic
advertisements citing the space and time constraints of such media and
concern that there would be information overload. Nevertheless, several
industry commenters suggested that if the Board did decide to expand
the requirements to non-written, non-electronic advertisements, the
Board should provide flexibility in how the required disclosures may be
made. Some industry commenters recommended that the alternative method
of disclosure available to television and radio advertisements for
disclosing triggered terms under Sec. 226.16(b)(1), as would be
permitted under Sec. 226.16(e), should be

[[Page 5374]]

available for promotional rate disclosures.
Current comment 16(b)-6, which the Board had proposed to delete in
the June 2007 Proposal as duplicative of the requirements under Sec.
226.16(g) (proposed as Sec. 226.16(e)), requires advertisements that
state a ``discounted variable rate'' to include ``the initial rate
(with the statement of how long it will remain in effect) and the
current indexed rate (with the statement that this second rate may
vary).'' The requirement applies to all advertisements, regardless of
media. Because current comment 16(b)-6 imposes requirements similar,
though not identical, to those required in Sec. 226.16(g) (proposed as
Sec. 226.16(e)) to non-written, non-electronic advertisements, the
Board believes that the requirements of Sec. 226.16(g) (proposed as
Sec. 226.16(e)) should also apply to such advertisements. Therefore,
Sec. 226.16(g)(1) has been amended to apply to any advertisement, and
current comment 16(b)-6 has been deleted as proposed. However, as
further discussed in the section-by-section analysis to comment 16-2.ii
above and Sec. 226.16(g)(4) below, the Board is providing flexibility
in how the required information may be presented in a non-written, non-
electronic context.
Finally, one industry commenter noted that the term ``consumer
credit card account,'' as used in Sec. 226.16(g), is not defined. The
commenter suggested that the Board either define ``consumer credit card
account'' specifically to exclude home equity lines of credit subject
to Sec. 226.5b or replace the term with the phrase ``open-end plan not
subject to Sec. 226.5b.'' To address this concern, the Board is
clarifying in Sec. 226.16(g)(1) that the requirements of Sec.
226.16(g) apply to any ``open-end (not home-secured) plan,'' as
proposed in June 2007. A similar change has been made to the definition
of ``promotional rate'' in Sec. 226.16(g)(2). As discussed in the June
2007 Proposal, the Board did not intend to cover advertisements of
open-end, home-secured plans subject to Sec. 226.5b, but did intend to
cover advertisements of all open-end plans that are not home-secured
under these requirements.
16(g)(2) Definitions
In the June 2007 Proposal, the Board proposed to define the term
``introductory rate'' as any rate of interest applicable to an open-end
plan for an introductory period if that rate is less than the
advertised APR that will apply at the end of the introductory period.
In addition, the Board defined an ``introductory period'' as ``the
maximum time period for which the introductory rate may be
applicable.'' In response to the June 2007 Proposal, several industry
commenters were critical of the use of these terms as applied to
special rates offered to consumers with an existing account. Commenters
noted that the phrase ``introductory rate'' commonly refers to
promotional rates offered in connection with the opening of a new
account only. Commenters also noted the use of the term ``advertised''
in the definition of ``introductory rate'' might imply that the APR in
effect after the introductory period would have to be ``advertised''
before the requirements under Sec. 226.16(e)(3) and (e)(4) in the June
2007 Proposal would apply.
Since the Board's June 2007 proposed definition for ``introductory
rate'' would have encompassed special rates that may be offered to
consumers with existing accounts, the Board proposed in May 2008 to
refer to these rates more broadly as ``promotional rates.'' The May
2008 Proposal would have defined the term ``promotional rates'' to
include any APR 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 APR that will be in effect at the end of that period. In
addition, consistent with definitions proposed by the Board and other
federal banking agencies in May 2008, the proposed definition under
Sec. 226.16(g) (proposed as Sec. 226.16(e)) also would have included
any rate of interest applicable to one or more transactions on a
consumer credit card account that is lower than the APR that applies to
other transactions of the same type. This definition was meant to
capture ``life of balance'' offers where a special rate is offered on a
particular balance for as long as any portion of that balance exists.
Proposed comment 16(e)-2) would have provided an illustrative example
of a ``life of balance'' offer similar to a comment proposed by the
Board and other federal banking agencies in May 2008. 73 FR 28904, May
19, 2008.
Furthermore, the definition proposed in May 2008 would have removed
the term ``advertised'' from the definition, as commenters asserted
this would imply that the APR in effect after the introductory period
had to have been ``advertised'' before the requirements under Sec.
226.16(g)(3) and (g)(4) (proposed as Sec. 226.16(e)(3) and (e)(4))
would have applied. This was not the Board's intention. The use of the
term ``advertised'' in the June 2007 proposed definition was intended
to refer to the advertising requirements regarding variable rates and
the accuracy requirements for such rates. The May 2008 Proposal would
have addressed these requirements in a new comment 16(e)-1.
Comment 16(e)-1, as proposed in May 2008, provided that if a
variable rate will apply at the end of the promotional period, the
post-promotional rate is the rate that would have applied at the time
the promotional rate was advertised if the promotional rate had not
been offered. In direct mail credit card applications and solicitations
(and accompanying promotional materials), this rate is one that must
have been in effect within 60 days before the date of mailing, as
required under proposed Sec. 226.5a(c)(2)(i) (and currently under
Sec. 226.5a(b)(1)(ii)). For variable-rate disclosures provided by
electronic communication, this rate is one that was in effect within 30
days before mailing the disclosures to a consumer's electronic mail
address, or within the last 30 days of making it available at another
location such as a card issuer's Web site, as required under proposed
Sec. 226.5a(c)(2)(ii) (and currently under Sec. 226.5a(b)(1)(iii)).
The Board also proposed a new definition for ``introductory rate''
to conform more closely to how the term is most commonly used. Section
226.16(e)(2)(ii) in the May 2008 Proposal defined ``introductory rate''
as a promotional rate that is offered in connection with the opening of
an account. As a result of the proposal, only ``introductory rates''
(and not other promotional rates) would have been subject to the
requirement in Sec. 226.16(e)(3) to state the term ``introductory'' in
immediate proximity to the rate.
Commenters were generally supportive of providing separate
definitions for ``promotional'' rates as distinguished from
``introductory'' rates. Several industry commenters, however, suggested
that the Board's definition for ``promotional rate'' may be overbroad
and cause certain rates that are not traditionally categorized as
``promotional rates'' to be considered ``promotional rates.'' These
commenters provided similar comments to rules proposed by the Board and
other federal banking agencies in May 2008, in which a similar
definition was proposed for ``promotional rate.'' Some of these
commenters also suggested specific language changes to the Board's
proposed definition.
Based on these comments, the Board is adopting the definition of
``introductory rate'' as proposed in the May 2008 Proposal, renumbered
as Sec. 226.16(g)(2)(ii), and amending the definition of ``promotional
rate,'' which

[[Page 5375]]

has been renumbered as Sec. 226.16(g)(2)(i). Specifically, the Board
is inserting in the definition of ``promotional rate'' the phrase ``on
such balances or transactions,'' to address commenters' concerns about
the breadth of the definition by clarifying to which balances and
transactions the rate that will be in effect after the end of the
promotional period applies. In addition, the Board is replacing the
phrase ``consumer credit card account'' in the definition with ``open-
end (not home-secured) plan'' to be consistent with the scope of the
requirements as set forth in Sec. 226.16(g)(1) and as discussed in the
supplementary information to Sec. 226.16(g)(1). The Board is also
adopting comment 16(e)-1, as proposed, renumbered as comment 16(g)-2.
In addition, the Board is deleting the provision in the definition
of ``promotional rate'' that was meant to capture life-of-balance
offers, as well as proposed comment 16(e)-2 from the May 2008 Proposal,
which would have provided an illustrative example of a life-of-balance
offer. The Board had included the provision in the May 2008 Proposal in
order to be consistent with the definition of ``promotional rate'' in
rules proposed by the Board and other federal banking agencies in May
2008. Since the advertising disclosure requirements the Board had
proposed relating to promotional rates would generally not apply for
life-of-balance offers, the Board had proposed in May 2008 to exempt
life-of-balance offers from many of these requirements. See proposed
Sec. 226.16(e)(2)(i)(B) and (e)(4) in the May 2008 Proposal. As a
result, the only requirement under the advertising rules for
promotional rates to which life-of-balance offers were subject under
the proposal was the requirement to state the term ``introductory''
within immediate proximity of the rate. The Board believes this
requirement would not be especially helpful to consumers for offers
where the rate would not change for the life of the balance except on
default. Since the minimal benefit to consumers does not seem to
warrant the burden on advertisers of distinguishing what types of
offers fit the definition, the Board has decided instead to eliminate
life-of-balance offers from the definition of ``promotional rate'' for
ease of compliance.
Moreover, the Board believes that further amendments suggested by
commenters to the definition of ``promotional rate'' are unnecessary.
In particular, some industry commenters recommended adding the concept
of a ``standard'' rate in the definition. The Board believes that
inserting this concept in the definition may generate further confusion
instead of providing clarity since there may not be consensus on what
would be considered a ``standard'' rate among all issuers. Furthermore,
with respect to some of the examples commenters provided to illustrate
why they thought the May 2008 proposed definition was overbroad, the
definition of ``promotional rate'' as proposed would likely not cover
these examples. For example, one industry commenter stated that a
standard rate could be considered a ``promotional rate'' when the rate
that will be ``in effect'' is a penalty rate. Pursuant to the
definition of ``promotional rate,'' that standard rate would have to be
in effect for a specified period of time before the penalty rate
applies in order to be considered a ``promotional rate.'' Typically,
penalty rates are applied upon the occurrence of a specific event or
action by the consumer rather than the passage of a specified time
period. As a result, this type of standard rate would not have been
considered a ``promotional rate'' under the proposal, and similarly is
not a ``promotional rate'' under the final rule.
The Board also proposed to define ``promotional period'' in Sec.
226.16(e)(2)(iii) in the May 2008 Proposal. The definition proposed in
May 2008 was similar to one previously proposed for ``introductory
period'' in the June 2007 Proposal, consistent with the definition in
TILA Section 127(c)(6)(D)(ii). No comments were received on this
definition, and Sec. 226.16(e)(2)(iii) is adopted as proposed and
renumbered as Sec. 226.16(g)(2)(iii).
16(g)(3) Stating the Term ``Introductory''
The Board proposed in the June 2007 Proposal to implement TILA
Section 127(c)(6)(A), as added by section 1303(a) of the Bankruptcy
Act, in Sec. 226.16(e)(3) (which the Board moves to Sec. 226.16(g)(3)
for organizational purposes). TILA Section 127(c)(6)(A) requires the
term ``introductory'' to be used in immediate proximity to each listing
of the temporary APR in the application, solicitation, or promotional
materials accompanying such application or solicitation. 15 U.S.C.
1637(c)(6)(A).
Requirement. As discussed above, industry commenters expressed
concern about requiring use of the word ``introductory'' to describe
special rates offered to consumers with an existing account. However,
with the revised definition of ``introductory rate'' under Sec.
226.16(g)(2) (proposed as Sec. 226.16(e)(2)), as discussed above, only
promotional rates offered in connection with the opening of an account
would be covered under Sec. 226.16(g)(3), which the Board believes
addresses commenters' concerns.
Some industry commenters also requested that the Board clarify that
the term ``introductory'' be used only in relation to rates that are
available exclusively to new customers. These commenters believe that
advertisements that state a rate that is offered to both new and
existing customers should not be required to be labeled as
``introductory.'' Alternatively, one industry commenter suggested that
the Board allow advertisers to choose whether to label a rate as
``introductory'' or ``promotional'' if an advertisement applies to both
new and existing accounts. The Board notes that there is no requirement
to use the term ``promotional'' with respect to a promotional rate
stated in an advertisement. The Board believes that there are several
terms that may be used to convey the concept of a promotional rate to
existing customers, and flexibility should be provided to advertisers.
Consistent with the requirements of TILA Section 127(c)(6)(A), however,
the Board believes that as long as the rate offered in an advertisement
could be considered an ``introductory rate,'' the term ``introductory''
must be used. Therefore, the Board declines to amend Sec. 226.16(g)(3)
(proposed as Sec. 226.16(e)(3)) to apply only to rates advertised
exclusively to new customers or to permit advertisers to choose whether
to label a rate as ``introductory'' if an advertisement applies to both
new and existing accounts.
Abbreviation. The Board proposed in the June 2007 Proposal to allow
advertisers to use the word ``intro'' as an alternative to the
requirement to use the term ``introductory.'' Commenters supported the
Board's proposal, and the final rule adopts Sec. 226.16(g)(3)
(proposed as Sec. 226.16(e)(3)) as proposed consistent with the
Board's authority under TILA Section 105(a) to facilitate compliance
with TILA, with minor technical amendments.
Immediate proximity. In the June 2007 Proposal, the Board proposed
to provide a safe harbor for creditors that place the word
``introductory'' or ``intro'' within the same phrase as each listing of
the introductory rate. One consumer group commenter suggested that the
word ``introductory'' be adjacent to or immediately before or after the
introductory rate. However, as discussed in the June 2007 Proposal, the
Board believes that interpreting ``immediate proximity'' to mean
adjacent to the rate may be too

[[Page 5376]]

restrictive and would effectively ban phrases such as ``introductory
balance transfer rate X percent.'' Therefore, the guidance in comment
16(g)-2 (proposed as comment 16(e)-2 in the June 2007 Proposal and
comment 16(e)-3 in the May 2008 Proposal) is adopted as proposed, with
minor technical amendments.
16(g)(4) Stating the Promotional Period and Post-Promotional Rate
The Board proposed Sec. 226.16(e)(4) in the June 2007 Proposal to
implement TILA Section 127(c)(6)(A), as added by Section 1303(a) of the
Bankruptcy Act. TILA Section 127(c)(6)(A) requires that the time period
in which the introductory period will end and the APR that will apply
after the end of the introductory period be listed in a clear and
conspicuous manner in a ``prominent location closely proximate to the
first listing'' of the introductory APR (excluding disclosures in the
application and solicitation table). 15 U.S.C. 1637(c)(6)(A).
Prominent location closely proximate. In the June 2007 Proposal,
the Board proposed that placing the time period in which the
promotional period will end and the APR that will apply after the end
of the promotional period in the same paragraph as the first listing of
the promotional rate would be deemed to be in a ``prominent location
closely proximate'' to the listing. As discussed in the June 2007
Proposal, the Board proposed a safe harbor in interpreting ``prominent
location closely proximate.'' In addition, the Board proposed that
placing this information in footnotes would not be a prominent location
closely proximate to the listing.
The Board received few comments on this proposal. Consumer groups
strongly opposed the Board's safe harbor. Instead, the commenters
suggested that if the Board used a safe harbor approach, the safe
harbor should be either ``side-by-side with or immediately under or
above the rate.'' One industry commenter suggested that it would be
sufficient to disclose the promotional period and the post-promotional
rate in the text of the offer.
As the Board reasoned in the June 2007 Proposal, Congress's use of
the term ``closely proximate'' may be distinguished from its use of the
term ``immediate proximity.'' Therefore, the Board believes that
guidance on the meaning of ``prominent location closely proximate''
should be more flexible than the guidance given for the meaning of
``immediate proximity'' in comment 16(g)-2 (proposed as comment 16(e)-2
in the June 2007 Proposal and comment 16(e)-3 in the May 2008 Proposal)
discussed above. In the Board's view, ``side-by-side with or
immediately under or above the rate'' is little different from the
guidance the Board has in place for ``immediate proximity.'' Requiring
terms to be in the same paragraph, on the other hand, gives advertisers
flexibility but ensures that the terms are fairly close to the
promotional rate. The Board believes that concerns that paragraphs will
be so long as to bury the information may be misplaced. Above all,
advertisements are intended to capture consumers' interest in the
advertised product or service, and long, dense paragraphs are often
eschewed in the advertising context. As a result, the Board adopts the
safe harbor in comment 16(g)-3 (proposed as comment 16(e)-3 in the June
2007 Proposal and comment 16(e)-4 in the May 2008 Proposal), as
proposed, with minor technical amendments.
First listing. In the June 2007 Proposal, the Board provided
guidance on determining which listing of a promotional rate should be
considered the ``first listing'' other than the rate provided in the
table required on or with credit card applications or solicitations.
The Board proposed in June 2007 that for a multi-page mailing or
application or solicitation package, the first listing is the most
prominent listing on the front of the first page of the ``principal
promotional document'' in the package. The ``principal promotional
document'' is the document designed to be seen first by the consumer in
a mailing, such as a cover letter or solicitation letter. This
definition is consistent with the FTC's definition of the term in its
regulations related to the FCRA. 16 CFR Sec. 642.2(b). If the
introductory rate does not appear in the principal promotional document
but appears in another document in the package or there is no principal
promotional document, then the requirements would have applied to each
separate document that lists the promotional rate. In determining which
listing is the ``most prominent,'' the Board proposed a safe harbor for
the listing with the largest type size.
The Board received few comments on the proposal. Consumer group
commenters supported the Board's proposal but suggested that the
requirements should apply to each document in a mailing regardless of
whether or not the promotional rate appears on the principal
promotional document. As the Board noted in the June 2007 Proposal, the
Board's consumer testing efforts suggest that consumers are most likely
to read the principal promotional document. The Board believes that
applying the requirement to each document in a mailing/package would be
overly burdensome and unnecessary if the consumer will already have
seen the promotional rate in the principal promotional document. As
provided in the comment, however, if the promotional rate does not
appear in the principal promotional document or there is no principal
promotional document, the requirements apply to the first listing of
the promotional rate in each document in the package containing the
promotional rate as it is not clear which document the consumer will
read first in such circumstances.
One industry commenter also suggested that there may be times when
a promotional rate is not listed on the front of the first page of a
document. In those cases, the Board believes that the first listing
should be the most prominent listing in the subsequent pages of the
document. Therefore, the Board adopts comment 16(g)-4 (previously
proposed as comment 16(e)-4 in the June 2007 Proposal and comment
16(e)-5 in the May 2008 Proposal), largely as proposed with
modifications to account for instances when a promotional rate may not
appear on the front of the first page of a principal promotional
document or other document. Technical changes are also made to clarify
that the comment applies solely to written or electronic
advertisements.
Post-promotional rate. In the June 2007 Proposal, the Board
proposed that a range of rates may be listed as the rate that will
apply after the promotional period if the specific rate for which the
consumer will qualify will depend on later determinations of a
consumer's creditworthiness. This approach is consistent with the
guidance the Board proposed for listing the APR in the table required
for credit card applications and solicitations under Sec.
226.5a(b)(1)(v). In addition, the Board solicited comment on whether
advertisers alternatively should be able to list only the highest rate
that may apply instead of a range of rates. For example, if there are
three rates that may apply (9.99 percent, 12.99 percent or 17.99
percent), instead of disclosing three rates (9.99 percent, 12.99
percent or 17.99 percent) or a range of rates (9.99 percent to 17.99
percent), the Board asked whether card issuers should be permitted to
provide only the highest rate (up to 17.99 percent).
Most of the comments the Board received regarding the
permissibility of disclosing a range of rates were focused on the
proposed rule under Sec. 226.5a(b)(1)(v) rather than the

[[Page 5377]]

corresponding proposed provision under the advertising rules. As
discussed in the section-by-section analysis to Sec. 226.5a(b)(1)(v),
the Board declines to allow creditors to list only the highest rate
that may apply instead of a range of rates for all applicable rates
other than the penalty rate. For the reasons set forth in the
supplementary information to Sec. 226.5a(b)(1)(v), the Board also
declines to allow advertisers to list only the highest rate that may
apply instead of a range of rates, and comment 16(g)-5 (proposed as
comment 16(e)-5 in the June 2007 Proposal and 16(e)-6 in the May 2008
Proposal) is adopted as proposed. In addition, the Board received one
industry comment suggesting that when a range is given, the
advertisement must state that the rates are based on creditworthiness
as required for applications and solicitations under Sec.
226.5a(b)(1)(v). The final rule does not adopt this suggestion as the
Board believes that consumers will see this statement in an application
or solicitation, so it is not necessary to include it in an
advertisement.
Life-of-balance offers. In May 2008, the Board proposed to exempt
life-of-balance promotional offers from the requirement to state when
the promotional rate will end and the APR that will apply thereafter.
See proposed Sec. 226.16(e)(2)(i)(B) and (e)(4). The Board recognized
that requiring disclosure of when the promotional rate will end and the
post-promotional rate that will apply after the end of the promotional
period would not be appropriate for these types of offers since the
rate in effect for such offers lasts as long as the balance is in
existence. Since the final rule excludes life-of-balance offers from
the definition of ``promotional rate,'' as discussed in the
supplementary information to Sec. 226.16(g)(2) above, the exception is
no longer necessary, and Sec. 226.16(g)(4) (proposed as Sec.
226.16(e)(4) in the May 2008 Proposal) has been revised, as
appropriate.
Non-written, non-electronic advertisements. As discussed above in
the section-by-section analysis to Sec. 226.16(g)(1), the Board is
expanding the requirements of Sec. 226.16(g) (proposed as Sec.
226.16(e)) to non-written, non-electronic advertisements. The Board,
however, recognizes that for non-written, non-electronic
advertisements, such as telephone marketing, radio and television
advertisements, there are unique challenges in presenting information
to consumers because of the space and time constraints of such media.
Therefore, the final rule amends Sec. 226.16(g)(4) to provide
flexibility in how the required information may be presented in non-
written, non-electronic advertisements. Specifically, for non-written,
non-electronic advertisements, Sec. 226.16(g)(4) does not impose any
specific proximity or formatting requirements other than the general
requirement that information be clear and conspicuous, as contemplated
under comment 16-1.
16(g)(5) Envelope Excluded
TILA Section 127(c)(6)(B), as added by Section 1303(a) of the
Bankruptcy Act, specifically excludes envelopes or other enclosures in
which an application or solicitation to open a credit card account is
mailed from the requirements of TILA Section 127(c)(6)(A)(ii) and
(iii). 15 U.S.C. 1637(c)(6)(B). In the June 2007 Proposal, the Board
set forth this provision in proposed Sec. 226.16(e)(5). Furthermore,
the Board proposed also to exclude banner advertisements and pop-up
advertisements that are linked to an electronic application or
solicitation.
Consumer group commenters disagreed with the Board's proposal to
extend the exception to banner advertisements and pop-up advertisements
that are linked to an electronic application or solicitation. As
discussed in the June 2007 Proposal, the Board extended the exception
because of the similarity of these approaches to envelopes or other
enclosures in the direct mail context. One industry commenter agreed
with the Board's proposal to exclude banner advertisements and pop-up
advertisements that are linked to an electronic application or
solicitation, but also suggested that the Board provide flexibility for
other marketing channels where an initial summary advertisement is used
to alert customers to an offer or prompt further inquiry about the
details of an offer, such as transportation and terminal posters,
roadside and merchant billboards or signs, and take-one application
display stands. The Board declines to extend the exception in the
manner suggested. Unlike envelopes and banner advertisements and pop-up
advertisements that are linked to an electronic application or
solicitation, these other approaches are stand-alone in nature and are
not connected to an advertising piece that contains detailed
information on the promotional rate. As a result, the Board adopts
Sec. 226.16(g)(5) (proposed as Sec. 226.16(e)(5)) as proposed.

Appendix E--Rules for Card Issuers That Bill on a Transaction-by-
Transaction Basis

Appendix E to part 226 applies to card programs in which the card
issuer and the seller are the same or related persons; no finance
charge is imposed; cardholders are billed in full for each use of the
card on a transaction-by-transaction basis; and no cumulative account
is maintained reflecting transactions during a period of time such as a
month. At the time the provisions now constituting Appendix E to part
226 were added to the regulation, they were intended to address card
programs offered by automobile rental companies.
Appendix E to part 226 specifies the provisions of Regulation Z
that apply to credit card programs covered by the Appendix. For
example, for the account-opening disclosures under Sec. 226.6, the
required disclosures are limited to penalty charges such as late
charges, and to a disclosure of billing error rights and of any
security interest. For the periodic statement disclosures under Sec.
226.7, the required disclosures are limited to identification of
transactions and an address for notifying the card issuer of billing
errors. Further, since under Appendix E to part 226 card issuers do not
issue periodic statements of account activity, Appendix E to part 226
provides that these disclosures may be made on the invoice or statement
sent to the consumer for each transaction. In general, the disclosures
that this category of card issuers need not provide are those that are
clearly inapplicable, either because the disclosures relate to finance
charges, are based on a system in which periodic statements are
generated, or apply to three-party credit cards (such as bank-issued
credit cards).
In the June 2007 Proposal, the Board proposed to revise Appendix E
to part 226 by inserting material explaining what is meant by ``related
persons.'' In addition, technical changes were proposed, including
numbering the paragraphs within the Appendix and changing cross
references to conform to the renumbering of other provisions of
Regulation Z.
The Board solicited comment on whether Appendix E to part 226
should be revised to specify that the disclosures required under Sec.
226.5a apply to card programs covered by the Appendix, as well as on
whether any other provisions of Regulation Z not currently specified in
Appendix E to part 226 as applicable to transaction-by-transaction card
issuers should be specified as being applicable. Comment was also
requested on whether any provisions currently specified as being
applicable should be deleted.
No comments were received on Appendix E to part 226. Therefore, the
proposed changes are adopted in the final rule (with further technical

[[Page 5378]]

changes, such as to conform cross references to other sections).

Appendix F--Optional Annual Percentage Rate Computations for Creditors
Offering Open-End Plans Subject to the Requirements of Sec. 226.5b

Appendix F to part 226 provides guidance regarding the computation
of the effective APR in situations where the finance charge imposed
during a billing cycle includes a transaction charge, such as a balance
transfer fee or a cash advance fee. In the June 2007 Proposal, the
Board did not propose changes to Appendix F to part 226 except to move
the substance of footnote 1 to Appendix F to the text of the Appendix.
In addition, a cross reference to proposed comment 14(d)(3)-3 would
have been added to the staff commentary to Appendix F to part 226. The
guidance in Appendix F to part 226 would have continued to apply to
either proposed Sec. 226.14(c)(3) (covering HELOCs) or proposed Sec.
226.14(d)(3) (covering open-end (not home-secured) credit). As
discussed above, since the Board has eliminated the requirement to
disclose the effective APR, proposed Sec. 226.14(d)(3) is not being
adopted, and compliance with Sec. 226.14(c)(3) is optional for HELOC
creditors, under the final rule. The guidance in Appendix F to part 226
therefore applies to HELOC creditors that choose to calculate and
disclose an effective APR under Sec. 226.14(c)(3). The Appendix is
retitled to reflect more accurately its scope.
No comments were received on Appendix F to part 226. The changes to
Appendix F to part 226 are adopted as proposed, except the cross
references in the Appendix F commentary are revised to conform to the
final changes to Sec. 226.14.

Appendix G--Open-End Model Forms and Clauses; Appendix H--Closed-End
Model Forms and Clauses

Appendices G and H to part 226 set forth model forms, model clauses
and sample forms that creditors may use to comply with the requirements
of Regulation Z. Appendix G to part 226 contains model forms, model
clauses and sample forms applicable to open-end plans. Appendix H to
part 226 contains model forms, model clauses and sample forms
applicable to closed-end loans. Although use of the model forms and
clauses is not required, creditors using them properly will be deemed
to be in compliance with the regulation with regard to those
disclosures. As discussed above, the Board proposed in June 2007 and
May 2008 to add or revise several model and sample forms to Appendix G
to part 226. The new or revised model and samples forms are discussed
above in the section-by-section analysis applicable to the regulatory
provisions to which the forms relate. See section-by-section analysis
to Sec. Sec. 226.4(d)(3), 226.5a(b), 226.6(a)(5) and (b)(7),
226.6(b)(1), (b)(2) and (b)(5), 226.7(b), 226.9(a), 226.9(b), 226.9(c),
226.9(g), and 226.12(b). In addition, the Board proposed to add a new
model clause and sample form relating to debt suspension coverage in
Appendix H to part 226. These forms are discussed above in the section-
by-section analysis to Sec. 226.4(d)(3).
In Appendix G to part 226, all the existing forms applicable to
HELOCs have been retained without revision, with three exceptions,
discussed below. These changes are permissive and do not require HELOC
creditors to revise any existing form. The Board anticipates
considering revisions to HELOC forms when it reviews the home-equity
disclosure requirements in Regulation Z.
The Board revises or adds commentary to the model and sample forms
in Appendix G to part 226, as discussed below. Furthermore, as
discussed in the general discussion on the effective APR in the
section-by-section analysis to Sec. 226.7(b), the Board is not
adopting proposed Sample G-18(B). Therefore, several forms and samples
sequentially following proposed Sample G-18(B) have been renumbered
accordingly.
Permissible changes to the model and sample forms. The commentary
to Appendices G and H to part 226 currently states that creditors may
make certain changes in the format and content of the model forms and
clauses and may delete any disclosures that are inapplicable to a
transaction or a plan without losing the act's protection from
liability. See comment app. G and H-1. As discussed above, the Board
has adopted format requirements with respect to certain disclosures
applicable to open-end (not home-secured) plans, such as a tabular
requirement for certain account-opening disclosures and certain change-
in-terms disclosures. See Sec. 226.5(a)(3). In addition, the Board is
revising certain model forms to improve their readability. See G-2(A),
G-3(A) and G-4(A). Thus, the Board amends comment app. G and H-1, as
proposed in June 2007, to indicate that formatting changes may not be
made to certain model and sample forms in Appendix G to part 226.
In a technical revision, the Board deletes comment app. G and H-
1.vii. as obsolete, as proposed in June 2007. This comment allows a
creditor to substitute appropriate references, such as ``bank,'' ``we''
or a specific name, for ``creditor'' in the account-opening
disclosures, but none of the model or sample forms applicable to the
account-opening disclosures uses the term ``creditor.'' Current comment
app. G and H-1.viii. has been renumbered as comment app. G and H-1.vii.
Model clauses for balance computation methods. Currently and under
the June 2007 Proposal, creditors are required to explain the method
used to determine the balance to which rates are applied. See current
Sec. 226.6(a) and proposed Sec. 226.6(a)(1)(iii) and (b)(2)(i)(D).
Model Clauses that explain commonly used methods, such as the average
daily balance method, are at Appendix G-1 to part 226.
The Model Clauses at Appendix G-1 to part 226 were republished
without change in the June 2007 Proposal. The Board requested comment
on whether model clauses for methods such as the ``previous balance''
or ``adjusted balance'' method should be eliminated because they are no
longer used. Few commenters addressed the issue. Those that did
recommended retaining the existing clauses, and two commenters asked
the Board to add a model clause explaining the daily balance method.
In May 2008, the Board proposed to add a new paragraph (f) to
describe a daily balance method in Appendix G-1 to part 226. In
addition, a new Appendix G-1(A) to part 226 was proposed for open-end
(not home-secured) plans. The clauses in Appendix G-1(A) to part 226
refer to ``interest charges'' rather than ``finance charges'' to
explain balance computation methods. The consumer testing conducted for
the Board prior to the June 2007 Proposal indicated that consumers
generally had a better understanding of ``interest charge'' than
``finance charge,'' which is reflected in the Board's use of
``interest'' (rather than ``finance charge'') in account-opening
samples and to describe costs other than fees on periodic statement
samples and forms under the June 2007 Proposal. See proposed Samples G-
17(B) and G-17(C), Sample G-18(A), and Forms G-18(G) and G-18(H).
Comment app. G-1 was proposed to be revised in May 2008 to clarify that
for HELOCs subject to Sec. 226.5b, creditors may properly use the
model clauses in either Appendix G-1 or G-1(A). The Board is adopting a
new paragraph (f) to describe a daily balance method in Model Clauses
G-1, a new Model Clauses G-1(A), and accompanying commentary, as
proposed in May 2008.
Model clauses for notice of liability for unauthorized use and
billing-error

[[Page 5379]]

rights. Currently, Appendix G contains Model Clause G-2 which provides
a model clause for the notice of liability for unauthorized use of a
credit card. In June 2007, the Board proposed to revise Model Clause G-
2 to improve its readability, proposed as Model Clause G-2(A) for open-
end (not home-secured) plans. In addition, Appendix G currently
includes Model Forms G-3 and G-4, which contain models for the long-
form billing-error rights statement (for use with the account-opening
disclosures and as an annual disclosure or, at the creditor's option,
with each periodic statement) and the alternative billing-error rights
statement (for use with each periodic statement), respectively. Like
with Model Clause G-2, the Board proposed to revise Model Forms G-3 and
G-4 to improve readability, proposed as Model Form G-3(A) and G-4(A)
for open-end (not home-secured) plans. The Board adopts Model Clause G-
2(A) and Model Forms G-3(A) and G-4(A), as proposed, with revisions
noted below. For HELOCs subject to Sec. 226.5b, at the creditor's
option, a creditor either may use the current forms (G-2, G-3, and G-4)
or the revised forms (G-2(A), 3(A) and 4(A)). For open-end (not home-
secured) plans, creditors may use G-2(A), 3(A) and 4(A). See comments
app. G-2 and -3.
As stated above, Model Clause G-2 and Model Forms G-3 and G-4 are
adopted without revision, except for optional language creditors may
use when instructing consumers on how to contact the creditor by
electronic communication, such as via the Internet. The same
instructions are contained in Model Clause G-2(A) and Model Forms G-
3(A) and G-4(A). Technical changes have also been made for clarity
without intended substantive change, in response to comments received.
See section-by-section analysis to Sec. 226.9(a).
Model and sample forms applicable to disclosures for credit card
applications and solicitations and account-opening disclosures.
Currently, Appendix G contains several model forms related to the
credit card application and solicitation disclosures required by Sec.
226.5a. Current Model Form G-10(A) illustrates, in the tabular format,
the disclosures required under Sec. 226.5a for applications and
solicitations for credit cards other than charge cards. Current Sample
G-10(B) is a sample disclosure illustrating an account with a lower
introductory rate and a penalty rate. The June 2007 Proposal would have
substantially revised Model Form G-10(A) and Sample G-10(B) to reflect
the proposed changes to Sec. 226.5a, as discussed in the section-by-
section analysis to Sec. 226.5a. In addition, Sample G-10(C) would
have been added to provide another example of how certain disclosures
required by Sec. 226.5a may be given. Current Model Form G-10(C)
illustrating the tabular format disclosures for charge card
applications and solicitations would have been moved to G-10(D) and
r