[Federal Register Volume 74, Number 18 (Thursday, January 29, 2009)]
[Rules and Regulations]
[Pages 5498-5584]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E8-31186]
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FEDERAL RESERVE SYSTEM
12 CFR Part 227
[Regulation AA; Docket No. R-1314]
DEPARTMENT OF THE TREASURY
Office of Thrift Supervision
12 CFR Part 535
[Docket ID. OTS-2008-0027]
RIN 1550-AC17
NATIONAL CREDIT UNION ADMINISTRATION
12 CFR Part 706
RIN 3133-AD47
Unfair or Deceptive Acts or Practices
AGENCIES: Board of Governors of the Federal Reserve System (Board);
Office of Thrift Supervision, Treasury (OTS); and National Credit Union
Administration (NCUA).
ACTION: Final rule.
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SUMMARY: The Board, OTS, and NCUA (collectively, the Agencies) are
exercising their authority under section 5(a) of the Federal Trade
Commission Act to prohibit unfair or deceptive acts or practices. The
final rule prohibits institutions from engaging in certain acts or
practices in connection with consumer credit card accounts. The final
rule relates to other Board rules under the Truth in Lending Act, which
are published elsewhere in today's Federal Register. Because the Board
has proposed new rules regarding overdraft services for deposit
accounts under the Electronic Fund Transfer Act elsewhere in today's
Federal Register, the Agencies are not taking action on overdraft
services at this time. A secondary basis for OTS's rule is the Home
Owners' Loan Act.
[[Page 5499]]
DATES: Effective Date: The final rule is effective on July 1, 2010.
FOR FURTHER INFORMATION CONTACT:
Board: Benjamin K. Olson, Attorney, or Ky Tran-Trong, Counsel,
Division of Consumer and Community Affairs, at (202) 452-2412 or (202)
452-3667, Board of Governors of the Federal Reserve System, 20th and C
Streets, NW., Washington, DC 20551. For users of Telecommunications
Device for the Deaf (TDD) only, contact (202) 263-4869.
OTS: April Breslaw, Director, Consumer Regulations, (202) 906-6989;
Suzanne McQueen, Consumer Regulations Analyst, Compliance and Consumer
Protection Division, (202) 906-6459; or Richard Bennett, Senior
Compliance Counsel, Regulations and Legislation Division, (202) 906-
7409, at Office of Thrift Supervision, 1700 G Street, NW., Washington,
DC 20552.
NCUA: Matthew J. Biliouris, Program Officer, Office of Examination
and Insurance, (703) 518-6360; or Moisette I. Green or Ross P. Kendall,
Staff Attorneys, Office of General Counsel, (703) 518-6540, National
Credit Union Administration, 1775 Duke Street, Alexandria, VA 22314-
3428.
SUPPLEMENTARY INFORMATION: The Federal Reserve Board (Board), the
Office of Thrift Supervision (OTS), and the National Credit Union
Administration (NCUA) (collectively, the Agencies) are adopting several
new provisions intended to protect consumers against unfair acts or
practices with respect to consumer credit card accounts. These rules
are promulgated pursuant to section 18(f)(1) of the Federal Trade
Commission Act (FTC Act), which makes the Agencies responsible for
prescribing regulations that prevent unfair or deceptive acts or
practices in or affecting commerce within the meaning of section 5(a)
of the FTC Act. See 15 U.S.C. 57a(f)(1), 45(a). A secondary basis for
OTS's rule is the Home Owners' Loan Act (HOLA), 12 U.S.C. 1461 et seq.
I. Background
A. The Board's June 2007 Regulation Z Proposal on Open-End (Non-Home
Secured) Credit
On June 14, 2007, the Board requested public comment on proposed
amendments to the open-end credit (not home-secured) provisions of
Regulation Z, which implements the Truth in Lending Act (TILA), as well
as proposed amendments to the corresponding staff commentary to
Regulation Z. 72 FR 32948 (June 2007 Regulation Z Proposal). The
purpose of TILA is to promote the informed use of consumer credit by
providing disclosures about its costs and terms. See 15 U.S.C. 1601 et
seq. TILA's disclosures differ depending on whether the consumer credit
is an open-end (revolving) plan or a closed-end (installment) loan. The
goal of the proposed amendments was to improve the effectiveness of the
disclosures that creditors provide to consumers at application and
throughout the life of an open-end (not home-secured) account.
As part of this effort, the Board retained a research and
consulting firm (Macro International) to assist the Board in conducting
extensive consumer testing in order to develop improved disclosures
that consumers would be more likely to pay attention to, understand,
and use in their decisions, while at the same time not creating undue
burdens for creditors. Although the testing assisted the Board in
developing improved disclosures, the testing also identified the
limitations of disclosure, in certain circumstances, as a means of
enabling consumers to make decisions effectively. See 72 FR at 32948-
32952.\1\
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\1\ As discussed below, the Agencies have relied in part on the
Board's consumer testing in determining that certain practices are
unfair under the FTC Act. The results of this consumer testing are
set forth in the reports prepared by the Board's testing consultant.
The initial report was posted on the Board's public website along
with the June 2007 Regulation Z Proposal. See Design and Testing of
Effective Truth in Lending Disclosures (May 16, 2007) (available at
http://www.federalreserve.gov/dcca/regulationz/20070523/Execsummary.pdf). Two supplemental reports have been posted on the
Board's public website along with the final rules under Regulation
Z, which are published elsewhere in today's Federal Register. See
Design and Testing of Effective Truth in Lending Disclosures:
Findings from Qualitative Consumer Research (Dec. 15, 2008); Design
and Testing of Effective Truth in Lending Disclosures: Findings from
Experimental Study (Dec. 15, 2008).
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In response to the June 2007 Regulation Z Proposal, the Board
received more than 2,500 comments, including approximately 2,100
comments from individual consumers. Comments from consumers, consumer
groups, a member of Congress, other government agencies, and some
creditors were generally supportive of the proposed revisions to
Regulation Z. A number of commenters, however, urged the Board to take
additional action with respect to a variety of credit card practices,
including late fees and other penalties resulting from perceived
reductions in the amount of time consumers are given to make timely
payments, allocation of payments first to balances with the lowest
annual percentage rate, application of increased annual percentage
rates to pre-existing balances, and the so-called two-cycle method of
computing interest.
B. The OTS's August 2007 FTC Act Advance Notice of Proposed Rulemaking
On August 6, 2007, OTS issued an ANPR requesting comment on its
rules under section 5 of the FTC Act. See 72 FR 43570 (OTS ANPR). The
purpose of OTS's ANPR was to determine whether OTS should expand on its
current prohibitions against unfair and deceptive acts or practices in
its Credit Practices Rule (12 CFR part 535).
OTS's ANPR discussed a very broad array of issues including:
The legal background on OTS's authority under the FTC Act
and HOLA;
OTS's existing Credit Practices Rule;
Possible principles OTS could use to define unfair and
deceptive acts or practices, including looking to standards the Federal
Trade Commission (FTC) and states follow;
Practices that OTS, individually or on an interagency
basis, has addressed through guidance;
Practices that other federal agencies have addressed
through rulemaking;
Practices that states have addressed statutorily;
Acts or practices OTS might target involving products such
as credit cards, residential mortgages, gift cards, and deposit
accounts; and
OTS's existing Advertising Rule (12 CFR 563.27).
OTS received 29 comment letters on its ANPR. These comments were
summarized in the Agencies' May 2008 proposed rule. See 73 FR 28904,
28905-28906 (May 19, 2008) (May 2008 Proposal). In brief, financial
industry commenters opposed OTS taking any further action beyond
issuing guidance along those lines. They argued that OTS must not
create an unlevel playing field for OTS-regulated institutions and that
uniformity among the federal banking agencies and the NCUA is
essential. They challenged the list of practices OTS had indicated it
could consider targeting, arguing that the practices listed were
neither unfair nor deceptive under the FTC standards.
In contrast, the consumer group commenters urged OTS to move ahead
with a rule that would combine the FTC's principles-based standards
with prohibitions on specific practices. They urged OTS to ban numerous
practices, including several practices addressed in the final rule
(such as ``universal default'' repricing, applying payments first to
balances with the lowest interest rate, and credit cards marketed at
subprime consumers that provide little available credit at account
opening).
[[Page 5500]]
C. Related Action by the Agencies Preceding This Rulemaking
In addition to receiving information via comments, the Agencies
have conducted outreach regarding credit card practices, including
meetings and discussions with consumer group representatives, industry
representatives, other federal and state banking agencies, and the FTC.
On April 8, 2008, the Board hosted a forum on credit cards in which
card issuers and payment network operators, consumer advocates,
counseling agencies, and other regulatory agencies met to discuss
relevant industry trends and identify areas that may warrant action or
further study. In addition, the Agencies reviewed consumer complaints
received by each of the federal banking agencies and several studies of
the credit card industry.\2\ The Agencies' understanding of credit card
practices and consumer behavior was also informed by the results of
consumer testing conducted on behalf of the Board in connection with
its June 2007 Regulation Z Proposal.
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\2\ See, e.g., Am. Bankers Assoc., Likely Impact of Proposed
Credit Card Legislation: Survey Results of Credit Card Issuers
(Spring 2008); Darryl E. Getter, Cong. Research Srvc., The Credit
Card Market: Recent Trends, Funding Cost Issues, and Repricing
Practices (Feb. 2008); Tim Westrich & Christian E. Weller, Ctr. for
Am. Progress, House of Cards: Consumers Turn to Credit Cards Amid
the Mortgage Crisis, Delaying Inevitable Defaults (Feb. 2008)
(available at http://www.americanprogress.org/issues/2008/02/pdf/house_of_cards.pdf); Jose A. Garcia, Demos, Borrowing to Make Ends
Meet: The Rapid Growth of Credit Card Debt in America (Nov. 2007)
(available at http://www.demos.org/pubs/stillborrowing.pdf); Nat'l
Consumer Law Ctr., Fee-Harvesters: Low-Credit, High-Cost Cards Bleed
Consumers (Nov. 2007) (available at http://www.consumerlaw.org/issues/credit_cards/content/FEE-HarvesterFinal.pdf); Jonathan M.
Orszag & Susan H. Manning, Am. Bankers Assoc., An Economic
Assessment of Regulating Credit Card Fees and Interest Rates (Oct.
2007) (available at http://www.aba.com/aba/documents/press/regulating_creditcard_fees_interest_rates92507.pdf); Cindy
Zeldin & Mark Rukavia, Demos, Borrowing to Stay Healthy: How Credit
Card Debt Is Related to Medical Expenses (Jan. 2007) (available at
http://www.demos.org/pubs/healthy_web.pdf); U.S. Gov't
Accountability Office, Credit Cards: Increased Complexity in Rates
and Fees Heightens Need for More Effective Disclosures to Consumers
(Sept. 2006) (``GAO Credit Card Report'') (available at http://www.gao.gov/new.items/d06929.pdf); Board of Governors of the Federal
Reserve System, Report to Congress on Practices of the Consumer
Credit Industry in Soliciting and Extending Credit and their Effects
on Consumer Debt and Insolvency (June 2006) (available at http://www.federalreserve.gov/boarddocs/rptcongress/bankruptcy/bankruptcybillstudy200606.pdf); Demos & Ctr. for Responsible
Lending, The Plastic Safety Net: The Reality Behind Debt in America
(Oct. 2005) (available at http://www.demos.org/pubs/PSN_low.pdf).
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Finally, the Agencies gathered information from a number of
Congressional hearings on consumer protection issues regarding credit
cards.\3\ In these hearings, members of Congress heard testimony from
individual consumers, representatives of consumer groups,
representatives of financial and credit card industry groups, and
others. Consumer and community group representatives generally
testified that certain credit card practices (including those discussed
above) unfairly increase the cost of credit after the consumer has
committed to a particular transaction. These witnesses further
testified that these practices should be prohibited because they lead
consumers to underestimate the costs of using credit cards and that
disclosure of these practices under Regulation Z is ineffective.
Financial services and credit card industry representatives agreed that
consumers need better disclosures of credit card terms but testified
that substantive restrictions on specific terms would lead to higher
interest rates for all borrowers as well as reduced access to credit
for some.\4\
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\3\ See, e.g., The Credit Cardholders' Bill of Rights: Providing
New Protections for Consumers: Hearing before the H. Subcomm. on
Fin. Instits. & Consumer Credit, 110th Cong. (2007); Credit Card
Practices: Unfair Interest Rate Increases: Hearing before the S.
Permanent Subcomm. on Investigations, 110th Cong. (2007); Credit
Card Practices: Current Consumer and Regulatory Issues: Hearing
before H. Comm. on Fin. Servs., 110th Cong. (2007); Credit Card
Practices: Fees, Interest Rates, and Grace Periods: Hearing before
the S. Permanent Subcomm. on Investigations, 110th Cong. (2007).
\4\ On September 23, 2008, the U.S. House of Representatives
passed the Credit Cardholders' Bill of Rights Act of 2008 (H.R.
5244), which addresses consumer protection issues regarding credit
cards. See also The Credit Card Accountability, Responsibility and
Disclosure Act, S. 3252, 110th Cong. (July 10, 2008); The Credit
Card Reform Act of 2008, S. 2753, 110th Cong. (Mar. 12, 2008); The
Stop Unfair Practices in Credit Cards Act of 2007, H.R. 5280, 110th
Cong. (Feb. 7, 2008); The Stop Unfair Practices in Credit Cards Act
of 2007, S. 1395, 110th Cong. (May 15, 2007); The Universal Default
Prohibition Act of 2007, H.R. 2146, 110th Cong. (May 3, 2007); The
Credit Card Accountability Responsibility and Disclosure Act of
2007, H.R. 1461, 110th Cong. (Mar. 9, 2007).
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D. The Agencies' May 2008 Proposal
In May 2008, the Agencies proposed rules under the FTC Act
addressing unfair or deceptive acts or practices in connection with
consumer credit card accounts and overdraft services for deposit
accounts. See 73 FR 28904 (May 2008 Proposal). These proposals were
accompanied by complementary proposals by the Board under Regulation Z
with respect to consumer credit card accounts and Regulation DD with
respect to deposit accounts. See 73 FR 28866 (May 19, 2008) (May 2008
Regulation Z Proposal); 73 FR 28739 (May 19, 2008) (May 2008 Regulation
DD Proposal).
In order to best ensure that all entities that offer consumer
credit card accounts and overdraft services on deposit accounts are
treated in a like manner, the Board, OTS, and NCUA joined together to
issue the May 2008 Proposal. This interagency approach is consistent
with section 303 of the Riegle Community Development and Regulatory
Improvement Act of 1994. See 12 U.S.C. 4803. Section 303(a)(3), 12
U.S.C. 4803(a)(3), directs the federal banking agencies to work jointly
to make uniform all regulations and guidelines implementing common
statutory or supervisory policies. Two federal banking agencies--the
Board and OTS--are primarily implementing the same statutory provision,
section 18(f) of the FTC Act, as is the NCUA (although HOLA serves as a
secondary basis for OTS's rule). Accordingly, the Agencies endeavored
to propose rules that are as uniform as possible. Prior to issuing the
proposed rules, the Agencies also consulted with the two other federal
banking agencies, the Office of the Comptroller of the Currency (OCC)
and the Federal Deposit Insurance Corporation (FDIC), as well as with
the FTC.
In an effort to achieve a level playing field, the May 2008
Proposal focused on unfair and deceptive acts or practices involving
credit cards and overdraft services, which are generally provided only
by depository institutions such as banks, savings associations, and
credit unions. The Agencies recognized that state-chartered credit
unions and any entities providing consumer credit card accounts
independent of a depository institution fall within the FTC's
jurisdiction and therefore would not be subject to the proposed rules.
The Agencies noted, however, that FTC-regulated entities appear to
represent a small percentage of the market for consumer credit card
accounts and overdraft services.\5\ For OTS, addressing certain
deceptive credit card practices in the May 2008 Proposal, rather than
through an interpretation or expansion
[[Page 5501]]
of its Advertising Rule, also fosters consistency because the other
Agencies do not have comparable advertising regulations.
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\5\ Some commenters on the May 2008 Proposal expressed concern
that the proposed rules would place institutions subject to the
final rule at a competitive disadvantage in relation to FTC-
regulated entities. As discussed in detail below, the Board has
published elsewhere in today's Federal Register a proposal regarding
overdraft services using its authority under the Electronic Fund
Transfer Act (EFTA) and Regulation E. These proposed rules would
apply to state-chartered credit unions providing overdraft services.
Furthermore, because FTC-regulated entities represent a small
percentage of the market for consumer credit card accounts, the
Agencies believe that any competitive disadvantage is unlikely to be
significant. In addition, although the final rule does not apply to
FTC-regulated entities, those entities are still subject to the FTC
Act.
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Credit Practices Rule
The Agencies proposed to make non-substantive, organizational
changes to the Credit Practices Rule. Specifically, in order to avoid
repetition, the Agencies proposed to move the statement of authority,
purpose, and scope out of the Credit Practices Rule and revise it to
apply not only to the Credit Practices Rule but also to the proposed
rules regarding consumer credit card accounts and overdraft services.
OTS and NCUA proposed additional, non-substantive changes to the
organization of their versions of the Credit Practices Rule. OTS also
solicited comment on whether to retain the state exemption provision in
its Credit Practices Rule.
Consumer Credit Card Accounts
The Agencies proposed seven provisions under the FTC Act regarding
consumer credit card accounts. These provisions were intended to ensure
that consumers have the ability to make informed decisions about the
use of credit card accounts without being subjected to unfair or
deceptive acts or practices.
First, institutions would have been prohibited from treating a
payment as late for any purpose unless consumers had been provided a
reasonable amount of time to make that payment. The proposed rule would
have created a safe harbor for institutions that adopt reasonable
procedures designed to ensure that periodic statements (which provide
payment information) are mailed or delivered at least 21 days before
the payment due date.
Second, when different annual percentage rates apply to different
balances, institutions 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, institutions would have
been required to allocate amounts in excess of the minimum payment
first to balances on which the rate is not discounted or interest is
not deferred (except, in the case of a deferred interest plan, for the
last two billing cycles during which interest is deferred).
Institutions would also have been prohibited from denying consumers a
grace period on purchases (if one is offered) solely because they have
not paid off a balance at a promotional rate or a balance on which
interest is deferred.
Third, institutions would have been prohibited from increasing the
annual percentage rate on an outstanding balance. This prohibition
would not have applied, however, where a variable rate increases due to
the operation of an index, where a promotional rate expired or was lost
(provided the rate was not increased to a penalty rate), or where the
minimum payment was not received within 30 days after the due date.
Fourth, institutions would have been prohibited from assessing a
fee if a consumer exceeds the credit limit on an account solely due to
a hold placed on the available credit. If, however, the actual amount
of the transaction would have exceeded the credit limit, then a fee
could have been assessed.
Fifth, institutions would have been prohibited from imposing
finance charges based on balances for days in billing cycles that
precede the most recent billing cycle. The proposed rule would have
prohibited institutions from reaching back to earlier billing cycles
when calculating the amount of interest charged in the current cycle, a
practice that is sometimes referred to as two- or double-cycle billing.
Sixth, institutions would have been prohibited from financing
security deposits or fees for the issuance or availability of credit
(such as account-opening fees or membership fees) if those deposits or
fees utilized the majority of the available credit on the account. The
proposal would also have required security deposits and fees exceeding
25 percent of the credit limit to be spread over the first year, rather
than charged as a lump sum during the first billing cycle.
Seventh, institutions making firm offers of credit advertising
multiple annual percentage rates or credit limits would have been
required to disclose in the solicitation the factors that determine
whether a consumer will qualify for the lowest annual percentage rate
and highest credit limit advertised.
Overdraft Services
The Agencies also proposed two provisions prohibiting unfair acts
or practices related to overdraft services in connection with consumer
deposit accounts. The proposed provisions were intended to ensure that
consumers understand the terms of overdraft services and have the
choice to avoid the associated costs where such services do not meet
their needs.
The first provision provided that it would be an unfair act or
practice for an institution to assess a fee or charge on a consumer's
account for paying an overdraft unless the institution provided the
consumer with the right to opt out of the institution's payment of
overdrafts and a reasonable opportunity to exercise the opt out, and
the consumer did not opt out. The proposed opt-out right would have
applied to all transactions that overdraw an account regardless of
whether the transaction is, for example, a check, an ACH transaction,
an ATM withdrawal, a recurring payment, or a debit card purchase at a
point of sale.
The second proposal would have prohibited certain acts or practices
associated with assessing overdraft fees in connection with debit
holds. Specifically, the proposal would have prohibited an institution
from assessing an overdraft fee if the overdraft was caused solely by a
hold placed on funds that exceeded the actual purchase amount of the
transaction, unless this purchase amount would have caused the
overdraft.
Comments on the May 2008 Proposal
The comment period for this proposal closed on August 4, 2008. The
Board received more than 60,000 comments on the May 2008 Proposal, more
than for any other regulatory proposal in its history. OTS received
approximately 5,200 comments. NCUA received approximately 1,000
comments. The overwhelming majority of these comments came from
individual consumers. A substantial majority of individual consumers
expressed support for the proposed rules, and many urged the Agencies
to go further in protecting consumers. The remaining comments came from
credit card issuers, banks, savings associations, credit unions, trade
associations, consumer groups, members of Congress, other federal
banking agencies, state and local governments, and others. These
commenters expressed varying views on the May 2008 Proposal. In
preparing this final rule, the Agencies considered the comments and the
accompanying information. To the extent that commenters addressed
specific aspects of the proposal, those comments are discussed below.
II. Statutory Authority Under the Federal Trade Commission Act To
Address Unfair or Deceptive Acts or Practices
A. Rulemaking and Enforcement Authority Under the FTC Act
Section 18(f)(1) of the FTC Act provides that the Board (with
respect to banks), OTS (with respect to savings associations), and the
NCUA (with
[[Page 5502]]
respect to federal credit unions) are responsible for prescribing
``regulations defining with specificity * * * unfair or deceptive acts
or practices, and containing requirements prescribed for the purpose of
preventing such acts or practices.'' 15 U.S.C. 57a(f)(1).\6\
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\6\ The FTC Act refers to OTS's predecessor agency, the Federal
Home Loan Bank Board (FHLBB), rather than to OTS. However, in
section 3(e) of HOLA, Congress transferred this rulemaking power of
the FHLBB, among others, to the Director of OTS. 12 U.S.C. 1462a(e).
The FTC Act refers to ``savings and loan institutions'' in some
provisions and ``savings associations'' in other provisions.
Although ``savings associations'' is the term currently used in the
HOLA, see, e.g., 12 U.S.C. 1462(4), the terms ``savings and loan
institutions'' and ``savings associations'' can be and are used
interchangeably. OTS has determined that the outdated language does
not affect OTS's rulemaking authority under the FTC Act.
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The FTC Act allocates responsibility for enforcing compliance with
regulations prescribed under section 18 with respect to banks, savings
associations, and federal credit unions among the Board, OTS, and NCUA,
as well as the OCC and the FDIC. See 15 U.S.C. 57a(f)(2)-(4). The FTC
Act grants the FTC rulemaking and enforcement authority with respect to
other persons and entities, subject to certain exceptions and
limitations. See 15 U.S.C. 45(a)(2); 15 U.S.C. 57a(a). The FTC Act,
however, sets forth specific rulemaking procedures for the FTC that do
not apply to the Agencies. See 15 U.S.C. 57a(b)-(e), (g)-(j); 15 U.S.C.
57a-3.\7\
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\7\ Some commenters suggested that the proposed rules were not
supported by sufficient evidence and that the Agencies should follow
the rulemaking procedures for the FTC under the FTC Act, which
include the requirement to hold informal hearings at which
interested parties may submit their positions and rebut the
positions of others. 15 U.S.C. 57a(c). As the commenters
acknowledge, this process applies only to the FTC. The Agencies
believe that the comment process provides a robust opportunity for
interested parties to express their views and provide relevant
information. This is confirmed by the unprecedented number of
comment letters received by the Agencies in response to the proposed
rules. In many cases, the data and other information necessary to
make informed judgments regarding the proposed rules is in the
possession of the institutions to which the rules would apply.
Although institutions generally consider this data proprietary, some
have chosen to submit certain information to the Agencies for
consideration as part of the public record. The Agencies have
carefully considered all public information in issuing the final
rule.
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In response to the May 2008 Proposal, industry commenters and the
OCC noted that the Board has stated in the past that enforcement of the
FTC Act's prohibition on unfair and deceptive practices is best handled
on a case-by-case basis because determinations of unfairness and
deception depend heavily on individual facts and circumstances.\8\
These commenters urged that the Agencies withdraw the proposed rules
and that the Board instead use its authority under TILA, the Electronic
Fund Transfer Act (EFTA), 15 U.S.C. 1693 et seq., or other statutes to
promulgate rules regarding consumer credit card accounts and overdraft
services on deposit accounts, respectively. One commenter suggested
that OTS instead use its authority under HOLA.
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\8\ See, e.g., Testimony of Randall S. Kroszner, Governor, Board
of Governors of the Federal Reserve System, before the H. Comm. on
Financial Services (June 13, 2007); Testimony of Sandra F.
Braunstein before the H. Subcomm. on Fin. Instits. & Consumer Credit
(Mar. 27, 2007); Letter from Ben S. Bernanke, Chairman, Board of
Governors of the Federal Reserve System, to the Hon. Barney Frank
(Mar. 21, 2006); Letter from Alan Greenspan, Chairman, Board of
Governors of the Federal Reserve System, to the Hon. John J. LaFalce
(May 30, 2002).
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As discussed in greater detail below in section VI of this
SUPPLEMENTARY INFORMATION, the Agencies agree that concerns about
overdraft services can be appropriately addressed using the Board's
authority under the EFTA. With respect to consumer credit card
accounts, however, the Agencies believe that use of their FTC Act
authority is appropriate. Although the Agencies continue to believe
that case-by-case enforcement is often the most effective means of
addressing unfair and deceptive practices, the practices addressed by
the final rule are or have been engaged in by a substantial number of
the institutions offering credit cards without significant material
variation in the facts and circumstances. As a result, case-by-case
enforcement by the banking agencies would not only be an inefficient
means of addressing these practices but could also lead to inconsistent
outcomes. Accordingly, the Agencies have determined that, in this
instance, promulgating regulations under the FTC Act is the most
effective way to address the practices at issue.\9\
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\9\ Industry commenters and the OCC raised concerns that,
because many of the practices prohibited by the proposed rules are
widely used, determinations by the Agencies that those practices are
unfair or deceptive under the FTC Act could lead to litigation under
similar state laws. As discussed below in Sec. VII of this
SUPPLEMENTARY INFORMATION, the Agencies do not intend these rules to
apply to acts or practices preceding the effective date and have
determined that, prior to the effective date, the prohibited
practices are not unfair under the FTC Act.
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B. Standards for Unfairness Under the FTC Act
Congress has codified standards developed by the FTC for its use in
determining whether acts or practices are unfair under section 5(a) of
the FTC Act.\10\ Specifically, the FTC Act provides that the FTC has no
authority to declare an act or practice unfair unless: (1) It causes or
is likely to cause substantial injury to consumers; (2) the injury is
not reasonably avoidable by consumers themselves; and (3) the injury is
not outweighed by countervailing benefits to consumers or to
competition. In addition, the FTC may consider established public
policy, but public policy may not serve as the primary basis for its
determination that an act or practice is unfair. See 15 U.S.C. 45(n).
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\10\ See 15 U.S.C. 45(n); FTC Policy Statement on Unfairness,
Letter from the FTC to the Hon. Wendell H. Ford and the Hon. John C.
Danforth, S. Comm. on Commerce, Science & Transp. (Dec. 17, 1980)
(FTC Policy Statement on Unfairness) (available at http://www.ftc.gov/bcp/policystmt/ad-unfair.htm).
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In proposing and finalizing rules under section 18(f)(1) of the FTC
Act, the Agencies have applied the statutory elements consistent with
the standards articulated by the FTC. The Board, FDIC, and OCC have
previously issued guidance generally adopting these standards for
purposes of enforcing the FTC Act's prohibition on unfair or deceptive
acts or practices.\11\ Although the OTS had not taken similar action in
generally applicable guidance prior to the May 2008 Proposal,\12\ the
commenters on OTS's ANPR who addressed this issue overwhelmingly urged
that any OTS action be consistent with the FTC's standards for
unfairness.
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\11\ See Board and FDIC, Unfair or Deceptive Acts or Practices
by State-Chartered Banks (Mar. 11, 2004) (available at http://www.federalreserve.gov/boarddocs/press/bcreg/2004/20040311/attachment.pdf); OCC Advisory Letter 2002-3, Guidance on Unfair or
Deceptive Acts or Practices (Mar. 22, 2002) (available at http://www.occ.treas.gov/ftp/advisory/2002-3.doc).
\12\ See OTS ANPR, 72 FR at 43573.
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According to the FTC, an unfair act or practice will almost always
represent a market failure or imperfection that prevents the forces of
supply and demand from maximizing benefits and minimizing costs.\13\
Not all market failures or imperfections constitute unfair acts or
practices, however. Instead, the central focus of the FTC's unfairness
analysis is whether the act or practice causes substantial consumer
injury.\14\
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\13\ Statement of Basis and Purpose and Regulatory Analysis for
Federal Trade Commission Credit Practices Rule (Statement for FTC
Credit Practices Rule), 49 FR 7740, 7744 (Mar. 1, 1984).
\14\ Id. at 7743.
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Substantial consumer injury. The FTC has stated that a substantial
consumer injury generally consists of monetary, economic, or other
tangible harm.\15\ Trivial or speculative harms do not constitute
substantial consumer injury.\16\ Consumer injury may be
[[Page 5503]]
substantial, however, if it imposes a small harm on a large number of
consumers or if it raises a significant risk of concrete harm.\17\
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\15\ See id.; FTC Policy Statement on Unfairness at 3.
\16\ See Statement for FTC Credit Practices Rule, 49 FR at 7743
(``[E]xcept in aggravated cases where tangible injury can be clearly
demonstrated, subjective types of harm--embarrassment, emotional
distress, etc.--will not be enough to warrant a finding of
unfairness.''); FTC Unfairness Policy Statement at 3 (``Emotional
impact and other more subjective types of harm * * * will not
ordinarily make a practice unfair.'').
\17\ See Statement for FTC Credit Practices Rule, 49 FR at 7743;
FTC Policy Statement on Unfairness at 3 & n.12.
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In response to the May 2008 Proposal, several commenters expressed
concern that the FTC's interpretation of substantial consumer injury is
overbroad and requested that the Agencies introduce a variety of
limitations. As noted above, the Agencies have adopted the FTC's
standards for determining whether an act or practice is unfair.
Accordingly, in the interest of uniform application of the FTC Act, the
Agencies decline to read in such limitations where the FTC has not done
so.\18\ Furthermore, the Agencies emphasize that a finding of consumer
injury does not, by itself, establish an unfair practice. Instead, as
discussed below and with respect to each of the prohibited practices,
the injury also must not be reasonably avoidable and must not be
outweighed by countervailing benefits to consumers or to competition.
Thus, while many practices that result in imposition of a fee or
assessment of interest may cause a substantial consumer injury, few may
satisfy the other elements of unfairness.
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\18\ See Am. Fin. Servs. Assoc. v. FTC, 767 F.2d 957, 978-83 (DC
Cir. 1985) (``In essence, petitioners ask the court to limit the
FTC's exercise of its unfairness authority to situations involving
deception, coercion, or withholding of material information. * * *
[D]espite considerable controversy over the bounds of the FTC's
authority, neither Congress nor the FTC has seen fit to delineate
the specific `kinds' of practices which will be deemed unfair within
the meaning of section 5.'').
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Injury is not reasonably avoidable. The FTC has stated that an
injury is not reasonably avoidable when consumers are prevented from
effectively making their own decisions about whether to incur that
injury.\19\ The marketplace is normally expected to be self-correcting
because consumers are relied upon to survey the available alternatives,
choose those that are most desirable, and avoid those that are
inadequate or unsatisfactory.\20\ Accordingly, the test is not whether
the consumer could have made a wiser decision but whether an act or
practice unreasonably creates or takes advantage of an obstacle to the
consumer's ability to make that decision freely.\21\
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\19\ See FTC Policy Statement on Unfairness at 3.
\20\ See Statement for FTC Credit Practices Rule, 49 FR at 7744
(``Normally, we can rely on consumer choice to govern the
market.''); FTC Policy Statement on Unfairness at 3.
\21\ See Statement for FTC Credit Practices Rule, 49 FR at 7744
(``In considering whether an act or practice is unfair, we look to
whether free market decisions are unjustifiably hindered.''); FTC
Policy Statement on Unfairness at 3 & n.19 (``In some senses any
injury can be avoided--for example, by hiring independent experts to
test all products in advance, or by private legal actions for
damages--but these courses may be too expensive to be practicable
for individual consumers to pursue.'').
---------------------------------------------------------------------------
In response to the May 2008 Proposal, several industry commenters
argued that an injury resulting from the operation of a contractual
provision is always reasonably avoidable because the consumer could
read the contract and decide not to enter into it. These commenters
further argued that institutions could not be held responsible for
consumers' failure to read or understand the contract or the
disclosures provided by the institution. These arguments, however, are
inconsistent with the FTC's application of the unfairness analysis in
support of its Credit Practices Rule, where the FTC determined that
consumers could not reasonably avoid injuries caused by otherwise valid
contractual provisions.\22\ Furthermore, as discussed below, many of
the practices at issue either create the complexity that acts as an
obstacle to consumers' ability to make free and informed decisions or
take advantage of that complexity by assessing interest or fees when a
consumer fails to understand the practice.\23\
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\22\ See Statement for FTC Credit Practices Rule, 49 FR 7740 et
seq.; see also Am. Fin. Servs. Assoc., 767 F.2d at 978-83 (upholding
the FTC's analysis).
\23\ One commenter stated that the following language from the
FTC Policy Statement on Unfairness suggested that complexity alone
is not sufficient to make injury unavoidable: ``A seller's failure
to present complex technical data on his product may lessen a
consumer's ability to choose * * * but may also reduce the initial
price he must pay for the article.'' FTC Policy Statement on
Unfairness at 3. The Agencies note that the FTC included this
example in its discussion of whether injury is outweighed by
countervailing benefits, not whether the injury is reasonably
avoidable.
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Injury is not outweighed by countervailing benefits. The FTC has
stated that the act or practice causing the injury must not also
produce benefits to consumers or competition that outweigh the
injury.\24\ Generally, it is important to consider both the costs of
imposing a remedy and any benefits that consumers enjoy as a result of
the practice.\25\ The FTC has stated that both consumers and
competition benefit from prohibitions on unfair or deceptive acts or
practices because prices may better reflect actual transaction costs
and merchants who do not rely on unfair or deceptive acts or practices
are no longer required to compete with those who do.\26\
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\24\ See Statement for FTC Credit Practices Rule, 49 FR at 7744;
FTC Policy Statement on Unfairness at 3; see also S. Rep. 103-130,
at 13 (1994), reprinted in 1994 U.S.C.C.A.N. 1776, 1788 (``In
determining whether a substantial consumer injury is outweighed by
the countervailing benefits of a practice, the Committee does not
intend that the FTC quantify the detrimental and beneficial effects
of the practice in every case. In many instances, such a numerical
benefit-cost analysis would be unnecessary; in other cases, it may
be impossible. This section would require, however, that the FTC
carefully evaluate the benefits and costs of each exercise of its
unfairness authority, gathering and considering reasonably available
evidence.'').
\25\ See FTC Public Comment on OTS-2007-0015, at 6 (Dec. 12,
2007) (available at http://www.ots.treas.gov/docs/9/963034.pdf).
\26\ See FTC Public Comment on OTS-2007-0015, at 8 (citing
Preservation of Consumers' Claims and Defenses, Statement of Basis
and Purpose, 40 FR 53506, 53523 (Nov. 18, 1975) (codified at 16 CFR
433)); see also FTC Policy Statement on Deception, Letter from the
FTC to the Hon. John H. Dingell, H. Comm. on Energy & Commerce (Oct.
14, 1983) (FTC Policy Statement on Deception) (available at http://www.ftc.gov/bcp/policystmt/ad-decept.htm) (``Deceptive practices
injure both competitors and consumers because consumers who
preferred the competitor's product are wrongly diverted.'').
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Public policy. As noted above, the FTC may consider established
public policy in making an unfairness determination, but public policy
may not serve as the primary basis for such a determination.\27\ For
purposes of the unfairness analysis, public policy is generally
embodied in a statute, regulation, or judicial decision.\28\ As
discussed below, the Agencies have considered various authorities cited
by commenters as evidence of public policy.\29\ At no point, however,
have the Agencies used public policy as the primary basis for a
determination that a practice was unfair.
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\27\ See 15 U.S.C. 45(n); Board and FDIC, Unfair or Deceptive
Acts or Practices by State-Chartered Banks at 3-4 (``Public policy,
as established by statute, regulation, or judicial decisions may be
considered with all other evidence in determining whether an act or
practice is unfair.'').
\28\ See, e.g., FTC Policy Statement on Unfairness at 5 (stating
that public policy ``should be clear and well-established'' and
``should be declared or embodied in formal sources such as statutes,
judicial decisions, or the Constitution as interpreted by the court
* * *'').
\29\ Several commenters urged the Agencies to consider the
safety and soundness of financial institutions either under the
countervailing benefits prong or as public policy. To the extent
that these commenters raised specific safety and soundness concerns,
those concerns are addressed below.
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Some commenters argued that section 18(f)(1) of the FTC Act
prevents the Board from issuing final rules that would seriously
conflict with the Board's essential monetary and payments systems
policies. The language cited by the commenters, however, does not apply
to this rulemaking. Instead, this language creates an exception to the
general requirement that the Board promulgate
[[Page 5504]]
regulations substantially similar to those issued by the FTC if the
Board ``finds that implementation of similar regulations with respect
to banks, savings and loan institutions or Federal credit unions would
seriously conflict with essential monetary and payments systems
policies of such Board, and publishes any such finding, and the reasons
therefore, in the Federal Register.'' \30\ Nevertheless, to the extent
a commenter has cited a specific monetary or payments systems policy
that may conflict with one of these rules, the Agencies have considered
that potential conflict below.
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\30\ 15 U.S.C. 57a(f)(1) (third sentence).
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C. Standards for Deception Under the FTC Act
The FTC has also adopted standards for determining whether an act
or practice is deceptive under the FTC Act.\31\ Under the FTC's
standards, an act or practice is deceptive where: (1) There is a
representation or omission of information that is likely to mislead
consumers acting reasonably under the circumstances; and (2) that
information is material to consumers.\32\ Although these standards have
not been codified, they have been applied by numerous courts.\33\
Accordingly, in proposing rules under section 18(f)(1) of the FTC Act,
the Agencies applied the standards articulated by the FTC for
determining whether an act or practice is deceptive.\34\
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\31\ FTC Policy Statement on Deception.
\32\ Id. at 1-2. The FTC views deception as a subset of
unfairness but does not apply the full unfairness analysis because
deception is very unlikely to benefit consumers or competition and
consumers cannot reasonably avoid being harmed by deception. Id.
\33\ See, e.g., FTC v. Tashman, 318 F.3d 1273, 1277 (11th Cir.
2003); FTC v. Gill, 265 F.3d 944, 950 (9th Cir. 2001); FTC v. QT,
Inc., 448 F. Supp. 2d 908, 957 (N.D. Ill. 2006); FTC v. Think
Achievement, 144 F. Supp. 2d 993, 1009 (N.D. Ind. 2000); FTC v.
Minuteman Press, 53 F. Supp. 2d 248, 258 (E.D.N.Y. 1998).
\34\ As noted above, the Board, FDIC, and OCC have issued
guidance generally adopting these standards for purposes of
enforcing the FTC Act's prohibition on unfair or deceptive acts or
practices. As with the unfairness standard, comments on OTS's ANPR
addressing this issue overwhelmingly urged the OTS to adopt the same
deception standard as the FTC.
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A representation or omission is deceptive if the overall net
impression created is likely to mislead consumers.\35\ The FTC conducts
its own analysis to determine whether a representation or omission is
likely to mislead consumers acting reasonably under the
circumstances.\36\ When evaluating the reasonableness of an
interpretation, the FTC considers the sophistication and understanding
of consumers in the group to whom the act or practice is targeted.\37\
If a representation is susceptible to more than one reasonable
interpretation, and if one such interpretation is misleading, then the
representation is deceptive even if other, non-deceptive
interpretations are possible.\38\
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\35\ See, e.g., FTC v. Cyberspace.com, 453 F.3d 1196, 1200 (9th
Cir. 2006); Gill, 265 F.3d at 956; Removatron Int'l Corp. v. FTC,
884 F.2d 1489, 1497 (1st Cir. 1989).
\36\ See FTC v. Kraft, Inc., 970 F.2d 311, 319 (7th Cir. 1992);
QT, Inc., 448 F. Supp. 2d at 958.
\37\ FTC Policy Statement on Deception at 3.
\38\ Id.
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A representation or omission is material if it is likely to affect
the consumer's conduct or decision regarding a product or service.\39\
Certain types of claims are presumed to be material, including express
claims and claims regarding the cost of a product or service.\40\
---------------------------------------------------------------------------
\39\ Id. at 2, 6-7.
\40\ See FTC Public Comment on OTS-2007-0015, at 21; FTC Policy
Statement on Deception at 6; see also FTC v. Pantron I Corp., 33
F.3d 1088, 1095-96 (9th Cir. 1994); In re Peacock Buick, 86 F.T.C.
1532, 1562 (1975), aff'd 553 F.2d 97 (4th Cir. 1977).
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D. Choice of Remedy
The Agencies have wide latitude to determine what remedy is
necessary to prevent an unfair or deceptive act or practice so long as
that remedy has a reasonable relation to the act or practice.\41\ The
Agencies have carefully considered the potential remedies for
addressing each practice and have adopted the remedy that, in the
Agencies' judgment, is effective in preventing that practice while
minimizing the burden on institutions.
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\41\ See Am. Fin. Servs. Assoc., 767 F.2d at 988-89 (citing
Jacob Siegel Co. v. FTC, 327 U.S. 608, 612-13 (1946)).
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III. Summary of Final Rule
Based on the comments and further analysis, the Agencies have
revised the proposed rules substantially. As discussed in greater
detail below, the Agencies are not taking action on some aspects of the
proposed rule at this time. However, the Agencies note that this rule
is not intended to identify all unfair or deceptive acts or practices,
even with regard to consumer credit card accounts. Accordingly, the
fact that a particular act or practice is not addressed by today's
final rule does not limit the ability of any agency to make a
determination that it is unfair or deceptive. As noted elsewhere, to
the extent that specific practices raise concerns regarding unfairness
or deception under the FTC Act, the Agencies plan to continue to
address those practices on a case-by-case basis through supervisory and
enforcement actions.
Credit Practices Rule
The Agencies proposed to make certain non-substantive,
organizational changes to their respective versions of the Credit
Practices Rule. These changes are adopted as proposed except for one
additional nonsubstantive clarification to the scope paragraph of OTS's
rule.
OTS also solicited comment on eliminating the section of its rule
on state exemptions. 73 FR at 28911. OTS is eliminating that section as
discussed in section IV of this SUPPLEMENTARY INFORMATION.
Consumer Credit Card Accounts
In May 2008, the Agencies proposed several provisions under the FTC
Act related to consumer credit card accounts. As discussed below, based
on the comments and further analysis, the Agencies have adopted five
provisions designed to protect consumers who use credit cards from
unfair acts or practices.
First, the Agencies have adopted the proposed rule prohibiting
institutions from treating a payment as late for any purpose unless
consumers have been provided a reasonable amount of time to make that
payment. The Agencies have also adopted the proposed safe harbor
providing that institutions may comply with this requirement by
adopting reasonable procedures designed to ensure that periodic
statements are mailed or delivered at least 21 days before the payment
due date. Elsewhere in today's Federal Register, the Board has adopted
two additional proposals under Regulation Z that further ensure that
consumers receive a reasonable amount of time to make payment.
Specifically, the Board has revised 12 CFR 226.10(b) to seek to ensure
that creditors do not set cut-off times for mailed payments earlier
than 5 p.m. at the location specified by the creditor for receipt of
such payments. The Board has also adopted 12 CFR 226.10(d), which
requires that, if the due date for payment is a day on which the U.S.
Postal Service does not deliver mail or the creditor does not accept
payment by mail, the creditor may not treat a payment received by mail
the next business day as late for any purpose.
Second, the Agencies have adopted a revised version of the proposed
rule regarding allocation of payments when different annual percentage
rates apply to different balances on a consumer credit card account.
The final rule requires institutions to allocate amounts paid in excess
of the minimum payment either by applying the entire amount
[[Page 5505]]
first to the balance with the highest annual percentage rate or by
splitting the amount pro rata among the balances.
Third, the Agencies have revised the proposed rule regarding
increases in annual percentage rates to require institutions to
disclose at account opening the rates that will apply to the account
and to prohibit institutions from increasing annual percentage rates
unless expressly permitted. Institutions are permitted to increase a
rate disclosed at account opening at the expiration of a specified
period, provided that the increased rate was also disclosed at account
opening. After the first year following opening of the account,
institutions are also permitted to increase rates for new transactions
so long as the institution complies with the 45-day advance notice
requirement in Regulation Z (adopted by the Board elsewhere in today's
Federal Register). In addition, institutions may increase a variable
rate due to the operation of an index and increase a rate when the
consumer is more than 30 days' delinquent.
Fourth, the Agencies have adopted the proposed rule prohibiting
institutions from imposing finance charges based on balances for days
in billing cycles that precede the most recent billing cycle as a
result of the loss of a grace period. This rule generally prohibits
institutions from reaching back to earlier billing cycles when
calculating the amount of interest charged in the current cycle, a
practice that is sometimes referred to as two- or double-cycle billing.
Fifth, the Agencies have adopted a revised version of the proposed
rule regarding the financing of security deposits or fees for the
issuance or availability of credit (such as account-opening fees or
membership fees). The final rule prohibits institutions from financing
security deposits or fees for the issuance or availability of credit
if, during the first year after account opening, those deposits or fees
consume the majority of the available credit on the account. In
addition, the Agencies have adopted a requirement that security
deposits and fees exceeding 25 percent of the credit limit to be spread
over no less than the first six months, rather than charged as a lump
sum during the first billing cycle. Furthermore, elsewhere in today's
Federal Register, the Board has adopted revisions to Regulation Z
requiring creditors that collect or obtain a consumer's agreement to
pay a fee before providing account-opening disclosures to permit that
consumer to reject the plan after receiving the disclosures and, if the
consumer does so, to refund any fee collected or to take any other
action necessary to ensure the consumer is not obligated to pay the
fee.
Finally, the Agencies are not taking action at this time on the
proposed rule addressing holds placed on available credit. As discussed
below, the Board is proposing to address holds placed on available
funds in a deposit account using its authority under Regulation E. In
addition, the Agencies are not taking action at this time on the
proposed rule regarding firm offers of credit advertising multiple
annual percentage rates or credit limits. Concerns about this practice
are addressed by amendments to Regulation Z adopted by the Board
elsewhere in today's Federal Register. The Agencies plan to rely on
case-by-case supervisory and enforcement actions in appropriate
circumstances where practices regarding credit holds or firm offers of
credit raise unfairness or deception concerns.
Overdraft Services
The Agencies are not taking action on overdraft services on deposit
accounts or debit holds at this time. As discussed below, the Board has
published a separate proposal addressing these issues under Regulation
E elsewhere in today's Federal Register. The Agencies will review
information obtained through that rulemaking to determine whether to
take further action.
IV. Section-by-Section Analysis of the Credit Practices Subpart
On March 1, 1984, the FTC adopted its Credit Practices Rule
pursuant to its authority under the FTC Act to promulgate rules that
define and prevent unfair or deceptive acts or practices in or
affecting commerce.\42\ The FTC Act provides that, whenever the FTC
promulgates a rule prohibiting specific unfair or deceptive practices,
the Board, OTS (as the successor to the Federal Home Loan Bank Board),
and NCUA must adopt substantially similar regulations imposing
substantially similar requirements with respect to banks, savings
associations, and federal credit unions within 60 days of the effective
date of the FTC's rule unless the agency finds that such acts or
practices by banks, savings associations, or federal credit unions are
not unfair or deceptive or the Board finds that the adoption of similar
regulations for banks, savings associations, or federal credit unions
would seriously conflict with essential monetary and payment-systems
policies of the Board. The Agencies have previously adopted rules
substantially similar to the FTC's Credit Practices Rule.\43\
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\42\ See 42 FR 7740 (Mar. 1, 1984) (codified at 16 CFR part
444); see also 15 U.S.C. 57a(a)(1)(B), 45(a)(1).
\43\ See 12 CFR part 227, subpart B (Board); 12 CFR 535 (OTS);
12 CFR 706 (NCUA).
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As part of this rulemaking, the Agencies proposed to reorganize
aspects of their respective Credit Practices Rules. Although the
Agencies have approached these revisions differently in some respects,
the Agencies do not intend to create any substantive difference among
their respective rules and believe that these rules remain
substantially similar to the FTC's Credit Practices Rule. Except as
otherwise stated below, the Agencies did not receive comments on this
portion of the proposal.
Subpart A--General Provisions
Subpart A contains general provisions that apply to the entire
part. As discussed below, there are some differences among the
Agencies' proposals.
Section --.1 Authority, purpose, and scope \44\
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\44\ The Board, OTS, and NCUA have placed these rules in,
respectively, parts 227, 535, and 706 of title 12 of the Code of
Federal Regulations. For each reference, the discussion in this
SUPPLEMENTARY INFORMATION uses the shared numerical suffix of each
agency's rule. For example, Sec. --.1 will be codified at 12 CFR
227.1 by the Board, 12 CFR 535.1 by OTS, and 12 CFR 706.1 by NCUA.
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The provisions in proposed Sec. --.1 were largely drawn from the
current authority, purpose, and scope provisions in the Agencies'
respective Credit Practices Rules. As discussed below, Sec. --.1 is
generally adopted as proposed.
Section --.1(a) Authority
Proposed Sec. --.1(a) provided that the Agencies issued this part
under section 18(f) of the FTC Act. Section --.1(a) is adopted largely
as proposed.
One commenter urged that OTS should use safety and soundness
authority as the legal basis for this rule, including its authority
under HOLA. While OTS disagrees with this commenter to the extent that
it argued that OTS should use its safety and soundness authority
instead of its FTC Act authority, OTS agrees that HOLA serves as an
appropriate secondary basis for OTS's portion of the rule. Accordingly,
OTS is inserting express references to HOLA in its rule (including
Sec. 535.1(a)) to reflect that HOLA serves as an independent secondary
basis for OTS's final rule.
HOLA provides authority for both safety and soundness and consumer
protection regulations. Consequently, HOLA serves as a secondary,
[[Page 5506]]
independent basis for OTS's rule. Using HOLA as a basis for this
rulemaking was discussed in the SUPPLEMENTARY INFORMATION that
accompanied the OTS's August 6, 2007 ANPR (72 FR at 43572-43573), was
reflected in the preamble to the proposed rule and proposed rule text
(73 FR at 28910 and 28948), and is also discussed further in the
section-by-section analysis of Sec. 535.26 in this SUPPLEMENTARY
INFORMATION.
With regard to safety and soundness, HOLA section 4(a) (12 U.S.C.
1463(a)) authorizes the Director of OTS to issue regulations governing
savings associations that the Director determines to be appropriate to
carry out his responsibilities, including providing for the
examination, safe and sound operation, and regulation of savings
associations. The Director of OTS has used HOLA authority to issue
regulations requiring savings associations to operate safely and
soundly.\45\ Existing OTS rules also allow the agency to impose limits
on credit card lending, if a savings association's concentration in
such lending presents a safety and soundness concern.\46\ All of the
practices addressed in the rule will advance the safety and soundness
of consumer credit card lending by savings associations such as by
reducing reputation risk, as well as the risk of litigation under state
contract laws and, where applicable, state laws prohibiting unfair or
deceptive acts or practices.
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\45\ See, e.g., 12 CFR 563.161(a) (OTS management and financial
policies rule).
\46\ See 12 CFR 560.30 and Endnote 6.
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With regard to consumer protection, HOLA section 5(a) (12 U.S.C.
1464(a)) authorizes the Director of OTS to regulate federal savings
associations giving primary consideration to the best practices of
thrift institution in the United States. As courts have consistently
and repeatedly recognized for decades, HOLA empowered OTS and its
predecessor agency, the Federal Home Loan Bank Board (FHLBB), to adopt
comprehensive rules and regulations governing the operations of federal
savings associations.\47\ Consequently, OTS has a history of using HOLA
as the legal basis for consumer protection regulations. Examples
include the OTS Advertising Rule,\48\ OTS rules that limit home loan
late charges, prepayment penalties, and adjustments to the interest
rate, payment, balance, or term to maturity,\49\ as well as the
portions of the OTS Nondiscrimination Rule that exceed Equal Credit
Opportunity Act and Fair Housing Act requirements.\50\ All of the
practices addressed in the rule will help protect consumers.
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\47\ As stated in Fid. Fed. Sav. & Loan Ass'n v. de la Cuesta,
458 U.S. 141, 144-45 (1982):
The [FHLBB], an independent federal regulatory agency, was
formed in 1932 and thereafter was vested with plenary authority to
administer [HOLA] * * *. Section 5(a) of the HOLA * * * empowers the
Board, ``under such rules and regulations as it may prescribe, to
provide for the organization, incorporation, examination, operation,
and regulation of associations to be known as `Federal Savings and
Loan Associations.' '' Pursuant to this authorization, the [FHLBB]
has promulgated regulations governing ``the powers and operations of
every Federal savings and loan association from its cradle to its
corporate grave.'' People v. Coast Federal Savings and Loan Ass'n,
98 F. Supp. 311, 316 (S.D. Cal. 1951).
Accord Conference of Federal Savings and Loan Associations v.
Stein, 604 F.2d 1256, 1260 (9th Cir. 1979), aff'd mem., 445 U.S. 921
(1980) (recognizing the ``pervasive'' and ``broad'' regulatory
control of the FHLBB over federal savings associations granted by
HOLA).
\48\ 12 CFR 563.27.
\49\ 12 CFR 560.33, 12 CFR 560.34, and 12 CFR 560.35.
\50\ 12 CFR part 528.
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Section --.1(b) Purpose
Proposed Sec. --.1(b) provided that the purpose of the part is to
prohibit unfair or deceptive acts or practices in violation of section
5(a)(1) of the FTC Act, 15 U.S.C. 45(a)(1). It further provided that
the part contains provisions that define and set forth requirements
prescribed for the purpose of preventing specific unfair or deceptive
acts or practices. In May 2008, the Agencies noted that these
provisions define and prohibit specific unfair or deceptive acts or
practices within a single provision, rather than setting forth the
definitions and remedies separately. Finally, proposed Sec. --.1(b)
clarified that the prohibitions in subparts B, C, and D do not limit
the Agencies' authority to enforce the FTC Act with respect to other
unfair or deceptive acts or practices.
The Agencies have revised proposed Sec. --.1(b) to reflect their
decision not to take action on proposed subpart D at this time. Also,
OTS has added an express reference to HOLA in Sec. 535.1(b).
Otherwise, this provision is adopted as proposed.
Section --.1(c) Scope
Proposed Sec. --.1(c) described the scope of each agency's rules.
The Agencies each tailored this paragraph to describe those entities to
which their part applies.
The Board's proposed provision stated that the Board's rules would
apply to banks and their subsidiaries, except savings associations as
defined in 12 U.S.C. 1813(b). It further explained that enforcement of
the Board's rules is allocated among the Board, the OCC, and the FDIC,
depending on the type of institution. This provision was updated to
reflect intervening changes in law. The Board also proposed to revise
its Staff Guidelines to the Credit Practices Rule to remove questions
11(c)-1 and 11(c)-2, to update the substance of its answers to those
questions, and to publish those answers as commentary to proposed Sec.
227.1(c). See proposed Board comments 227.1(c)-1 and -2. As proposed,
the remaining questions and answers in the Board's Staff Guidelines
would remain in place. The Board has adopted these proposals without
alteration.
OTS's proposed provision stated that its rules apply to savings
associations and subsidiaries owned in whole or in part by a savings
association. OTS also enforces compliance with respect to these
institutions. As proposed, the entire OTS part would have the same
scope. In May 2008, OTS noted that this scope is somewhat different
from the scope of its existing Credit Practices Rule. Prior to today's
revisions, OTS's Credit Practices Rule applied to savings associations
and service corporations that were wholly owned by one or more savings
associations, which engaged in the business of providing credit to
consumers. Since the proposed rules would cover more practices than
consumer credit, the proposal deleted the reference to engaging in the
business of providing credit to consumers. The proposal also updated
the reference to wholly owned service corporations to refer instead to
subsidiaries in order to reflect the current terminology used in OTS's
Subordinate Organizations Rule.\51\
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\51\ 12 CFR part 559. OTS has substantially revised this rule
since promulgating its Credit Practices Rule. See, e.g.,
Subsidiaries and Equity Investments: Final Rule, 61 FR 66561 (Dec.
18, 1996).
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Only one commenter addressed the scope of OTS's proposed rule. It
supported applying the rule to savings associations and subsidiaries as
proposed. Another commenter requested clarification of which entities
the rule refers to as ``you.'' OTS is finalizing the scope as proposed
but clarifying through a parenthetical in Sec. 535.1(c) that the term
``you'' refers to savings associations and subsidiaries owned in whole
or in part by a savings association.
The NCUA's proposed provision stated that its rules would apply to
federal credit unions. This provision is adopted as proposed.
Section 227.1(d) Definitions
Proposed Sec. --.1(d) of the Board's rule would have clarified
that, unless
[[Page 5507]]
otherwise noted, terms used in the Board's proposed Sec. --.1(c) that
are not defined in the FTC Act or in section 3(s) of the Federal
Deposit Insurance Act (12 U.S.C. 1813(s)) have the meaning given to
them in section 1(b) of the International Banking Act of 1978 (12
U.S.C. 3101). This provision is adopted as proposed.
OTS and NCUA did not have a need for a comparable subsection so
none was included in their proposed rules.
Section 227.2 Consumer-Complaint Procedure
In order to accommodate the revisions discussed above, the Board
proposed to consolidate the consumer complaint provisions previously
located in 12 CFR 227.1 and 227.2 in proposed Sec. 227.2. The Board
has revised the proposal for clarity and to include an e-mail address
and Web site where consumers can submit complaints. Otherwise, this
provision is adopted as proposed.
OTS and NCUA do not have and did not propose to add comparable
provisions.\52\
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\52\ Longstanding OTS and NCUA complaint procedures are
available to consumers and the public at http://www.ots.treas.gov
and http://www.ncua.gov.
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Subpart B--Credit Practices
Each agency has placed the substantive provisions of their Credit
Practices Rule in Subpart B. In order to retain the current numbering
in its Credit Practices Rule, the Board has reserved 12 CFR 227.11,
which previously contained the Board's statement of authority, purpose,
and scope. The other provisions of the Board's Credit Practices Rule
(Sec. Sec. 227.12 through 227.16) have not been revised.
As discussed below, OTS proposed several notable changes to its
version of Subpart B. Except as otherwise stated, these sections have
been adopted as proposed.
Section 535.11 Definitions (Previously Sec. 535.1)
OTS received no comments on its proposed changes to this section
and is finalizing it as proposed. OTS has deleted the definitions of
``Act,'' ``creditor,'' and ``savings association'' as unnecessary. It
has substituted the term ``you'' for ``savings association'' or
``creditor'' in the definitions of ``consumer credit'' and
``obligation'' as applicable. For the convenience of the user, OTS has
also incorporated the definition of ``consumer credit'' into this
section, instead of using a cross-reference to a definition contained
in a different part of OTS's rules. OTS has moved the definition of
``cosigner'' to the section on unfair or deceptive cosigner practices.
OTS has also merged the definition of ``debt'' into the definition of
``collecting a debt'' contained in the section on late charges.
Finally, OTS has moved the definition of ``household goods'' to the
section on unfair credit contract provisions.
Section 535.12 Unfair Credit Contract Provisions (Previously Sec.
535.2)
OTS received no comments on its proposed changes to this section
and is finalizing it as proposed. OTS has revised the title of this
section to reflect its focus on credit contract provisions. OTS has
also deleted the obsolete reference to extensions of credit after
January 1, 1986.
Section 535.13 Unfair or Deceptive Cosigner Practices (Previously Sec.
535.3)
OTS received no comments on its proposed changes to this section
and is finalizing it as proposed. OTS has deleted the obsolete
reference to extensions of credit after January 1, 1986. OTS has
substituted the term ``substantially similar'' for the term
``substantially equivalent'' in referencing a document that equates to
the cosigner notice for consistency with the Board's rule and to avoid
confusion with the term of art ``substantial equivalency'' used in the
Board's section on state exemptions. OTS has also clarified that the
date that may be stated on the cosigner notice is the date of the
transaction. NCUA has made similar amendments to its rule in Sec.
706.13 (previously Sec. 706.3).
Section 535.14 Unfair Late Charges (Previously Sec. 535.4)
OTS received no comments on its proposed changes to this section
and is finalizing it as proposed. OTS has revised the title of this
section to reflect its focus on unfair late charges. OTS has deleted
the obsolete reference to extensions of credit after January 1, 1986.
Similarly, NCUA has made similar revisions to Sec. 706.14 (previously
Sec. 706.4).
Section 535.15 State Exemptions (Previously Sec. 535.5)
OTS proposed to revise the subsection on delegated authority to
update the current title of the OTS official with delegated authority
to make determinations under this section. As discussed below, however,
OTS has removed Sec. 535.5 from codification and has not replaced it
with proposed Sec. 535.15.
The FTC's Credit Practices Rule included a provision allowing
states to seek exemptions from the rule if state law affords a greater
or substantially similar level of protection. See 16 CFR 444.5. The
Agencies adopted similar provisions in their respective Credit
Practices Rules. See 12 CFR 227.16; 12 CFR 535.5; 12 CFR 706.5. The May
2008 Proposal did not extend this provision to the proposed rules for
consumer credit card accounts and overdraft services because there was
no legal requirement to do so.\53\ The Agencies noted that only three
states have been granted exemptions under the Credit Practices
Rule.\54\ The Agencies stated that, because the exemption is available
when state law is ``substantially equivalent'' to the federal rule, an
exemption may provide little relief from regulatory burden while
undermining the uniform application of federal standards. Accordingly,
the Agencies requested comment on whether states should be permitted to
seek exemption from the proposed rules on consumer credit card accounts
and overdraft services if state law affords a greater or substantially
similar level of protection. In addition, OTS requested comment on
whether the state exemption provision in its Credit Practices Rule
should be retained.
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\53\ The provision requiring consideration of requests for
exemption from rules promulgated under the FTC Act applies only to
the FTC. See 12 U.S.C. 57a(g).
\54\ The Board and the FTC have granted exemptions to Wisconsin,
New York, and California. 51 FR 24304 (July 3, 1986) (FTC exemption
for Wisconsin); 51 FR 28238 (Aug. 7, 1986) (FTC exemption for New
York); 51 FR 41763 (Nov. 19, 1986) (Board exemption for Wisconsin);
52 FR 2398 (Jan. 22, 1987) (Board exemption for New York); 53 FR
19893 (June 1, 1988) (FTC exemption for California); 53 FR 29233
(Aug. 3, 1988) (Board exemption for California). The Federal Home
Loan Bank Board (``FHLBB''), OTS's predecessor agency, granted an
exemption to Wisconsin. 51 FR 45879 (Dec. 23, 1986). The NCUA has
not granted any exemptions.
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The Agencies received only a few comments on state exemptions. One
consumer advocacy organization urged the Agencies to expand the
opportunity for state exemptions to the final rule as a way to ensure a
consumer private right of action under state law and to enable states
to develop new protections. In contrast, several financial institutions
opposed allowing states to seek exemption from practices addressed in
the final rule. They argued that allowing such exemptions would provide
no meaningful regulatory burden relief and would interfere with
consistent implementation of the final rule.
The Agencies have decided not to extend the opportunity for state
exemptions to the final rule. First, as noted above, the FTC Act does
not require the Agencies to provide such an opportunity. Second,
requiring all
[[Page 5508]]
institutions under the Agencies' jurisdiction to comply with the final
rule will enhance consumer protections nationwide and facilitate
uniformity in examinations.
OTS received a few comments on whether it should retain the
existing state exemption provision in its Credit Practices Rule. The
comments on this issue largely tracked those discussed above concerning
whether to expand the availability of state exemptions to new practices
addressed in the final rule. In addition, one organization representing
state banking interests supported preserving state laws that afford
more protection to consumers than the federal rule.
A few comments reflect confusion about how the availability or
unavailability of state exemptions would affect federal savings
associations. Eliminating the availability of exemptions under the OTS
Credit Practices Rule will have no direct effect on federal savings
associations. Apparently, the only state exemption granted by OTS or
its predecessor is to the State of Wisconsin for substantially
equivalent provisions of the Wisconsin Consumer Act. That exemption
only applied to state-chartered savings associations; it specifically
did not extend to federal savings associations.\55\
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\55\ See Prohibited Consumer Credit Practices; Request for
Exemption by State of Wisconsin, 51 FR 45879 (Dec. 23, 1986) (``It
is well established that the [FHLBB] has exclusive authority to
regulate all aspects of the operations of federally chartered
associations under section 5 of [HOLA]. See, e.g., 12 CFR 545.2.
Federally chartered associations will therefore continue to be
subject to the rule rather than the Wisconsin Act, and the [FHLBB]
will continue to examine them for compliance with the Rule.'').
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For the same reasons the Agencies are not extending the opportunity
for state exemptions to apply to new practices addressed in the final
rule, OTS is removing Sec. 535.5 and eliminating the existing state
exemption authority under its rule. Accordingly, the exemption granted
to Wisconsin and any other exemptions which may have been granted by
OTS or its predecessor with respect to its Credit Practices Rule will
cease to be in effect as of this rule's effective date.
V. Section-by-Section Analysis of the Consumer Credit Card Practices
Subpart
Pursuant to their authority under 15 U.S.C. 57a(f)(1), the Agencies
adopt rules prohibiting specific unfair acts or practices with respect
to consumer credit card accounts. A secondary basis for OTS's rule is
HOLA. These rules are located in a new Subpart C to the Agencies'
respective regulations under the FTC Act.
Section --.21--Definitions
Section --.21 defines certain terms used in Subpart C.
Section --.21(a) Annual Percentage Rate
Proposed Sec. --.21(a) defined ``annual percentage rate'' as the
product of multiplying each periodic rate for a balance or transaction
on a consumer credit card account by the number of periods in a year.
This definition corresponded to the definition of ``annual percentage
rate'' in 12 CFR 226.14(b). As discussed in the Board's official staff
commentary to 12 CFR 226.14(b), this computation does not reflect any
particular finance charge or periodic balance. See 12 CFR 226.14
comment 226.14(b)-1. This definition also incorporated the definition
of ``periodic rate'' from Regulation Z. See 12 CFR 226.2.
The Agencies did not receive any significant comments on this
definition. Accordingly, it is adopted as proposed.
Section --.21(b) Consumer
Proposed Sec. --.21(b) defined ``consumer'' as a natural person to
whom credit is extended under a consumer credit card account or a
natural person who is a co-obligor or guarantor of a consumer credit
card account. The Agencies did not receive any significant comments on
this definition. Accordingly, it is adopted as proposed.
Section --.21(c) Consumer Credit Card Account
Proposed Sec. --.21(c) defined ``consumer credit card account'' as
an account provided to a consumer primarily for personal, family, or
household purposes under an open-end credit plan that is accessed by a
credit or charge card. This definition incorporated the definitions of
``open-end credit,'' ``credit card,'' and ``charge card'' from
Regulation Z. See 12 CFR 226.2. Under the proposed definition, a number
of accounts would have been excluded consistent with exceptions to
disclosure requirements for credit and charge card applications and
solicitations. See 12 CFR 226.5a(a)(5). For example, home-equity plans
accessible by a credit card and lines of credit accessible by a debit
card are not covered by proposed Sec. --.21(c).
One consumer group requested that this definition be expanded to
cover debit cards with a linked credit card feature. The Agencies do
not believe any change is necessary because, to the extent such cards
meet the definition of ``credit card'' under 12 CFR 226.2, they are
covered. Accordingly, this definition is adopted as proposed.
Proposed Section --.21(d) Promotional Rate
Proposed Sec. --.21(d) defined ``promotional rate.'' This
definition was similar to the definition of ``promotional rate''
proposed by the Board in 12 CFR 226.16(e)(2) in the May 2008 Regulation
Z Proposal. See 73 FR at 28892. As discussed in greater detail below,
the provisions in proposed Sec. Sec. --.23 and --.24 utilizing this
definition have been revised such that a definition of ``promotional
rate'' is no longer necessary for purposes of this subpart.
Accordingly, this definition and its accompanying commentary have not
been included in the final rule.
Section --.22--Unfair Acts or Practices Regarding Time To Make Payment
Summary. In May 2008, the Agencies proposed Sec. --.22(a), which
would have prohibited institutions from treating payments on a consumer
credit card account as late for any purpose unless the institution has
provided a reasonable amount of time for consumers to make payment. See
73 FR at 28912-28914. The Agencies also proposed a safe harbor in Sec.
--.22(b) for institutions that adopt reasonable procedures designed to
ensure that periodic statements specifying the payment due date are
mailed or delivered to consumers at least 21 days before the payment
due date. Finally, to avoid any potential conflict with section 163(a)
of TILA (15 U.S.C. 1666b(a)), the Agencies expressly stated in proposed
Sec. --.22(c) that the rule would not apply to any time period
provided by an institution within which the consumer may repay any
portion of the credit extended without incurring an additional finance
charge. As discussed below, based on the comments and further analysis,
the Agencies have adopted Sec. --.22 as proposed except that proposed
Sec. --.22(b) has been revised to clarify that institutions must be
able to establish that they have complied with Sec. --.22(a).
Background. Section 163(a) of TILA requires creditors to send
periodic statements at least 14 days before expiration of any period
during which consumers can avoid finance charges on purchases by paying
the balance in full (in other words, the ``grace period''). 15 U.S.C.
1666b(a). TILA does not, however, mandate a grace period, and grace
periods generally do not apply when consumers carry a balance from
month to month. Regulation Z requires that creditors mail or deliver
periodic
[[Page 5509]]
statements 14 days before the date by which payment is due for purposes
of avoiding additional finance charges or other charges, such as late
fees. See 12 CFR 226.5(b)(2)(ii); 12 CFR 226.5 comment 5(b)(2)(ii)-1.
In its June 2007 Regulation Z Proposal, the Board noted anecdotal
evidence of consumers receiving statements relatively close to the
payment due date, with little time remaining to mail their payments in
order to avoid having those payments treated as late. The Board
observed that it may take several days for a consumer to receive a
statement after the close of a billing cycle. The Board also observed
that consumers who pay by mail may need to mail their payments several
days before the due date to ensure that the payment is received on or
before that date. Accordingly, the Board requested comment on whether
it should recommend to Congress that the 14-day requirement in section
163(a) of TILA be increased. See 72 FR at 32973.
In response to the June 2007 Regulation Z Proposal, individual
consumers, consumer groups, and a member of Congress stated that
consumers were not being provided with a reasonable amount of time to
pay their credit card bills. These commenters indicated that, because
of the time required for periodic statements to reach consumers by mail
and for consumers' payments to reach creditors by mail, consumers had
little time in between to review their statements for accuracy before
making payment. This situation can be exacerbated if the consumer is
traveling unexpectedly or otherwise unable to give the statement
immediate attention when it is delivered or if the consumer needs to
compare the statement to receipts or other records. In addition, some
commenters indicated that consumers are unable to accurately predict
when their payment will be received by a creditor due to uncertainties
about how quickly mail is delivered. Some commenters argued that,
because of these difficulties, consumers' payments were received after
the due date, leading to finance charges as a result of loss of the
grace period, late fees, rate increases, and other adverse
consequences.
Industry commenters, however, generally stated that consumers
currently receive ample time to make payments, particularly in light of
the increasing number of consumers who receive periodic statements
electronically and make payments electronically or by telephone. These
commenters also stated that providing additional time for consumers to
make payments would be operationally difficult and would reduce
interest revenue, which would have to be recovered by raising the cost
of credit for all consumers.
Comments on the Agencies' May 2008 Proposal were generally
consistent with those on the Board's June 2007 Regulation Z Proposal.
Individual consumers, consumer groups, members of Congress, the FDIC,
and state attorneys general largely supported the proposed rule. Some
of these commenters stated that institutions have reduced the amount of
time for consumers to make payment while increasing the late payment
fees, penalty rates, and other costs imposed on consumers as a result
of late payment.\56\ In contrast, although some industry groups and
credit card issuers supported the proposal, most industry commenters
opposed the proposed rule, stating that consumers have more time to
make payment than ever before because of alternative means for
receiving statements and making payments. Some industry commenters also
stated that complying with the proposed safe harbor would be impossible
without making costly operational changes. To the extent that
commenters addressed specific aspects of the proposal or its supporting
legal analysis, those comments are discussed below.
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\56\ See Testimony of Adam J. Levitin, Assoc. Prof. of Law,
Georgetown Univ. Law Ctr. before the H. Subcomm. on Fin. Instits. &
Consumer Credit at 13-14 (Mar. 13, 2008) (cited by several
commenters).
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Legal Analysis
The Agencies conclude that, based on the comments received and
their own analysis, it is an unfair act or practice under 15 U.S.C.
45(n) and the standards articulated by the FTC to treat a payment on a
consumer credit card account as late for any purpose (other than
expiration of a grace period) unless the consumer has been provided a
reasonable amount of time to make that payment.
Substantial consumer injury. In the May 2008 Proposal, the Agencies
stated that an institution's failure to provide consumers a reasonable
amount of time to make payment appeared to cause substantial monetary
and other injury. The Agencies noted that, when a payment is received
after the due date, institutions may impose late fees, increase the
annual percentage rate on the account as a penalty, or report the
consumer as delinquent to a credit reporting agency.
Several industry commenters stated that consumers are not harmed by
the lack of a reasonable amount of time to pay because a significant
majority of consumers pay on or before the due date, indicating that
they currently receive sufficient time to make payment. Other
commenters, however, noted that the GAO Report found that, in 2005, 35
percent of active accounts were assessed at least one late fee and that
the average late fee assessment per active account was $30.92.\57\ In
addition, the Chairman of the Senate Permanent Subcommittee on
Investigations cited case histories of consumers who received periodic
statements shortly before the due date, making it difficult for them to
avoid a late fee and, in some cases, a rate increase. This comment also
cited instances in which consumers submitted payments 10 to 14 days in
advance of the due date, only to have the payment treated as late.
Individual consumers described similar experiences in their comments.
Thus, the Agencies conclude that the failure to provide a reasonable
amount of time to make payment causes or is likely to cause substantial
monetary injury to a significant number of consumers.
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\57\ See GAO Report at 32-33.
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Injury is not reasonably avoidable. The Agencies stated in the May
2008 Proposal that it appeared consumers could not reasonably avoid the
injuries caused by late payment unless they were provided a reasonable
amount of time to pay. The Agencies observed that it could be
unreasonable to expect consumers to make a timely payment if they are
not given a reasonable amount of time to do so after receiving a
periodic statement, although what constitutes a reasonable amount of
time may vary based on the circumstances. The Agencies noted that TILA
and Regulation Z provide consumers with the right to dispute
transactions or other items that appear on their periodic statements.
Accordingly, the Agencies reasoned that, in order to exercise certain
of these rights, consumers must have a reasonable opportunity to review
their statements. See 15 U.S.C. 1666i; 12 CFR 226.12(c).
The Agencies further stated that, in some cases, travel or other
circumstances may prevent the consumer from reviewing the statement
immediately upon receipt. Finally, as discussed above, the Agencies
recognized that, because consumers cannot control when a mailed payment
will be received by the institution, a payment mailed well in advance
of the due date may nevertheless arrive after that date.
Some industry commenters stated that consumers should know the due
date
[[Page 5510]]
and minimum payment before receiving a periodic statement and should
therefore be prepared to make payment immediately. As an initial
matter, however, the consumer's due date and minimum payment may vary
from month to month depending on the institution's practices. For
example, some institutions use a 30-day billing cycle, which results in
due dates that vary with the length of the month. Similarly, a consumer
would not necessarily know how much to pay without the periodic
statement because the amount of the required minimum payment may vary
depending on the percentage of the total balance included and whether
interest charges and fees are included. Furthermore, a consumer who
pays the balance in full each month may not know how much to pay until
receiving a periodic statement stating the total amount owed.
Furthermore, this argument fails to recognize, as discussed above,
that consumers must have a reasonable opportunity to review their
statement in order to exercise their dispute rights under TILA and
Regulation Z. Finally, travel or other circumstances may prevent the
consumer from reviewing the statement immediately. Accordingly, the
Agencies conclude the injuries caused by late payment are not
reasonably avoidable unless the consumer is provided a reasonable
amount of time to make payment.
Injury is not outweighed by countervailing benefits. The May 2008
Proposal stated that the injury does not appear to be outweighed by any
countervailing benefits to consumers or competition. At the proposal
stage, the Agencies were not aware of any direct benefit to consumers
from receiving too little time to make their payments. The Agencies
observed that, although a longer time to make payment could result in
additional finance charges for consumers who do not receive a grace
period, the consumer would have the choice whether to wait until the
due date to make payment. The Agencies also acknowledged that, as a
result of the proposed rule, some institutions could be required to
incur costs to alter their systems and would, directly or indirectly,
pass those costs on to consumers. The Agencies stated, however, that it
did not appear that these costs would outweigh the benefits to
consumers of receiving a reasonable amount of time to make payment.
Some industry commenters stated that, because their practices are
already consistent with the proposed safe harbor in Sec. --.22(b), the
costs of complying with the proposed rule would be minimal. Other
industry commenters indicated that complying with the proposed safe
harbor would require significant changes to their processes for
generating and delivering periodic statements. As discussed below, the
Agencies have adopted the safe harbor as proposed. See Sec.
--.22(b)(2). Assuming that the cost of altering practices to comply
with a 21-day safe harbor will be passed on to consumers, this cost
will be spread among thousands or hundreds of thousands of consumers
and will not outweigh the benefits to consumers of avoiding late fees
and increased annual percentage rates. Thus, the Agencies conclude that
the injury to consumers is not outweighed by any countervailing
benefits to consumers or competition.
Public policy. Some industry commenters stated that the proposed
21-day safe harbor was contrary to public policy and the Board's
established payment systems policy as set forth in section 163(a) of
TILA and section 226.5(b)(2)(ii) of Regulation Z, which, as discussed
above, provide that periodic statements must be mailed at least 14 days
in advance of the expiration of the grace period. The Agencies,
however, have expressly provided that Sec. --.22 does not apply to the
mailing or delivery of periodic statements with respect to the
expiration of grace periods. See Sec. --.22(c). In the May 2008
Proposal, the Agencies recognized that, in enacting section 163(a) of
TILA, Congress set the minimum amount of time between sending the
periodic statement and expiration of any grace period offered by the
creditor at 14 days. Because most creditors currently offer grace
periods and use a single due date for expiration of the grace period
and the date after which a payment will be considered late for other
purposes (such as the assessment of late fees), the Board requested
comment in its June 2007 Regulation Z Proposal on whether it should
request that Congress increase the mailing requirement with respect to
grace periods.
Based on the comments received, the Agencies concluded in May 2008
that, because many consumers carry a balance from month to month and
therefore do not receive a grace period, a separate rule might be
needed to specifically address harms other than loss of the grace
period when institutions do not provide a reasonable amount of time for
consumers to make payment (such as late fees and rate increases as a
penalty for late payment). However, in order to avoid any conflict with
the statutory requirement regarding grace periods, proposed Sec.
--.22(c) specifically provided that the rule would not affect the
requirements of section 163(a) of TILA. Accordingly, because Sec.
--.22(c) has been adopted as proposed, the Agencies conclude that Sec.
--.22 is not contrary to public policy generally or any established
payment systems policy of the Board.
Final Rule
Section --.22(a) General Rule
Proposed Sec. --.22(a) 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 that payment. For the
reasons discussed above, the Agencies have adopted Sec. --.22(a) as
proposed.
Proposed comment 22(a)-1 clarified that treating a payment as late
for any purpose includes increasing the annual percentage rate as a
penalty, reporting the consumer as delinquent to a credit reporting
agency, or assessing a late fee or any other fee based on the
consumer's failure to make a payment within the amount of time provided
under this section. One industry commenter stated that the failure to
provide a reasonable amount of time to pay is unlikely to cause a
consumer to be reported as delinquent to a credit reporting agency,
citing the policy of credit reporting agencies to consider an account
delinquent only when it is 30 days past due.\58\ Although the Agencies
agree that the failure to provide a reasonable amount of time to pay is
unlikely to cause injury in the form of a delinquency notation on a
credit report, allowing institutions that fail to provide a reasonable
amount of time to pay to treat payments as late for purposes of credit
reporting but not for other purposes would be anomalous. Accordingly,
comment 22(a)-1 is adopted as proposed.
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\58\ See Consumer Data Industry Ass'n, Credit Reporting Resource
Guide 6-6 (2006).
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Proposed comment 22(a)-2 stated that whether an institution had
provided a reasonable amount of time to pay would be evaluated from the
perspective of the consumer, not the institution. Some industry
commenters requested that the Agencies establish standards for
determining whether a particular amount of time is reasonable. The
Agencies, however, have adopted a flexible reasonableness analysis
rather than a set of fixed standards because whether a particular
amount of time is sufficient for consumers to make payment will depend
on the facts and circumstances. In addition, in order to remove
uncertainty and facilitate compliance, the Agencies have, as discussed
below, provided a means for complying with Sec. --.22(a) in Sec.
--.22(b)
[[Page 5511]]
and its accompanying commentary. Accordingly, comment 22(a)-2 is
adopted as proposed.
Section --.22(b) Compliance With General Rule
As proposed, Sec. --.22(b) provided a safe harbor for institutions
that have adopted reasonable procedures designed to ensure that
periodic statements specifying the payment due date are mailed or
delivered to consumers at least 21 days before the payment due date. As
explained in the May 2008 Proposal, the 21-day safe harbor was intended
to ensure that consumers received at least a week to review their
statement and make payment. Compliance with this safe harbor would
allow seven days for the periodic statement to reach the consumer by
mail, seven days for the consumer to review the statement and make
payment, and seven days for that payment to reach the institution by
mail. The Agencies noted that, although increasing numbers of consumers
are receiving periodic statements and making payments electronically, a
significant number still utilize mail. The Agencies further noted that,
while first class mail is often delivered within three business days,
in some cases it can take significantly longer.\59\ Furthermore, some
large credit card issuers already recommend that consumers allow up to
seven days for their payments to be received by the issuer via mail.
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\59\ See, e.g., Testimony of Jody Berenblatt, Senior Vice
President--Postal Strategy, Bank of America, before the S. Subcomm.
on Fed. Fin. Mgmt., Gov't Info., Fed. Srvs., and Int'l Security
(Aug. 2, 2007).
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The Agencies requested comment on whether the proposed 21-day safe
harbor provided a reasonable amount of time for consumers to review
their periodic statements and make payment. Consumer groups and others
stated that a longer period of 28 or 30 days was needed. Some industry
commenters stated that they currently mail or deliver periodic
statements 21 days in advance of the due date. Most industry
commenters, however, raised the following objections to the proposed
21-day safe harbor.
First, many industry commenters stated that allowing seven days for
receipt of mailed periodic statements was excessive because, in most
cases, statements are generally delivered two to four days after
mailing. These commenters, however, provided only the average delivery
time or the delivery time for the great majority of consumers, not the
outer range of delivery times. For example, as one consumer group
noted, mailing times are often significantly longer for consumers in
sparsely populated rural areas. Thus, while the Agencies agree that
seven days may be more time than is needed for most consumers to
receive a periodic statement by mail, a safe harbor based solely on
average mailing times would not adequately protect the small but
significant number of consumers whose delivery times are longer than
average. Furthermore, because many institutions use practices that
reduce delivery times for periodic statements (such as pre-sorting
statements by ZIP code prior to delivery to the U.S. Postal Service),
delivery times for periodic statements mailed by institutions to
consumers likely are not representative of delivery times for payments
mailed by consumers to institutions.
Second, several industry commenters stated that allowing seven days
for mailing time was excessive for the additional reason that many
consumers receive their statements electronically and make payment
electronically or by telephone. These commenters, however, also
confirmed that a significant number of consumers receive statements and
make payments by mail. While many consumers at larger institutions have
the ability to review statements online, it is unclear how many
actually do so since most also receive statements by mail. Furthermore,
the percentage of consumers paying by mail varied significantly by the
type of institution. For example, some larger institutions reported
that less than half of their consumers use mail to submit payments,
while an industry group reported that 70 to 80 percent of community
bank consumers mail their payments. In addition, one consumer group
cited a study indicating that internet usage is not evenly distributed
among the population.\60\ Thus, a safe harbor based on the assumption
that consumers use alternative means to receive statements or make
payments would not protect a significant number of consumers.\61\
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\60\ See Public Policy Institute of Cal., California's Digital
Divide (June 2008) (``Whites, blacks, and Asians currently have
similarly high rates of computer and Internet use. Latinos have the
lowest rates by far (computers 58%, Internet 48%).'') (available at
http://www.ppic.org/content/pubs/jtf/JTF_DigitalDivideJTF.pdf).
\61\ In addition, multiple safe harbors providing longer or
shorter periods of time depending on how the consumer receives
periodic statements or makes payments would not be operationally
feasible because an institution will not know in advance what method
a consumer will use. For example, a consumer might review their
periodic statement online one month but wait for the statement to
arrive by mail the next. Similarly, a consumer might pay
electronically one month and by mail the next.
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Third, many industry commenters stated that complying with the 21-
day safe harbor would require significant and costly changes to
institutions' practices for generating and mailing periodic statements.
As discussed above, however, the Agencies have concluded that these
costs are outweighed by the benefits to consumers of receiving a
reasonable amount of time to pay.
Finally, some commenters stated that adjusting to the 21-day safe
harbor could lead to consumer confusion because the institution would
not have sufficient time to reflect timely payments on the subsequent
periodic statement. This concern, however, depends on a number of
variables, including the number of days in the month, whether the
institution uses billing cycles that vary with the length of the month
(as opposed to a fixed 30-day billing cycle), and whether the
institution processes payments on weekends or holidays. Although it is
possible that, in some narrow set of circumstances, an institution may
not be able to reflect a timely payment on the periodic statement, the
Agencies conclude that any resulting confusion does not warrant a
reduction in the proposed safe harbor. Accordingly, the 21-day safe
harbor is adopted as proposed except that, for the reasons discussed
below, this provision has been retitled and, for reasons discussed
below, moved to Sec. --.22(b)(2).
In order to minimize burden and facilitate compliance, proposed
comment 22(b)-1 clarified that an institution with reasonable
procedures in place designed to ensure that statements are mailed or
delivered within a certain number of days from the closing date of the
billing cycle may utilize the safe harbor by adding that number to the
21-day safe harbor for purposes of determining the payment due date on
the periodic statement. Proposed comment 22(b)-1 is adopted as
proposed. Accordingly, if, for example, an institution had reasonable
procedures in place designed to ensure that statements are mailed or
delivered within three days of the closing date of the billing cycle,
the institution could comply with the safe harbor by stating a payment
due date on its periodic statements that is 24 days from the close of
the billing cycle (in other words, 21 days plus three days). Similarly,
if an institution's procedures reasonably ensured that payments would
be sent within five days of the close of the billing cycle, the
institution could comply with the safe harbor by setting the due date
26 days from the close of the billing cycle.
Proposed comment 22(b)-2 further clarified that the payment due
date is
[[Page 5512]]
the date by which the institution requires the consumer to make payment
in order to avoid being treated as late for any purpose (except with
respect to expiration of a grace period). Comment 22(b)-2 is adopted as
proposed.
The Agencies also received requests from industry for clarification
that compliance with the safe harbor is not the only means of complying
with the requirement that consumers be provided a reasonable amount of
time to make the payment. Accordingly, the Agencies have restructured
Sec. .22(b) to provide additional clarity regarding compliance with
Sec. --.22(a). The Agencies have added a new Sec. --.22(b)(1), which
clarifies that institutions are responsible for establishing that they
have complied with Sec. --.22(a). The 21-day safe harbor, which the
Agencies have moved to Sec. --.22(b)(2), provides one method of
compliance. Finally, the Agencies have added comment 22(b)-3, which
provides an example of an alternative compliance method. In this
example, because an institution only provides periodic statements and
accepts payments electronically, the institution could deliver
statements for those accounts less than 21 days before the payment due
date and still satisfy the general rule in Sec. --.22(a) because those
consumers would need less time to receive their statements or make
their payments by mail.
Section --.22(c) Exception for Grace Periods
In order to avoid any potential conflict with section 163(a) of
TILA, proposed Sec. --.22(c) provided that proposed Sec. --.22(a)
would not apply to any time period provided by the institution within
which the consumer may repay the new balance or any portion of the new
balance without incurring finance charges (in other words, a grace
period).
Several industry commenters argued that, notwithstanding proposed
Sec. --.22(c), institutions would essentially be required to use a
single date for the payment due date and for expiration of the grace
period because consumers would be confused by different dates. Consumer
groups also raised concerns about the potential for consumer confusion.
One consumer group requested that the Board use its authority under
section 1604(a) of TILA to require that the expiration of the grace
period coincide with the payment due date. Because the mailing or
delivery of periodic statements in relation to expiration of the grace
period is specifically addressed by section 163(a) of TILA, the
Agencies believe that deviating from the statutory requirement would be
inappropriate and unnecessary in this case, particularly because
Regulation Z would require an institution that elected to use separate
dates to disclose both dates on the periodic statement. See 12 CFR
226.6(b), adopted elsewhere in today's Federal Register. An institution
that chooses to use separate dates, however, must ensure that consumers
understand the implications if payment is not received on or before
each date.
Other Issues
Implementation. As discussed in section VII of this SUPPLEMENTARY
INFORMATION, the effective date for Sec. --.22 is July 1, 2010. As of
that date, this provision applies to existing as well as new consumer
credit card accounts. Thus, institutions must provide consumers with a
reasonable amount of time to make any payment due on or after the
effective date.
Alternatives to proposed rule. The Agencies requested comment on
two potential alternatives to the proposed rule. First, the Agencies
asked for comment on whether to adopt a rule that would prohibit
institutions from treating a payment as late if received within a
certain number of days after the due date and, if so, the number of
days that would be appropriate. Consumer groups and some institutions
that currently provide such a period of time were supportive, but most
industry commenters stated that this requirement would be operationally
burdensome. The Agencies have concluded that requiring institutions to
provide a period of time after the due date during which payments must
be treated as timely could create consumer confusion regarding when
payment is actually due and undermine the Board's efforts elsewhere in
today's Federal Register to ensure that consumers' due dates are
meaningful.\62\
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\62\ See 12 CFR 226.10(b)(2)(ii) (providing that a reasonable
cut-off time for payments received by mail would be 5 p.m. on the
payment due date at the location specified by the creditor for the
receipt of such payments); 12 CFR 226.10(d) (providing that, if the
due date for payments is a day on which the creditor does not
receive or accept payments by mail, the creditor may not treat a
payment received by mail the next business day as late for any
purpose).
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Second, the Agencies sought comment on whether to adopt a rule that
would require institutions, upon the request of a consumer, to reverse
a decision to treat a payment mailed before the due date as late and,
if so, what evidence the institution could require the consumer to
provide (for example, a receipt from the U.S. Postal Service or other
common carrier) and what time frame would be appropriate (for example,
payment mailed at least five days before the due date, payment received
no more than two business days' late). Although some commenters
supported such a requirement, the Agencies also received comments from
both industry and a consumer group opposing the requirement on the
grounds that it would be burdensome for consumers to obtain proof of
mailing and for institutions to establish systems for accepting such
proof. Furthermore, the Agencies note that some institutions stated
that they will generally waive any late payment fee when a consumer
produces proof that a payment was mailed sufficiently in advance of the
due date.
Supplemental Legal Basis for This Section of the OTS Final Rule
As discussed above, HOLA provides authority for both safety and
soundness and consumer protection regulations. Section 535.22 supports
safety and soundness by reducing reputational risk that would result
from providing consumers an unreasonably short period of time to make
payment. Section 535.22 also protects consumers by providing sufficient
time to make payment. It is somewhat akin to OTS's late charge
provision for home loans, which prohibits federal savings associations
from imposing a late charge as to any payment received within 15 days
of the due date.\63\ Section 535.22 is consistent with the best
practices of thrift institutions nationwide. Most savings associations,
including the ten largest, generally mail or deliver periodic
statements to their customers at least 20 days before the due date.
Consequently, HOLA serves as an independent basis for Sec. 535.22.
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\63\ 12 CFR 560.33.
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Section --.23--Unfair Acts or Practices Regarding Allocation of
Payments
Summary. In May 2008, the Agencies proposed Sec. --.23 in response
to concerns that institutions were applying consumers' payments in a
manner that inappropriately maximized interest charges on consumer
credit card accounts with balances at different annual percentage
rates. Specifically, most institutions allocate consumers' payments
first to the balance with the lowest annual percentage rate, resulting
in the accrual of interest at higher rates on other balances (unless
all balances are paid in full). See 73 FR at 28914-28917. Proposed
Sec. --.23(a) would have addressed this practice by requiring
institutions to allocate payments in excess of the required minimum
periodic payment (``excess payments'')
[[Page 5513]]
using one of three permitted methods or a method equally beneficial to
consumers. The permitted methods were allocating the excess payment
first to the balance with the highest annual percentage rate,
allocating equal portions of the excess payment to each balance, and
allocating the excess payment pro rata among the balances.
In addition, because the Agencies were concerned that existing
payment allocation practices were especially harmful when an account
had a balance at a discounted promotional rate or a balance on which
interest was deferred, proposed Sec. --.23(b) would have placed more
stringent requirements on those accounts. Proposed Sec. --.23(b)(1)(i)
would have prohibited institutions from allocating excess payments to
promotional rate and deferred interest balances unless all other
balances had been paid in full. Proposed Sec. --.23(b)(1)(ii),
however, created an exception for the existing practice by some
institutions of allocating excess payments first to a deferred interest
balance during the last two billing cycles of the deferred interest
period so that consumers could pay off that balance and avoid
assessment of deferred interest. Finally, proposed Sec. --.23(b)(2)
would have prohibited institutions from denying consumers a grace
period solely because an account had a promotional rate or deferred
interest balance.
Based on the comments received and further analysis, the Agencies
have revised the general payment allocation rule in proposed Sec.
--.23(a) to require institutions either to apply excess payments first
to the balance with the highest annual percentage rate or to allocate
excess payments pro rata among the balances. The final version of Sec.
--.23 prohibits the current practice of applying payments to the lowest
rate balance first while also responding to concerns raised by
commenters that the number of allocation methods permitted by the
proposed rule would have increased the complexity of payment
allocation, making the practice and its effects on interest charges
even less transparent for consumers.
In addition, the Agencies have not included proposed Sec. --.23(b)
in the final rule. First, because current practices regarding
assessment of deferred interest are not permitted under the final
version of Sec. --.24, the provisions regarding deferred interest
plans are no longer necessary. Second, due to concerns that proposed
Sec. --.23(b) could significantly reduce or eliminate promotional rate
offers that provide substantial benefits to consumers, the Agencies
have not included the provisions regarding promotional rate balances.
Instead, the Agencies believe that applying the general allocation rule
in Sec. --.23 in all circumstances strikes the appropriate balance by
preserving promotional rate offers that provide substantial benefits to
consumers while prohibiting the most harmful payment allocation
practices.
Background. In its June 2007 Regulation Z Proposal, the Board
discussed the practice among some creditors of allocating payments
first to balances that are subject to the lowest interest rate. 72 FR
at 32982-32983. Because many creditors offer different rates for
purchases, cash advances, and balance transfers, this practice can
result in consumers who do not pay the balance in full each month
incurring higher finance charges than they would under any other
allocation method. The Agencies were also concerned that, when the
consumer has responded to a promotional rate or deferred interest
offer, the allocation of payments to balances with the lowest interest
rate often prevents the consumer from receiving the full benefit of the
promotional rate or deferred interest plan if the consumer uses the
credit card account for other transactions.
For example, assume that a consumer credit card account charges
annual percentage rates of 12% on purchases and 20% on cash advances.
Assume also that, in the same billing cycle, the consumer uses the
account for purchases totaling $3,000 and cash advances totaling $300.
If the consumer makes an $800 excess payment, most creditors would
apply the entire payment to the purchase balance and the consumer would
incur interest charges on the more costly cash advance balance. Under
these circumstances, the consumer is effectively prevented from paying
off the balance with the higher interest rate (cash advances) unless
the consumer pays the total balance (purchases and cash advances) in
full.
This outcome is exacerbated if the consumer uses the card in
reliance on a promotional rate or deferred interest offer. For example,
assume the same facts as above but that, during the same billing cycle,
the consumer also transfers to the account a balance of $3,000 in
response to a promotional rate offer of 5% for six months. In this
case, most creditors would apply the consumer's $800 excess payment to
the promotional rate balance and the consumer would incur interest
charges on the more costly purchase and cash advance balances. Under
these circumstances, the consumer would effectively be denied the
benefit of the 5% promotional rate for six months if the card is used
for purchase or cash advance transactions because the consumer must pay
off the entire transferred balance in order to avoid paying a higher
rate on other transactions. Indeed, the only way for the consumer to
receive the full benefit of the 5% promotional rate is not to use the
card for purchases, which would effectively require the consumer to use
an open-end credit account as a closed-end installment loan.
Deferred interest plans raise similar--but not identical--concerns.
Currently, some creditors offer deferred interest plans under which
interest accrues on purchases at a specified rate but is not charged to
the account for a period of time. If the balance is paid in full by the
end of the period, the consumer generally will not be charged any
interest. If, however, the balance is not paid in full by the end of
the period, all interest accrued during that period will be charged to
the account. With respect to payment allocation, a consumer whose
payments are applied to a deferred interest balance instead of balances
on which interest is not deferred will incur additional finance charges
during the deferred interest period.
In addition, creditors typically provide consumers who pay their
balance in full each month a grace period for purchases but not for
balance transfers or cash advances. Because payments generally will be
allocated to the transferred balance first, a consumer typically cannot
take advantage of both a promotional rate on balance transfers or cash
advances and a grace period on purchases. Under these circumstances,
the only way for a consumer to avoid paying interest on purchases would
be to pay off the entire balance, including the transferred balance or
cash advance balance subject to the promotional rate.
In preparing its June 2007 Regulation Z Proposal, the Board sought
to address issues regarding payment allocation by developing
disclosures explaining payment allocation methods on accounts with
multiple balances at different annual percentage rates so that
consumers could make informed decisions about card usage, particularly
with regard to promotional rates. For example, if consumers knew that
they would not receive the full benefit of a promotional rate on a
particular credit card account if they used that account for purchases
during the promotional period, they might use a different account for
purchases and pay that second account in full every month to take
advantage of the grace period. The Board conducted extensive consumer
testing in an effort to develop
[[Page 5514]]
disclosures that would enable consumers to understand typical payment
allocation practices and make informed decisions regarding the use of
credit cards for different types of transactions. In this testing, many
participants did not understand that they could not take advantage of
the grace period on purchases and the discounted rate on balance
transfers at the same time. Model forms were tested that included a
disclosure notice attempting to explain this to consumers. Testing,
however, showed that a significant percentage of participants still did
not fully understand how payment allocation can affect their interest
charges, even after reading the model disclosures.
In the June 2007 Regulation Z Proposal, the Board acknowledged
these results and stated that it would conduct further testing to
determine whether the disclosure could be improved to communicate more
effectively to consumers how payment allocation can affect their
interest charges. The Board also solicited comment on a proposed
amendment to Regulation Z that would have required creditors to explain
payment allocation to consumers. Specifically, the Board proposed that
creditors explain how payment allocation would affect consumers'
interest charges if an initial discounted rate was offered on balance
transfers or cash advances but not purchases. The Board proposed that
creditors must disclose to consumers that: (1) The initial discounted
rate applies only to balance transfers or cash advances, as applicable,
and not to purchases; (2) that payments will be allocated to the
balance transfer or cash advance balance, as applicable, before being
allocated to any purchase balance during the time the initial
discounted rate is in effect; and (3) that the consumer will incur
interest on the purchase balance until the entire balance is paid,
including the transferred balance or cash advance balance, as
applicable. 72 FR at 33047-33050.
In response to the June 2007 Regulation Z Proposal, several
commenters recommended that the Board test a simplified payment
allocation disclosure that covered situations other than low rate
balance transfers. One credit card issuer, however, stated that, even
if an effective disclosure could be developed, consumers could not shop
for a better payment allocation method because creditors almost
uniformly apply payments to the balance with the lowest annual
percentage rate. Furthermore, consumer and consumer group commenters
urged the Board to go further and prohibit payment allocation methods
that applied payments to the lowest rate balance before other balances.
In consumer testing conducted for the Board prior to the May 2008
Proposal, the Board tested a revised payment allocation disclosure.
This disclosure was not effective in improving consumers'
understanding. The majority of participants understood from earlier
experience that creditors typically will apply payments to lower rate
balances first and that this method causes them to incur higher
interest charges. However, for those participants that did not know
about payment allocation methods from earlier experience, the
disclosure tested was not effective in communicating payment allocation
methods.\64\
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\64\ The Board also tested whether, given the opportunity,
consumers could select how amounts paid in excess of the minimum
would be allocated using a payment coupon. Most participants,
however, were not able to understand the effects of payment
allocation sufficiently to apply payments in a manner that minimized
interest charges.
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Accordingly, because the Board's testing indicated that disclosure
was not effective in allowing consumers to avoid the common practice of
allocating payments first to the balance with the lowest rate, the
Agencies proposed in May 2008 to address concerns regarding payment
allocation in proposed Sec. --.23 by placing limitations on allocation
of excess payments.\65\ The Agencies also solicited comment on whether
the exception regarding deferred interest balances was needed. 73 FR
28916.
---------------------------------------------------------------------------
\65\ After the May 2008 Proposal, the Board conducted additional
testing of consumers' ability to understand payment allocation
disclosures and select how excess payments would be allocated. This
testing, however, produced similar results to those discussed above.
---------------------------------------------------------------------------
The Agencies received comments in support of proposed Sec. .--23
from individual consumers, consumer groups, members of Congress, the
FDIC, state attorneys general, a state consumer protection agency, and
others. Nevertheless, many of these commenters criticized the proposed
rule as overly complex, arguing that--if consumers cannot understand
the effects of the current low-to-high allocation method on interest
charges--increasing the number and complexity of allocation methods
would only make the cost of credit less transparent. These commenters
urged the Agencies to revise the proposed rule to require that excess
payments be applied first to the balance with the highest rate in all
circumstances. Some consumer advocates urged the Agencies to ban
deferred interest balances rather than create an exception for them.
In contrast, credit card issuers and industry groups strongly
opposed the proposal, particularly the special requirements regarding
accounts with promotional rate and deferred interest balances. These
commenters generally argued that disclosure would enable consumers to
avoid any harm caused by payment allocation, that the proposed
restrictions regarding promotional rate and deferred interest balances
would ultimately harm consumers by reducing or eliminating promotional
rate and deferred interest offers, and that complying with the proposed
rule would require burdensome systems changes.
To the extent that commenters addressed specific aspects of the
proposal or its supporting legal analysis, those comments are discussed
below.
Legal Analysis
When different annual percentage rates apply to different balances
on a consumer credit card account, the Agencies conclude that, based on
the comments received and their own analysis, it is an unfair act or
practice under 15 U.S.C. 45(n) and the standards articulated by the FTC
to allocate amounts paid by the consumer in excess of the required
minimum periodic payment in a manner that does not apply a significant
portion of the amount to the balance with the highest annual percentage
rate.\66\
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\66\ In the May 2008 Proposal, the Agencies considered whether
other practices specifically related to promotional rate and
deferred interest balances were unfair. As discussed below, based on
the comments and further analysis, Sec. --.23 does not include the
provisions specifically addressing those practices. To the extent
that specific practices raise concerns regarding unfairness or
deception under the FTC Act, the Agencies plan to address those
practices on a case-by-case basis through supervisory and
enforcement actions.
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Substantial consumer injury. In the May 2008 Proposal, the Agencies
stated that allocating excess payments first to the balance with the
lowest rate appeared to cause substantial monetary injury to consumers
in the form of higher interest charges than would be incurred if some
or all of the excess payment were applied to balances with higher
rates.
In response, the Agencies received an analysis of credit card data
purporting to represent approximately 70 percent of outstanding
consumer credit card balances (the Argus Analysis). Although the
Agencies are not able to verify the accuracy of the Argus Analysis or
the data supporting it, the Agencies note that this analysis estimated
that consumers are charged an additional
[[Page 5515]]
$930 million annually as a result of the practices addressed by
proposed Sec. --.23.\67\ In addition, a state consumer protection
agency stated that the practice of allocating payments first to the
balance with the lowest rate is particularly harmful to low-income
consumers, citing its own study finding that a quarter of low-income
cardholders surveyed used a credit card for a cash advance (which
generally accrues interest at a higher rate than other transactions)
every few months.\68\
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\67\ See Exhibit 1, Table 1 to Comment from Oliver I. Ireland,
Morrison Foerster LLP (Aug 7, 2008) (``Argus Analysis'') (presenting
results of analysis by Argus Information & Advisory Services, LLC of
historical data for consumer credit card accounts believed to
represent approximately 70 percent of all outstanding consumer
credit card balances).
\68\ See N.Y. City Dept. of Consumer Affairs, Neighborhood
Financial Services Study: An Analysis of Supply and Demand in Two
N.Y. City Neighborhoods at 6 (June 2008) (available at http://www.nyc.gov/html/ofe/downloads/pdf/NFS_ExecSumm.pdf).
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One industry commenter asserted that allocating payments first to
the balance with the lowest interest rate could not cause an injury for
purposes of the FTC Act merely because other, less costly allocation
methods exist. It is well established, however, that monetary harm
constitutes an injury under the FTC Act.\69\ This comment did not
provide any legal authority distinguishing interest charges assessed as
a result of current payment allocation practices from other monetary
harms, nor are the Agencies aware of any such authority.
---------------------------------------------------------------------------
\69\ See Statement for FTC Credit Practices Rule, 49 FR at 7743;
FTC Policy Statement on Unfairness at 3.
---------------------------------------------------------------------------
Another industry commenter stated that assessing interest
consistent with a contractual provision to which the consumer has
agreed cannot constitute an injury under the FTC Act. This argument,
however, is inconsistent with the FTC's application of the unfairness
analysis in support of its Credit Practices Rule, where the FTC
determined that otherwise valid contractual provisions injured
consumers.\70\
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\70\ See Statement for FTC Credit Practices Rule, 49 FR at 7740
et seq.; see also Am. Fin. Servs. Assoc., 767 F.2d at 978-83
(upholding the FTC analysis).
---------------------------------------------------------------------------
Accordingly, the Agencies conclude that the failure to allocate a
significant portion of an excess payment to the balance with the
highest rate causes or is likely to cause substantial monetary injury
to consumers.
Injury is not reasonably avoidable. In May 2008, the Agencies cited
several factors that appeared to prevent consumers from reasonably
avoiding the injury. First, consumers generally have no control over
the institution's allocation of payments. Second, the Board's consumer
testing indicated that disclosures do not enable consumers to
understand sufficiently the effects of payment allocation. Furthermore,
the Agencies stated that, even if disclosures were effective, it
appeared consumers still could not avoid the injury by selecting a
credit card account with more favorable terms because institutions
almost uniformly apply payments first to the balance with the lowest
rate.\71\ Third, although a consumer could avoid the injury by paying
the balance in full each month, this may not be a reasonable
expectation as many consumers are unable to do so.
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\71\ See Statement for FTC Credit Practices Rule, 48 FR at 7746
(``If 80 percent of creditors include a certain clause in their
contracts, for example, even the consumer who examines contract[s]
from three different sellers has a less than even chance of finding
a contract without the clause. In such circumstances relatively few
consumers are likely to find the effort worthwhile, particularly
given the difficulties of searching for contract terms * * *''
(footnotes omitted)).
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The Agencies conclude that these factors support a determination
that the injury caused by the failure to allocate a significant portion
of an excess payment to the highest rate balance is not reasonably
avoidable. In particular, the Agencies note that additional consumer
testing has further confirmed that disclosure is not an effective
alternative to the proposed rule.\72\
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\72\ For this reason, the Board has removed the proposed
disclosure regarding payment allocation under Regulation Z, as
discussed elsewhere in today's Federal Register.
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Furthermore, although one industry commenter argued that consumers
could reasonably avoid the injury by paying their balance in full each
month, one of the intended purposes of a credit card (as opposed to a
charge card) is to finance purchases over multiple billing cycles.
Thus, it is unreasonable to expect consumers to avoid the harm caused
by current payment allocation practices by paying their balances in
full each month.
Injury is not outweighed by countervailing benefits. In the May
2008 Proposal, the Agencies stated that the prohibited practices did
not appear to create benefits for consumers or competition that
outweighed the injury. The Agencies noted that, if implemented, the
proposal could reduce the revenue that institutions receive from
interest charges, which could in turn lead institutions to increase
rates generally. The Agencies stated, however, that this effect should
be muted because the proposal prohibited only the practices that are
most harmful to consumers and leaves institutions with considerable
flexibility. Specifically, the proposed rule permitted institutions to
choose between three specified allocation methods or any other method
that was no less beneficial to the consumer. In addition, the proposed
rule did not apply to the allocation of minimum payments.
Furthermore, the Agencies stated that the proposal would enhance
transparency and enable consumers to better assess the costs associated
with using their credit card accounts at the time they engage in
transactions. The Agencies noted that, to the extent that upfront costs
have been artificially reduced because many consumers cannot reasonably
avoid paying higher interest charges later, the reduction does not
represent a true benefit to consumers as a whole. Finally, the Agencies
stated that it appeared the proposal would enhance rather than harm
competition because institutions offering rates that reflect the
institution's costs (including the cost to the institution of borrowing
funds and operational expenses) would no longer be forced to compete
with institutions offering rates that are artificially reduced based on
the expectation that interest will accrue on higher rate balances until
the promotional rate balance is paid in full.
Based on the comments and further analysis, the Agencies conclude
that these rationales support a determination that the injury to
consumers when institutions do not allocate a significant portion of
the excess payment to the balance with the highest annual percentage
rate outweighs any benefits of this practice for consumers and
competition. Industry commenters generally argued that the restrictions
in proposed Sec. --.23 would reduce interest revenue and force
institutions to compensate by increasing the interest rates or fees
charged to consumers, decreasing the amount of available credit, or
using some combination of the two. For example, the Argus Analysis
stated that, as a result of proposed Sec. --.23, institutions could
lose 0.125 percent of their annual interest revenue on revolving credit
card accounts (in other words, accounts where interest is charged
because the balance is not paid in full each billing cycle).\73\ Again,
as noted above, the Agencies are unable to verify the accuracy of the
conclusions reached by the Argus Analysis or its supporting data.
Furthermore, the Argus Analysis did not estimate the potential
[[Page 5516]]
impact of proposed Sec. --.23 on the cost and availability of
credit.\74\ Nevertheless, assuming for the sake of discussion that the
data and assumptions underlying the Argus Analysis are accurate, it
appears that institutions might respond by increasing interest rates
approximately 0.15 percentage points or by decreasing credit limits
approximately $155.\75\ Accordingly, if, for example, an institution
charges its consumers an interest rate of 15% on a credit line of
$9,000, the Argus Analysis appears to indicate that the institution
might respond to proposed Sec. --.23 by increasing the rate to 15.15%
or by decreasing the credit limit to $8,850.\76\
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\73\ See Exhibit 1, Table 1 to Argus Analysis (combining the
predictions for ``Revolvers'' in the rows labeled ``Change in
Payment Allocation'' and ``Grace Period Requirement for Retail
Transactions'').
\74\ As discussed in greater detail below, the Argus Analysis
assumes that institutions will adjust to the restrictions in the
proposed rules by increasing interest rates, decreasing credit
limits, eliminating credit for consumers with low credit scores, or
some combination of the three. This analysis ignores other potential
adjustments, such as increasing fee revenue (including the
assessment of annual fees) and developing improved underwriting
techniques that will reduce losses and the need to engage in
repricing when a consumer violates the account terms.
\75\ The Argus Analysis estimated that proposed Sec. --.23 will
reduce interest revenue by 0.125 percent. Accordingly, for purposes
of this discussion, the Agencies assumed that, consistent with the
Argus Analysis, the increase in interest rates attributable to
proposed Sec. --.23 would be 120 percent of the reduction in
interest revenue (0.125 x 1.2 = 0.15). The Agencies also assumed
that the reduction in credit limits attributable to proposed Sec.
--.23 would be proportionate to the overall reduction predicted by
the Argus Analysis. Thus, because the estimated revenue loss
attributable to proposed Sec. --.23 (0.125) is 7.6% of the overall
estimated revenue loss predicted by the Argus Analysis (1.637), the
Agencies assumed that the reduction in credit limits attributable to
proposed Sec. --.23 would be 7.6% of the overall reduction of
$2,029 predicted by the Argus Analysis ($2,029 x 0.076 = $155). The
Agencies were not able to estimate the potential impact on credit
availability for consumers with FICO scores below 620 but, given the
limited estimated impact of proposed Sec. --.23 on rates and credit
limits, it appears this impact would not be substantial.
\76\ As discussed in greater detail in section VII of this
SUPPLEMENTARY INFORMATION, the Agencies anticipate that, prior to
the effective date, some institutions may respond to the
restrictions in Sec. --.23 by, for example, adjusting interest
rates on existing balances or reducing credit limits.
---------------------------------------------------------------------------
The Argus Analysis also stated that more than three quarters of
revolving accounts do not carry multiple balances, meaning that the
estimated $930 million in interest revenue is currently generated from
only one quarter of all revolving accounts.\77\ Thus, even if the
Agencies were to accept the Argus Analysis and its underlying data at
face value, it appears that the restrictions in proposed Sec. --.23
will result in significantly reduced interest charges for one quarter
of consumer credit card accounts, while potentially resulting in a
smaller increase in interest charges for all other accounts or a small
reduction in available credit for all accounts. Furthermore, the Argus
Analysis was based on the proposed rule. Although the final rule
permits only two allocation methods, the Agencies' decision to omit
from the final rule the more restrictive rules for accounts with
promotional rate balances in proposed Sec. --.23(b) should
significantly reduce the estimated impact.\78\ The Agencies therefore
conclude that, based on the available information, the injury to
consumers as a result of the current practice of applying excess
payments in a manner that maximizes interest charges outweighs the
potential increase in interest rates or reduction in available credit
as a result of prohibiting that practice. Even if the shifting of costs
from one group of consumers to another, much larger group is viewed as
neutral from a cost-benefit perspective, the less quantifiable benefits
to consumers and competition of more transparent upfront pricing weigh
in favor of the proposed rule.
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\77\ See Exhibit 4a, Table 3b to Argus Analysis.
\78\ As noted above, the Argus Analysis stated that, as a result
of proposed Sec. --.23, institutions could lose 0.125 percent of
their annual interest revenue on revolving credit card accounts. See
Exhibit 1, Table 1 to Argus Analysis. This figure appears to be
based on the equal share method, which--according to the Argus
Analysis--would have the least impact of any of the proposed methods
on interest revenue. See Exhibit 1, Table 3a to Argus Analysis
(column labeled ``New Payment Allocation Method,'' row labeled
``Equal''). Although the final rule does not permit use of the equal
share method, the Argus Analysis estimates that the impact of the
pro rata method (which is permitted) would only be two one-
hundredths of a percent (0.002) higher. See id. (column labeled
``New Payment Allocation Method,'' row labeled ``Proportional'').
Furthermore, the 0.125 figure also includes an estimated 0.014 loss
in interest revenue attributable to proposed Sec. --.23(b)(2),
which the Agencies have not adopted. See Exhibit 1, Table 1 to Argus
Analysis. Thus, assuming the Argus Analysis is accurate, the overall
impact of the final rule on interest revenue should be less than the
proposal.
---------------------------------------------------------------------------
Some industry commenters also argued that compliance with proposed
Sec. --.23 would require extensive changes to payment allocation
systems, the cost of which would be passed on to consumers. One systems
provider estimated the cost of developing systems to allocate payments
among different balances at tens of thousands of dollars per
institution. Another systems provider, however, stated that these
systems currently exist. Again, because the Agencies have simplified
the payment allocation rule by permitting only two payment allocation
methods and by omitting the special allocation requirements for
promotional rate balances, the burden associated with systems changes
should be reduced. Furthermore, if the cost of altering practices to
comply with Sec. --.23 is passed on to consumers, that cost will be
spread among thousands, hundreds of thousands, or millions of consumers
and will not outweigh the benefits to consumers of avoiding additional
interest charges and more transparent upfront pricing.\79\
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\79\ As discussed below, the Agencies have revised the proposed
remedy for this unfair practice by allowing only two allocation
methods for excess payments: high-to-low and pro rata allocation.
Unlike the proposal, the final rule would not permit institutions to
split excess payments equally among the balances or to allocate
using a method that is no less beneficial to consumers than one of
the listed methods because the Agencies have determined that these
methods would not provide benefits to consumers that outweigh the
injury addressed by this final rule.
---------------------------------------------------------------------------
Public policy. Some industry commenters argued that the proposed
rule was contrary to public policy as set forth in statements by
another federal banking agency. Specifically, these commenters pointed
to statements in Congressional testimony and an advisory letter by the
OCC suggesting that concerns regarding payment allocation should be
addressed through disclosure rather than substantive regulation.\80\
---------------------------------------------------------------------------
\80\ See Testimony of Julie L. Williams, Chief Counsel & First
Senior Deputy Controller, OCC before H. Subcomm. on Fin. Instits. &
Consumer Credit at 10-11 (Apr. 17, 2008) (available at http://www.house.gov/apps/list/hearing/financialsvcs_dem/williams041708.pdf); see also OCC Advisory Letter 2004-10 (Sept. 14,
2004) (available at http://www.occ.treas.gov/ftp/advisory/2004-10.doc).
---------------------------------------------------------------------------
While public policy may be considered as part of the unfairness
analysis under the FTC Act, it is not a required element of that
analysis and cannot serve as the primary basis for determining that an
act or practice is unfair.\81\ For purposes of the unfairness analysis,
public policy is generally embodied in a statute, regulation, or
judicial decision.\82\ Nevertheless, to the extent that the OCC's
statements constitute public policy, the Agencies find that those
statements (which the Agencies have not adopted) do not preclude a
determination that allocating excess payments in a manner that does not
apply a significant portion to the balance with the highest rate is an
unfair practice. The May 2008 Proposal explained that extensive
consumer testing conducted by the Board indicated that disclosure was
not effective in enabling consumers to avoid the harm caused by current
payment allocation practices. The Agencies also note that the OCC
statements cited by
[[Page 5517]]
the commenters were made prior to the May 2008 Proposal and were not
repeated in the OCC's comment on that proposal.
---------------------------------------------------------------------------
\81\ 15 U.S.C. 45(n).
\82\ See, e.g., FTC Policy Statement on Unfairness at 5 (stating
that public policy ``should be clear and well-established'' and
``should be declared or embodied in formal sources such as statutes,
judicial decisions, or the Constitution as interpreted by the court
* * *'').
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Final Rule
As proposed, Sec. --.23(a) would have established a general rule
governing payment allocation on accounts that have balances with
different annual percentage rates but do not have a promotional rate or
deferred interest balance. Proposed Sec. --.23(b) would have
established special rules for accounts with balances at different rates
that do have a promotional rate or deferred interest balance. As
discussed below, however, the final rule eliminates the special rules
in proposed Sec. --.23(b) and applies a revised version of the general
rule in proposed Sec. --.23(a) to all types of balances.
As an initial matter, industry commenters and a member of Congress
criticized proposed Sec. --.23 as overly complex. They stated that,
rather than making payment allocation practices easier for consumers to
understand, the proposed rule would make payment allocation harder to
disclose and increase consumer confusion. The Agencies reemphasize that
the Board's consumer testing indicates that, regardless of the
complexity of the method, payment allocation methods cannot be
effectively disclosed. The proposed restrictions on payment allocation
were not intended to ease disclosure but instead to protect consumers
from unfair practices that cannot be effectively addressed by
disclosure. Nevertheless, as discussed below, the Agencies have greatly
simplified the final rule.
Section --.23 Allocation of Excess Payments
When an account has balances with different annual percentage
rates, proposed Sec. --.23(a) would have required institutions to
allocate any amount paid by the consumer in excess of the required
minimum periodic payment among the balances in a manner that is no less
beneficial to consumers than one of three listed methods. First,
proposed Sec. --.23(a)(1) would have allowed an institution to apply
the excess payment first to the balance with the highest annual
percentage rate and any remaining portion to the balance with the next
highest annual percentage rate and so forth. Second, proposed Sec.
--.23(a)(2) would have allowed an institution to allocate equal
portions of the excess payment to each balance. Third, proposed Sec.
--.23(a)(3) would have allowed an institution to allocate the excess
payment among the balances in the same proportion as each balance bears
to the total balance (in other words, pro rata).
As discussed above, some consumer group commenters argued that--
because the Board's consumer testing indicates that disclosure does not
enable consumers to understand the effects of payment allocation on
interest charges--providing institutions with the ability to choose
between different allocation methods would only make payment allocation
more complex and the associated costs less transparent. Because this
result would be contrary to the intended purpose of proposed Sec.
--.23, the final rule allows only two allocation methods for excess
payments: Applying the excess payment first to the balance with the
highest annual percentage rate and any remaining amount to the other
balances in descending order based on the applicable annual percentage
rate; and allocating the excess payment pro rata.
Although consumer groups and others argued that the Agencies should
require allocation to the highest rate balance first in all
circumstances because this method would minimize interest charges, the
Agencies believe that the final version of Sec. --.23 strikes the
appropriate balance between institutions and consumers. It prohibits
institutions from using the allocation method that maximizes interest
charges but does not require use of the method that minimizes interest
charges. The Agencies expect that most institutions will use the pro
rata method, which will standardize payment allocation practices and
focus competition on more transparent costs of credit (such as interest
rates). Although permitting a second allocation method creates the
potential for increased complexity, the Agencies believe that the
allocation of excess payments first to the highest rate balance should
be permitted because, even if few institutions will do so, this method
minimizes interest charges for consumers.
The Agencies have not included the proposed methods allowing
allocation of equal portions of the excess payment to each balance and
allowing institutions to allocate excess payments in a manner that is
no less beneficial to the consumer than one of the listed methods in
order to reduce complexity and promote transparency. In addition,
because information received during the comment period indicates that,
as a general matter, consumers have approximately 25 percent of their
total balance at a discounted promotional rate,\83\ it appears that the
equal share method would generally be less beneficial to consumers than
the pro rata method because--unless the account has four or more
balances--the equal share method would apply more of the excess payment
to the discounted promotional rate balance (and therefore less to
balances with higher interest rates) than the pro rata method.\84\
Finally, because an allocation method would have been no less
beneficial to a consumer than a listed method only if it resulted in
the same or lesser interest charges,\85\ institutions were unlikely to
take advantage of this option because it would require individualized
determinations based on each consumer's balances and rates.
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\83\ See Exhibit 7, Table 1c to Argus Analysis (column labeled
``Overall'').
\84\ The Agencies note that, according to the Argus Analysis,
the pro rata method will result in a greater loss in annual interest
revenue than the equal share method. See Exhibit 1, Table 3a to
Argus Analysis (column labeled ``New Payment Allocation Method,''
rows labeled ``Proportional'' and ``Equal''). Thus, assuming these
data are accurate, the pro rata method will result in lower interest
charges for consumers than the equal share method.
\85\ See proposed comment 23(a)-1, 73 FR at 28944.
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The Agencies note that several industry commenters argued that
institutions should be permitted to allocate payments first to the
oldest transactions on the account, which would often be transactions
on which the institution is prohibited from increasing the annual
percentage rate pursuant to proposed Sec. --.24. These commenters
stated that this method (which is sometimes referred to as ``first in,
first out'' or ``FIFO'') would pay down those transactions faster,
thereby reducing the burden to institutions of carrying balances at
rates that no longer reflect market rates or the consumer's risk.
However, the Agencies believe that concerns related to proposed Sec.
--.24 are better addressed through revisions to that proposal (as
discussed below), rather than through payment allocation. In addition,
permitting FIFO allocation would, in some circumstances, allow
institutions to allocate excess payments first to the balance with the
lowest rate. For example, if a consumer opened an account by
transferring a balance in reliance on a discounted promotional rate,
that balance would be the oldest balance on the account. Consequently,
FIFO allocation could perpetuate the current practice of using payment
allocation to maximize interest charges.
Although some industry commenters stated that their payment
allocation systems could allocate excess payments pro rata or in equal
portions, others stated that their systems could not and
[[Page 5518]]
that they would be forced instead to allocate payments first to the
balance with the highest interest rate. The Agencies note that neither
the proposal nor the final rule require institutions to allocate first
to the balance with the highest interest rate. Accordingly, if an
institution's payment allocation system cannot currently allocate
excess payments pro rata, the institution must make the determination
whether to adjust that system or allocate to the highest rate balance
first and forego the additional interest charges. As discussed below in
section VII of this SUPPLEMENTARY INFORMATION, institutions will be
provided with 18 months in which to adjust their systems.
The Agencies proposed commentary to clarify how proposed Sec.
--.23 would be applied. Proposed comment 23-1 clarified that Sec.
--.23 would not limit or otherwise address the institution's ability to
determine the amount of the required minimum periodic payment or how
that payment is allocated. Consumer groups urged the Agencies to apply
proposed Sec. --.23 to the entire payment. In contrast, one industry
commenter stated that excluding the minimum payment was not helpful
because such payments are kept small for competitive reasons. Another
industry commenter urged the Agencies to remove the distinction between
minimum and excess payments in order to reduce the rule's complexity.
The Agencies, however, believe that proposed Sec. --.23 strikes
the appropriate balance by providing institutions flexibility regarding
the minimum amount consumers must pay while ensuring that, when
consumers voluntarily pay more than the minimum, those payments are not
allocated in a manner that maximizes interest charges.\86\ In response
to comments from institutions whose systems cannot distinguish between
minimum and excess payments when allocating and comments objecting to
the complexity created by the distinction, the Agencies clarify in
comment 23-1 that institutions may apply the entire payment consistent
with Sec. --.23 (unless doing so would be inconsistent with applicable
law and regulatory guidance). The Agencies have also clarified that the
amount and allocation of the required minimum periodic payment must be
determined consistent with applicable law and regulatory guidance.
Otherwise, proposed comment 23-1 is adopted as proposed.
---------------------------------------------------------------------------
\86\ One commenter requested that proposed Sec. --.23 be
revised to permit excess payments to be allocated first to interest
and fees. The Agencies do not believe such a change is necessary
because, to the extent that an institution wishes to recover
interest and fees, those amounts can (and often are) included in the
required minimum periodic payment.
---------------------------------------------------------------------------
In order to simplify the allocation process and reduce the
operational burden on institutions, proposed comment 23-2 permitted
institutions to make small adjustments of one dollar or less when
allocating payments. One industry commenter requested that institutions
also be permitted to make adjustments equal to or less than one percent
of the total balance. This is not, however, the type of small
adjustment envisioned by the Agencies. For example, one percent of a
$5,000 balance would be $50. Accordingly, comment 23-2 is adopted as
proposed.
Because proposed Sec. --.23 would have required institutions to
allocate payments based on the balances and annual percentage rates on
the account, some industry commenters requested guidance regarding the
point in time at which the various determinations required by proposed
Sec. --.23 would be made. For example, because transactions are
commonly made between the close of a billing cycle and the date on
which payment for that billing cycle is received, the balances on the
account on the day the payment is applied will often be different than
the balances on the periodic statement for the billing cycle.
Similarly, the annual percentage rates may have changed in the interim.
One industry commenter stated that payment allocation should be based
on the balances and rates on the preceding periodic statement, while
two other industry commenters stated that the balances and rates at the
time the payment is credited should be used. The Agencies believe that,
because the benefit to consumers of one approach or the other will
depend on the consumer's individual circumstances, there is no need to
require a particular approach. Accordingly, the Agencies adopt comment
23-3, which clarifies that an institution may allocate based on the
balances and annual percentage rates on the date the preceding billing
cycle ends (which will typically be the balances and rates reflected on
the periodic statement), on the date the payment is credited to the
account, or on any day in between those two dates.
Some commenters requested that the Agencies prohibit institutions
from varying the allocation method on an account from billing cycle to
billing cycle or from account to account, while others requested that
this be expressly permitted. The Agencies are not prohibiting
institutions from moving from one permissible allocation method to
another or from using one permissible method on some accounts and a
different permissible method on other accounts. Because, under the
final rule, the only alternative to allocating pro rata is allocating
to the highest rate balance first, the Agencies do not believe there is
a significant danger that institutions will be able to manipulate the
payment allocation process to their advantage by switching from one
method to another. Accordingly, the Agencies adopt comment 23-4, which
acknowledges that Sec. --.23 does not restrict an institution's
ability to shift between permissible allocation methods or to use
different permissible allocation methods for different accounts.
One industry commenter noted that the commentary to Regulation Z,
12 CFR 226.12(c) sets forth specific payment allocation requirements
when a consumer asserts a claim or defense under that section that
could be inconsistent with those in proposed Sec. --.23. Because the
payment allocation requirements in the commentary to Sec. 226.12(c)
are intended to prevent extinguishment of claims or defenses, the
Agencies adopt comment 23-5, which clarifies that, when a consumer has
made a claim or defense pursuant to 12 CFR 226.12(c), an institution
must allocate payments consistent with 12 CFR 226.12 comment 226.12(c)-
4, as adopted elsewhere in today's Federal Register.
An industry commenter requested clarification regarding allocation
of payments when an account has multiple balances with the same annual
percentage rate. As an initial matter, because Sec. --.23 applies only
``when different annual percentage rates apply to different balances on
a consumer credit card account,'' this section does not apply if all
balances in the account have the same rate. If, however, an account has
multiple balances with the same annual percentage rate and another
balance with a different rate, the benefit to the consumer of
allocating between the balances with the same rate in a particular
manner will depend on the circumstances and the allocation method
chosen by the institution. Accordingly, the Agencies have adopted
comment 23-6, which clarifies that, in these circumstances, the
institution may allocate between balances with the same rate in the
manner that the institution determines is appropriate. This comment
also clarifies that institutions may treat balances with the same
annual percentage rate as separate balances or as a single balance.
The Agencies have also revised the proposed commentary and adopted
new commentary in response to comments
[[Page 5519]]
regarding specific allocation methods.\87\ Proposed comment 23(a)(1)-1
provided examples of allocating excess payments to the highest rate
balance first. In response to requests from commenters, the Agencies
have added examples illustrating application of this method to accounts
with balances on which the annual percentage rate cannot be increased
pursuant to Sec. --.24 and accounts with multiple balances at the same
rate and at least one balance at a different rate. Otherwise, this
comment is redesignated as comment 23(a)-1 and adopted as proposed.
---------------------------------------------------------------------------
\87\ Because the final rule does not permit institutions to use
a payment allocation method that is no less beneficial to consumers
than one of the listed methods, the Agencies have omitted proposed
comments 23(a)-1 and -2, which clarified the meaning of this aspect
of the proposal. Similarly, because the final rule does not permit
institutions to allocate equal portions of the excess payment to
each balance, the Agencies have omitted proposed comment 23(a)(2)-1,
which provided examples of that allocation method.
---------------------------------------------------------------------------
With respect to pro rata allocation, some industry commenters
requested guidance on how the total balance should be determined. They
suggested that amounts paid by the required minimum periodic payment
should be included in the total balance because excluding such amounts
would be operationally burdensome insofar as it would require
institutions to allocate the minimum payment and then recalculate each
balance for purposes of allocating pro rata. The Agencies agree that
the suggested clarification will reduce burden and assist institutions
in allocating payments consistent with Sec. --.23(b). Accordingly, the
Agencies have adopted comment 23(b)-1 clarifying that an institution
may, but is not required to, deduct amounts paid by the consumer's
required minimum periodic payment when calculating the total balance
for purposes of Sec. --.23(b). An illustrative example is provided in
comment 23(b)-2.iii.
In the May 2008 Proposal, proposed comment 23(a)(3)-1 provided an
example of allocating excess payments pro rata among the balances. This
comment is redesignated as comment 23(b)-2 for organizational reasons
and generally adopted as proposed. In response to requests from
commenters, however, the Agencies have added examples illustrating
application of this method to accounts with balances on which the
annual percentage rate cannot be increased pursuant to Sec. --.24 and,
as noted above, the different methods of calculating the total balance
consistent with comment 23(b)-1.
Proposed Section --.23(b) Special Rules for Accounts With Promotional
Rate Balances or Deferred Interest Balances
As proposed, Sec. --.23(b) contained special rules for accounts
with promotional rate and deferred interest balances that were intended
to ensure that consumers received the full benefit of the promotional
rate or deferred interest plan. Proposed Sec. --.23(b)(1)(i) would
have required that excess payments be allocated to promotional rate
balances or deferred interest balances only after all other balances
had been paid in full. Because, however, the Agencies were concerned
that consumers may want to pay off deferred interest balances shortly
before the deferred interest period expired, proposed Sec.
--.23(b)(1)(ii) would have permitted the existing practice by some
institutions of allocating the entire payment first to the deferred
interest balance in the last two months of the deferred interest
period. Finally, proposed Sec. --.23(b)(2) would have prohibited
institutions from requiring consumers who are otherwise eligible for a
grace period to repay any portion of a promotional rate balance or
deferred interest balance in order to receive the benefit of a grace
period on other balances (such as purchases).
Proposed Sec. --.23(b) was strongly opposed by industry commenters
on the grounds that, if implemented, it would significantly diminish
interest revenue, leading institutions to significantly reduce or
eliminate promotional rate and deferred interest offers that provide
substantial benefits to consumers. Many of these commenters requested
that proposed Sec. --.23(b) be withdrawn and that institutions instead
be permitted to apply excess payments first to promotional rate and
deferred interest balances. Some industry commenters, however,
requested that the general rule in proposed Sec. --.23(a) be applied
to all balances. In contrast, some consumer advocates urged the
Agencies to ban deferred interest balances rather than create an
exception for them.
As an initial matter, the Agencies have not included the special
rules regarding deferred interest balances. As discussed below with
respect to the Sec. --.24, the final rule does not permit institutions
to charge interest retroactively and thus does not permit deferred
interest plans.
With respect to promotional rates, the Argus Analysis indicates
that 16-19 percent of active accounts have one or more promotional rate
balances and that the average promotional rate on those balances is
between two and three percent, which is approximately 13 percentage
points lower than the average non-promotional rate.\88\ Furthermore,
when the rates were weighted to account for the proportion of the total
balance that was at a promotional rate, the effective annual percentage
rate for these accounts was approximately 5.5 percent or roughly ten
percentage points lower than the average rate for non-promotional
balances.\89\ Assuming this information is accurate, it appears that
discounted promotional rates offer significant benefits to many
consumers.
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\88\ See Exhibit 7, Tables 1b and 2 to Argus Analysis.
\89\ See id.
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Notwithstanding these benefits, the Agencies continue to believe
that, as suggested by other commenters, allocating payments to
promotional rate balances before other balances with higher interest
rates significantly diminishes the value of promotional rate offers.
Furthermore, although the Agencies believe that proposed Sec. --.23
would have had a negative impact on the availability of promotional
rates, the commenters provided little data regarding the extent of that
impact. Thus, the Agencies believe that application of the general
payment allocation rule in Sec. --.23 to promotional rate balances is
appropriate. Application of this rule to all balances will limit the
extent to which institutions may reduce promotional rate offers while
ensuring that payment allocation is not used to significantly undercut
the benefits to consumers who act in reliance on such offers.
Accordingly, the Agencies have not included proposed Sec.
--.23(b)(1)(i) in the final rule. To the extent that specific practices
raise concerns regarding unfairness or deception under the FTC Act, the
Agencies plan to address those practices on a case-by-case basis
through supervisory and enforcement actions.
The Agencies have also omitted proposed Sec. --.23(b)(2), which
would have prohibited institutions from denying a grace period solely
because a consumer did not repay a promotional rate or deferred
interest balance. This proposal was strongly criticized by industry as
operationally burdensome and punitive for institutions that voluntarily
provide a grace period on purchases. Proposed Sec. --.23(b)(2) was
intended to act in combination with proposed Sec. --.23(b)(1)(i) to
ensure that consumers receive the full benefit of promotional rate and
deferred interest offers. Because the Agencies have concluded that a
different approach is appropriate, the Agencies have not included
proposed Sec. --.23(b)(2) in the
[[Page 5520]]
final rule. To the extent that specific practices raise concerns
regarding unfairness or deception under the FTC Act, the Agencies plan
to address those practices on a case-by-case basis through supervisory
and enforcement actions.
Other Issues
Implementation. As discussed in section VII of this SUPPLEMENTARY
INFORMATION, the effective date for Sec. --.23 is July 1, 2010. As of
that date, this provision applies to existing as well as new consumer
credit card accounts and balances. Thus, institutions must apply
amounts paid by the consumer in excess of the required minimum periodic
payment that the institution receives after the effective date
consistent with Sec. --.23.
Alternative to proposed rule. The Agencies requested comment on
whether consumers should be permitted to instruct the institution
regarding allocation of amounts in excess of the required minimum
periodic payment. The response was mixed. Some consumer groups
supported creating an exception to proposed Sec. --.23 allowing
consumers to select how their excess payments would be allocated, while
others expressed concern that such an exception would be ineffective
and subject to abuse because disclosures do not enable consumers to
understand payment allocation. Similarly, institutions that currently
allow consumers to select how their payments are allocated requested
that they be permitted to continue doing so, while most industry
commenters opposed any provision that would require them to allocate
consistent with consumer choice as operationally burdensome.
In consumer testing prior to the May 2008 Proposal, the Board
tested whether, given the opportunity, consumers could select how
amounts paid in excess of the minimum would be allocated using the
payment coupon. Most participants, however, were not able to understand
the effects of payment allocation sufficiently to apply payments in a
manner that minimized interest charges. Additional testing conducted by
the Board after the May 2008 Proposal produced similar results.
Accordingly, because it does not appear that consumer choice would be
effective, the Agencies have not included such an exception in the
final rule.
Supplemental Legal Basis for This Section of the OTS Final Rule
As discussed above, HOLA provides authority for both safety and
soundness and consumer protection regulations. Section 535.23 supports
safety and soundness by reducing reputational risk that would result
from allocating consumers' payments in an unfair manner. Section 535.23
also protects consumers by providing them with fair allocations of
their payments. When a creditor treats a consumer credit card account
as having separate balances with separate interest rates and terms, it
is essentially treating the card as having separate debts even though
the consumer makes only one payment. Were the separate balances
actually separate debts being collected by a debt collector, the
consumer would have the right under section 810 of the Fair Debt
Collection Practices Act (15 U.S.C. 1692h) to have payments applied in
accordance with the consumer's directions. As discussed above, that
approach did not test well for consumer credit card accounts with
multiple balances, and the Agencies are not imposing the same
requirement under Sec. --.23. However, ensuring that the consumer's
payment will be applied to the highest rate balance first or pro rata
will be an important protection for consumers. Consequently, HOLA
serves as an independent basis for Sec. 535.23.
Section --.24--Unfair Acts or Practices Regarding Increases in Annual
Percentage Rates
Summary. In May 2008, the Agencies proposed to prohibit the
application of increased rates to outstanding balances, except in
certain limited circumstances. See 73 FR 28917-28921. Specifically,
proposed Sec. --.24(a)(1) would have prohibited the application of an
increased annual percentage rate to an outstanding balance on a
consumer credit card account, except as provided in proposed Sec.
--.24(b). Proposed Sec. --.24(a)(2) would have defined ``outstanding
balance'' as the amount owed on an account at the end of the fourteenth
day after the institution provides the notice required by Regulation Z,
12 CFR 226.9(c) or (g). Proposed Sec. --.24(b) would have permitted
institutions to increase the rate on an outstanding balance due to an
increase in an index, when a promotional rate expired or was lost, or
when the account became more than 30 days' delinquent. Finally,
proposed Sec. --.24(c) would have prohibited institutions from
engaging in certain practices that would undercut the protections in
proposed Sec. --.24(a). Under proposed Sec. --.24(c)(1), institutions
would have been prohibited from requiring consumers to repay the
outstanding balance over a period of less than 5 years or from more
than doubling the repayment rate on the outstanding balance. Proposed
Sec. --.24(c)(2) would also have prohibited institutions from
assessing fees or charges based solely on the outstanding balance (for
example, assessing a maintenance fee in lieu of increased interest
charges).
Based on the comments received and further analysis, the Agencies
have revised proposed Sec. --.24(a) to prohibit institutions from
increasing the annual percentage rate for a category of transactions on
any consumer credit card account unless specifically permitted by one
of the exceptions in Sec. --.24(b). The final rule also requires
institutions to disclose at account opening all rates that will apply
to each category of transactions on the account. Because consumers rely
on the rates stated by the institution when deciding whether to open a
credit card account and whether to use the account for transactions,
these requirements are intended to ensure that consumers are protected
from unfair surprise and to better enable them to comparison shop.
The Agencies have also revised the exceptions in proposed Sec.
--.24(b). First, the Agencies have adopted a new Sec. --.24(b)(1),
which permits an institution that has disclosed at account opening that
an annual percentage rate will increase at a specified time to a
specified amount to increase that rate accordingly. Second, the
Agencies have adopted the proposed exception for variable rates as
Sec. --.24(b)(2). Third, the Agencies have adopted a new Sec.
--.24(b)(3), which permits institutions to increase rates for new
transactions pursuant to the 45-day advance notice requirement in 12
CFR 226.9 (adopted by the Board elsewhere in today's Federal Register),
although this exception does not apply during the first year after
account opening. Fourth, to allow institutions to adjust rates in
response to serious delinquencies, the Agencies have adopted the
proposed exception allowing repricing when an account becomes more than
30 days' delinquent as Sec. --.24(b)(4). Fifth, to avoid discouraging
workout arrangements that decrease rates for consumers in default if
the consumer abides by certain conditions (for example, making payment
on time each month), Sec. --.24(b)(5) has been added allowing a
decreased rate to be returned to the pre-existing rate if the consumer
fails to abide by the conditions of the workout arrangement. Finally,
the Agencies have adopted the repayment provisions in proposed Sec.
--.24(c) with some stylistic changes.
Background. Prior to the Regulation Z amendments published
elsewhere in today's Federal Register, 12 CFR
[[Page 5521]]
226.9(c) required 15 days' advance notice of certain changes to the
terms of an open-end plan as well as increases in the minimum payment.
However, advance notice was not required if an interest rate or other
finance charge increased due to a consumer's default or
delinquency.\90\ Furthermore, no change-in-terms notice was required if
the creditor set forth the specific change in the account-opening
disclosures.\91\
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\90\ See prior versions of 12 CFR 226.9(c)(1); 12 CFR 226.9
comment 226.9(c)(1)-3.
\91\ See prior version of 12 CFR 226.9 comment 226.9(c)-1.
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In its June 2007 Regulation Z Proposal, the Board expressed concern
that the imposition of penalty pricing can come as a costly surprise to
consumers who are not aware of, or do not understand, what behavior is
considered a ``default'' under their agreement. See 72 FR at 33009-
33013. The Board noted that penalty rates can be more than twice as
much as the consumer's normal rate on purchases and may apply to all of
the balances on the consumer's account for several months or
longer.\92\
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\92\ See also GAO Credit Card Report at 24 (noting that, for the
28 credit cards it reviewed, ``[t]he default rates were generally
much higher than rates that otherwise applied to purchases, cash
advances, or balance transfers. For example, the average default
rate across the 28 cards was 27.3 percent in 2005--up from the
average of 23.8 in 2003--with as many as 7 cards charging rates over
30 percent'').
---------------------------------------------------------------------------
Consumer testing conducted for the Board indicated that interest
rates are a primary consideration for consumers when shopping for
credit card accounts but that some consumers do not understand that
events such as one late payment can cause them to lose the advertised
rate and incur penalty pricing. In addition, some testing participants
did not appear to understand that penalty rates can apply to all of
their balances, including outstanding balances. Some participants also
did not appear to understand how long a penalty rate could remain in
effect. The Board observed that account-opening disclosures may be
provided to the consumer too far in advance for the consumer to recall
the circumstances that may cause rates to increase. In addition, the
consumer may not have retained a copy of the account-opening
disclosures and may not be able to effectively link the information
disclosed at account opening to the current repricing of the account.
The Board's June 2007 Regulation Z Proposal included revisions to
the regulation and its commentary designed to improve consumers'
awareness about changes in their account terms and increased rates,
including rate increases imposed as a penalty for delinquency or other
acts or omissions constituting default under the account agreement.
These revisions were also intended to enhance consumers' ability to
shop for alternative financing before such changes in terms or
increased rates become effective. Specifically, the Board proposed to
give consumers 45 days' advance notice of a change in terms or an
increased rate imposed as a penalty and to make the disclosures about
changes in terms and increased rates more effective.\93\ The Board also
proposed to require that periodic statements for credit card accounts
disclose the annual percentage rate or rates that may be imposed as a
result of late payment.\94\
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\93\ See proposed 12 CFR 226.9(c), (g), 72 FR at 33056-33058, 73
FR at 28891. Elsewhere in today's Federal Register, the Board has
adopted a revised version of this proposal.
\94\ See proposed 12 CFR 226.7(b)(11)(i)(C), 72 FR at 33053.
Elsewhere in today's Federal Register, the Board has adopted a
revised version of this proposal.
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When developing the June 2007 Regulation Z Proposal, the Board
considered, but did not propose, a prohibition on so-called ``universal
default clauses'' or similar practices under which a creditor raises a
consumer's interest rate to the penalty rate if, for example, the
consumer makes a late payment on an account with a different creditor.
The Board also considered but did not propose a requirement similar to
that in some state laws providing consumers with the right to reject a
change in terms if the consumer agrees to close the account.
In response to its June 2007 Regulation Z Proposal, individual
consumers, consumer groups, another federal banking agency, and a
member of Congress stated that notice alone was not sufficient to
protect consumers from the harm caused by rate increases. These
commenters argued that many consumers would not read or understand the
proposed disclosures and, even if they did, many would be unable to
transfer the balance to a new credit card account with comparable terms
before the increased rate went into effect. Some of these commenters
argued that creditors should be prohibited from increasing the rate on
an outstanding balance in all instances. Others argued that consumers
should be given the right to reject application of an increased rate to
an outstanding balance by closing the account, but only if the increase
was not triggered by a late payment or other violation of the terms of
that account. This approach was also endorsed by some credit card
issuers. On the other hand, most industry commenters stated that the
45-day notice requirement would delay issuers from increasing rates to
reflect a consumer's increased risk of default, requiring them to
account for that risk by, for example, charging higher annual
percentage rates at the outset of the account relationship. These
commenters also noted that, because rate increases are also used to
pass on the cost of funds issuers themselves pay, delays in the
imposition of increased rates could result in higher costs of credit or
less available credit.
In the May 2008 Proposal, the Agencies expressed concern that
disclosure alone may be insufficient to protect consumers from the harm
caused by the application of increased rates to outstanding balances.
Accordingly, the Agencies proposed Sec. --.24, which would have
prohibited this practice except in certain limited circumstances. This
aspect of the proposal received strong support from individual
consumers, consumer groups, members of Congress, the FDIC, two state
attorneys general, and a state consumer protection agency. Many of
these commenters urged the Agencies to go further, by eliminating all
but the exception for variable rates and by applying the prohibition to
rate increases on future transactions. In contrast, however, the
proposal received strong opposition from credit card issuers, industry
groups, and the OCC. These commenters generally argued that the
proposed restrictions undermined institutions' ability to price
according to current market conditions and the risk presented by the
consumer and would therefore result in higher costs of credit or
reduced credit availability for all consumers. They requested that the
Agencies adopt additional exceptions to the proposed rule, take a
different approach (such as requiring consumers to opt out of rate
increases), or withdraw the proposal entirely. To the extent that
commenters addressed specific aspects of the proposal or its supporting
legal analysis, those comments are discussed below.
Legal Analysis
The Agencies conclude that, except in certain limited
circumstances, increasing the annual percentage rate applicable to an
outstanding balance on a consumer credit card account is an unfair
practice under 15 U.S.C. 45(n) and the standards articulated by the
FTC. In addition, based on these standards, the Agencies conclude that
it is also an unfair practice to increase an annual percentage rate
that applies to a consumer credit card account during the first year
after account opening (except in certain limited circumstances).
[[Page 5522]]
Substantial consumer injury. In May 2008, the Agencies stated that
application of an increased annual percentage rate to an outstanding
balance appeared to cause substantial monetary injury by increasing the
interest charges assessed to a consumer's credit card account.
Commenters who opposed the proposed rule did not dispute that such
increases result in additional interest charges. Indeed, the Argus
Analysis indicated that consumers are charged more than $11 billion in
interest annually as a result of the practices addressed by proposed
Sec. --.24.\95\
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\95\ See Exhibit 1, Table 1 to Argus Analysis (estimated
annualized interest lost for rows labeled ``30+DPD Penalty
Trigger,'' ``CIT Repricing,'' and ``Non 30+DPD Penalty Triggers'').
The Argus Analysis indicates that some portion of this total is
attributable to the requirement in Regulation Z, 12 CFR 226.9, that
creditors provide 45 days' advance notice of most rate increases.
---------------------------------------------------------------------------
Some industry commenters stated that only a minority of accounts
are repriced each year and that even consumers who have violated the
account terms by, for example, paying late are, as a general matter,
not repriced. This does not, however, alter the fact that consumers who
are repriced incur substantial monetary injury.
Some industry commenters argued that, to the extent the increased
rate reflects the prevailing market rate for consumers with the same
risk profile and other relevant characteristics, it cannot constitute
an injury under the FTC Act. These commenters did not provide--nor are
the Agencies aware of--any legal authority supporting the proposition
that increasing the cost of credit is not an injury under the FTC Act
so long as the increased rate does not exceed the market rate.
For all of these reasons, the Agencies conclude that applying an
increased annual percentage rate to an outstanding balance causes
substantial consumer injury. The Agencies further conclude that
consumers who rely on advertised interest rates when deciding to open
and use a credit card account experience substantial injury in the form
of the increased cost of new transactions when rates are increased
during the first year after account opening.\96\ In addition, the
account loses some of its value because the cost of financing
transactions is higher than anticipated when the consumer decided to
open the account.
---------------------------------------------------------------------------
\96\ For this reason, consumers must be informed at account
opening of the rates that will apply to each category of
transactions on the account.
---------------------------------------------------------------------------
Injury is not reasonably avoidable. In May 2008, the Agencies
stated that, although the injury resulting from increases in the annual
percentage rate may be avoidable by some consumers under certain
circumstances, this injury did not appear to be reasonably avoidable as
a general matter because consumers appeared to lack control over many
of the circumstances in which institutions increase rates. The Agencies
grouped these circumstances into four categories: Circumstances that
are completely unrelated to the consumer's behavior (for example,
changes in market conditions); consumer behavior that is unrelated to
the account on which the rate is increased (for example, so-called
``universal defaults''); consumer behavior that is related to the
account in question but does not violate the terms of that account (for
example, using most but not all of the credit limit); and consumer
behavior that violates the terms of the account (for example, late
payment or exceeding the credit limit). As discussed below, based on
the comments and further analysis, the Agencies conclude that consumers
cannot, as a general matter, reasonably avoid rate increases on
outstanding balances.
First, an institution may increase a rate for reasons that are
completely unrelated to the consumer's behavior. For instance, an
institution may increase rates to increase revenues or to respond to
changes in the cost to the institution of borrowing funds. In May 2008,
the Agencies observed that consumers lack any control over these
increases and cannot be reasonably expected to predict when such
repricings will occur because many institutions reserve the right to
change the terms of the consumer's account at any time and for any
reason. Accordingly, the Agencies concluded that consumers appeared to
be unable to reasonably avoid injury in these circumstances.
Some industry commenters responded that consumers can reasonably
avoid injury by transferring the balance to another credit card
account, particularly if the consumer receives the 45 days' advance
notice required by proposed 12 CFR 226.9. These commenters
acknowledged, however, that many consumers will be unable to find
another credit card account with a rate comparable to the pre-increase
rate. Furthermore, even if a comparable rate could be found, the
transfer may carry a cost because many institutions charge a flat fee
for transferring a balance or a fee equal to a percentage of the
transferred balance. Accordingly, the Agencies conclude that consumers
cannot reasonably avoid the injury caused by rate increases on
outstanding balances for reasons that are unrelated to their behavior.
Second, an institution may increase an annual percentage rate on a
consumer credit card account based on behavior that is unrelated to the
consumer's performance on that account. This is sometimes referred to
as ``off-account'' behavior or ``universal default.'' For example, an
institution may increase a rate due to a drop in a consumer's credit
score or a default on an account with a different creditor even though
the consumer has paid the credit card account with the institution
according to the terms of the cardholder agreement.\97\ The consumer
may or may not have been aware of or able to control the factor that
caused the drop in credit score, and the consumer cannot control what
factors are considered or how those factors are weighted in creating
the credit score. For example, a consumer is not likely to be aware
that using a certain amount of the available credit on open-end credit
accounts can lead to a reduction in credit score. Moreover, even if a
consumer were aware that the utilization of available credit can affect
a credit score, the consumer could not control how the institution uses
credit scores or other information to set interest rates.\98\
Furthermore, as discussed below, a late payment or default on a
different account (or the account in question) will not be reasonably
avoidable in some instances.
---------------------------------------------------------------------------
\97\ See, e.g., Statement of Janet Hard before S. Perm. Subcomm.
on Investigations, Hearing on Credit Card Practices: Unfair Interest
Rate Increases (Dec. 4, 2007) (available at http://www.senate.gov/
~govt-aff/index.cfm?Fuseaction=Hearings.Detail&HearingID=509).
\98\ Indeed, several credit card issuers stated in their
comments that, rather than relying solely on credit scores to
increase rates, they use proprietary underwriting systems that
examine a wide range of criteria. Because those criteria are not
available to the public, consumers cannot be reasonably expected to
know what behavior will cause their issuer to increase the rate on
their account.
---------------------------------------------------------------------------
One industry commenter stated that a consumer has a right under the
Fair Credit Reporting Act (FCRA) to dispute any inaccurate information
that causes a drop in credit score.\99\ This right, however, does not
assist consumers whose credit scores decrease due to information that
accurately reflects events that were nevertheless unavoidable by the
consumer. Furthermore, even when the drop in credit score was caused by
inaccurate information, the right to dispute that information comes too
late to enable the consumer to avoid the harm caused by an increase in
rate on an outstanding balance. Accordingly, the Agencies conclude
that, as a general matter, consumers cannot reasonably avoid the
[[Page 5523]]
injury caused by rate increases on outstanding balances that are based
on a drop in credit score or on behavior that is unrelated to the
consumer's performance on the account in question.
---------------------------------------------------------------------------
\99\ See 15 U.S.C. 1681i.
---------------------------------------------------------------------------
Third, some institutions increase annual percentage rates on
consumer credit card accounts based on consumer behavior that is
related to the account but does not violate the account terms. For
example, an institution may increase the annual percentage rates of
consumers who are close to (but not over) the credit limit on the
account or who make only the required minimum periodic payment set by
the institution for several consecutive months.\100\ Although in some
cases this type of activity may be within the consumer's control, the
consumer cannot reasonably avoid the resulting injury because the
consumer is not aware that this behavior may be used by the
institution's internal risk models as a basis for increasing the rate
on the account. Indeed, a consumer could reasonably interpret an
institution's provision of a specific credit limit, minimum payment, or
other account term as an implicit representation that the consumer will
not be penalized if the credit limit is not exceeded, the minimum
payment is made, or the consumer otherwise complies with the terms of
the account. Accordingly, the Agencies conclude that consumers cannot
reasonably avoid the injury caused rate increases based on behavior
that does not violate the account terms.
---------------------------------------------------------------------------
\100\ See, e.g., Statement of Bruce Hammonds, President, Bank of
America Card Services before S. Perm. Subcomm. on Investigations,
Hearing on Credit Card Practices: Unfair Interest Rate Increases at
5 (Dec. 4, 2007) (available at http://hsgac.senate.gov/public/_files/STMTHammondsBOA.pdf).
---------------------------------------------------------------------------
Fourth, institutions increase annual percentage rates based on
consumer behavior that violates the account terms. Although what
violates the account terms can vary from institution to institution and
from account to account, the most common violations that result in an
increase in rate are exceeding the credit limit, a payment that is
returned for insufficient funds, and a late payment.\101\ In the May
2008 Proposal, the Agencies stated that, in some cases, it appeared
that individual consumers could avoid these events by taking reasonable
precautions. In other cases, however, it appeared that the event was
not reasonably avoidable. For example, consumers who carefully track
their transactions are less likely to exceed their credit limit than
those who do not, but these consumers may still exceed the limit due to
charges of which they were unaware (such as the institution's
imposition of interest or fees) or because of the institution's delay
in replenishing the credit limit following payment. Similarly, although
consumers can reduce the risk of making a payment that will be returned
for insufficient funds by carefully tracking the credits and debits on
their deposit account, consumers still lack sufficient information
about key aspects on their accounts, including when funds from a
deposit or a credit will be made available by the depository
institution.\102\ Finally, the Agencies noted that, although proposed
Sec. --.22 would ensure that a consumer's payment would not be treated
as late for any reason (including for purposes of triggering an
increase in rate) unless the consumer received a reasonable amount of
time to make that payment, consumers may nevertheless pay late for
reasons that are not reasonably avoidable. As support, the Agencies
cited the FTC's conclusion with respect to its Credit Practices Rule
that the majority of defaults are not reasonably avoidable by consumers
as well as studies, reports, and other evidence indicating that
involuntary factors such as unemployment play a large role in
delinquency.\103\
---------------------------------------------------------------------------
\101\ See GAO Credit Card Report at 25.
\102\ See also 73 FR at 28927-28933 (discussing unfairness
concerns regarding overdraft services and debit holds).
\103\ See Statement for FTC Credit Practices Rule, 49 FR at
7747-48 (finding that ``the majority [of defaults] are not
reasonably avoidable by consumers'' because of factors such as loss
of income or illness); Testimony of Gregory Baer, Deputy General
Counsel, Bank of America before the H. Fin. Servs. Subcomm. on Fin.
Instit. & Consumer Credit at 4 (Mar. 13, 2008) (``If a customer
falls behind on an account, our experience tells us it is likely due
to circumstances outside his or her control.''); Sumit Agarwal &
Chunlin Liu, Determinants of Credit Card Delinquency and Bankruptcy:
Macroeconomic Factors, 27 J. of Econ. & Finance 75, 83 (2003)
(finding ``conclusive evidence that unemployment is critical in
determining delinquency''); Fitch: U.S. Credit Card & Auto ABS Would
Withstand Sizeable Unemployment Stress, Reuters (Mar. 24, 2008)
(``According to analysis performed by Fitch, increases in the
unemployment rate are expected to cause auto loan and credit card
loss rates to increase proportionally with subprime assets
experiencing the highest proportional rate.'') (available at http://www.reuters.com/article/pressRelease/idUS94254+24-Mar-2008+BW20080324).
---------------------------------------------------------------------------
In response, some industry commenters asserted that, because most
consumers pay on time and do not otherwise violate the account terms,
these behaviors must be reasonably avoidable. As an initial matter,
although the information available is limited, it appears that a
significant number of consumers are penalized for violating the account
terms.\104\ Furthermore, the fact that a particular behavior may be
relatively infrequent does not necessarily make it reasonably
avoidable.\105\
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\104\ See GAO Report at 32-33 (finding that, in 2005, 11% of
active accounts were being assessed a penalty interest rate, 35% had
been assessed a late fee, and 13% had been assessed a fee for
exceeding the credit limit); Exhibit 6, Tables 1a to Argus Analysis
(stating that a total of 15.6% of accounts were repriced as a
penalty from March 2007 through February 2008). One credit card
issuer cited data showing that its consumers tend to make payments
close to the due date, which--it argued--indicates that consumers
are able to reasonably avoid late payment. This same data, however,
indicated that a significant number of payments are received after
the due date.
\105\ Some industry commenters noted that the Board's consumer
testing indicated that consumers have a general understanding that
their rate would change if they violated the account terms by, for
example, paying late. This does not, however, mean that consumers
can, as a general matter, reasonably avoid such violations.
---------------------------------------------------------------------------
Another commenter cited as evidence that late payment is reasonably
avoidable a study finding that a consumer is 44 percent less likely to
pay a late fee in the current month if that consumer paid a late fee
the prior month.\106\ While this study indicates that consecutive late
payments are less likely to be accidental, it does not indicate that
the initial late payment (which currently may trigger a rate increase)
is reasonably avoidable.
---------------------------------------------------------------------------
\106\ See Sumit Agarwal et al., Stimulus and Response: The Path
from Naivete to Sophistication in the Credit Card Market (Aug. 20,
2006) (available at http://www.iue.it/FinConsEU/ResearchActivities/BehavioralApproachesMay2007/Driscoll.pdf).
---------------------------------------------------------------------------
Accordingly, the Agencies conclude that, as a general matter, the
injury caused by rate increases on outstanding balances due to a
violation of the account terms is not reasonably avoidable. For all of
the reasons discussed above, the Agencies further conclude that,
although the injury resulting from the application of increased annual
percentage rates to outstanding balances is avoidable in some
individual cases, this injury is not reasonably avoidable by consumers
as a general matter.\107\
---------------------------------------------------------------------------
\107\ Some commenters argued that the Board's existing or
proposed Regulation Z disclosures or state laws allowing consumers
to opt out of rate increases by closing the account enable consumers
to reasonably avoid injury. These arguments are addressed below in
the Agencies' discussion of public policy. In particular, the
Agencies note that disclosure will not enable consumers to select a
credit card that does not reprice because institutions almost
uniformly reserve the right to increase rates at any time and for
any reason. See Statement for FTC Credit Practices Rule, 48 FR at
7746. In addition, some commenters criticized the May 2008 Proposal
for failing to explain why injury was reasonably avoidable for each
of the proposed exceptions in proposed Sec. --.24(b). As discussed
below, the exceptions in Sec. --.24(b) are not based on a
conclusion that the injury is reasonably avoidable as a general
matter but instead on a determination that allowing repricing in
those circumstances ensures that the costs of prohibiting rate
increases on outstanding balances do not outweigh the benefits.
---------------------------------------------------------------------------
For these same reasons, the Agencies also conclude that the injury
caused by
[[Page 5524]]
rate increases during the first year after account opening is not, as a
general matter, reasonably avoidable, particularly if consumers are not
informed at account opening of the rates that will apply to the
account. A consumer will receive 45 days' advance notice of such
increases pursuant to the Board's revisions to 12 CFR 226.9 (adopted
elsewhere in today's Federal Register) but, as discussed above, many
consumers will be unable to find another credit card account with a
rate comparable to the pre-increase rate. Thus, although some consumers
may be able to avoid injury by using a different credit card account
for transactions or ceasing to use credit cards entirely, consumers who
open an account to finance important purchases (such as medical
services or home or automotive repairs) and cannot obtain credit at the
same or a better rate elsewhere cannot reasonably avoid injury.
Furthermore, to the extent that consumers are injured because the rate
increase caused the account to lose value as a means of financing
transactions, this injury is not reasonably avoidable because, as
discussed above, rate increases are not, as a general matter,
reasonably avoidable.
Injury is not outweighed by countervailing benefits. In May 2008,
the Agencies stated that, although proposed Sec. --.24 could result in
increased costs or reduced credit availability for consumers generally,
these costs did not appear to outweigh the substantial benefits to
consumers of avoiding significant unanticipated increases in the cost
of completed transactions. As discussed below, based on the comments
received and further analysis, the Agencies have revised aspects of
proposed Sec. --.24 in order to ensure that the final rule creates
benefits for consumers that exceed any associated costs. In light of
these revisions, the Agencies conclude that, to the extent prohibited
by Sec. --.24, increases in the annual percentage rate do not produce
benefits for consumers or competition that outweigh the injury.
In response to the May 2008 Proposal, individual consumers,
consumer groups, and some members of Congress argued that repricing is
inherently unfair and should be prohibited in most if not all
circumstances. In contrast, industry commenters generally argued that
flexible pricing models that respond to changes in the consumer's risk
of default have produced substantial benefits for consumers and
competition that outweigh any injury. These commenters noted that,
whereas institutions once charged a single rate of around 20 percent on
all credit card accounts regardless of the risk presented by the
consumer, institutions now vary the interest rate based on the
consumer's risk profile with the result that the great majority of
consumers receive rates below 20 percent.\108\
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\108\ Many of these commenters relied on the GAO Credit Card
Report, which states that data reported by six top issuers indicated
that, in 2005, about 80% of active accounts were assessed rates of
less than 20% (with more than 40% receiving rates of 15% or less).
See GAO Credit Card Report at 5. However, as noted by consumer
groups, this data also indicated that approximately 11% of active
accounts were charged rates over 25%. See id. at 32.
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The exceptions in proposed Sec. --.24(b) permitted three types of
repricing that appeared to produce benefits for consumers and
competition that outweighed the injury. These exceptions were designed
to provide institutions with flexibility in the repricing of
outstanding balances while protecting consumers from unfair surprise.
Based on the comments and further analysis, the Agencies have modified
these exceptions as well as the general rule. As discussed below, the
Agencies believe that the final rule achieves the appropriate balance
between providing consumers with increased certainty and transparency
regarding the cost of credit and providing institutions with sufficient
flexibility to adjust to market conditions and allocate risk
efficiently.
1. Increases in the Rate That Applies to New Transactions
Individual consumers, consumer groups, members of Congress, and the
FDIC urged the Agencies to apply the proposed restrictions on the
repricing of outstanding balances to increases in the rates that apply
to future transactions. Some argued that consumers who have opened an
account in reliance on the rates stated by the institution should be
protected from unexpected increases in those rates for a specified
period of time.
As discussed above, the Agencies agree that rate increases during
the first year after account opening can cause substantial injury that
is not, as a general matter, reasonably avoidable by consumers. In
addition, because the Board's consumer testing indicates that interest
rates are a primary focus for consumers when reviewing credit card
applications and solicitations, the Agencies believe that allowing
unlimited rate increases during the first year would be contrary to the
purpose of Sec. --.24, which is to prevent surprise increases in the
cost of credit. Indeed, as noted below with respect to promotional
rates, allowing this type of repricing while restricting others would
create an incentive for institutions to offer artificially low interest
rates to attract new customers based on the expectation that future
repricings will generate sufficient revenues, a practice which distorts
competition and undermines consumers' ability to evaluate the true cost
of using credit. Accordingly, because consumers who open an account
should be able to rely on the interest rate (or rates) stated by the
institution, the Agencies have revised Sec. --.24 to prohibit, as a
general matter, rate increases during the first year after account
opening.
This prohibition, however, is not absolute. The exception in Sec.
--.24(b)(1) permits an institution to increase any annual percentage
rate disclosed at account opening so long as the institution also
disclosed a period of time after which the rate will increase and the
increased rate that will apply. In addition, a variable rate may be
increased due to an increase in the index pursuant to Sec.
--.24(b)(2). Furthermore, after the first year, Sec. --.24(b)(3)
permits an institution to increase the rates that apply to new
transactions, provided the institution complies with Regulation Z's 45-
day advance notice requirement. Finally, Sec. --.24(b)(4) permits an
institution to increase rates when the account becomes more than 30
days delinquent.
The Agencies acknowledge that these additional restrictions will
reduce interest revenue and therefore have some effect on the cost and
availability of credit. Industry commenters, however, generally stated
that the amount of interest revenue generated from raising rates on
future transactions was relatively small in comparison to the revenue
generated from applying increased rates to outstanding balances.
Therefore, the Agencies believe that the effect of restricting rate
increases during the first year after account opening will be
significantly less than that for restricting rate increases on
outstanding balances. Accordingly, the Agencies conclude that repricing
during the first year after account opening does not produce benefits
for consumers or competition that outweigh the injury to consumers.
By requiring institutions to commit in advance to the rates that
will ultimately apply to transactions and to disclose those rates to
consumers, the final rule will also prevent institutions from relying
on the ability to reprice outstanding balances when setting upfront
rates, thereby creating additional incentives for institutions to
ensure that the rates offered to consumers at the outset fully reflect
the risk presented by the consumer as well
[[Page 5525]]
as current and anticipated market conditions.
2. Variable Rates
The proposed rule provided that the prohibition on applying an
increased annual percentage rate to an outstanding balance would not
extend to variable rates. This exception was intended to allow
institutions to adjust to increases in the cost of funds by utilizing a
variable rate that reflects market conditions because, if institutions
were not permitted to do so, they would be less willing to extend open-
end credit. The Agencies reasoned that, although the injury caused by
application of an increased variable rate to an outstanding balance is
not reasonably avoidable insofar as the increase is due to market
conditions that are beyond the consumer's ability to predict or
control, the proposed exception would protect consumers from arbitrary
rate increases by requiring that the index for the variable rate be
outside the institution's control and available to the general public.
This exception was supported by most commenters. Accordingly, because
allowing institutions to utilize variable rates provides countervailing
benefits sufficient to outweigh the increased interest charges, the
Agencies have adopted the proposed exception for variable rates as
Sec. --.24(b)(2) with some stylistic changes.
3. Non-Variable Rates
Industry commenters urged the Agencies to revise proposed Sec.
--.24 to provide greater flexibility to offer rates that do not vary
with an index. Without such an exception, they argued, concerns
regarding increases in the cost of funds would force institutions to
offer only variable rates, depriving consumers of the reliability of
rates that do not fluctuate with the market. Some of these commenters
requested that proposed Sec. --.24 be revised to allow repricing of
outstanding balances at the end of a specified period (such as six
months, one year, or two years).
The Agencies agree that non-variable rates can provide significant
benefits to consumers but only if consumers are informed before opening
an account or engaging in transactions how long the rate will apply and
what rate will be applied thereafter. Accordingly, the final rule
provides two ways for institutions to offer non-variable rates. First,
at account opening, Sec. --.24(b)(1) permits institutions to offer
non-variable rates that apply for a specified period of time and to
reprice at the end of that period so long as the institution discloses
at account opening the increased rate that will apply. For example, an
institution could offer a consumer credit card account with a non-
variable rate of 10% for six months after which a variable rate based
on a disclosed index and margin will apply to outstanding balances and
new transactions. Similarly, following the first year after account
opening, Sec. --.24(b)(3) permits institutions to provide non-variable
rates that apply for a specified period of time, although these rates
can only be applied to new transactions. For example, consistent with
the notice requirements in 12 CFR 226.9(c), an institution could apply
a non-variable rate of 15% to purchases for one year after which a
variable rate will apply.
In either case, a consumer who receives a non-variable rate would
be subject to repricing. However, the consumer will know at the time of
each purchase not only how long the current rate will apply to that
purchase but also the specific rate that will apply thereafter. Thus,
the final rule provides institutions with the ability to increase rates
to reflect anticipated changes in market conditions while enabling
consumers to make informed decisions about the cost of using credit.
Accordingly, the Agencies conclude that the benefits of allowing
repricing under these circumstances outweigh the injury.
4. Promotional Rates
The proposed rule would have allowed institutions to apply an
increased rate to an outstanding balance upon expiration or loss of a
promotional rate, except that, when a promotional rate was lost, the
increased rate could not exceed the rate that would have applied after
expiration. Consumer groups opposed this exception, stating that,
because it did not limit the circumstances in which a promotional rate
could be lost, it would leave in place abusive repricing practices.
These commenters argued that this exception would allow institutions to
continue to engage in ``hair trigger'' repricing by, for example,
increasing the rate on an outstanding balance from a 0% promotional
rate to a 15% standard rate when the consumer's payment was received
one day after the due date. They also stated that some institutions
impose conditions on retention of a promotional rate that are unrelated
to the consumer's risk of default and are instead intended to trap
unwary consumers into losing the discounted rate (for example,
requiring consumers to make a certain number or dollar amount of
purchases each billing cycle). Accordingly, they argued that, because
discounted promotional rate offers are used to encourage consumers to
engage in transactions they would not otherwise make (such as large
purchases or balance transfers), consumers who rely on promotional rate
offers need the same protections as consumers who rely on non-
promotional rates.
Based on the comments and further analysis, the Agencies agree that
this aspect of the proposed rule could allow the very practices that
the Agencies intended to prevent. For example, an institution seeking
to attract new consumers by offering a promotional rate that is lower
than its competitors' rates could offer a rate that would be
unprofitable if the institution did not place conditions on retention
of the rate that, based on past consumer behavior, it anticipates will
result in a sufficient number of repricings to generate sufficient
revenues. This type of practice distorts competition and undermines
consumers' ability to evaluate the true cost of using credit.
Although the Agencies understand that discounted promotional rates
can provide substantial benefits to consumers \109\ and that
institutions may reduce promotional rate offers if their ability to
reprice is restricted, practices that cause consumers to lose a
promotional rate before the previously-disclosed expiration date
deprive those consumers of the benefit of a rate on which they have
relied. Accordingly, because proposed Sec. --.24 was intended to
improve transparency and prevent surprise increases in the cost of
completed transactions, the Agencies conclude that the injury caused by
the repricing of promotional rate balances prior to expiration is not
outweighed by the benefits of the promotional rate itself. Absent a
serious default, a consumer should be able to rely on a rate for the
period specified in advance by the institution. Therefore, the final
rule does not permit repricing of outstanding balances prior to the end
of the specified period (except in the case of a delinquency of more
than 30 days as provided in Sec. --.24(b)(4)). As discussed above,
however, the final rule (like the proposal) permits repricing at the
end of a specified period so long as the increased rate was disclosed
in advance.
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\109\ See above discussion regarding the benefits of promotional
rates in relation to Sec. --.23 (payment allocation).
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5. Violations of the Account Terms
The proposed rule would have permitted institutions to increase the
annual percentage rate on an outstanding balance if the consumer became
more than 30 days delinquent.
[[Page 5526]]
The Agencies observed that, although this delinquency may not have been
reasonably avoidable in certain individual cases, the consumer will
have received notice of the delinquency (in the periodic statement and
likely in other notices as well) and had an opportunity to cure before
becoming more than 30 days delinquent. The Agencies noted that a
consumer is unlikely, for example, to become more than 30 days
delinquent due to a single returned item or the loss of a payment in
the mail. Thus, the harm in individual cases where a delinquency of
more than 30 days is not reasonably avoidable appeared to be outweighed
by the benefits to all consumers (in the form of lower annual
percentage rates and broader access to credit) of allowing institutions
to reprice for risk once a consumer has become significantly
delinquent. For these reasons and for the additional reasons discussed
below, the Agencies conclude that the benefits of allowing repricing in
these circumstances outweigh the costs. The Agencies further conclude,
however, that the same is not true for repricing based on other
violations of the account terms.
In response to the May 2008 Proposal, consumer groups argued that
repricing outstanding balances based on violations of the account terms
is fundamentally unfair and should be prohibited entirely or, failing
that, a delinquency of more than 30 days should be the only
circumstance in which institutions are permitted to reprice based on a
violation of the account terms. A consumer group explained that a
delinquency of more than 30 days was the appropriate period because,
under industry guidelines governing credit reporting, an account is not
reported as delinquent until it is at least 30 days late, suggesting
that paying less than 30 days late is not considered to affect
creditworthiness significantly.\110\ In contrast, industry commenters
and the OCC argued that the proposed rule provided insufficient
flexibility because accounts that become more than 30 days delinquent
have such a high rate of loss that repricing is ineffective. The Argus
Analysis stated that 32.4 percent of accounts that are more than 30
days past due and 49.8 percent of the balances on those accounts will
become losses within the next twelve months.\111\ Industry commenters
argued that, given these rates, institutions would be unable to
compensate for the losses through rate increases on all accounts that
become more than 30 days delinquent. Instead, they argued, these losses
would have to be spread over a larger population of accounts,
potentially raising rates and reducing credit availability for many or
all consumers.
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\110\ See Consumer Data Industry Ass'n, Credit Reporting
Resource Guide 6-6 (2006).
\111\ See Exhibit 5, Tables 1a and 1b to Argus Analysis (row
labeled ``Mar-07'' containing twelve-month outcome duration). The
Argus Analysis categorized an account as a loss if it became 90 or
more days delinquent, charged off, or bankrupt. Id.
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The Argus Analysis stated that--as a result of the restrictions in
proposed Sec. --.23 (payment allocation), proposed Sec. --.24
(repricing), and proposed 12 CFR 226.9 (45 days advance notice of most
rate increases)--institutions could lose 1.639 percent of their annual
interest revenue on revolving credit card accounts.\112\ This analysis
estimated that, in order to offset this loss, institutions might
increase interest rates by approximately 120 percent of the loss (1.937
percentage points), decrease the average credit line of $9,561 by
approximately 22 percent ($2,029), cease lending to consumers with Fair
Isaac Corporation (``FICO'') scores below 620, or engage in some
combination of these responses.\113\
---------------------------------------------------------------------------
\112\ See Argus Analysis at 3; Exhibit 1, Table 1 to Argus
Analysis.
\113\ See Argus Analysis at 4; Exhibit 1, Tables 7-11 to Argus
Analysis.
---------------------------------------------------------------------------
Although the Argus Analysis did not estimate the potential impact
on interest rates and credit availability specifically attributable to
proposed Sec. --.24, it did state that annual interest revenue on
revolving accounts would be reduced by approximately 1.514 percent as a
result of proposed Sec. --.24 and proposed 12 CFR 226.9.\114\
Therefore, assuming for the sake of discussion that the data and
assumptions underlying the Argus Analysis are accurate, that analysis
predicts that institutions might respond by increasing interest rates
approximately 1.817 percentage points, by decreasing credit limits
approximately $1,874, or by substantially reducing lending to consumers
with FICO scores below 620.\115\ Accordingly, if, for example, an
institution currently charges a consumer an interest rate of 15% on a
credit line of $9,000, the institution could respond to proposed Sec.
--.24 and proposed 12 CFR 226.9 by increasing the rate to 16.82% or by
decreasing the credit limit to $7,126.
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\114\ See Exhibit 1, Table 1 to Argus Analysis (combining the
predictions for ``Revolvers'' in the rows labeled ``30+DPD Penalty
Trigger,'' ``CIT Repricing,'' and ``Non 30+DPD Penalty Triggers'').
\115\ As noted above, the Argus Analysis estimated that proposed
Sec. --.24 and proposed 12 CFR 226.9 would reduce interest revenue
by 1.514 percent. Accordingly, the Agencies assumed that, consistent
with the Argus Analysis, the increase in interest rates attributable
to proposed Sec. --.24 and proposed 12 CFR 226.9 would be 120
percent of the reduction in interest revenue (1.514 x 1.2 = 1.817).
The Agencies also assumed that the reduction in credit limits
attributable to proposed Sec. --.24 and proposed 12 CFR 226.9 would
be proportionate to the overall reduction predicted by the Argus
Analysis. Thus, because the estimated revenue loss attributable to
proposed Sec. --.24 and proposed 12 CFR 226.9 (1.514) is 92.4% of
the overall estimated revenue loss (1.637), the Agencies assumed
that the reduction in credit limits attributable to proposed Sec.
--.24 and proposed 12 CFR 226.9 would be 92.4% of the overall
reduction of $2,029 predicted by the Argus Analysis ($2,029 x 0.924
= $1,874.26). The Agencies were not able to estimate the potential
impact on credit availability for consumers with FICO scores below
620 but, because proposed Sec. --.24 and proposed 12 CFR 226.9
accounted for 92.4% of the estimated revenue loss, the Agencies
assumed the reduction in available credit for these consumers would
be substantial.
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As noted above, however, the Agencies are unable to verify the
accuracy of the conclusions reached by the Argus Analysis or its
supporting data. Furthermore, this analysis assumed that institutions
could only respond to the proposed rules by increasing rates, reducing
credit limits, or eliminating credit to consumers with FICO scores
below 620, ignoring other potential responses such as offsetting lost
interest revenue by increasing revenue from fees (including annual
fees) or developing improved underwriting techniques in order to reduce
losses on accounts that eventually default.\116\
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\116\ As discussed above with respect to Sec. --.23 and in
greater detail below in section VII of this SUPPLEMENTARY
INFORMATION, the Agencies anticipate that, prior to the effective
date, some institutions may respond to the restrictions in proposed
Sec. --.24 and proposed 12 CFR 226.9 by, for example, adjusting
interest rates on existing balances, increasing fees, or reducing
credit limits.
---------------------------------------------------------------------------
In addition, even if the Agencies were to accept the Argus Analysis
and its underlying data at face value, that analysis also indicates
that the typical rate increase is approximately eight percentage points
and that approximately 22 percent of accounts are repriced over the
course of a year.\117\ Thus, with respect to interest rates, the Argus
Analysis indicates that the impact of the proposed rule would be
relatively neutral because the rule would prevent a six percentage
point net increase on roughly a quarter of accounts while the other
three-quarters may experience an increase of less than two percentage
points.\118\ Although the Argus Analysis
[[Page 5527]]
also predicted that--instead of increasing interest rates--institutions
might reduce credit limits or lending to consumers with lower FICO
scores, those responses would reduce or eliminate the need for a rate
increase, thereby retaining roughly the same relationship between the
costs and benefits of the rule.\119\
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\117\ See Argus Analysis at 7; Exhibit 6, Tables 1a and 3a to
Argus Analysis (totaling the percentage of accounts repriced as a
penalty and as a change-in-terms from March 2007 through February
2008).
\118\ In other words, if, according to the Argus Analysis,
roughly 22% of consumers currently experience a rate increase
averaging 8 percentage points each year and all consumers will
experience a 1.817-point increase in interest rate as a result of
the proposed rules, then the proposed rules will prevent 22% of
consumers from incurring a net increase of 6.183 points (8 minus
1.817) while the other 78% may experience an increase of 1.817.
Although some portion of the 22 percent are presumably accounts that
become 30 days delinquent and thus would still be repriced, the
comments indicate that this portion is relatively small.
\119\ The Agencies also note that, while the estimated impact on
interest rates and credit availability is a prediction regarding
potential future events, the average eight percentage point increase
appears to reflect the harm that is currently imposed on consumers.
Accordingly, the Agencies believe that the latter figure is entitled
to greater weight.
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As with Sec. --.23, even if the shifting of costs from one group
of consumers to another, much larger group is viewed as neutral from a
cost-benefit perspective, the less quantifiable benefits to consumers
and competition of more transparent upfront pricing weigh in favor of
Sec. --.24. Upfront annual percentage rates that are artificially
reduced based on the expectation of future increases do not represent a
true benefit to consumers as a whole. In addition to protecting
consumers from unexpected increases in the cost of transactions that
have already been completed, Sec. --.24 will enable consumers to more
accurately assess the cost of using their credit card accounts at the
time they engage in new transactions. Finally, competition will be
enhanced because institutions that offer annual percentage rates that
more accurately reflect risk and market conditions will no longer be
forced to compete with institutions offering artificially reduced
rates. Accordingly, the Agencies conclude that limiting rate increases
on outstanding balances and during the first year to circumstances
where the account is more than 30 days delinquent produces benefits
that outweigh the associated costs.
Industry commenters and the OCC urged the Agencies to adopt
additional exceptions to proposed Sec. --.24 based on violations of
the account terms other than a single late payment (specifically,
exceeding the credit limit, making payment with a check that is
returned for insufficient funds, and paying late twice in a twelve
month period). Many of these commenters provided data indicating that
these behaviors are associated with loss rates that are significantly
higher than those for consumers who do not violate the account terms
(although all of these loss rates were significantly lower than the
loss rates associated with delinquencies of more than 30 days). As an
initial matter, the Agencies note that the impact on the cost and
availability of credit of prohibiting repricing based on these
behaviors is subsumed within the impact of prohibiting repricing based
on any violation of the account terms other than a delinquency of more
than 30 days. Accordingly, for the reasons already stated above,
repricing outstanding balances based on these behaviors does not
provide benefits to consumers or competition that outweigh the injury
to consumers.
Furthermore, with respect to repricing outstanding balances when
the credit limit is exceeded or when a payment is returned for
insufficient funds, the Agencies have already concluded that these
violations of the account terms are not, as a general matter,
reasonably avoidable by consumers. Accordingly, allowing repricing in
those circumstances would undermine the purpose of Sec. --.24, which
is to protect consumers from being unfairly surprised by increases in
the cost of completed transactions.
Similarly, the Agencies conclude that allowing repricing based on
two late payments in twelve months would not sufficiently protect
consumers from unfair surprise. As discussed above, the Agencies have
already concluded that consumers cannot, as a general matter,
reasonably avoid repricing based on late payments. Furthermore, making
a payment that is received one day after the due date twice in a period
of twelve months is precisely the type of ``hair trigger'' repricing
that Sec. --.24 is intended to prevent. Even if repricing were allowed
only when the late payments were received two, three, or even five days
after the due date (as some commenters suggested), these periods would
not provide consumers with sufficient time to learn of the delinquency
and cure it (unlike a delinquency of 30 days or more).\120\
Furthermore, as discussed above with respect to Sec. --.22, the
Agencies have already concluded that providing a short period of time
after the due date during which payments must be treated as timely
could create consumer confusion regarding when payment is actually due
and undermine the Board's efforts elsewhere in today's Federal Register
to ensure that consumers' due dates are meaningful. Finally, the
Agencies note that the exception in Sec. --.24(b)(4) permitting
repricing for delinquencies of more than 30 days is similar to an
exception allowing repricing based on consecutive delinquencies because
a consumer who is more than 30 days' delinquent will, in most cases,
have missed two due dates.
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\120\ One commenter suggested that the second late payment would
be reasonably avoidable if the first late payment was followed by a
notice warning the consumer that a second delinquency would result
in repricing. Because, however, this notice could precede the second
late payment by as much as eleven months, the Agencies do not
believe it would be effective to enable consumers to avoid
repricing. See Agarwal, Stimulus and Response (finding that a
consumer is 44 percent less likely to pay a late fee in the current
month if that consumer paid a late fee the prior month but that this
effect decreases with each additional month).
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6. Assessment of Deferred Interest
As noted above, consumer groups stated that the assessment of
deferred interest raises many of the same concerns as the repricing of
outstanding balances. Deferred interest plans are typically marketed as
being ``interest free'' for a specified period (such as a year) and are
often offered to promote large purchases such as furniture or
appliances. However, although interest is not charged to the account
during that period, interest accrues at a specified rate. If the
consumer violates the account terms (which could include a ``hair
trigger'' violation such as paying one day late) or fails to pay the
purchase balance in full before expiration of the period, the
institution retroactively charges all interest accrued from the date of
purchase.
Consumer groups stated that, like discounted promotional rates,
deferred interest plans are used to encourage consumers to engage in
transactions they would not otherwise make. They argued that, because
of ``hair trigger'' repricing, many consumers lose the benefit of the
deferred interest plan earlier than expected and that many other
consumers incur deferred interest charges by failing to pay the balance
in full prior to expiration either inadvertently or because they lack
the resources to do so. In addition, they noted that the injury to the
consumer in such cases may be far greater than when a promotional rate
is lost because interest is charged retroactively on the outstanding
balance. Finally, they stated that deferred interest plans cannot be
adequately disclosed to consumers because of their complexity.
Based on the comments and further analysis, the Agencies believe
that the assessment of deferred interest under these circumstances is
effectively a repricing of an outstanding balance. For example, assume
that an institution offers a consumer credit card account that accrues
interest on purchases at an annual percentage rate of 15% but interest
will not be charged on purchases for one year unless the
[[Page 5528]]
consumer violates the account terms or the purchase balance is not paid
in full by the end of the year. The account is marketed as ``no
interest on purchases for one year.'' On January 1 of year one, a
consumer opens an account in order to make a $3,000 purchase. Although
interest technically accrues on the $3,000 purchase at 15% from January
1 through December 31, this interest is not charged to the account,
making the rate that applies to the purchase effectively zero during
that period. If, however, the consumer violates the account terms
during year one by paying late or fails to pay the $3,000 in full by
January 1 of year two, all of the interest that has accrued at 15%
since January 1 of year one will be charged retroactively to the
account. In addition, the 15% rate (or a higher penalty rate) will
apply to the $3,000 balance thereafter.
The Agencies believe that this is precisely the type of surprise
increase in the cost of completed transactions that Sec. --.24 is
intended to prevent. As noted by the commenters, the assessment of
accrued interest causes substantial injury to consumers. In addition,
for the same reasons that consumers cannot, as a general matter,
reasonably avoid rate increases as a result of a violation of the
account terms, consumers cannot, as a general matter, reasonably avoid
assessment of deferred interest as a result of a violation of the
account terms or the failure to pay the balance in full prior to
expiration of the deferred interest period. For example, just as
illness or unemployment may reasonably prevent some consumers from
paying on time, these conditions may reasonably prevent some consumers
from paying the deferred interest balance in full prior to expiration.
In addition, as noted by the commenters, disclosure may not provide an
effective means for consumers to avoid the harm caused by these plans.
Finally, although deferred interest plans provide some consumers
with substantial benefits in the form of an interest-free advance if
the balance is paid in full prior to expiration, the Agencies conclude
that these benefits do not outweigh the substantial injury to
consumers. As discussed above, deferred interest plans are typically
marketed as ``interest free'' products but many consumers fail to
receive that benefit and are instead charged interest retroactively.
Accordingly, as with the prohibitions on other repricing practices
discussed above, prohibiting the assessment of deferred interest will
improve transparency and enable consumers to make more informed
decisions regarding the cost of using credit. Accordingly, the Agencies
conclude that an exception to the general prohibition on rate increases
is not warranted for the assessment of deferred interest.
The Agencies note, however, that the final rule does not preclude
institutions from offering consumers interest-free promotional plans.
As discussed above, institutions can still offer 0% promotional rates
for specified periods so long as they disclose the rate that will apply
thereafter. Furthermore, an institution could offer a plan where
interest is assessed on purchases at a disclosed rate for a period of
time but the interest charges are waived or refunded if the principal
is paid in full by the end of the period. For example, assume that an
institution offers an account that charges interest on purchases at a
15% non-variable rate but only requires the consumer to repay a portion
of the outstanding principal balance each month during the first year
after the account is opened. If the principal is paid in full by the
end of that year, the institution waives all interest accrued during
that year. At account opening on January 1 of year one, the institution
discloses these terms (including the 15% rate at which interest will
accrue). The consumer uses the account for a $3,000 purchase on January
1. The consumer makes no other purchases and begins making payments. At
the end of each billing cycle, the institution charges to the account
interest accrued on the principal balance at the 15% rate. On December
15 of year one, the consumer pays the remaining principal balance and
the institution waives all accrued interest. This type of product would
comply with the final rule.
Public policy. Industry commenters and the OCC argued that proposed
Sec. --.24 conflicted with established public policy, citing a variety
of sources. The Agencies note that public policy is not a required
element of the unfairness analysis.\121\ Nevertheless, after carefully
considering the materials cited by the comments, the Agencies conclude
that any inconsistency is necessary to protect consumers from practices
that satisfy the required statutory elements of unfairness.
---------------------------------------------------------------------------
\121\ See 15 U.S.C. 45(n).
---------------------------------------------------------------------------
First, industry commenters and the OCC cited testimony, guidance,
reports, and advisory letters from federal banking regulators
(including the Board and OTS) stating or suggesting that institutions
should actively manage risk on credit card accounts, that one method of
managing risk is adjusting interest rates on outstanding balances and
new transactions to reflect the consumer's risk of default, and that
doing so can be beneficial for consumers insofar as it reduces rates
overall.\122\ The Agencies agree that, to the extent that these
materials constitute public policy for purposes of the FTC Act
unfairness analysis, many contain statements that could be deemed
inconsistent with the restrictions in Sec. --.24. As discussed above,
however, the Agencies have already taken the benefits of adjusting
rates to reflect changes in a consumer's risk of default into account
and concluded that these benefits do not outweigh the injury to
consumers caused by this practice. Accordingly, the Agencies find that
the regulatory materials cited do not preclude a determination that, to
the extent prohibited by Sec. --.24, application of increased annual
percentage rates is an unfair practice.
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\122\ See, e.g., Testimony of Julie L. Williams, Chief Counsel &
First Senior Deputy Controller, OCC before H. Subcomm. on Fin.
Instits. & Consumer Credit at 5 (Apr. 17, 2008); Board of Governors
of the Federal Reserve System, Report to Congress on Credit Scoring
and Its Effects on the Availability and Affordability of Credit at
O5 (Aug. 2007) (available at http://www.federalreserve.gov/boarddocs/RptCongress/creditscore/creditscore.pdf); Testimony of
John C. Dugan, Comptroller of the Currency, OCC, before the H.
Subcomm. on Fin. Instits. & Consumer Credit at 21-24 (June 7, 2007)
(available at http://www.house.gov/apps/list/hearing/financialsvcs_dem/htdugan060707.pdf); OTS Handbook on Credit Card Lending Sec.
218 (2006) (available at http://files.ots.treas.gov/422064.pdf); OCC
Advisory Letter 2004-10, at 3 (Sept. 14, 2004); OCC Handbook, Rating
Credit Risk (Apr. 2001) (available at http://www.occ.treas.gov/handbook/RCR.pdf).
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Second, some industry commenters and the OCC stated that proposed
Sec. --.24 conflicts with previous Board policy regarding rate
increases. Specifically, these commenters noted that, prior to the
revisions to Regulation Z in today's Federal Register, 12 CFR 226.9
placed no restrictions on rate increases resulting from a violation of
the account terms and required only 15 days' advance notice of rate
increases resulting from a change in the terms of the contract. These
commenters further noted that, rather than proposing to prohibit
repricing of outstanding balances in the June 2007 Regulation Z
Proposal, the Board instead proposed to improve disclosures regarding
the rate increases. According to these commenters, the improved
Regulation Z disclosures are sufficient, by themselves, to address any
concerns regarding application of increased rates to outstanding
balances.
These commenters first argued that disclosure in solicitations and
at account opening of the circumstances in which a penalty rate will be
applied to
[[Page 5529]]
a consumer credit card account will enable consumers to avoid those
circumstances and therefore any injury. Although these disclosures are
necessary and appropriate for the informed use of credit, the Agencies
do not believe that, by themselves, they would be effective in
preventing the harm caused by application of increased rates.
Disclosure will not enable consumers to select a credit card that does
not reprice outstanding balances because institutions almost uniformly
reserve the right to increase rates at any time and for any reason and
to apply those increased rates to prior transactions.\123\ Nor, as
discussed above, would disclosure enable consumers to avoid rate
increases resulting from circumstances outside their control, such as
late payments due to delays in the delivery of mail. Furthermore, as
noted in the May 2008 Proposal, there is evidence that disclosure at
solicitation and account opening has limited effectiveness in
preventing subsequent defaults because consumers do not focus on the
consequences of default when deciding whether to open a credit card
account and whether to use the account for a particular
transaction.\124\
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\123\ The GAO's 2005 analysis of 28 popular credit cards, for
example, identified only one that did not reprice outstanding
balances to a default rate. See GAO Report at 24. Furthermore, the
comments from industry on the May 2008 Proposal generally stated
that all or almost all credit card issuers reprice outstanding
balances. Thus, as the FTC concluded with respect to its Credit
Practices Rule, the prevalence of a contractual provision indicates
that harm caused by that provision is not reasonably avoidable. See
Statement for FTC Credit Practices Rule, 48 FR at 7746.
\124\ See Statement for FTC Credit Practices Rule, 49 FR at 7744
(``Because remedies are relevant only in the event of default, and
default is relatively infrequent, consumers reasonably concentrate
their search on such factors as interest rates and payment
terms.''); see, e.g., Angela Littwin, Beyond Usury: A Study of
Credit-Card Use and Preference Among Low-Income Consumers, 80 Tex.
L. Rev. 451, 467-478, 494 (2008) (``Issuers currently compete on the
basis of interest rates, but because this competition focuses on
initial interest rates and not on the total amount that consumers
will pay, it fails to give sufficient decision-making information
either to consumers who literally do not understand the events that
trigger higher interest rates and fees or to consumers who
underestimate the likelihood that they will be faced with these
rates and fees.''); Shane Frederick, et al., Time Discounting and
Time Preference: A Critical Review, 40 J. Econ. Literature 351, 366-
67 (2002); Ted O'Donoghue & Matthew Rabin, Doing It Now or Later, 89
Am. Econ. Rev. 103, 103, 111 (1999). Some industry commenters argued
that, under the FTC Policy Statement on Unfairness, a finding of
unfairness is not appropriate when the institutions did not create
an obstacle to the free exercise of consumer decisionmaking. In
fact, the FTC Policy Statement on Unfairness states (at 3) that the
proper analysis is whether the institution ``unreasonably creates or
takes advantage of an obstacle to the free exercise of consumer
decisionmaking.'' (Emphasis added.)
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Industry commenters also argued that disclosure of the rate
increase 45 days before that increase goes into effect allows consumers
to avoid injury by paying the balance in full or transferring that
balance to another credit card account.\125\ It would be unreasonable,
however, to expect consumers who have chosen to use a credit card to
finance purchases in reliance on the rate in effect at that time to pay
those purchases in full in order to avoid injury. Furthermore, as
discussed above, alternative financing (such as a balance transfer)
only enables the consumer to avoid injury if the consumer can obtain a
comparable annual percentage rate and terms elsewhere, which often will
not be the case. Accordingly, because disclosure alone would not be
effective in preventing the harm caused by application of increased
rates to outstanding balances, the Agencies conclude that Sec. --.24
does not conflict with the Board's Regulation Z.
---------------------------------------------------------------------------
\125\ See 12 CFR 226.9(c)(2) and (g).
---------------------------------------------------------------------------
Third, industry commenters and the OCC argued that proposed Sec.
--.24 conflicts with state laws that, rather than prohibiting repricing
of outstanding balances, require consumers to affirmatively reject (or
opt out of) such increases by closing the account.\126\ These
commenters urged the Agencies to adopt this approach as a less
restrictive alternative to proposed Sec. --.24.
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\126\ See, e.g., Ala. Code Sec. 5-20-5; 5 Del. Code Sec. 952;
Off. Code of Ga. Sec. 7-5-4; Nev. Rev. Stat. Sec. 97A.140; S.D.
Codified Laws Sec. 54-11-10; Utah Code Sec. 70C-4-102.
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In the May 2008 Proposal, the Agencies considered a similar
suggestion raised by some commenters in response to the Board's June
2007 Regulation Z Proposal and concluded that this remedy would not
effectively protect consumers.\127\ The Agencies noted that, in most
cases, it would not be economically rational for a consumer to choose
to pay more for credit that has already been extended, particularly
when the increased rate is significantly higher than the prior rate. If
consumers understand their right to reject a rate increase, most would
rationally exercise that right.\128\ Thus, the Agencies conclude that
providing consumers with a right to opt out of rate increases on
outstanding balances would be less restrictive than prohibiting such
increases only if a significant number of consumers inadvertently
forfeited that right by failing to read, understand, or act on the
notice.\129\ According to the GAO Report, however, although state laws
applying to four of the six largest credit card issuers require an opt-
out, representatives of those issuers stated that few consumers
exercise that right.\130\ Although several institutions asserted that
providing an opt-out would allow consumers to reasonably avoid injury,
none provided the percentage of consumers that currently opt out under
applicable state statutes.\131\
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\127\ At that time, commenters urged that the opt-out right not
apply when the rate increase was due to a violation of the account
terms. As the Agencies noted in May 2008, such a right would not
address the injury to consumers whose rates were increased due to a
violation of the account terms that was not reasonably avoidable.
The Agencies understand the commenters on this proposal to urge that
the opt-out right be given in all circumstances. This suggestion,
however, does not alter the Agencies' conclusion that an opt-out
right would not effectively address the injury to consumers.
\128\ As some commenters noted, a consumer who cannot obtain a
lower rate elsewhere and wants continued access to a credit card
account could rationally choose not to reject application of an
increased rate to an outstanding balance if rejection meant closing
the account. In the scenario, however, the consumer cannot
reasonably avoid injury.
\129\ The Agencies also noted in May 2008 that providing
consumers with notice and a means to exercise an opt-out right
(e.g., a toll-free telephone number) would create additional costs
and burdens for institutions.
\130\ GAO Credit Card Report at 26-27.
\131\ One institution stated that half of the consumers who
called its customer service with questions regarding an opt-out
notice exercised that right, although it is unclear what percentage
of all affected consumers this subset comprised.
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Finally, some industry commenters argued that the failure to
provide an opt-out for rate increases was inconsistent with the
provision of an opt-out for payment of overdrafts in proposed Sec.
--.32(a). As discussed below, the Agencies are not taking action on
proposed Sec. --.32(a) at this time. The Board has proposed a revised
opt-out right with respect to overdraft services under Regulation E
elsewhere in today's Federal Register. The Board is also proposing an
alternative approach that would require consumer opt-in to overdraft
services. Furthermore, the Agencies' decision to propose an opt-out
with respect to payment of overdrafts but not with respect rate
increases was based on an evaluation of the consumers' incentives in
each situation. A consumer could rationally prefer assessment of an
overdraft fee to rejection of the transaction because of the costs
associated with rejection (for example, a merchant fee for a check that
is not honored), whereas--for the reasons discussed above--few if any
consumers would willingly choose to pay more for credit already
extended.
Accordingly, although Sec. --.24 is broader than the law in some
states, the Agencies conclude that provision of a right to opt out of
rate increases would not be effective in preventing the harm
[[Page 5530]]
caused by application of increased rates to outstanding balances.
Applicability of unfairness analysis to other practices. Industry
and consumer group commenters questioned why the Agencies' unfairness
analysis with respect to rate increases as a result of a violation of
the account terms could not be applied to other consequences of such
violations, such as increases in the rate for new transactions or fees.
As discussed above, the Agencies have concluded that the unfairness
analysis does, in fact, preclude rate increases during the first year
after account opening. After the first year, however, the Agencies
believe that the consumer has less of a reasonable expectation that the
rate promised at account opening will continue to apply to new
transactions. At that point, even if the reason for the rate increase
was not reasonably avoidable, other provisions should enable consumers
to reasonably avoid the harm caused by an increase in the rate for new
transactions. Specifically, consumers will receive notice of most rate
increases 45 days before the increase goes into effect.\132\
Furthermore, as discussed below, Sec. --.24(b)(3) prevents surprise by
prohibiting application of the increased rate to transactions made up
to seven days after provision of the 45-day notice. After the first
year, these provisions will enable consumers to reasonably avoid any
injury caused by application of an increased rate to new transactions
by providing them sufficient time to receive the 45-day notice and to
decide whether to continue using the card.
---------------------------------------------------------------------------
\132\ See 12 CFR 226.9(c)(2) and (g).
---------------------------------------------------------------------------
Similarly, although there will be circumstances in which some
consumers cannot reasonably avoid fees for violating the account terms
(for example, a late payment fee when a delay in mail delivery caused
the late payment), this injury is not sufficient to outweigh the
countervailing benefits to consumers and competition of discouraging
violations of the account terms. The application of an increased rate
to an outstanding balance increases consumers' costs until the rate is
reduced or the balance is paid in full or transferred to an account
with more favorable terms. Similarly, an increase in the rate
applicable to new transactions increases the costs of using the account
indefinitely. The assessment of a fee, however, is generally an
isolated cost that will not be repeated unless the account terms are
violated again.
Final Rule
As discussed below, Sec. --.24 imposes certain disclosure
requirements on institutions. Comment 24-1 clarifies that an
institution that complies with the applicable disclosure requirements
in Regulation Z, 12 CFR part 226, has complied with the disclosure
requirements in Sec. 227.24. This comment further clarifies that
nothing in Sec. --.24 alters the 45-day advance notice requirements in
12 CFR 226.9(c) and (g). However, nothing in Sec. --.24, its
commentary, or this SUPPLEMENTARY INFORMATION should be construed to
suggest that, by itself, a failure to comply with the notice
requirements in 12 CFR 226.9 constitutes a violation of Sec. --.24.
Section --.24(a) General Rule
Proposed Sec. --.24(a)(1) would have prohibited institutions from
increasing the annual percentage rate applicable to any outstanding
balance on a consumer credit card account, except in the circumstances
set forth in proposed Sec. --.24(b). Proposed Sec. --.24(a)(2)
defined ``outstanding balance.''
As discussed above, the Agencies have adopted a new Sec. --.24(a),
which requires institutions to disclose at account opening the annual
percentage rates that will apply to each category of transactions on
the consumer credit card account. Section --.24(a) further provides
that an institution must not increase the annual percentage rate for a
category of transactions on any consumer credit card account except as
provided in Sec. --.24(b). As discussed below, the general prohibition
on increasing rates in Sec. --.24(b) applies to existing accounts and
balances as of the July 1, 2010 effective date.
Comment 24(a)-1 clarifies that an institution cannot satisfy the
disclosure requirement in Sec. --.24(a) by disclosing at account
opening only a range of rates or that a rate will be ``up to'' a
particular amount. Comment 24(a)-2 provides illustrative examples of
the application of the prohibition on increasing rates.
Section --.24(b) Exceptions
Proposed Sec. --.24(b) set forth exceptions to the general
prohibition in proposed Sec. --.24(a) on applying increased rates to
outstanding balances. As discussed above, the Agencies have revised
Sec. --.24(b) to reflect the changes to Sec. --.24(a) and to ensure
that consumers are protected from unfair surprise regarding the cost of
credit.
Section --.24(b)(1) Account Opening Disclosure Exception
Section --.24(b)(1) permits an increase in the annual percentage
rate for a category of transactions to a rate that was disclosed at
account opening upon expiration of a period of time that was also
disclosed at account opening. For example, an institution could offer a
consumer credit card account that applies a 5% non-variable rate during
the first six months after account opening, a 15% non-variable rate for
an additional six months, and a variable rate thereafter. So long as
the institution discloses these terms to the consumer at account
opening, Sec. --.24(b)(1) permits the institution to apply the 15%
rate to the purchase balance and to new purchases after six months and
the variable rate to the purchase balance and new purchases after the
first year. However, the institution could not subsequently increase
that variable rate unless specifically permitted by one of the other
exceptions in Sec. --.24(b).
Comment 24(b)(1)-1 clarifies that Sec. --.24(b)(1) does not permit
application of increased rates that are disclosed at account opening
but are contingent on a particular event or occurrence or may be
applied at the institution's discretion (unless one of the exceptions
in Sec. --.24(b) applies). The comment provides several examples,
including the retroactive assessment of deferred interest. However,
comment 24(b)(1)-2 clarifies that nothing in Sec. --.24 prohibits an
institution from assessing interest due to the loss of a grace period
as provided in Sec. --.25. In addition, comment 24(b)(1)-3 clarifies
that nothing in Sec. --.24 prohibits an institution from applying a
rate that is lower than the disclosed rate upon expiration of the
period. However, if the lower rate is applied to an existing balance,
the institution cannot subsequently increase the rate with respect to
that balance unless it has provided the consumer with advance notice
pursuant to 12 CFR 226.9(c). An illustrative example is provided.
Section --.24(b)(2) Variable Rate Exception
Proposed Sec. --.24(b)(1) would have permitted an increase in the
annual percentage rate due to an increase in an index that is not under
the institution's control and is available to the general public. This
exception was designed to be similar to the exception for variable
rates in 12 CFR 226.5b(f)(1). This aspect of the proposal was supported
by comments from both industry and consumer groups. Accordingly,
proposed Sec. --.24(b)(1) is adopted as Sec. --.24(b)(2) with
stylistic revisions. This provision cannot be used to increase the
annual percentage rate based on an index except to the extent
disclosed.
[[Page 5531]]
The Agencies have adopted a new comment 24(b)(2)-1, which clarifies
that Sec. --.24(b)(2) does not permit an institution to increase an
annual percentage rate by changing the method used to determine a
variable (such as by increasing the margin), even if that change will
not result in an immediate increase.
Proposed comment 24(b)(1)-1 clarified that an institution may not
increase a variable rate balance based on its own prime rate but may
use a published prime rate, such as that in the Wall Street Journal,
even if the institution's prime rate is one of several rates used to
establish the published rate. This comment also clarified that an
institution may not increase a variable rate by changing the method
used to determine the indexed rate. Proposed comment 24(b)(1)-2
clarified when a rate is considered ``publicly available.''
One industry commenter requested clarification that institutions
were not limited to basing variable rates on prime rates and could also
use one or more other publicly available indices, such as the Consumer
Price Index. Because the method for determining the variable rate must
be disclosed consistent with 12 CFR 226.6, the Agencies believe that
the use of multiple indices is appropriate so long as those indices are
publicly available. The Agencies have revised proposed comments
24(b)(1)-1 and -2 accordingly and adopted those comments as 24(b)(2)-2
and -3.
Some industry commenters requested that institutions be permitted
to change a non-variable rate to a variable rate or to change the
method used to determine a variable rate so long as, at the time of the
change, the rate would not increase. Because such changes could lead to
future increases in a rate during the first year or a rate applicable
to an outstanding balance, comment 24(b)(2)-4 clarifies that a non-
variable rate may be converted to a variable rate only when
specifically permitted by Sec. --.24. For example, under Sec.
--.24(b)(1), an institution may convert a non-variable rate to a
variable rate if this change was disclosed at account opening.
Because Sec. --.24 applies only to increases in annual percentage
rates, the Agencies have adopted comment 24(b)(2)-5, which clarifies
that nothing in Sec. --.24 prohibits an institution from changing a
variable rate to an equal or lower non-variable rate. Whether the non-
variable rate is equal to or lower than the variable rate is determined
at the time the institution provides the notice required by 12 CFR
226.9(c). For example, assume that on March 1 a variable rate that is
currently 15% applies to a balance of $2,000 and the institution sends
a notice pursuant to 12 CFR 226.9(c) informing the consumer that the
variable rate will be converted to a non-variable rate of 14% effective
April 16. On April 16, the institution may apply the 15% non-variable
rate to the $2,000 balance and to new transactions even if the variable
rate on April 16 was less than 14%.
Comment 24(b)(2)-6 clarifies that an institution may change the
index and margin used to determine a variable rate if the original
index becomes unavailable, so long as historical fluctuations in the
original and replacement indices were substantially similar and the
replacement index and margin will produce a rate similar to the rate
that was in effect at the time the original index became unavailable.
This comment further clarifies that, if the replacement index is newly
established and therefore does not have any rate history, it may be
used if it produces a rate substantially similar to the rate in effect
when the original index became unavailable. This comment is modeled on
comment 226.5b(f)(3)(ii)-1 to 12 CFR 226.5b.
Section --.24(b)(3) Advance Notice Exception
The Agencies have adopted a new Sec. --.24(b)(3), which provides
that an annual percentage rate for a category of transactions may be
increased pursuant to a notice under 12 CFR 226.9(c) or (g) for
transactions that occur more than seven days after provision of the
notice. An institution cannot, however, utilize this exception during
the first year after account opening.
The prohibition in Sec. --.24(b)(3) on applying an increased rate
to transactions that occur more than seven days after provision of the
12 CFR 226.9 notice is modeled on the definition of ``outstanding
balance'' in proposed Sec. --.24(a)(2). Proposed Sec. --.24(a)(2)
defined ``outstanding balance'' as the amount owed on a consumer credit
card account at the end of the fourteenth day after the institution
provides the notice required by proposed 12 CFR 226.9(c) or (g). This
definition was intended to prevent the requirement in proposed 12 CFR
226.9 that creditors provide 45 days' advance notice of rate increases
from creating an extended period following receipt of that notice
during which new transactions could be made at the prior rate. Although
institutions could address this concern by denying additional
extensions of credit after sending the 45-day notice, the Agencies
believe that this outcome would not be beneficial to consumers who have
received the notice and wish to use the account for new transactions.
The 14-day period was intended to be consistent with the 21-day safe
harbor in proposed Sec. --.22(b) insofar as it would allow seven days
for the notice to reach the consumer and seven days for the consumer to
review that notice and take appropriate action.
Some industry commenters opposed proposed Sec. --.24(a)(2)
entirely, arguing that--because rates are often increased as a result
of increases in the consumer's risk of default--delaying imposition of
the new rate only increases the risk borne by the institution. Other
industry commenters acknowledged that it is reasonable to provide some
period of time for consumers to receive and review the notice but that
fourteen days is excessive because average mail times are much less
than seven days and because a consumer who does not wish to engage in
transactions at the new rate need only cease to use the card.
As discussed above with respect to Sec. --.22, while the Agencies
believe that seven days will be more than sufficient for the great
majority of consumers to receive a periodic statement or notice by
mail, relying on average mailing times would not adequately protect the
significant number of consumers whose delivery times are longer than
average. The Agencies agree, however, that consumers do not require
seven days to review the notice and take appropriate action. Indeed,
many consumers will not be required to take any action to reasonably
avoid transactions to which the increased rate will apply. In addition,
because in most cases the notice will be delivered in less than seven
days, most consumers will have time to cancel recurring charges to
their account (if necessary). The Agencies conclude that, in order to
protect consumers from inadvertently engaging in transactions to which
an increased rate will apply while minimizing the period during which
credit extended by the institution must remain at the pre-increase
rate, a rate that is increased pursuant to Sec. --.24(b)(3) should
apply only to transactions that occur after the seventh day following
provision of the 12 CFR 226.9 notice.
Comment 24(b)(3)-1 clarifies that the limitation in Sec.
--.24(b)(3) regarding rate increases during the first year after an
account is opened does not apply to accounts opened prior to July 1,
2010.
One industry commenter expressed concern that the ``outstanding
balance'' under proposed Sec. --.24(a)(2) could be construed to
include transactions that were authorized before the end of the
relevant date but were settled until after that date. The Agencies
agree that an institution should not be required to
[[Page 5532]]
include such transactions in the balance to which the increased rate
cannot be applied. Accordingly, comment 24(b)(3)-2 clarifies that an
institution may apply a rate increased pursuant to Sec. --.24(b)(3) to
transactions that occur within seven days after provision of the notice
but are settled more than seven days after that notice was provided. An
illustrative example is provided in comment 24(b)(3)-3.
Section --.24(b)(4) Delinquency Exception
Proposed Sec. --.24(b)(3) provided that an institution could apply
an increased rate if the consumer's minimum payment had not been
received within 30 days after the due date. This exception was intended
to ensure that consumers would generally have notice and an opportunity
to cure the delinquency before becoming more than 30 days' past due. As
discussed above, the Agencies have adopted proposed Sec. --.24(b)(3)
as Sec. --.24(b)(4) with stylistic changes.\133\
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\133\ The example provided in proposed comment 24(b)(3)-1 has
been removed. Instead, examples of the application of this exception
are provided in comment 24(a)-1.
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Some commenters requested that, in addition to restricting the
circumstances in which institutions could apply high penalty rates to
existing balances based on a violation of the account terms, the
Agencies also restrict the length of time a penalty rate can be applied
to an account. They suggested that, for example, institutions be
prohibited from applying a penalty rate to an account for more than six
months if the consumer does not violate the account terms during that
period. The Agencies, however, are not imposing a substantive
prohibition at this time. As discussed above, the Agencies have placed
significant limitations on institutions' ability to reprice outstanding
balances based on violations of the account terms. Furthermore, because
the amendments to Regulation Z adopted by the Board elsewhere in
today's Federal Register require creditors to provide 45 days' advance
notice of the imposition of a penalty rate, a consumer will have the
opportunity to decide whether to engage in transactions at the penalty
rate.\134\ Finally, the Board has also improved the disclosures under
Regulation Z to require creditors to disclose how long a penalty rate
will remain in effect or, if the creditor reserves the right to apply
the penalty rate indefinitely, to affirmatively state that fact.\135\
Although the Agencies are not requiring such practices as part of
today's final rule, they believe that limiting the duration of a
penalty rate and periodically reevaluating a consumer's
creditworthiness to determine eligibility to return to the non-penalty
rate are policies that can be both beneficial for the consumer and safe
and sound policy for the institution. Some industry commenters
indicated that they already follow such a practice.
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\134\ See 12 CFR 226.9(g).
\135\ See 12 CFR 226.5a(b)(1)(iv); comment 5a(b)(1)-5; App. G-
10(B) and G-10(C).
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Section --.24(b)(5) Workout Arrangement Exception
One commenter noted that, as proposed, Sec. --.24 would prohibit
institutions that reduced the annual percentage rate on an account
pursuant to a workout arrangement from increasing the rate if the
consumer failed to comply with the terms of the arrangement. Because
workout arrangements can provide important benefits to consumers in
serious default, the Agencies have adopted Sec. --.24(b)(5), which
provides that, when a consumer fails to comply with the terms of a
workout arrangement, the institution may increase the annual percentage
rate to a rate that does not exceed the rate that applied prior to the
arrangement. For example, assume that, consistent with Sec.
--.24(b)(4), the annual percentage rate on a $5,000 balance is
increased from 15% to 25%. Assume also that the institution and the
consumer subsequently agree to a workout arrangement that reduces the
rate to 15% on the condition that the consumer pay a specified amount
by the payment due date each month. If the consumer does not pay the
agreed-upon amount by the payment due date, Sec. --.24(b)(5) permits
the institution to increase the rate on the $5,000 balance to no more
than 25%. See comment 24(b)(5)-3.
Comment 24(b)(5)-1 clarifies that, except as expressly provided,
Sec. --.24(b)(5) does not permit an institution to alter any of the
requirements in Sec. --.24 pursuant to a workout arrangement between a
consumer and the institution. For example, an institution cannot
increase a rate pursuant to a workout arrangement unless otherwise
permitted by Sec. --.24. In addition, an institution cannot require
the consumer to make payments with respect to a protected balance that
exceed the payments permitted under Sec. --.24(c).
Comment 24(b)(5)-2 clarifies that, if the rate that applied prior
to the workout arrangement was a variable rate, the rate that can be
applied if the consumer fails to comply with the terms of the
arrangement must be calculated using the same formula as before the
arrangement.
Section --.24(c) Treatment of Protected Balances
Proposed Sec. --.24(c) was intended to ensure that the protections
in Sec. --.24 were not undercut. Accordingly, it would have provided
that, when an institution increases the annual percentage rate
applicable to a category of transactions (for example, purchases), the
institution was prohibited from requiring repayment of an outstanding
balance in that category using a method that is less beneficial to the
consumer than one of the methods listed in Sec. --.24(c)(1) and from
assessing fees or charges solely on an outstanding balance. In order to
clarify the application of Sec. --.24(c), the Agencies have revised
this paragraph to state that it applies only to ``protected balances,''
which are defined as amounts owed for a category of transactions to
which an increased annual percentage rate cannot be applied after the
rate for that category of transactions has been increased pursuant to
Sec. --.24(b)(3). This definition is similar to the definition of
``outstanding balance'' in proposed Sec. --.24. In addition, proposed
Sec. .24(c) has been revised for consistency with the revisions to
Sec. --.24(b) and for stylistic reasons. Otherwise, it has been
adopted as proposed.
The Agencies have replaced proposed comments 23(c)-1 and -2 with a
new comment 24(c)-1, which clarifies that, because rates cannot be
increased pursuant to Sec. --.24(b)(3) during the first year after
account opening, the requirements of Sec. --.24(c) do not apply to
balances during the first year. Instead, Sec. --.24(c) applies only to
``protected balances.'' For example, assume that, on March 15 of year
two, an account has a purchase balance of $1,000 at a non-variable rate
of 12% and that, on March 16, the bank sends a notice pursuant to 12
CFR 226.9(c) informing the consumer that the rate for new purchases
will increase to a non-variable rate of 15% on May 2. On March 20, the
consumer makes a $100 purchase. On March 24, the consumer makes a $150
purchase. On May 2, Sec. --.24(b)(3) permits the bank to start
charging interest at 15% on the $150 purchase made on March 24 but does
not permit the bank to apply that 15% rate to the $1,100 purchase
balance as of March 23. Accordingly, Sec. --.24(c) applies to the
$1,100 purchase balance as of March 23 but not the $150 purchase made
on March 24.
Section --.24(c)(1) Repayment
In the May 2008 Proposal, the Agencies stated that, while there may
be
[[Page 5533]]
circumstances in which institutions would accelerate repayment of the
outstanding balance to manage risk, proposed Sec. --.24 would provide
little effective protection if consumers did not receive a reasonable
amount of time to pay off the outstanding balance. Accordingly,
proposed Sec. --.24(c)(1) would have required institutions to provide
consumers with a method of paying the outstanding balance that is no
less beneficial to the consumer than one of the methods listed in
proposed Sec. --.24(c)(1)(i) and (ii).
Proposed Sec. --.24(c)(1)(i) would have allowed an institution to
amortize the outstanding balance over a period of no less than five
years, starting from the date on which the increased rate went into
effect for new transactions. Although some industry commenters
criticized the five-year period as excessive and requested that it be
reduced or eliminated, the OCC and consumer groups generally supported
this repayment period as reasonable. One consumer group argued that, if
the amount owed is large, five years may be insufficient.
In May 2008, the Agencies cited as support for the proposed five-
year amortization period guidance issued by the Board, OCC, FDIC, and
OTS (under the auspices of the Federal Financial Institutions
Examination Council) stating that credit card workout arrangements
should generally strive to have borrowers repay debt within 60
months.\136\ One commenter argued that the Agencies' reliance on this
guidance was misplaced because it applies to workout arrangements and
uses 60 months as a maximum repayment period, rather than a minimum.
The Agencies note, however, that the guidance set 60 months as the
repayment period preferred in most cases for consumers who had become
sufficiently delinquent to be placed in workout arrangements. Section
--.24(c), however, will generally apply to a less risky population of
consumers because accounts that have paid more than 30 days late are
excluded. See Sec. --.24(b)(4). Accordingly, based on the comments and
the Agencies' own analysis, the Agencies conclude that a five-year
minimum amortization period is appropriate. Therefore, proposed Sec.
--.24(c)(1)(i) has been revised for stylistic reasons and adopted as
proposed.
---------------------------------------------------------------------------
\136\ See, e.g., Board Supervisory Letter SR 03-1 on Account
Management and Loss Allowance Methodology for Credit Card Lending
(Jan. 8, 2003) (available at http://www.federalreserve.gov/boarddocs/srletters/2003/sr0301.htm).
---------------------------------------------------------------------------
An industry commenter requested clarification regarding the
relationship between Sec. --.24(c)(1) and the payment allocation rules
in proposed Sec. --.23. Section .23 addresses only payments in excess
of the required minimum periodic payment. Thus, nothing in Sec. --.23
limits an institution's ability to set a required minimum periodic
payment consistent with Sec. --.24(c). By the same token, nothing in
Sec. --.24(c)(1) alters the requirement regarding allocation of excess
payments in Sec. --.23. Thus, if an institution has elected to set a
required minimum periodic payment on a protected balance that will
amortize that balance over a five-year period consistent with Sec.
--.24(c)(1)(i), the institution must apply excess payments consistent
with Sec. --.23 even if doing so will cause the protected balance to
pay off in less than five years. In order to eliminate any ambiguity,
the Agencies have added examples to the commentary to Sec. --.23
illustrating how an excess payment could be applied in this situation.
See comment 23(a)-1.iii; comment 23(b)-2.ii. In addition, the Agencies
have added comment 24(c)(1)(i)-1, which clarifies that an institution
is not required to recalculate the amortization period even if, during
the course of that period, allocation of excess payments to the
protected balance means the balance will be paid off in less than 5
years.
An industry commenter requested clarification on whether an
institution that chose to provide an amortization period of five years
for the outstanding balance consistent with proposed Sec.
--.24(c)(1)(i) was prohibited from applying some or all of the required
minimum periodic payment to the outstanding balance before the
effective date of the rate increase if doing so would result in a
shorter amortization period. Section --.24(c)(1)(i) provides for ``[a]n
amortization period for the outstanding balance of no less than five
years, starting from the date on which the increased annual percentage
rate becomes effective.'' (Emphasis added.) Accordingly, Sec.
--.24(c)(1)(i) does not affect an institution's ability to apply some
or all of the required minimum periodic payment to the protected
balance prior to the effective date of the rate increase.
An industry commenter requested clarification regarding how an
amortization period would be calculated if the annual percentage rate
was variable. Comment 24(c)(1)(i)-2 clarifies that, if the annual
percentage rate that applies to the protected balance varies with an
index as provided in Sec. --.24(b)(2), the institution may vary the
interest charges included in the required minimum periodic payment for
that balance accordingly in order to ensure that the protected balance
is amortized in five years.
As an alternative to the five-year amortization period, proposed
Sec. --.24(c)(1)(ii) would have allowed the percentage of the total
balance that was included in the required minimum periodic payment
before the rate increase to be doubled with respect to the outstanding
balance. For example, if the required minimum periodic payment prior to
the rate increase was one percent of the total amount owed plus accrued
interest and fees, an institution would be permitted to increase the
minimum payment for the outstanding balance up to two percent of that
balance plus accrued interest and fees. The Agencies did not receive
any significant comment on this aspect of the proposal. Accordingly,
Sec. --.24(c)(1)(ii) has been revised for stylistic reasons and
adopted as proposed.
Proposed comment 24(c)(1)(ii)-1 clarified that proposed Sec.
--.24(c)(1)(ii) did not limit or otherwise address an institution's
ability to determine the amount of the minimum payment on other
balances (in other words, balances that are not outstanding balances
under Sec. --.24(a)(2)). This comment has been revised for stylistic
reasons and adopted as proposed.
Proposed comment 24(c)(1)(ii)-2 provided an example of how an
institution could adjust the minimum payment on the outstanding
balance. This comment has been revised for clarity.
Proposed comment 24(c)(1)-1 clarified that an institution may
provide a method of paying the outstanding balance that is different
from the methods listed in Sec. --.24(c)(1) so long as the method used
is no less beneficial to the consumer than one of the listed methods.
It further stated that a method is no less beneficial to the consumer
if the method amortizes the outstanding balance in five years or longer
or if the method results in a required minimum periodic payment on the
outstanding balance that is equal to or less than a minimum payment
calculated consistent with Sec. --.24(c)(1)(ii). As requested by the
commenters, the Agencies have clarified and expanded the examples
provided in the proposed comment. Otherwise, the comment has been
revised for stylistic reasons and adopted as proposed.
An industry commenter asked whether, if amortization of the
outstanding balance over a five-year period would result in a required
minimum periodic payment below the lower limit or ``floor'' used by the
[[Page 5534]]
institution for such payments,\137\ the institution could require the
consumer to pay the floor minimum payment. The Agencies believe this
should be permitted, so long as the lower limit for the required
minimum periodic payment on the protected balance is the same limit
used by the institution before the increased rate went into effect.
Similarly, an institution is permitted to require the consumer to make
a pre-existing floor minimum payment that exceeds the amount permitted
under Sec. --.24(c)(1)(ii). Accordingly, the Agencies have adopted
comment 24(c)(1)-2.
---------------------------------------------------------------------------
\137\ For example, an institution might require a minimum
periodic payment that is the greater of $20 or the total of 1% of
the amount owed plus interest and fees.
---------------------------------------------------------------------------
Section --.24(c)(2) Fees and Charges
The protections of proposed Sec. --.24(a) would also be undercut
if institutions were permitted to assess fees or other charges as a
substitute for an increase in the annual percentage rate. Accordingly,
proposed Sec. --.24(c)(2) would have prohibited institutions from
assessing any fee or charge based solely on the outstanding balance. As
explained in proposed comment 24(c)(2)-1, this proposal would have
prohibited, for example, an institution from assessing a monthly
maintenance fee on the outstanding balance. The proposal would not,
however, have prohibited an institution from assessing fees such as
late payment fees or fees for exceeding the credit limit that are based
in part on the outstanding balance. Similarly, proposed Sec.
--.24(c)(2) would not have prohibited assessment of fees that are
unrelated to the outstanding balance, such as fees for providing
account documents.
The Agencies did not receive any significant comment on this aspect
of the proposal. Accordingly, proposed Sec. --.24(c)(2) and the
accompanying commentary have been revised for stylistic reasons and
adopted as proposed.
Other Issues
Implementation. As discussed in section VII of this SUPPLEMENTARY
INFORMATION, the effective date for Sec. --.24 is July 1, 2010. As of
that date, this provision applies to existing as well as new consumer
credit card accounts and balances (except as expressly stated below).
The Agencies provide the following guidance:
Account opening disclosures. The disclosure requirements
in Sec. --.24(a) apply only to accounts opened on or after the
effective date. Thus, if a consumer credit card account is opened on or
after July 1, 2010, the institution must disclose the annual percentage
rates that will apply to each category of transactions on that account.
Rates that expire after a specified period of time. If a
rate that will expire after a specified period of time applies to a
balance on the effective date, the institution can apply an increased
rate to that balance at expiration so long as the institution
previously disclosed the increased rate. For example, if on January 1,
2010 an account is opened with a non-variable promotional rate of 5% on
purchases that applies for one year (after which a variable rate will
apply) and, on July 1, 2010, the 5% rate applies to a balance of
$2,000, the institution can apply the previously disclosed variable
rate to any remaining portion of the $2,000 balance on January 1, 2011
pursuant to Sec. --.24(b)(1).
Variable rates that do not expire. If a variable rate that
does not expire applies to a balance on the effective date, the
institution may continue to adjust that rate due to increases in an
index consistent with Sec. --.24(b)(2).
Non-variable rates that do not expire. If a non-variable
rate that does not expire applies to a balance on the effective date,
the institution cannot increase the rate that applies to that balance
unless the account becomes more than 30 days delinquent (in which case
an increase is permitted by Sec. --.24(b)(4)). For example, if an
account has a $3,000 purchase balance at a non-variable rate of 15% on
July 1, 2010, the institution cannot subsequently increase the rate
that applies to the $3,000 (unless the account becomes more than 30
days delinquent, in which case Sec. --.24(b)(4) applies).
Rate increases pursuant to advance notice under 12 CFR
226.9(c) or (g). Section --.24(b)(3) applies to any rate increase for
new transactions that will take effect on or after the July 1, 2010
effective date. For example, assume that an account has a $3,000
purchase balance at a non-variable rate of 15%. In order to increase
the rate that applies to purchases made on or after July 1, 2010 to a
non-variable rate of 18%, the institution must comply with 12 CFR
226.9(c) by providing notice of the increase at least 45 days in
advance (in this case, on or before May 17, 2010). Assuming the
institution provides the notice on May 17, the requirements in Sec.
--.24(c) will apply to the $3,000 balance beginning on May 24, 2010.
First year after the account is opened. An institution may
not increase an annual percentage rate pursuant to Sec. --.24(b)(3)
during the first year after the account is opened. However, this
limitation does not apply to accounts opened prior to July 1, 2010. For
example, if an account is opened on June 1, 2010, the institution may
increase a rate for new transactions pursuant to Sec. --.24(b)(3).
Delinquencies of more than 30 days. An institution may
increase a rate pursuant to Sec. --.24(b)(4) when an account becomes
more than 30 days delinquent even if the delinquency began prior to the
effective date. For example, if the required minimum periodic payment
due on June 15, 2010 is not received until July 20, Sec. --.24(b)(4)
permits the institution to increase the rates on that account.
Workout arrangements. If a workout arrangement applies to
an account on the effective date and the consumer fails to comply with
the terms of arrangement after the effective date, Sec. --.24(b)(5)
only permits the institution to apply an increased rate that does not
exceed the rate that applied prior to commencement of the workout
arrangement. For example, assume that, on June 1, 2010, an institution
decreases the rate that applies to a $5,000 balance from a non-variable
penalty rate of 30% to a non-variable rate of 15% pursuant to a workout
arrangement between the institution and the consumer. Under this
arrangement, the consumer must pay by the fifteenth of each month in
order to retain the 15% rate. The institution does not receive the
payment due on July 15 until July 20. In these circumstances, Sec.
--.24(b)(5) does not permit the institution to apply a rate to the
$5,000 balance that exceeds the 30% penalty rate.
Effect of Sec. --.24 on securitization. In the May 2008 Proposal,
the Agencies requested comment on what effect the restrictions in
proposed Sec. --.24 would have on outstanding securitizations and
institutions' ability to securitize credit card assets in the future.
In response, industry commenters raised general concerns that a
reduction in interest revenue as a result of proposed Sec. --.24 could
require institutions to alter the structure of existing securities and
could reduce investor interest in future offerings. As discussed below,
however, the Agencies are providing institutions and the markets for
credit card securities with 18 months in which to adjust interest rates
and other account terms to compensate for the restrictions in the final
rules. Accordingly, the Agencies do not believe that any additional
revisions are necessary to accommodate securitization of credit card
assets.
[[Page 5535]]
Supplemental Legal Basis for This Section of the OTS Final Rule
As discussed above, HOLA provides authority for both safety and
soundness and consumer protection regulations. For example, Sec.
535.24 supports safety and soundness by reducing reputation risk that
would occur from repricing consumer credit card accounts in an unfair
manner. Section 535.24 also protects consumers by providing them with
fair terms on which their accounts may be repriced. Consequently, HOLA
serves as an independent basis for Sec. 535.24.
Section --.25--Unfair Balance Computation Method
Summary. In the May 2008 Proposal, the Agencies proposed Sec.
--.26, which would have prohibited institutions from imposing finance
charges on consumer credit card accounts based on balances for days in
billing cycles that precede the most recent billing cycle. 73 FR at
28922-28923. This proposal was intended to prohibit the balance
computation method sometimes referred to as ``two-cycle billing'' or
``double-cycle billing.'' As discussed below, based on the comments and
further analysis, the Agencies have revised the proposed rule and its
commentary to clarify that the final rule prohibits the assessment of
interest charges on balances for days in prior billing cycles when such
charges are imposed as a result of the loss of a grace period. The
Agencies have also removed the exception for assessment of deferred
interest and added an exception permitting adjustments to finance
charges following the return of a payment for insufficient funds.
Finally, because the Agencies are not taking action on proposed Sec.
--.25 at this time (as discussed below), proposed Sec. --.26 has been
designated in the final rule as Sec. --.25.
Background. TILA requires creditors to explain as part of the
account-opening disclosures the method used to determine the balance to
which interest rates are applied. 15 U.S.C. 1637(a)(2). In its June
2007 Regulation Z Proposal, the Board proposed that the balance
computation method be disclosed outside the account-opening table
because explaining lengthy and complex methods may not benefit
consumers. 72 FR at 32991-32992. That proposal was based on the Board's
consumer testing, which indicated that consumers did not understand
explanations of balance computation methods. Nevertheless, the Board
observed that, because some balance computation methods are more
favorable to consumers than others, it was appropriate to highlight the
method used, if not the technical computation details.
In response to the June 2007 Regulation Z Proposal, consumers,
consumer groups, and a member of Congress urged the Board to prohibit
two-cycle billing. The two-cycle balance computation method has several
permutations but, generally speaking, an institution using the two-
cycle method assesses interest not only on the balance for the current
billing cycle but also on balances on days in the preceding billing
cycle. This method generally does not result in additional finance
charges for a consumer who consistently carries a balance from month to
month (and therefore does not receive a grace period) because interest
is always accruing on the balance. Nor does the two-cycle method affect
consumers who pay their balance in full within the grace period every
month because interest is not imposed on their balances. The two-cycle
method does, however, result in greater interest charges for consumers
who pay their balance in full one month but not the next month (and
therefore lose the grace period).
The following example illustrates how the two-cycle method results
in higher costs for these consumers than other balance computation
methods: Assume that the billing cycle on a consumer credit card
account starts on the first day of the month and ends on the last day
of the month. The payment due date for the account is the twenty-fifth
day of the month. Under the terms of the account, the consumer will not
be charged interest on purchases if the balance at the end of a billing
cycle is paid in full by the following payment due date (in other
words, if the consumer receives a grace period). The consumer uses the
credit card to make a $500 purchase on March 15. The consumer pays the
balance for the February billing cycle in full on March 25. At the end
of the March billing cycle (March 31), the consumer's balance consists
only of the $500 purchase and the consumer will not be charged interest
on that balance if it is paid in full by the following due date (April
25). The consumer pays $400 on April 25, leaving a $100 balance.
Because the consumer did not pay the balance for the March billing
cycle in full on April 25, the consumer would lose the grace period and
most institutions would charge interest on the $500 purchase from the
start of the April billing cycle (April 1) through April 24 and
interest on the remaining $100 from April 25 through the end of the
April billing cycle (April 30). Institutions using the two-cycle
method, however, would also charge interest on the $500 purchase from
the date of purchase (March 15) to the end of the March billing cycle
(March 31).
The proposed ban on two-cycle billing was generally supported by
individual consumers, consumer groups, members of Congress, other
federal banking regulators, state consumer protection agencies, state
attorneys general, and some industry groups and credit card issuers. On
the other hand, some credit card issuers and one industry group opposed
the proposal on the grounds that two-cycle billing was not sufficiently
prevalent to warrant a ban. As discussed below, the Agencies are
including a prohibition on the two-cycle method because that method
continues to be used by a number of large credit card issuers. To the
extent that the commenters addressed specific aspects of the proposal
or the supporting legal analysis, those comments are discussed below.
Legal Analysis
The Agencies conclude that, based on the comments received and
their own analysis, it is an unfair act or practice under 15 U.S.C.
45(n) and the standards articulated by the FTC to impose finance
charges on consumer credit card accounts based on balances for days in
billing cycles that precede the most recent billing cycle as a result
of the loss of any time period provided by the institution within which
the consumer may repay any portion of the credit extended without
incurring a finance charge (in other words, a grace period).
Substantial consumer injury. In the May 2008 Proposal, the Agencies
stated that computing finance charges based on balances preceding the
most recent billing cycle appeared to cause substantial consumer injury
because consumers who lose the grace period incur higher interest
charges than they would under a balance computation method that
calculates interest based only on the most recent billing cycle.
One industry commenter asserted that use of the two-cycle method
could not cause an injury for purposes of the FTC Act simply because
other, less costly methods exist. As discussed above, however, it is
well established that monetary harm constitutes an injury under the FTC
Act.\138\ As with similar arguments raised regarding Sec. --.23, this
commenter did not provide any legal
[[Page 5536]]
authority distinguishing interest charges assessed as a result of the
two-cycle method from other monetary harms, nor are the Agencies aware
of any such authority.
---------------------------------------------------------------------------
\138\ See Statement for FTC Credit Practices Rule, 49 FR at
7743; FTC Policy Statement on Unfairness at 3.
---------------------------------------------------------------------------
Another industry commenter stated that assessing interest
consistent with a contractual provision to which the consumer agreed
cannot constitute an injury under the FTC Act. As discussed above,
however, this argument is inconsistent with the FTC's application of
the unfairness analysis in support of the Credit Practices Rule, where
the FTC determined that otherwise valid contractual provisions injured
consumers.\139\
---------------------------------------------------------------------------
\139\ See Statement for FTC Credit Practices Rule, 49 FR 7740 et
seq.; see also Am. Fin. Servs. Assoc. 767 F.2d at 978-83 (upholding
the FTC's analysis).
---------------------------------------------------------------------------
Finally, an industry commenter argued that the two-cycle method was
not unfair because it only injures consumers who lose the grace period.
A practice need not, however, injure all consumers in order to be
unfair.
Accordingly, the Agencies conclude that the two-cycle balance
computation method causes substantial consumer injury.
Injury is not reasonably avoidable. The Agencies' May 2008 Proposal
stated that it did not appear that consumers can reasonably avoid
injury because, once they use the card, they have no control over the
methods used to calculate the finance charges on their accounts. The
proposal further noted that, because the Board's consumer testing
indicates that disclosures are not successful in helping consumers
understand balance computation methods, a disclosure would not enable
consumers to avoid the two-cycle method when comparing credit card
accounts or to avoid the effects of the two-cycle method when using a
credit card.\140\
---------------------------------------------------------------------------
\140\ Although several industry commenters on the May 2008
Proposal argued that disclosure would enable consumers to choose a
credit card with a different balance computation method, those
commenters did not provide any evidence that refutes the Board's
consumer testing.
---------------------------------------------------------------------------
One industry commenter argued that consumers could reasonably avoid
the injury by paying their balance in full each month. As discussed
above, however, because one of the intended purposes of a credit card
(as opposed to a charge card) is to finance purchases over multiple
billing cycles, it would not be reasonable to expect consumers to avoid
the two-cycle method by paying their balance in full each month.
Accordingly, the Agencies conclude that consumers cannot reasonably
avoid the injury caused by the two-cycle balance computation method.
Injury is not outweighed by countervailing benefits. The May 2008
Proposal stated that there did not appear to be any significant
benefits to consumers or competition from computing finance charges
based on balances for days in billing cycles preceding the most recent
billing cycle. The Agencies also noted that many institutions no longer
use the two-cycle balance computation method. In addition, the Agencies
noted that, although prohibition of the two-cycle method may reduce
revenue for the institutions that currently use it and those
institutions may replace that revenue by charging consumers higher
annual percentage rates or fees, it appeared that this result would
nevertheless benefit consumers because it will result in more
transparent pricing.
One industry commenter stated that, given a preference, consumers
would choose lower prices and other purported benefits of the two-cycle
method (such as the provision of a grace period) over transparency. As
an initial matter, the commenter did not cite any evidence that
institutions that use the two-cycle method are more likely to offer
lower prices and grace periods than institutions that do not, nor are
the Agencies aware of any such evidence. Furthermore, individual
consumers overwhelmingly supported the proposed prohibition on the two-
cycle method. Finally, the Agencies believe that transparent pricing
provides substantial benefits to consumer by enabling them to make
informed decisions about the use of credit.
Accordingly, the Agencies conclude that the two-cycle method does
not produce benefits that outweigh the injury to consumers.
Public policy. Several industry commenters stated that the proposed
rule was contrary to established public policy because, as noted above,
TILA requires creditors to disclose the balance computation method at
account opening (15 U.S.C. 1637(a)(2)) and Regulation Z includes the
two-cycle method in the list of methods that may be described by name
(12 CFR 226.5a(g)).\141\ Regulation Z's acknowledgment that the two-
cycle method has been a commonly used balance computation method does
not, however, constitute an endorsement of that method. Furthermore,
nothing in TILA or Regulation Z requires use of the two-cycle method.
---------------------------------------------------------------------------
\141\ As discussed elsewhere in today's Federal Register, the
Board has not deleted the two-cycle method from the list in 12 CFR
226.5a(g) because the prohibition in Sec. --.25 does not apply to
all credit card issuers.
---------------------------------------------------------------------------
One industry commenter noted that, more than twenty years ago, a
member of the Board expressed concern that the costs of regulating
balance computation methods could outweigh the benefits for
consumers.\142\ As discussed above, however, the Agencies have
concluded that, in today's marketplace, the costs associated with
prohibiting this particular balance computation method do not outweigh
the benefits to consumers.
---------------------------------------------------------------------------
\142\ See Statement of Emmett J. Rice, Member, Board of
Governors of the Federal Reserve System before the S. Subcomm. on
Fin. Instits. (May 21, 1986).
---------------------------------------------------------------------------
Final Rule
As discussed below, the Agencies are not taking action on credit
holds at this time. Accordingly, subject to the revisions discussed
below, proposed Sec. --.26 is adopted as Sec. --.25. The proposed
commentary has been redesignated to reflect this change.
Section --.25(a) General Rule
The proposed rule prohibited institutions from imposing finance
charges on balances on consumer credit card accounts based on balances
for days in billing cycles preceding the most recent billing cycle.
Proposed comment 26(a)-1 cited the two-cycle average daily balance
computation method as an example of balance computation methods that
would be prohibited by the proposed rule, tracking commentary under
Regulation Z. See 12 CFR 226.5a(g)(2). Proposed comment 26(a)-2
provided an example of the circumstances in which the proposed rule
prohibited the assessment of interest.
Industry commenters stated that, as drafted, the proposed rule went
further than necessary to protect consumers from the injury caused by
the two-cycle balance computation method. Specifically, because the
proposed rule was not limited to circumstances in which the two-cycle
method results in greater interest charges than other balance
computation methods (that is, when a consumer who has been eligible for
a grace period does not pay the balance in full on the due date), it
would prohibit the assessment of interest from the date of the
transaction even when the consumer was not eligible for a grace period.
Because the Agencies did not intend this result, Sec. --.25(a) and its
commentary have been revised to clarify that an institution is
prohibited from imposing finance charges based on balances for days in
billing cycles that precede the most
[[Page 5537]]
recent billing cycle as a result of the loss of the grace period.
Otherwise, the Agencies adopt the proposed rule and commentary.
Section --.25(b) Exceptions
As proposed, Sec. --.26(b) contained two exceptions to the general
prohibition in Sec. --.26(a). First, under proposed Sec. --.26(b)(1),
institutions would not be prohibited from charging consumers for
deferred interest even though that interest may have accrued over
multiple billing cycles. Thus, if a consumer did not pay a balance or
transaction in full by the specified date under a deferred interest
plan, the institution would have been permitted to charge the consumer
for interest accrued during the period the plan was in effect. As
discussed above, because current practices regarding the assessment of
deferred interest are prohibited by Sec. --.24, this exception has not
been adopted.
Second, under proposed Sec. --.26(b)(2), institutions would not
have been prohibited from adjusting finance charges following
resolution of a billing error dispute. For example, if after complying
with the requirements of 12 CFR 226.13 an institution determines that a
consumer owes all or part of a disputed amount, the institution would
be permitted to adjust the finance charge consistent with 12 CFR
226.13, even if that requires computing finance charges based on
balances in billing cycles preceding the most recent billing cycle. The
Agencies did not receive any significant comment on this exception.
Accordingly, the Agencies have revised this exception for clarity and
adopted it as Sec. --.25(b)(1).
Industry commenters requested two additional exceptions to the
proposed rule. First, they requested an exception when the date of a
transaction for which the consumer does not receive a grace period is
in a different billing cycle than the date on which that transaction is
posted to the account--for example, if a consumer uses a convenience
check for a cash advance transaction (which is not typically subject to
a grace period) on the last day of a billing cycle, the check may not
reach the institution for posting to the account until the first day of
the next billing cycle or later. These commenters stated that the
proposed rule should not apply in this situation because the
institution is entitled to assess interest from the transaction date.
Rather than creating an additional exception, the Agencies have
addressed this concern by clarifying, as discussed above, that Sec.
--.25(a) only applies to interest charges imposed as a result of the
consumer losing the grace period. Accordingly, when a consumer is not
eligible for a grace period at the time of a transaction, the final
rule does not prohibit the institution from assessing interest from the
date of the transaction.
Second, industry commenters requested an exception allowing
adjustments to finance charges when a consumer's payment is credited to
the account in one billing cycle but is returned for insufficient funds
in the subsequent billing cycle. This could occur, for example, when a
consumer's check is received and credited by the institution near the
end of a billing cycle but is returned to the institution for
insufficient funds early in the next billing cycle. The Agencies view
this situation as analogous to adjusting finance charges following
resolution of a billing error or other dispute, which is permitted
under Sec. --.25(b)(1). Accordingly, the final rule adopts, in Sec.
--.25(b)(2), an exception permitting adjustments to finance charges as
a result of the return of a payment for insufficient funds.
Other Issues
Implementation. As discussed in section VII of this SUPPLEMENTARY
INFORMATION, the effective date for Sec. --.25 is July 1, 2010. As of
the effective date, this provision applies to existing as well as new
consumer credit card accounts and balances.
Additional prohibitions considered. Consumer groups and a member of
Congress requested that the proposed rule be expanded to cover two
additional practices. First, they urged that, when a consumer who is
eligible for a grace period pays some but not all of the relevant
balance by the due date, the institution be prohibited from assessing
interest on the amount paid. For example, assume that the billing cycle
on a consumer credit card account starts on the first day of the month
and ends on the last day of the month and that the payment due date is
the twenty-fifth day of the month. Under the terms of the account, the
consumer will receive a grace period on purchases if the balance at the
end of a billing cycle is paid in full by the following payment due
date. The consumer is eligible for a grace period on a $500 purchase
made on March 15. At the end of the March billing cycle (March 31), the
consumer's balance consists only of the $500 purchase. The consumer
pays $400 on the following due date (April 25), leaving a $100 balance.
Because the consumer did not pay the balance for the March billing
cycle in full on April 25, Sec. --.25(a) prohibits the institution
from charging interest on the $500 purchase from the date of purchase
(March 15) to the end of the March billing cycle (March 31). The
commenters would also prohibit the institution from assessing any
interest on $400 of the $500 purchase during the April billing cycle
because the consumer paid that amount by the due date.
The Agencies, however, are not taking action on this issue at this
time. As an initial matter, elsewhere in today's Federal Register, the
Board has improved the disclosures under Regulation Z to assist
consumers in understanding that they must pay the entire balance by the
due date to receive the grace period.\143\ Furthermore, because TILA
does not require institutions to provide a grace period, the requested
prohibition could reduce the availability of such periods, which
provide substantial benefits to consumers. To the extent that specific
practices raise concerns regarding unfairness or deception under the
FTC Act, the Agencies plan to address those practices on a case-by-case
basis through supervisory and enforcement actions.
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\143\ See 12 CFR 226.5a(b)(5) comment 5a(b)(5)-1 (``The card
issuer must state any conditions on the applicability of the grace
period. An issuer that offers a grace period on all purchases and
conditions the grace period on the consumer paying his or her
outstanding balance in full by the due date each billing cycle, or
on the consumer paying the outstanding balance in full by the due
date in the previous and/or the current billing cycle(s) will be
deemed to meet these requirements by providing the following
disclosure, as applicable: `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.' '').
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Second, many of the same commenters requested that, when a consumer
who has been carrying a balance from month to month--and therefore has
not been receiving a grace period--pays the balance stated on the most
recent periodic statement by the applicable due date, the institution
be prohibited from assessing interest on that balance in the period
between mailing or delivery of the statement and receipt of the
consumer's payment. This type of interest is sometimes referred to as
``trailing interest.'' For example, assume that a consumer who is not
eligible for a grace period receives a periodic statement reflecting a
balance of $1,000 as of March 31 and a due date of April 25. The
consumer mails a payment of $1,000, which is credited by the
institution on April 25. Ordinarily, because the consumer was not
eligible for a grace period, this payment will not be sufficient to pay
off the balance in full because interest will have accrued on the
$1,000 balance from April 1 through April 24. The commenters, however,
would prohibit the assessment
[[Page 5538]]
of interest on the $1,000 balance after March 31. The Agencies note
that, because an institution will not know at the time it sends a
periodic statement whether the consumer will pay the balance in full,
the requested prohibition would essentially require institutions to
waive subsequent interest charges for the subset of consumers who do
so. To the extent that specific practices raise concerns regarding
unfairness or deception under the FTC Act, the Agencies plan to address
those practices on a case-by-case basis through supervisory and
enforcement actions.
Supplemental Legal Basis for This Section of the OTS Final Rule
As discussed above, HOLA provides authority for both safety and
soundness and consumer protection regulations. Section 535.25 supports
safety and soundness by reducing reputation risk that would occur from
using unfair balance computation methods. Section 535.25 also protects
consumers by providing them with fair balance computation methods on
their account so that they do not pay additional interest due to the
application of this balance computation method that testing shows few
understand. Section 535.25 is consistent with the best practices of
thrift institutions nationwide. Few institutions still use the two-
cycle balance computation method. Based on OTS supervisory observations
and experience, no large savings associations are currently engaged in
this practice. Consequently, HOLA serves as an independent basis for
Sec. 535.25.
Section --.26--Unfair Charging of Security Deposits and Fees for the
Issuance or Availability of Credit to Consumer Credit Card Accounts
Summary. In the May 2008 Proposal, the Agencies proposed Sec.
--.27(a), which would have prohibited institutions from charging to a
consumer credit card account security deposits and fees for the
issuance or availability of credit during the twelve months after the
account is opened that, in the aggregate, constitute the majority of
the credit limit for that account. The Agencies also proposed Sec.
--.27(b), which would have prohibited institutions from charging to the
account during the first billing cycle security deposits and fees for
the issuance or availability of credit that total more than 25 percent
of the credit limit and would have required that if security deposits
and fees for the issuance or availability of credit total more than 25
percent but less than the majority of the credit limit during the first
year, the institution must spread that amount equally over the eleven
billing cycles following the first billing cycle. Further, the Agencies
proposed Sec. --.27(c), which would have defined ``fees for the
issuance or availability of credit.'' See 73 FR at 28925-28926.
Based on the comments received and further analysis, the Agencies
have revised proposed Sec. --.27(a) for clarity and adopted that
provision as Sec. --.26(a).\144\ The Agencies have revised proposed
Sec. --.27(b) to permit security deposits and fees to be spread over
no fewer than the first six months, rather than the first year (as
proposed). This provision has been adopted as Sec. --.26(b).\145\
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\144\ As discussed above, the Agencies are not taking action on
proposed Sec. --.25 at this time. Accordingly, proposed Sec. --.26
and Sec. --.27 have been adopted as Sec. --.25 and Sec. --.26,
respectively.
\145\ For purposes of this discussion, products that currently
charge security deposits and fees for the issuance or availability
of credit that exceed the amounts permitted by the final rule are
referred to as ``high-fee subprime credit cards.''
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In Sec. --.26(c), the Agencies have adopted a new provision
prohibiting institutions from evading Sec. Sec. --.26(a) and (b) by
providing the consumer with additional credit to fund the payment of
security deposits and fees for the issuance or availability of credit
in excess of the amounts permitted by Sec. Sec. --.26(a) and (b). The
Agencies have also added definitions to proposed Sec. --.27(c) and
adopted that provision as Sec. --.26(d).
Background. Subprime credit cards often have substantial fees
related to the issuance or availability of credit. For example, these
cards may impose an annual fee and a monthly maintenance fee for the
card. In other cases, a security deposit may be charged to the account.
These cards may also impose multiple one-time fees when the consumer
opens the card account, such as an application fee and a program fee.
Those amounts are often billed to the consumer as part of the first
periodic statement and substantially reduce the amount of credit that
the consumer has available to make purchases or other transactions on
the account. For example, some subprime credit card issuers assess $250
in fees at account opening on accounts with credit limits of $300,
leaving the consumer with only $50 of available credit with which to
make purchases or other transactions. In addition, the consumer will
pay interest on the $250 in fees until they are paid in full.
The federal banking agencies have received many complaints from
consumers with respect to subprime credit cards. Consumers often stated
that they were not aware of how the high upfront fees would affect
their ability to use the card for its intended purpose of engaging in
transactions. In an effort to address these concerns, the Board's June
2007 and May 2008 Regulation Z Proposals included several proposed
amendments to the disclosure requirements for credit and charge cards
(which have been adopted in a revised form elsewhere in today's Federal
Register). Because, however, the Agencies were concerned that
disclosure alone was insufficient to protect consumers from unfair
practices regarding high-fee subprime credit cards, the May 2008
Proposal contained additional, substantive protections.
The Agencies received comments on the proposed rule from a wide
range of interested parties. The proposal received strong support from
consumer groups, several members of Congress, the FDIC, the OCC, two
state attorneys general, and a state consumer protection agency. These
commenters generally argued that high-fee subprime credit cards trap
consumers with low incomes or poor credit histories, causing those
consumers either to pay off the upfront fees by depleting their limited
resources or to default and further damage their credit records. In
particular, one consumer group stated that high-fee subprime credit
cards are unfair because: (1) The upfront fees impose an overly high
price for access to credit and significantly reduce available credit,
leading consumers to exceed their credit limit and incur additional
fees; (2) disclosures are insufficient because subprime consumers are
particularly vulnerable to predatory marketing practices and may have
limited educational or literacy skills; and (3) subprime consumers
generally have limited incomes and therefore cannot pay the upfront
fees within the grace period for the initial billing cycle, causing
them to incur interest charges. Many of these commenters urged the
Agencies to strengthen the proposed rule by, for example, lowering the
thresholds for security deposits and fees, applying those thresholds to
all security deposits and fees regardless of whether they are charged
to the account, and prohibiting the marketing of subprime credit cards
as credit repair products.
Some industry commenters also expressed support for the proposed
rule, stating that it was an appropriate use of the Agencies'
rulemaking authority under the FTC Act. In contrast, other issuers who
specialize in subprime credit cards strongly opposed the proposed rule.
According to these commenters, the large upfront fees and
[[Page 5539]]
limited initial credit availability that characterize high-fee subprime
credit cards are necessitated by the risk and expense of extending
credit to consumers who pose a greater risk of default than prime
consumers. They asserted that subprime credit card accounts have higher
delinquencies, losses, reserve requirements, and servicing costs than
prime credit card accounts.\146\ They further argued that, to the
extent the proposal would prevent issuers from protecting themselves
against the risk of loss, it would ultimately harm consumers because
issuers would be forced to reduce credit access and increase the price
of credit. They also asserted that high-fee subprime credit cards offer
important benefits by providing credit cards to consumers who could not
otherwise obtain them and by enabling consumers with limited or damaged
credit records to build positive credit histories and qualify for prime
credit. Finally, these commenters argued that any concerns regarding
high-fee subprime credit cards should be addressed through improved
disclosures, such as those proposed by the Board under Regulation Z.
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\146\ One subprime credit card issuer stated that approximately
30% of its consumers charge off without paying all or part of the
balance due. The same issuer stated that the delinquency rate for
subprime credit card accounts is approximately 20% (versus 4-5% for
prime accounts) and that reserve requirements for such accounts can
be up to 56% of outstanding balances (versus as little as 8% for
prime credit card issuers). Finally, this issuer stated that
subprime consumers contact their issuers an average of once or twice
a month (versus once per year for prime consumers).
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Subprime credit card issuers received support from some state and
Congressional representatives. The Agencies also received comments from
thousands of individual consumers, who explained that high-fee subprime
credit cards were the only option available to them because of their
credit problems. These consumers expressed concern that they might have
fewer credit alternatives if the proposal were finalized. Finally, two
advocacy organizations expressed concern that the proposed rule would
result in reduced credit availability for low-income minority
consumers.
Legal Analysis
The Agencies conclude that, based on the comments received and
their own analysis, it is an unfair act or practice under 15 U.S.C.
45(n) and the standards articulated by the FTC to charge to a consumer
credit card account security deposits or fees for the issuance or
availability of credit that exceed the limits in the final rule.
Substantial consumer injury. The Agencies conclude that consumers
incur substantial monetary injury when security deposits and fees for
the issuance or availability of credit are charged to a consumer credit
card account, both in the form of the charges themselves and in the
form of interest on those charges. Even in cases where the institution
provides a grace period, many consumers will be unable to pay the
charges in full during that grace period and will incur interest.
Indeed, many consumers who use high fee subprime cards submitted
comments explaining that they have very limited incomes. Moreover, a
large issuer of subprime cards commented that, while it offers
consumers the option of paying fees up front, most new cardholders do
not do so. Thus, as consumer advocates noted in their comments,
consumers who open a high-fee subprime credit card account are unlikely
to be able to pay down the upfront charges quickly. In addition, when
security deposits and fees for the issuance or availability of credit
are charged to the consumer's account, they substantially diminish the
value of that account by reducing the credit available to the consumer
for purchases or other transactions.\147\
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\147\ See OCC Advisory Letter 2004-4, at 3 (Apr. 28, 2004)
(stating that a finding of unfairness with respect to subprime cards
with financed security deposits could be based on the fact that
``because charges to the card by the issuer utilize all or
substantially all of the nominal credit line assigned by the issuer,
they eliminate the card utility and credit availability applied and
paid for by the cardholder'') (available at http://www.occ.treas.gov/ftp/advisory/2004-4.txt).
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Injury is not reasonably avoidable. In May 2008, the Agencies
stated that the Board's proposed disclosures under Regulation Z did not
appear to be sufficient, by themselves, to allow consumers to
reasonably avoid the injury caused by security deposits and fees that
consume most of the available credit at account opening. Specifically,
the Agencies expressed concern that high-fee subprime credit cards are
typically marketed to financially vulnerable consumers with limited
credit options and that these products have in the past been associated
with deceptive sales practices. Although several industry commenters
asserted that the disclosures in Regulation Z were sufficient to enable
consumers to avoid any injury, the Agencies conclude, for the reasons
discussed below, that consumers cannot, as a general matter, reasonably
avoid the injury caused by high-fee subprime credit cards.
In the May 2008 Proposal, the Agencies noted that high-fee subprime
credit cards are typically marketed to vulnerable consumers whose
credit histories or other characteristics prevent them from obtaining
less expensive credit card products.\148\ In support of its Credit
Practices Rule, the FTC suggested that, when most or all credit offers
received by a consumer contain particular terms, those terms may not be
reasonably avoidable.\149\ In addition, when evaluating whether a
practice violates the FTC Act, the FTC has considered whether that
practice targets consumers who are particularly vulnerable to unfair or
deceptive practices.\150\ Similarly, states have used statutes and
regulations prohibiting unfairness and deception to ensure that lenders
do not ``exploit the lack of access of low-income individuals, the
elderly, and communities of color to mainstream banking institutions.''
\151\
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\148\ For a consumer who has sufficient funds, a secured credit
card account is generally a more beneficial product than a high-fee
subprime credit card. Secured credit cards generally require the
consumer to provide a cash collateral deposit that is equal to the
credit line for the account. For example, in order to obtain a
credit line of $300, a consumer would be required to deposit $300
with the lender. Generally, the consumer can receive the deposit
back if the account is closed with no outstanding balance. In some
cases, these deposits earn interest. See OTS Examination Handbook,
Asset Quality, Section 218 Credit Card Lending at Sec. 218.3 (May
2006). The final rule does not limit issuers' ability to offer
secured credit cards. Indeed, by restricting the financing of
security deposits and fees, the final rule may encourage issuers to
expand secured credit card offerings.
\149\ See Statement for FTC Credit Practices Rule, 48 FR at 7746
(``If 80 percent of creditors include a certain clause in their
contracts, for example, even the consumer who examines contract[s]
from three different sellers has a less than even chance of finding
a contract without the clause. In such circumstances relatively few
consumers are likely to find the effort worthwhile, particularly
given the difficulties of searching for contract terms. * * *''
(footnotes omitted)).
\150\ See FTC Trade Regulation Rule; Funeral Industry Practices,
47 FR 42260, 42262 (Sept. 24, 1982) (stating finding by the FTC's
Presiding Offer ``that the funeral transaction has several
characteristics which place the consumer in a disadvantaged
bargaining position * * *, leave the consumer vulnerable to unfair
and deceptive practices, and cause consumers to have little
knowledge of legal requirements [and] available alternatives. * *
*''); In the Matter of Travel King, Inc., 86 F.T.C. 715 (Sept. 30,
1975), paragraphs 7 and 8 (alleging that ``[p]eople who are
seriously ill, and their families, are vulnerable to the influence
of respondents' promotions [regarding `psychic surgery'] which held
out tantalizing hope which the medical profession, by contrast,
cannot offer'').
\151\ United Companies Lending Corp. v. Sargeant, 20 F. Supp. 2d
192, 203 (D. Mass. 1998) (upholding a state regulation that limited
the rates and other terms of certain subprime mortgage loans in
order to ``prevent[] lenders from exploiting the financial vacuum
created by redlining'').
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In response to the proposed rule, the Agencies received thousands
of comments from individual consumers who have used high-fee subprime
credit cards. These consumers frequently stated that, due to their
credit problems
[[Page 5540]]
and limited incomes, high-fee subprime credit cards were the only type
of credit card that they could obtain. Many of these consumers
described themselves as elderly, living on limited incomes, and/or
having serious health problems. Accordingly, because high-fee subprime
credit cards are marketed to financially vulnerable consumers who
generally cannot obtain credit card products with less onerous terms,
the Agencies conclude that--even with improved disclosures--those
consumers cannot, as a general matter, reasonably avoid the injury
caused by high upfront fees and low initial credit availability.
As discussed in the May 2008 Proposal, this conclusion is further
supported by the Agencies' concern that the Regulation Z disclosures
could be undermined by deceptive sales practices. In addition to taking
enforcement actions against issuers of high-fee subprime credit cards,
the OCC has found as a general matter that ``solicitations and other
marketing materials used for [high-fee subprime] credit card programs
have not adequately informed consumers of the costs and other terms,
risks, and limitations of the product being offered'' and that, ``[i]n
a number of cases, disclosure problems associated with secured credit
cards and related products have constituted deceptive practices under
the applicable standards of the FTC Act.'' \152\ The Agencies believe
that the amendments to Regulation Z published elsewhere in today's
Federal Register will reduce the risk of deception in written
solicitations. However, because of the vulnerable nature of subprime
consumers and the history of deceptive practices by some subprime
credit card issuers, the Agencies remain concerned that the required
disclosures could be undermined by, for example, deceptive
telemarketing practices.\153\
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\152\ OCC Advisory Letter 2004-4, at 2-3 (emphasis in original);
see also In re First Nat'l Bank in Brookings, No. 2003-1 (Dept. of
the Treasury, OCC) (Jan. 17, 2003) (available at http://www.occ.treas.gov/ftp/eas/ea2003-1.pdf); In re First Nat'l Bank of
Marin, No. 2001-97 (Dept. of the Treasury, OCC Dec. 3, 2001)
(available at http://www.occ.treas.gov/ftp/eas/ea2001-97.pdf).
\153\ See, e.g., People v. Applied Card Sys., Inc., 805 N.Y.S.2d
175, 178 (App. Div. 2005) (finding that credit card marketing
materials sent to consumers who were otherwise unable to qualify for
credit ``did not represent an accurate estimation of a consumer's
credit limit'' and that, ``at all times, it appeared that the
confusion was purposely fostered by [the defendant's]
telemarketers.'').
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Injury is not outweighed by countervailing benefits. In May 2008,
the Agencies recognized that, in some cases, high-fee subprime credit
cards can provide access to credit to consumers who are unable to
obtain other credit card products. Nevertheless, the Agencies stated
that, once security deposits and fees for the issuance or availability
of credit consume a majority of the initial credit limit, the benefit
to consumers from access to credit appeared to be outweighed by the
high cost of paying for that credit. In order to minimize the impact on
access to credit, the Agencies tailored the proposed rule to allow
institutions to charge to the account security deposits and fees that
total less than a majority of the credit limit during the first year
and by allowing institutions to charge amounts totaling up to 25
percent of the initial credit limit in the first billing cycle. In
addition, the Agencies clarified that security deposits and fees paid
from separate funds would not be affected by the proposal.
In response, industry commenters who opposed the rule primarily
relied on two arguments. First, they contended that, rather than
increasing access to credit, the restrictions in the proposed rule
would reduce or eliminate the availability of credit cards for subprime
consumers. Specifically, they argued that the cost of extending credit
to subprime consumers is substantially higher than the cost of
extending credit to prime consumers and that the proposed rule would
limit subprime issuers' ability to pass those higher costs on to
consumers. In addition, they argued that the proposed restrictions on
the amount of security deposits and fees that may be charged to the
account in the first billing cycle will actually increase issuer costs
because subprime issuers will be forced to make more credit available
to consumers, which will increase their cost of funds, their reserve
requirements, and their losses. As a result, they argued, subprime
credit card issuers will be forced to reduce costs by substantially
reducing the amount of credit extended to subprime consumers.
The Agencies have carefully considered the arguments presented by
these commenters but have concluded that, while the final rule may
result in some subprime consumers who are currently eligible for high-
fee subprime credit cards not having access to a credit card, this
outcome does not outweigh the benefits to subprime consumers generally
of receiving credit cards that provide a meaningful amount of available
credit. The Agencies recognize that credit cards enable consumers to
engage in certain types of transactions, such as making purchases by
telephone or online or renting a car or hotel room. As noted above,
however, credit lines for subprime credit card accounts are typically
very low, meaning that, once security deposits and fees have been
charged to the account, consumers receive little available credit with
which to make purchases until they pay off the deposits or fees.
Currently, many subprime credit card issuers assess fees that consume
75 percent or more of the credit line at account opening. Thus, on an
account with a $400 credit limit, a consumer may pay $300 (plus
interest charges) to obtain $100 of available credit. The benefit of
receiving this relatively small amount of available credit does not
outweigh its high cost.
Some industry commenters suggested that, rather than focusing on
the amount of available credit at account opening, the Agencies should
consider the benefits to consumers who pay the upfront charges and then
have access to the entire credit line. As an initial matter, these
commenters did not provide information regarding how many consumers are
able to obtain access to the entire credit line or how long it takes
them to do so. Furthermore, as noted above, a large issuer of subprime
cards indicated that few new cardholders choose not to finance the
upfront fees, and many consumer commenters who use high fee subprime
cards explained that they have limited incomes. Therefore, it is
unlikely that consumers who open a high-fee subprime credit card
account will be able to pay down the upfront charges quickly. Moreover,
as noted above, consumers who have the resources to pay upfront charges
may receive more economic benefit from using those resources to obtain
secured credit card accounts instead of high-fee subprime credit cards.
Accordingly, the Agencies conclude that, when security deposits and
fees charged to a credit card account in the first year exceed the
amount of credit extended at account opening, the injury caused by the
charges outweighs the benefit to the consumer of receiving available
credit. Similarly, the Agencies conclude that, in order to ensure that
consumers receive a meaningful amount of available credit at account
opening that outweighs the injury, security deposits and fees can
consume no more than 25 percent of the available credit at account
opening.\154\
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\154\ Some issuers and members of Congress recommended that the
Agencies endorse a ``Code of Fair Practices'' instead of finalizing
the rule. These practices include enhanced disclosure, offering
consumers the option to pay fees up front, not assessing interest on
fees posted to the account, a commitment to report account payment
experience to credit reporting agencies, and offering consumers the
opportunity to cancel the card after receiving disclosures. Several
of these ``best practices'' have essentially been codified by the
Board's amendments to Regulation Z elsewhere in today's Federal
Register. For example, creditors will be required to disclose the
impact of security deposits and fees for the issuance or
availability of credit on the amount of available credit the
consumer will receive at account opening. See 12 CFR 226.5a(b)(14).
In addition, the Board has clarified the circumstances under which a
consumer who has received account-opening disclosures (but has not
yet used the account or paid a fee) may reject the plan and not be
obligated to pay upfront fees. See 12 CFR 226.5(b)(1)(iv). As
discussed above, few consumers considering high fee subprime cards
are likely to have the resources to pay the amount of fees currently
assessed ``up front.'' Moreover, while the Agencies support accurate
credit reporting, the rulemaking record discussed below indicates
that the majority of high fee subprime cardholders do not improve
their credit scores. Finally, while forbearance from charging
interest on fees would provide some benefit to consumers, that
benefit is outweighed by the harm that consumers experience from the
high fees themselves.
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[[Page 5541]]
Although these restrictions will require issuers of high-fee
subprime credit cards to adjust their lending practices, the Agencies
believe that the final rule provides sufficient flexibility for these
issuers to continue offering credit cards to subprime consumers.
Specifically, subprime issuers may charge to the account in the first
year security deposits and fees totaling 50 percent of the initial
credit limit and may charge half of that total at account opening.\155\
In addition, the Agencies have modified the proposal to permit issuers
to spread deposits and fees that constitute more than 25 percent of the
initial credit limit over the first six months rather than the first
year. This change is intended to better enable issuers to limit the
risk from the early default of new cardholders, but still ensure that
consumers who obtain these cards have meaningful access to credit.
Furthermore, although issuers are prohibited from evading the final
rule by providing the consumer with additional credit to finance
additional fees, the final rule does not limit issuers' ability to
collect additional amounts if the consumer can obtain those funds
independently.
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\155\ Notably, the final rule does not place any limit on the
dollar amount of security deposits and fees that may be charged to
the account. Instead, the amount of deposits and fees that an issuer
may charge to the account is tied to the credit limit, which the
issuer determines.
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The second argument raised by industry commenters was that high-fee
subprime credit cards offer an opportunity for consumers with damaged
or limited credit histories to build or repair their credit records and
qualify for credit at prime rates. However, the data supplied by these
commenters indicates that most users of high-fee subprime credit cards
do not experience an increase in credit score. Specifically, a study of
subprime accounts performed by TransUnion (one of the three nationwide
consumer reporting agencies) indicates that, while approximately 37
percent of consumers experienced an increase in credit score during the
twelve months following the opening of a subprime credit card, the
other 63 percent experienced a drop or no change in credit score.\156\
Similarly, a subprime credit card issuer stated that only 35 percent of
consumers who receive its low limit credit cards improve their credit
score within 24 months of account opening.\157\ The Agencies cannot
verify the accuracy of this data, nor can the Agencies verify that the
subset of consumers who did experience an increase in credit score did
so as a result of the use of a subprime credit card and not due to
other factors. Furthermore, even assuming for purposes of this
discussion that the data are accurate, they indicate that most
consumers who use subprime credit cards do not experience an increase
in credit score. In fact, it appears that the majority of the consumers
in the sample studied by TransUnion actually experienced a decrease in
credit score within twelve months of opening a subprime credit card
account.\158\
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\156\ See TransUnion Summary of Results for CEAC Coalition
(``TransUnion Summary'') at 4 (dated July 2008) (attached to comment
letter from the Political and Economic Research Council (PERC)
(dated Aug. 4, 2008)).
\157\ This same issuer also stated that, on average, only 22.5%
of these consumers receive a higher limit card within 24 months,
which--it asserted--is higher than the industry average of 20%.
\158\ See TransUnion Summary at 6.
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Accordingly, for the reasons discussed above, the Agencies conclude
that high-fee subprime credit cards do not produce benefits that
outweigh the injury to consumers.
Public policy. For purposes of the unfairness analysis, public
policy is generally embodied in a statute, regulation, or judicial
decision.\159\ In the May 2008 Proposal, however, the Agencies noted
that the OCC has concluded in regulatory guidance that high-fee
subprime credit card accounts increase the risk of default and
therefore present concerns regarding the safety and soundness of
financial institutions.\160\ To the extent that this guidance
constitutes public policy, that policy weighs in favor of the
restrictions in the final rule. The OCC's guidance does not, however,
serve as a primary basis for the Agencies' unfairness determination.
---------------------------------------------------------------------------
\159\ See, e.g., FTC Policy Statement on Unfairness at 5.
\160\ See OCC Advisory Letter 2004-4, at 4 (``[P]roducts
carrying fee structures that are significantly higher than the norm
pose a greater risk of default. * * * This is particularly true when
the security deposit and fees deplete the credit line so as to
provide little or no card utility or credit availability upon
issuance. In such circumstances, when the consumer has no separate
funds at stake, and little or no consideration has been provided in
exchange for the fees and other amounts charged to the consumer, the
product may provide a disincentive for responsible credit behavior
and adversely affect the consumer's credit standing.'')
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Supplemental Legal Basis for This Section of the OTS Final Rule
As discussed above, HOLA provides authority for both safety and
soundness and consumer protection regulations. Section 535.26 supports
safety and soundness. The commenters described very high credit risks
associated with high-fee subprime credit cards. One estimated that at
least one-third of new high fee cardholders default and over 75 percent
of them default immediately, upon using 97 percent of their available
credit, paying no fees, and repaying no principal. The TransUnion study
also found that about 60 percent of subprime cardholders experience a
drop in their VantageScore, which suggests a continuing inability to
pay these obligations. Section 535.26 provides issuers with an
incentive to employ better underwriting in order to target customers
who are less likely to default. Consequently, it fosters the safe and
sound operation of the institutions that offer these products.
In this vein, it should be noted that the federal banking agencies
have agreed that subprime lending that is appropriately underwritten,
priced and administered can serve the goals of enhancing credit access
for borrowers with blemished credit histories.\161\ However, OTS has
made it clear that credit card issuers under its jurisdiction must have
well-defined credit approval criteria to ensure that underwriting
standards are appropriately and uniformly followed.\162\ OTS advises
all of its institutions that whether they use a judgmental process, an
automated scoring system, or a combination of both to make the credit
decision, it is important to have well-defined credit approval criteria
to ensure that underwriting standards are appropriately and uniformly
followed.\163\ Appropriate underwriting should reduce the costs of
default for issuers and consumers with subprime credit histories.
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\161\ Interagency Expanded Guidance for Subprime Lending
Programs (Feb. 2, 2001).
\162\ OTS Examination Handbook, Asset Quality, Section 218
Credit Card Lending, at Sec. 218.5 (May 2006).
\163\ Id.
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Moreover, as noted above, subprime cardholders now receive little
usable credit due to the current market practice of charging fees for
the issuance of credit in amounts that substantially
[[Page 5542]]
exhaust the line. Section 535.26 should alleviate some of the negative
consequences associated with this practice, including the creation of
unmanageable debt that consumers cannot repay. In particular, requiring
issuers to spread the payment of a portion of account opening fees over
a number of billing cycles should increase the likelihood that
borrowers can repay them. It is therefore consistent with guidance
issued by the federal banking agencies on the management of credit card
lending.\164\ It is also consistent with guidance issued by the
OTS.\165\
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\164\ See Interagency Guidance, Credit Card Lending, Account
Management and Loss Allowance Guidance, OTS, Examination Handbook,
Asset Quality, Credit Card Lending, Appendix A.
\165\ OTS Examination Handbook, Asset Quality, Section 218
Credit Card Lending, p. 218.10 (May 2006). Notably, OTS has
recognized the risks to safety and soundness of subprime lending by
requiring more intensive risk management and capital for
institutions that engage in subprime lending. Id. at Sec. 218.4.
These risks are particularly pronounced in the current economic
environment, in which credit card charge-offs have increased. See
Federal Reserve Board Statistical Release, Charge-off and
Delinquency Rates, 3rd Q 2008 (available at: http://www.federalreserve.gov/releases/chargeoff/chgallsa.htm).
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Given the high default rate and the unsecured nature of credit card
lending, OTS concludes that it is not a safe and sound practice for
savings associations to offer consumer credit cards that charge
security deposits and fees that do not comply with Sec. 535.26.
With regard to consumer protection, Sec. 535.26 is consistent with
regulating savings associations in a manner that protects consumers and
gives due consideration to best practices of thrift institutions
nationwide. As a result of this provision, consumers will be protected
from excessive security deposits and fees for the issuance or
availability of credit that diminish the value of the account by
reducing the credit available to the consumer for purchases or other
transactions. They will also be protected from incurring excessive cost
for credit cards that provide access to a very small amount of credit.
Issuers will have less incentive to make unsubstantiated claims that
these products facilitate credit repair. These benefits are
particularly important when it is recognized that the consumers most
likely to receive the protections provided by Sec. 535.26 are those
who are the most vulnerable, including people who are elderly, live on
limited incomes, have serious health problems, or live with a
combination of these circumstances. Among OTS-supervised institutions,
cards that do not comply with the restrictions in Sec. 535.26 are
rare. In fact, based on OTS supervisory observations and experience,
only two savings associations currently offer such cards and those
products are a small part of their business.
Consequently, HOLA serves as an independent basis for Sec. 535.26.
Final Rule
As discussed above, the Agencies have redesignated proposed Sec.
--.27 as Sec. --.26. The proposed commentary has been revised
accordingly. In addition, the title of this section has been revised
for clarity.
Section --.26(a) Limitation for First Year
Proposed Sec. --.27(a) would have prohibited institutions from
charging to the account security deposits and fees for the issuance or
availability of credit during the twelve months following account
opening if, in the aggregate, those fees constitute a majority of the
initial credit limit. The Agencies have revised this paragraph of the
proposed rule for clarity and adopted it as Sec. --.26(a).
Proposed comment 27(a)-1 clarified that the total amount of
security deposits and fees for the issuance or availability of credit
constitutes a majority of the initial credit limit if that total is
greater than half of the limit and provided an example. The Agencies
adopt this comment as comment 26(a)-1.
Proposed Sec. --.27(b) would have prohibited institutions from
charging to the account during the first billing cycle security
deposits and fees for the issuance or availability of credit that, in
the aggregate, constitute more than 25 percent of the initial credit
limit. It would have further required that any additional security
deposits and fees be spread equally among the eleven billing cycles
following the first billing cycle. Proposed comment 27(b)-1 clarified
that, when dividing amounts pursuant to Sec. --.27(b)(2), the
institution may adjust amounts by one dollar or less. Proposed comment
27(b)-2 provided an example of the application of the rule.
As discussed above, the Agencies have adopted Sec. --.27(b) as
Sec. --.26(b) with modifications. The final rule provides that
security deposits and fees that constitute more than 25 percent of the
initial credit limit be charged to the account in equal portions in no
fewer than the five billing cycles immediately following the first
billing cycle. Institutions that wish to spread these deposits and fees
over a longer period may do so. This change is intended to better
enable issuers to limit the risk of early default by new cardholders,
but still ensure that consumers who obtain these cards have meaningful
access to credit. The Agencies have revised proposed comments 27(b)-1
and 27(b)-2 for consistency with the final rule and adopted those
comments as 26(b)-1 and 26(b)-2, respectively.
Section --.26(c) Evasion Prohibited
As discussed above, some consumer groups expressed concern that
institutions could evade the proposed rule by requiring consumers to
pay security deposits and fees for the issuance or availability of
credit from separate funds. Although the Agencies generally do not
intend the final rule to apply to amounts that are not charged to the
account (such as deposits for secured credit cards), the Agencies
conclude that Sec. --.26 would provide little effective protection
against the unfair assessment of security deposits and fees if
institutions could evade its requirements by providing the consumer
with additional credit to fund the payment of security deposits and
fees for the issuance or availability of credit that exceed the total
amounts permitted by Sec. --.26(a) and (b). Accordingly, the Agencies
have adopted Sec. --.26(c), which prohibits this practice. The
Agencies have also adopted comment 26(c)-1 (which provides an example
of the application of the rule) and comment 26(c)-2 (which clarifies
that an institution does not violate Sec. --.26(c) if it requires the
consumer to pay security deposits or fees for the issuance or
availability of credit using funds that are not obtained, directly or
indirectly, from the institution).
Section --.26(d) Definitions
Proposed Sec. --.27(c) would have defined ``fees for the issuance
or availability of credit'' as including any annual or other periodic
fee, any fee based on account activity or inactivity, and any non-
periodic fee that relates to opening an account. This definition is
based on the definition of ``fees for the issuance or availability of
credit'' in 12 CFR 226.5a(b)(2), published by the Board elsewhere in
today's Federal Register. This definition does not include fees such as
late fees or fees for exceeding the credit limit. In order to provide
additional clarity, the Agencies have added definitions of other terms
used in the rule and have adopted those definitions in Sec. --.26(d).
Specifically, the Agencies have moved the definition of ``initial
credit limit'' in proposed comment 27-1 into the text of the regulation
and added definitions clarifying the meaning of the terms ``first
billing cycle'' and ``first year.''
Proposed comments 27(c)-1, -2, and -3 clarified the meaning of
``fees for the
[[Page 5543]]
issuance or availability of credit.'' These comments were based on
similar commentary to 12 CFR 226.5a(b)(2), which was proposed by the
Board with its June 2007 Regulation Z Proposal. The Agencies have
revised the proposed commentary to Sec. --.26(d) for consistency with
the final Regulation Z commentary published by the Board elsewhere in
today's Federal Register. Specifically, proposed comment 27(c)-2 has
been revised to clarify that fees for providing additional cards to
primary cardholders (as opposed to authorized users) are fees for the
issuance or availability of credit. Otherwise, these comments are
redesignated as comments 26(d)-1, -2, and -3 and adopted as proposed.
Other Issues
Implementation. As discussed in section VII of this SUPPLEMENTARY
INFORMATION, the effective date for Sec. --.26 is July 1, 2010.
Although the Agencies particularly encourage institutions to use their
best efforts to conform their practices to this section of the final
rule sooner, institutions are not prohibited from charging security
deposits and fees for the issuance or availability that do not comply
with Sec. --.26 until the effective date. These provisions do not
affect security deposits and fees charged to consumer credit card
accounts prior to that date, even if some or all of the security
deposits and fees have not been paid in full as of the effective date.
Advertising. Based on the record in this rulemaking, the Agencies
are not persuaded that, as a general matter, high-fee subprime credit
cards provide meaningful benefits to consumers as credit repair tools.
Notably, institutions that make marketing claims regarding the use of
subprime credit cards as a means to improve credit scores risk
violating the FTC Act's prohibition on deception if they cannot
substantiate their claims.\166\ Savings associations that cannot do so
are also at risk of violating the OTS rule against making inaccurate
representations in advertising.\167\
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\166\ See FTC Policy Statement Regarding Advertising
Substantiation, 49 FR 30999 (Aug. 2, 1984); see also FTC v. QT,
Inc., 448 F. Supp. 2d. 908, 959-960 (N.D. Ill. 2006) (substantiation
policy used in federal litigation as guidance for the court), aff'd,
512 F.3d 858 (7th Cir. 2008).
\167\ See 12 CFR 563.27.
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Other Proposals
Proposed Sec. --.25--Unfair Acts or Practices Regarding Fees for
Exceeding the Credit Limit Caused by Credit Holds
Summary. In May 2008, the Agencies proposed Sec. --.25, which
would have prohibited institutions from assessing a fee or charge for
exceeding the credit limit on a consumer credit card account if the
credit limit would not have been exceeded but for a hold placed on any
portion of the available credit on the account that is in excess of the
actual purchase or transaction amount. See 73 FR 28921-28922. The
Agencies intended this provision to parallel proposed Sec. --.32(b),
which would have imposed identical restrictions with respect to holds
placed on available funds in a deposit account as a result of a debit
card transaction. See id. at 28931-32892. As discussed below, the
Agencies are not taking action on debit holds or credit holds at this
time.
Background. Although the Board's June 2007 Regulation Z Proposal
did not directly address over-the-credit-limit (OCL) fees, the Board
received comments from consumers, consumer groups, and members of
Congress expressing concern about the penalties imposed by creditors
for exceeding the credit limit. Specifically, commenters were concerned
that consumers may unknowingly exceed their credit limit and incur
significant rate increases and fees as a result.
As discussed in the May 2008 Proposal, the Agencies believed these
concerns were addressed by proposed Sec. --.24 to the extent that it
prohibited institutions from applying increased rates to outstanding
balances as a penalty for exceeding the credit limit. The Agencies were
concerned, however, about the imposition of OCL fees in connection with
credit holds. As further discussed below in section VI of this
SUPPLEMENTARY INFORMATION, some merchants place a temporary ``hold'' on
an account when a consumer uses a credit or debit card for a
transaction in which the actual purchase amount is not known at the
time the transaction is authorized. For example, when a consumer uses a
credit card to obtain a hotel room, the hotel often will not know the
total amount of the transaction at the time because that amount may
depend on, for example, the number of days the consumer stays at the
hotel or the charges for incidental services the hotel may provide to
the consumer during the stay (such as room service). Therefore, the
hotel may place a hold on the available credit on the consumer's
account in an amount sufficient to cover the expected length of the
stay plus an additional amount for potential purchases of incidentals.
In these circumstances, the institution may authorize the hold but the
final amount of the transaction will not be known until the hotel
submits the actual purchase amount for settlement.
Typically, the hold is kept in place until the transaction amount
is presented to the institution for payment and settled, which may take
place a few days after the original authorization. During this time
between authorization and settlement, the hold may remain in place on
the consumer's account. As discussed in the May 2008 Proposal, the
Agencies were concerned that consumers who were unfamiliar with credit
hold practices might inadvertently exceed the credit limit and incur an
OCL fee because they assumed that the available credit was reduced only
by the actual amount of the purchase.
Comments received. Industry commenters stated that credit holds do
not typically reduce the amount of available credit on a consumer
credit card account (in contrast to debit holds, which do reduce the
amount of available funds in a deposit account). Some stated that, for
this reason, they did not object to the proposed rule, while others
argued that--to the extent the provision would require any changes to
issuers' systems--it would be unnecessarily burdensome because credit
holds are very unlikely to result in OCL fees.
The proposed rule was supported by consumer groups, members of
Congress, the FDIC, state attorneys general, and state consumer
protection agencies, although these commenters generally argued that
the final rule should go further in addressing the harm caused by OCL
fees. Some of these commenters argued that exceeding the credit limit
should not be a basis for loss of a promotional rate under proposed
Sec. --.24(b)(2). As discussed above with respect to Sec. --.24, the
Agencies agree and the final version of Sec. --.24(b)(2) does not
permit this practice.
In addition, some of these commenters argued that institutions that
reduce the credit limit on a consumer credit card account should be
prohibited from penalizing consumers for exceeding that reduced limit.
The Agencies believe that these concerns are addressed by the Board's
revisions to Regulation Z, published elsewhere in today's Federal
Register. Specifically, 12 CFR 226.9(c)(2)(v) provides that, if a
creditor decreases the credit limit on an account, notice of the
decrease must be provided at least 45 days before an OCL fee or a
penalty rate can be imposed solely as a result of the consumer
exceeding the newly-decreased limit.
These commenters also urged the Agencies to take a variety of other
actions with respect to OCL fees, including prohibiting OCL fees unless
the account is over the credit limit at the
[[Page 5544]]
end of the billing cycle, prohibiting OCL fees when the institution
approved the transaction that put the account over the credit limit (or
allowing consumers to direct institutions not to honor such
transactions), prohibiting OCL fees when interest charges or other fees
placed the account over the credit limit, prohibiting multiple OCL fees
based on a single transaction, and prohibiting OCL fees that are not
reasonably related to the institution's cost. The Agencies, however,
believe that the protections provided elsewhere in Regulation Z and in
this final rule--particularly the prohibition on repricing existing
balances as a penalty for exceeding the credit limit--provide
substantial protections for consumers who exceed their credit limit.
Conclusion. The Agencies are not taking action on credit holds or
debit holds at this time. As discussed below in section VI of this
SUPPLEMENTARY INFORMATION, the Board has published proposed amendments
to Regulation E addressing debit holds elsewhere in today's Federal
Register. The Agencies will review information obtained through that
rulemaking to determine whether to take further action. In addition, to
the extent that specific practices involving debit or credit holds
raise concerns regarding unfairness or deception under the FTC Act, the
Agencies plan to address those practices on a case-by-case basis
through supervisory and enforcement actions.
Proposed Sec. --.28--Deceptive Acts or Practices Regarding Firm Offers
of Credit
Summary. In May 2008, the Agencies proposed Sec. --.28 to address
circumstances in which institutions make firm offers of credit for
consumer credit card accounts that contain a range of or multiple
annual percentage rates or credit limits because such offers appeared
to be deceptive. See 72 FR at 28925-28927. When the rate or credit
limit that a consumer responding to such an offer will receive depends
on specific criteria bearing on creditworthiness, proposed Sec. --.28
would have required that the institution disclose the types of
eligibility criteria in the solicitation. An institution would have
been permitted to use the following disclosure to meet these
requirements: ``If you are approved for credit, your annual percentage
rate and/or credit limit will depend on your credit history, income,
and debts.'' Based on the comments and further analysis, the Agencies
have concluded that concerns regarding firm offers of credit containing
a range of or multiple annual percentage rates are adequately addressed
by provisions of Regulation Z published by the Board elsewhere in
today's Federal Register. Accordingly, as discussed below, the Agencies
are not taking action on this issue at this time.
Background. The Fair Credit Reporting Act (FCRA) limits the
purposes for which consumer reports can be obtained. It permits
consumer reporting agencies to furnish consumer reports only for one of
the ``permissible purposes'' enumerated in the statute.\168\ One of the
permissible purposes set forth in the FCRA relates to prescreened firm
offers of credit or insurance.\169\ In a typical use of prescreening
for firm offers of credit, a creditor submits a request to a consumer
reporting agency for the contact information of consumers meeting
certain pre-established criteria, such as credit scores or a lack of
serious delinquencies. The creditor then sends offers of credit
targeted to those consumers, which state certain terms under which
credit may be provided. For example, a firm offer of credit may contain
statements regarding the annual percentage rate or credit limit that
may be provided.
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\168\ See 15 U.S.C. 1681b. Similarly, persons obtaining consumer
reports may do so only with a permissible purpose. See 15 U.S.C.
1681b(f).
\169\ See 15 U.S.C. 1681b(c); see also 15 U.S.C. 1681a(l)
(defining ``firm offer of credit or insurance'').
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The FCRA requires that a firm offer of credit state, among other
things, that (1) information contained in the consumer's credit report
was used in connection with the transaction; (2) the consumer received
the firm offer because the consumer satisfied the criteria for
creditworthiness under which the consumer was selected for the offer;
and (3) if applicable, the credit may not be extended if, after the
consumer responds to the offer, the consumer does not meet the criteria
used to select the consumer for the offer or any other applicable
criteria bearing on creditworthiness or does not furnish any required
collateral.\170\ The creditor may apply certain additional criteria to
evaluate applications from consumers that respond to the offer, such as
the consumer's income.\171\
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\170\ See 15 U.S.C. 1681m(d)(1); see also 16 CFR 642.1-642.4
(Prescreen Opt-Out Notice Rule).
\171\ See, e.g., 15 U.S.C. 1681a(l).
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As discussed in the May 2008 Proposal, the Agencies were concerned
that, because firm offers of credit often state that consumers have
been ``pre-selected'' for credit or make similar statements, consumers
receiving such offers may not understand that they are not necessarily
eligible for the lowest annual percentage rate and the highest credit
limit stated in the offer. Thus, in the absence of an affirmative
statement to the contrary, consumers could reasonably believe that they
could receive the lowest annual percentage rate and highest credit
limit stated in the offer even though that is not the case.
Accordingly, the Agencies proposed Sec. --.28.
Comments received. Proposed Sec. --.28 was supported by some
industry commenters as well as some members of Congress, the FDIC, and
state attorneys general. Other industry commenters argued that the
Agencies' concerns regarding firm offers of credit were more
appropriately addressed under Regulation Z or the FCRA. Consumer
groups, some members of Congress, and a state consumer protection
agency criticized the proposed disclosure as ineffective and requested
that the Agencies take more substantive action, such as prohibiting
institutions from making firm offers of credit that do not state a
specific annual percentage rate or credit limit or making firm offers
of credit to consumers who are not eligible for the best terms stated
in the offer.
Conclusion. The Agencies believe that the Board's final rules under
Regulation Z (published elsewhere in today's Federal Register)
adequately address their concerns regarding firm offers of credit that
contain a range of or multiple annual percentage rates. Specifically,
the Board has adopted 12 CFR 226.5a(b)(1)(v) to address circumstances
in which a creditor is unable to state in a solicitation the exact rate
all consumers who respond to the solicitation will receive because that
rate depends on a subsequent evaluation of the consumer's
creditworthiness. This provision generally requires the creditor to
disclose in the Schumer Box provided with credit card solicitations
(including firm offers of credit) the specific rates or the range of
rates that could apply and to state that the rate for which the
consumer may qualify at account opening will depend on the consumer's
creditworthiness and other factors (if applicable).
After conducting consumer testing, the Board has also provided
model forms that can be used to disclose multiple rates or a range of
rates. See App. G to 12 CFR 226, Samples G-10(B) and G-10(C). In this
testing, almost all participants understood that, when multiple rates
or a range of rates were provided in the Schumer Box, it meant that the
consumer's initial annual percentage rate would be determined among
those rates or within that range based on the consumer's credit history
and credit score. Accordingly, the Agencies believe that 12 CFR
[[Page 5545]]
226.5a(b)(1)(v) adequately addresses concerns that consumers will be
misled when firm offers state multiple or a range of annual percentage
rates.
Similarly, although Regulation Z does not require disclosure of the
credit limit in the Schumer Box, the Board's consumer testing indicates
that consumers are not misled by solicitations stating multiple credit
limits or a range of credit limits. Specifically, when a solicitation
did not state a specific credit limit, almost all participants
understood that the credit limit for which they would qualify depended
on their creditworthiness. In addition, when looking at statements that
the initial credit limit would be ``up to $2,500,'' most participants
understood that the limit they would receive might be lower than
$2,500.\172\
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\172\ In the May 2008 Proposal, the Agencies noted that prior
consumer testing by the Board indicated that consumers who read
solicitations that did not state a specific credit limit generally
understood that the limit they would receive depended on their
creditworthiness. This testing did not, however, specifically focus
on firm offers of credit that contain statements that the consumer
has been selected for the offer. Accordingly, after the May 2008
Proposal, the Board conducted additional testing using such an
offer, which produced similar results.
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Accordingly, the Agencies are not taking action regarding firm
offers of credit at this time. To the extent that specific practices
regarding firm offers of credit raise concerns regarding unfairness or
deception under the FTC Act, the Agencies plan to address those
practices on a case-by-case basis through supervisory and enforcement
actions. Further, to the extent that individual consumers do not wish
to receive firm offers of credit, they can elect to be excluded from
firm offer lists.\173\
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\173\ 12 U.S.C. 1681b(e).
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VI. Proposed Subpart Regarding Overdraft Services
Background
Historically, if a consumer attempted to engage in a transaction
that would overdraw his or her deposit account, the consumer's
depository institution used its discretion on an ad hoc basis to
determine whether to pay the overdraft. If an overdraft was paid, the
institution usually imposed a fee on the consumer's account. In recent
years, many institutions have largely automated the overdraft payment
process. Automation is used to apply specific criteria for determining
whether to honor overdrafts and set limits on the amount of the
coverage provided.
Overdraft services vary among institutions but often share certain
common characteristics. In general, consumers who meet the
institution's criteria are automatically enrolled in overdraft
services.\174\ While institutions generally do not underwrite on an
individual account basis when enrolling the consumer in the service,
most institutions will review individual accounts periodically to
determine whether the consumer continues to qualify for the service,
and the amounts that may be covered. Most institutions disclose to
consumers that the payment of overdrafts is discretionary, and that the
institution has no legal obligation to pay any overdraft.
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\174\ These criteria may include whether the account has been
open a certain number of days, whether the account is in ``good
standing,'' and whether deposits are regularly made to the account.
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In the past, institutions generally provided overdraft coverage
only for check transactions. In recent years, however, the service has
been extended to cover overdrafts resulting from non-check
transactions, including withdrawals at ATMs, automated clearinghouse
(ACH) transactions, debit card transactions at point-of-sale (POS),
pre-authorized automatic debits from a consumer's account, telephone-
initiated funds transfers, and online banking transactions.\175\
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\175\ According to the FDIC's Study of Bank Overdraft Programs
(FDIC Study), nearly 70 percent of banks surveyed implemented their
automated overdraft program after 2001. In addition, 81 percent of
banks surveyed that operate automated programs allow overdrafts to
be paid at ATMs and POS debit card terminals. See FDIC Study of Bank
Overdraft Programs 8, 10 (Nov. 2008) (hereinafter, FDIC Study)
(available at: http://www.fdic.gov/bank/analytical/overdraft/FDIC138_Report_FinalTOC.pdf). See also Overdraft Protection: Fair
Practices for Consumers: Hearing before the House Subcomm. on
Financial Institutions and Consumer Credit, House Comm. on Financial
Services, 110th Cong., at 72 (2007) (hereinafter, Overdraft
Protection Hearing) (available at http://www.house.gov/apps/list/hearing/financialsvcs_dem/hr0705072.shtml) (stating that as
recently as 2004, 80 percent of banks still declined ATM and debit
card transactions without charging a fee when account holders did
not have sufficient funds in their account).
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Institutions charge a flat fee each time an overdraft is paid,
regardless of the amount of the overdraft. Institutions commonly charge
the same amount for paying the overdraft as they would if they returned
the item unpaid.\176\ A daily fee also may apply for each day the
account remains overdrawn.
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\176\ See Bank Fees: Federal Banking Regulators Could Better
Ensure That Consumers Have Required Disclosure Documents Prior to
Opening Checking or Savings Accounts, GAO Report 08-281, at 14 (Jan.
2008) (reporting that the average cost of overdraft and insufficient
funds fees was just over $26 per item in 2007). See also Bankrate
2008 Checking Account Study, posted October 27, 2008 (available at:
http://www.bankrate.com/brm/news/chk/chkstudy/20081027-bounced-check-fees-a1.asp?caret=2) (reporting an average overdraft fee of
approximately $29 per item).
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In the May 2008 Proposal, the Agencies proposed to establish a new
Subpart D to their respective FTC Act regulations which would adopt
rules prohibiting specific unfair acts or practices with respect to
overdraft services. One provision (discussed in more detail below)
would have prohibited institutions from assessing any fees on a
consumer's account in connection with an overdraft service, unless the
consumer is given notice and a reasonable opportunity to opt out of the
service, and the consumer does not opt out.\177\ The Agencies also
proposed to prohibit institutions from assessing an overdraft fee where
the overdraft would not have occurred but for a hold placed on funds
that exceeds the actual purchase or transaction amount.
---------------------------------------------------------------------------
\177\ As noted above, the Board also separately published a
proposal under its authority under TISA and Regulation DD setting
forth requirements regarding the form, content and timing for the
opt-out notice. 73 FR 28739 (May 19, 2008).
---------------------------------------------------------------------------
Based on the comments received and further analysis, the Agencies
are not taking action regarding overdraft services or debit holds at
this time. As noted above, the Board has proposed rules regarding
overdraft services under Regulation E elsewhere in today's Federal
Register.\178\ The Agencies will review information obtained during
that rulemaking to determine whether to take further action.
---------------------------------------------------------------------------
\178\ The proposed provisions under Regulation DD regarding the
form, content and timing of delivery for the opt-out notice are not
included in that final rule, but instead are included with certain
revisions in the Regulation E proposal. Both rulemakings are
published elsewhere in today's Federal Register.
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A. Proposed Section --.32(a)--Consumer Right To Opt Out
The Agencies proposed in Sec. --.32(a) to prohibit institutions
from assessing any fees on a consumer's account in connection with an
overdraft service, unless the consumer is given notice and a reasonable
opportunity to opt out of the service, and the consumer does not opt
out. The proposed opt-out right would have applied to overdrafts
resulting from all methods of payment, including check, ACH
transactions, ATM withdrawals and debit card transactions (full opt-
out). In addition, the proposal would have required institutions to
provide consumers with the option of opting out of only those
overdrafts resulting from ATM withdrawals and debit card transactions
at POS (partial opt-out). In a separate proposal under TISA and
Regulation DD, the Board proposed additional amendments regarding the
form, content, and timing requirements for the opt-out notice.
[[Page 5546]]
Comments received. The Agencies received approximately 1,500
comment letters on the overdraft services portion of the May 2008
Proposal. Banks, savings associations, credit unions, and industry
trade associations, generally, but not uniformly, opposed the proposed
requirement to provide consumers with the right to opt out of an
institution's payment of overdrafts. Industry commenters stated that
the cost of complying with the rule would far exceed any consumer
benefits. Rather than causing consumer harm, industry commenters
asserted that overdraft services provide consumers substantial
benefits, particularly with respect to check transactions. These
industry commenters observed that the payment of overdrafts for checks
enables consumers to avoid more significant injuries, such as merchant
fees, negative credit reports, and violations of bad check laws.
Industry commenters and the OCC stated that if the opt-out right
applied to check transactions, more checks would be returned unpaid.
Industry commenters and the OCC also noted a potential unintended
consequence of the rule could be that institutions would lengthen their
availability schedules to the extent permitted by the Board's
Regulation CC, 12 CFR Part 229, to ensure that a deposited check was
written on good funds. As a result, consumers would have to wait longer
than they do today before gaining access to deposited funds.
Industry commenters also raised a number of operational concerns
regarding the proposed partial opt-out for ATM and POS transactions.
These commenters noted that most systems may not be able to
differentiate POS debit card transactions from other types of debit
card transactions. Some industry commenters, however, argued that the
opt-out should be limited to ATM withdrawals and debit card
transactions. These commenters stated that the majority of consumer
complaints about overdraft fees arise in connection with debit card
purchases in which the amount of the overdraft fee is significantly
higher than the amount of the overdraft.
Finally, industry commenters believed that it was inappropriate to
address overdraft practices under the Agencies' FTC Act authority. In
particular, industry commenters disputed the suggestion that overdraft
services were unfair in light of the consumer benefits when overdrafts
are paid, such as the avoidance of merchant fees. Industry commenters
also argued that consumers could reasonably avoid overdraft fees even
without being given an opportunity to opt out by properly managing
their accounts. Lastly, industry commenters noted that the federal
banking agencies have not previously indicated that institutions'
payment of overdrafts pursuant to non-promoted overdraft services raise
significant supervisory concerns, and asserted that the Agencies'
proposal would subject institutions to potential litigation risks.
Accordingly, many industry commenters recommended that the Board
address any concerns about overdraft services under other regulatory
authority, such as Regulation E and Regulation DD.
Consumer groups, members of Congress, the FDIC, individual
consumers, and others supported the Agencies' proposal to prohibit
institutions from assessing fees for overdraft services, unless the
consumer is given notice and the opportunity to opt out. However, most
of these commenters argued that the rule should instead require
institutions to obtain the consumer's affirmative consent (that is,
opt-in) before overdrafts could be paid and fees assessed. These
commenters also stated that overdrafts are extensions of credit and
should be subject to Regulation Z. Specifically, they asserted that
institutions should be required to disclose the cost of an overdraft
service as an annual percentage rate to allow consumers to compare
those costs with other forms of credit.
Consumer testing. The Agencies noted in the May 2008 Proposal that,
as part of the rulemaking process, the Board would conduct consumer
testing on a proposed opt-out form (set forth in the accompanying May
2008 Regulation DD Proposal) to ensure that the notice can be easily
understood by consumers. After considering the comments received in
response to both proposals, Board staff worked with a testing
consultant, Macro International (Macro), to revise the proposed model
form and to create a short-form opt-out notice that would appear on the
periodic statement. In September 2008, Macro conducted two rounds of
one-on-one interviews with a diverse group of consumers.
In general, after reviewing the model disclosures, testing
participants generally understood the concept of overdraft coverage,
and that they would be charged fees if their institution paid their
overdrafts. Participants also appeared to understand that if they opted
out of overdraft coverage, this meant their checks would not be paid
and they could be charged fees by both their institution and by the
merchant.\179\
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\179\ See Review and Testing of Overdraft Notices, Macro
International (Dec. 8, 2008).
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During the first round of testing, Macro tested an opt-out form
that allowed consumers to opt out of the payment of overdrafts for all
transaction types, including checks and recurring debits. During both
rounds, virtually all of the participants indicated that they would not
opt out if their checks would be returned unpaid. However, when asked
if they would opt out if the choice was limited to opting out of
overdrafts in connection with ATM withdrawals and debit card purchases,
half of the participants indicated that they would consider doing so.
Conclusion. Based on the comments received and further analysis,
the Board is publishing a proposal elsewhere in today's Federal
Register under Regulation E that would require that an institution
provide its consumers the right to opt out of the institution's payment
of ATM withdrawals and one-time debit card transactions pursuant to the
institution's overdraft service. The Board is also proposing an
alternative approach that would require an institution to obtain a
consumer's affirmative consent (that is, opt-in) before the institution
could pay overdrafts for ATM withdrawals and one-time debit card
transactions and assess a fee. Additional comments received in response
to the Agencies' May 2008 Proposal and the Board's Regulation DD
Proposal regarding the content, timing, and format of the opt-out
notice are further discussed in the Board's Regulation E proposal. The
Board also anticipates conducting further consumer testing following
its review of the comments received on the Regulation E proposal.
Accordingly, the Agencies are not taking action regarding overdraft
services at this time. The Agencies will review information obtained
from the Board's rulemaking to determine whether to take further
action.
B. Proposed Section --.32(b)--Debit Holds
When a consumer uses a debit card to make a purchase, a hold may be
placed on funds in the consumer's account to ensure that the consumer
has sufficient funds in the account when the transaction is presented
for settlement. This is commonly referred to as a ``debit hold.''
During the time the debit hold remains in place, which may be up to
three days after authorization, those funds may be unavailable for the
consumer's use for other transactions.
In some cases, the actual purchase amount is not known at the time
the transaction is authorized, such as when a consumer uses a debit
card to pay for gas at the pump or pay for a meal at a
[[Page 5547]]
restaurant. Consequently, a debit hold may be placed for an estimated
amount which may exceed the actual transaction amount. The consumer may
engage in subsequent transactions reasonably assuming that the account
has only been debited for the actual transaction amount. Because of the
excess hold, however, the consumer may incur overdraft fees for those
subsequent transactions.
In May 2008, the Agencies proposed in Sec. --.32(b) to prohibit
institutions from assessing an overdraft fee where the overdraft would
not have occurred but for a hold placed on funds in the consumer's
account that exceeds the actual purchase or transaction amount. The
proposed prohibition was intended to enable consumers to avoid the
assessment of fees when the consumer would not have overdrawn his or
her account had the actual transaction amount been presented for
payment in a timely manner.
Consumer groups supported the proposed prohibition. However, they
recommended that the Agencies also address check holds and prohibit the
assessment of overdraft fees if a consumer has deposited funds that
have not yet cleared, but where the deposit would have been sufficient
to cover the overdraft. Alternatively, consumer groups urged the Board
to use its authority under the Expedited Funds Availability Act (EFAA)
to shorten the funds availability schedule for deposited items.
Industry commenters, however, opposed the debit hold proposal,
stating that it would present significant operational difficulties. For
example, industry commenters noted that institutions authorize
transactions in real time, taking into account transactions subject to
a debit hold. Because the actual purchase amount for certain
transactions subject to a debit hold will not be known until the
transaction is presented for payment, some industry commenters
expressed concern that the rule would require institutions to monitor
accounts retroactively and manually adjust transactions and fees that
have posted to the account to determine whether an overdraft was caused
by an excess hold. Otherwise, institutions would have to stop placing
holds altogether which, industry commenters argued, raised potential
safety and soundness concerns. Nonetheless, a few financial institution
commenters stated that for fuel purchases, they do not place holds
beyond the $1 pre-authorization amount, and one large financial
institution commenter stated that it does not currently place holds of
any amount on authorizations coming from gas stations, hotels, or
rental car companies.
Rather than using their FTC Act authority, industry commenters
urged the Agencies to use other existing regulatory authority. For
example, industry commenters recommended that the Board exercise its
authority under Regulation E to require merchants to disclose at the
point-of-sale when holds may be placed on debit card transactions.
As discussed above, the Board is proposing to address concerns
about debit holds pursuant to the Board's authority under the EFTA and
Regulation E in a separate proposal published elsewhere in today's
Federal Register. Accordingly, the Agencies are not taking action
regarding overdraft services at this time. The Agencies will review
information obtained from the Board's rulemaking to determine whether
to take further action.\180\
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\180\ Additional comments received on the proposed FTC Act debit
hold provision are discussed in more detail in the Board's
Regulation E proposal where relevant.
---------------------------------------------------------------------------
Other Overdraft Practices
Balance disclosures. The Agencies also noted their concerns in the
proposal regarding how consumer balances are disclosed. In particular,
the Agencies observed that consumers could be misled by balance
disclosures that include additional funds that the institution may
provide to cover an overdraft. The Board is addressing this issue in
the final rule under Regulation DD published contemporaneously in
today's Federal Register.
Transaction clearing practices. The May 2008 Proposal also noted
the Agencies' concerns about the impact of transaction clearing
practices on the amount of overdraft fees that may be incurred by the
consumer. The February 2005 overdraft guidance recommends as a best
practice that institutions explain the impact of transaction clearing
policies to consumers. For example, institutions could disclose that
transactions may not be processed in the order in which they occurred
and that the order in which transactions are received by the
institution and processed can affect the total amount of overdraft fees
incurred by the consumer.\181\ In its Guidance on Overdraft Protection
Programs, the OTS also recommended as best practices: (1) Clearly
disclosing rules for processing and clearing transactions; and (2)
having transaction clearing rules that are not administered unfairly or
manipulated to inflate fees.\182\
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\181\ 70 FR at 8431; 70 FR at 9132.
\182\ 70 FR at 8431.
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The May 2008 Proposal did not propose any rules addressing
transaction clearing practices. Instead, the Agencies solicited comment
on the impact of requiring institutions to pay smaller-dollar items
before larger-dollar items when received on the same day for purposes
of assessing overdraft fees on a consumer's account. The Agencies also
solicited comment on how such a rule would impact an institution's
ability to process transactions on a real-time basis.
Industry commenters urged the Agencies not to engage in a
rulemaking relating to transaction clearing practices. First, they
argued that state law under the Uniform Commercial Code \183\
specifically provides institutions flexibility in determining posting
order.\184\ Second, industry commenters stated that each transaction
clearing method has inherent flaws, and that most customers prefer
high-to-low posting order because it results in consumers' largest
bills--typically their higher priority payments--being paid first.
Third, these commenters argued that transaction clearing processes are
more complex than high-to-low or low-to-high decisions. Industry
commenters stated, for example, that institutions use a variety of
other clearing methods based on different processing capabilities, such
as real-time processing or processing in check number order. In
addition, an institution may use a combination of posting order methods
based on the capabilities of its processing system and the transaction
type. For example, an institution may clear some items in real-time and
others on a high-to-low basis during batch processing, depending on how
the item is presented and depending on applicable funds availability
and payment decision requirements. Industry commenters also expressed
concern that requiring a particular processing order would create
significant litigation risk given the complexity of items processing.
Finally, industry commenters stated that it would be technologically
impracticable to permit a small subset of consumers to opt in to a
particular processing order and to treat their transactions differently
than other consumers' transactions.
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\183\ U.C.C. Sec. 4-303. The commentary to Sec. 4-303 states
that any posting order is permitted because (1) it is impossible to
state a rule that would be fair in all circumstances, and (2) a
drawer should have sufficient funds on deposit at all times, he or
she should thus be indifferent as to posting order.
\184\ See also OCC Interp. Letter No. 916 (May 22, 2001).
---------------------------------------------------------------------------
Consumer groups and some members of Congress urged the Agencies to
ban institutions from engaging in
[[Page 5548]]
manipulative clearing practices. In particular, they asserted that
institutions use transaction processing order to maximize revenue from
overdrafts because more overdraft fees can be levied if largest debits
are processed first and cause other small debits to overdraw the
account multiple times. They also argued that the justification
favoring high-to-low payment order because higher-priority items are
paid first is undermined by the fact that all items are paid via the
institution's overdraft protection program.
The Agencies are not addressing transaction processing order at
this time. The Agencies believe that it would be difficult to set forth
a bright-line rule that would clearly result in the best outcome for
all or most consumers. For example, requiring institutions to pay
smaller dollar items first may cause an institution to return unpaid a
large dollar nondiscretionary item, such as a mortgage payment, if
there is an insufficient amount of overdraft coverage remaining to
cover the large dollar item after the smaller items have been paid. The
Agencies also acknowledge the inherent complexity of payments
processing and recognize that mandating a particular posting order
could create complications for institutions seeking to move toward
real-time transaction processing.
VII. Effective Date
The May 2008 Proposal solicited comment on whether the rules should
become effective one year after issuance or whether a different period
was appropriate. Although some industry commenters agreed that a one-
year period was appropriate, most urged the Agencies to allow 18 or 24
months due to the difficulty of redesigning systems and procedures to
comply with the rules. In contrast, some consumer advocates requested a
shorter period.
The final rule is effective on July 1, 2010. Compliance with the
provisions of the final rule is not required before the effective date.
Accordingly, the final rule and the Agencies' accompanying analysis
should have no bearing on whether or not acts or practices restricted
or prohibited under this rule are unfair or deceptive before the
effective date of this rule.
Unfair acts or practices can be addressed through case-by-case
enforcement actions against specific institutions, through regulations
applying to all institutions, or both. An enforcement action concerns a
specific institution's conduct and is based on all of the facts and
circumstances surrounding that conduct. By contrast, a regulation is
prospective and applies to the market as a whole, drawing bright lines
that distinguish broad categories of conduct.
Because broad regulations, such as those in the final rule, can
require large numbers of institutions to make major adjustments to
their practices, there could be more harm to consumers than benefit if
the regulations were effective earlier than the effective date. If
institutions were not provided a reasonable time to make changes to
their operations and systems to comply with the final rule, they would
either incur excessively large expenses, which would be passed on to
consumers, or cease engaging in the regulated activity altogether, to
the detriment of consumers. And because the Agencies find an act or
practice unfair only when the harm outweighs the benefits to consumers
or to competition, the implementation period preceding the effective
date set forth in the final rule is integral to the Agencies' decision
to restrict or prohibit certain acts or practices by regulation.
For these reasons, acts or practices occurring before the effective
date of the final rule will be judged on the totality of the
circumstances under applicable laws or regulations. Similarly, acts or
practices occurring after the rule's effective date that are not
governed by these rules will continue to be judged on the totality of
the circumstances under applicable laws or regulations.
Some industry commenters requested that, because existing accounts
were established with the expectation that institutions could engage in
the practices prohibited by the final rule, those accounts (or existing
balances on those accounts) be exempted from the final rule. The
Agencies recognize that, as discussed above with respect to specific
prohibitions, the final rule prohibits some long-standing practices
that have been expressly or implicitly permitted under state or federal
law or the guidance of the federal banking agencies. As noted above,
the final rule is not intended to suggest that these practices are
unfair or deceptive prior to the effective date. However, the Agencies
do not believe the requested exemption is necessary because
institutions will have sufficient time prior to the effective date to
adjust their pricing and other practices with respect to existing
accounts and balances. Indeed, prior to the effective date,
institutions may change interest rates on existing balances and take
other actions that will be prohibited once the final rule is effective.
However, in light of the significant nature of the changes required by
the final rule (including training staff), the Agencies anticipate that
institutions will need to begin the compliance process long before the
effective date. Although institutions are not required to comply with
the final rule before the effective date, the Agencies strongly
encourage institutions to use their best efforts to conform their
practices to the final rule before July 1, 2010.
VIII. Regulatory Analysis
A. Regulatory Flexibility Act
Board: The Regulatory Flexibility Act (5 U.S.C. 601 et seq.) (RFA)
generally requires an agency to perform an assessment of the impact a
rule is expected to have on small entities. Under section 605(b) of the
RFA, 5 U.S.C. 605(b), the regulatory flexibility analysis otherwise
required under section 604 of the RFA is not required if an agency
certifies, along with a statement providing the factual basis for such
certification, that the rule will not have a significant economic
impact on a substantial number of small entities. The Board prepared an
initial regulatory flexibility analysis in connection with the May 2008
Proposal, which reached the preliminary conclusion that the proposed
rule would not have a significant economic impact on a substantial
number of small entities. See 73 FR 28933-28934 (May 19, 2008). The
Board received no comments specifically addressing its initial
regulatory flexibility analysis. However, industry commenters generally
stated that the overall proposal would impose significant
implementation costs and result in a loss of revenue from interest
charges and overdraft fees.
Based on the comments and further analysis, the Board has concluded
that the final rule will have a significant economic impact on a
substantial number of small entities. Accordingly, the Board has
prepared the following final regulatory flexibility analysis pursuant
to section 604 of the RFA.
1. Succinct statement of the need for, and objectives of, the rule.
The Federal Trade Commission Act (15 U.S.C. 41 et seq.) (FTC Act)
prohibits unfair or deceptive acts or practices in or affecting
commerce. 15 U.S.C. 45(a)(1). The FTC Act provides that the Board (with
respect to banks), OTS (with respect to savings associations), and the
NCUA (with respect to federal credit unions) are responsible for
prescribing regulations prohibiting such acts or practices. 15 U.S.C.
57a(f)(1). The Board, OTS, and NCUA are jointly issuing regulations
under the FTC Act to protect consumers from specific unfair or
deceptive acts or practices regarding consumer credit card accounts.
The
[[Page 5549]]
Board's final rule will amend Regulation AA.
The SUPPLEMENTARY INFORMATION above describes in detail the need
for, and objectives of, the final rule.
2. Summary of the significant issues raised by public comments in
response to the Board's initial analysis, the Board's assessment of
such issues, and a statement of any changes made as a result of such
comments. As discussed above, the Board's initial regulatory
flexibility analysis reached the preliminary conclusion that the
proposed rule would not have a significant economic impact on a
substantial number of small entities. See 73 FR 28933-28934 (May 19,
2008). The Board received no comments specifically addressing this
analysis.
3. Description and estimate of the number of small entities to
which the final rule applies. The Board's final rule applies to banks
and their subsidiaries, except savings associations as defined in 12
U.S.C. 1813(b). Based on 2008 call report data, there are approximately
709 banks with assets of $175 million or less that offer credit cards
and are therefore required to comply with the Board's final rule.
4. Description of the recordkeeping, reporting, and other
compliance requirements of the final rule. The final rule does not
impose any new recordkeeping or reporting requirements. The final rule
does, however, impose new compliance requirements.
Section 227.22 will require some small entities to extend the
period of time provided to consumers to make payments on consumer
credit card accounts. One commenter estimated the cost of compliance at
$30,000 per institution, although this cost will vary depending on the
size of the institution. Based on the comments, however, many credit
card issuers already send periodic statements 21 days in advance of the
payment due date, which constitutes a reasonable amount of time under
the rule. Indeed, a trade association representing community banks
(many of which are small entities under the RFA) stated in its comment
that 90 percent of its members currently mail or deliver periodic
statements more than 21 days before the payment due date.
Section 227.23 will require small entities that provide consumer
credit card accounts with multiple balances at different rates to alter
their payment allocation systems and, in some cases, develop new
systems for allocating payments among different balances. The cost of
such changes will depend on the size of the institution and the
composition of its portfolio. Compliance with this provision will also
reduce interest revenue for small entities that currently allocate
payments first to balances with the lowest annual percentage rate. The
economic impact, however, will be mitigated to the extent that small
entities adjust other terms to compensate for the loss of revenue (such
as by increasing the dollar amount of fees and the annual percentage
rates offered to consumers when an account is opened).
Section 227.24 generally prohibits small entities from increasing
annual percentage rates, except in certain circumstances. This
provision will reduce interest revenue, although--as noted above--small
entities can mitigate the economic impact by increasing the dollar
amount of fees, increasing the annual percentage rates offered to
consumers when an account is opened, or otherwise adjusting account
terms. In addition, Sec. 227.24 permits small entities to increase the
rates applicable to new transactions after the first year and to
increase the rates on outstanding balances pursuant to an increase in
an index and when the consumer's payment has not been received within
30 days after the due date.
Section 227.25 may require some small entities to change the way
finance charges are calculated. The Board understands, however, that
few institutions still use the prohibited method.
Section 227.26 will reduce the revenue that some small entities
derive from security deposits and fees. These costs, however, will be
borne only by those entities offering cards with security deposits and
fees that currently consume a majority of the credit limit.
Accordingly, the Board believes that, in the aggregate, the
provisions in its final rule will have a significant economic impact on
a substantial number of small entities.
5. Description of the steps the Board has taken to minimize the
significant economic impact on small entities consistent with the
stated objectives of the FTC Act. As discussed above in this
SUPPLEMENTARY INFORMATION, the Board has considered a wide variety of
alternatives and has concluded that the restrictions in the final rule
achieve the appropriate balance between providing effective protections
for consumers against unfair or deceptive acts or practices (which are
prohibited by the FTC Act) and minimizing the burden on institutions
that offer credit cards (including small entities). In the May 2008
Proposal, the Board considered whether small entities should be
exempted from the proposed rules. The Board indicated, however, that
such an exemption would not be appropriate because the FTC Act neither
exempts small entities from the prohibition against engaging in unfair
or deceptive acts or practices nor provides the Board with authority to
create such an exemption. Furthermore, the Board noted that whether an
act or practice is unfair or deceptive should not depend on the size of
the institution. See 73 FR at 28934. The Board did not receive any
comments regarding this preliminary conclusion. Accordingly, the Board
has not exempted small entities from the final rule.
The Board also believes that the final rule, where appropriate,
provides sufficient flexibility and choice for institutions, including
small entities. As such, any institution, regardless of size, may
tailor its operations to its individual needs and thereby mitigate to
some degree any burdens created by the final rule. For instance,
although Sec. 227.23 prohibits institutions from applying payments in
excess of the minimum payment first to the balance with the lowest
interest rate, it allows institutions to choose between two permissible
allocation methods and does not place any limitations on institutions'
ability to allocate the minimum payment. In addition, although Sec.
227.24 generally prohibits institutions from increasing the annual
percentage rates on outstanding balances, it provides reasonable
exceptions and does not restrict the ability of institutions to
increase rates on future transactions after the first year.
OTS: The Regulatory Flexibility Act (5 U.S.C. 601 et seq.) (RFA)
generally requires an agency to perform an assessment of the impact a
rule is expected to have on small entities. For purposes of the RFA and
OTS-regulated entities, a ``small entity'' is a savings association
with assets of $175 million or less. Under section 605(b) of the RFA, 5
U.S.C. 605(b), the regulatory flexibility analysis otherwise required
under section 604 of the RFA is not required if an agency certifies,
along with a statement providing the factual basis for such
certification, that the rule will not have a significant economic
impact on a substantial number of small entities. OTS certified that
the proposed rule would not have a significant economic impact on a
substantial number of small entities but prepared an initial regulatory
flexibility analysis in connection with the May 2008 Proposal anyway.
See 73 FR 28934-28935 (May 19, 2008). OTS received no comments
specifically addressing its initial regulatory flexibility analysis.
[[Page 5550]]
OTS certifies that this final rule will not have a significant
economic impact on a substantial number of small entities. OTS is the
primary federal regulator for 817 federally- and state-chartered
savings associations. Of these 817 savings associations, only 116
report any credit card assets. Of these 116, only 22 have assets of
$175 million or less.
NCUA: The Regulatory Flexibility Act (5 U.S.C. 601 et seq.) (RFA)
generally requires an agency to perform an assessment of the impact a
rule is expected to have on small entities. For purposes of the RFA and
NCUA, a ``small entity'' is a credit union with assets of $10 million
or less. Under section 605(b) of the RFA, 5 U.S.C. 605(b), the
regulatory flexibility analysis otherwise required under section 604 of
the RFA is not required if an agency certifies, along with a statement
providing the factual basis for such certification, that the rule will
not have a significant economic impact on a substantial number of small
entities. NCUA certified that the proposed rule would not have a
significant economic impact on a substantial number of small entities,
but prepared an initial regulatory flexibility analysis in connection
with the May 2008 Proposal anyway. See 73 FR 28904, 28935 (May 19,
2008). NCUA received no comments specifically addressing its initial
regulatory flexibility analysis.
Accordingly, NCUA certifies that this final rule will not have a
significant economic impact on a substantial number of small entities.
NCUA regulates approximately 5036 federal credit unions. Only 2427
federal credit unions report credit card assets. Of those federal
credit unions offering loan products, 2363 small federal credit unions
offer loans, and 425 small federal credit unions offer credit cards to
members.
B. Paperwork Reduction Act
Board: In accordance with the Paperwork Reduction Act (PRA) of 1995
(44 U.S.C. 3506; 5 CFR part 1320 Appendix A.1), the Board has reviewed
the final rule under the authority delegated to the Board by the Office
of Management and Budget (OMB). The collections of information that are
required by this proposed rule are found in 12 CFR 227.14 and
227.24(b)(2).
This information collection is required to provide benefits for
consumers and is mandatory (15 U.S.C. 4301 et seq.). The respondents/
recordkeepers are for-profit financial institutions, including small
businesses. Regulation AA establishes consumer complaint procedures and
defines unfair or deceptive acts or practices in extending credit to
consumers. As discussed above, the final rule amends Regulation AA to
prohibit institutions from engaging in certain acts or practices in
connection with consumer credit card accounts. This proposal evolved
from the Board's June 2007 Regulation Z Proposal. This final rule is
coordinated with the Board's final rule under the Truth in Lending Act
and Regulation Z, which is published elsewhere in today's Federal
Register.
Under Sec. 227.24(a) (Unfair acts or practices regarding increases
in annual percentage rates), banks are generally required to disclose
at account opening the annual percentage rates that will apply to the
account. In addition, under Sec. 227.24(b)(3), banks must disclose in
advance any increase in the rate that applies to new transactions
pursuant to 12 CFR 226.9. The Board anticipates that banks will, with
no additional burden, incorporate the disclosure requirements under
Sec. 227.24(a) with the disclosure requirements regarding credit and
charge cards in Regulation Z, 12 CFR 226.5a and 226.6. Thus, in order
to avoid double-counting, the Board will account for the burden
associated with proposed Regulation AA Sec. 227.24(a) under Regulation
Z (OMB No. 7100-0199) Sec. Sec. 226.5a and 226.6. Similarly, because
the Board anticipates that banks will, with no additional burden,
incorporate the disclosure requirement under Sec. 227.24(b)(3) with
the disclosure requirements in Regulation Z, 12 CFR 226.9, the Board
will account for the burden associated with proposed Regulation AA
Sec. 227.24(b)(2) under Regulation Z (OMB No. 7100-0199) Sec. 226.9.
Under Regulation AA Sec. 227.14(b) (Unfair and deceptive practices
involving cosigners), a clear and conspicuous disclosure statement
shall be given in writing to the cosigner prior to being obligated. The
disclosure statement must be substantively similar to the example
provided in Sec. 227.14(b). The Board will also account for the burden
associated with Regulation AA Sec. 227.14(b) under Regulation Z. The
title of the Regulation Z information collection will be updated to
account for this section of Regulation AA.
In May 2008, the Board proposed Sec. 227.28, which would have
prohibited banks from engaging in certain marketing practices in
relation to prescreened firm offers of credit for consumer credit card
accounts unless a disclaimer sufficiently explained the limitations of
the offer. As discussed elsewhere in the SUPPLEMENTARY INFORMATION, the
Board has not taken action on proposed Sec. 227.28 at this time
because, among other reasons, the disclosures required by Regulation Z
will address the Board's concerns. The burden increase of 1,808 hours
associated with proposed Sec. 227.28 would have been accounted for
under Regulation Z (OMB No. 7100-0199) Sec. 226.5a; however, it has
been removed from the Regulation Z burden estimate.
In May 2008, the Board proposed Sec. 227.32, which would have
provided that a consumer could not be assessed a fee or charge for
paying an overdraft unless the consumer was provided with the right to
opt out of the payment of overdrafts and a reasonable opportunity to
exercise that right but did not do so. The Board stated that the burden
associated with proposed Sec. 227.32 would be accounted for under
Regulation DD (OMB No. 7100-0271). However, as discussed elsewhere in
the SUPPLEMENTARY INFORMATION, the Board is not taking action on
proposed Sec. 227.32 at this time.
OTS and NCUA: In accordance with section 3512 of the Paperwork
Reduction Act of 1995, 44 U.S.C. 3501-3521 (``PRA''), the Agencies may
not conduct or sponsor, and the respondent is not required to respond
to, an information collection unless it displays a currently valid
Office of Management and Budget (``OMB'') control number. The
information requirements contained in this joint final rule have been
submitted by the OTS and NCUA to OMB for review and approval under
section 3507 of the PRA and section 1320.11 of OMB's implementing
regulations (5 CFR part 1320). The review and authorization information
for the Board is provided earlier in this section along with the
Board's burden estimates. The collections of information that are
required by this final rule are found in 12 CFR --.13 and --.24.
Collections of information that were required by the proposed rule in
Sec. --.28 and Sec. --.32 are not included in the final rule.
OTS: Savings associations and their subsidiaries.
NCUA: Federal credit unions.
Abstract: Under section 18(f) of the FTC Act, the Agencies are
responsible for prescribing rules to prevent unfair or deceptive acts
or practices in or affecting commerce, including acts or practices that
are unfair or deceptive to consumers. Under the final rule, the
Agencies are incorporating their existing Credit Practices Rules, which
govern unfair or deceptive acts or practices involving consumer credit,
into new, more comprehensive rules that also address unfair or
deceptive acts or practices involving credit cards.
[[Page 5551]]
Under Sec. --.24(a) (Unfair acts or practices regarding increases
in annual percentage rates), institutions are generally required to
disclose at account opening the annual percentage rates that will apply
to the account. In addition, under Sec. --.24(b)(3), institutions must
disclose in advance any increase in the rate that applies to new
transactions pursuant to 12 CFR 226.9 in Regulation Z. The OTS and NCUA
anticipate that institutions would, with little additional burden,
incorporate the proposed disclosure requirement under Sec. --.24(a)
with the existing disclosure requirements regarding credit and charge
cards in Regulation Z, 12 CFR 226.5a, and 226.6. Similarly, the OTS and
NCUA anticipate that institutions will, with little additional burden,
incorporate the disclosure requirement under Sec. --.24(b)(3) with the
disclosure requirements in Regulation Z, 12 CFR 226.9.
Under the existing Credit Practices Rule, 12 CFR 535.3 (to be
recodified at 12 CFR 535.13) and 12 CFR 706.3, (to be recodified at 12
CFR 706.13) both entitled ``Unfair or deceptive cosigner practices,'' a
clear and conspicuous disclosure statement shall be given in writing to
the cosigner prior to being obligated. The disclosure statement must be
substantively similar to the example provided in the section of the
rule. Since this is not a new requirement, the OTS and NCUA anticipate
little additional burden associated with this section of the rule.
In May 2008, the OTS, NCUA and the Board proposed Sec. --.28,
which would have prohibited financial institutions from engaging in
certain marketing practices in relation to prescreened firm offers of
credit for consumer credit card accounts unless a disclaimer
sufficiently explained the limitations of the offer. As discussed
elsewhere in this SUPPLEMENTARY INFORMATION, the Agencies are not
taking action on proposed Sec. --.28 at this time. The burden
increases of 8,260 for OTS and 50,360 for NCUA have been removed from
the burden estimate.
In May 2008, the Agencies' proposed Sec. --.32, which would have
provided that a consumer could not be assessed a fee or charge for
paying an overdraft unless the consumer was provided with the right to
opt out of the payment of overdrafts and a reasonable opportunity to
exercise that right but did not do so. The OTS stated that the burden
associated with proposed Sec. 535.32 would be 8,260 hours. OTS's
burden estimate was based on the effect of this rule on all of its
institutions because they are all depository institutions, most of
which offer overdraft services. By not including provisions on
overdrafts, OTS's rule affects only the 116 OTS-supervised institutions
that issue credit cards. The NCUA stated that the burden associated
with proposed Sec. 706.32 would be 50,360 hours. As discussed
elsewhere in this SUPPLEMENTARY INFORMATION, the Agencies are not
taking action on proposed Sec. --.32 at this time. Accordingly, the
OTS and NCUA remove their respective burden increase.
Estimated Burden: The burden associated with this collection of
information may be summarized as follows.
OTS:
Estimated number of respondents: 116.
Estimated time for developing disclosures: 4 hours.
Estimated time for training: 4 hours.
Total estimated time per respondent: 8 hours.
Total estimated annual burden: 928 hours.
NCUA:
Estimated number of respondents: 2,427.
Estimated time for developing disclosures: 4 hours.
Estimated time for training: 4 hours.
Total estimated time per respondent: 8 hours.
Total estimated annual burden: 19,416 hours.
C. OTS Executive Order 12866 Determination
Executive Order 12866 requires federal agencies to prepare a
regulatory impact analysis for agency actions that are found to be
``significant regulatory actions.'' ``Significant regulatory actions''
include, among other things, rulemakings that ``have an annual effect
on the economy of $100 million or more or adversely affect in a
material way the economy, a sector of the economy, productivity,
competition, jobs, the environment, public health or safety, or State,
local, or tribal governments or communities.'' \185\
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\185\ See 58 FR 51735 (October 4, 1993), as amended.
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Based on the prediction of industry commenters, OTS anticipates
that the final rule will exceed the $100 million threshold. However,
OTS believes that these estimates may overstate the actual costs borne
by institutions under OTS jurisdiction for a number of reasons. First,
OTS-supervised institutions account for only a small portion of the
entire credit card market. Second, several provisions included in the
proposed rulemaking are not being finalized at this time, which reduces
the overall economic impact of the final rule. Third, OTS-supervised
institutions already refrain from engaging in many of the practices
prohibited by this final rule. Issuing a rule to prevent institutions
from taking up these practices will help ensure that market conduct
standards remain high, but it will not cause significant economic
impact on these institutions.
OTS acknowledges that several provisions of the rules may carry
operational costs, although the general information provided by
commenters on this point does not permit the OTS to quantify such costs
with any precision. Moreover, commenter suggestions about the effect
that two provisions of the rule may have on the fee and interest income
may be overestimated. Notably, these suggestions blend the effects of
this rulemaking with those of a related Board rulemaking on Regulation
Z.
Further, given the continuing contraction in the economy since the
May 2008 proposal and the close of the August 2008 comment period, OTS
anticipates that the economic effect on credit card issuers will be
lower than projected by commenters as the industry itself shrinks.\186\
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\186\ See National Bureau of Economic Research, Determination of
the December 2007 Peak in Economic Activity (Dec. 1, 2008)
(available at: http://www.dev.nber.org/dec2008.html).
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OTS has provided the Administrator of the Office of Management and
Budget's (OMB) Office of Information and Regulatory Affairs (OIRA) an
economic analysis. As required by Executive Order 12866, it addresses:
(1) The need for the regulatory action and how the rule meets that
need, (2) the costs and benefits of the rule and its consistency with a
statutory mandate that avoids interference with State, local and tribal
governments, (3) the benefits anticipated from the regulation, (4) the
costs anticipated from the regulation, and (5) alternatives to the
regulation.
1. The Need for the Regulatory Action and How the Rule Meets That Need
The OTS final rule, like the rules issued by the Board and NCUA,
consists of five provisions intended to protect consumers from unfair
acts or practices with respect to consumer credit card accounts. The
identified unfair acts or practices inhibit or prevent a consumer from
accurately assessing the costs and benefits of their actions and thus
produce a market failure. The rule should permit cardholders to better
predict how their actions will affect their costs and benefits.
Presently, they cannot do so effectively.\187\ The final
[[Page 5552]]
rule should also promote the safe and sound operation of institutions
that issue credit cards by better aligning the interests of the
financial markets and consumers to ensure that credit card loans will
be repaid.
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\187\ ``Although they work well for many consumers, credit card
plans have become more complex. The greater complexity has reduced
transparency in credit card pricing and increased the risk that
consumers will not understand key terms that affect the cost of
using the account. The Federal Reserve has used consumer testing to
make great strides in developing improved disclosures under the
Truth in Lending Act. However, based on our review of consumers'
response to the Board's recent regulatory initiative, it seems clear
that improved disclosures alone cannot solve all of the problems
consumers face in trying to manage their credit card accounts.''
Statement by Federal Reserve Board Chairman Ben S. Bernanke (May 2,
2008) (available at: http://www.federalreserve.gov/newsevents/press/bcreg/bernankecredit20080502.htm).
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Regulatory Background
OTS issued an Advance Notice of Proposed Rulemaking on August 6,
2007, requesting comment on possible changes to its rules under section
5 of the FTC Act. See 72 FR 43570 (OTS ANPR). OTS received comments
from consumers, the industry and Congress. Industry commenters
suggested that OTS should use guidance rather than rules, arguing OTS
would create an unlevel playing field for OTS-regulated institutions
and that uniformity among the federal banking agencies and the NCUA is
essential, and that the possible practices listed in the ANPR were
neither unfair nor deceptive under the FTC standards.
In contrast, the consumer commenters urged OTS to move ahead with a
rule that would combine the FTC's principles-based standards with
prohibitions on specific practices. They urged OTS to ban numerous
practices, including several practices addressed in the final rule,
such as ``universal default'' repricing, applying payments first to
balances with the lowest interest rate, and credit cards marketed at
subprime consumers that provide little available credit at account
opening.
The May 2008 Proposal
To address the issue of lack of uniformity if only OTS issued a
rule, and to best ensure that all entities that offer consumer credit
card accounts and overdraft services on deposit accounts are treated in
a like manner, the OTS, Board, and NCUA joined together to issue the
May 2008 Proposal.\188\ This proposal was based on outreach conducted
by the Agencies, consumer testing and Congressional hearings.\189\ It
was accompanied by complementary proposals by the Board under
Regulation Z with respect to consumer credit card accounts and
Regulation DD with respect to deposit accounts.\190\
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\188\ See 73 FR 28904 (May 19, 2008) (May 2008 Proposal).
\189\ See 73 FR at 28905-07.
\190\ See 73 FR 28866 (May 19, 2008) (May 2008 Regulation Z
Proposal); 73 FR 28739 (May 19, 2008) (May 2008 Regulation DD
Proposal).
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The Final Rule
A description of the five provisions in this final rule follows. It
includes observations about how each provision responds to a specific
unfair practice.
First, Sec. 535.22 prohibits savings associations from treating a
payment as late for any purpose unless consumers have been provided a
reasonable amount of time to make that payment. The rule provides that
21 days is a safe harbor. Consumers have complained that they
encountered situations where they did not have enough time to make
payments and that this was an unfair practice. This provision will
prevent card issuers from providing an insufficient time for consumers
to make payments, and then charging fees or increasing interest rates
because the payment was late. The largest issuers under OTS supervision
already provide at least a 20 day period to pay.
Second, when an account has balances with different annual
percentage rates, Sec. 535.23 requires savings associations to
allocate amounts paid in excess of the minimum payment using one of two
specified methods: either allocating the excess payment to the highest
interest balance or proportionately to all balances. This provision
addresses the unfairness that consumers experience when they accept
low-rate promotional offers, but do not appreciate that card issuers
now allocate their payments to minimize the benefits of the offer and
maximize interest charges.
Third, Sec. 535.24 prohibits savings associations from increasing
the APR during the first year unless the planned increase has been
disclosed at account opening, the APR varies with an index, the card
holder fails to pay within 30 days of the due date, or the card holder
fails to comply with a workout arrangement. After the first year, the
rule also allows savings associations to increase the annual percentage
rate on transactions that occur more than seven days after the
institution provides a notice of the APR increase under Regulation Z.
This section addresses the unfairness consumers experience when a
creditor increases interest rates at any time and for any reason, and
where a creditor applies a new rate to purchases that have already been
made. The rule will allow consumers to more accurately estimate their
costs and to predict the consequences of their decisions and actions.
Fourth, Sec. 535.25 prohibits savings associations from using the
practice sometimes referred to as two-cycle billing, in which, as a
result of the loss of a grace period, a savings association imposes
finance charges based on balances associated with previous billing
cycles. Research conducted by the Board showed that consumers do not
understand disclosures that attempt to explain this billing practice.
As a result, consumers could not avoid cards that feature this
practice. However, this practice is now rare, especially for OTS-
supervised issuers.
Fifth, to address concerns regarding subprime credit cards with
high fees and low credit limits, Sec. 535.26 prohibits savings
associations from charging to the account security deposits and fees
for the issuance or availability of credit that constitute a majority
of the initial credit limit in the first year or more than 25 percent
of the initial credit limit in the first month. In addition the rule
requires that if the fees and security deposit charges exceed 25% of
the available credit, repayment would be spread over at least the first
six months. These cards impose multiple fees when the consumer opens
the card account and those amounts are billed to the consumer in the
first statement. These large initial billings substantially reduce the
amount of credit that the consumer has available on the card. For
example, a card with a credit line of $250 may have only $100 available
after security deposits or fees have been billed and consumers will pay
interest on these billings until they are paid in full. Consumers have
complained that they were not aware of how little available credit they
would have after the assessment of security deposits and fees. This
rule prevents this practice and provides that consumers will have a
sizeable percentage of the initial credit on the card available for
use.
2. The Costs and Benefits of the Rule, Consistency With Statutory
Mandate and Non-Interference With State, Local and Tribal Governments
Costs and Benefits
Both the costs and the benefits of the rule are difficult to
measure with precision. As noted above, OTS has relied on cost
projections submitted by industry commenters, but has reduced these
estimates where they appear to be overstated. Benefits, such as
protecting consumers from unfairness, are more intangible and more
difficult to quantify. Moreover, the monetary costs
[[Page 5553]]
and benefits of this rule have a net effect in some important ways. The
approach taken by the OTS with respect to these issues is explained in
subsequent sections of this statement.
Consistency With Statutory Mandate and Non-Interference With State,
Local and Tribal Governments
Section 18(f)(1) of the FTC Act provides that OTS (with respect to
savings associations), as well as the Board (with respect to banks) and
the NCUA (with respect to federal credit unions) are responsible for
prescribing ``regulations defining with specificity * * * unfair or
deceptive acts or practices, and containing requirements prescribed for
the purpose of preventing such acts or practices.'' \191\ The FTC Act
allocates responsibility for enforcing compliance with regulations
prescribed under section 18 with respect to savings associations,
banks, and federal credit unions among OTS, the Board, and NCUA, as
well as the OCC and FDIC.\192\ Consistent with the FTC Act, this final
rule is intended to prevent the unfair practices discussed more fully
elsewhere in the SUPPLEMENTARY INFORMATION.
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\191\ 15 U.S.C. 57a(f)(1).
\192\ See 15 U.S.C. 57a(f)(2)-(4). The FTC Act grants the FTC
rulemaking and enforcement authority with respect to other persons
and entities, subject to certain exceptions and limitations. See 15
U.S.C. 45(a)(2); 15 U.S.C. 57a(a). The FTC Act, however, sets forth
specific rulemaking procedures for the FTC that do not apply to OTS,
the Board, or the NCUA. See 15 U.S.C. 57a(b)-(e), (g)-(j); 15 U.S.C.
57a-3.
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Also, as discussed in the SUPPLEMENTARY INFORMATION that
accompanied the OTS August 6, 2007 ANPR,\193\ reflected in the proposed
rule,\194\ and explained in detail in the SUPPLEMENTARY INFORMATION to
today's issuance, HOLA serves as an independent basis for the final OTS
final rule. HOLA provides authority for both safety and soundness and
consumer protection regulations. Consistent with HOLA, this final rule
is intended to prevent unsafe and unsound practices and to protect
consumers as discussed more fully elsewhere in the SUPPLEMENTARY
INFORMATION.
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\193\ 72 FR at 43572-73.
\194\ See 73 FR at 28910 and 28948.
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Issuing the rule on an interagency basis is consistent with section
303 of the Riegle Community Development and Regulatory Improvement Act
of 1994.\195\ Section 303(a)(3) \196\ directs the federal banking
agencies to work jointly to make uniform all regulations and guidelines
implementing common statutory or supervisory policies. Two federal
banking agencies--the Board and OTS--are primarily implementing the
same statutory provision, section 18(f) of the FTC Act, as is the NCUA.
Accordingly, the Agencies endeavored to finalize rules that are as
uniform as possible. This rule will not interfere with State, local, or
tribal governments in the exercise of their governmental functions.
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\195\ See 12 U.S.C. 4803.
\196\ 12 U.S.C. 4803(a)(3).
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3. Benefits of the Regulation
The most important benefit of the rule is that it will protect
consumers from certain practices that meet well established standards
for unfairness. In so doing, the rule will increase consumer confidence
in the financial system.
Since the rule was proposed in May 2008, exigent market
circumstances have arisen which necessitate immediate liquidity in
consumer credit cards. These circumstances are reflected in the
announcement on November 25, 2008 of the Treasury Department and
Federal Reserve Board Term Asset-Backed Securities Loan Facility (TALF)
program.\197\ This final rule furthers liquidity in the consumer credit
card market by providing certainty to the industry, consumers, and
other members of the public as to rules governing such transactions in
the future. In addition, OTS anticipates that provisions of the final
rule that are designed to ensure greater safety and soundness for
financial institutions may also yield a beneficial economic result for
the taxpayers who ultimately bear the cost of a program such as the
TALF, which will make and insure loans backed by credit card
securities.
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\197\ See November 25, 2008 announcements by the Department of
Treasury and Board of the TALF under the authority in the Emergency
Economic Stabilization Act of 2008, Pub. L. 110-343 and section
13(3) of the Federal Reserve Act (12 U.S.C. 343) (available at
http://www.treas.gov/press/releases/hp1292.htm and http://www.federalreserve.gov/newsevents/press/monetary/monetary20081125a1.pdf).
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However, because this rule provides more rationality and integrity
to the credit card system, its broader benefits are more qualitative
than quantitative. For example, the rule will promote more efficient
functioning of the economy by creating more transparency for consumers
as they make credit card agreements. Consumers currently are confused
by the complexity of credit card agreements, and are surprised by
unexpected terms. In several of the areas addressed by the rule,
disclosures have been inadequate to make the terms understandable.\198\
Consequently, the clear standards set by this rule will promote more
efficient credit decisions by consumers.
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\198\ See ``Design and Testing of Effective Truth in Lending
Disclosures'' (available at: http://www.federalreserve.gov/dcca/regulationz/20070523/Execsummary.pdf).
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The monetary costs and benefits of this rule have a net effect.
Particularly as a result of the payment allocation and retroactive rate
increase provisions, some card issuers will experience reduced revenues
and additional expenses, but the cost of credit will be substantially
reduced for many consumers. Moreover, the rule will create stability,
predictability, and standardization in the credit card market and its
receivables, and will help foster steady sources of funding that would
otherwise avoid some risk and uncertainty.
Another benefit of the rule is that it will create a uniform
playing field for credit card issuers, not only because the federal
financial regulators are issuing consistent rules, but also because of
its clarity. As the Board and the NCUA are simultaneously issuing
virtually identical rules governing credit card practices for other
types of federally insured financial institutions, the OTS final rule
will ensure that consistent rules apply among banks, federal credit
unions, and savings associations.
Significantly, issuers that have tried to provide better and
clearer terms for consumers will no longer face a competitive
disadvantage for doing so. Consumers will have more confidence in the
credit card system because of the uniform protections.\199\
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\199\ See Furletti, Mark, Payment System Regulation and How It
Causes Consumer Confusion, Discussion Paper, Payment Cards Center,
Philadelphia Federal Reserve, Nov 2004, at 7, quoting Professor Mark
Budnitz of Georgia State University School of Law (available at:
http://www.philadelphiafed.org/payment-cards-center/publications/discussion-papers/2004/PaymentSystemRegulation_112004.pdf).
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By substantially limiting behavioral risk pricing, the rule will
foster more efficient risk-based pricing by credit card issuers at the
initial underwriting stage. Consequently, this rule will improve credit
risk management. Issuer interest in assessing the cost of risk will be
more closely aligned with the consumer interest in taking on more
credit and being able to repay it.
Finally, because the rule clearly defines several examples of
unfair practices, the federal financial institution regulatory agencies
will be able to monitor and supervise the credit card market more
efficiently. Similarly, the reduced uncertainty will simplify issuer
efforts to act in compliance with the law.
[[Page 5554]]
4. Anticipated Costs of the Regulation
It is helpful to put the share of OTS supervised issuers in
context. OTS is the primary federal regulator for 817 federally- and
state-chartered savings associations. Of these 817 savings
associations, only 116 report any credit card assets. Among the 116
savings associations that offer credit cards, only 18 have more than 1%
of their total assets in credit card receivables. Moreover, credit card
assets comprise only 3% of all assets held by savings associations.
With respect to the share of the overall credit card market held by OTS
supervised institutions, it is notable that savings associations hold
only 3.5% of credit card receivables.\200\ In part, this figure is
attributable to the fact that two large savings associations, one with
$10.6 billion in credit card receivables, have failed since OTS
proposed these rules in May 2008 and do not currently operate under OTS
supervision.\201\ In sum, most provisions of the rulemaking would have
no economic effect on the vast majority of the institutions under OTS
jurisdiction, since the vast majority simply does not issue credit
cards.
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\200\ Federal Reserve Board, Statistical Supplement to the
November Federal Reserve Bulletin, Nov. 7, 2008, G.19, Consumer
Credit (available at: http://www.federalreserve.gov/releases/g19/Current/).
\201\ IndyMac Bank was closed on July 11, 2008. The Federal
Deposit Insurance Corporation is running the successor institution
that holds IndyMac's assets. See OTS Release OTS 08-029 (available
at: http://www.ots.treas.gov/index.cfm?p=PressReleases&ContentRecord_id=37f10b00-1e0b-8562-ebdd-d5d38f67934c&ContentType_id=4c12f337-b5b6-4c87-b45c-838958422bf3&MonthDisplay=7&YearDisplay=2008).
After Washington Mutual Bank was closed on Sept. 25, 2008,
JPMorganChase, a national bank regulated by the Office of the
Comptroller of the Currency, acquired its assets. OTS Release 08-046
(available at: http://www.ots.treas.gov/index.cfm?p=PressReleases&ContentRecord_id=9c306c81-1e0b-8562-eb0c-fed5429a3a56&ContentType_id=4c12f337-b5b6-4c87-b45c-838958422bf3&MonthDisplay=9&YearDisplay=2008).
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Limited Economic Effect: Several Affected Practices Are Uncommon
The majority of the practices covered by this rulemaking have been
included as a prophylactic measure to ensure that institutions do not
begin to use or expand the use of activities deemed unfair or
deceptive. Since most OTS-supervised institutions do not currently
engage in these practices, the costs of complying with the provisions
of the final rules are likely to be minimal.
Unfair time to make payments. This section prohibits treating a
payment on a consumer credit card account as late for any purpose
unless consumers have been provided a reasonable amount of time to make
payment with 21 days serving as a safe harbor.
Although some commenters indicated that implementing this provision
would entail operational costs, OTS supervisory observations and
experience indicates that most savings associations generally mail or
deliver periodic statements to their customers at least 20 days before
the due date, including the ten largest.\202\ Therefore, a rule that
requires institutions to provide a reasonable amount of time to make
payment, such as by complying with the safe harbor for mailing or
delivering periodic statements to customers at least 21 days in advance
of the payment due date, should have insignificant or no economic
impact on institutions under OTS jurisdiction.
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\202\ One commenter noted that some institutions could incur up
to $30,000 in operational costs if procedural changes are needed to
comply with the final rules. It is unclear whether this is an
accurate estimate of the cost of those changes and whether the size
of the bank would affect the actual cost. Furthermore, as a
mitigating economic factor, consumers should incur fewer fees and
interest charges as a result of receiving a reasonable amount of
time to pay.
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Unfair balance computation method. OTS has adopted this section
substantially as proposed in May 2008. It prohibits institutions from
imposing finance charges on consumer credit card accounts based on
balances for days in billing cycles that precede the most recent
billing cycle. This rule is intended to prohibit the balance
computation method sometimes referred to as ``two-cycle billing'' or
``double-cycle billing.'' The final rule contains an added exception
permitting adjustments to finance charges following the return of a
payment for insufficient funds.
OTS notes that many institutions no longer use the two-cycle
balance computation method and very few institutions compute balances
using any method other than a single-cycle method and according to the
Government Accountability Office, of the six largest card issuers, only
two used the double-cycle billing method between 2003 and 2005.\203\
Because few other institutions still use this practice,\204\ the
prohibition on two-cycle billing should not have a significant impact
on institutions under OTS jurisdiction.
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\203\ ``In our review of 28 popular cards from the six largest
issuers, we found that two of the six issuers used the double-cycle
billing method on one or more popular cards between 2003 and 2005.
The other four issuers indicated they would only go back one cycle
to impose finance charges.'' ``Credit Cards, Increased Complexity in
Rates and Fees Heightens Need for More Effective Disclosures to
Consumers,'' Government Accountability Office, Sept. 2006 at 28.
Neither of the two issuers referred to is supervised by OTS.
\204\ Based on OTS supervisory observations and experience, only
one large savings association engaged in this practice at the time
that this provision was proposed. That institution was closed in
September 2008 and is no longer subject to rules issued by the OTS,
as noted above.
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Unfair charging to the account of security deposits and fees for
the issuance or availability of credit. This section prohibits
institutions from charging high security deposits and fees for issuing
a credit card to the account's credit limit if those fees amounted to
more than half of the credit available over the first year. Further,
those fees cannot exceed 25% of the available credit in the first
month; fees above that limit would have to be spread out over at least
the first 6 months.
This section does not apply to security deposits and fees for the
issuance or availability of credit that are not charged to the account,
i.e., not financed through the credit card, except to the extent such
an arrangement is a mere evasion of the prohibition. Further, this
provision does not set any ceiling on the amount of security deposits
and fees that may be charged to the account. Rather, any limit is
calculated as a percentage of the credit line (a majority or 25%) and
changes with the credit line. Since the rule does not limit the credit
line that a creditor may offer on high fee accounts, it necessarily
does not set a ceiling on the security deposits or fees, either. The
final rule contains a new paragraph (d) prohibiting evasions of the
section. The paragraph is modeled after the anti-evasion provisions in
Regulation Z.\205\
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\205\ See 12 CFR 226.34(a)(3) and 226.35(b)(4).
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Credit cards to which security deposits and high account opening
related fees are charged against the credit line are found
predominately in the subprime credit card market, i.e., the market that
targets borrowers with lower credit scores. Many of these consumers
will incur significantly lower fees as a result of this provision.
As noted above, savings associations have only a 3.5% share of the
credit card market generally.\206\ Subprime credit cards represent just
5% of all credit cards issued,\207\ and high fee cards represent only a
portion of the subprime market. Among OTS-supervised institutions,
cards of this type are rare. In fact, based on OTS supervisory
observations and experience, only two savings
[[Page 5555]]
associations currently offer such cards and those product lines are a
small part of their business.
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\206\ See Federal Reserve Board, Statistical Supplement to the
November Federal Reserve Bulletin, Nov. 7, 2008, G.19, Consumer
Credit (available at: http://www.federalreserve.gov/releases/g19/Current/).
\207\ Outstanding credit card balances as of February 2008 as
reported by Fitch Ratings, Know Your Risk; Asset Backed Securities
Prime Credit Card Index and Subprime Credit Card Index (available
at: http://www.fitchresearch.com/creditdesk/sectors/surveilance/asset_backed/credit_card).
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Based on one commenter's estimate, this provision of the rule would
mean these OTS-supervised subprime issuers would receive as much as
$10,948,000 less revenue.\208\ This estimate is based on the rule as it
was proposed, with a repayment schedule spread over 12 months. The
final rule allows the repayment period to be shortened to six months.
This shorter time would mitigate some of the estimated lost revenue.
The commenter's estimate assumes that the issuers will experience
higher losses from making more credit available to consumers with
blemished credit histories, and it assumes that the issuers will make
no changes in the way that they acquire new accounts as a result of the
rule. However, with better underwriting, issuers should be able to
target customers who are less likely to default and thereby limit their
losses. Another strategy to limit loss would be to offer consumers
smaller lines of credit. In sum, the limited economic impact noted
above may be overstated.
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\208\ The commenter estimated that this provision of the rule
could reduce revenue to subprime issuers by as much as $119 per
account. OTS estimates that the institutions under its jurisdiction
hold approximately 92,000 affected high fee accounts.
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Economic Effect That Appears To Trigger the Requirements of Executive
Order 12866
This final rule contains two other sections with a greater economic
impact. One affects the way in which an institution allocates customer
payments among the customer's outstanding balances. The other specifies
the conditions under which an institution can raise the APR on
outstanding balances.
Unfair payment allocations. A consumer may have multiple balances
on a consumer credit card account, each with a different interest rate.
Currently, most institutions allocate payments they receive from a
consumer by first covering fees and finance charges, then allocating
any remaining amount from the lowest APR balance to the highest. In May
2008, OTS proposed this section in response to concerns that, by
following this practice, institutions were applying consumers' payments
in a way that inappropriately maximized interest charges on consumer
credit card accounts by not allocating payments to balances that accrue
interest at higher rates unless all balances are paid in full.
Commenters noted that some institutions would have to alter their
systems and in some cases develop new systems for allocating payments
among different balances, although the cost of such changes is not
known and will depend on the size of the institution and the
composition of its portfolio. Commenters further noted that this
provision would discourage promotional rate offers to consumers and
would affect the institutions' interest revenue. Finally, commenters
predicted that issuers would compensate by increasing costs or
decreasing credit available to consumers.
Based on the comments received and OTS's analysis, the final rule
adopts the general payment allocation rule as proposed with a few
important changes to reduce burden and cost to the industry. This
section will prohibit institutions from allocating payments above the
minimum required to the balance with the lowest rate first. It will
allow institutions to split such payments pro rata among the balances
or to allocate them to the balance with the highest rate first. The
costs of this rule are mitigated somewhat by providing institutions
with flexibility as to which of the allocation methods they choose. In
addition, by allowing institutions to have a general rule for
allocating payments to all balances, including promotional balances,
the costs to institutions have been reduced.
Due to concerns that this section as proposed could significantly
reduce or eliminate promotional rate offers, OTS has modified this
provision. For the most part, this is because commenters supplied data
that indicates that promotional rates provide an overall benefit to
consumers in addition to the marketing benefits that such rates provide
to institutions. Consequently, OTS believes that applying the general
allocation rule to promotional rate balances strikes the appropriate
balance by preserving promotional rate offers that provide substantial
benefits to consumers while prohibiting the most harmful payment
allocation practices. Accordingly, the final rule, unlike the proposal,
does not require payments above the minimum payment to be applied to
promotional rate balances last, after other balances are paid.
Commenters indicated that this provision may affect institutions'
interest revenue. Based on a projection for the total industry by a
group of credit card issuers representing 70% of outstanding balances,
the Board has estimated that this rule could result in an annual loss
in interest revenue of $415 million.\209\ Savings associations
currently account for a 3.5 percent share of total credit card
receivables.\210\ The estimated loss of revenue for savings
associations under this provision could be as high as $14,525,000.\211\
However, neither the OTS nor the Board has the data necessary to
quantify the economic impact of this provision with specificity.
Notably, the commenter did not provide adequate information to validate
its assertions.
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\209\ The commenter projected a loss of interest revenue of up
to $930 million, based on a drop of 0.098 percent in income. Board
and OTS staff estimate that the removal of requirements in the
proposed rule regarding grace periods reduced the projected loss by
$100 million, and the removal of requirements in the proposed rule
regarding promotional rate balances further decreases the impact on
interest revenue by at least 55 percent, to approximately $415
million.
\210\ Outstanding revolving credit for September 2008 was $970.5
billion. Of this, savings institutions accounted for $34.4 billion,
a 3.5% share. Federal Reserve Board, Statistical Supplement to
November 2008 Federal Reserve Bulletin, G.19 (Nov. 7, 2008)
(available at http://www.federalreserve.gov/releases/g19/Current/).
\211\ This estimate may be excessive because the OTS estimate of
overall credit card receivables may inappropriately include charge
cards, which do not carry balances and do not have different
interest rates. To the extent that outstanding balances on charge
cards are included, the economic effect of the rule is overstated.
---------------------------------------------------------------------------
It should also be noted that while this provision will
significantly reduce interest charges that consumers will pay, removing
requirements in the proposed rule regarding promotional rate balances
will mitigate this effect by reducing the estimated impact on interest
revenue. Moreover, to the extent that the payment allocation
restrictions included in the rule impose costs, institutions are likely
to adjust initial credit card terms to reflect those costs. If this
occurs, consumers will likely have a clearer initial disclosure of
potential costs with which to compare credit card offerings than they
do now. Their actual cost of credit will not be increased by low-to-
high balance payment allocation strategies implemented by institutions
after charges have been incurred.
Unfair annual percentage rate increases. This section generally
prohibits institutions from increasing the annual percentage rate on
any balance the first year and on outstanding balances thereafter. For
new accounts, institutions would be prohibited from increasing the APR
during the first year unless the APR varies with an index, the card
holder fails to pay within 30 days of the due date, or the card holder
fails to comply with a workout arrangement. After the first year, the
rule also allows savings associations to increase the annual percentage
rate on transactions that occur more than seven days after the
institution provides a notice of the APR
[[Page 5556]]
increase under Regulation Z. Nothing in the final rule prohibits
issuers from imposing late charges or other sanctions short of
increasing the APR.
The rule will not permit the institution to increase the APR on the
outstanding balances if the consumer defaults on other debt
obligations. This practice is sometimes referred to as ``universal
default.'' Based on OTS supervisory observations and experience, none
of the larger savings associations practice universal default. The
final rule will also require issuers to adjust the manner in which they
offer deferred interest rate balances to ensure that consumers are not
unfairly surprised by the assessment of deferred interest.
A group of credit card issuers representing 70% of outstanding
balances submitted a comment which projected that the overall cost to
the industry of this provision of the rule as proposed would result in
an annual loss in interest revenue of 0.872 percent, or $7.40 billion.
This analysis stated that banks will compensate for a loss in interest
revenue by increasing rates and/or decreasing available credit for
consumers. Even assuming this analysis is accurate, the OTS, Board, and
NCUA believe that the revisions to the proposed rule may decrease the
estimated impact on interest revenue by more than 70 percent (to an
annual loss of interest revenue of 0.242 percent, or approximately
$2.05 billion) and, therefore, result in a proportionately lower impact
on consumers.\212\ However, this lower projection may still be
overstated because some of the impact asserted by the commenter is
attributable to disclosure requirements of Regulation Z. These
Regulation Z requirements, implemented by the Board, require advance
notice to consumers of increased rates and delay implementation of
increased rates for 45 days.
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\212\ The issuers' analysis does not consider the effect of
prohibiting APR changes in the first year on new balances or the
adjustments that they will likely make to the way deferred interest
rate balances are offered.
---------------------------------------------------------------------------
Applying these estimates to institutions under OTS jurisdiction,
this provision of the final rule appears to have an economic impact on
savings associations that ranges from $71.75 million (based on a
potential $2.05 billion in loss of industry revenue) \213\ to $259
million (based on loss of industry revenue of $7.4 billion).\214\
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\213\ Applying 3.5 percent to the $2.05 billion loss of revenue
gives an estimated revenue loss of $71,750,000 for this provision.
See Federal Reserve Board, Statistical Supplement to November 2008
Federal Reserve Bulletin, G.19 (Nov. 7, 2008) (available at http://www.federalreserve.gov/releases/g19/Current/). As with the payment
allocation estimate, this estimate may be excessive since it may
inappropriately include charge cards, which do not carry balances
and do not have different interest rates. To the extent that charge
card outstanding balances are included, the effect of the rule has
been overstated.
\214\ Applying 3.5 percent to the $7.4 billion estimate gives an
estimated revenue loss for OTS-supervised institutions of $259
million for this provision.
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However, if such revenue is economically justified in a competitive
environment for the allocation of credit, then a likely longer-term
outcome will be that institutions will incorporate such economic
factors in the initial terms of credit card contracts. If that occurs,
then consumers will have clearer initial information than they
currently have on the comparative costs of credit card offerings.
Consequently, the short-term disruptions to institutions caused by this
rulemaking will likely be addressed in the longer term by changes in
disclosed credit card account interest rates and fees, thus making it
easier for consumers to more easily compare and consider the costs and
benefits of different credit cards.
Costs to Consumers
Commenters have suggested that institutions will compensate for
potential losses in interest revenue by increasing credit card rates
and/or decreasing credit available to consumers. Even assuming this
assertion is accurate, OTS believes that the differences between the
proposed and final rules will lead to both a smaller loss of revenue
for issuers and decreased incentives for raising rates or limiting
credit offered to consumers. To the extent income to savings
associations is affected, the corresponding offset is an equally sized
consumer benefit of lower fees and interest payments. Although OTS is
unable to estimate its precise impact, OTS believes that many consumers
will incur significantly reduced interest charges as a result of the
rule. As a result, the economic effects of this rulemaking may result
in transfers from institutions to consumers, with an overall limited
net effect.
Costs to the Government
The costs to OTS from this rule are insignificant. OTS, like the
other federal financial regulators, conducts examinations of
institutions on a regular basis for safety, soundness and compliance
with laws and regulations. This rule will not add to that supervisory
burden. To the contrary, OTS anticipates that this rule, by clarifying
some of the prohibitions against unfair acts and practices in credit
card lending with bright line rules, will make the supervision of
savings associations more efficient, less time consuming, and less
burdensome.
Conclusion
Some predict that because of this rule, issuers will raise credit
card rates for consumers and lower credit limits. However, OTS believes
that many consumers will incur significantly reduced interest charges
as a result of the rule.
The costs to OTS from this rule are insignificant. In fact, this
rule will make supervision and enforcement more efficient, less time
consuming, and less burdensome.
The cost to savings associations is limited because of the small
size of the credit card market held by savings associations, the
reduced impact of this rule caused by the Agencies' decision not to
finalize several provisions, and the small number of institutions that
presently employ the practices prohibited in this rule. Although the
revenue loss data submitted by commenters has not been verified, the
OTS has used it to provide the most generous estimate of the costs of
this rule. Based on that data, the costs of this rule range between
$97,223,000 and $284,473,000.\215\
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\215\ The range is based on $10,948,000 (high fee cards) +
$14,525,000 (payment allocation) + $71,750,000 (restriction on rate
increases--with reduced impact) = $97,223,000. The higher figure is
based on $10,948,000 (high fee cards) + $14,525,000 (payment
allocation) + $259,000,000 (restriction on rate increases--higher
estimated impact) = $284,747,000.
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5. Why the Final Regulation Is Preferable to Alternatives
Alternative A: OTS Issues Rule Alone
In proposing this rule, OTS considered different approaches. As
suggested in the ANPR, one approach was for OTS to issue a rule under
either the FTC Act or as an expansion of OTS's Advertising rule that
would cover only OTS-supervised institutions.\216\ Industry commenters
responded that such an approach would create an unlevel playing field,
and put OTS-supervised institutions at a possible competitive
disadvantage. They argued that uniformity among the federal banking
agencies and the NCUA is essential for the efficient functioning of the
market. Consequently, the OTS has joined with the Board and NCUA to
issue rules applicable to all banks, federal credit unions, and savings
associations.\217\
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\216\ 72 FR 43573.
\217\ The Agencies recognized that state-chartered credit unions
and any entities providing consumer credit card accounts independent
of a depository institution fall within the FTC's jurisdiction and
therefore would not be subject to the proposed rules. However, FTC-
regulated entities appear to represent a small percentage of the
market for consumer credit card accounts and overdraft services.
See, Federal Reserve Board, Statistical Supplement to November 2008
Federal Reserve Bulletin, G.19 (Nov. 7, 2008) (available at http://www.federalreserve.gov/releases/g19/Current/).
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[[Page 5557]]
Alternative B: Agencies Issue Rules That Address a Range of Issues in a
Variety of Markets
In its ANPR, the OTS sought comment on whether it should attempt to
address a broad range of potentially unfair or deceptive practices
including those relating credit cards, residential mortgage lending,
gift cards, and deposit accounts.\218\ However, the May 2008 Proposal
focused on unfair and deceptive acts or practices involving credit
cards and overdraft services, which are generally provided only by
depository institutions such as banks, savings associations, and credit
unions. Targeting such practices fosters a level playing field and the
efficient functioning of the market.
---------------------------------------------------------------------------
\218\ 72 FR 43575.
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Alternative C: Agencies Issue Rules Addressing All Practices Covered in
the May 2008 Proposal
In the May 2008 Proposal, the Agencies proposed seven provisions
under the FTC Act regarding consumer credit card accounts and two
provisions regarding checking account overdraft services. These
provisions were intended to ensure that consumers were protected from
harmful practices that they could not reasonably avoid and have the
ability to make informed decisions about the use of credit card
accounts and checking accounts without being subjected to unfair or
deceptive acts or practices.
However, after considering the comments received, OTS has decided
not to address the practices covered by four of the proposed provisions
in a final rule at this time. These provisions concerned overdraft and
overlimit fees caused by holds, deceptive firm offers of credit, and a
provision that would have provided a mechanism for a consumer to opt
out of overdraft protection services.
The Board is issuing a proposal under Regulation E published
elsewhere in today's Federal Register to address overdraft and
overlimit fees caused by holds and a mechanism for a consumer to opt
out of overdraft protection services. OTS will determine whether to
address these matters in the future in light of further information
that may be obtained through the Board's Regulation E rulemaking. The
Board is also publishing a final rule under Regulation Z that will
address firm offers of credit containing a range of or multiple annual
percentage rates. OTS will also address unfair or deceptive acts or
practices that are not specifically included in today's final rule on a
case-by-case basis.
Alternative D: Agencies Issue Rules That Address Five Unfair Credit
Card Practices
There were more than 65,000 comments on the May 2008 Proposal, and
the overwhelming majority of these were from consumers. There were also
comments from the industry, members of Congress \219\ and other
governmental organizations. Based on the comments, outreach and
Congressional testimony, the Agencies concluded that the final rule
should contain five provisions.
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\219\ Members of Congress have proposed several bills addressing
consumer protection issues regarding credit cards. See, e.g., H.R.
5244 and S. 3255. See also The Credit Cardholders' Bill of Rights:
Providing New Protections for Consumers: Hearing before the H.
Subcomm. on Fin. Instits. & Consumer Credit, 110th Cong. (2007);
Credit Card Practices: Unfair Interest Rate Increases: Hearing
before the S. Permanent Subcomm. on Investigations, 110th Cong.
(2007); Credit Card Practices: Current Consumer and Regulatory
Issues: Hearing before H. Comm. on Fin. Servs., 110th Cong. (2007);
Credit Card Practices: Fees, Interest Rates, and Grace Periods:
Hearing before the S. Permanent Subcomm. on Investigations, 110th
Cong. (2007).
---------------------------------------------------------------------------
Time to make payments. Based on the comments of consumers and on
Congressional testimony, there were many instances of consumers who
received their statements just before the due date, and that the
consequence of late fees and higher interest was not avoidable. The
Agencies agreed that a consumer should have a reasonable time to pay. A
reasonable amount of time to pay may vary depending on the
circumstances, but if a consumer is to have the possibility of
disputing errors on the statement, that amount of time needs to be
approximately three weeks. That allows a week to receive the statement,
a week to review it, and a week for the payment to travel by mail.
Shorter amounts of time for mailing would cover the majority of
consumers, but would not adequately protect the small but significant
number of consumers whose delivery times are longer than average.
Unfair payment allocation. This rule requires issuers to allocate a
consumer's payment over the required minimum to balances with the
highest interest first or proportionately to all balances. This
provision was a response to concerns that institutions applied
consumers' payments in a manner that inappropriately maximized interest
charges on consumer credit card accounts with balances at different
interest rates. Interest charges were maximized by applying payments to
balances with the lowest interest rate. The Agencies considered an
exception for promotional rate balances, so that they would not be paid
down and thereby lose the benefit of the promotional rate. However, the
Agencies decided not to pursue that alternative because it would
discourage promotional balance offers, and such offers are a
significant benefit to consumers. The Agencies also considered an
exception for deferred interest balances, but the need for this
exception is negated by the final rule's restriction on the manner in
which deferred interest rate balances are offered. The Agencies also
considered using consumer disclosures as an alternative to this rule.
After extensive testing by the Board, it became clear that consumers
did not understand payment allocation practices and could not make
informed decisions on using credit cards for different types of
transactions.
Unfair annual percentage rate increases. The rule will prohibit
credit card issuers from increasing interest rates during the first
year unless the planned increase has been disclosed at account opening,
the annual percentage rate varies with an index, the card holder fails
to pay within 30 days of the due date, or the card holder fails to
comply with a workout arrangement. After the first year, the rule also
allows card issuers to increase the annual percentage rate on
transactions that occur more than seven days after the institution
provides a notice of the annual percentage rate increase under
Regulation Z. This rule was a response to changes in credit card terms
that consumers either did not expect or could not avoid. Some changes
in terms were a response to a consumer's lowered credit score--caused
by actions unrelated to the credit card account (universal default).
Some changes were a response to a payment that was late by a day (hair
trigger penalty repricing). Some changes in terms were based on a
credit card issuer's changed business circumstances (any time any
reason repricing). Consumer testing showed that many consumers did not
understand what factors, such as one late payment, can trigger penalty
pricing.
Many consumer commenters, as well as consumer groups, members of
Congress, the FDIC, two state attorneys general and a state consumer
protection agency supported the proposal to limit repricing except in
very limited situations. Some advocated providing
[[Page 5558]]
the consumer with a right to opt-out of interest rate increases.
The injury to consumers of having their interest rate increased
substantially is difficult for most consumers to avoid. There are
several circumstances that give rise to interest rate changes: market
conditions (unrelated to consumer behavior), consumer default on an
unrelated account, using a large proportion of the available credit, or
late payment or overlimit charges. It is only the last two that are
violations of the card agreement. Most consumers would not avoid the
rate increase because they would not expect it in the circumstances
described.
The Agencies considered, and rejected the alternative proposed by
some commenters to allow a consumer to ``opt out'' of the card
relationship by closing it and transferring the balance. This was not a
good alternative because it may not be possible for a consumer to close
the card and transfer the balance to a comparable rate card without
paying a transfer fee. The Agencies considered the impact on credit
card issuers by limiting this rule to apply to outstanding balances,
not to new purchases, except for the first year an account is open.
The Agencies considered requiring the use of disclosures to inform
consumers about the triggers for repricing. However, it was clear,
based on consumer testing, that consumers did not understand how the
triggers work, and consumers do not focus on the possibility of default
at the time they open accounts. More importantly, disclosures would not
allow consumers to avoid credit cards with this feature, since
institutions almost uniformly apply increased rates to prior
transactions.
Unfair balance computation method. The final rule prohibits
``double-cycle'' billing--charging interest on credit card balances for
the days preceding the most recent billing cycle. The effect on a
consumer is to lose the grace period for paying the full balance when a
consumer who normally pays in full pays less than the full balance one
month. This rule prohibits this practice because it is so difficult for
consumers to understand. The Agencies considered the alternative of
disclosures. However, after extensive consumer testing by the Board, it
became clear that it was not possible to disclose this practice so that
consumers could understand it.
Unfair charging to the account of security deposits and fees for
the issuance or availability of credit. This rule prohibits a credit
card issuer from charging fees or security deposits to an account that
use up more than the majority of the available credit. If the fees
amount to more than 25% of the initial available credit, their
repayment must be spread out over at least six months. These cards are
called high fee accounts, or derogatorily, ``fee-harvester cards.''
The Agencies have received many complaints from consumers about
these cards from consumers who say they were not aware of how little
available credit they would have after the security deposit and fees
were charged to the card. Over 70 members of Congress, several states,
the Federal Deposit insurance Corporation and the Office of the
Comptroller of the Currency supported this provision. Many commenters
wanted to add more prohibitions to this rule, by lowering fee
thresholds, prohibiting the charging of security deposits to the cards,
enhancing disclosure and prohibiting the marketing of these cards and
credit repair products. Many industry commenters supported this rule.
However, some commenters who are in this business asserted that
they provide credit to consumers who would otherwise be unable to
obtain it. In an effort to balance the concerns of consumers and the
subprime credit card industry, the Agencies have limited the percentage
of the fees and security deposits that can be charged to the card. This
limit is no more than the majority. In addition, the rule will require
issuers to spread repayment over the first six months if the fees and
security deposits amount to more than 25 percent of the available
credit. OTS believes that its issuers will change their underwriting,
or reduce initial credit available, in response to this rule.
D. OTS Executive Order 13132 Determination
OTS has determined that its portion of the rulemaking does not have
any federalism implications for purposes of Executive Order 13132. As
discussed in section IV of this SUPPLEMENTARY INFORMATION, OTS is
removing from codification 12 CFR 535.5. This section had allowed OTS
to grant state exemptions from OTS's Credit Practices Rule if state law
affords a greater or substantially similar level of protection. The
FHLBB, OTS's predecessor agency, had granted an exemption to the State
or Wisconsin for substantially equivalent provisions of the Wisconsin
Consumer Act. By removing this section, the exemption will cease to
exist on July 1, 2010, the rule's effective date. As a result, state
chartered savings associations that had previously been exempt from
complying with OTS's Credit Practices Rule with regard to their
Wisconsin operations but were required to comply with equivalent
provisions of the Wisconsin Consumer Act, will now be required to
comply with both OTS's Credit Practices Rule and the equivalent
provisions of the Wisconsin Consumer Act.
E. NCUA Executive Order 13132 Determination
The NCUA has determined that its portion of the rulemaking does not
have any federalism implications for purposes of Executive Order 13132.
F. OTS Unfunded Mandates Reform Act of 1995 Determinations
Section 202 of the Unfunded Mandates Reform Act of 1995, Public Law
104-4 (Unfunded Mandates Act) requires that an agency prepare a
budgetary impact statement before promulgating a rule that includes a
Federal mandate that may result in expenditure by State, local, and
tribal governments, in the aggregate, or by the private sector, of $100
million or more (adjusted annually for inflation) in any one year. (The
inflation adjusted threshold is $133 million or more.) If a budgetary
impact statement is required, section 205 of the Unfunded Mandates Act
also requires an agency to identify and consider a reasonable number of
regulatory alternatives before promulgating a rule.
OTS has determined that this rule will not result in expenditures
by State, local, and tribal governments in excess of the threshold but
may result in expenditures by the private sector in excess of the
threshold. Accordingly, OTS has prepared a budgetary impact statement
and addressed the regulatory alternatives considered. This is discussed
further in section VIII.C. of this SUPPLEMENTARY INFORMATION (``OTS
Executive Order 12866 Analysis'').
G. NCUA: The Treasury and General Government Appropriations Act, 1999--
Assessment of Federal Regulations and Policies on Families
NCUA has determined that this final rule will not affect family
well-being within the meaning of section 654 of the Treasury and
General Government Appropriations Act, 1999, Pub. L. 105-277, 112 Stat.
2681 (1998).
IX. Comments on Use of Plain Language
Section 722 of the Gramm-Leach-Bliley Act requires the Board and
OTS to use plain language in all proposed and final rules published
after January 1, 2000. Additionally, NCUA's goal is to promulgate clear
and understandable regulations that impose minimal
[[Page 5559]]
regulatory burdens. Therefore, the Agencies invited comment on how to
make the May 2008 Proposal easier to understand.
The Agencies received only one comment in response. A credit card
issuer suggested that the proposed rules prohibiting unfair or
deceptive acts or practices with respect to consumer credit card
accounts would be easier to understand if placed with the rules
governing credit cards in the Board's Regulation Z. As discussed above,
however, the Agencies have determined that the FTC Act is the
appropriate authority for issuance of the final rule.
List of Subjects
12 CFR Part 227
Banks, Banking, Credit, Intergovernmental relations, Trade
practices.
12 CFR Part 535
Consumer credit, Consumer protection, Credit, Credit cards,
Deception, Intergovernmental relations, Savings associations, Trade
practices, Unfairness.
12 CFR Part 706
Credit, Credit unions, Deception, Intergovernmental relations,
Trade practices, Unfairness.
Board of Governors of the Federal Reserve System
12 CFR Chapter II
Authority and Issuance
0
For the reasons discussed in the joint preamble, the Board amends 12
CFR part 227 as set forth below:
PART 227--UNFAIR OR DECEPTIVE ACTS OR PRACTICES (REGULATION AA)
0
1. The separate authority citations for subparts A and B are removed
and a new authority citation for part 227 is added to read as follows:
Authority: 15 U.S.C. 57a(f).
Subpart A--General Provisions
0
2. The heading for subpart A is revised to read as set forth above.
Sec. 227.1 [Removed]
0
3. Section 227.1 is removed.
Sec. 227.11 [Redesignated as Sec. 227.1]
0
3a. Section 227.11 is redesignated as Sec. 227.1 and transferred to
subpart A, and revised to read as follows:
Sec. 227.1 Authority, purpose, and scope.
(a) Authority. This part is issued by the Board under section 18(f)
of the Federal Trade Commission Act, 15 U.S.C. 57a(f) (section 202(a)
of the Magnuson-Moss Warranty--Federal Trade Commission Improvement
Act, Pub. L. 93-637).
(b) Purpose. The purpose of this part is to prohibit unfair or
deceptive acts or practices in violation of section 5(a)(1) of the
Federal Trade Commission Act, 15 U.S.C. 45(a)(1). Subparts B and C
define and contain requirements prescribed for the purpose of
preventing specific unfair or deceptive acts or practices of banks. The
prohibitions in subparts B and C do not limit the Board's or any other
agency's authority to enforce the FTC Act with respect to any other
unfair or deceptive acts or practices.
(c) Scope. Subparts B and C apply to banks, including subsidiaries
of banks and other entities listed in paragraph (c)(2) of this section.
Subparts B and C do not apply to savings associations as defined in 12
U.S.C. 1813(b). Compliance is to be enforced by:
(1) The Comptroller of the Currency, in the case of national banks
and federal branches and federal agencies of foreign banks;
(2) The Board of Governors of the Federal Reserve System, in the
case of banks that are members of the Federal Reserve System (other
than banks referred to in paragraph (c)(1) of this section), branches
and agencies of foreign banks (other than federal branches, federal
agencies, and insured state branches of foreign banks), commercial
lending companies owned or controlled by foreign banks, and
organizations operating under section 25 or 25A of the Federal Reserve
Act; and
(3) The Federal Deposit Insurance Corporation, in the case of banks
insured by the Federal Deposit Insurance Corporation (other than banks
referred to in paragraphs (c)(1) and (c)(2) of this section), and
insured state branches of foreign banks.
(d) Definitions. Unless otherwise noted, the terms used in
paragraph (c) of this section that are not defined in the Federal Trade
Commission Act or in section 3(s) of the Federal Deposit Insurance Act
(12 U.S.C. 1813(s)) shall have the meaning given to them in section
1(b) of the International Banking Act of 1978 (12 U.S.C. 3101).
0
4. Section 227.2 is revised to read as follows:
Sec. 227.2 Consumer-complaint procedure.
(a) Definitions. For purposes of this section, unless the context
indicates otherwise, the following definitions apply:
(1) ``Board'' means the Board of Governors of the Federal Reserve
System.
(2) ``Consumer complaint'' means an allegation by or on behalf of
an individual, group of individuals, or other entity that a particular
act or practice of a State member bank is unfair or deceptive, or in
violation of a regulation issued by the Board pursuant to a Federal
statute, or in violation of any other act or regulation under which the
bank must operate. Unless the context indicates otherwise,
``complaint'' shall be construed to mean a ``consumer complaint'' for
purposes of this section.
(3) ``State member bank'' means a bank that is chartered by a State
and is a member of the Federal Reserve System.
(b) Submission of complaints. (1) Any consumer having a complaint
regarding a State member bank is invited to submit it to the Federal
Reserve System. The complaint should be submitted in writing, if
possible, and should include the following information:
(i) A description of the act or practice that is thought to be
unfair or deceptive, or in violation of existing law or regulation,
including all relevant facts;
(ii) The name and address of the State member bank that is the
subject of the complaint; and
(iii) The name and address of the complainant.
(2) Consumer complaints should be made to--Federal Reserve Consumer
Help Center, P.O. Box 1200, Minneapolis, MN 55480, Toll-free number:
(888) 851-1920, Fax number: (877) 888-2520, TDD number: (877) 766-8533,
E-mail address: [email protected], Web site address:
www.federalreserveconsumerhelp.gov.
(c) Response to complaints. Within 15 business days of receipt of a
written complaint by the Board or a Federal Reserve Bank, a substantive
response or an acknowledgment setting a reasonable time for a
substantive response will be sent to the individual making the
complaint.
(d) Referrals to other agencies. Complaints received by the Board
or a Federal Reserve Bank regarding an act or practice of an
institution other than a State member bank will be forwarded to the
Federal agency having jurisdiction over that institution.
Sec. 227.11 [Added and reserved]
0
5. In Subpart B, Sec. 227.11 is added and reserved.
0
6. A new Subpart C is added to part 227 to read as follows:
[[Page 5560]]
Subpart C--Consumer Credit Card Account Practices Rule
Sec.
227.21 Definitions.
227.22 Unfair acts or practices regarding time to make payment.
227.23 Unfair acts or practices regarding allocation of payments.
227.24 Unfair acts or practices regarding increases in annual
percentage rates.
227.25 Unfair balance computation method.
227.26 Unfair charging of security deposits and fees for the
issuance or availability of credit to consumer credit card accounts.
Subpart C--Consumer Credit Card Account Practices Rule
Sec. 227.21 Definitions.
For purposes of this subpart, the following definitions apply:
(a) ``Annual percentage rate'' means the product of multiplying
each periodic rate for a balance or transaction on a consumer credit
card account by the number of periods in a year. The term ``periodic
rate'' has the same meaning as in 12 CFR 226.2.
(b) ``Consumer'' means a natural person to whom credit is extended
under a consumer credit card account or a natural person who is a co-
obligor or guarantor of a consumer credit card account.
(c) ``Consumer credit card account'' means an account provided to a
consumer primarily for personal, family, or household purposes under an
open-end credit plan that is accessed by a credit card or charge card.
The terms ``open-end credit,'' ``credit card,'' and ``charge card''
have the same meanings as in 12 CFR 226.2. The following are not
consumer credit card accounts for purposes of this subpart:
(1) Home equity plans subject to the requirements of 12 CFR 226.5b
that are accessible by a credit or charge card;
(2) Overdraft lines of credit tied to asset accounts accessed by
check-guarantee cards or by debit cards;
(3) Lines of credit accessed by check-guarantee cards or by debit
cards that can be used only at automated teller machines; and
(4) Lines of credit accessed solely by account numbers.
Sec. 227.22 Unfair acts or practices regarding time to make payment.
(a) General rule. Except as provided in paragraph (c) of this
section, a bank must not treat a payment on a consumer credit card
account as late for any purpose unless the consumer has been provided a
reasonable amount of time to make the payment.
(b) Compliance with general rule--(1) Establishing compliance. A
bank must be able to establish that it has complied with paragraph (a)
of this section.
(2) Safe harbor. A bank complies with paragraph (a) of this section
if it has adopted reasonable procedures designed to ensure that
periodic statements specifying the payment due date are mailed or
delivered to consumers at least 21 days before the payment due date.
(c) Exception for grace periods. Paragraph (a) of this section does
not apply to any time period provided by the bank within which the
consumer may repay any portion of the credit extended without incurring
an additional finance charge.
Sec. 227.23 Unfair acts or practices regarding allocation of
payments.
When different annual percentage rates apply to different balances
on a consumer credit card account, the bank must allocate any amount
paid by the consumer in excess of the required minimum periodic payment
among the balances using one of the following methods:
(a) High-to-low method. The amount paid by the consumer in excess
of the required minimum periodic payment is allocated first to the
balance with the highest annual percentage rate and any remaining
portion to the other balances in descending order based on the
applicable annual percentage rate.
(b) Pro rata method. The amount paid by the consumer in excess of
the required minimum periodic payment is allocated among the balances
in the same proportion as each balance bears to the total balance.
Sec. 227.24 Unfair acts or practices regarding increases in annual
percentage rates.
(a) General rule. At account opening, a bank must disclose the
annual percentage rates that will apply to each category of
transactions on the consumer credit card account. A bank must not
increase the annual percentage rate for a category of transactions on
any consumer credit card account except as provided in paragraph (b) of
this section.
(b) Exceptions. The prohibition in paragraph (a) of this section on
increasing annual percentage rates does not apply where an annual
percentage rate may be increased pursuant to one of the exceptions in
this paragraph.
(1) Account opening disclosure exception. An annual percentage rate
for a category of transactions may be increased to a rate disclosed at
account opening upon expiration of a period of time disclosed at
account opening.
(2) Variable rate exception. An annual percentage rate for a
category of transactions that varies according to an index that is not
under the bank's control and is available to the general public may be
increased due to an increase in the index.
(3) Advance notice exception. An annual percentage rate for a
category of transactions may be increased pursuant to a notice under 12
CFR 226.9(c) or (g) for transactions that occur more than seven days
after provision of the notice. This exception does not permit an
increase in any annual percentage rate during the first year after the
account is opened.
(4) Delinquency exception. An annual percentage rate may be
increased due to the bank not receiving the consumer's required minimum
periodic payment within 30 days after the due date for that payment.
(5) Workout arrangement exception. An annual percentage rate may be
increased due to the consumer's failure to comply with the terms of a
workout arrangement between the bank and the consumer, provided that
the annual percentage rate applicable to a category of transactions
following any such increase does not exceed the rate that applied to
that category of transactions prior to commencement of the workout
arrangement.
(c) Treatment of protected balances. For purposes of this
paragraph, ``protected balance'' means the amount owed for a category
of transactions to which an increased annual percentage rate cannot be
applied after the rate for that category of transactions has been
increased pursuant to paragraph (b)(3) of this section.
(1) Repayment. The bank must provide the consumer with one of the
following methods of repaying a protected balance or a method that is
no less beneficial to the consumer than one of the following methods:
(i) An amortization period of no less than five years, starting
from the date on which the increased rate becomes effective for the
category of transactions; or
(ii) A required minimum periodic payment that includes a percentage
of the protected balance that is no more than twice the percentage
required before the date on which the increased rate became effective
for the category of transactions.
(2) Fees and charges. The bank must not assess any fee or charge
based solely on a protected balance.
Sec. 227.25 Unfair balance computation method.
(a) General rule. Except as provided in paragraph (b) of this
section, a bank must not impose finance charges on
[[Page 5561]]
balances on a consumer credit card account based on balances for days
in billing cycles that precede the most recent billing cycle as a
result of the loss of any time period provided by the bank within which
the consumer may repay any portion of the credit extended without
incurring a finance charge.
(b) Exceptions. Paragraph (a) of this section does not apply to:
(1) Adjustments to finance charges as a result of the resolution of
a dispute under 12 CFR 226.12 or 12 CFR 226.13; or
(2) Adjustments to finance charges as a result of the return of a
payment for insufficient funds.
Sec. 227.26 Unfair charging of security deposits and fees for the
issuance or availability of credit to consumer credit card accounts.
(a) Limitation for first year. During the first year, a bank must
not charge to a consumer credit card account security deposits and fees
for the issuance or availability of credit that in total constitute a
majority of the initial credit limit for the account.
(b) Limitations for first billing cycle and subsequent billing
cycles. (1) First billing cycle. During the first billing cycle, the
bank must not charge to a consumer credit card account security
deposits and fees for the issuance or availability of credit that in
total constitute more than 25 percent of the initial credit limit for
the account.
(2) Subsequent billing cycles. Any additional security deposits and
fees for the issuance or availability of credit permitted by paragraph
(a) of this section must be charged to the account in equal portions in
no fewer than the five billing cycles immediately following the first
billing cycle.
(c) Evasion prohibited. A bank must not evade the requirements of
this section by providing the consumer with additional credit to fund
the payment of security deposits and fees for the issuance or
availability of credit that exceed the total amounts permitted by
paragraphs (a) and (b) of this section.
(d) Definitions. For purposes of this section, the following
definitions apply:
(1) ``Fees for the issuance or availability of credit'' means:
(i) Any annual or other periodic fee that may be imposed for the
issuance or availability of a consumer credit card account, including
any fee based on account activity or inactivity; and
(ii) Any non-periodic fee that relates to opening an account.
(2) ``First billing cycle'' means the first billing cycle after a
consumer credit card account is opened.
(3) ``First year'' means the period beginning with the date on
which a consumer credit card account is opened and ending twelve months
from that date.
(4) ``Initial credit limit'' means the credit limit in effect when
a consumer credit card account is opened.
0
7. A new Supplement I is added to part 227 as follows:
Supplement I to Part 227--Official Staff Commentary
Subpart A--General Provisions for Consumer Protection Rules
Section 227.1--Authority, Purpose, and Scope
1(c) Scope
1. Penalties for noncompliance. Administrative enforcement of
the rule for banks may involve actions under section 8 of the
Federal Deposit Insurance Act (12 U.S.C. 1818), including cease-and-
desist orders requiring that actions be taken to remedy violations
and civil money penalties.
2. Industrial loan companies. Industrial loan companies that are
insured by the Federal Deposit Insurance Corporation are covered by
the Board's rule.
Subpart C--Consumer Credit Card Account Practices Rule
Section 227.22--Unfair Acts or Practices Regarding Time To Make
Payment
22(a) General Rule
1. Treating a payment as late for any purpose. Treating a
payment as late for any purpose includes increasing the annual
percentage rate as a penalty, reporting the consumer as delinquent
to a credit reporting agency, or assessing a late fee or any other
fee based on the consumer's failure to make a payment within the
amount of time provided to make that payment under this section.
2. Reasonable amount of time to make payment. Whether an amount
of time is reasonable for purposes of making a payment is determined
from the perspective of the consumer, not the bank. Under Sec.
227.22(b)(2), a bank provides a reasonable amount of time to make a
payment if it has adopted reasonable procedures designed to ensure
that periodic statements specifying the payment due date are mailed
or delivered to consumers at least 21 days before the payment due
date.
22(b) Compliance with General Rule
1. Reasonable procedures. A bank is not required to determine
the specific date on which periodic statements are mailed or
delivered to each individual consumer. A bank provides a reasonable
amount of time to make a payment if it has adopted reasonable
procedures designed to ensure that periodic statements are mailed or
delivered to consumers no later than a certain number of days after
the closing date of the billing cycle and adds that number of days
to the 21-day period in Sec. 227.24(b)(2) when determining the
payment due date. For example, if a bank has adopted reasonable
procedures designed to ensure that periodic statements are mailed or
delivered to consumers no later than three days after the closing
date of the billing cycle, the payment due date on the periodic
statement must be no less than 24 days after the closing date of the
billing cycle.
2. Payment due date. For purposes of Sec. 227.22(b)(2),
``payment due date'' means the date by which the bank requires the
consumer to make the required minimum periodic payment in order to
avoid being treated as late for any purpose, except as provided in
Sec. 227.22(c).
3. Example of alternative method of compliance. Assume that, for
a particular type of consumer credit card account, a bank only
provides periodic statements electronically and only accepts
payments electronically (consistent with applicable law and
regulatory guidance). Under these circumstances, the bank could
comply with Sec. 227.22(a) even if it does not provide periodic
statements 21 days before the payment due date consistent with Sec.
227.22(b)(2).
Section 227.23--Unfair Acts or Practices Regarding Allocation of
Payments
1. Minimum periodic payment. Section 227.23 addresses the
allocation of amounts paid by the consumer in excess of the minimum
periodic payment required by the bank. Section 227.23 does not limit
or otherwise address the bank's ability to determine, consistent
with applicable law and regulatory guidance, the amount of the
required minimum periodic payment or how that payment is allocated.
A bank may, but is not required to, allocate the required minimum
periodic payment consistent with the requirements in Sec. 227.23 to
the extent consistent with other applicable law or regulatory
guidance.
2. Adjustments of one dollar or less permitted. When allocating
payments, the bank may adjust amounts by one dollar or less. For
example, if a bank is allocating $100 pursuant to Sec. 227.23(b)
among balances of $1,000, $2,000, and $4,000, the bank may apply $14
to the $1,000 balance, $29 to the $2,000 balance, and $57 to the
$4,000 balance.
3. Applicable balances and annual percentage rates. Section
227.23 permits a bank to allocate an amount paid by the consumer in
excess of the required minimum periodic payment based on the
balances and annual percentage rates on the date the preceding
billing cycle ends, on the date the payment is credited to the
account, or on any day in between those two dates. For example,
assume that the billing cycles for a consumer credit card account
start on the first day of the month and end on the last day of the
month. On the date the March billing cycle ends (March 31), the
account has a purchase balance of $500 at a variable annual
percentage rate of 14% and a cash advance balance of $200 at a
variable annual percentage rate of 18%. On April 1, the rate for
purchases increases to 16% and the rate for cash advances increases
to 20% consistent with Sec. 227.24(b)(2). On April 15, the purchase
balance increases to $700. On April 25, the bank credits to the
account $400 paid by the consumer in excess of the required minimum
periodic payment. Under
[[Page 5562]]
Sec. 227.23, the bank may allocate the $400 based on the balances
in existence and rates in effect on any day from March 31 through
April 25.
4. Use of permissible allocation methods. A bank is not
prohibited from changing the allocation method for a consumer credit
card account or from using different allocation methods for
different consumer credit card accounts, so long as the methods used
are consistent with Sec. 227.23. For example, a bank may change
from allocating to the highest rate balance first pursuant to Sec.
227.23(a) to allocating pro rata pursuant to Sec. 227.23(b) or vice
versa. Similarly, a bank may allocate to the highest rate balance
first pursuant to Sec. 227.23(a) on some of its accounts and
allocate pro rata pursuant to Sec. 227.23(b) on other accounts.
5. Claims or defenses under Regulation Z, 12 CFR 226.12(c). When
a consumer has asserted a claim or defense against the card issuer
pursuant to 12 CFR 226.12(c), the bank must allocate consistent with
12 CFR 226.12 comment 226.12(c)-4.
6. Balances with the same annual percentage rate. When the same
annual percentage rate applies to more than one balance on an
account and a different annual percentage rate applies to at least
one other balance on that account, Sec. 227.23 does not require
that any particular method be used when allocating among the
balances with the same annual percentage rate. Under these
circumstances, a bank may treat the balances with the same rate as a
single balance or separate balances. See comments 23(a)-1.iv and
23(b)-2.iv.
23(a) High-to-Low Method
1. Examples. For purposes of the following examples, assume that
none of the required minimum periodic payment is allocated to the
balances discussed (unless otherwise stated).
i. Assume that a consumer's account has a cash advance balance
of $500 at an annual percentage rate of 20% and a purchase balance
of $1,500 at an annual percentage rate of 15% and that the consumer
pays $800 in excess of the required minimum periodic payment. A bank
using this method would allocate $500 to pay off the cash advance
balance and then allocate the remaining $300 to the purchase
balance.
ii. Assume that a consumer's account has a cash advance balance
of $500 at an annual percentage rate of 20% and a purchase balance
of $1,500 at an annual percentage rate of 15% and that the consumer
pays $400 in excess of the required minimum periodic payment. A bank
using this method would allocate the entire $400 to the cash advance
balance.
iii. Assume that a consumer's account has a cash advance balance
of $100 at an annual percentage rate of 20%, a purchase balance of
$300 at an annual percentage rate of 18%, and a $600 protected
balance on which the 12% annual percentage rate cannot be increased
pursuant to Sec. 227.24. If the consumer pays $500 in excess of the
required minimum periodic payment, a bank using this method would
allocate $100 to pay off the cash advance balance, $300 to pay off
the purchase balance, and $100 to the protected balance.
iv. Assume that a consumer's account has a cash advance balance
of $500 at an annual percentage rate of 20%, a purchase balance of
$1,000 at an annual percentage rate of 15%, and a transferred
balance of $2,000 that was previously at a discounted annual
percentage rate of 5% but is now at an annual percentage rate of
15%. Assume also that the consumer pays $800 in excess of the
required minimum periodic payment. A bank using this method would
allocate $500 to pay off the cash advance balance and allocate the
remaining $300 among the purchase balance and the transferred
balance in the manner the bank deems appropriate.
23(b) Pro Rata Method
1. Total balance. A bank may, but is not required to, deduct
amounts paid by the consumer's required minimum periodic payment
when calculating the total balance for purposes of Sec.
227.23(b)(3). See comment 23(b)-2.iii.
2. Examples. For purposes of the following examples, assume that
none of the required minimum periodic payment is allocated to the
balances discussed (unless otherwise stated) and that the amounts
allocated to each balance are rounded to the nearest dollar.
i. Assume that a consumer's account has a cash advance balance
of $500 at an annual percentage rate of 20% and a purchase balance
of $1,500 at an annual percentage rate of 15% and that the consumer
pays $555 in excess of the required minimum periodic payment. A bank
using this method would allocate 25% of the amount ($139) to the
cash advance balance and 75% of the amount ($416) to the purchase
balance.
ii. Assume that a consumer's account has a cash advance balance
of $100 at an annual percentage rate of 20%, a purchase balance of
$300 at an annual percentage rate of 18%, and a $600 protected
balance on which the 12% annual percentage rate cannot be increased
pursuant to Sec. 227.24. If the consumer pays $130 in excess of the
required minimum periodic payment, a bank using this method would
allocate 10% of the amount ($13) to the cash advance balance, 30% of
the amount ($39) to the purchase balance, and 60% of the amount
($78) to the protected balance.
iii. Assume that a consumer's account has a cash advance balance
of $300 at an annual percentage rate of 20% and a purchase balance
of $600 at an annual percentage rate of 15%. Assume also that the
required minimum periodic payment is $50 and that the bank allocates
this payment first to the balance with the lowest annual percentage
rate (the $600 purchase balance). If the consumer pays $300 in
excess of the $50 minimum payment, a bank using this method could
allocate based on a total balance of $850 (consisting of the $300
cash advance balance plus the $550 purchase balance after
application of the $50 minimum payment). In this case, the bank
would apply 35% of the $300 ($105) to the cash advance balance and
65% of that amount ($195) to the purchase balance. In the
alternative, the bank could allocate based on a total balance of
$900 (which does not reflect the $50 minimum payment). In that case,
the bank would apply one third of the $300 excess payment ($100) to
the cash advance balance and two thirds ($200) to the purchase
balance.
iv. Assume that a consumer's account has a cash advance balance
of $500 at an annual percentage rate of 20%, a purchase balance of
$1,000 at an annual percentage rate of 15%, and a transferred
balance of $2,000 that was previously at a discounted annual
percentage rate of 5% but is now at an annual percentage rate of
15%. Assume also that the consumer pays $800 in excess of the
required minimum periodic payment. A bank using this method would
allocate 14% of the excess payment ($112) to the cash advance
balance and allocate the remaining 86% ($688) among the purchase
balance and the transferred balance in the manner the bank deems
appropriate.
Section 227.24--Unfair Acts or Practices Regarding Increases in
Annual Percentage Rates
1. Relationship to Regulation Z, 12 CFR part 226. A bank that
complies with the applicable disclosure requirements in Regulation
Z, 12 CFR part 226, has complied with the disclosure requirements in
Sec. 227.24. See 12 CFR 226.5a, 226.6, 226.9. For example, a bank
may comply with the requirement in Sec. 227.24(a) to disclose at
account opening the annual percentage rates that will apply to each
category of transactions by complying with the disclosure
requirements in 12 CFR 226.5a regarding applications and
solicitations and the requirements in 12 CFR 226.6 regarding
account-opening disclosures. Similarly, in order to increase an
annual percentage rate on new transactions pursuant to Sec.
227.24(b)(3), a bank must comply with the disclosure requirements in
12 CFR 226.9(c) or (g). However, nothing in Sec. 227.24 alters the
requirements in 12 CFR 226.9(c) and (g) that creditors provide
consumers with written notice at least 45 days prior to the
effective date of certain increases in the annual percentage rates
on open-end (not home-secured) credit plans.
24(a) General Rule
1. Rates that will apply to each category of transactions.
Section 227.24(a) requires banks to disclose, at account opening,
the annual percentage rates that will apply to each category of
transactions on the account. A bank cannot satisfy this requirement
by disclosing at account opening only a range of rates or that a
rate will be ``up to'' a particular amount.
2. Application of prohibition on increasing rates. Section
227.24(a) prohibits banks from increasing the annual percentage rate
for a category of transactions on any consumer credit card account
unless specifically permitted by one of the exceptions in Sec.
227.24(b). The following examples illustrate the application of the
rule:
i. Assume that, at account opening on January 1 of year one, a
bank discloses that the annual percentage rate for purchases is a
non-variable rate of 15% and will apply for six months. The bank
also discloses that, after six months, the annual percentage rate
for purchases will be a variable rate that is currently 18% and will
be adjusted quarterly by adding a margin of 8 percentage points to a
publicly available index not under the
[[Page 5563]]
bank's control. Finally, the bank discloses that the annual
percentage rate for cash advances is the same variable rate that
will apply to purchases after six months. The payment due date for
the account is the twenty-fifth day of the month and the required
minimum periodic payments are applied to accrued interest and fees
but do not reduce the purchase and cash advance balances.
A. On January 15, the consumer uses the account to make a $2,000
purchase and a $500 cash advance. No other transactions are made on
the account. At the start of each quarter, the bank adjusts the
variable rate that applies to the $500 cash advance consistent with
changes in the index (pursuant to Sec. 227.24(b)(2)). All required
minimum periodic payments are received on or before the payment due
date until May of year one, when the payment due on May 25 is
received by the bank on May 28. The bank is prohibited by Sec.
227.24 from increasing the rates that apply to the $2,000 purchase,
the $500 cash advance, or future purchases and cash advances. Six
months after account opening (July 1), the bank begins accruing
interest on the $2,000 purchase at the previously disclosed variable
rate determined using an 8-point margin (pursuant to Sec.
227.24(b)(1)). Because no other increases in rate were disclosed at
account opening, the bank may not subsequently increase the variable
rate that applies to the $2,000 purchase and the $500 cash advance
(except due to increases in the index pursuant to Sec.
227.24(b)(2)). On November 16, the bank provides a notice pursuant
to 12 CFR 226.9(c) informing the consumer of a new variable rate
that will apply on January 1 of year two (calculated using the same
index and an increased margin of 12 percentage points). On January 1
of year two, the bank increases the margin used to determine the
variable rate that applies to new purchases to 12 percentage points
(pursuant to Sec. 227.24(b)(3)). On January 15 of year two, the
consumer makes a $300 purchase. The bank applies the variable rate
determined using the 12-point margin to the $300 purchase but not
the $2,000 purchase.
B. Same facts as above except that the required minimum periodic
payment due on May 25 of year one is not received by the bank until
June 30 of year one. Because the bank received the required minimum
periodic payment more than 30 days after the payment due date, Sec.
227.24(b)(4) permits the bank to increase the annual percentage rate
applicable to the $2,000 purchase, the $500 cash advance, and future
purchases and cash advances. However, the bank must first comply
with the notice requirements in 12 CFR 226.9(g). Thus, if the bank
provided a 12 CFR 226.9(g) notice on June 25 stating that all rates
on the account would be increased to a non-variable penalty rate of
30%, the bank could apply that 30% rate beginning on August 9 to all
balances and future transactions.
ii. Assume that, at account opening on January 1 of year one, a
bank discloses that the annual percentage rate for purchases will
increase as follows: A non-variable rate of 5% for six months; a
non-variable rate of 10% for an additional six months; and
thereafter a variable rate that is currently 15% and will be
adjusted monthly by adding a margin of 5 percentage points to a
publicly available index not under the bank's control. The payment
due date for the account is the fifteenth day of the month and the
required minimum periodic payments are applied to accrued interest
and fees but do not reduce the purchase balance. On January 15, the
consumer uses the account to make a $1,500 purchase. Six months
after account opening (July 1), the bank begins accruing interest on
the $1,500 purchase at the previously disclosed 10% non-variable
rate (pursuant to Sec. 227.24(b)(1)). On September 15, the consumer
uses the account for a $700 purchase. On November 16, the bank
provides a notice pursuant to 12 CFR 226.9(c) informing the consumer
of a new variable rate that will apply on January 1 of year two
(calculated using the same index and an increased margin of 8
percentage points). One year after account opening (January 1 of
year two), the bank begins accruing interest on the $2,200 purchase
balance at the previously disclosed variable rate determined using a
5-point margin (pursuant to Sec. 227.24(b)(1)). Because the
variable rate determined using the 8-point margin was not disclosed
at account opening, the bank may not apply that rate to the $2,200
purchase balance. Furthermore, because no other increases in rate
were disclosed at account opening, the bank may not subsequently
increase the variable rate that applies to the $2,200 purchase
balance (except due to increases in the index pursuant to Sec.
227.24(b)(2)). The bank may, however, apply the variable rate
determined using the 8-point margin to purchases made on or after
January 1 of year two (pursuant to Sec. 227.24(b)(3)).
iii. Assume that, at account opening on January 1 of year one, a
bank discloses that the annual percentage rate for purchases is a
variable rate determined by adding a margin of 6 percentage points
to a publicly available index outside of the bank's control. The
bank also discloses that, to the extent consistent with Sec. 227.24
and other applicable law, a non-variable penalty rate of 28% may
apply if the consumer makes a late payment. The due date for the
account is the fifteenth of the month. On May 30 of year two, the
account has a purchase balance of $1,000. On May 31, the creditor
provides a notice pursuant to 12 CFR 226.9(c) informing the consumer
of a new variable rate that will apply on July 16 for all purchases
made on or after June 8 (calculated by using the same index and an
increased margin of 8 percentage points). On June 7, the consumer
makes a $500 purchase. On June 8, the consumer makes a $200
purchase. On June 25, the bank has not received the payment due on
June 15 and provides the consumer with a notice pursuant to 12 CFR
226.9(g) stating that the penalty rate of 28% will apply as of
August 9 to all transactions made on or after July 3. On July 4, the
consumer makes a $300 purchase.
A. The payment due on June 15 of year two is received on June
26. On July 16, Sec. 227.24(b)(3) permits the bank to apply the
variable rate determined using the 8-point margin to the $200
purchase made on June 8 but does not permit the bank to apply this
rate to the $1,500 purchase balance. On August 9, Sec. 227.24(b)(3)
permits the bank to apply the 28% penalty rate to the $300 purchase
made on July 4 but does not permit the bank to apply this rate to
the $1,500 purchase balance (which remains at the variable rate
determined using the 6-point margin) or the $200 purchase (which
remains at the variable rate determined using the 8-point margin).
B. Same facts as above except the payment due on September 15 of
year two is received on October 20. Section 227.24(b)(4) permits the
bank to apply the 28% penalty rate to all balances on the account
and to future transactions because it has not received payment
within 30 days after the due date. However, in order to apply the
28% penalty rate to the entire $2,000 purchase balance, the bank
must provide an additional notice pursuant to 12 CFR 226.9(g). This
notice must be sent no earlier than October 16, which is the first
day the account became more than 30 days' delinquent.
C. Same facts as paragraph A. above except the payment due on
June 15 of year two is received on July 20. Section 227.24(b)(4)
permits the bank to apply the 28% penalty rate to all balances on
the account and to future transactions because it has not received
payment within 30 days after the due date. Because the bank provided
a 12 CFR 226.9(g) notice on June 24 stating the 28% penalty rate,
the bank may apply the 28% penalty rate to all balances on the
account as well as any future transactions on August 9 without
providing an additional notice pursuant to 12 CFR 226.9(g).
24(b) Exceptions
24(b)(1) Account Opening Disclosure Exception
1. Prohibited increases in rate. Section 227.24(b)(1) permits an
increase in the annual percentage rate for a category of
transactions to a rate disclosed at account opening upon expiration
of a period of time that was also disclosed at account opening.
Section 227.24(b)(1) does not permit application of increased rates
that are disclosed at account opening but are contingent on a
particular event or occurrence or may be applied at the bank's
discretion. The following examples illustrate rate increases that
are not permitted by Sec. 227.24(a):
i. Assume that a bank discloses at account opening on January 1
of year one that a non-variable rate of 15% applies to purchases but
that all rates on an account may be increased to a non-variable
penalty rate of 30% if a consumer's required minimum periodic
payment is received after the payment due date, which is the
fifteenth of the month. On March 1, the account has a $2,000
purchase balance. The payment due on March 15 is not received until
March 20. Section 227.24 does not permit the bank to apply the 30%
penalty rate to the $2,000 purchase balance. However, pursuant to
Sec. 227.24(b)(3), the bank could provide a 12 CFR 226.9(c) or (g)
notice on November 16 informing the consumer that, on January 1 of
year two, the 30% rate (or a different rate) will apply to new
transactions.
[[Page 5564]]
ii. Assume that a bank discloses at account opening on January 1
of year one that a non-variable rate of 5% applies to transferred
balances but that this rate will increase to a non-variable rate of
18% if the consumer does not use the account for at least $200 in
purchases each billing cycle. On July 1, the consumer transfers a
balance of $4,000 to the account. During the October billing cycle,
the consumer uses the account for $150 in purchases. Section 227.24
does not permit the bank to apply the 18% rate to the $4,000
transferred balance. However, pursuant to Sec. 227.24(b)(3), the
bank could provide a 12 CFR 226.9(c) or (g) notice on November 16
informing the consumer that, on January 1 of year two, the 18% rate
(or a different rate) will apply to new transactions.
iii. Assume that a bank discloses at account opening on January
1 of year one that interest on purchases will be deferred for one
year, although interest will accrue on purchases during that year at
a non-variable rate of 20%. The bank further discloses that, if all
purchases made during year one are not paid in full by the end of
that year, the bank will begin charging interest on the purchase
balance and new purchases at 20% and will retroactively charge
interest on the purchase balance at a rate of 20% starting on the
date of each purchase made during year one. On January 1 of year
one, the consumer makes a purchase of $1,500. No other transactions
are made on the account. On January 1 of year two, $500 of the
$1,500 purchase remains unpaid. Section 227.24 does not permit the
bank to reach back to charge interest on the $1,500 purchase from
January 1 through December 31 of year one. However, the bank may
apply the previously disclosed 20% rate to the $500 purchase balance
beginning on January 1 of year two (pursuant to Sec. 227.24(b)(1)).
2. Loss of grace period. Nothing in Sec. 227.24 prohibits a
bank from assessing interest due to the loss of a grace period to
the extent consistent with Sec. 227.25.
3. Application of rate that is lower than disclosed rate.
Section 227.24(b)(1) permits an increase in the annual percentage
rate for a category of transactions to a rate disclosed at account
opening upon expiration of a period of time that was also disclosed
at account opening. Nothing in Sec. 227.24 prohibits a bank from
applying a rate that is lower than the disclosed rate upon
expiration of the period. However, if a lower rate is applied to an
existing balance, the bank cannot subsequently increase the rate on
that balance unless it has provided the consumer with advance notice
of the increase pursuant to 12 CFR 226.9(c). Furthermore, the bank
cannot increase the rate on that existing balance to a rate that is
higher than the increased rate disclosed at account opening. The
following example illustrates the application of this rule:
i. Assume that, at account opening on January 1 of year one, a
bank discloses that a non-variable annual percentage rate of 15%
will apply to purchases for one year and discloses that, after the
first year, the bank will apply a variable rate that is currently
20% and is determined by adding a margin of 10 percentage points to
a publicly available index not under the bank's control. On December
31 of year one, the account has a purchase balance of $3,000.
A. On November 16 of year one, the bank provides a notice
pursuant to 12 CFR 226.9(c) informing the consumer of a new variable
rate that will apply on January 1 of year two (calculated using the
same index and a reduced margin of 8 percentage points). The notice
further states that, on July 1 of year two, the margin will increase
to the margin disclosed at account opening (10 percentage points).
On July 1 of year two, the bank increases the margin used to
determine the variable rate that applies to new purchases to 10
percentage points and applies that rate to any remaining portion of
the $3,000 purchase balance (pursuant to Sec. 227.24(b)(1)).
B. Same facts as above except that the bank does not send a
notice on November 16 of year one. Instead, on January 1 of year
two, the bank lowers the margin used to determine the variable rate
to 8 percentage points and applies that rate to the $3,000 purchase
balance and to new purchases. 12 CFR 226.9 does not require advance
notice in these circumstances. However, unless the account becomes
more than 30 days' delinquent, the bank may not subsequently
increase the rate that applies to the $3,000 purchase balance except
due to increases in the index (pursuant to Sec. 227.24(b)(2)).
24(b)(2) Variable Rate Exception
1. Increases due to increase in index. Section 227.24(b)(2)
provides that an annual percentage rate for a category of
transactions that varies according to an index that is not under the
bank's control and is available to the general public may be
increased due to an increase in the index. This section does not
permit a bank to increase the annual percentage rate by changing the
method used to determine a rate that varies with an index (such as
by increasing the margin), even if that change will not result in an
immediate increase.
2. External index. A bank may increase the annual percentage
rate if the increase is based on an index or indices outside the
bank's control. A bank may not increase the rate based on its own
prime rate or cost of funds. A bank is permitted, however, to use a
published prime rate, such as that in the Wall Street Journal, even
if the bank's own prime rate is one of several rates used to
establish the published rate.
3. Publicly available. The index or indices must be available to
the public. A publicly available index need not be published in a
newspaper, but it must be one the consumer can independently obtain
(by telephone, for example) and use to verify the rate applied to
the outstanding balance.
4. Changing a non-variable rate to a variable rate. Section
227.24 generally prohibits a bank from changing a non-variable
annual percentage rate to a variable rate because such a change can
result in an increase in rate. However, Sec. 227.24(b)(1) permits a
bank to change a non-variable rate to a variable rate if the change
was disclosed at account opening. Furthermore, following the first
year after the account is opened, Sec. 227.24(b)(3) permits a bank
to change a non-variable rate to a variable rate with respect to new
transactions (after complying with the notice requirements in 12 CFR
226.9(c) or (g)). Finally, Sec. 227.24(b)(4) permits a bank to
change a non-variable rate to a variable rate if the required
minimum periodic payment is not received within 30 days of the
payment due date (after complying with the notice requirements in 12
CFR 226.9(g)).
5. Changing a variable annual percentage rate to a non-variable
annual percentage rate. Nothing in Sec. 227.24 prohibits a bank
from changing a variable annual percentage rate to an equal or lower
non-variable rate. Whether the non-variable rate is equal to or
lower than the variable rate is determined at the time the bank
provides the notice required by 12 CFR 226.9(c). For example, assume
that on March 1 a variable rate that is currently 15% applies to a
balance of $2,000 and the bank sends a notice pursuant to 12 CFR
226.9(c) informing the consumer that the variable rate will be
converted to a non-variable rate of 14% effective April 17. On April
17, the bank may apply the 14% non-variable rate to the $2,000
balance and to new transactions even if the variable rate on March 2
or a later date was less than 14%.
6. Substitution of index. A bank may change the index and margin
used to determine the annual percentage rate under Sec.
227.24(b)(2) if the original index becomes unavailable, as long as
historical fluctuations in the original and replacement indices were
substantially similar, and as long as the replacement index and
margin will produce a rate similar to the rate that was in effect at
the time the original index became unavailable. If the replacement
index is newly established and therefore does not have any rate
history, it may be used if it produces a rate substantially similar
to the rate in effect when the original index became unavailable.
24(b)(3) Advance Notice Exception
1. First year after the account is opened. A bank may not
increase an annual percentage rate pursuant to Sec. 227.24(b)(3)
during the first year after the account is opened. This limitation
does not apply to accounts opened prior to July 1, 2010.
2. Transactions that occur more than seven days after notice
provided. Section 227.24(b)(3) generally prohibits a bank from
applying an increased rate to transactions that occur within seven
days after provision of the 12 CFR 226.9(c) or (g) notice. This
prohibition does not, however, apply to transactions that are
authorized within seven days after provision of the 12 CFR 226.9(c)
or (g) notice but are settled more than seven days after the notice
was provided.
3. Examples.
i. Assume that a consumer credit card account is opened on
January 1 of year one. On March 14 of year two, the account has a
purchase balance of $2,000 at a non-variable annual percentage rate
of 15%. On March 15, the bank provides a notice pursuant to 12 CFR
226.9(c) informing the consumer that the rate for new purchases will
increase to a non-variable rate of 18% on May 1. The notice further
states that the 18% rate will apply for six months (until November
1) and states that thereafter the bank will apply a variable rate
that is currently 22% and is determined by adding a margin of 12
percentage points to a publicly-available index that is not under
[[Page 5565]]
the bank's control. The seventh day after provision of the notice is
March 22 and, on that date, the consumer makes a $200 purchase. On
March 24, the consumer makes a $1,000 purchase. On May 1, Sec.
227.24(b)(3) permits the bank to begin accruing interest at 18% on
the $1,000 purchase made on March 24. The bank is not permitted to
apply the 18% rate to the $2,200 purchase balance as of March 22.
After six months (November 2), the bank may begin accruing interest
on any remaining portion of the $1,000 purchase at the previously-
disclosed variable rate determined using the 12-point margin.
ii. Same facts as above except that the $200 purchase is
authorized by the bank on March 22 but is not settled until March
23. On May 1, Sec. 227.24(b)(3) permits the bank to start charging
interest at 18% on both the $200 purchase and the $1,000 purchase.
The bank is not permitted to apply the 18% rate to the $2,000
purchase balance as of March 22.
iii. Same facts as in paragraph i. above except that on
September 17 of year two (which is 45 days before expiration of the
18% non-variable rate), the bank provides a notice pursuant to 12
CFR 226.9(c) informing the consumer that, on November 2, a new
variable rate will apply to new purchases and any remaining portion
of the $1,000 balance (calculated by using the same index and a
reduced margin of 10 percentage points). The notice further states
that, on May 1 of year three, the margin will increase to the margin
disclosed at account opening (12 percentage points). On May 1 of
year three, Sec. 227.24(b)(3) permits the bank to increase the
margin used to determine the variable rate that applies to new
purchases to 12 percentage points and to apply that rate to any
remaining portion of the $1,000 purchase as well as to new
purchases. See comment 24(b)(1)-3. The bank is not permitted to
apply this rate to any remaining portion of the $2,200 purchase
balance as of March 22.
24(b)(5) Workout Arrangement Exception
1. Scope of exception. Nothing in Sec. 227.24(b)(5) permits a
bank to alter the requirements of Sec. 227.24 pursuant to a workout
arrangement between a consumer and the bank. For example, a bank
cannot increase an annual percentage rate pursuant to a workout
arrangement unless otherwise permitted by Sec. 227.24. In addition,
a bank cannot require the consumer to make payments with respect to
a protected balance that exceed the payments permitted under Sec.
227.24(c).
2. Variable annual percentage rates. If the annual percentage
rate that applied to a category of transactions prior to
commencement of the workout arrangement varied with an index
consistent with Sec. 227.24(b)(2), the rate applied to that
category of transactions following an increase pursuant to Sec.
227.24(b)(5) must be determined using the same formula (index and
margin).
3. Example. Assume that, consistent with Sec. 227.24(b)(4), the
margin used to determine a variable annual percentage rate that
applies to a $5,000 balance is increased from 5 percentage points to
15 percentage points. Assume also that the bank and the consumer
subsequently agree to a workout arrangement that reduces the margin
back to 5 points on the condition that the consumer pay a specified
amount by the payment due date each month. If the consumer does not
pay the agreed-upon amount by the payment due date, the bank may
increase the margin for the variable rate that applies to the $5,000
balance up to 15 percentage points. 12 CFR 226.9 does not require
advance notice of this type of increase.
24(c) Treatment of Protected Balances
1. Protected balances. Because rates cannot be increased
pursuant to Sec. 227.24(b)(3) during the first year after account
opening, Sec. 227.24(c) does not apply to balances during the first
year. Instead, the requirements in Sec. 227.24(c) apply only to
``protected balances,'' which are amounts owed for a category of
transactions to which an increased annual percentage rate cannot be
applied after the rate for that category of transactions has been
increased pursuant to Sec. 227.24(b)(3). For example, assume that,
on March 15 of year two, an account has a purchase balance of $1,000
at a non-variable rate of 12% and that, on March 16, the bank sends
a notice pursuant to 12 CFR 226.9(c) informing the consumer that the
rate for new purchases will increase to a non-variable rate of 15%
on May 2. On March 20, the consumer makes a $100 purchase. On March
24, the consumer makes a $150 purchase. On May 2, Sec. 227.24(b)(3)
permits the bank to start charging interest at 15% on the $150
purchase made on March 24 but does not permit the bank to apply that
15% rate to the $1,100 purchase balance as of March 23. Accordingly,
Sec. 227.24(c) applies to the $1,100 purchase balance as of March
23 but not the $150 purchase made on March 24.
24(c)(1) Repayment
1. No less beneficial to the consumer. A bank may provide a
method of repaying the protected balance that is different from the
methods listed in Sec. 227.24(c)(1) so long as the method used is
no less beneficial to the consumer than one of the listed methods. A
method is no less beneficial to the consumer if the method amortizes
the protected balance in five years or longer or if the method
results in a required minimum periodic payment that is equal to or
less than a minimum payment calculated consistent with Sec.
227.24(c)(1)(ii). For example, a bank could increase the percentage
of the protected balance included in the required minimum periodic
payment from 2% to 5% so long as doing so would not result in
amortization of the protected balance in less than five years.
Alternatively, a bank could require a consumer to make a minimum
payment that amortizes the protected balance in less than five years
so long as the payment does not include a percentage of the balance
that is more than twice the percentage included in the minimum
payment before the effective date of the increased rate. For
example, a bank could require the consumer to make a minimum payment
that amortizes the protected balance in four years so long as doing
so would not more than double the percentage of the balance included
in the minimum payment prior to the effective date of the increased
rate.
2. Lower limit for required minimum periodic payment. If the
required minimum periodic payment under Sec. 227.24(c)(1)(i) or
(c)(1)(ii) is less than the lower dollar limit for minimum payments
established in the cardholder agreement before the effective date of
the rate increase, the bank may set the minimum payment consistent
with that limit. For example, if at account opening the cardholder
agreement stated that the required minimum periodic payment would be
either the total of fees and interest charges plus 1% of the total
amount owed or $20 (whichever is greater), the bank may require the
consumer to make a minimum payment of $20 even if doing so would pay
off the protected balance in less than five years or constitute more
than 2% of the protected balance plus fees and interest charges.
Paragraph 24(c)(1)(i)
1. Amortization period starting from date on which increased
rate becomes effective. Section 227.24(c)(1)(i) provides for an
amortization period for the protected balance of no less than five
years, starting from the date on which the increased annual
percentage rate becomes effective. A bank is not required to
recalculate the required minimum periodic payment for the protected
balance if, during the amortization period, that balance is reduced
as a result of the allocation of amounts paid by the consumer in
excess of the minimum payment consistent with Sec. 227.23 or any
other practice permitted by these rules and other applicable law.
2. Amortization when applicable annual percentage rate is
variable. If the annual percentage rate that applies to the
protected balance varies with an index consistent with Sec.
227.24(b)(2), the bank may adjust the interest charges included in
the required minimum periodic payment for that balance accordingly
in order to ensure that the outstanding balance is amortized in five
years. For example, assume that a variable rate that is currently
15% applies to a protected balance and that, in order to amortize
that balance in five years, the required minimum periodic payment
must include a specific amount of principal plus all accrued
interest charges. If the 15% variable rate increases due to an
increase in the index, the bank may increase the required minimum
periodic payment to include the additional interest charges.
Paragraph 24(c)(1)(ii)
1. Required minimum periodic payment on other balances. Section
227.24(c)(1)(ii) addresses the required minimum periodic payment on
the protected balance. Section 227.24(c)(1)(ii) does not limit or
otherwise address the bank's ability to determine the amount of the
required minimum periodic payment for other balances.
2. Example. Assume that the method used by a bank to calculate
the required minimum periodic payment for a consumer credit card
account requires the consumer to pay either the total of fees and
interest charges plus 1% of the total amount owed or $20, whichever
is greater. Assume also that the account has a purchase balance of
$2,000 at an annual percentage rate of 15% and a cash advance
balance of $500 at an annual percentage rate of 20% and that the
bank increases the rate for purchases to 18% but does not increase
[[Page 5566]]
the rate for cash advances. Under Sec. 227.24(c)(1)(ii), the bank
may require the consumer to pay fees and interest plus 2% of the
$2,000 purchase balance. Section 227.24(c)(1)(ii) does not prohibit
the bank from increasing the required minimum periodic payment for
the cash advance balance.
24(c)(2) Fees and Charges
1. Fee or charge based solely on the protected balance. A bank
is prohibited from assessing a fee or charge based solely on
balances to which Sec. 227.24(c) applies. For example, a bank is
prohibited from assessing a monthly maintenance fee that would not
be charged if the account did not have a protected balance. A bank
is not, however, prohibited from assessing fees such as late payment
fees or fees for exceeding the credit limit even if such fees are
based in part on the protected balance.
Section 227.25--Unfair Balance Computation Method
25(a) General Rule
1. Two-cycle method prohibited. When a consumer ceases to be
eligible for a time period provided by the bank within which the
consumer may repay any portion of the credit extended without
incurring a finance charge (a grace period), the bank is prohibited
from computing the finance charge using the so-called two-cycle
average daily balance computation method. This method calculates the
finance charge using a balance that is the sum of the average daily
balances for two billing cycles. The first balance is for the
current billing cycle, and is calculated by adding the total balance
(including or excluding new purchases and deducting payments and
credits) for each day in the billing cycle, and then dividing by the
number of days in the billing cycle. The second balance is for the
preceding billing cycle.
2. Examples.
i. Assume that the billing cycle on a consumer credit card
account starts on the first day of the month and ends on the last
day of the month. The payment due date for the account is the
twenty-fifth day of the month. Under the terms of the account, the
consumer will not be charged interest on purchases if the balance at
the end of a billing cycle is paid in full by the following payment
due date. The consumer uses the credit card to make a $500 purchase
on March 15. The consumer pays the balance for the February billing
cycle in full on March 25. At the end of the March billing cycle
(March 31), the consumer's balance consists only of the $500
purchase and the consumer will not be charged interest on that
balance if it is paid in full by the following due date (April 25).
The consumer pays $400 on April 25, leaving a $100 balance. The bank
may charge interest on the $500 purchase from the start of the April
billing cycle (April 1) through April 24 and interest on the
remaining $100 from April 25 through the end of the April billing
cycle (April 30). The bank is prohibited, however, from reaching
back and charging interest on the $500 purchase from the date of
purchase (March 15) to the end of the March billing cycle (March
31).
ii. Assume the same circumstances as in the previous example
except that the consumer does not pay the balance for the February
billing cycle in full on March 25 and therefore, under the terms of
the account, is not eligible for a time period within which to repay
the $500 purchase without incurring a finance charge. With respect
to the $500 purchase, the bank may charge interest from the date of
purchase (March 15) through April 24 and interest on the remaining
$100 from April 25 through the end of the April billing cycle (April
30).
Section 227.26--Unfair Charging of Security Deposits and Fees for
the Issuance or Availability of Credit to Consumer Credit Card
Accounts
26(a) Limitation for First Year
1. Majority of the credit limit. The total amount of security
deposits and fees for the issuance or availability of credit
constitutes a majority of the initial credit limit if that total is
greater than half of the limit. For example, assume that a consumer
credit card account has an initial credit limit of $500. Under Sec.
227.26(a), a bank may charge to the account security deposits and
fees for the issuance or availability of credit totaling no more
than $250 during the first year (consistent with Sec. 227.26(b)).
26(b) Limitations for First Billing Cycle and Subsequent Billing Cycles
1. Adjustments of one dollar or less permitted. When dividing
amounts pursuant to Sec. 227.26(b)(2), a bank may adjust amounts by
one dollar or less. For example, if a bank is dividing $87 over five
billing cycles, the bank may charge $18 for two months and $17 for
the remaining three months.
2. Examples.
i. Assume that a consumer credit card account opened on January
1 has an initial credit limit of $500. Assume also that the billing
cycles for this account begin on the first day of the month and end
on the last day of the month. Under Sec. 227.26(a), the bank may
charge to the account no more than $250 in security deposits and
fees for the issuance or availability of credit during the first
year after the account is opened. If it charges $250, the bank may
charge up to $125 during the first billing cycle. If it charges $125
during the first billing cycle, it may then charge no more than $25
in each of the next five billing cycles. If it chooses, the bank may
spread the additional security deposits and fees over a longer
period, such as by charging $12.50 in each of the ten billing cycles
following the first billing cycle.
ii. Same facts as above except that on July 1 the bank increases
the credit limit on the account from $500 to $750. Because the
prohibition in Sec. 227.26(a) is based on the initial credit limit
of $500, the increase in credit limit does not permit the bank to
charge to the account additional security deposits and fees for the
issuance or availability of credit (such as a fee for increasing the
credit limit).
26(c) Evasion Prohibited
1. Evasion. Section 227.26(c) prohibits a bank from evading the
requirements of this section by providing the consumer with
additional credit to fund the consumer's payment of security
deposits and fees that exceed the total amounts permitted by Sec.
227.26(a) and (b). For example, assume that on January 1 a consumer
opens a consumer credit card account with an initial credit limit of
$400 and the bank charges to that account $100 in fees for the
issuance or availability of credit. Assume also that the billing
cycles for the account coincide with the days of the month and that
the bank will charge $20 in fees for the issuance or availability of
credit in the February, March, April, May, and June billing cycles.
The bank violates Sec. 227.26(c) if it provides the consumer with a
separate credit product to fund additional security deposits or fees
for the issuance or availability of credit.
2. Payment with funds not obtained from the bank. A bank does
not violate Sec. 227.26(c) if it requires the consumer to pay
security deposits or fees for the issuance or availability of credit
using funds that are not obtained, directly or indirectly, from the
bank. For example, a bank does not violate Sec. 227.26(c) if a $400
security deposit paid by a consumer to obtain a consumer credit card
account with a credit line of $400 is not charged to a credit
account provided by the bank or its affiliate.
26(d) Definitions
1. Membership fees. Membership fees for opening an account are
fees for the issuance or availability of credit. A membership fee to
join an organization that provides a credit or charge card as a
privilege of membership is a fee for the issuance or availability of
credit only if the card is issued automatically upon membership. If
membership results merely in eligibility to apply for an account,
then such a fee is not a fee for the issuance or availability of
credit.
2. Enhancements. Fees for optional services in addition to basic
membership privileges in a credit or charge card account (for
example, travel insurance or card-registration services) are not
fees for the issuance or availability of credit if the basic account
may be opened without paying such fees. 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, are fees for the issuance or availability of
credit. Thus, a fee to obtain an additional card on the account
beyond the first card (so that each cardholder would have his or her
own card) is a fee for the issuance or availability of credit even
if the fee is optional; that is, if the fee is charged only if the
cardholder requests one or more additional cards.
3. One-time fees. Non-periodic fees related to opening an
account (such as application fees or one-time membership or
participation fees) are fees for the issuance or availability of
credit. Fees for reissuing a lost or stolen card, statement
reproduction fees, and fees for late payment or other violations of
the account terms are examples of fees that are not fees for the
issuance or availability of credit.
0
8. The Federal Reserve System Board of Governors' Staff Guidelines on
the Credit Practices Rule, published November 14, 1985 at 50 FR 47036,
is
[[Page 5567]]
amended by revising paragraph 3 to read as follows:
Staff Guidelines on the Credit Practices Rule
Effective January 1, 1986; as amended effective July 1, 2010.
Introduction
* * * * *
3. Scope; enforcement. As stated in subpart A of Regulation AA,
this rule applies to all banks and their subsidiaries, except savings
associations as defined in 12 U.S.C. 1813(b). The Board has enforcement
responsibility for state-chartered banks that are members of the
Federal Reserve System. The Office of the Comptroller of the Currency
has enforcement responsibility for national banks. The Federal Deposit
Insurance Corporation has enforcement responsibility for insured state-
chartered banks that are not members of the Federal Reserve System.
* * * * *
0
9. The following portions of the Federal Reserve System Board of
Governors' Staff Guidelines on the Credit Practices Rule, published
November 14, 1985 at 50 FR 47036, are removed:
Section 227.11 Authority, Purpose, and Scope
Q11(c)-1: Penalties for noncompliance. What are the penalties for
noncompliance with the rule?
A: Administrative enforcement of the rule for banks may involve
actions under section 8 of the Federal Deposit Insurance Act (12 U.S.C.
1818), including cease-and-desist orders requiring that actions be
taken to remedy violations. If the terms of the order are violated, the
federal supervisory agency may impose penalties of up to $1,000 per day
for every day that the bank is in violation of the order.
Q11(c)-2: Industrial loan companies. Are industrial loan companies
subject to the Board's rule?
A: Industrial loan companies that are insured by the Federal
Deposit Insurance Corporation are covered by the Board's rule.
* * * * *
Department of the Treasury
Office of Thrift Supervision
12 CFR Chapter V
Authority and Issuance
0
For the reasons discussed in the joint preamble, OTS revises 12 CFR
part 535 to read as follows:
PART 535--UNFAIR OR DECEPTIVE ACTS OR PRACTICES
Subpart A--General Provisions
Sec.
535.1 Authority, purpose, and scope.
Subpart B--Consumer Credit Practices
535.11 Definitions.
535.12 Unfair credit contract provisions.
535.13 Unfair or deceptive cosigner practices.
535.14 Unfair late charges.
Subpart C--Consumer Credit Card Account Practices
535.21 Definitions.
535.22 Unfair time to make payment.
535.23 Unfair allocation of payments.
535.24 Unfair increases in annual percentage rates.
535.25 Unfair balance computation method.
535.26 Unfair charging of security deposits and fees for the
issuance or availability of credit to consumer credit card accounts.
Appendix A to Part 535--Official Staff Commentary
Authority: 12 U.S.C. 1462a, 1463, 1464; 15 U.S.C. 57a.
Subpart A--General Provisions
Sec. 535.1 Authority, purpose and scope.
(a) Authority. This part is issued by OTS under section 18(f) of
the Federal Trade Commission Act, 15 U.S.C. 57a(f) (section 202(a) of
the Magnuson-Moss Warranty--Federal Trade Commission Improvement Act,
Pub. L. 93-637) and the Home Owners' Loan Act, 12 U.S.C. 1461 et seq.
(b) Purpose. The purpose of this part is to prohibit unfair or
deceptive acts or practices in violation of section 5(a)(1) of the
Federal Trade Commission Act, 15 U.S.C. 45(a)(1). Subparts B and C
define and contain requirements prescribed for the purpose of
preventing specific unfair or deceptive acts or practices of savings
associations. The prohibitions in subparts B and C do not limit OTS's
authority to enforce the FTC Act with respect to any other unfair or
deceptive acts or practices. The purpose of this part is also to
prohibit unsafe and unsound practices and protect consumers under the
Home Owners' Loan Act, 12 U.S.C. 1461 et seq.
(c) Scope. This part applies to savings associations and
subsidiaries owned in whole or in part by a savings association
(``you'').
Subpart B--Consumer Credit Practices
Sec. 535.11 Definitions.
For purposes of this subpart, the following definitions apply:
(a) Consumer means a natural person who seeks or acquires goods,
services, or money for personal, family, or household purposes, other
than for the purchase of real property, and who applies for or is
extended consumer credit.
(b) Consumer credit means credit extended to a natural person for
personal, family, or household purposes. It includes consumer loans;
educational loans; unsecured loans for real property alteration, repair
or improvement, or for the equipping of real property; overdraft loans;
and credit cards. It also includes loans secured by liens on real
estate and chattel liens secured by mobile homes and leases of personal
property to consumers that may be considered the functional equivalent
of loans on personal security but only if you rely substantially upon
other factors, such as the general credit standing of the borrower,
guaranties, or security other than the real estate or mobile home, as
the primary security for the loan.
(c) Earnings means compensation paid or payable to an individual or
for the individual's account for personal services rendered or to be
rendered by the individual, whether denominated as wages, salary,
commission, bonus, or otherwise, including periodic payments pursuant
to a pension, retirement, or disability program.
(d) Obligation means an agreement between you and a consumer.
(e) Person means an individual, corporation, or other business
organization.
Sec. 535.12 Unfair credit contract provisions.
It is an unfair act or practice for you, directly or indirectly, to
enter into a consumer credit obligation that constitutes or contains,
or to enforce in a consumer credit obligation you purchased, any of the
following provisions:
(a) Confession of judgment. A cognovit or confession of judgment
(for purposes other than executory process in the State of Louisiana),
warrant of attorney, or other waiver of the right to notice and the
opportunity to be heard in the event of suit or process thereon.
(b) Waiver of exemption. An executory waiver or a limitation of
exemption from attachment, execution, or other process on real or
personal property held, owned by, or due to the consumer, unless the
waiver applies solely to property subject to a security interest
executed in connection with the obligation.
(c) Assignment of wages. An assignment of wages or other earnings
unless:
(1) The assignment by its terms is revocable at the will of the
debtor;
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(2) The assignment is a payroll deduction plan or preauthorized
payment plan, commencing at the time of the transaction, in which the
consumer authorizes a series of wage deductions as a method of making
each payment; or
(3) The assignment applies only to wages or other earnings already
earned at the time of the assignment.
(d) Security interest in household goods. A nonpossessory security
interest in household goods other than a purchase-money security
interest. For purposes of this paragraph, household goods:
(1) Means clothing, furniture, appliances, linens, china, crockery,
kitchenware, and personal effects of the consumer and the consumer's
dependents.
(2) Does not include:
(i) Works of art;
(ii) Electronic entertainment equipment (except one television and
one radio);
(iii) Antiques (any item over one hundred years of age, including
such items that have been repaired or renovated without changing their
original form or character); or
(iv) Jewelry (other than wedding rings).
Sec. 535.13 Unfair or deceptive cosigner practices.
(a) Prohibited deception. It is a deceptive act or practice for
you, directly or indirectly in connection with the extension of credit
to consumers, to misrepresent the nature or extent of cosigner
liability to any person.
(b) Prohibited unfairness. It is an unfair act or practice for you,
directly or indirectly in connection with the extension of credit to
consumers, to obligate a cosigner unless the cosigner is informed,
before becoming obligated, of the nature of the cosigner's liability.
(c) Disclosure requirement--(1) Disclosure statement. A clear and
conspicuous statement must be given in writing to the cosigner before
becoming obligated. In the case of open-end credit, the disclosure
statement must be given to the cosigner before the time that the
cosigner becomes obligated for any fees or transactions on the account.
The disclosure statement must contain the following statement or one
that is substantially similar:
Notice of Cosigner
You are being asked to guarantee this debt. Think carefully
before you do. If the borrower doesn't pay the debt, you will have
to. Be sure you can afford to pay if you have to, and that you want
to accept this responsibility.
You may have to pay up to the full amount of the debt if the
borrower does not pay. You may also have to pay late fees or
collection costs, which increase this amount.
The creditor can collect this debt from you without first trying
to collect from the borrower. The creditor can use the same
collection methods against you that can be used against the
borrower, such as suing you, garnishing your wages, etc. If this
debt is ever in default, that fact may become a part of your credit
record.
(2) Compliance. Compliance with paragraph (d)(1) of this section
constitutes compliance with the consumer disclosure requirement in
paragraph (b) of this section.
(3) Additional content limitations. If the notice is a separate
document, nothing other than the following items may appear with the
notice:
(i) Your name and address;
(ii) An identification of the debt to be cosigned (e.g., a loan
identification number);
(iii) The date (of the transaction); and
(iv) The statement, ``This notice is not the contract that makes
you liable for the debt.''
(d) Cosigner defined--(1) Cosigner means a natural person who
assumes liability for the obligation of a consumer without receiving
goods, services, or money in return for the obligation, or, in the case
of an open-end credit obligation, without receiving the contractual
right to obtain extensions of credit under the account.
(2) Cosigner includes any person whose signature is requested as a
condition to granting credit to a consumer, or as a condition for
forbearance on collection of a consumer's obligation that is in
default. The term does not include a spouse or other person whose
signature is required on a credit obligation to perfect a security
interest pursuant to state law.
(3) A person who meets the definition in this paragraph is a
cosigner, whether or not the person is designated as such on a credit
obligation.
Sec. 535.14 Unfair late charges.
(a) Prohibition. In connection with collecting a debt arising out
of an extension of credit to a consumer, it is an unfair act or
practice for you, directly or indirectly, to levy or collect any
delinquency charge on a payment, when the only delinquency is
attributable to late fees or delinquency charges assessed on earlier
installments and the payment is otherwise a full payment for the
applicable period and is paid on its due date or within an applicable
grace period.
(b) Collecting a debt defined-- Collecting a debt means, for the
purposes of this section, any activity, other than the use of judicial
process, that is intended to bring about or does bring about repayment
of all or part of money due (or alleged to be due) from a consumer.
Subpart C--Consumer Credit Card Account Practices
Sec. 535.21 Definitions.
For purposes of this subpart, the following definitions apply:
(a) Annual percentage rate means the product of multiplying each
periodic rate for a balance or transaction on a consumer credit card
account by the number of periods in a year. The term ``periodic rate''
has the same meaning as in 12 CFR 226.2.
(b) Consumer means a natural person to whom credit is extended
under a consumer credit card account or a natural person who is a co-
obligor or guarantor of a consumer credit card account.
(c) Consumer credit card account means an account provided to a
consumer primarily for personal, family, or household purposes under an
open-end credit plan that is accessed by a credit card or charge card.
The terms open-end credit, credit card, and charge card have the same
meanings as in 12 CFR 226.2. The following are not consumer credit card
accounts for purposes of this subpart:
(1) Home equity plans subject to the requirements of 12 CFR 226.5b
that are accessible by a credit or charge card;
(2) Overdraft lines of credit tied to asset accounts accessed by
check-guarantee cards or by debit cards;
(3) Lines of credit accessed by check-guarantee cards or by debit
cards that can be used only at automated teller machines; and
(4) Lines of credit accessed solely by account numbers.
Sec. 535.22 Unfair time to make payment.
(a) General rule. Except as provided in paragraph (c) of this
section, you must not treat a payment on a consumer credit card account
as late for any purpose unless you have provided the consumer a
reasonable amount of time to make the payment.
(b) Compliance with general rule-- (1) Establishing compliance. You
must be able to establish that you have complied with paragraph (a) of
this section.
(2) Safe harbor. You comply with paragraph (a) of this section if
you have adopted reasonable procedures designed to ensure that periodic
statements specifying the payment due date are mailed or delivered to
consumers at least 21 days before the payment due date.
[[Page 5569]]
(c) Exception for grace periods. Paragraph (a) of this section does
not apply to any time period you provided within which the consumer may
repay any portion of the credit extended without incurring an
additional finance charge.
Sec. 535.23 Unfair allocation of payments.
When different annual percentage rates apply to different balances
on a consumer credit card account, you must allocate any amount paid by
the consumer in excess of the required minimum periodic payment among
the balances using one of the following methods:
(a) High-to-low method. The amount paid by the consumer in excess
of the required minimum periodic payment is allocated first to the
balance with the highest annual percentage rate and any remaining
portion to the other balances in descending order based on the
applicable annual percentage rate.
(b) Pro rata method. The amount paid by the consumer in excess of
the required minimum periodic payment is allocated among the balances
in the same proportion as each balance bears to the total balance.
Sec. 535.24 Unfair increases in annual percentage rates.
(a) General rule. At account opening, you must disclose the annual
percentage rates that will apply to each category of transactions on
the consumer credit card account. You must not increase the annual
percentage rate for a category of transactions on any consumer credit
card account except as provided in paragraph (b) of this section.
(b) Exceptions. The prohibition in paragraph (a) of this section on
increasing annual percentage rates does not apply where an annual
percentage rate may be increased pursuant to one of the exceptions in
this paragraph.
(1) Account opening disclosure exception. An annual percentage rate
for a category of transactions may be increased to a rate disclosed at
account opening upon expiration of a period of time disclosed at
account opening.
(2) Variable rate exception. An annual percentage rate for a
category of transactions that varies according to an index that is not
under your control and is available to the general public may be
increased due to an increase in the index.
(3) Advance notice exception. An annual percentage rate for a
category of transactions may be increased pursuant to a notice under 12
CFR 226.9(c) or (g) for transactions that occur more than seven days
after provision of the notice. This exception does not permit an
increase in any annual percentage rate during the first year after the
account is opened.
(4) Delinquency exception. An annual percentage rate may be
increased due to your not receiving the consumer's required minimum
periodic payment within 30 days after the due date for that payment.
(5) Workout arrangement exception. An annual percentage rate may be
increased due to the consumer's failure to comply with the terms of a
workout arrangement between you and the consumer, provided that the
annual percentage rate applicable to a category of transactions
following any such increase does not exceed the rate that applied to
that category of transactions prior to commencement of the workout
arrangement.
(c) Treatment of protected balances. For purposes of this
paragraph, ``protected balance'' means the amount owed for a category
of transactions to which an increased annual percentage rate cannot be
applied after the rate for that category of transactions has been
increased pursuant to paragraph (b)(3) of this section.
(1) Repayment. You must provide the consumer with one of the
following methods of repaying a protected balance or a method that is
no less beneficial to the consumer than one of the following methods:
(i) An amortization period of no less than five years, starting
from the date on which the increased rate becomes effective for the
category of transactions; or
(ii) A required minimum periodic payment that includes a percentage
of the protected balance that is no more than twice the percentage
required before the date on which the increased rate became effective
for the category of transactions.
(2) Fees and charges. You must not assess any fee or charge based
solely on a protected balance.
Sec. 535.25 Unfair balance computation method.
(a) General rule. Except as provided in paragraph (b) of this
section, you must not impose finance charges on balances on a consumer
credit card account based on balances for days in billing cycles that
precede the most recent billing cycle as a result of the loss of any
time period you provided within which the consumer may repay any
portion of the credit extended without incurring a finance charge.
(b) Exceptions. Paragraph (a) of this section does not apply to:
(1) Adjustments to finance charges as a result of the resolution of
a dispute under 12 CFR 226.12 or 12 CFR 226.13; or
(2) Adjustments to finance charges as a result of the return of a
payment for insufficient funds.
Sec. 535.26 Unfair charging of security deposits and fees for the
issuance or availability of credit to consumer credit card accounts.
(a) Limitation for first year. During the first year, you must not
charge to a consumer credit card account security deposits and fees for
the issuance or availability of credit that in total constitute a
majority of the initial credit limit for the account.
(b) Limitations for first billing cycle and subsequent billing
cycles--(1) First billing cycle. During the first billing cycle, you
must not charge to a consumer credit card account security deposits and
fees for the issuance or availability of credit that in total
constitute more than 25 percent of the initial credit limit for the
account.
(2) Subsequent billing cycles. Any additional security deposits and
fees for the issuance or availability of credit permitted by paragraph
(a) of this section must be charged to the account in equal portions in
no fewer than the five billing cycles immediately following the first
billing cycle.
(c) Evasion prohibited. You must not evade the requirements of this
section by providing the consumer with additional credit to fund the
payment of security deposits and fees for the issuance or availability
of credit that exceed the total amounts permitted by paragraphs (a) and
(b) of this section.
(d) Definitions. For purposes of this section, the following
definitions apply:
(1) Fees for the issuance or availability of credit means:
(i) Any annual or other periodic fee that may be imposed for the
issuance or availability of a consumer credit card account, including
any fee based on account activity or inactivity; and
(ii) Any non-periodic fee that relates to opening an account.
(2) First billing cycle means the first billing cycle after a
consumer credit card account is opened.
(3) First year means the period beginning with the date on which a
consumer credit card account is opened and ending twelve months from
that date.
(4) Initial credit limit means the credit limit in effect when a
consumer credit card account is opened.
[[Page 5570]]
Appendix A to Part 535--Official Staff Commentary
Subpart A--General Provisions for Consumer Protection Rules
Section 535.1--Authority, Purpose, and Scope
1(c) Scope
1. Penalties for noncompliance. Administrative enforcement of
the rule for savings associations may involve actions under section
8 of the Federal Deposit Insurance Act (12 U.S.C. 1818), including
cease-and-desist orders requiring that actions be taken to remedy
violations and civil money penalties.
2. Application to subsidiaries. The term ``savings association''
as used in this Appendix also includes subsidiaries owned in whole
or in part by a savings association.
Subpart C--Consumer Credit Card Account Practices
Section 535.22--Unfair Time To Make Payment
22(a) General Rule
1. Treating a payment as late for any purpose. Treating a
payment as late for any purpose includes increasing the annual
percentage rate as a penalty, reporting the consumer as delinquent
to a credit reporting agency, or assessing a late fee or any other
fee based on the consumer's failure to make a payment within the
amount of time provided to make that payment under this section.
2. Reasonable amount of time to make payment. Whether an amount
of time is reasonable for purposes of making a payment is determined
from the perspective of the consumer, not the savings association.
Under Sec. 535.22(b)(2), a savings association provides a
reasonable amount of time to make a payment if it has adopted
reasonable procedures designed to ensure that periodic statements
specifying the payment due date are mailed or delivered to consumers
at least 21 days before the payment due date.
22(b) Compliance with General Rule
1. Reasonable procedures. A savings association is not required
to determine the specific date on which periodic statements are
mailed or delivered to each individual consumer. A savings
association provides a reasonable amount of time to make a payment
if it has adopted reasonable procedures designed to ensure that
periodic statements are mailed or delivered to consumers no later
than a certain number of days after the closing date of the billing
cycle and adds that number of days to the 21-day period in Sec.
535.24(b)(2) when determining the payment due date. For example, if
a savings association has adopted reasonable procedures designed to
ensure that periodic statements are mailed or delivered to consumers
no later than three days after the closing date of the billing
cycle, the payment due date on the periodic statement must be no
less than 24 days after the closing date of the billing cycle.
2. Payment due date. For purposes of Sec. 535.22(b)(2),
``payment due date'' means the date by which the savings association
requires the consumer to make the required minimum periodic payment
in order to avoid being treated as late for any purpose, except as
provided in Sec. 535.22(c).
3. Example of alternative method of compliance. Assume that, for
a particular type of consumer credit card account, a savings
association only provides periodic statements electronically and
only accepts payments electronically (consistent with applicable law
and regulatory guidance). Under these circumstances, the savings
association could comply with Sec. 535.22(a) even if it does not
provide periodic statements 21 days before the payment due date
consistent with Sec. 535.22(b)(2).
Section 535.23--Unfair Allocation of Payments
1. Minimum periodic payment. Section 535.23 addresses the
allocation of amounts paid by the consumer in excess of the minimum
periodic payment required by the savings association. Section 535.23
does not limit or otherwise address the savings association's
ability to determine, consistent with applicable law and regulatory
guidance, the amount of the required minimum periodic payment or how
that payment is allocated. A savings association may, but is not
required to, allocate the required minimum periodic payment
consistent with the requirements in Sec. 535.23 to the extent
consistent with other applicable law or regulatory guidance.
2. Adjustments of one dollar or less permitted. When allocating
payments, the savings association may adjust amounts by one dollar
or less. For example, if a savings association is allocating $100
pursuant to Sec. 535.23(b) among balances of $1,000, $2,000, and
$4,000, the savings association may apply $14 to the $1,000 balance,
$29 to the $2,000 balance, and $57 to the $4,000 balance.
3. Applicable balances and annual percentage rates. Section
535.23 permits a savings association to allocate an amount paid by
the consumer in excess of the required minimum periodic payment
based on the balances and annual percentage rates on the date the
preceding billing cycle ends, on the date the payment is credited to
the account, or on any day in between those two dates. For example,
assume that the billing cycles for a consumer credit card account
start on the first day of the month and end on the last day of the
month. On the date the March billing cycle ends (March 31), the
account has a purchase balance of $500 at a variable annual
percentage rate of 14% and a cash advance balance of $200 at a
variable annual percentage rate of 18%. On April 1, the rate for
purchases increases to 16% and the rate for cash advances increases
to 20% consistent with Sec. 535.24(b)(2). On April 15, the purchase
balance increases to $700. On April 25, the savings association
credits to the account $400 paid by the consumer in excess of the
required minimum periodic payment. Under Sec. 535.23, the savings
association may allocate the $400 based on the balances in existence
and rates in effect on any day from March 31 through April 25.
4. Use of permissible allocation methods. A savings association
is not prohibited from changing the allocation method for a consumer
credit card account or from using different allocation methods for
different consumer credit card accounts, so long as the methods used
are consistent with Sec. 535.23. For example, a savings association
may change from allocating to the highest rate balance first
pursuant to Sec. 535.23(a) to allocating pro rata pursuant to Sec.
535.23(b) or vice versa. Similarly, a savings association may
allocate to the highest rate balance first pursuant to Sec.
535.23(a) on some of its accounts and allocate pro rata pursuant to
Sec. 535.23(b) on other accounts.
5. Claims or defenses under Regulation Z, 12 CFR 226.12(c). When
a consumer has asserted a claim or defense against the card issuer
pursuant to 12 CFR 226.12(c), the savings association must allocate
consistent with 12 CFR 226.12 comment 226.12(c)-4.
6. Balances with the same annual percentage rate. When the same
annual percentage rate applies to more than one balance on an
account and a different annual percentage rate applies to at least
one other balance on that account, Sec. 535.23 does not require
that any particular method be used when allocating among the
balances with the same annual percentage rate. Under these
circumstances, a savings association may treat the balances with the
same rate as a single balance or separate balances. See comments
23(a)-1.iv and 23(b)-2.iv.
23(a) High-to-Low Method
1. Examples. For purposes of the following examples, assume that
none of the required minimum periodic payment is allocated to the
balances discussed (unless otherwise stated).
i. Assume that a consumer's account has a cash advance balance
of $500 at an annual percentage rate of 20% and a purchase balance
of $1,500 at an annual percentage rate of 15% and that the consumer
pays $800 in excess of the required minimum periodic payment. A
savings association using this method would allocate $500 to pay off
the cash advance balance and then allocate the remaining $300 to the
purchase balance.
ii. Assume that a consumer's account has a cash advance balance
of $500 at an annual percentage rate of 20% and a purchase balance
of $1,500 at an annual percentage rate of 15% and that the consumer
pays $400 in excess of the required minimum periodic payment. A
savings association using this method would allocate the entire $400
to the cash advance balance.
iii. Assume that a consumer's account has a cash advance balance
of $100 at an annual percentage rate of 20%, a purchase balance of
$300 at an annual percentage rate of 18%, and a $600 protected
balance on which the 12% annual percentage rate cannot be increased
pursuant to Sec. 535.24. If the consumer pays $500 in excess of the
required minimum periodic payment, a savings association using this
method would allocate $100 to pay off the cash advance balance, $300
to pay off the purchase balance, and $100 to the protected balance.
iv. Assume that a consumer's account has a cash advance balance
of $500 at an annual percentage rate of 20%, a purchase balance of
$1,000 at an annual percentage rate of 15%, and a transferred
balance of $2,000 that
[[Page 5571]]
was previously at a discounted annual percentage rate of 5% but is
now at an annual percentage rate of 15%. Assume also that the
consumer pays $800 in excess of the required minimum periodic
payment. A savings association using this method would allocate $500
to pay off the cash advance balance and allocate the remaining $300
among the purchase balance and the transferred balance in the manner
the savings association deems appropriate.
23(b) Pro Rata Method
1. Total balance. A savings association may, but is not required
to, deduct amounts paid by the consumer's required minimum periodic
payment when calculating the total balance for purposes of Sec.
535.23(b)(3). See comment 23(b)-2.iii.
2. Examples. For purposes of the following examples, assume that
none of the required minimum periodic payment is allocated to the
balances discussed (unless otherwise stated) and that the amounts
allocated to each balance are rounded to the nearest dollar.
i. Assume that a consumer's account has a cash advance balance
of $500 at an annual percentage rate of 20% and a purchase balance
of $1,500 at an annual percentage rate of 15% and that the consumer
pays $555 in excess of the required minimum periodic payment. A
savings association using this method would allocate 25% of the
amount ($139) to the cash advance balance and 75% of the amount
($416) to the purchase balance.
ii. Assume that a consumer's account has a cash advance balance
of $100 at an annual percentage rate of 20%, a purchase balance of
$300 at an annual percentage rate of 18%, and a $600 protected
balance on which the 12% annual percentage rate cannot be increased
pursuant to Sec. 535.24. If the consumer pays $130 in excess of the
required minimum periodic payment, a savings association using this
method would allocate 10% of the amount ($13) to the cash advance
balance, 30% of the amount ($39) to the purchase balance, and 60% of
the amount ($78) to the protected balance.
iii. Assume that a consumer's account has a cash advance balance
of $300 at an annual percentage rate of 20% and a purchase balance
of $600 at an annual percentage rate of 15%. Assume also that the
required minimum periodic payment is $50 and that the savings
association allocates this payment first to the balance with the
lowest annual percentage rate (the $600 purchase balance). If the
consumer pays $300 in excess of the $50 minimum payment, a savings
association using this method could allocate based on a total
balance of $850 (consisting of the $300 cash advance balance plus
the $550 purchase balance after application of the $50 minimum
payment). In this case, the savings association would apply 35% of
the $300 ($105) to the cash advance balance and 65% of that amount
($195) to the purchase balance. In the alternative, the savings
association could allocate based on a total balance of $900 (which
does not reflect the $50 minimum payment). In that case, the savings
association would apply one third of the $300 excess payment ($100)
to the cash advance balance and two thirds ($200) to the purchase
balance.
iv. Assume that a consumer's account has a cash advance balance
of $500 at an annual percentage rate of 20%, a purchase balance of
$1,000 at an annual percentage rate of 15%, and a transferred
balance of $2,000 that was previously at a discounted annual
percentage rate of 5% but is now at an annual percentage rate of
15%. Assume also that the consumer pays $800 in excess of the
required minimum periodic payment. A savings association using this
method would allocate 14% of the excess payment ($112) to the cash
advance balance and allocate the remaining 86% ($688) among the
purchase balance and the transferred balance in the manner the
savings association deems appropriate.
Section 535.24--Unfair Increases in Annual Percentage Rates
1. Relationship to Regulation Z, 12 CFR part 226. A savings
association that complies with the applicable disclosure
requirements in Regulation Z, 12 CFR part 226, has complied with the
disclosure requirements in Sec. 535.24. See 12 CFR 226.5a, 226.6,
226.9. For example, a savings association may comply with the
requirement in Sec. 535.24(a) to disclose at account opening the
annual percentage rates that will apply to each category of
transactions by complying with the disclosure requirements in 12 CFR
226.5a regarding applications and solicitations and the requirements
in 12 CFR 226.6 regarding account-opening disclosures. Similarly, in
order to increase an annual percentage rate on new transactions
pursuant to Sec. 535.24(b)(3), a savings association must comply
with the disclosure requirements in 12 CFR 226.9(c) or (g). However,
nothing in Sec. 535.24 alters the requirements in 12 CFR 226.9(c)
and (g) that creditors provide consumers with written notice at
least 45 days prior to the effective date of certain increases in
the annual percentage rates on open-end (not home-secured) credit
plans.
24(a) General Rule
1. Rates that will apply to each category of transactions.
Section 535.24(a) requires savings associations to disclose, at
account opening, the annual percentage rates that will apply to each
category of transactions on the account. A savings association
cannot satisfy this requirement by disclosing at account opening
only a range of rates or that a rate will be ``up to'' a particular
amount.
2. Application of prohibition on increasing rates. Section
535.24(a) prohibits savings associations from increasing the annual
percentage rate for a category of transactions on any consumer
credit card account unless specifically permitted by one of the
exceptions in Sec. 535.24(b). The following examples illustrate the
application of the rule:
i. Assume that, at account opening on January 1 of year one, a
savings association discloses that the annual percentage rate for
purchases is a non-variable rate of 15% and will apply for six
months. The savings association also discloses that, after six
months, the annual percentage rate for purchases will be a variable
rate that is currently 18% and will be adjusted quarterly by adding
a margin of 8 percentage points to a publicly-available index not
under the savings association's control. Finally, the savings
association discloses that the annual percentage rate for cash
advances is the same variable rate that will apply to purchases
after six months. The payment due date for the account is the
twenty-fifth day of the month and the required minimum periodic
payments are applied to accrued interest and fees but do not reduce
the purchase and cash advance balances.
A. On January 15, the consumer uses the account to make a $2,000
purchase and a $500 cash advance. No other transactions are made on
the account. At the start of each quarter, the savings association
adjusts the variable rate that applies to the $500 cash advance
consistent with changes in the index (pursuant to Sec.
535.24(b)(2)). All required minimum periodic payments are received
on or before the payment due date until May of year one, when the
payment due on May 25 is received by the savings association on May
28. The savings association is prohibited by Sec. 535.24 from
increasing the rates that apply to the $2,000 purchase, the $500
cash advance, or future purchases and cash advances. Six months
after account opening (July 1), the savings association begins
accruing interest on the $2,000 purchase at the previously-disclosed
variable rate determined using an 8-point margin (pursuant to Sec.
535.24(b)(1)). Because no other increases in rate were disclosed at
account opening, the savings association may not subsequently
increase the variable rate that applies to the $2,000 purchase and
the $500 cash advance (except due to increases in the index pursuant
to Sec. 535.24(b)(2)). On November 16, the savings association
provides a notice pursuant to 12 CFR 226.9(c) informing the consumer
of a new variable rate that will apply on January 1 of year two
(calculated using the same index and an increased margin of 12
percentage points). On January 1 of year two, the savings
association increases the margin used to determine the variable rate
that applies to new purchases to 12 percentage points (pursuant to
Sec. 535.24(b)(3)). On January 15 of year two, the consumer makes a
$300 purchase. The savings association applies the variable rate
determined using the 12-point margin to the $300 purchase but not
the $2,000 purchase.
B. Same facts as above except that the required minimum periodic
payment due on May 25 of year one is not received by the savings
association until June 30 of year one. Because the savings
association received the required minimum periodic payment more than
30 days after the payment due date, Sec. 535.24(b)(4) permits the
savings association to increase the annual percentage rate
applicable to the $2,000 purchase, the $500 cash advance, and future
purchases and cash advances. However, the savings association must
first comply with the notice requirements in 12 CFR 226.9(g). Thus,
if the savings association provided a 12 CFR 226.9(g) notice on June
25 stating that all rates on the account would be increased to a
non-variable penalty rate of 30%, the savings association could
apply that 30% rate beginning on August 9 to all balances and future
transactions.
ii. Assume that, at account opening on January 1 of year one, a
savings association
[[Page 5572]]
discloses that the annual percentage rate for purchases will
increase as follows: A non-variable rate of 5% for six months; a
non-variable rate of 10% for an additional six months; and
thereafter a variable rate that is currently 15% and will be
adjusted monthly by adding a margin of 5 percentage points to a
publicly available index not under the savings association's
control. The payment due date for the account is the fifteenth day
of the month and the required minimum periodic payments are applied
to accrued interest and fees but do not reduce the purchase balance.
On January 15, the consumer uses the account to make a $1,500
purchase. Six months after account opening (July 1), the savings
association begins accruing interest on the $1,500 purchase at the
previously disclosed 10% non-variable rate (pursuant to Sec.
535.24(b)(1)). On September 15, the consumer uses the account for a
$700 purchase. On November 16, the savings association provides a
notice pursuant to 12 CFR 226.9(c) informing the consumer of a new
variable rate that will apply on January 1 of year two (calculated
using the same index and an increased margin of 8 percentage
points). One year after account opening (January 1 of year two), the
savings association begins accruing interest on the $2,200 purchase
balance at the previously disclosed variable rate determined using a
5-point margin (pursuant to Sec. 535.24(b)(1)). Because the
variable rate determined using the 8-point margin was not disclosed
at account opening, the savings association may not apply that rate
to the $2,200 purchase balance. Furthermore, because no other
increases in rate were disclosed at account opening, the savings
association may not subsequently increase the variable rate that
applies to the $2,200 purchase balance (except due to increases in
the index pursuant to Sec. 535.24(b)(2)). The savings association
may, however, apply the variable rate determined using the 8-point
margin to purchases made on or after January 1 of year two (pursuant
to Sec. 535.24(b)(3)).
iii. Assume that, at account opening on January 1 of year one, a
savings association discloses that the annual percentage rate for
purchases is a variable rate determined by adding a margin of 6
percentage points to a publicly available index outside of the
savings association's control. The savings association also
discloses that, to the extent consistent with Sec. 535.24 and other
applicable law, a non-variable penalty rate of 28% may apply if the
consumer makes a late payment. The due date for the account is the
fifteenth of the month. On May 30 of year two, the account has a
purchase balance of $1,000. On May 31, the creditor provides a
notice pursuant to 12 CFR 226.9(c) informing the consumer of a new
variable rate that will apply on July 16 for all purchases made on
or after June 8 (calculated by using the same index and an increased
margin of 8 percentage points). On June 7, the consumer makes a $500
purchase. On June 8, the consumer makes a $200 purchase. On June 25,
the savings association has not received the payment due on June 15
and provides the consumer with a notice pursuant to 12 CFR 226.9(g)
stating that the penalty rate of 28% will apply as of August 9 to
all transactions made on or after July 3. On July 4, the consumer
makes a $300 purchase.
A. The payment due on June 15 of year two is received on June
26. On July 16, Sec. 535.24(b)(3) permits the savings association
to apply the variable rate determined using the 8-point margin to
the $200 purchase made on June 8 but does not permit the savings
association to apply this rate to the $1,500 purchase balance. On
August 9, Sec. 535.24(b)(3) permits the savings association to
apply the 28% penalty rate to the $300 purchase made on July 4 but
does not permit the savings association to apply this rate to the
$1,500 purchase balance (which remains at the variable rate
determined using the 6-point margin) or the $200 purchase (which
remains at the variable rate determined using the 8-point margin).
B. Same facts as above except the payment due on September 15 of
year two is received on October 20. Section 535.24(b)(4) permits the
savings association to apply the 28% penalty rate to all balances on
the account and to future transactions because it has not received
payment within 30 days after the due date. However, in order to
apply the 28% penalty rate to the entire $2,000 purchase balance,
the savings association must provide an additional notice pursuant
to 12 CFR 226.9(g). This notice must be sent no earlier than October
16, which is the first day the account became more than 30 days'
delinquent.
C. Same facts as paragraph A. above except the payment due on
June 15 of year two is received on July 20. Section 535.24(b)(4)
permits the savings association to apply the 28% penalty rate to all
balances on the account and to future transactions because it has
not received payment within 30 days after the due date. Because the
savings association provided a 12 CFR 226.9(g) notice on June 24
stating the 28% penalty rate, the savings association may apply the
28% penalty rate to all balances on the account as well as any
future transactions on August 9 without providing an additional
notice pursuant to 12 CFR 226.9(g).
24(b) Exceptions
24(b)(1) Account Opening Disclosure Exception
1. Prohibited increases in rate. Section 535.24(b)(1) permits an
increase in the annual percentage rate for a category of
transactions to a rate disclosed at account opening upon expiration
of a period of time that was also disclosed at account opening.
Section 535.24(b)(1) does not permit application of increased rates
that are disclosed at account opening but are contingent on a
particular event or occurrence or may be applied at the savings
association's discretion. The following examples illustrate rate
increases that are not permitted by Sec. 535.24(a):
i. Assume that a savings association discloses at account
opening on January 1 of year one that a non-variable rate of 15%
applies to purchases but that all rates on an account may be
increased to a non-variable penalty rate of 30% if a consumer's
required minimum periodic payment is received after the payment due
date, which is the fifteenth of the month. On March 1, the account
has a $2,000 purchase balance. The payment due on March 15 is not
received until March 20. Section 535.24 does not permit the savings
association to apply the 30% penalty rate to the $2,000 purchase
balance. However, pursuant to Sec. 535.24(b)(3), the savings
association could provide a 12 CFR 226.9(c) or (g) notice on
November 16 informing the consumer that, on January 1 of year two,
the 30% rate (or a different rate) will apply to new transactions.
ii. Assume that a savings association discloses at account
opening on January 1 of year one that a non-variable rate of 5%
applies to transferred balances but that this rate will increase to
a non-variable rate of 18% if the consumer does not use the account
for at least $200 in purchases each billing cycle. On July 1, the
consumer transfers a balance of $4,000 to the account. During the
October billing cycle, the consumer uses the account for $150 in
purchases. Section 535.24 does not permit the savings association to
apply the 18% rate to the $4,000 transferred balance. However,
pursuant to Sec. 535.24(b)(3), the savings association could
provide a 12 CFR 226.9(c) or (g) notice on November 16 informing the
consumer that, on January 1 of year two, the 18% rate (or a
different rate) will apply to new transactions.
iii. Assume that a savings association discloses at account
opening on January 1 of year one that interest on purchases will be
deferred for one year, although interest will accrue on purchases
during that year at a non-variable rate of 20%. The savings
association further discloses that, if all purchases made during
year one are not paid in full by the end of that year, the savings
association will begin charging interest on the purchase balance and
new purchases at 20% and will retroactively charge interest on the
purchase balance at a rate of 20% starting on the date of each
purchase made during year one. On January 1 of year one, the
consumer makes a purchase of $1,500. No other transactions are made
on the account. On January 1 of year two, $500 of the $1,500
purchase remains unpaid. Section 535.24 does not permit the savings
association to reach back to charge interest on the $1,500 purchase
from January 1 through December 31 of year one. However, the savings
association may apply the previously disclosed 20% rate to the $500
purchase balance beginning on January 1 of year two (pursuant to
Sec. 535.24(b)(1)).
2. Loss of grace period. Nothing in Sec. 535.24 prohibits a
savings association from assessing interest due to the loss of a
grace period to the extent consistent with Sec. 535.25.
3. Application of rate that is lower than disclosed rate.
Section Sec. 535.24(b)(1) permits an increase in the annual
percentage rate for a category of transactions to a rate disclosed
at account opening upon expiration of a period of time that was also
disclosed at account opening. Nothing in Sec. 535.24 prohibits a
savings association from applying a rate that is lower than the
disclosed rate upon expiration of the period. However, if a lower
rate is applied to an existing balance, the savings association
cannot subsequently increase the rate on that balance unless it has
provided the consumer with advance notice
[[Page 5573]]
of the increase pursuant to 12 CFR 226.9(c). Furthermore, the
savings association cannot increase the rate on that existing
balance to a rate that is higher than the increased rate disclosed
at account opening. The following example illustrates the
application of this rule:
i. Assume that, at account opening on January 1 of year one, a
savings association discloses that a non-variable annual percentage
rate of 15% will apply to purchases for one year and discloses that,
after the first year, the savings association will apply a variable
rate that is currently 20% and is determined by adding a margin of
10 percentage points to a publicly available index not under the
savings association's control. On December 31 of year one, the
account has a purchase balance of $3,000.
A. On November 16 of year one, the savings association provides
a notice pursuant to 12 CFR 226.9(c) informing the consumer of a new
variable rate that will apply on January 1 of year two (calculated
using the same index and a reduced margin of 8 percentage points).
The notice further states that, on July 1 of year two, the margin
will increase to the margin disclosed at account opening (10
percentage points). On July 1 of year two, the savings association
increases the margin used to determine the variable rate that
applies to new purchases to 10 percentage points and applies that
rate to any remaining portion of the $3,000 purchase balance
(pursuant to Sec. 535.24(b)(1)).
B. Same facts as above except that the savings association does
not send a notice on November 16 of year one. Instead, on January 1
of year two, the savings association lowers the margin used to
determine the variable rate to 8 percentage points and applies that
rate to the $3,000 purchase balance and to new purchases. 12 CFR
226.9 does not require advance notice in these circumstances.
However, unless the account becomes more than 30 days' delinquent,
the savings association may not subsequently increase the rate that
applies to the $3,000 purchase balance except due to increases in
the index (pursuant to Sec. 535.24(b)(2)).
24(b)(2) Variable Rate Exception
1. Increases due to increase in index. Section 535.24(b)(2)
provides that an annual percentage rate for a category of
transactions that varies according to an index that is not under the
savings association's control and is available to the general public
may be increased due to an increase in the index. This section does
not permit a savings association to increase the annual percentage
rate by changing the method used to determine a rate that varies
with an index (such as by increasing the margin), even if that
change will not result in an immediate increase.
2. External index. A savings association may increase the annual
percentage rate if the increase is based on an index or indices
outside the savings association's control. A savings association may
not increase the rate based on its own prime rate or cost of funds.
A savings association is permitted, however, to use a published
prime rate, such as that in the Wall Street Journal, even if the
savings association's own prime rate is one of several rates used to
establish the published rate.
3. Publicly available. The index or indices must be available to
the public. A publicly-available index need not be published in a
newspaper, but it must be one the consumer can independently obtain
(by telephone, for example) and use to verify the rate applied to
the outstanding balance.
4. Changing a non-variable rate to a variable rate. Section
535.24 generally prohibits a savings association from changing a
non-variable annual percentage rate to a variable rate because such
a change can result in an increase in rate. However, Sec.
535.24(b)(1) permits a savings association to change a non-variable
rate to a variable rate if the change was disclosed at account
opening. Furthermore, following the first year after the account is
opened, Sec. 535.24(b)(3) permits a savings association to change a
non-variable rate to a variable rate with respect to new
transactions (after complying with the notice requirements in 12 CFR
226.9(c) or (g)). Finally, Sec. 535.24(b)(4) permits a savings
association to change a non-variable rate to a variable rate if the
required minimum periodic payment is not received within 30 days of
the payment due date (after complying with the notice requirements
in 12 CFR 226.9(g)).
5. Changing a variable annual percentage rate to a non-variable
annual percentage rate. Nothing in Sec. 535.24 prohibits a savings
association from changing a variable annual percentage rate to an
equal or lower non-variable rate. Whether the non-variable rate is
equal to or lower than the variable rate is determined at the time
the savings association provides the notice required by 12 CFR
226.9(c). For example, assume that on March 1 a variable rate that
is currently 15% applies to a balance of $2,000 and the savings
association sends a notice pursuant to 12 CFR 226.9(c) informing the
consumer that the variable rate will be converted to a non-variable
rate of 14% effective April 17. On April 17, the savings association
may apply the 14% non-variable rate to the $2,000 balance and to new
transactions even if the variable rate on March 2 or a later date
was less than 14%.
6. Substitution of index. A savings association may change the
index and margin used to determine the annual percentage rate under
Sec. 535.24(b)(2) if the original index becomes unavailable, as
long as historical fluctuations in the original and replacement
indices were substantially similar, and as long as the replacement
index and margin will produce a rate similar to the rate that was in
effect at the time the original index became unavailable. If the
replacement index is newly established and therefore does not have
any rate history, it may be used if it produces a rate substantially
similar to the rate in effect when the original index became
unavailable.
24(b)(3) Advance Notice Exception
1. First year after the account is opened. A savings association
may not increase an annual percentage rate pursuant to Sec.
535.24(b)(3) during the first year after the account is opened. This
limitation does not apply to accounts opened prior to July 1, 2010.
2. Transactions that occur more than seven days after notice
provided. Section 535.24(b)(3) generally prohibits a savings
association from applying an increased rate to transactions that
occur within seven days after provision of the 12 CFR 226.9(c) or
(g) notice. This prohibition does not, however, apply to
transactions that are authorized within seven days after provision
of the 12 CFR 226.9(c) or (g) notice but are settled more than seven
days after the notice was provided.
3. Examples.
i. Assume that a consumer credit card account is opened on
January 1 of year one. On March 14 of year two, the account has a
purchase balance of $2,000 at a non-variable annual percentage rate
of 15%. On March 15, the savings association provides a notice
pursuant to 12 CFR 226.9(c) informing the consumer that the rate for
new purchases will increase to a non-variable rate of 18% on May 1.
The notice further states that the 18% rate will apply for six
months (until November 1) and states that thereafter the savings
association will apply a variable rate that is currently 22% and is
determined by adding a margin of 12 percentage points to a publicly-
available index that is not under the savings association's control.
The seventh day after provision of the notice is March 22 and, on
that date, the consumer makes a $200 purchase. On March 24, the
consumer makes a $1,000 purchase. On May 1, Sec. 535.24(b)(3)
permits the savings association to begin accruing interest at 18% on
the $1,000 purchase made on March 24. The savings association is not
permitted to apply the 18% rate to the $2,200 purchase balance as of
March 22. After six months (November 2), the savings association may
begin accruing interest on any remaining portion of the $1,000
purchase at the previously-disclosed variable rate determined using
the 12-point margin.
ii. Same facts as above except that the $200 purchase is
authorized by the savings association on March 22 but is not settled
until March 23. On May 1, Sec. 535.24(b)(3) permits the savings
association to start charging interest at 18% on both the $200
purchase and the $1,000 purchase. The savings association is not
permitted to apply the 18% rate to the $2,000 purchase balance as of
March 22.
iii. Same facts as in paragraph i. above except that on
September 17 of year two (which is 45 days before expiration of the
18% non-variable rate), the savings association provides a notice
pursuant to 12 CFR 226.9(c) informing the consumer that, on November
2, a new variable rate will apply to new purchases and any remaining
portion of the $1,000 balance (calculated by using the same index
and a reduced margin of 10 percentage points). The notice further
states that, on May 1 of year three, the margin will increase to the
margin disclosed at account opening (12 percentage points). On May 1
of year three, Sec. 535.24(b)(3) permits the savings association to
increase the margin used to determine the variable rate that applies
to new purchases to 12 percentage points and to apply that rate to
any remaining portion of the $1,000 purchase as well as to new
purchases. See comment 24(b)(1)-3. The
[[Page 5574]]
savings association is not permitted to apply this rate to any
remaining portion of the $2,200 purchase balance as of March 22.
24(b)(5) Workout Arrangement Exception
1. Scope of exception. Nothing in Sec. 535.24(b)(5) permits a
savings association to alter the requirements of Sec. 535.24
pursuant to a workout arrangement between a consumer and the savings
association. For example, a savings association cannot increase an
annual percentage rate pursuant to a workout arrangement unless
otherwise permitted by Sec. 535.24. In addition, a savings
association cannot require the consumer to make payments with
respect to a protected balance that exceed the payments permitted
under Sec. 535.24(c).
2. Variable annual percentage rates. If the annual percentage
rate that applied to a category of transactions prior to
commencement of the workout arrangement varied with an index
consistent with Sec. 535.24(b)(2), the rate applied to that
category of transactions following an increase pursuant to Sec.
535.24(b)(5) must be determined using the same formula (index and
margin).
3. Example. Assume that, consistent with Sec. 535.24(b)(4), the
margin used to determine a variable annual percentage rate that
applies to a $5,000 balance is increased from 5 percentage points to
15 percentage points. Assume also that the savings association and
the consumer subsequently agree to a workout arrangement that
reduces the margin back to 5 points on the condition that the
consumer pay a specified amount by the payment due date each month.
If the consumer does not pay the agreed-upon amount by the payment
due date, the savings association may increase the margin for the
variable rate that applies to the $5,000 balance up to 15 percentage
points. 12 CFR 226.9 does not require advance notice of this type of
increase.
24(c) Treatment of Protected Balances
1. Protected balances. Because rates cannot be increased
pursuant to Sec. 535.24(b)(3) during the first year after account
opening, Sec. 535.24(c) does not apply to balances during the first
year. Instead, the requirements in Sec. 535.24(c) apply only to
``protected balances,'' which are amounts owed for a category of
transactions to which an increased annual percentage rate cannot be
applied after the rate for that category of transactions has been
increased pursuant to Sec. 535.24(b)(3). For example, assume that,
on March 15 of year two, an account has a purchase balance of $1,000
at a non-variable rate of 12% and that, on March 16, the savings
association sends a notice pursuant to 12 CFR 226.9(c) informing the
consumer that the rate for new purchases will increase to a non-
variable rate of 15% on May 2. On March 20, the consumer makes a
$100 purchase. On March 24, the consumer makes a $150 purchase. On
May 2, Sec. 535.24(b)(3) permits the savings association to start
charging interest at 15% on the $150 purchase made on March 24 but
does not permit the savings association to apply that 15% rate to
the $1,100 purchase balance as of March 23. Accordingly, Sec.
535.24(c) applies to the $1,100 purchase balance as of March 23 but
not the $150 purchase made on March 24.
24(c)(1) Repayment
1. No less beneficial to the consumer. A savings association may
provide a method of repaying the protected balance that is different
from the methods listed in Sec. 535.24(c)(1) so long as the method
used is no less beneficial to the consumer than one of the listed
methods. A method is no less beneficial to the consumer if the
method amortizes the protected balance in five years or longer or if
the method results in a required minimum periodic payment that is
equal to or less than a minimum payment calculated consistent with
Sec. 535.24(c)(1)(ii). For example, a savings association could
increase the percentage of the protected balance included in the
required minimum periodic payment from 2% to 5% so long as doing so
would not result in amortization of the protected balance in less
than five years. Alternatively, a savings association could require
a consumer to make a minimum payment that amortizes the protected
balance in less than five years so long as the payment does not
include a percentage of the balance that is more than twice the
percentage included in the minimum payment before the effective date
of the increased rate. For example, a savings association could
require the consumer to make a minimum payment that amortizes the
protected balance in four years so long as doing so would not more
than double the percentage of the balance included in the minimum
payment prior to the effective date of the increased rate.
2. Lower limit for required minimum periodic payment. If the
required minimum periodic payment under Sec. 535.24(c)(1)(i) or
(c)(1)(ii) is less than the lower dollar limit for minimum payments
established in the cardholder agreement before the effective date of
the rate increase, the savings association may set the minimum
payment consistent with that limit. For example, if at account
opening the cardholder agreement stated that the required minimum
periodic payment would be either the total of fees and interest
charges plus 1% of the total amount owed or $20 (whichever is
greater), the savings association may require the consumer to make a
minimum payment of $20 even if doing so would pay off the protected
balance in less than five years or constitute more than 2% of the
protected balance plus fees and interest charges.
Paragraph 24(c)(1)(i)
1. Amortization period starting from date on which increased
rate becomes effective. Section 535.24(c)(1)(i) provides for an
amortization period for the protected balance of no less than five
years, starting from the date on which the increased annual
percentage rate becomes effective. A savings association is not
required to recalculate the required minimum periodic payment for
the protected balance if, during the amortization period, that
balance is reduced as a result of the allocation of amounts paid by
the consumer in excess of the minimum payment consistent with Sec.
535.23 or any other practice permitted by these rules and other
applicable law.
2. Amortization when applicable annual percentage rate is
variable. If the annual percentage rate that applies to the
protected balance varies with an index consistent with Sec.
535.24(b)(2), the savings association may adjust the interest
charges included in the required minimum periodic payment for that
balance accordingly in order to ensure that the outstanding balance
is amortized in five years. For example, assume that a variable rate
that is currently 15% applies to a protected balance and that, in
order to amortize that balance in five years, the required minimum
periodic payment must include a specific amount of principal plus
all accrued interest charges. If the 15% variable rate increases due
to an increase in the index, the savings association may increase
the required minimum periodic payment to include the additional
interest charges.
Paragraph 24(c)(1)(ii)
1. Required minimum periodic payment on other balances. Section
535.24(c)(1)(ii) addresses the required minimum periodic payment on
the protected balance. Section 535.24(c)(1)(ii) does not limit or
otherwise address the savings association's ability to determine the
amount of the required minimum periodic payment for other balances.
2. Example. Assume that the method used by a savings association
to calculate the required minimum periodic payment for a consumer
credit card account requires the consumer to pay either the total of
fees and interest charges plus 1% of the total amount owed or $20,
whichever is greater. Assume also that the account has a purchase
balance of $2,000 at an annual percentage rate of 15% and a cash
advance balance of $500 at an annual percentage rate of 20% and that
the savings association increases the rate for purchases to 18% but
does not increase the rate for cash advances. Under Sec.
535.24(c)(1)(ii), the savings association may require the consumer
to pay fees and interest plus 2% of the $2,000 purchase balance.
Section 535.24(c)(1)(ii) does not prohibit the savings association
from increasing the required minimum periodic payment for the cash
advance balance.
24(c)(2) Fees and Charges
1. Fee or charge based solely on the protected balance. A
savings association is prohibited from assessing a fee or charge
based solely on balances to which Sec. 535.24(c) applies. For
example, a savings association is prohibited from assessing a
monthly maintenance fee that would not be charged if the account did
not have a protected balance. A savings association is not, however,
prohibited from assessing fees such as late payment fees or fees for
exceeding the credit limit even if such fees are based in part on
the protected balance.
Section 535.25--Unfair Balance Computation Method
25(a) General Rule
1. Two-cycle method prohibited. When a consumer ceases to be
eligible for a time period provided by the savings association
within which the consumer may repay any portion of the credit
extended without incurring a finance charge (a grace period), the
savings association is prohibited from
[[Page 5575]]
computing the finance charge using the so-called two-cycle average
daily balance computation method. This method calculates the finance
charge using a balance that is the sum of the average daily balances
for two billing cycles. The first balance is for the current billing
cycle, and is calculated by adding the total balance (including or
excluding new purchases and deducting payments and credits) for each
day in the billing cycle, and then dividing by the number of days in
the billing cycle. The second balance is for the preceding billing
cycle.
2. Examples.
i. Assume that the billing cycle on a consumer credit card
account starts on the first day of the month and ends on the last
day of the month. The payment due date for the account is the
twenty-fifth day of the month. Under the terms of the account, the
consumer will not be charged interest on purchases if the balance at
the end of a billing cycle is paid in full by the following payment
due date. The consumer uses the credit card to make a $500 purchase
on March 15. The consumer pays the balance for the February billing
cycle in full on March 25. At the end of the March billing cycle
(March 31), the consumer's balance consists only of the $500
purchase and the consumer will not be charged interest on that
balance if it is paid in full by the following due date (April 25).
The consumer pays $400 on April 25, leaving a $100 balance. The
savings association may charge interest on the $500 purchase from
the start of the April billing cycle (April 1) through April 24 and
interest on the remaining $100 from April 25 through the end of the
April billing cycle (April 30). The savings association is
prohibited, however, from reaching back and charging interest on the
$500 purchase from the date of purchase (March 15) to the end of the
March billing cycle (March 31).
ii. Assume the same circumstances as in the previous example
except that the consumer does not pay the balance for the February
billing cycle in full on March 25 and therefore, under the terms of
the account, is not eligible for a time period within which to repay
the $500 purchase without incurring a finance charge. With respect
to the $500 purchase, the savings association may charge interest
from the date of purchase (March 15) through April 24 and interest
on the remaining $100 from April 25 through the end of the April
billing cycle (April 30).
Section 535.26--Unfair Charging of Security Deposits and Fees for
the Issuance or Availability of Credit to Consumer Credit Card
Accounts
26(a) Limitation for First Year
1. Majority of the credit limit. The total amount of security
deposits and fees for the issuance or availability of credit
constitutes a majority of the initial credit limit if that total is
greater than half of the limit. For example, assume that a consumer
credit card account has an initial credit limit of $500. Under Sec.
535.26(a), a savings association may charge to the account security
deposits and fees for the issuance or availability of credit
totaling no more than $250 during the first year (consistent with
Sec. 535.26(b)).
26(b) Limitations for First Billing Cycle and Subsequent Billing Cycles
1. Adjustments of one dollar or less permitted. When dividing
amounts pursuant to Sec. 535.26(b)(2), a savings association may
adjust amounts by one dollar or less. For example, if a savings
association is dividing $87 over five billing cycles, the savings
association may charge $18 for two months and $17 for the remaining
three months.
2. Examples.
i. Assume that a consumer credit card account opened on January
1 has an initial credit limit of $500. Assume also that the billing
cycles for this account begin on the first day of the month and end
on the last day of the month. Under Sec. 535.26(a), the savings
association may charge to the account no more than $250 in security
deposits and fees for the issuance or availability of credit during
the first year after the account is opened. If it charges $250, the
savings association may charge up to $125 during the first billing
cycle. If it charges $125 during the first billing cycle, it may
then charge no more than $25 in each of the next five billing
cycles. If it chooses, the savings association may spread the
additional security deposits and fees over a longer period, such as
by charging $12.50 in each of the ten billing cycles following the
first billing cycle.
ii. Same facts as above except that on July 1 the savings
association increases the credit limit on the account from $500 to
$750. Because the prohibition in Sec. 535.26(a) is based on the
initial credit limit of $500, the increase in credit limit does not
permit the savings association to charge to the account additional
security deposits and fees for the issuance or availability of
credit (such as a fee for increasing the credit limit).
26(c) Evasion Prohibited
1. Evasion. Section 535.26(c) prohibits a savings association
from evading the requirements of this section by providing the
consumer with additional credit to fund the consumer's payment of
security deposits and fees that exceed the total amounts permitted
by Sec. 535.26(a) and (b). For example, assume that on January 1 a
consumer opens a consumer credit card account with an initial credit
limit of $400 and the savings association charges to that account
$100 in fees for the issuance or availability of credit. Assume also
that the billing cycles for the account coincide with the days of
the month and that the savings association will charge $20 in fees
for the issuance or availability of credit in the February, March,
April, May, and June billing cycles. The savings association
violates Sec. 535.26(c) if it provides the consumer with a separate
credit product to fund additional security deposits or fees for the
issuance or availability of credit.
2. Payment with funds not obtained from the savings association.
A savings association does not violate Sec. 535.26(c) if it
requires the consumer to pay security deposits or fees for the
issuance or availability of credit using funds that are not
obtained, directly or indirectly, from the savings association. For
example, a savings association does not violate Sec. 535.26(c) if a
$400 security deposit paid by a consumer to obtain a consumer credit
card account with a credit line of $400 is not charged to a credit
account provided by the savings association or its affiliate.
26(d) Definitions
1. Membership fees. Membership fees for opening an account are
fees for the issuance or availability of credit. A membership fee to
join an organization that provides a credit or charge card as a
privilege of membership is a fee for the issuance or availability of
credit only if the card is issued automatically upon membership. If
membership results merely in eligibility to apply for an account,
then such a fee is not a fee for the issuance or availability of
credit.
2. Enhancements. Fees for optional services in addition to basic
membership privileges in a credit or charge card account (for
example, travel insurance or card-registration services) are not
fees for the issuance or availability of credit if the basic account
may be opened without paying such fees. 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, are fees for the issuance or availability of
credit. Thus, a fee to obtain an additional card on the account
beyond the first card (so that each cardholder would have his or her
own card) is a fee for the issuance or availability of credit even
if the fee is optional; that is, if the fee is charged only if the
cardholder requests one or more additional cards.
3. One-time fees. Non-periodic fees related to opening an
account (such as application fees or one-time membership or
participation fees) are fees for the issuance or availability of
credit. Fees for reissuing a lost or stolen card, statement
reproduction fees, and fees for late payment or other violations of
the account terms are examples of fees that are not fees for the
issuance or availability of credit.
National Credit Union Administration
12 CFR Chapter VII
Authority and Issuance
0
For the reasons discussed in the joint preamble, NCUA revises part 706
of Title 12 of the Code of Federal Regulations to read as follows:
PART 706--UNFAIR OR DECEPTIVE ACTS OR PRACTICES
Subpart A--General Provisions
Sec.
706.1 Authority, purpose, and scope.
706.2-706.10 [Reserved]
Subpart B--Consumer Credit Practices
706.11 Definitions.
706.12 Unfair credit contract provisions.
706.13 Unfair or deceptive cosigner practices.
706.14 Unfair late charges.
706.15-706.20 [Reserved]
Subpart C--Consumer Credit Card Account Practices Rule
706.21 Definitions.
706.22 Unfair time to make payment.
706.23 Unfair allocation of payments.
[[Page 5576]]
706.24 Unfair increases in annual percentage rates.
706.25 Unfair balance computation method.
706.26 Unfair charging of security deposits and fees for the
issuance or availability of credit to consumer credit card accounts.
Appendix A to Part 706--Official Staff Commentary
Authority: 15 U.S.C. 57a.
Subpart A--General Provisions
Sec. 706.1 Authority, purpose, and scope.
(a) Authority. This part is issued by NCUA under section 18(f) of
the Federal Trade Commission Act, 15 U.S.C. 57a(f) (section 202(a) of
the Magnuson-Moss Warranty--Federal Trade Commission Improvement Act,
Pub. L. 93-637).
(b) Purpose. The purpose of this part is to prohibit unfair or
deceptive acts or practices in violation of section 5(a)(1) of the
Federal Trade Commission Act, 15 U.S.C. 45(a)(1). Subparts B and C
define and contain requirements prescribed for the purpose of
preventing specific unfair or deceptive acts or practices of federal
credit unions. The prohibitions in subparts B and C do not limit NCUA's
authority to enforce the FTC Act with respect to any other unfair or
deceptive acts or practices.
(c) Scope. This part applies to federal credit unions.
Sec. Sec. 706.2-706.10 [Reserved]
Subpart B--Consumer Credit Practices
Sec. 706.11 Definitions.
For purposes of this subpart, the following definitions apply:
Consumer means a natural person member who seeks or acquires goods,
services, or money for personal, family, or household purposes, other
than for the purchase of real property, and who applies for or is
extended consumer credit.
Consumer credit means credit extended to a natural person member
for personal, family, or household purposes. It includes consumer
loans; educational loans; unsecured loans for real property alteration,
repair or improvement, or for the equipping of real property; overdraft
loans; and credit cards. It also includes loans secured by liens on
real estate and chattel liens secured by mobile homes and leases of
personal property to consumers that may be considered the functional
equivalent of loans on personal security but only if the federal credit
union relies substantially upon other factors, such as the general
credit standing of the borrower, guaranties, or security other than the
real estate or mobile home, as the primary security for the loan.
Earnings means compensation paid or payable to an individual or for
the individual's account for personal services rendered or to be
rendered by the individual, whether denominated as wages, salary,
commission, bonus, or otherwise, including periodic payments pursuant
to a pension, retirement, or disability program.
Obligation means an agreement between a consumer and a federal
credit union.
Person means an individual, corporation, or other business
organization.
Sec. 706.12 Unfair credit contract provisions.
It is an unfair act or practice for a federal credit union,
directly or indirectly, to enter into a consumer credit obligation that
constitutes or contains, or to enforce in a consumer credit obligation
the federal credit union purchased, any of the following provisions:
(a) Confession of judgment. A cognovit or confession of judgment
(for purposes other than executory process in the State of Louisiana),
warrant of attorney, or other waiver of the right to notice and the
opportunity to be heard in the event of suit or process thereon.
(b) Waiver of exemption. An executory waiver or a limitation of
exemption from attachment, execution, or other process on real or
personal property held, owned by, or due to the consumer, unless the
waiver applies solely to property subject to a security interest
executed in connection with the obligation.
(c) Assignment of wages. An assignment of wages or other earnings
unless:
(1) The assignment by its terms is revocable at the will of the
debtor;
(2) The assignment is a payroll deduction plan or preauthorized
payment plan, commencing at the time of the transaction, in which the
consumer authorizes a series of wage deductions as a method of making
each payment; or
(3) The assignment applies only to wages or other earnings already
earned at the time of the assignment.
(d) Security interest in household goods. A nonpossessory security
interest in household goods other than a purchase-money security
interest. For purposes of this paragraph, household goods:
(1) Means clothing, furniture, appliances, linens, china, crockery,
kitchenware, and personal effects of the consumer and the consumer's
dependents.
(2) Does not include:
(i) Works of art;
(ii) Electronic entertainment equipment (except one television and
one radio);
(iii) Antiques (any item over one hundred years of age, including
such items that have been repaired or renovated without changing their
original form or character); or
(iv) Jewelry (other than wedding rings).
Sec. 706.13 Unfair or deceptive cosigner practices.
(a) Prohibited deception. It is a deceptive act or practice for a
federal credit union, directly or indirectly in connection with the
extension of credit to consumers, to misrepresent the nature or extent
of cosigner liability to any person.
(b) Prohibited unfairness. It is an unfair act or practice for a
federal credit union, directly or indirectly in connection with the
extension of credit to consumers, to obligate a cosigner unless the
cosigner is informed, before becoming obligated, of the nature of the
cosigner's liability.
(c) Disclosure requirement--(1) Disclosure statement. A clear and
conspicuous statement must be given in writing to the cosigner before
becoming obligated. In the case of open-end credit, the disclosure
statement must be given to the cosigner before the time that the
cosigner becomes obligated for any fees or transactions on the account.
The disclosure statement must contain the following statement or one
that is substantially similar:
Notice of Cosigner
You are being asked to guarantee this debt. Think carefully
before you do. If the borrower doesn't pay the debt, you will have
to. Be sure you can afford to pay if you have to, and that you want
to accept this responsibility.
You may have to pay up to the full amount of the debt if the
borrower does not pay. You may also have to pay late fees or
collection costs, which increase this amount.
The creditor can collect this debt from you without first trying
to collect from the borrower. The creditor can use the same
collection methods against you that can be used against the
borrower, such as suing you, garnishing your wages, etc. If this
debt is ever in default, that fact may become a part of your credit
record.
(2) Compliance. Compliance with paragraph (c)(1) of this section
constitutes compliance with the consumer disclosure requirement in
paragraph (b) of this section.
(3) Additional content limitations. If the notice is a separate
document, nothing other than the following items may appear with the
notice:
(i) The federal credit union's name and address;
[[Page 5577]]
(ii) An identification of the debt to be cosigned (e.g., a loan
identification number);
(iii) The date (of the transaction); and
(iv) The statement, ``This notice is not the contract that makes
you liable for the debt.''
(d) Cosigner defined--(1) Cosigner means a natural person who
assumes liability for the obligation of a consumer without receiving
goods, services, or money in return for the obligation, or, in the case
of an open-end credit obligation, without receiving the contractual
right to obtain extensions of credit under the account.
(2) Cosigner includes any person whose signature is requested as a
condition to granting credit to a consumer, or as a condition for
forbearance on collection of a consumer's obligation that is in
default. The term does not include a spouse or other person whose
signature is required on a credit obligation to perfect a security
interest pursuant to state law.
(3) A person who meets the definition in this paragraph is a
cosigner, whether or not the person is designated as such on a credit
obligation.
Sec. 706.14 Unfair late charges.
(a) Prohibition. In connection with collecting a debt arising out
of an extension of credit to a consumer, it is an unfair act or
practice for a federal credit union, directly or indirectly, to levy or
collect any delinquency charge on a payment, when the only delinquency
is attributable to late fees or delinquency charges assessed on earlier
installments and the payment is otherwise a full payment for the
applicable period and is paid on its due date or within an applicable
grace period.
(b) Collecting a debt defined. Collecting a debt means, for the
purposes of this section, any activity, other than the use of judicial
process, that is intended to bring about or does bring about repayment
of all or part of money due (or alleged to be due) from a consumer.
Sec. Sec. 706.15-706.20 [Reserved]
Subpart C--Consumer Credit Card Account Practices Rule
Sec. 706.21 Definitions.
For purposes of this subpart, the following definitions apply:
Annual percentage rate means the product of multiplying each
periodic rate for a balance or transaction on a consumer credit card
account by the number of periods in a year. The term ``periodic rate''
has the same meaning as in 12 CFR 226.2.
Consumer means a natural person member to whom credit is extended
under a consumer credit card account or a natural person who is a co-
obligor or guarantor of a consumer credit card account.
Consumer credit card account means an account provided to a
consumer primarily for personal, family, or household purposes under an
open-end credit plan that is accessed by a credit card or charge card.
The terms ``open-end credit,'' ``credit card,'' and ``charge card''
have the same meanings as in 12 CFR 226.2. The following are not
consumer credit card accounts for purposes of this subpart:
(1) Home equity plans subject to the requirements of 12 CFR 226.5b
that are accessible by a credit or charge card;
(2) Overdraft lines of credit tied to asset accounts accessed by
check-guarantee cards or by debit cards;
(3) Lines of credit accessed by check-guarantee cards or by debit
cards that can be used only at automated teller machines; and
(4) Lines of credit accessed solely by account numbers.
Sec. 706.22 Unfair time to make payment.
(a) General rule. Except as provided in paragraph (c) of this
section, a federal credit union must not treat a payment on a consumer
credit card account as late for any purpose unless the consumer has
been provided a reasonable amount of time to make the payment.
(b) Compliance with general rule--(1) Establishing compliance. A
federal credit union must be able to establish that it has complied
with paragraph (a) of this section.
(2) Safe harbor. A federal credit union complies with paragraph (a)
of this section if it has adopted reasonable procedures designed to
ensure that periodic statements specifying the payment due date are
mailed or delivered to consumers at least 21 days before the payment
due date.
(c) Exception for grace periods. Paragraph (a) of this section does
not apply to any time period a federal credit union provides within
which the consumer may repay any portion of the credit extended without
incurring an additional finance charge.
Sec. 706.23 Unfair allocation of payments.
When different annual percentage rates apply to different balances
on a consumer credit card account, a federal credit union must allocate
any amount paid by the consumer in excess of the required minimum
periodic payment among the balances using one of the following methods:
(a) High-to-low method. The amount paid by the consumer in excess
of the required minimum periodic payment is allocated first to the
balance with the highest annual percentage rate and any remaining
portion to the other balances in descending order based on the
applicable annual percentage rate.
(b) Pro rata method. The amount paid by the consumer in excess of
the required minimum periodic payment is allocated among the balances
in the same proportion as each balance bears to the total balance.
Sec. 706.24 Unfair increases in annual percentage rates.
(a) General rule. At account opening, a federal credit union must
disclose the annual percentage rates that will apply to each category
of transactions on the consumer credit card account. A federal credit
union must not increase the annual percentage rate for a category of
transactions on any consumer credit card account except as provided in
paragraph (b) of this section.
(b) Exceptions. The prohibition in paragraph (a) of this section on
increasing annual percentage rates does not apply where an annual
percentage rate may be increased pursuant to one of the exceptions in
this paragraph.
(1) Account opening disclosure exception. An annual percentage rate
for a category of transactions may be increased to a rate disclosed at
account opening upon expiration of a period of time disclosed at
account opening.
(2) Variable rate exception. An annual percentage rate for a
category of transactions that varies according to an index that is not
under the federal credit union's control and is available to the
general public may be increased due to an increase in the index.
(3) Advance notice exception. An annual percentage rate for a
category of transactions may be increased pursuant to a notice under 12
CFR 226.9(c) or (g) for transactions that occur more than seven days
after provision of the notice. This exception does not permit an
increase in any annual percentage rate during the first year after the
account is opened.
(4) Delinquency exception. An annual percentage rate may be
increased due to the federal credit union not receiving the consumer's
required minimum periodic payment within 30 days after the due date for
that payment.
(5) Workout arrangement exception. An annual percentage rate may be
increased due to the consumer's failure to comply with the terms of a
workout arrangement between the federal credit union and the consumer,
provided that the annual percentage rate applicable to
[[Page 5578]]
a category of transactions following any such increase does not exceed
the rate that applied to that category of transactions prior to
commencement of the workout arrangement.
(c) Treatment of protected balances. For purposes of this
paragraph, ``protected balance'' means the amount owed for a category
of transactions to which an increased annual percentage rate cannot be
applied after the rate for that category of transactions has been
increased pursuant to paragraph (b)(3) of this section.
(1) Repayment. A federal credit union must provide the consumer
with one of the following methods of repaying a protected balance or a
method that is no less beneficial to the consumer than one of the
following methods:
(i) An amortization period of no less than five years, starting
from the date on which the increased rate becomes effective for the
category of transactions; or
(ii) A required minimum periodic payment that includes a percentage
of the protected balance that is no more than twice the percentage
required before the date on which the increased rate became effective
for the category of transactions.
(2) Fees and charges. A federal credit union must not assess any
fee or charge based solely on a protected balance.
Sec. 706.25 Unfair balance computation method.
(a) General rule. Except as provided in paragraph (b) of this
section, a federal credit union must not impose finance charges on
balances on a consumer credit card account based on balances for days
in billing cycles that precede the most recent billing cycle as a
result of the loss of any time period provided by the federal credit
union within which the consumer may repay any portion of the credit
extended without incurring a finance charge.
(b) Exceptions. Paragraph (a) of this section does not apply to:
(1) Adjustments to finance charges as a result of the resolution of
a dispute under 12 CFR 226.12 or 12 CFR 226.13; or
(2) Adjustments to finance charges as a result of the return of a
payment for insufficient funds.
Sec. 706.26 Unfair charging of security deposits and fees for the
issuance or availability of credit to consumer credit card accounts.
(a) Limitation for first year. During the first year, a federal
credit union must not charge to a consumer credit card account security
deposits and fees for the issuance or availability of credit that in
total constitute a majority of the initial credit limit for the
account.
(b) Limitations for first billing cycle and subsequent billing
cycles--(1) First billing cycle. During the first billing cycle, the
federal credit union must not charge to a consumer credit card account
security deposits and fees for the issuance or availability of credit
that in total constitute more than 25 percent of the initial credit
limit for the account.
(2) Subsequent billing cycles. Any additional security deposits and
fees for the issuance or availability of credit permitted by paragraph
(a) of this section must be charged to the account in equal portions in
no fewer than the five billing cycles immediately following the first
billing cycle.
(c) Evasion prohibited. A federal credit union must not evade the
requirements of this section by providing the consumer additional
credit to fund the payment of security deposits and fees for the
issuance or availability of credit that exceed the total amounts
permitted by paragraphs (a) and (b) of this section.
(d) Definitions. For purposes of this section, the following
definitions apply:
(1) Fees for the issuance or availability of credit means:
(i) Any annual or other periodic fee that may be imposed for the
issuance or availability of a consumer credit card account, including
any fee based on account activity or inactivity; and
(ii) Any non-periodic fee that relates to opening an account.
(2) First billing cycle means the first billing cycle after a
consumer credit card account is opened.
(3) First year means the period beginning with the date on which a
consumer credit card account is opened and ending twelve months from
that date.
(4) Initial credit limit means the credit limit in effect when a
consumer credit card account is opened.
Appendix A to Part 706--Official Staff Commentary
Subpart A--General Provisions for Consumer Protection Rules
Section 706.1--Authority, Purpose, and Scope
1(c) Scope
1. Penalties for noncompliance. Administrative enforcement of
the rule for federal credit unions may involve actions under section
206 of the Federal Credit Union Act (12 U.S.C. 1786), including
cease-and-desist orders requiring that actions be taken to remedy
violations and civil money penalties.
Subpart C--Consumer Credit Card Account Practices Rule
Section 706.22--Unfair Time To Make Payment
22(a) General Rule
1. Treating a payment as late for any purpose. Treating a
payment as late for any purpose includes increasing the annual
percentage rate as a penalty, reporting the consumer as delinquent
to a credit reporting agency, or assessing a late fee or any other
fee based on the consumer's failure to make a payment within the
amount of time provided to make that payment under this section.
2. Reasonable amount of time to make payment. Whether an amount
of time is reasonable for purposes of making a payment is determined
from the perspective of the consumer, not the federal credit union.
Under Sec. 706.22(b)(2), a federal credit union provides a
reasonable amount of time to make a payment if it has adopted
reasonable procedures designed to ensure that periodic statements
specifying the payment due date are mailed or delivered to consumers
at least 21 days before the payment due date.
22(b) Compliance With General Rule
1. Reasonable procedures. A federal credit union is not required
to determine the specific date on which periodic statements are
mailed or delivered to each consumer. A federal credit union
provides a reasonable amount of time to make a payment if it has
adopted reasonable procedures designed to ensure that periodic
statements are mailed or delivered to consumers no later than a
certain number of days after the closing date of the billing cycle
and adds that number of days to the 21-day period in Sec.
706.24(b)(2) when determining the payment due date. For example, if
a federal credit union has adopted reasonable procedures designed to
ensure that periodic statements are mailed or delivered to consumers
no later than three days after the closing date of the billing
cycle, the payment due date on the periodic statement must be no
less than 24 days after the closing date of the billing cycle.
2. Payment due date. For purposes of Sec. 706.22(b)(2),
``payment due date'' means the date by which a federal credit union
requires the consumer to make the required minimum periodic payment
in order to avoid being treated as late for any purpose, except as
provided in Sec. 706.22(c).
3. Example of alternative method of compliance. Assume that, for
a particular type of consumer credit card account, a federal credit
union only provides periodic statements electronically and only
accepts payments electronically, consistent with applicable law and
regulatory guidance. Under these circumstances, the federal credit
union could comply with Sec. 706.22(a) even if it does not provide
periodic statements 21 days before the payment due date consistent
with Sec. 706.22(b)(2).
Section 706.23--Unfair Allocation of Payments
1. Minimum periodic payment. Section 706.23 addresses the
allocation of amounts paid by a consumer in excess of the minimum
periodic payment required by a
[[Page 5579]]
federal credit union. Section 706.23 does not limit or otherwise
address a federal credit union's ability to determine, consistent
with applicable law and regulatory guidance, the amount of the
required minimum periodic payment or how that payment is allocated.
A federal credit union may, but is not required to, allocate the
required minimum periodic payment consistent with the requirements
in Sec. 706.23 to the extent consistent with other applicable law
or regulatory guidance.
2. Adjustments of one dollar or less permitted. When allocating
payments, a federal credit union may adjust amounts by one dollar or
less. For example, if a federal credit union is allocating $100
pursuant to Sec. 706.23(b) among balances of $1,000, $2,000, and
$4,000, the federal credit union may apply $14 to the $1,000
balance, $29 to the $2,000 balance, and $57 to the $4,000 balance.
3. Applicable balances and annual percentage rates. Section
706.23 permits a federal credit union to allocate an amount paid by
the consumer in excess of the required minimum periodic payment
based on the balances and annual percentage rates on the date the
preceding billing cycle ends, on the date the payment is credited to
the account, or on any day between those two dates. For example,
assume that the billing cycles for a consumer credit card account
start on the first day of the month and end on the last day of the
month. On the date the March billing cycle ends, March 31, the
account has a purchase balance of $500 at a variable annual
percentage rate of 10% and a cash advance balance of $200 at a
variable annual percentage rate of 13%. On April 1, the rate for
purchases increases to 13% and the rate for cash advances increases
to 15% consistent with Sec. 706.24(b)(2). On April 15, the purchase
balance increases to $700. On April 25, the federal credit union
credits to the account $400 paid by the consumer in excess of the
required minimum periodic payment. Under Sec. 706.23, the federal
credit union may allocate the $400 based on the balances in
existence and rates in effect on any day from March 31 through April
25.
4. Use of permissible allocation methods. A federal credit union
is not prohibited from changing the allocation method for a consumer
credit card account or from using different allocation methods for
different consumer credit card accounts, so long as the methods used
are consistent with Sec. 706.23. For example, a federal credit
union may change from allocating to the highest rate balance first
pursuant to Sec. 706.23(a) to allocating pro rata pursuant to Sec.
706.23(b) or vice versa. Similarly, a federal credit union may
allocate to the highest rate balance first pursuant to Sec.
706.23(a) on some of its accounts and allocate pro rata pursuant to
Sec. 706.23(b) on other accounts.
5. Claims or defenses under Regulation Z, 12 CFR 226.12(c). When
a consumer has asserted a claim or defense against the card issuer
pursuant to 12 CFR 226.12(c), a federal credit union must allocate
consistent with 12 CFR 226.12 comment 226.12(c)-4.
6. Balances with the same annual percentage rate. When the same
annual percentage rate applies to more than one balance on an
account and a different annual percentage rate applies to at least
one other balance on that account, Sec. 706.23 does not require
that a federal credit union use any particular method when
allocating among the balances with the same annual percentage rate.
Under these circumstances, a federal credit union may treat the
balances with the same rate as a single balance or separate
balances. See comments 23(a)-1.iv and 23(b)-2.iv.
23(a) High-to-Low Method
1. Examples. For purposes of the following examples, assume that
none of the required minimum periodic payment is allocated to the
balances discussed, unless otherwise stated.
i. Assume that a consumer's account has a cash advance balance
of $500 at an annual percentage rate of 15% and a purchase balance
of $1,500 at an annual percentage rate of 10% and that the consumer
pays $800 in excess of the required minimum periodic payment. A
federal credit union using this method would allocate $500 to pay
off the cash advance balance and then allocate the remaining $300 to
the purchase balance.
ii. Assume that a consumer's account has a cash advance balance
of $500 at an annual percentage rate of 15% and a purchase balance
of $1,500 at an annual percentage rate of 10% and that the consumer
pays $400 in excess of the required minimum periodic payment. A
federal credit union using this method would allocate the entire
$400 to the cash advance balance.
iii. Assume that a consumer's account has a cash advance balance
of $100 at an annual percentage rate of 15%, a purchase balance of
$300 at an annual percentage rate of 13%, and a $600 protected
balance on which the 10% annual percentage rate cannot be increased
pursuant to Sec. 706.24. If the consumer pays $500 in excess of the
required minimum periodic payment, a federal credit union using this
method would allocate $100 to pay off the cash advance balance, $300
to pay off the purchase balance, and $100 to the protected balance.
iv. Assume that a consumer's account has a cash advance balance
of $500 at an annual percentage rate of 15%, a purchase balance of
$1,000 at an annual percentage rate of 12%, and a transferred
balance of $2,000 that was previously at a discounted annual
percentage rate of 5% but is now at an annual percentage rate of
12%. Assume also that the consumer pays $800 in excess of the
required minimum periodic payment. A federal credit union using this
method would allocate $500 to pay off the cash advance balance and
allocate the remaining $300 among the purchase balance and the
transferred balance in the manner the federal credit union deems
appropriate.
23(b) Pro Rata Method
1. Total balance. A federal credit union may, but is not
required to, deduct amounts paid by the consumer's required minimum
periodic payment when calculating the total balance for purposes of
Sec. 706.23(b)(3). See comment 23(b)-2.iii.
2. Examples. For purposes of the following examples, assume that
none of the required minimum periodic payment is allocated to the
balances discussed, unless otherwise stated, and that the amounts
allocated to each balance are rounded to the nearest dollar.
i. Assume that a consumer's account has a cash advance balance
of $500 at an annual percentage rate of 15% and a purchase balance
of $1,500 at an annual percentage rate of 12% and that the consumer
pays $555 in excess of the required minimum periodic payment. A
federal credit union using this method would allocate 25% of the
amount ($139) to the cash advance balance and 75% of the amount
($416) to the purchase balance.
ii. Assume that a consumer's account has a cash advance balance
of $100 at an annual percentage rate of 15%, a purchase balance of
$300 at an annual percentage rate of 13%, and a $600 protected
balance on which the 10% annual percentage rate cannot be increased
pursuant to Sec. 706.24. If the consumer pays $130 in excess of the
required minimum periodic payment, a federal credit union using this
method would allocate 10% of the amount ($13) to the cash advance
balance, 30% of the amount ($39) to the purchase balance, and 60% of
the amount ($78) to the protected balance.
iii. Assume that a consumer's account has a cash advance balance
of $300 at an annual percentage rate of 15% and a purchase balance
of $600 at an annual percentage rate of 13%. Assume also that the
required minimum periodic payment is $50 and that the federal credit
union allocates this payment first to the balance with the lowest
annual percentage rate, the $600 purchase balance. If the consumer
pays $300 in excess of the $50 minimum payment, a federal credit
union using this method could allocate based on a total balance of
$850, consisting of the $300 cash advance balance plus the $550
purchase balance after application of the $50 minimum payment. In
this case, the federal credit union would apply 35% of the $300
($105) to the cash advance balance and 65% of that amount ($195) to
the purchase balance. In the alternative, the federal credit union
could allocate based on a total balance of $900, which does not
reflect the $50 minimum payment. In that case, the federal credit
union would apply one-third of the $300 excess payment ($100) to the
cash advance balance and two-thirds ($200) to the purchase balance.
iv. Assume that a consumer's account has a cash advance balance
of $500 at an annual percentage rate of 15%, a purchase balance of
$1,000 at an annual percentage rate of 12%, and a transferred
balance of $2,000 that was previously at a discounted annual
percentage rate of 5%, but is now at an annual percentage rate of
12%. Assume also that the consumer pays $800 in excess of the
required minimum periodic payment. A federal credit union using this
method would allocate 14% of the excess payment ($112) to the cash
advance balance and allocate the remaining 86% ($688) among the
purchase balance and the transferred balance in the manner the
federal credit union deems appropriate.
Section 706.24--Unfair Increases in Annual Percentage Rates
1. Relationship to Regulation Z, 12 CFR part 226. A federal
credit union that complies with the applicable disclosure
[[Page 5580]]
requirements in Regulation Z, 12 CFR part 226, has complied with the
disclosure requirements in Sec. 706.24. See 12 CFR 226.5a, 226.6,
226.9. For example, a federal credit union may comply with the
requirement in Sec. 706.24(a) to disclose at account opening the
annual percentage rates that will apply to each category of
transactions by complying with the disclosure requirements in 12 CFR
226.5a regarding applications and solicitations and the requirements
in 12 CFR 226.6 regarding account-opening disclosures. Similarly, in
order to increase an annual percentage rate on new transactions
pursuant to Sec. 706.24(b)(3), a federal credit union must comply
with the disclosure requirements in 12 CFR 226.9(c) or (g). However,
nothing in Sec. 706.24 alters the requirements in 12 CFR 226.9(c)
and (g) that creditors provide consumers with written notice at
least 45 days prior to the effective date of certain increases in
the annual percentage rates on open-end (not home-secured) credit
plans.
24(a) General Rule
1. Rates that will apply to each category of transactions.
Section 706.24(a) requires federal credit unions to disclose, at
account opening, the annual percentage rates that will apply to each
category of transactions on the account. A federal credit union
cannot satisfy this requirement by disclosing at account opening
only a range of rates or that a rate will be ``up to'' a particular
amount.
2. Application of prohibition on increasing rates. Section
706.24(a) prohibits federal credit unions from increasing the annual
percentage rate for a category of transactions on any consumer
credit card account unless specifically permitted by one of the
exceptions in Sec. 706.24(b). The following examples illustrate the
application of the rule:
i. Assume that, at account opening on January 1 of year one, a
federal credit union discloses that the annual percentage rate for
purchases is a non-variable rate of 1% and will apply for six
months. The federal credit union also discloses that, after six
months, the annual percentage rate for purchases will be a variable
rate that is currently 9% and will be adjusted quarterly by adding a
margin of 8 percentage points to a publicly-available index not
under the federal credit union's control. Finally, the federal
credit union discloses that the annual percentage rate for cash
advances is the same variable rate that will apply to purchases
after six months. The payment due date for the account is the
twenty-fifth day of the month and the required minimum periodic
payments are applied to accrued interest and fees but do not reduce
the purchase and cash advance balances.
A. On January 15, the consumer uses the account to make a $2,000
purchase and a $500 cash advance. No other transactions are made on
the account. At the start of each quarter, the federal credit union
adjusts the variable rate that applies to the $500 cash advance
consistent with changes in the index, pursuant to Sec.
706.24(b)(2). All required minimum periodic payments are received on
or before the payment due date until May of year one, when the
payment due on May 25 is received by the federal credit union on May
28. The federal credit union is prohibited by Sec. 706.24 from
increasing the rates that apply to the $2,000 purchase, the $500
cash advance, or future purchases and cash advances. Six months
after account opening, July 1, the federal credit union applies the
previously-disclosed variable rate determined using an 8-point
margin pursuant to Sec. 706.24(b)(1). Because no other increases in
rate were disclosed at account opening, the federal credit union may
not subsequently increase the variable rate that applies to the
$2,000 purchase and the $500 cash advance, except due to increases
in the index pursuant to Sec. 706.24(b)(2). On November 16, the
federal credit union provides a notice pursuant to 12 CFR 226.9(c)
informing the consumer of a new variable rate that will apply on
January 1 of year two, calculated using the same index and an
increased margin of 12 percentage points. On January 1 of year two,
the federal credit union increases the margin used to determine the
variable rate that applies to new purchases to 12 percentage points
pursuant to Sec. 706.24(b)(3). On January 15 of year two, the
consumer makes a $300 purchase. The federal credit union applies the
variable rate determined using the 12-point margin to the $300
purchase but not the $2,000 purchase.
B. Same facts as above, except that the required minimum
periodic payment due on May 25 of year one is not received by the
federal credit union until June 30 of year one. Because the federal
credit union received the required minimum periodic payment more
than 30 days after the payment due date, Sec. 706.24(b)(4) permits
the federal credit union to increase the annual percentage rate
applicable to the $2,000 purchase, the $500 cash advance, and future
purchases and cash advances. However, the federal credit union must
first comply with the notice requirements in 12 CFR 226.9(g). Thus,
if the federal credit union provided a 12 CFR 226.9(g) notice on
June 25 stating that all rates on the account would be increased to
a non-variable penalty rate of 15%, the federal credit union could
apply that 15% rate beginning on August 9, to all balances and
future transactions.
ii. Assume that, at account opening on January 1 of year one, a
federal credit union discloses that the annual percentage rate for
purchases will increase as follows: A non-variable rate of 3% for
six months; a non-variable rate of 8% for an additional six months;
and thereafter a variable rate that is currently 13% and will be
adjusted monthly by adding a margin of 5 percentage points to a
publicly available index not under the federal credit union's
control. The payment due date for the account is the fifteenth day
of the month and the required minimum periodic payments are applied
to accrued interest and fees but do not reduce the purchase balance.
On January 15, the consumer uses the account to make a $1,500
purchase. Six months after account opening, July 1, the federal
credit union begins accruing interest on the $1,500 purchase at the
previously disclosed 8% non-variable rate pursuant to Sec.
706.24(b)(1). On September 15, the consumer uses the account for a
$700 purchase. On November 16, the federal credit union provides a
notice pursuant to 12 CFR 226.9(c) informing the consumer of a new
variable rate that will apply on January 1 of year two, calculated
using the same index and an increased margin of 8 percentage points.
One year after account opening, January 1 of year two, the federal
credit union begins accruing interest on the $2,200 purchase balance
at the previously disclosed variable rate determined using a 5-point
margin pursuant to Sec. 706.24(b)(1). Because the variable rate
determined using the 8-point margin was not disclosed at account
opening, the federal credit union may not apply that rate to the
$2,200 purchase balance. Furthermore, because no other increases in
rate were disclosed at account opening, the federal credit union may
not subsequently increase the variable rate that applies to the
$2,200 purchase balance (except due to increases in the index
pursuant to Sec. 706.24(b)(2)). The federal credit union may,
however, apply the variable rate determined using the 8-point margin
to purchases made on or after January 1 of year two pursuant to
Sec. 706.24(b)(3).
iii. Assume that, at account opening on January 1 of year one, a
federal credit union discloses that the annual percentage rate for
purchases is a variable rate determined by adding a margin of 6
percentage points to a publicly available index outside of the
federal credit union's control. The federal credit union also
discloses that, to the extent consistent with Sec. 706.24 and other
applicable law, a non-variable penalty rate of 15% may apply if the
consumer makes a late payment. The due date for the account is the
fifteenth of the month. On May 30 of year two, the account has a
purchase balance of $1,000. On May 31, the creditor provides a
notice pursuant to 12 CFR 226.9(c) informing the consumer of a new
variable rate that will apply on July 16 for all purchases made on
or after June 8, calculated by using the same index and an increased
margin of 8 percentage points. On June 7, the consumer makes a $500
purchase. On June 8, the consumer makes a $200 purchase. On June 25,
the federal credit union has not received the payment due on June
15, and provides the consumer with a notice pursuant to 12 CFR
226.9(g) stating that the penalty rate of 15% will apply as of
August 9, to all transactions made on or after July 2. On July 4,
the consumer makes a $300 purchase.
A. The payment due on June 15 of year two is received on June
25. On July 17, Sec. 706.24(b)(3) permits the federal credit union
to apply the variable rate determined using the 8-point margin to
the $200 purchase made on June 8 but does not permit the federal
credit union to apply this rate to the $1,500 purchase balance. On
August 9, Sec. 706.24(b)(3) permits the federal credit union to
apply the 15% penalty rate to the $300 purchase made on July 4, but
does not permit the federal credit union to apply this rate to the
$1,500 purchase balance, which remains at the variable rate
determined using the 6-point margin, or the $200 purchase, which
remains at the variable rate determined using the 8-point margin.
B. Same facts as above, except the payment due on September 15
of year two is received on October 20. Section 706.24(b)(4) permits
the federal credit union to apply the 15% penalty rate to all
balances on the account
[[Page 5581]]
and to future transactions because it has not received payment
within 30 days after the due date. However, in order to apply the
15% penalty rate to the entire $2,000 purchase balance, the federal
credit union must provide an additional notice pursuant to 12 CFR
226.9(g). This notice must be sent no earlier than October 16, which
is the first day the account became more than 30 days delinquent.
C. Same facts as paragraph A above, except the payment due on
June 15 of year two is received on July 20. Section 706.24(b)(4)
permits the federal credit union to apply the 15% penalty rate to
all balances on the account and to future transactions because it
has not received payment within 30 days after the due date. Because
the federal credit union provided a 12 CFR 226.9(g) notice on June
24 stating the 15% penalty rate, the federal credit union may apply
the 15% penalty rate to all balances on the account as well as any
future transactions on August 9, without providing an additional
notice pursuant to 12 CFR 226.9(g).
24(b) Exceptions
24(b)(1) Account Opening Disclosure Exception
1. Prohibited increases in rate. Section Sec. 706.24(b)(1)
permits an increase in the annual percentage rate for a category of
transactions to a rate disclosed at account opening upon expiration
of a period of time that was also disclosed at account opening.
Section 706.24(b)(1) does not permit application of increased rates
that are disclosed at account opening but are contingent on a
particular event or occurrence or may be applied at the federal
credit union's discretion. The following examples illustrate rate
increases that are not permitted by Sec. 706.24(a):
i. Assume that a federal credit union discloses at account
opening on January 1 of year one that a non-variable rate of 8%
applies to purchases, but that all rates on an account may be
increased to a non-variable penalty rate of 15% if a consumer's
required minimum periodic payment is received after the payment due
date, which is the fifteenth of the month. On March 1, the account
has a $2,000 purchase balance. The payment due on March 15 is not
received until March 20. Section 706.24 does not permit the federal
credit union to apply the 15% penalty rate to the $2,000 purchase
balance. However, pursuant to Sec. 706.24(b)(3), the federal credit
union could provide a 12 CFR 226.9(c) or (g) notice on November 16,
informing the consumer that, on January 1 of year two, the 15% rate
(or a different rate) will apply to new transactions.
ii. Assume that a federal credit union discloses at account
opening on January 1 of year one that a non-variable rate of 5%
applies to transferred balances but that this rate will increase to
a non-variable rate of 15% if the consumer does not use the account
for at least $200 in purchases each billing cycle. On July 1, the
consumer transfers a balance of $4,000 to the account. During the
October billing cycle, the consumer uses the account for $150 in
purchases. Section 706.24 does not permit the federal credit union
to apply the 15% rate to the $4,000 transferred balance. However,
pursuant to Sec. 706.24(b)(3), the federal credit union could
provide a 12 CFR 226.9(c) or (g) notice on November 16 informing the
consumer that, on January 1 of year two, the 15% rate, or a
different rate, will apply to new transactions.
iii. Assume that a federal credit union discloses at account
opening on January 1 of year one that interest on purchases will be
deferred for one year, although interest will accrue on purchases
during that year at a non-variable rate of 15%. The federal credit
union further discloses that, if all purchases made during year one
are not paid in full by the end of that year, the federal credit
union will begin charging interest on the purchase balance and new
purchases at 15% and will retroactively charge interest on the
purchase balance at a rate of 15% starting on the date of each
purchase made during year one. On January 1 of year one, the
consumer makes a purchase of $1,500. No other transactions are made
on the account. On January 1 of year two, $500 of the $1,500
purchase remains unpaid. Section 706.24 does not permit the federal
credit union to reach back to charge interest on the $1,500 purchase
from January 1 through December 31 of year one. However, the federal
credit union may apply the previously disclosed 15% rate to the $500
purchase balance beginning on January 1 of year two pursuant to
Sec. 706.24(b)(1).
2. Loss of grace period. Nothing in Sec. 706.24 prohibits a
federal credit union from assessing interest due to the loss of a
grace period to the extent consistent with Sec. 706.25.
3. Application of rate that is lower than disclosed rate.
Section 706.24(b)(1) permits an increase in the annual percentage
rate for a category of transactions to a rate disclosed at account
opening upon expiration of a period of time that was also disclosed
at account opening. Nothing in Sec. 706.24 prohibits a federal
credit union from applying a rate that is lower than the disclosed
rate upon expiration of the period. However, if a lower rate is
applied to an existing balance, the federal credit union cannot
subsequently increase the rate on that balance unless it has
provided the consumer with advance notice of the increase pursuant
to 12 CFR 226.9(c). Furthermore, the federal credit union cannot
increase the rate on that existing balance to a rate that is higher
than the increased rate disclosed at account opening. The following
example illustrates the application of this rule:
i. Assume that, at account opening on January 1 of year one, a
federal credit union discloses that a non-variable annual percentage
rate of 5% will apply to purchases for one year and discloses that,
after the first year, the federal credit union will apply a variable
rate that is currently 15% and is determined by adding a margin of
10 percentage points to a publicly available index not under the
federal credit union's control. On December 31 of year one, the
account has a purchase balance of $3,000.
A. On November 16 of year one, the federal credit union provides
a notice pursuant to 12 CFR 226.9(c) informing the consumer of a new
variable rate that will apply on January 1 of year two, calculated
using the same index and a reduced margin of 8 percentage points.
The notice further states that, on July 1 of year two, the margin
will increase to the margin disclosed at account opening, 5
percentage points. On July 1 of year two, the federal credit union
increases the margin used to determine the variable rate that
applies to new purchases to 10 percentage points and applies that
rate to any remaining portion of the $3,000 purchase balance
pursuant to Sec. 706.24(b)(1).
B. Same facts as above, except that the federal credit union
does not send a notice on November 16 of year one. Instead, on
January 1 of year two, the federal credit union lowers the margin
used to determine the variable rate to 8 percentage points and
applies that rate to the $3,000 purchase balance and to new
purchases. 12 CFR 226.9 does not require advance notice in these
circumstances. However, unless the account becomes more than 30 days
delinquent, the federal credit union may not subsequently increase
the rate that applies to the $3,000 purchase balance except due to
increases in the index pursuant to Sec. 706.24(b)(2).
24(b)(2) Variable Rate Exception
1. Increases due to increase in index. Section 706.24(b)(2)
provides that an annual percentage rate for a category of
transactions that varies according to an index that is not under the
federal credit union's control and is available to the general
public may be increased due to an increase in the index. This
section does not permit a federal credit union to increase the
annual percentage rate by changing the method used to determine a
rate that varies with an index, such as by increasing the margin,
even if that change will not result in an immediate increase.
2. External index. A federal credit union may increase the
annual percentage rate if the increase is based on an index or
indices outside the federal credit union's control. A federal credit
union may not increase the rate based on its own prime rate or cost
of funds. A federal credit union is permitted, however, to use a
published prime rate, such as that in the Wall Street Journal, even
if the federal credit union's own prime rate is one of several rates
used to establish the published rate.
3. Publicly available. The index or indices must be available to
the public. A publicly available index need not be published in a
newspaper, but it must be one the consumer can independently obtain,
by telephone, for example, and use to verify the rate applied to the
outstanding balance.
4. Changing a non-variable rate to a variable rate. Section
706.24 generally prohibits a federal credit union from changing a
non-variable annual percentage rate to a variable rate because such
a change can result in an increase in rate. However, Sec.
706.24(b)(1) permits a federal credit union to change a non-variable
rate to a variable rate if the change was disclosed at account
opening. Furthermore, following the first year after the account is
opened, Sec. 706.24(b)(3) permits a federal credit union to change
a non-variable rate to a variable rate with respect to new
transactions, after complying with the notice requirements in 12 CFR
226.9(c) or (g). Finally, Sec. 706.24(b)(4) permits a federal
credit union to change a
[[Page 5582]]
non-variable rate to a variable rate if the required minimum
periodic payment is not received within 30 days of the payment due
date, after complying with the notice requirements in 12 CFR
226.9(g).
5. Changing a variable annual percentage rate to a non-variable
annual percentage rate. Nothing in Sec. 706.24 prohibits a federal
credit union from changing a variable annual percentage rate to an
equal or lower non-variable rate. Whether the non-variable rate is
equal to or lower than the variable rate is determined at the time
the federal credit union provides the notice required by 12 CFR
226.9(c). For example, assume that on March 1 a variable rate that
is currently 15% applies to a balance of $2,000 and the federal
credit union sends a notice pursuant to 12 CFR 226.9(c) informing
the consumer that the variable rate will be converted to a non-
variable rate of 14% effective April 17. On April 17, the federal
credit union may apply the 14% non-variable rate to the $2,000
balance and to new transactions even if the variable rate on March 2
or a later date was less than 14%.
6. Substitution of index. A federal credit union may change the
index and margin used to determine the annual percentage rate under
Sec. 706.24(b)(2) if the original index becomes unavailable, as
long as historical fluctuations in the original and replacement
indices were substantially similar, and as long as the replacement
index and margin will produce a rate similar to the rate that was in
effect at the time the original index became unavailable. If the
replacement index is newly established and therefore does not have
any rate history, it may be used if it produces a rate substantially
similar to the rate in effect when the original index became
unavailable.
24(b)(3) Advance Notice Exception
1. First year after the account is opened. A federal credit
union may not increase an annual percentage rate pursuant to Sec.
706.24(b)(3) during the first year after the account is opened. This
limitation does not apply to accounts opened prior to July 1, 2010.
2. Transactions that occur more than seven days after notice
provided. Section 706.24(b)(3) generally prohibits a federal credit
union from applying an increased rate to transactions that occur
within seven days after provision of the 12 CFR 226.9(c) or (g)
notice. This prohibition does not, however, apply to transactions
that are authorized within seven days after provision of the 12 CFR
226.9(c) or (g) notice but are settled more than seven days after
the notice was provided.
3. Examples.
i. Assume that a consumer credit card account is opened on
January 1 of year one. On March 14 of year two, the account has a
purchase balance of $2,000 at a non-variable annual percentage rate
of 5%. On March 15, the federal credit union provides a notice
pursuant to 12 CFR 226.9(c) informing the consumer that the rate for
new purchases will increase to a non-variable rate of 15% on May 1.
The notice further states that the 5% rate will apply for six months
until November 1, and states that thereafter the federal credit
union will apply a variable rate that is currently 15% and is
determined by adding a margin of 10 percentage points to a publicly-
available index that is not under the federal credit union's
control. The seventh day after provision of the notice is March 22
and, on that date, the consumer makes a $200 purchase. On March 24,
the consumer makes a $1,000 purchase. On May 1, Sec. 706.24(b)(3)
permits the federal credit union to begin accruing interest at 15%
on the $1,000 purchase made on March 24. The federal credit union is
not permitted to apply the 15% rate to the $2,200 purchase balance
as of March 22. After six months, November 2, the federal credit
union may begin accruing interest on any remaining portion of the
$1,000 purchase at the previously-disclosed variable rate determined
using the 10-point margin.
ii. Same facts as above except that the $200 purchase is
authorized by the federal credit union on March 22 but is not
settled until March 23. On May 1, Sec. 706.24(b)(3) permits the
federal credit union to start charging interest at 15% on both the
$200 purchase and the $1,000 purchase. The federal credit union is
not permitted to apply the 15% rate to the $2,000 purchase balance
as of March 22.
iii. Same facts as in paragraph i above, except that on
September 17 of year two, which is 45 days before expiration of the
18% non-variable rate, the federal credit union provides a notice
pursuant to 12 CFR 226.9(c) informing the consumer that, on November
2, a new variable rate will apply to new purchases and any remaining
portion of the $1,000 balance, calculated by using the same index
and a reduced margin of 10 percentage points. The notice further
states that, on May 1 of year three, the margin will increase to the
margin disclosed at account opening, 12 percentage points. On May 1
of year three, Sec. 706.24(b)(3) permits the federal credit union
to increase the margin used to determine the variable rate that
applies to new purchases to 12 percentage points and to apply that
rate to any remaining portion of the $1,000 purchase as well as to
new purchases. See comment 24(b)(1)-3. The federal credit union is
not permitted to apply this rate to any remaining portion of the
$2,200 purchase balance as of March 22.
24(b)(5) Workout Arrangement Exception
1. Scope of exception. Nothing in Sec. 706.24(b)(5) permits a
federal credit union to alter the requirements of Sec. 706.24
pursuant to a workout arrangement between a consumer and the federal
credit union. For example, a federal credit union cannot increase an
annual percentage rate pursuant to a workout arrangement unless
otherwise permitted by Sec. 706.24. In addition, a federal credit
union cannot require the consumer to make payments with respect to a
protected balance that exceed the payments permitted under Sec.
706.24(c).
2. Variable annual percentage rates. If the annual percentage
rate that applied to a category of transactions prior to
commencement of the workout arrangement varied with an index
consistent with Sec. 706.24(b)(2), the rate applied to that
category of transactions following an increase pursuant to Sec.
706.24(b)(5) must be determined using the same formula, index and
margin.
3. Example. Assume that, consistent with Sec. 706.24(b)(4), the
margin used to determine a variable annual percentage rate that
applies to a $5,000 balance is increased from 5 percentage points to
15 percentage points. Assume also that the federal credit union and
the consumer subsequently agree to a workout arrangement that
reduces the margin back to 5 points on the condition that the
consumer pay a specified amount by the payment due date each month.
If the consumer does not pay the agreed-upon amount by the payment
due date, the federal credit union may increase the margin for the
variable rate that applies to the $5,000 balance up to 15 percentage
points. 12 CFR 226.9 does not require advance notice of this type of
increase.
24(c) Treatment of Protected Balances
1. Protected balances. Because rates cannot be increased
pursuant to Sec. 706.24(b)(3) during the first year after account
opening, Sec. 706.24(c) does not apply to balances during the first
year. Instead, the requirements in Sec. 706.24(c) apply only to
``protected balances,'' which are amounts owed for a category of
transactions to which an increased annual percentage rate cannot be
applied after the rate for that category of transactions has been
increased pursuant to Sec. 706.24(b)(3). For example, assume that,
on March 15 of year two, an account has a purchase balance of $1,000
at a non-variable rate of 12% and that, on March 16, the federal
credit union sends a notice pursuant to 12 CFR 226.9(c) informing
the consumer that the rate for new purchases will increase to a non-
variable rate of 15% on May 2. On March 20, the consumer makes a
$100 purchase. On March 24, the consumer makes a $150 purchase. On
May 2, Sec. 706.24(b)(3) permits the federal credit union to start
charging interest at 15% on the $150 purchase made on March 24 but
does not permit the federal credit union to apply that 15% rate to
the $1,100 purchase balance as of March 23. Accordingly, Sec.
706.24(c) applies to the $1,100 purchase balance as of March 23 but
not the $150 purchase made on March 24.
24(c)(1) Repayment
1. No less beneficial to the consumer. A federal credit union
may provide a method of repaying the protected balance that is
different from the methods listed in Sec. 706.24(c)(1) so long as
the method used is no less beneficial to the consumer than one of
the listed methods. A method is no less beneficial to the consumer
if the method amortizes the protected balance in five years or
longer or if the method results in a required minimum periodic
payment that is equal to or less than a minimum payment calculated
consistent with Sec. 706.24(c)(1)(ii). For example, a federal
credit union could increase the percentage of the protected balance
included in the required minimum periodic payment from 2% to 5% so
long as doing so would not result in amortization of the protected
balance in less than five years. Alternatively, a federal credit
union could require a consumer to make a minimum payment that
amortizes the protected balance
[[Page 5583]]
in less than five years so long as the payment does not include a
percentage of the balance that is more than twice the percentage
included in the minimum payment before the effective date of the
increased rate. For example, a federal credit union could require
the consumer to make a minimum payment that amortizes the protected
balance in four years so long as doing so would not more than double
the percentage of the balance included in the minimum payment prior
to the effective date of the increased rate.
2. Lower limit for required minimum periodic payment. If the
required minimum periodic payment under Sec. 706.24(c)(1)(i) or
(c)(1)(ii) is less than the lower dollar limit for minimum payments
established in the cardholder agreement before the effective date of
the rate increase, the federal credit union may set the minimum
payment consistent with that limit. For example, if at account
opening the cardholder agreement stated that the required minimum
periodic payment would be either the total of fees and interest
charges plus 1% of the total amount owed or $20, whichever is
greater, the federal credit union may require the consumer to make a
minimum payment of $20 even if doing so would pay off the protected
balance in less than five years or constitute more than 2% of the
protected balance plus fees and interest charges.
Paragraph 24(c)(1)(i)
1. Amortization period starting from date on which increased
rate becomes effective. Section 706.24(c)(1)(i) provides for an
amortization period for the protected balance of no less than five
years, starting from the date on which the increased annual
percentage rate becomes effective. A federal credit union is not
required to recalculate the required minimum periodic payment for
the protected balance if, during the amortization period, that
balance is reduced as a result of the allocation of amounts paid by
the consumer in excess of the minimum payment consistent with Sec.
706.23 or any other practice permitted by these rules and other
applicable law.
2. Amortization when applicable annual percentage rate is
variable. If the annual percentage rate that applies to the
protected balance varies with an index consistent with Sec.
706.24(b)(2), the federal credit union may adjust the interest
charges included in the required minimum periodic payment for that
balance accordingly in order to ensure that the outstanding balance
is amortized in five years. For example, assume that a variable rate
that is currently 10% applies to a protected balance and that, in
order to amortize that balance in five years, the required minimum
periodic payment must include a specific amount of principal plus
all accrued interest charges. If the 10% variable rate increases due
to an increase in the index, the federal credit union may increase
the required minimum periodic payment to include the additional
interest charges.
Paragraph 24(c)(1)(ii)
1. Required minimum periodic payment on other balances. Section
706.24(c)(1)(ii) addresses the required minimum periodic payment on
the protected balance. Section 706.24(c)(1)(ii) does not limit or
otherwise address the federal credit union's ability to determine
the amount of the required minimum periodic payment for other
balances.
2. Example. Assume that the method used by a federal credit
union to calculate the required minimum periodic payment for a
consumer credit card account requires the consumer to pay either the
total of fees and interest charges plus 1% of the total amount owed
or $20, whichever is greater. Assume also that the account has a
purchase balance of $2,000 at an annual percentage rate of 10% and a
cash advance balance of $500 at an annual percentage rate of 15% and
that the federal credit union increases the rate for purchases to
15%, but does not increase the rate for cash advances. Under Sec.
706.24(c)(1)(ii), the federal credit union may require the consumer
to pay fees and interest plus 2% of the $2,000 purchase balance.
Section 706.24(c)(1)(ii) does not prohibit the federal credit union
from increasing the required minimum periodic payment for the cash
advance balance.
24(c)(2) Fees and Charges
1. Fee or charge based solely on the protected balance. A
federal credit union is prohibited from assessing a fee or charge
based solely on balances to which Sec. 706.24(c) applies. For
example, a federal credit union is prohibited from assessing a
monthly maintenance fee that would not be charged if the account did
not have a protected balance. A federal credit union is not,
however, prohibited from assessing fees such as late payment fees or
fees for exceeding the credit limit even if such fees are based in
part on the protected balance.
Section 706.25--Unfair Balance Computation Method
25(a) General Rule
1. Two-cycle method prohibited. When a consumer ceases to be
eligible for a time period provided by the federal credit union
within which the consumer may repay any portion of the credit
extended without incurring a finance charge, a grace period, the
federal credit union is prohibited from computing the finance charge
using the so-called two-cycle average daily balance computation
method. This method calculates the finance charge using a balance
that is the sum of the average daily balances for two billing
cycles. The first balance is for the current billing cycle, and is
calculated by adding the total balance, including or excluding new
purchases and deducting payments and credits, for each day in the
billing cycle, and then dividing by the number of days in the
billing cycle. The second balance is for the preceding billing
cycle.
2. Examples.
i. Assume that the billing cycle on a consumer credit card
account starts on the first day of the month and ends on the last
day of the month. The payment due date for the account is the
twenty-fifth day of the month. Under the terms of the account, the
consumer will not be charged interest on purchases if the balance at
the end of a billing cycle is paid in full by the following payment
due date. The consumer uses the credit card to make a $500 purchase
on March 15. The consumer pays the balance for the February billing
cycle in full on March 25. At the end of the March billing cycle,
March 31, the consumer's balance consists only of the $500 purchase
and the consumer will not be charged interest on that balance if it
is paid in full by the following due date, April 25. The consumer
pays $400 on April 25, leaving a $100 balance. The federal credit
union may charge interest on the $500 purchase from the start of the
April billing cycle, April 1, through April 24 and interest on the
remaining $100 from April 25 through the end of the April billing
cycle, April 30. The federal credit union is prohibited, however,
from reaching back and charging interest on the $500 purchase from
the date of purchase, March 15 to the end of the March billing
cycle, March 31.
ii. Assume the same circumstances as in the previous example
except that the consumer does not pay the balance for the February
billing cycle in full on March 25 and therefore, under the terms of
the account, is not eligible for a time period within which to repay
the $500 purchase without incurring a finance charge. With respect
to the $500 purchase, the federal credit union may charge interest
from the date of purchase, March 15, through April 24 and interest
on the remaining $100 from April 25 through the end of the April
billing cycle, April 30.
Section 706.26--Unfair Charging of Security Deposits and Fees for
the Issuance or Availability of Credit to Consumer Credit Card
Accounts
26(a) Limitation for First Year
1. Majority of the credit limit. The total amount of security
deposits and fees for the issuance or availability of credit
constitutes a majority of the initial credit limit if that total is
greater than half of the limit. For example, assume that a consumer
credit card account has an initial credit limit of $500. Under Sec.
706.26(a), a federal credit union may charge to the account security
deposits and fees for the issuance or availability of credit
totaling no more than $250 during the first year (consistent with
Sec. 706.26(b)).
26(b) Limitations for First Billing Cycle and Subsequent Billing Cycles
1. Adjustments of one dollar or less permitted. When dividing
amounts pursuant to Sec. 706.26(b)(2), a federal credit union may
adjust amounts by one dollar or less. For example, if a federal
credit union is dividing $87 over five billing cycles, the federal
credit union may charge $18 for two months and $17 for the remaining
three months.
2. Examples.
i. Assume that a consumer credit card account opened on January
1 has an initial credit limit of $500. Assume also that the billing
cycles for this account begin on the first day of the month and end
on the last day of the month. Under Sec. 706.26(a), the federal
credit union may charge to the account no more than $250 in security
deposits and fees for the issuance or availability of credit during
the first year after the account is opened. If it charges $250, the
federal credit union may charge up to $125 during the first
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billing cycle. If it charges $125 during the first billing cycle, it
may then charge no more than $25 in each of the next five billing
cycles. If it chooses, the federal credit union may spread the
additional security deposits and fees over a longer period, such as
by charging $12.50 in each of the ten billing cycles following the
first billing cycle.
ii. Same facts as above except that on July 1 the federal credit
union increases the credit limit on the account from $500 to $750.
Because the prohibition in Sec. 706.26(a) is based on the initial
credit limit of $500, the increase in credit limit does not permit
the federal credit union to charge to the account additional
security deposits and fees for the issuance or availability of
credit, such as a fee for increasing the credit limit.
26(c) Evasion Prohibited
1. Evasion. Section 706.26(c) prohibits a federal credit union
from evading the requirements of this section by providing the
consumer with additional credit to fund the consumer's payment of
security deposits and fees that exceed the total amounts permitted
by Sec. 706.26(a) and (b). For example, assume that on January 1 a
consumer opens a consumer credit card account with an initial credit
limit of $400 and the federal credit union charges to that account
$100 in fees for the issuance or availability of credit. Assume also
that the billing cycles for the account coincide with the days of
the month and that the federal credit union will charge $20 in fees
for the issuance or availability of credit in the February, March,
April, May, and June billing cycles. The federal credit union
violates Sec. 706.26(c) if it provides the consumer with a separate
credit product to fund additional security deposits or fees for the
issuance or availability of credit.
2. Payment with funds not obtained from the federal credit
union. A federal credit union does not violate Sec. 706.26(c) if it
requires the consumer to pay security deposits or fees for the
issuance or availability of credit using funds that are not
obtained, directly or indirectly, from the federal credit union. For
example, a federal credit union does not violate Sec. 706.26(c) if
a $400 security deposit paid by a consumer to obtain a consumer
credit card account with a credit line of $400 is not charged to a
credit account provided by the federal credit union or its
affiliate.
26(d) Definitions
1. Membership fees. Membership fees for opening an account are
fees for the issuance or availability of credit. A membership fee to
join an organization that provides a credit or charge card as a
privilege of membership is a fee for the issuance or availability of
credit only if the card is issued automatically upon membership. If
membership results merely in eligibility to apply for an account,
then such a fee is not a fee for the issuance or availability of
credit.
2. Enhancements. Fees for optional services in addition to basic
membership privileges in a credit or charge card account, for
example, travel insurance or card-registration services, are not
fees for the issuance or availability of credit if the basic account
may be opened without paying such fees. 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, are fees for the issuance or availability of
credit. Thus, a fee to obtain an additional card on the account
beyond the first card, so that each cardholder would have his or her
own card, is a fee for the issuance or availability of credit even
if the fee is optional; that is, if the fee is charged only if the
cardholder requests one or more additional cards.
3. One-time fees. Non-periodic fees related to opening an
account, such as application fees or one-time membership or
participation fees, are fees for the issuance or availability of
credit. Fees for reissuing a lost or stolen card, statement
reproduction fees, and fees for late payment or other violations of
the account terms are examples of fees that are not fees for the
issuance or availability of credit.
By order of the Board of Governors of the Federal Reserve
System, December 18, 2008.
Jennifer J. Johnson,
Secretary of the Board.
Dated: December 16, 2008.
By the Office of Thrift Supervision,
John M. Reich,
Director.
By the National Credit Union Administration Board, on December
18, 2008.
Mary F. Rupp,
Secretary of the Board.
[FR Doc. E8-31186 Filed 1-28-09; 8:45 am]
BILLING CODE 6720-01-P; 6720-01-P; 7535-01-P