[Federal Register Volume 74, Number 85 (Tuesday, May 5, 2009)]
[Proposed Rules]
[Pages 20804-20832]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E9-9861]
[[Page 20803]]
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Part III
Federal Reserve System
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Department of the Treasury
Office of Thrift Supervision
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National Credit Union Administration
12 CFR Part 227, 535, and 706
Unfair or Deceptive Acts or Practices; Clarifications; Proposed Rule
Federal Register / Vol. 74, No. 85 / Tuesday, May 5, 2009 / Proposed
Rules
[[Page 20804]]
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FEDERAL RESERVE SYSTEM
12 CFR Part 227
[Regulation AA; Docket No. R-1314]
DEPARTMENT OF THE TREASURY
Office of Thrift Supervision
12 CFR Part 535
[Docket ID OTS-2009-0006]
RIN 1550-AC17
NATIONAL CREDIT UNION ADMINISTRATION
12 CFR Part 706
RIN 3133-AD62
Unfair or Deceptive Acts or Practices; Clarifications
AGENCIES: Board of Governors of the Federal Reserve System (Board);
Office of Thrift Supervision, Treasury (OTS); and National Credit Union
Administration (NCUA).
ACTION: Proposed rule; request for public comment.
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SUMMARY: In December 2008, the Board, OTS, and NCUA (collectively, the
Agencies) exercised their authority under the Federal Trade Commission
Act to issue a final rule prohibiting institutions from engaging in
specific acts or practices in connection with consumer credit card
accounts. The Agencies understand that clarification is needed
regarding certain aspects of the final rule. Accordingly, in order to
facilitate compliance, the Agencies propose to amend specific portions
of the regulations and official staff commentary.
DATES: Comments must be received on or before June 4, 2009.
ADDRESSES: Because paper mail in the Washington DC area and at the
Agencies is subject to delay, we encourage commenters to submit
comments by e-mail, if possible. We also encourage commenters to use
the title ``Unfair or Deceptive Acts or Practices'' to facilitate our
organization and distribution of the comments. Comments submitted to
one or more of the Agencies will be made available to all of the
Agencies. Interested parties are invited to submit comments as follows:
Board: You may submit comments, identified by Docket No. R-1314, by
any of the following methods:
Agency Web site: http://www.federalreserve.gov. Follow the
instructions for submitting comments at http://www.federalreserve.gov/generalinfo/foia/ProposedRegs.cfm.
Federal eRulemaking Portal: http://www.regulations.gov.
Follow the instructions for submitting comments.
E-mail: [email protected]. Include the
docket number in the subject line of the message.
Facsimile: (202) 452-3819 or (202) 452-3102.
Mail: Jennifer J. Johnson, Secretary, Board of Governors
of the Federal Reserve System, 20th Street and Constitution Avenue,
NW., Washington, DC 20551.
All public comments are available from the Board's Web site at
http://www.federalreserve.gov/generalinfo/foia/ProposedRegs.cfm as
submitted, unless modified for technical reasons. Accordingly, your
comments will not be edited to remove any identifying or contact
information. Public comments may also be viewed electronically or in
paper form in Room MP-500 of the Board's Martin Building (20th and C
Streets, NW.), between 9 a.m. and 5 p.m. on weekdays.
OTS: You may submit comments, identified by OTS-2009-0006, by any
of the following methods:
Federal eRulemaking Portal-``Regulations.gov'': Go to
http://www.regulations.gov, under the ``more Search Options'' tab click
next to the ``Advanced Docket Search'' option where indicated, select
``Office of Thrift Supervision'' from the agency drop-down menu, then
click ``Submit.'' In the ``Docket ID'' column, select ``OTS-2009-0006''
to submit or view public comments and to view supporting and related
materials for this proposed rulemaking. The ``How to Use This Site''
link on the Regulations.gov home page provides information on using
Regulations.gov, including instructions for submitting or viewing
public comments, viewing other supporting and related materials, and
viewing the docket after the close of the comment period.
Mail: Regulation Comments, Chief Counsel's Office, Office
of Thrift Supervision, 1700 G Street, NW., Washington, DC 20552,
Attention: OTS-2009-0006.
Facsimile: (202) 906-6518.
Hand Delivery/Courier: Guard's Desk, East Lobby Entrance,
1700 G Street, NW., from 9 a.m. to 4 p.m. on business days, Attention:
Regulation Comments, Chief Counsel's Office, Attention: OTS-2009-0006.
Instructions: All submissions received must include the
agency name and docket number for this rulemaking. All comments
received will be entered into the docket and posted on Regulations.gov
without change, including any personal information provided. Comments,
including attachments and other supporting materials received are part
of the public record and subject to public disclosure. Do not enclose
any information in your comment or supporting materials that you
consider confidential or inappropriate for public disclosure.
Viewing Comments Electronically: Go to http://www.regulations.gov, select ``Office of Thrift Supervision'' from the
agency drop-down menu, then click ``Submit.'' Select Docket ID ``OTS-
2009-0006'' to view public comments for this notice of proposed
rulemaking.
Viewing Comments On-Site: You may inspect comments at the
Public Reading Room, 1700 G Street, NW., by appointment. To make an
appointment for access, call (202) 906-5922, send an e-mail to
public.info@ots.treas.gov">public.info@ots.treas.gov, or send a facsimile transmission to (202)
906-6518. (Prior notice identifying the materials you will be
requesting will assist us in serving you.) We schedule appointments on
business days between 10 a.m. and 4 p.m. In most cases, appointments
will be available the next business day following the date we receive a
request.
NCUA: You may submit comments, identified by number RIN 3133-AD62,
by any of the following methods:
Federal eRulemaking Portal: http://www.regulations.gov.
Follow the instructions for submitting comments.
NCUA Web site: http://www.ncua.gov/news/proposed_regs/proposed_regs.html. Follow the instructions for submitting comments.
E-mail: Address to [email protected]. Include ``[Your
name] Comments on Proposed Rule Part 706'' in the e-mail subject line.
Facsimile: (703) 518-6319. Use the subject line described
above for e-mail.
Mail: Address to Mary Rupp, Secretary of the Board,
National Credit Union Administration, 1775 Duke Street, Alexandria, VA
22314-3428.
Hand Delivery/Courier: Same as mail address.
Public Inspection: All public comments are available on
the agency's Web site at http://www.ncua.gov/RegulationsOpinionsLaws/comments as submitted, except as may not be possible for technical
reasons. Public comments will not be edited to remove any identifying
or contact information. Paper copies of comments may be inspected in
NCUA's law library at 1775 Duke Street, Alexandria, Virginia 22314, by
appointment, weekdays between 9 a.m. and 3 p.m. To make an appointment,
call (703) 518-6540 or send an e-mail to [email protected].
FOR FURTHER INFORMATION CONTACT:
[[Page 20805]]
Board: Benjamin K. Olson, Attorney, or Ky Tran-Trong, Counsel,
Division of Consumer and Community Affairs, at (202) 452-2412 or (202)
452-3667, Board of Governors of the Federal Reserve System, 20th and C
Streets, NW., Washington, DC 20551. For users of Telecommunications
Device for the Deaf (TDD) only, contact (202) 263-4869.
OTS: April Breslaw, Director, Consumer Regulations, (202) 906-6989;
Suzanne McQueen, Consumer Regulations Analyst, Compliance and Consumer
Protection Division, (202) 906-6459; or Richard Bennett, Senior
Compliance Counsel, Regulations and Legislation Division, (202) 906-
7409, at Office of Thrift Supervision, 1700 G Street, NW., Washington,
DC 20552.
NCUA: Matthew J. Biliouris, Program Officer, Office of Examination
and Insurance, (703) 518-6360; or Moisette I. Green, Staff Attorney,
Office of General Counsel, (703) 518-6540, National Credit Union
Administration, 1775 Duke Street, Alexandria, VA 22314-3428.
SUPPLEMENTARY INFORMATION:
I. Background
In December 2008, the Federal Reserve Board (Board), the Office of
Thrift Supervision (OTS), and the National Credit Union Administration
(NCUA) (collectively, the Agencies) adopted a final rule under the
Federal Trade Commission Act (FTC Act) to protect consumers from unfair
acts or practices with respect to consumer credit card accounts. This
rule was published in the Federal Register on January 29, 2009. See 74
FR 5498 (January 2009 Rule). On that same date, the Board published a
final rule amending the provisions regarding open-end credit (not home
secured) in Regulation Z, which implements the Truth in Lending Act
(TILA). See 74 FR 5244 (January 2009 Regulation Z Rule). The effective
date for both rules is July 1, 2010. See 74 FR 5548; 74 FR 5388-5390.
Since publication of the two rules, the Agencies have become aware
that clarification is needed to resolve confusion regarding how
institutions will comply with particular aspects of those rules.
Accordingly, in order to provide guidance and facilitate compliance
with the January 2009 Rule by the effective date, the Agencies propose
to amend portions of the rule and the accompanying staff commentary.
These proposed amendments are discussed in detail in section III of
this SUPPLEMENTARY INFORMATION. Similarly, elsewhere in today's Federal
Register, the Board has proposed to amend certain aspects of the
January 2009 Regulation Z Rule.
Although comment is requested on the proposed amendments, the
Agencies emphasize that the purpose of these rulemakings is to clarify
and facilitate compliance with the final rule, not to reconsider the
need for--or the extent of--the protections that the rule affords
consumers. Thus, commenters are encouraged to limit their submissions
accordingly.
In addition, because the Agencies do not intend to extend the
effective date for the January 2009 Rule, any amendments must be
adopted in final form with sufficient time for institutions to
implement the amended rule on or prior to July 1, 2010. The Agencies
emphasize that, because this rulemaking focuses on clarifications to
discrete aspects of the January 2009 Rule, institutions should continue
their efforts to come into compliance with that rule as soon as
practicable and, in any event, prior to July 1, 2010. In order to
ensure that final clarifications can be provided as soon as possible,
the Agencies are requiring that comments on this proposal be submitted
within 30 days from publication in the Federal Register.\1\
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\1\ Generally, NCUA gives the public 60 days to comment on
proposed rules; however, a shorter comment period is appropriate in
this instance to ensure compliance with the January 2009 Rule. See
IRPS 87-2, 52 FR 35231 (Sept. 18, 1987).
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II. Statutory Authority
Section 18(f)(1) of the FTC Act provides that the Board (with
respect to banks), OTS (with respect to savings associations), and the
NCUA (with respect to federal credit unions) are responsible for
prescribing ``regulations defining with specificity * * * unfair or
deceptive acts or practices, and containing requirements prescribed for
the purpose of preventing such acts or practices.'' 15 U.S.C.
57a(f)(1). In the SUPPLEMENTARY INFORMATION for the January 2009 Rule,
the Agencies set forth the standards codified by Congress or adopted by
the Federal Trade Commission for determining whether an act or practice
is unfair or deceptive and applied those standards to the practices
prohibited by the final rule. See 74 FR 5501 et seq. In addition, the
OTS relied on its authority under the Home Owners' Loan Act (HOLA) as a
secondary basis for its final rule. See, e.g., 74 FR 5505-5506. For
purposes of this rulemaking, the Agencies continue to rely on this
legal authority and analysis.
III. Section-by-Section Analysis
The final rules adopted by the Board, OTS, and NCUA under the FTC
Act are located in, respectively, parts 227, 535, and 706 of title 12
of the Code of Federal Regulations. For purposes of the discussion in
this SUPPLEMENTARY INFORMATION, the Agencies use the shared numerical
suffix for each provision. For example, Sec. --.21 refers to the
Board's 12 CFR 227.21, the OTS's 12 CFR 535.21, and the NCUA's 12 CFR
706.21.
Section --.21--Definitions
Subpart C to the Agencies' rules contains the provisions addressing
consumer credit card accounts. Section --.21 defines certain terms used
in Subpart C.
Section --.21(a) Annual Percentage Rate
Section --.21(a) defines ``annual percentage rate'' as the product
of multiplying each periodic rate for a balance or transaction on a
consumer credit card account by the number of periods in a year. In the
text of the regulations and in the commentary, the Agencies sometimes
use the term ``rate'' in place of ``annual percentage rate'' to
conserve space and avoid repetition. To avoid possible confusion, the
Agencies propose to add a new comment 21(a)-1, clarifying that, for
purposes of Subpart C, ``rate'' has the same meaning as ``annual
percentage rate'' unless otherwise specified. Furthermore, for clarity
and consistency, the Agencies propose to substitute ``rate'' for
``annual percentage rate'' in the titles to certain comments. See
comments 23-3, 23-6, 24(b)(2)-5, 24(b)(5)-2, 24(c)(1)(i)-2.
Section --.21(c) Consumer Credit Card Account
The provisions of Subpart C apply to ``consumer credit card
accounts,'' which are defined in Sec. --.21(c) as accounts provided to
a consumer primarily for personal, family, or household purposes under
an open-end credit plan that is accessed by a credit or charge card.
Based on questions received following issuance of the January 2009
Rule, the Agencies understand that clarification is needed regarding
whether an outstanding balance on a consumer credit card account
remains subject to Subpart C when the account is closed, when the
account is acquired by another institution, and when the balance is
transferred to another credit account. In particular, concerns have
been raised that permitting institutions to apply an increased rate to
an outstanding balance in these circumstances could lead to
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circumvention of the general prohibition in Sec. --.24 on such
increases.
To address these concerns, the Agencies propose to add comments
21(c)-1 through 3, which would clarify that, as a general matter, the
protections in Subpart C continue to apply to an outstanding balance
following the closure or acquisition of the account or the transfer of
the balance to another credit account issued by the same institution
(or its affiliate or subsidiary). Accordingly, in these circumstances,
an institution must, for example, continue to provide consumers a
reasonable amount of time to make payment on such balances pursuant to
Sec. --.22; allocate payments in excess of the required minimum
periodic payment among such balances consistent with Sec. --.23; and
increase the annual percentage rates that apply to such balances only
to the extent permitted by Sec. --.24.
Because the protections in Subpart C cannot be waived or forfeited,
the proposed comments do not distinguish between closures or transfers
initiated by the institution and closures or transfers initiated by the
consumer. In the January 2009 Rule, the Agencies determined that,
because many of the prohibited practices cannot be effectively
disclosed, consumers are unable to reasonably avoid the harm caused by
those practices. Thus, as discussed below, allowing institutions to
engage in the prohibited practices by obtaining the consumer's
agreement could undercut the purpose of the rule.
Although there may be circumstances in which individual consumers
could make informed choices about the benefits and costs of waiving the
protections in Subpart C, an exception for those circumstances would
create a significant loophole that could be used to deny the
protections to other consumers. For example, if an institution offered
to transfer its cardholder's outstanding balance to a credit product
that would reduce the rate on the balance for a period of time in
exchange for the cardholder accepting a higher rate after that period,
the cardholder would have to determine whether the savings created by
the temporary reduction would offset the cost of the subsequent
increase, which would depend on the amount of the balance, the amount
and length of the reduction, the amount of the increase, and the length
of time it would take the consumer to pay off the balance at the
increased rate. Based on extensive consumer testing conducted during
the preparation of the January 2009 Rule (and the Board's January 2009
Regulation Z Rule), the Agencies believe that it would be very
difficult to ensure that institutions disclose this information in a
manner that will enable most consumers to make informed decisions about
whether to accept the increase in rate. Although some approaches to
disclosure may be effective, others may not and it would be impossible
to distinguish among such approaches in a way that would provide clear
guidance for institutions. Furthermore, consumers might be presented
with choices that are not meaningful (such as a choice between
accepting a higher rate on an outstanding balance or losing credit
privileges on the account). Thus, the proposed commentary to Sec.
--.21(c) would clarify that, as a general matter, the protections in
Subpart C do not depend on whether the consumer agrees to the closure
of an account or the transfer of a balance.
Accordingly, proposed comment 21(c)-1 states that, if a consumer
credit card account with an outstanding balance is closed by the
consumer or the institution, the account continues to be the same
consumer credit card account for purposes of Subpart C with respect to
that balance. Thus, in these circumstances, the institution could not
increase the rate that applies to the outstanding balance (except to
the extent permitted by Sec. --.24).
Proposed comment 21(c)-2 addresses circumstances in which an
institution acquires a consumer credit card account with an outstanding
balance by, for example, merging with or acquiring another institution
or by purchasing another institution's credit card portfolio. In some
cases, the acquiring institution may elect to close the acquired
account and replace it with its own credit card account. See 12 CFR
226.12 comment 12(a)(2)-3. The acquisition of an account does not
involve any choice on the part of consumers, and the Agencies believe
that consumers whose accounts are acquired should receive the same
level of protection after acquisition as they did beforehand.
Accordingly, the proposed comment states that an institution that
acquires a consumer credit card account remains subject to the
provisions of Subpart C with respect to any outstanding balances on the
account. For example, the institution would generally be prohibited
from increasing the annual percentage rate on an outstanding purchase
balance to the rate that the institution applies to purchases on its
accounts.\2\
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\2\ Thus, the acquiring institution would not be permitted to
substitute a new index for the index applicable to an acquired
variable rate balance if the change could result in an increase in
the applicable annual percentage rate. See comment 24(b)(2)-1. An
institution that does not utilize the index used to determine the
variable rate for an acquired balance may, however, convert that
rate to an equal or lower non-variable rate, subject to the notice
requirements of 12 CFR 226.9(c). See comment 24(b)(2)-5.
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Finally, proposed comment 21(c)-3 addresses balance transfers
between accounts issued by the same institution (or its affiliate or
subsidiary) and balance transfers between accounts issued by different
institutions. Balances may be transferred from one consumer credit card
account issued by an institution to another consumer credit card
account issued by the same institution when, for example, the
consumer's account is converted from a retail credit card that may only
be used at a single retailer or affiliated group of retailers to a co-
branded general purpose credit card which may be used at a wider number
of merchants. Because of the concerns discussed above regarding
circumvention and informed consumer choice and for consistency with the
issuance rules regarding card renewals or substitutions for accepted
credit cards under Regulation Z, 12 CFR 226.12(a)(2), the Agencies
believe--and proposed comment 21(c)-3 states--that these transfers
should be treated as a continuation of the existing account
relationship rather than the creation of a new account relationship.
See 12 CFR 226.12 comment 12(a)(2)-2. Similarly, proposed comment
21(c)-3 would apply to circumstances where a balance is transferred to
a line of credit accessed solely by an account number or another type
of credit account issued by the same institution or its affiliate or
subsidiary (except for an open-end credit plan secured by the
consumer's dwelling).\3\ Accordingly, under these circumstances, an
institution could not, for example, apply an increased rate to an
existing balance in a manner prohibited by Sec. --.24.
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\3\ Proposed comment 21(c)-3 clarifies that Subpart C would not
apply to balances transferred from a consumer credit card account
issued by an institution to an open-end credit plan secured by the
consumer's dwelling issued by the same institution (or its affiliate
or subsidiary) because these plans provide protections that are
similar to--and, in some cases, more stringent than--the protections
in Subpart C. For example, a creditor may not change the annual
percentage rate on a home-equity plan unless the change is based on
an index that is not under the creditor's control and is available
to the general public. See 12 CFR 226.5a(f)(1).
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In contrast, proposed comment 21(c)-3 also states that, when a
consumer chooses to transfer a balance to a consumer credit card
account issued by a different institution, Subpart C does not prohibit
the institution to which the balance is transferred from applying its
[[Page 20807]]
account terms to that balance, provided those terms comply with Subpart
C. For example, if a consumer credit card account issued by institution
A has a $1,000 purchase balance at an annual percentage rate of 15% and
the consumer transfers that balance to a consumer credit card account
with a purchase rate of 17% issued by institution B, institution B may
apply the 17% rate to the $1,000 balance. However, institution B may
not subsequently increase the rate that applies to that balance unless
permitted by one of the exceptions in Sec. --.24(b).
Although balance transfers from one institution to another raise
some of the same concerns as balance transfers involving the same
institution, the Agencies believe that transfers between institutions
are not contrary to Subpart C because the institution to which the
balance is transferred is not increasing the cost of credit it
previously extended to the consumer. For example, assume that
institution A has extended a consumer $1,000 of credit at a rate of
15%. Because Sec. --.24 generally prohibits institution A from
increasing the rate that applies to that balance, it would be
inconsistent with Sec. --.24 to allow institution A to reprice that
balance simply by transferring it to another account. In contrast, in
order for the $1,000 balance to be transferred to institution B,
institution B must provide the consumer with a new $1,000 extension of
credit in an arms-length transaction and should be permitted to price
that new extension consistent with its evaluation of prevailing market
rates, the risk presented by the consumer, and other factors. Thus, the
transfer from institution A to institution B does not appear to raise
concerns about circumvention of Sec. --.24 because institution B is
not increasing the cost of credit it previously extended.
The Agencies understand that drawing this distinction between
balance transfers involving the same institution and balance transfers
involving different institutions may limit an institution's ability to
offer its existing cardholders the same terms that it would offer
another institution's cardholders. Currently, however, the Agencies
understand that institutions generally do not make promotional balance
transfer offers available to their existing cardholders for balances
held by the institution because it is not cost-effective to do so.
Furthermore, although many institutions do offer existing cardholders
the opportunity to upgrade to accounts offering different terms or
features (such as upgrading to an account that offers a particular type
of rewards), the Agencies understand that these offers generally are
not conditioned on a balance transfer, which indicates that it may be
cost-effective for institutions to make these offers without repricing
an outstanding balance. Nevertheless, the Agencies solicit comment on
the extent to which proposed comment 21(c)-3 would affect institutions'
ability to make offers to existing cardholders.
Section --.22--Unfair Acts or Practices Regarding Time To Make Payment
Section --.22(a) provides that an institution must not treat a
payment on a consumer credit card account as late for any purpose
unless the consumer has been provided a reasonable amount of time to
make the payment. Section --.22(b)(1) states that an institution must
be able to demonstrate that it has complied with this requirement, and
Sec. --.22(b)(2) provides a safe harbor for institutions that have
adopted reasonable procedures designed to ensure that periodic
statements specifying the payment due date are mailed or delivered to
consumers at least 21 days before the payment due date.
Comment 22(b)-3 offers an example of an alternative method of
complying with Sec. --.22(a). In this example, an institution that
only provides periodic statements electronically and only accepts
payments electronically for a particular type of consumer credit card
account could comply with Sec. --.22(a) even if it does not provide
periodic statements 21 days before the payment due date. The Agencies
understand that, although the example states that this type of account
must also comply with ``applicable law and regulatory guidance,'' an
explicit reference to the consumer notice and consent procedures of the
Electronic Signatures in Global and National Commerce Act (E-Sign Act),
15 U.S.C. 7001 et seq., may be helpful to avoid confusion. Accordingly,
the Agencies propose to add an explicit reference to the E-Sign Act in
comment 22(b)-3.
Section --.23--Unfair Acts or Practices Regarding Allocation of
Payments
When different annual percentage rates apply to different balances
on a consumer credit card account, Sec. --.23 requires institutions to
allocate any amount paid by the consumer in excess of the required
minimum periodic payment (the excess payment) among the balances using
one of two methods. The institution may apply the excess payment first
to the balance with the highest annual percentage rate and any
remaining portion to the other balances in descending order based on
the applicable rate (the high-to-low method). Alternatively, the
institution may allocate the excess payment among the balances in the
same proportion as each balance bears to the total balance (the pro
rata method).
When the Agencies originally proposed to address payment
allocation, the proposed rule contained provisions specifically
addressing accounts with a balance subject to a deferred interest
program.\4\ One of these proposed provisions would have permitted (but
not required) an existing practice by some institutions of allocating
excess payments first to a balance on which interest is deferred during
the last two billing cycles of the deferred interest period so that
consumers could pay off that balance and avoid assessment of the
accrued interest. See proposed Sec. --.23(b)(1)(ii), 73 FR 28916,
28942 (May 19, 2008). Some industry commenters supported this aspect of
the proposal, while others argued that it would require burdensome
changes to their systems. Some consumer group commenters argued that,
rather than allowing institutions to choose whether to apply excess
payments to deferred interest balances in the last two billing cycles,
this allocation method should be mandatory. Due to other concerns about
deferred interest plans, however, the January 2009 Rule did not include
this provision. See 74 FR 5519, 5527-5528.
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\4\ Many creditors offer deferred interest programs under which
consumers are not obligated to pay interest on purchases if those
purchases are paid in full by the end of a specified period. If the
purchases are not paid in full when the period ends, these programs
generally require the consumer to pay interest that has accrued on
the purchases during the period.
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As discussed in greater detail below with respect to Sec. --.24,
the Agencies propose to clarify that--so long as consumers receive
sufficient protections--institutions may continue to provide
promotional programs under which a consumer will not be obligated to
pay interest that accrues on a balance if that balance is paid in full
prior to a specified date or expiration of a specified period of time
(deferred or waived interest programs).\5\ One area in which
clarification is needed with respect to such programs is payment
allocation. Under the current version of Sec. --.23, if the deferred
or waived interest balance is not the only balance on the account, the
consumer would generally be required to pay off the entire outstanding
balance in order to avoid interest charges on the deferred or
[[Page 20808]]
waived interest balance.\6\ If the consumer is unaware of the need to
pay off the entire balance, the consumer would be charged interest on
the deferred or waived interest balance and thus would not obtain the
benefits of the promotional program.
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\5\ For purposes of this SUPPLEMENTARY INFORMATION, a waived
interest program includes a promotional program where interest is
refunded if a balance is paid in full within a specified period of
time.
\6\ For example, assume that a consumer credit card account has
a $2,000 purchase balance with a 20% annual percentage rate and a
$1,000 balance on which interest accrues at a 15% annual percentage
rate, but the consumer will not be obligated to pay that interest if
that balance is paid in full by a specified date. Regardless of
whether the institution uses the high-to-low allocation method or
the pro rata allocation method, the consumer would be required to
pay $3,000 in order to avoid interest charges on the $1,000 balance.
Indeed, under the current version of Sec. --.23, the only
circumstance in which the consumer could pay off the $1,000 balance
without also paying off the $2,000 purchase balance would be if the
$1,000 balance had a higher annual percentage rate than the $2,000
purchase balance and the institution chose to use the high-to-low
method.
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To ensure that consumers are adequately protected, the Agencies
propose to amend Sec. --.23 to require institutions to allocate excess
payments first to deferred or waived interest balances during the last
two billing cycles of the promotional period. As noted above, this is
consistent with the current practice of many institutions with respect
to deferred interest plans and is generally beneficial to consumers
insofar as it enables them to avoid interest charges by paying off the
accrued interest balance in full prior to expiration without paying off
all other balances on the account.\7\ Accordingly, the Agencies propose
to move the provisions in the current version of Sec. --.23 to Sec.
--.23(a), to place the new provision for deferred or waived programs in
Sec. --.23(b), and to renumber the existing commentary accordingly.
The Agencies also propose to add a new example in comment 23(a)-1
(proposed comment 23(a)(1)-1) illustrating the application of proposed
Sec. --.23(b). In addition, elsewhere in today's Federal Register, the
Board has proposed to amend the disclosure requirements for periodic
statements in Regulation Z, 12 CFR 226.7, to ensure that consumers are
informed of the amount of interest accrued on the deferred or waived
balance and the date by which that balance must be paid in full to
avoid those accrued interest charges.\8\
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\7\ As discussed above, for purposes of this proposal, the
Agencies continue to rely on the legal authority and analysis
contained in the January 2009 Rule. In particular, with respect to
the proposed amendment to Sec. --.23, the Agencies rely on the
legal analysis regarding unfair payment allocation practices at 74
FR 5514-5517. In addition, the Agencies note that failing to
allocate excess payments first to deferred or waived interest
balances during the last two billing cycles of the promotional
period appears to cause substantial consumer injury insofar as a
different allocation method would result in the assessment of
accrued interest (unless the consumer pays off all balances on the
account). Because one of the intended purposes of a credit card
account is to finance purchases over multiple billing cycles, it
would be unreasonable to expect consumers to avoid accrued interest
charges on a deferred or waived interest balance by paying off all
balances on the account. Finally, failing to comply with the
proposed amendment does not appear to create any benefits for
consumers that would outweigh the injury. Indeed, the Agencies
understand that the payment allocation practices of many
institutions offering deferred or waived interest programs already
comply with the proposed amendment.
\8\ Specifically, the Board is proposing to amend 12 CFR 226.7
comment 7(b)-1 to require creditors offering deferred or waived
interest programs to disclose on the periodic statement the balance
subject to the program and the amount of interest that has accrued
on that balance. In addition, the Board is proposing to add a new 12
CFR 226.7(b)(14) that would require creditors to state on the front
of the periodic statement for the two billing cycles immediately
preceding expiration of the promotional period the date on which the
period expires and that the deferred or waived interest balance must
be paid in full by a specific date in order to avoid accrued
interest charges.
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Furthermore, the Agencies propose to amend comment 23-6 to clarify
that, for purposes of Sec. --.23, a balance on which interest will not
be charged if the balance is paid in full prior to expiration of a
specified period should be treated as a balance with an annual
percentage rate of zero rather than a balance with the rate at which
interest accrues during the promotional period (the accrual rate). As
an initial matter, treating the rate as zero is consistent with the
nature of the deferred or waived interest program insofar as the
consumer will not be obligated to pay any accrued interest if the
balance is paid in full prior to expiration. In addition, because Sec.
--.23 only applies when different annual percentage rates apply to
different balances on the account, using the accrual rate for purposes
of Sec. --.23 could significantly narrow the protections of the
payment allocation rules. Specifically, when the accrual rate for a
deferred or waived interest balance is the same as the rate that
applies to purchases (which the Agencies understand is often the case)
and there are no other balances on the account, Sec. --.23 would not
apply if the accrual rate was used. For example, if an account has a
$1,000 purchase balance with an annual percentage rate of 15% and a
$2,000 balance on which interest accrues at 15% but will not be charged
if that balance is paid in full within a specific period of time, Sec.
--.23 would not apply if the accrual rate of 15% was the applicable
rate for the $2,000 balance for purposes of payment allocation. The
Agencies believe that, in these circumstances, consumers should be
afforded the protections in Sec. --.23 (and, in particular, the
protections in proposed Sec. --.23(b)).
In addition, for purposes of the high-to-low allocation method in
Sec. --.23(a)(1), treating the rate on this type of promotional
balance as zero during the accrued interest period ensures that excess
payments will be applied first to balances on which interest is being
charged, which will generally result in lower interest charges if the
consumer pays the deferred or waived interest balance in full prior to
expiration of the promotional period. Thus, using the above example,
the amendments to comment 23-6 would clarify that an institution using
the high-to-low method would allocate excess payments to the $1,000
purchase balance before the $2,000 balance until the last two billing
cycles of the accrued interest period (when proposed Sec. --.24(b)
would require that excess payments be applied first to any remaining
portion of the $2,000 balance). Although treating the rate on the
deferred or waived interest balance as zero could prevent consumers who
wish to pay off that balance in installments over the course of the
promotional period from doing so, the Agencies believe that, on
balance, this treatment produces the best overall outcome for consumers
when the high-to-low allocation method is used.\9\
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\9\ The Agencies note that, if the institution uses the pro rata
allocation method, a proportionate amount of the excess payment will
be applied to the deferred or waived interest balance each month
during the promotional period.
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Finally, proposed comment 23(b)-1 would clarify that Sec. --.23(b)
applies to promotional programs under which the consumer is not
obligated to pay interest that accrues on a balance if that balance is
paid in full prior to the expiration of a specified period of time, not
to grace periods offered by the institution.
Requests for Comment
The Agencies request comment on:
Whether the provision in proposed Sec. --.23(b) regarding
balances on which interest will not be charged if the balance is paid
in full by a specified date should apply during the last two billing
cycles of the deferred or waived interest period or during a longer or
shorter time period.
Whether proposed Sec. --.23(b) should apply to a grace
period offered by the institution. In particular, the Agencies request
comment on whether institutions offer grace periods that only require
consumers to pay certain balances in full each billing cycle (rather
than the entire balance) and, if so, whether proposed Sec. --.23(b)
should
[[Page 20809]]
permit institutions to apply excess payments to those balances first.
Section --.24--Unfair Acts or Practices Regarding Increases in Annual
Percentage Rates
Section --.24(a) requires institutions to disclose, at account
opening, the annual percentage rates that will apply to each category
of transactions on a consumer credit card account. In addition, Sec.
--.24(a) prohibits institutions from increasing those rates unless
specifically permitted by one of the exceptions in Sec. --.24(b).
As an initial matter, the Agencies understand that clarification is
needed regarding the meaning of ``category of transactions'' for
purposes of Sec. --.24. Accordingly, the Agencies propose to add a new
comment 24-3 to clarify that, for purposes of Sec. --.24, a ``category
of transactions'' is a type or group of transactions to which an annual
percentage rate applies that is different than the annual percentage
rate that applies to other transactions. For example, purchase
transactions, cash advance transactions, and balance transfer
transactions are separate categories of transactions for purposes of
Sec. --.24 if an institution applies different annual percentage rates
to each. Furthermore, if, for example, the institution applies
different annual percentage rates to different types of purchase
transactions (such as one rate for purchases of gasoline and a
different rate for all other purchases), each type constitutes a
separate category of transactions for purposes of Sec. --.24.\10\
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\10\ As noted below, the Agencies request comment on whether
institutions establish separate categories of transactions based on
factors other than annual percentage rates and, if so, for what
reasons.
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In addition, the Agencies understand there is some confusion
regarding whether certain changes to a consumer credit card account
constitute an ``account opening'' for purposes of Sec. --.24 generally
and, in particular, the general prohibition on increasing rates during
the first year after account opening. Accordingly, the Agencies propose
to add a new comment 24-4 clarifying that, when a consumer has a credit
card account with an institution and the consumer opens a new credit
card account with the same institution (or its affiliate or
subsidiary), the opening of the new account constitutes an ``account
opening'' for purposes of Sec. --.24 if the consumer retains the
ability to obtain additional extensions of credit on both accounts.
Thus, for example, if a consumer opens a credit card account with an
institution on January 1 of year one and opens a second credit card
account with that institution on July 1 of year one, the opening of the
second account constitutes an account opening for purposes of Sec.
--.24 so long as the consumer can engage in transactions using either
account. This is the case even if the consumer transfers a balance from
the first account to the second. Thus, because the institution has two
separate account relationships with the consumer, the general
prohibition in Sec. --.24 on increasing rates during the first year
after account opening would apply to the opening of the second account.
In contrast, the comment would clarify that an account has not been
opened for purposes of Sec. --.24 when an institution replaces one
consumer credit card account with another consumer credit card account
(such as when a retail credit card is replaced with a cobranded general
purpose card that can be used at a wider number of merchants) or when
an institution consolidates or combines a credit card account with one
or more other credit card accounts into a single credit card account.
As discussed above, the Agencies believe that these transfers should be
treated as a continuation of the existing account relationship rather
than the creation of a new account relationship. Similarly, the comment
would also clarify that the replacement of an acquired credit card
account does not constitute an ``account opening'' for purposes of
Sec. --.24. Thus, in these circumstances, the general prohibition in
Sec. --.24 on increasing rates during the first year after account
opening would not apply. However, when a replacement or consolidation
occurs during the first year after account opening, proposed comment
24-4 would clarify that the institution may not increase an annual
percentage rate in a manner otherwise prohibited by Sec. --.24.\11\
Similarly, the other protections in Sec. --.24 (such as the
limitations on repayment of protected balances in Sec. --.24(c)) would
still apply following the replacement or consolidation.
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\11\ For example, assume that, on January 1 of year one, a
consumer opens a consumer credit card account with a purchase rate
of 15%. On July 1 of year one, the account is replaced with a
consumer credit card account issued by the same institution, which
offers different features (such as rewards on purchases). Under
these circumstances, the institution could not increase the annual
percentage rate for purchases to a rate that is higher than 15%
pursuant to Sec. --.24(b)(3) until January 1 of year two (which is
one year after the first account was opened).
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Finally, the Agencies understand that the replacement of one
consumer credit card account with another generally is not
instantaneous. If, for example, a consumer requests that a credit card
account with a $1,000 balance be upgraded to a credit card account that
offers rewards on purchases, the second account may be opened
immediately or within a few days but, for operational reasons, there
may be a delay before the $1,000 balance can be transferred and the
first account can be closed.\12\ Accordingly, the Agencies solicit
comment on whether the appropriate amount of time for the replacement
of one consumer credit card account with another is 15 days, 30 days,
or a different period.\13\
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\12\ As discussed above, the proposed commentary to Sec. --.21
would clarify that, in these circumstances, the institution could
not increase the annual percentage rate that applies to the $1,000
balance unless otherwise permitted by Sec. --.24.
\13\ Proposed comment 24-4 provides 15 days and 30 days as
alternatives.
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Section --.24(a) General Rule
The Agencies also understand that there is some confusion regarding
the relationship between comment 24(a)-1 and Regulation Z, 12 CFR
226.6(b)(2)(i)(D) with respect to the disclosure of penalty rates.
Specifically, comment 24(a)-1 states that institutions cannot satisfy
the disclosure requirements in Sec. --.24(a) by disclosing a range of
annual percentage rates or that a rate will be ``up to'' a particular
amount. In contrast, when more than one penalty rate may apply, 12 CFR
226.6(b)(2)(i)(D) permits creditors to disclose ``the highest rate that
could apply, instead of disclosing the specific rates or the range of
rates that could apply.'' Because the disclosure requirements in Sec.
--.24(a) are intended to ensure that consumers receive notice at
account opening of the specific annual percentage rates that will apply
to the categories of transactions on the account, those requirements do
not apply to rates that may or may not apply depending on a particular
event or occurrence (such as penalty rates) or rates that may be
applied at the institution's discretion. Therefore, the Agencies
propose to amend comment 24(a)-1 accordingly. The Agencies note,
however, that this clarification is limited to the disclosure
requirements in Sec. --.24(a) and does not alter Sec. --.24(a)'s
general prohibition on applying penalty rates or other contingent rates
unless specifically permitted by Sec. --.24(b).
The Agencies also propose the following clarifications and
technical corrections to the commentary to Sec. --.24(a):
Amend the example in comment 24(a)-2.i to clarify that the
institution
[[Page 20810]]
disclosed a penalty rate at account opening.
Amend the example in comment 24(a)-2.iii to clarify that
the 12 CFR 226.9(g) notice states that, if the consumer becomes more
than 30 days late on the account, the penalty rate will apply to all
balances on the account.
Amend the example in comment 24(a)-2.iii.C to correct a
typographical error.
Section --.24(b)(1) Account Opening Disclosure Exception
Section --.24(b)(1) provides that an annual percentage rate for a
category of transactions may be increased to a rate disclosed at
account opening upon expiration of a period of time disclosed at
account opening. Under this exception, if, for example, an institution
discloses at account opening that a 5% rate will apply to purchases for
six months and that a 15% rate will apply thereafter, the institution
can increase the rate on the existing purchase balance and on new
purchases to 15% after six months. These plans are sometimes referred
to as ``stepped rates.''
Comment 24(b)(1)-1 states that, because Sec. --.24(b)(1) is
limited to increased rates that will apply after a specified period of
time, the exception does not permit application of increased rates that
are disclosed at account opening but are contingent on a particular
event or occurrence or may be applied at the institution's discretion.
For example, as illustrated in comment 24(b)(1)-1.i, Sec. --.24(b)(1)
does not permit an institution to apply an increased penalty rate when
a consumer makes a late payment even if the institution disclosed that
rate at account opening. For clarity, the Agencies propose to move this
language into the text of Sec. --.24(b)(1). The Agencies also propose
to amend comment 24(b)(1)-1 to clarify that the examples illustrate the
application of Sec. --.24, rather than just Sec. --.24(a).
Comment 24(b)(1)-2 clarifies that nothing in Sec. --.24 prohibits
an institution from assessing interest due to the loss of a grace
period to the extent consistent with the prohibition on two-cycle
billing in Sec. --.25. Because the Agencies understand that there is
some confusion regarding the relationship between Sec. --.24 and the
provision of a grace period, the Agencies propose to add language to
this comment clarifying that an institution has not reduced an annual
percentage rate on a consumer credit card account for purposes of Sec.
--.24 if the institution does not charge interest on a balance when the
consumer pays that balance in full prior to the expiration of a grace
period. In addition, for organizational purposes, the Agencies propose
to redesignate this comment as 24-2 and renumber comment 24(b)(1)-3
accordingly.
Finally, the Agencies understand that there is some confusion as to
whether an institution waives the right to impose an increased rate
pursuant to Sec. --.24(b)(1) if it does not do so immediately upon
expiration of the specified time period. As a general matter, because
Sec. --.24 is intended to increase predictability and transparency for
consumers, the exceptions in Sec. --.24(b) do not permit institutions
to retain the right to increase a rate indefinitely and at their
discretion. For example, if at account opening an institution discloses
a stepped rate of 15% on purchases for one year and 20% thereafter, the
institution can apply a lower rate of 17% at the end of the year but,
if it wants to retain its right under Sec. --.24(b)(1) to apply the
20% rate to purchases made during the first year, it must disclose to
the consumer (pursuant to 12 CFR 226.9(c)) how long the 17% rate will
apply and that the 20% rate will apply thereafter so that the consumer
can make informed decisions when using the card. See comment 24(b)(1)-3
(proposed comment 24(b)(1)-2)).
The Agencies understand, however, that applying an increased rate
on a specific date can present operational difficulties when that date
falls in the middle of a billing cycle. Accordingly, to address this
concern, the Agencies propose to add a new comment 24(b)-1 clarifying
that, if Sec. --.24(b) permits an institution to apply an increased
annual percentage rate on a date that is not the first day of a billing
cycle, the institution may delay application of the increased rate
until the first day of the following billing cycle without
relinquishing the ability to apply that rate.\14\
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\14\ For example, assume that, at account opening on January 1,
an institution discloses that a 10% rate will apply to purchases for
six months and a 15% rate will apply thereafter. The first day of
the billing cycle for the account is the fifteenth of the month. If
the six-month period expires on July 1, the institution may delay
application of the 15% rate until July 15 without relinquishing its
ability to apply that rate under Sec. --.24(b)(1).
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Section --.24(b)(3) Advance Notice Exception
Section --.24(b)(3) provides that an annual percentage rate for a
category of transactions may be increased pursuant to a notice under 12
CFR 226.9(c) or (g) for transactions that occur more than seven days
after provision of the notice. The Agencies understand that there has
been some confusion regarding the interaction between this seven-day
period in Sec. --.24(b)(3) and the requirement in 12 CFR 226.9(c) and
(g) that notice of an increased rate be provided at least 45 days prior
to imposition of the increased rate. As illustrated in the examples in
comment 24(b)(3)-3, the distinction is that the institution may apply
the increased rate to any transaction that occurs after the seventh day
following provision of the notice, but it must wait 45 days to begin
accruing interest at that rate. The reason for this distinction is that
the two time periods serve different purposes. The seven-day period is
intended to ensure that the consumer receives the notice and is aware
of the increased rate before engaging in transactions to which that
increased rate will eventually apply (unless the consumer transfers or
pays off the balance). See 74 FR 5531. In contrast, the 45-day period
is intended to give the consumer sufficient time to evaluate whether to
continue using the credit card account at the increased rate or whether
better terms can be obtained elsewhere. See 74 FR 5344-5356. For
additional clarity, the Agencies propose to amend comment 24(b)(3)-2 to
state that, when calculating interest charges, Sec. --.24(b)(3) does
not permit an institution to reach back to days before the effective
date of the rate increase under 12 CFR 226.9(c) or (g)--in other words,
the date 45 days after provision of the notice.
The Agencies also propose to amend comment 24(b)(3)-2 to clarify
when a transaction is deemed to have occurred for purposes of Sec.
--.24(b)(3). Specifically, the current version of comment 24(b)(3)-2
states that an institution may apply a rate increased pursuant to Sec.
--.24(b)(3) to transactions that are authorized within seven days--but
are settled more than seven days--after provision of the notice. The
Agencies understand, however, that this distinction has created some
confusion because, for example, authorization may not be obtained for
all transactions and because the term ``settled'' could refer to
different points in the payment process, including settlement between
the acquirer and the merchant or settlement between the consumer and
the card issuer. Accordingly, for consistency and clarity, the Agencies
propose to amend comment 24(b)(3)-2 to clarify that when a transaction
occurred for purposes of Sec. --.24(b)(3) is determined by the date of
the transaction (without regard to when the transaction is authorized,
settled, or posted to the consumer's account). In addition, the
Agencies would clarify that, when a merchant places a ``hold''
[[Page 20811]]
on the available credit on an account for an estimated transaction
amount when the actual transaction amount will not be known until a
later date, the date of the transaction for purposes of Sec.
--.24(b)(3) is the date on which the merchant determines the actual
transaction amount. The Agencies also propose to amend the examples in
comment 24(b)(3)-3 for consistency with these proposed changes.
In addition, the Agencies propose to amend Sec. --.24(b)(3) and
its commentary to reflect that notice of an increased rate may be
provided under 12 CFR 226.9(b), which applies to supplemental access
devices (such as convenience checks) and additional features added to
the account after account opening. 12 CFR 226.9(b) requires creditors
to disclose the rates and other key terms applicable to the device or
feature before the consumer uses the device or feature for the first
time. For example, 12 CFR 226.9(b)(3)(A) requires that creditors
providing convenience checks to which a temporary promotional rate
applies disclose key terms on the front of the page containing the
checks, including the promotional rate, the period during which the
promotional rate will be in effect, and the rate that will apply after
the promotional rate expires. Thus, unlike rates increased pursuant to
a 12 CFR 226.9(c) and (g) notice, the seven-day period is not necessary
for rate increases disclosed pursuant to 12 CFR 226.9(b) because the
device or feature will not be used before the consumer has received
notice of the applicable rates and terms. Accordingly, the Agencies
propose to amend Sec. --.24(b)(3) to provide that increased rates
disclosed pursuant to 12 CFR 226.9(b) must not be applied to
transactions that occurred prior to provision of the notice. Section
--.24(b)(3) would continue to provide that increased rates disclosed
pursuant to 12 CFR 226.9(c) or (g) must not be applied to transactions
that occurred within seven days after provision of the notice. The
Agencies would also clarify in comment 24(b)(3)-2 that, if a rate
increase is disclosed pursuant to both 12 CFR 226.9(b) and 12 CFR
226.9(c), that rate may only be applied to transactions that occur more
than seven days after provision of the 12 CFR 226.9(c) notice. In
addition, the Agencies would add an illustrative example in new comment
24(b)(3)-4.iv.
Finally, the Agencies understand that clarification is needed
regarding the application of discounted promotional rates to existing
accounts. As discussed above, Sec. --.24(b)(1) permits stepped rates
disclosed at account opening. In addition, comment 24(b)(3)-3 provides
some examples of how a stepped rate could be provided pursuant to a 12
CFR 226.9(c) notice. The Agencies did not, however, specifically
address circumstances in which a discounted promotional stepped rate is
offered after account opening. Consistent with comment 24(b)(3)-3, the
Agencies believe that, if the consumer receives advance notice of the
term of the discounted rate and the rate that will apply after that
term expires, a promotional stepped rate offer on an existing account
can provide the same benefits to consumers as a promotional stepped
rate offer at account opening so long as the offer cannot be used to
increase the rate that applies to pre-existing balances.
Accordingly, to clarify that such offers are permitted, the
Agencies propose to add a new comment 24(b)(3)-4 stating that nothing
in Sec. --.24 prohibits an institution from lowering the annual
percentage rate that applies to an existing balance or to new
transactions. The comment would further state, however, that, if a
lower rate is applied to an existing balance, the institution cannot
subsequently increase the rate on that balance unless it has provided
the consumer with advance notice of the increase pursuant to 12 CFR
226.9(b) or (c). This notice must state the period of time during which
the lower rate will apply (or the date until which that rate will
apply) and the rate that will apply after expiration of that period.
Furthermore, to ensure that the consumer receives notice of the offer
before engaging in transactions that are subject to that offer (and
will therefore eventually be taken to a higher rate), the comment would
clarify that, when an institution applies a decreased rate to
transactions that occurred prior to provision of the notice (or, in the
case of a 12 CFR 226.9(c) or (g) notice, transactions that occurred
within seven days after provision of the notice), the institution may
not subsequently increase the rate that applies to those transactions
to a rate that is higher than the rate that applied prior to the
decrease.\15\ Finally, the comment would provide illustrative examples
of stepped rate offers that would comply with these requirements.\16\
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\15\ For example, assume that the annual percentage rate for
purchases on an account is 15% and that, pursuant to 12 CFR
226.9(c), the institution provides notice on July 1 that a rate of
5% will apply to purchases until December 31, after which a rate of
17% will apply. If the institution applies the 5% rate to purchases
made on or before July 8, the institution may only increase the rate
on those purchases to a maximum of 15% on December 31.
\16\ For the same reasons, the Agencies propose to amend comment
24(b)(1)-3 (proposed comment 24(b)(1)-2) to clarify that
institutions may offer discounted stepped rates during the first
year after account opening so long as the rate that applies after
expiration of the discounted rate does not exceed the rate disclosed
at account opening for that category of transactions.
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Section --.24(b)(5) Workout Arrangement Exception
Section --.24(b)(5) provides that an annual percentage rate may be
increased due to the consumer's failure to comply with the terms of a
workout arrangement between the institution and the consumer, provided
that the annual percentage rate applicable to a category of
transactions following any such increase does not exceed the rate that
applied to that category of transactions prior to commencement of the
workout arrangement. This exception is intended to encourage
institutions to continue offering workout arrangements that reduce
rates for consumers in serious default, while also ensuring that a
consumer who enters into such an arrangement but is unable to comply
with its terms is not charged a rate that exceeds the rate that applied
prior to the arrangement. See 74 FR 5532.
Because the term ``workout'' has been used by the Agencies in other
contexts,\17\ the Agencies understand that there is some confusion as
to whether this exception also applies to temporary hardship
arrangements that assist consumers in overcoming financial difficulties
by lowering the annual percentage rate for a period of time. For
example, if an account becomes seriously delinquent because of a loss
of employment, the institution may reduce the rate that applies to the
outstanding balance from the penalty rate to a rate of zero on the
condition that the consumer make payments that will cure the
delinquency within a specified period of time. If the arrangement is
successful, the institution may choose to return the annual percentage
rate to the rate that applied prior to commencement of the temporary
hardship arrangement. Because such arrangements can provide important
benefits to consumers, the Agencies propose to amend Sec. --.24(b)(5)
and its commentary to clarify that this exception also applies to
temporary hardship arrangements and when the consumer completes a
workout or temporary hardship arrangement.
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\17\ See, e.g., Board Supervisory Letter SR 03-1 on Account
Management and Loss Allowance Methodology for Credit Card Lending
(Jan. 8, 2003) (available at http://www.federalreserve.gov/boarddocs/srletters/2003/sr0301.htm); OTS Regulatory Bulletin RB 37-
16 on Examination Handbook, Asset Quality Section 218, Credit Card
Lending (May 8, 2006) (available at http://files.ots.treas.gov/74827.pdf).
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[[Page 20812]]
Proposed Sec. --.24(b)(6) Servicemembers Civil Relief Act Exception
The Agencies understand that clarification is required regarding
the relationship between Sec. --.24 and certain provisions of the
Servicemembers Civil Relief Act (SCRA), 50 U.S.C. app. 501 et seq.
Specifically, 50 U.S.C. app. 527(a)(1) provides that ``[a]n obligation
or liability bearing interest at a rate in excess of 6 percent per year
that is incurred by a servicemember, or the servicemember and the
servicemember's spouse jointly, before the servicemember enters
military service shall not bear interest at a rate in excess of 6
percent. * * *'' With respect to consumer credit card accounts, this
restriction applies during the period of military service. See 50
U.S.C. app. 527(a)(1)(B).\18\
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\18\ 50 U.S.C. app. 527(a)(1)(B) applies to obligations or
liabilities that do not consist of a mortgage, trust deed, or other
security in the nature of a mortgage.
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Under the current version of Sec. --.24, an institution that
complies with the SCRA by lowering the rate that applies to an existing
balance on a consumer credit card account when the consumer enters
military service would not be permitted to increase the rate for that
balance once the period of military service ends and the protections of
the SCRA no longer apply. The Agencies did not intend this result,
which appears to be inconsistent with the plain language of the SCRA.
Accordingly, the Agencies propose to add a new exception in Sec.
--.24(b)(6) stating that an annual percentage rate that has been
decreased pursuant to 50 U.S.C. app. 527 may be increased once that
provision no longer applies, provided that the increased rate does not
exceed the rate that applied prior to the period of military service.
Treatment of Deferred Interest and Similar Promotional Programs
In the final rule, the Agencies concluded that deferred interest
programs, as currently designed and marketed, are inconsistent with the
general prohibition in Sec. --.24 on the application of increased
rates to existing balances. See 74 FR 5527-5528. The Agencies noted
that, although such programs provide substantial benefits to consumers
who pay the balance in full prior to expiration of the program (thereby
avoiding the assessment of interest charges), consumers who do not do
so may be unfairly surprised, particularly because these programs are
typically marketed as ``interest free.'' Accordingly, the Agencies
determined that the assessment of deferred interest is effectively a
repricing of past transactions subject to Sec. --.24 and that
prohibiting this practice would improve transparency and enable
consumers to make more informed decisions regarding the cost of using
credit. See id.
The Agencies specifically stated, however, that Sec. --.24 does
not prohibit institutions from offering promotional programs that
provide similar benefits to consumers but do not raise concerns about
unfair surprise. In particular, the Agencies noted that an institution
could offer a program where interest is assessed on purchases at a
disclosed rate for a period of time but the interest charged is waived
if the principal is paid in full by the end of that period.
The Agencies understand that the distinction in the January 2009
Rule between deferred interest and waived interest has caused confusion
with respect to the manner in which institutions should structure
promotional programs under which the consumer will not be obligated to
pay interest that accrues on a balance if that balance is paid in full
by a specified date or within a specified period of time. In light of
this confusion, the Agencies believe that the January 2009 Rule focused
too heavily on the form or technical aspects of these programs.\19\
Deferred interest programs should not be categorically prohibited while
waived interest programs are categorically exempt from the requirements
of the final rule. Instead, the Agencies believe the better approach is
to focus on applying consistent standards to ensure that consumers are
not unfairly surprised by the cost of using these types of promotional
programs. Accordingly, the Agencies propose the following amendments.
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\19\ In particular, the Agencies understand that the references
in the January 2009 Rule to ``assessing'' or ``charging'' interest
have caused uncertainty about whether, during the promotional
period, an institution must treat accrued interest for which the
consumer may or may not ultimately be responsible (depending on
whether the balance is paid in full prior to expiration) as part of
the consumer's debt. The Agencies did not intend to regulate the
accounting treatment of this accrued interest. Instead, the Agencies
intended to ensure that consumers understand the amount of interest
for which they will be responsible if the balance is not paid in
full before expiration. As discussed elsewhere in this SUPPLEMENTARY
INFORMATION, the Board is proposing amendments to Regulation Z in
today's Federal Register to accomplish this purpose.
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As an initial matter, the Agencies understand that the distinction
in the January 2009 Rule between ``deferred interest'' programs and
``waived interest'' programs could be read to suggest that some
programs were covered by the final rule and others were not. Because
the protections consumers receive should not depend on this technical
distinction, the Agencies propose to amend the commentary to Sec.
--.24 to clarify that, although institutions may continue to provide
promotional programs under which the consumer will not be obligated to
pay interest that accrues on a balance if that balance is paid in full
within a specified period of time, those programs are subject to all of
the protections in Sec. --.24, including the general prohibition on
so-called ``hair trigger'' or ``universal default'' repricings of
existing balances. See proposed comments 24(a)-2.iv and 24(b)(3)-4.iii.
Thus, for example, if a consumer relies on this type of promotional
program when making a purchase, the institution cannot deny the
consumer the opportunity to avoid interest charges on that purchase by
paying the purchase in full prior to expiration of the promotional
period unless the consumer is more than 30 days' delinquent on the
account.\20\
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\20\ If, however, the waived or deferred interest balance is not
paid in full on or before the date the program expires, the
institution is not required to wait an additional 30 days before
charging accrued interest. See proposed comment 24(a)-2.iv.
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Furthermore, as discussed above, the Agencies propose to amend the
payment allocation rules in Sec. --.23 to ensure that consumers are
not required to pay off all balances on the account in order to receive
the benefits of these types of promotional programs. In addition,
elsewhere in today's Federal Register, the Board has proposed to amend
the advertising requirements in Regulation Z, 12 CFR 226.16, to address
concerns that the use of terms such as ``no interest'' to describe
deferred or waived interest programs may confuse consumers.
Specifically, whenever ``no interest'' or a similar term is used in an
advertisement for a deferred or waived interest program, proposed 12
CFR 226.16(h) would require the creditor to disclose that any balance
subject to the program must be paid in full by the end of the
promotional period to avoid interest charges (for example, ``no
interest if paid in full within six months''). In addition, the
creditor would be required to state that, if the balance subject to the
program is not paid in full within the promotional period, interest
will be charged from the date the consumer became obligated for each
transaction subject to the program.\21\ The Agencies believe that
[[Page 20813]]
these amendments will ensure that institutions can continue to offer
programs that provide substantial benefits to consumers while
protecting consumers from unexpected increases in the cost of completed
transactions.
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\21\ As discussed above, the Board has also proposed to amend
the periodic statement disclosures in Regulation Z, 12 CFR 226.7, to
ensure that consumers who utilize these types of promotional
programs are informed of the date on which the program expires and
the amount of interest for which they will be responsible if the
promotional balance is not paid in full by that date.
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Finally, the Agencies understand that there is some confusion
regarding implementation of the final rule with respect to existing
deferred interest programs. As noted above, the effective date of the
January 2009 Rule is July 1, 2010. In the SUPPLEMENTARY INFORMATION to
that rule, the Agencies provided guidance regarding the implementation
of Sec. --.24. See 74 FR 5534. The Agencies did not, however, address
the effect of the rule on deferred interest programs established prior
to the effective date that expire after that date. The Agencies did not
intend to convert these programs into interest-free loans by
prohibiting an institution from charging interest if the deferred
interest balance is not paid in full prior to expiration of the
deferred interest period. However, the Agencies will not permit
institutions to continue practices prohibited by the January 2009 Rule
after the effective date. Accordingly, if a deferred interest program
established prior to the effective date permits a consumer to avoid
deferred interest charges by paying the deferred interest balance in
full by a date that falls on or after July 1, 2010, the institution may
charge deferred interest to the account consistent with the terms of
the program, provided that: (1) Any periodic statement mailed or
delivered on or after July 1, 2010 complies with the disclosure
requirements in 12 CFR 226.7 (as amended); and (2) as of July 1, 2010,
the institution fully complies with the protections in the January 2009
Rule (as amended), including the payment allocation requirements in
proposed Sec. --.23(b) and the prohibitions on ``hair trigger'' and
``universal default'' repricings in Sec. --.24.
24(c) Treatment of Protected Balances
The Agencies propose to amend comment 24(c)(2)-1 to clarify that
Sec. --.24(c)(2) does not prohibit an institution from continuing to
assess a periodic fee that was assessed before the account had a
protected balance or from assessing fees such as late payment fees if
the only balance on the account is a protected balance.
Requests for Comment
The Agencies request comment on:
Whether institutions establish separate categories of
transactions based on factors other than annual percentage rates and,
if so, for what reasons and whether proposed comment 24-3 should be
revised accordingly.
Whether the proposed implementation guidance regarding
deferred interest plans provides sufficient protections for consumers
and flexibility for institutions.
Section --.25--Unfair Balance Computation Method
Section --.25(a) prohibits institutions from imposing finance
charges on balances on a consumer credit card account based on balances
for days in billing cycles that precede the most recent billing cycle
as a result of the loss of any time period provided by the institution
within which the consumer may repay any portion of the credit extended
without incurring finance charges. The prohibited practice is sometimes
referred to as ``two-cycle'' or ``double-cycle'' billing.
As discussed above, the Agencies are proposing amendments to Sec.
--.23, Sec. --.24, and Regulation Z that would clarify the substantive
and disclosure requirements for promotional programs under which a
consumer will not be obligated to pay interest that accrues on a
balance if that balance is paid in full prior to a specified date or
the expiration of a specified period of time. Consistent with these
proposed amendments, the Agencies also propose to add a new comment
25(a)-3, clarifying that Sec. --.25 does not prohibit the institution
from charging accrued interest under this type of program if the
balance is not paid in full prior to the specified date.
IV. Regulatory Analysis
Section VIII of the SUPPLEMENTARY INFORMATION to the January 2009
Rule sets forth the Agencies' respective analyses under the Regulatory
Flexibility Act (5 U.S.C. 601 et seq.) and the Paperwork Reduction Act
of 1995 (44 U.S.C. 3506; 5 CFR part 1320 Appendix A.1). See 74 FR 5548-
5551. This section also sets forth the OTS's determinations with
respect to Executive Orders 12866 and 13132 and the Unfunded Mandates
Reform Act of 1995 as well as the NCUA's determinations with respect to
Executive Order 13132 and the Treasury and General Government
Appropriations Act, 1999. See 74 FR 5551-5558. Because the proposed
amendments are clarifications and would not, if adopted, alter the
substance of the analyses and determinations accompanying the January
2009 Rule, the Agencies continue to rely on those analyses and
determinations for purposes of this rulemaking.
V. Solicitation of Comments on Use of Plain Language
Section 722 of the Gramm-Leach-Bliley Act requires the Board and
OTS to use plain language in all proposed and final rules published
after January 1, 2000. Additionally, NCUA's goal is to promulgate clear
and understandable regulations that impose minimal regulatory burdens.
Therefore, the Agencies specifically invite your comments on how to
make this proposal easier to understand.
List of Subjects
12 CFR Part 227
Banks, Banking, Credit, Intergovernmental relations, Trade
practices.
12 CFR Part 535
Consumer credit, Consumer protection, Credit, Credit cards,
Deception, Intergovernmental relations, Savings associations, Trade
practices, Unfairness.
12 CFR Part 706
Credit, Credit unions, Deception, Intergovernmental relations,
Trade practices, Unfairness.
Board of Governors of the Federal Reserve System
12 CFR Chapter II
Text of Proposed Revisions
Certain conventions have been used to highlight the proposed
revisions. New language is shown inside [rtrif]bold-type arrows[ltrif]
while language that would be deleted is set off with [lsqbb]bold-type
brackets[rsqbb].
Authority and Issuance
For the reasons discussed in the joint preamble, the Board proposes
to further amend 12 CFR part 227, as amended at 74 FR 5559, January 29,
2009, as set forth below:
PART 227--UNFAIR OR DECEPTIVE ACTS OR PRACTICES (REGULATION AA)
1. Section 227.23 is revised to read as follows:
Sec. 227.23 Unfair acts or practices regarding allocation of
payments.
When different annual percentage rates apply to different balances
on a consumer credit card account[rtrif]:
(a) General rule. Except as provided in paragraph (b) of this
section[ltrif], the bank must allocate any amount paid by the consumer
in excess of the required
[[Page 20814]]
minimum periodic payment among the balances using one of the following
methods:
[rtrif](1)[ltrif] [lsqbb](a)[rsqbb] High-to-low method. The amount
paid by the consumer in excess of the required minimum periodic payment
is allocated first to the balance with the highest annual percentage
rate and any remaining portion to the other balances in descending
order based on the applicable annual percentage rate.
[rtrif](2)[ltrif] [lsqbb](b)[rsqbb] Pro rata method. The amount
paid by the consumer in excess of the required minimum periodic payment
is allocated among the balances in the same proportion as each balance
bears to the total balance.
[rtrif](b) Special rule for accounts subject to certain promotional
programs. When a promotional program provides that a consumer will not
be obligated to pay interest that accrues on a balance if that balance
is paid in full prior to the expiration of a specified period of time,
the bank must allocate amounts paid by the consumer in excess of the
required minimum periodic payment first to that balance during the two
billing cycles immediately preceding expiration of the specified period
and any remaining portion to the other balances consistent with
paragraph (a) of this section.[ltrif]
2. Section 227.24 is amended by revising paragraph (b) to read as
follows:
Sec. 227.24 Unfair acts or practices regarding increases in annual
percentage rates.
* * * * *
(b) Exceptions. The prohibition in paragraph (a) of this section on
increasing annual percentage rates does not apply where an annual
percentage rate may be increased pursuant to one of the exceptions in
this paragraph.
(1) Account opening disclosure exception. An annual percentage rate
for a category of transactions may be increased to [rtrif]an annual
percentage rate[ltrif] [lsqbb]a rate[rsqbb] disclosed at account
opening upon expiration of a period of time disclosed at account
opening. [rtrif]This exception does not permit application of an
increased annual percentage rate disclosed at account opening that is
contingent on a particular event or occurrence or that may be applied
at the bank's discretion.[ltrif]
(2) Variable rate exception. An annual percentage rate for a
category of transactions that varies according to an index that is not
under the bank's control and is available to the general public may be
increased due to an increase in the index.
(3) Advance notice exception. An annual percentage rate for a
category of transactions may be increased pursuant to a notice under 12
CFR 226.9[rtrif](b), (c), or (g)[ltrif] [lsqbb](c) or
(g)[rsqbb][rtrif], provided that:
(i) If the bank discloses the increased rate pursuant to 12 CFR
226.9(b), that rate must not be applied to transactions that occurred
prior to provision of the notice;
(ii) If the bank discloses the increased rate pursuant to 12 CFR
226.9(c) or (g), that rate must not be applied to transactions that
occurred within seven days after provision of the notice; and
(iii) This exception does not permit an increase in any annual
percentage rate during the first year after the account is
opened.[ltrif] [lsqbb]for transactions that occur more than seven days
after provision of the notice. This exception does not permit an
increase in any annual percentage rate during the first year after the
account is opened.[rsqbb]
(4) Delinquency exception. An annual percentage rate may be
increased due to the bank not receiving the consumer's required minimum
periodic payment within 30 days after the due date for that payment.
(5) Workout [rtrif]and temporary hardship[ltrif] arrangement
exception. An annual percentage rate may be increased due to the
consumer's [rtrif]completion of[ltrif] [lsqbb]failure to comply with
the terms of[rsqbb] a workout [rtrif]or temporary hardship[ltrif]
arrangement between the bank and the consumer [rtrif]or the consumer's
failure to comply with the terms of such an arrangement[ltrif],
provided that the annual percentage rate applicable to a category of
transactions following any such increase does not exceed the rate that
applied to that category of transactions prior to commencement of the
[lsqbb]workout[rsqbb] arrangement.
[rtrif](6) Servicemembers Civil Relief Act exception. An annual
percentage rate that has been decreased pursuant to 50 U.S.C. app. 527
may be increased once that provision no longer applies, provided that
the annual percentage rate applicable to a category of transactions
following any such increase does not exceed the rate that applied to
that category of transactions prior to the decrease.[ltrif]
* * * * *
3. In Supplement I to Part 227:
A. Add Section 227.21--Definitions.
B. Under Section 227.22--Unfair Acts or Practices Regarding Time to
Make Payment, under 22(b) Compliance with General Rule, paragraph 3. is
revised.
C. Under Section 227.23--Unfair Acts or Practices Regarding
Allocation of Payments:
(i) Paragraph 2., the heading of paragraph 3., and paragraphs 4.
and 6. are revised;
(ii) Redesignate 23(a) High-to-Low Method as 23(a)(1) High-to-Low
Method;
(iii) Under 23(a)(1) High-to-Low Method, paragraph 1.v is added;
(iv) Redesignate 23(b) Pro Rata Method as 23(a)(2) Pro Rata Method;
(v) Under 23(a)(2) Pro Rata Method, paragraph 1. is revised; and
(vi) Add 23(b) Special Rule for Accounts Subject to Certain
Promotional Programs.
D. Under Section 227.24--Unfair Acts or Practices Regarding
Increases in Annual Percentage Rates:
(i) Paragraph 1. is revised;
(ii) Add paragraphs 2., 3., 4.;
(iii) Under 24(a) General Rule, paragraphs 1., 2.i. introductory
text, 2.iii. introductory text, and 2.iii.C. are revised, and paragraph
2.iv is added;
(iv) Under 24(b) Exceptions, add paragraph 1.;
(v) Under 24(b)(1) Account Opening Disclosure Exception, paragraph
1. introductory text is revised, paragraph 1.iii. and paragraph 2. are
removed, paragraph 3. is redesignated as paragraph 2., the introductory
text of newly designated paragraph 2. is revised, and paragraph 2.ii.
is added;
(vi) Under 24(b)(2) Variable Rate Exception, the heading of
paragraph 5. is revised;
(vii) Under 24(b)(3) Advance Notice Exception, paragraphs 2. and 3.
are revised and paragraph 4. is added;
(viii) Revise 24(b)(5) Workout Arrangement Exception;
(ix) Under 24(c) Treatment of Protected Balances, under 24(c)(1)
Repayment, under Paragraph 24(c)(1)(i), the heading of paragraph 2. is
revised; and
(x) Under 24(c) Treatment of Protected Balances, under 24(c)(2)
Fees and Charges, paragraph 1. is revised.
E. Under Section 227.25--Unfair Balance Computation Method, under
25(a) General Rule, paragraph 3. is added.
* * * * *
Subpart C--Consumer Credit Card Account Practices Rule
[rtrif]Sec. 227.21--Definitions
21(a) Annual Percentage Rate
1. Use of ``rate.'' For purposes of Subpart C, ``rate'' has the
same meaning as ``annual percentage rate'' unless otherwise specified.
21(c) Consumer Credit Card Account
1. Closed accounts. If a consumer credit card account with an
outstanding balance is closed, the account continues to be the same
consumer credit card account for purposes of Subpart C with
[[Page 20815]]
respect to that balance. For example, if a bank or a consumer closes a
consumer credit card account with an outstanding balance, the bank
would still be prohibited from increasing the annual percentage rate
that applies to that balance unless permitted by one of the exceptions
in Sec. 227.24(b).
2. Acquired accounts. If, through merger or acquisition (for
example), a bank acquires a consumer credit card account with an
outstanding balance, the account continues to be the same consumer
credit card account for purposes of Subpart C with respect to that
balance. For example, if a consumer credit card account has a $1,000
purchase balance with an annual percentage rate of 15% and the bank
that acquires that account applies an 18% rate to purchases, the bank
would be prohibited from applying the 18% rate to the $1,000 balance
unless permitted by one of the exceptions in Sec. 227.24(b).
3. Balance transfers.
i. Between accounts issued by the same bank. If a balance is
transferred from a consumer credit card account issued by a bank to
another credit account issued by the same bank or its affiliate or
subsidiary, the account continues to be the same consumer credit card
account for purposes of Subpart C with respect to that balance unless
the account to which the balance is transferred is an open-end credit
plan secured by the consumer's dwelling. For example, if a consumer
credit card account has a $2,000 purchase balance with an annual
percentage rate of 15% and that balance is transferred to another
consumer credit card account issued by the same bank that applies an
18% rate to purchases, the bank would be prohibited from applying the
18% rate to the $2,000 balance unless permitted by one of the
exceptions in Sec. 227.24(b). Additional circumstances in which a
balance is considered transferred for purposes of this comment include
when:
A. A retail credit card with an outstanding balance is replaced or
substituted with a cobranded general purpose card that can be used with
a broader merchant base;
B. A credit card account with an outstanding balance is replaced or
substituted with another credit card account offering different
features;
C. A credit card account with an outstanding balance is
consolidated or combined with one or more other credit card accounts
into a single credit card account; and
D. A credit card account is replaced or substituted with a line of
credit that can be accessed solely by an account number.
ii. Between accounts issued by different institutions. If a balance
is transferred to a consumer credit card account issued by a bank from
a credit account issued by a different bank or an institution that is
not an affiliate or subsidiary of the bank that issued the consumer
credit card account, the account is not the same consumer credit card
account for purposes of Subpart C with respect to that balance. Thus,
the provisions of Subpart C do not prohibit the bank to which the
balance is transferred from applying its account terms to that balance,
provided that those terms comply with Subpart C. For example, if a
consumer credit card account issued by bank A has a $1,000 purchase
balance at an annual percentage rate of 15% and the consumer transfers
that balance to a consumer credit card account with a purchase rate of
17% issued by bank B, bank B may apply the 17% rate to the $1,000
balance. However, bank B may not subsequently increase the rate on that
balance unless permitted by one of the exceptions in Sec.
227.24(b).[ltrif]
Sec. 227.22--Unfair Acts or Practices Regarding Time To Make Payment
* * * * *
22(b) Compliance With General Rule
* * * * *
3. Example of alternative method of compliance. Assume that, for a
particular type of consumer credit card account, a bank only provides
periodic statements electronically and only accepts payments
electronically (consistent with applicable law and regulatory
guidance[rtrif], including the consumer notice and consent procedures
of the Electronic Signatures in Global and National Commerce Act (E-
Sign Act), 15 U.S.C. 7001 et seq.[ltrif]). Under these circumstances,
the bank could comply with Sec. 227.22(a) even if it does not provide
periodic statements 21 days before the payment due date consistent with
Sec. 227.22(b)(2).
Sec. 227.23--Unfair Acts or Practices Regarding Allocation of Payments
* * * * *
2. Adjustments of one dollar or less permitted. When allocating
payments, the bank may adjust amounts by one dollar or less. For
example, if a bank is allocating $100 pursuant to Sec.
227.23[rtrif](a)(2)[ltrif][lsqbb](b)[rsqbb] among balances of $1,000,
$2,000, and $4,000, the bank may apply $14 to the $1,000 balance, $29
to the $2,000 balance, and $57 to the $4,000 balance.
3. Applicable balances and [lsqbb]annual percentage[rsqbb] rates. *
* *
4. Use of permissible allocation methods. A bank is not prohibited
from changing the allocation method for a consumer credit card account
or from using different allocation methods for different consumer
credit card accounts, so long as the methods used are consistent with
Sec. 227.23. For example, a bank may change from allocating to the
highest rate balance first pursuant to Sec. 227.23(a)[rtrif](1)[ltrif]
to allocating pro rata pursuant to Sec.
227.23[rtrif](a)(2)[ltrif][lsqbb](b)[rsqbb] or vice versa. Similarly, a
bank may allocate to the highest rate balance first pursuant to Sec.
227.23(a)[rtrif](1)[ltrif] on some of its accounts and allocate pro
rata pursuant to Sec. 227.23[rtrif](a)(2)[ltrif][lsqbb](b)[rsqbb] on
other accounts.
* * * * *
6. Balances with the same [lsqbb]annual percentage[rsqbb] rate.
When the same annual percentage rate applies to more than one balance
on an account and a different annual percentage rate applies to at
least one other balance on that account, Sec. 227.23
[rtrif]generally[ltrif] does not require that any particular method be
used when allocating among the balances with the same annual percentage
rate. Under these circumstances, a bank may treat the balances with the
same rate as a single balance or separate balances. See comments
23(a)[rtrif](1)[ltrif]-1.iv and
23[rtrif](a)(2)[ltrif][lsqbb](b)[rsqbb]-2.iv. [rtrif]However, when a
consumer will not be obligated to pay interest that accrues on a
balance if that balance is paid in full prior to the expiration of a
specified period of time, that balance must be treated as a balance
with an annual percentage rate of zero for purposes of Sec. 227.23
during that period of time. For example, if an account has a $1,000
purchase balance and a $2,000 balance on which the consumer will not be
obligated to pay interest if that balance is paid in full prior to July
1 and a 15% annual percentage rate applies to both, the balances must
be treated as balances with different rates for purposes of Sec.
227.23 until July 1. In addition, for purposes of allocating pursuant
to Sec. 227.23(a)(1), any amount paid by the consumer in excess of the
required minimum periodic payment must be applied first to the $1,000
purchase balance except during the last two billing cycles of the
promotional period (when it must be applied first to any remaining
portion of the $2,000 balance). See comment 23(a)(1)-1.v.[ltrif]
23(a)[rtrif](1)[ltrif] High-to-Low Method
1. * * *
[rtrif]v. Assume that on January 1 a consumer uses a credit card
account to make a $1,200 purchase subject to a
[[Page 20816]]
promotional offer under which interest accrues at an annual percentage
rate of 15% but the consumer will not be obligated to pay that interest
if the balance is paid in full on or before June 30. The billing cycles
for this account begin on the first day of the month and end on the
last day of the month. Each month from January through June, the
consumer uses the account to make $200 in purchases that are not
subject to the promotional offer but are subject to the 15% rate. Each
month from February through June, the consumer pays $400 in excess of
the required minimum periodic payment on the payment due date, which is
the twenty-fifth of the month. Any interest that accrues on the non-
promotional purchases is paid by the required minimum periodic payment.
A bank using this method would allocate the $400 excess payments
received on February 25, March 25, and April 25 as follows: $200 to pay
off the non-promotional balance (that is subject to the 15% rate) and
the remaining $200 to the promotional balance (that is treated as a
balance with a rate of zero). Section 227.23(b), however, requires the
bank to allocate the entire $400 excess payment received on May 25 to
the promotional balance. Similarly, Sec. 227.23(b) requires the bank
to allocate the $400 excess payment received on June 25 as follows:
$200 to the promotional balance (which pays that purchase in full) and
the remaining $200 to the non-promotional balance.[ltrif]
23[rtrif](a)(2)[ltrif][lsqbb](b)[rsqbb] Pro Rata Method
1. Total balance. A bank may, but is not required to, deduct
amounts paid by the consumer's required minimum periodic payment when
calculating the total balance for purposes of Sec.
227.23[rtrif](a)(2)[ltrif][lsqbb](b)(3)[rsqbb]. See comment
23[rtrif](a)(2)[ltrif][lsqbb](b)[rsqbb]-2.iii.
* * * * *
[rtrif]23(b) Special Rule for Accounts Subject to Certain Promotional
Programs
1. Grace periods. Section 227.23(b) applies to promotional programs
under which the consumer is not obligated to pay interest that accrues
on a balance if that balance is paid in full prior to the expiration of
a specified period of time. A grace period during which a consumer may
repay one or more balances on a consumer credit card account is not a
``promotional program'' for purposes of Sec. 227.23(b).[ltrif]
Sec. 227.24--Unfair Acts or Practices Regarding Increases in Annual
Percentage Rates
1. Relationship to Regulation Z, 12 CFR part 226. A bank that
complies with the applicable disclosure requirements in Regulation Z,
12 CFR part 226, has complied with the disclosure requirements in Sec.
227.24. See 12 CFR 226.5a, 226.6, 226.9. For example, a bank may comply
with the requirement in Sec. 227.24(a) to disclose at account opening
the annual percentage rates that will apply to each category of
transactions by complying with the disclosure requirements in 12 CFR
226.5a regarding applications and solicitations and the requirements in
12 CFR 226.6 regarding account-opening disclosures. Similarly, in order
to increase an annual percentage rate on new transactions pursuant to
Sec. 227.24(b)(3), a bank must comply with the disclosure requirements
in 12 CFR 226.9[rtrif](b), (c), or (g)[ltrif] [lsqbb](c) or (g)[rsqbb].
However, nothing in Sec. 227.24 alters the requirements in 12 CFR
226.9(c) and (g) that creditors provide consumers with written notice
at least 45 days prior to the effective date of certain increases in
the annual percentage rates on open-end (not home-secured) credit
plans.
[rtrif]2. Relationship to grace period. Nothing in Sec. 227.24
prohibits a bank from assessing interest due to the loss of a grace
period to the extent consistent with Sec. 227.25. In addition, a bank
has not reduced an annual percentage rate on a consumer credit account
for purposes of Sec. 227.24 if the bank does not charge interest on a
balance when the consumer pays that balance in full prior to the
expiration of a grace period.
3. Category of transactions. For purposes of Sec. 227.24, a
``category of transactions'' is a type or group of transactions to
which an annual percentage rate applies that is different than the
annual percentage rate that applies to other transactions. For example,
purchase transactions, cash advance transactions, and balance transfer
transactions are separate categories of transactions for purposes of
Sec. 227.24 if a bank applies different annual percentage rates to
each. Furthermore, if, for example, the bank applies different annual
percentage rates to different types of purchase transactions (such as
one rate for purchases of gasoline and a different rate for all other
purchases), each type constitutes a separate category of transactions
for purposes of Sec. 227.24.
4. Account opening.
i. Multiple accounts with same bank. When a consumer has a credit
card account with a bank and the consumer opens a new credit card
account with the same bank (or its affiliate or subsidiary), the
opening of the new account constitutes an ``account opening'' for
purposes of Sec. 227.24 if, more than 15/30 days after the new account
is opened, the consumer has the ability to obtain additional extensions
of credit on each account. For example, assume that, on January 1 of
year one, a consumer opens a credit card account with a bank. On July 1
of year one, the consumer opens a second credit card account with that
bank. On July 15, a $1,000 balance is transferred from the first
account to the second account. The opening of the second account
constitutes the opening of an account for purposes of Sec. 227.24 so
long as, on July 17/August 1, the consumer can engage in transactions
using either account. Under these circumstances, the bank could not
increase an annual percentage rate on the second account pursuant to
Sec. 227.24(b)(3) until July 1 of year two (which is one year after
the second account was opened).
ii. Replacement or consolidation.
A. Generally. A consumer credit card account has not been opened
for purposes of Sec. 227.24 when a consumer credit card account issued
by a bank is replaced or consolidated with another consumer credit card
account issued by the same bank (or its affiliate or subsidiary).
Circumstances in which a consumer credit card account has not been
opened for purposes of Sec. 227.24 include when:
(1) A retail credit card is replaced with a cobranded general
purpose card that can be used at a wider number of merchants;
(2) A credit card account is replaced with another consumer credit
card account offering different features;
(3) A credit card account is consolidated or combined with one or
more other credit card accounts into a single credit card account; or
(4) A credit card account acquired through merger or acquisition is
replaced with a credit card account issued by the acquiring bank.
B. Limitation. A bank that replaces or consolidates a consumer
credit card account with another consumer credit card account issued by
the bank (or its affiliate or subsidiary) may not increase an annual
percentage rate in a manner otherwise prohibited by Sec. 227.24. For
example, assume that, on January 1 of year one, a consumer opens a
consumer credit card account with an annual percentage rate for
purchases of 15%. On July 1 of year one, the account is replaced with a
consumer credit card account that offers different features (such as
rewards on purchases). Under
[[Page 20817]]
these circumstances, the bank cannot increase the annual percentage
rate for purchases to a rate that is higher than 15% pursuant to Sec.
227.24(b)(3) until January 1 of year two (which is one year after the
first account was opened).[ltrif]
24(a) General Rule
1. Rates that will apply to each category of transactions. Section
227.24(a) requires banks to disclose, at account opening, the annual
percentage rates that will apply to each category of transactions on
the account. A bank cannot satisfy this requirement by disclosing at
account opening only a range of rates or that a rate will be ``up to''
a particular amount. [rtrif]The disclosure requirements in Sec.
227.24(a) do not apply to annual percentage rates that are contingent
on a particular event or occurrence or may be applied at the bank's
discretion (such as penalty rates) insofar as those rates may be
applied consistent with Sec. 227.24.[ltrif]
2. * * *
i. Assume that, at account opening on January 1 of year one, a bank
discloses that the annual percentage rate for purchases is a non-
variable rate of 15% and will apply for six months. The bank also
discloses that, after six months, the annual percentage rate for
purchases will be a variable rate that is currently 18% and will be
adjusted quarterly by adding a margin of 8 percentage points to a
publicly available index not under the bank's control.
[rtrif]Furthermore,[ltrif] [lsqbb]Finally,[rsqbb] the bank discloses
that the annual percentage rate for cash advances is the same variable
rate that will apply to purchases after six months. [rtrif]Finally, the
bank discloses that, to the extent consistent with Sec. 227.24 and
other applicable law, a non-variable penalty rate of 30% may apply if
the consumer makes a late payment.[ltrif] The payment due date for the
account is the twenty-fifth day of the month and the required minimum
periodic payments are applied to accrued interest and fees but do not
reduce the purchase and cash advance balances.
* * * * *
iii. Assume that, at account opening on January 1 of year one, a
bank discloses that the annual percentage rate for purchases is a
variable rate determined by adding a margin of 6 percentage points to a
publicly-available index outside of the bank's control. The bank also
discloses that, to the extent consistent with Sec. 227.24 and other
applicable law, a non-variable penalty rate of 28% may apply if the
consumer makes a late payment. The due date for the account is the
fifteenth of the month. On May 30 of year two, the account has a
purchase balance of $1,000. On May 31, the creditor provides a notice
pursuant to 12 CFR 226.9(c) informing the consumer of a new variable
rate that will apply on July 16 for all purchases made on or after June
8 (calculated by using the same index and an increased margin of 8
percentage points). On June 7, the consumer makes a $500 purchase. On
June 8, the consumer makes a $200 purchase. On June 25, the bank has
not received the payment due on June 15 and provides the consumer with
a notice pursuant to 12 CFR 226.9(g) stating that the penalty rate of
28% will apply as of August 9 to all transactions made on or after July
3 [rtrif]and that, if the consumer becomes more than 30 days late, the
penalty rate will apply to all balances on the account[ltrif]. On July
4, the consumer makes a $300 purchase.
* * * * *
C. Same facts as paragraph A. above except the payment due on June
15 of year two is received on July 20. Section 227.24(b)(4) permits the
bank to apply the 28% penalty rate to all balances on the account and
to future transactions because it has not received payment within 30
days after the due date. Because the bank provided a 12 CFR 226.9(g)
notice on June [rtrif]25[ltrif][lsqbb]24[rsqbb] stating the 28% penalty
rate, the bank may apply the 28% penalty rate to all balances on the
account as well as any future transactions on August 9 without
providing an additional notice pursuant to 12 CFR 226.9(g).
[rtrif]iv. Assume that, at account opening on January 1 of year
one, the bank discloses a promotional program under which interest on
purchases made during January will accrue at a non-variable rate of
20%, but the consumer will not be obligated to pay that interest if
those purchases are paid in full by December 31 of year one. On January
15, the consumer makes a purchase of $2,000. No other transactions are
made on the account. The payment due on April 1 is not received until
April 10. Section 227.24 does not permit the bank to deny the consumer
the opportunity to avoid interest charges on the $2,000 purchase by
paying that purchase in full on or before December 31 of year one. If,
however, the $2,000 purchase remains unpaid on January 1 of year two,
Sec. 227.24 does not prohibit the bank from charging the interest
accrued on that purchase during year one.[ltrif]
24(b) Exceptions
[rtrif]1. Delayed implementation of rate increase. If Sec.
227.24(b) permits a bank to apply an increased annual percentage rate
on a date that is not the first day of a billing cycle, the bank may
delay application of the increased rate until the first day of the
following billing cycle without relinquishing the ability to apply that
rate. For example, assume that, at account opening on January 1, a bank
discloses that a non-variable annual percentage rate of 10% will apply
to purchases for six months and a non-variable rate of 15% will apply
thereafter. The first day of the billing cycle for the account is the
fifteenth of the month. If the six-month period expires on July 1, the
bank may delay application of the 15% rate until July 15 without
relinquishing its ability to apply that rate under Sec.
227.24(b)(1).[ltrif]
24(b)(1) Account Opening Disclosure Exception
1. Prohibited increases in rate. Section Sec. 227.24(b)(1) permits
an increase in the annual percentage rate for a category of
transactions to a rate disclosed at account opening upon expiration of
a period of time that was also disclosed at account opening. Section
227.24(b)(1) does not permit application of [rtrif]an increased annual
percentage rate[ltrif] [lsqbb]increased rates that are[rsqbb] disclosed
at account opening [rtrif]that is[ltrif] [lsqbb]but are[rsqbb]
contingent on a particular event or occurrence or [rtrif]that[ltrif]
may be applied at the bank's discretion. The following examples
illustrate rate increases that are not permitted by Sec.
227.24[lsqbb](a)[rsqbb]:
* * * * *
[lsqbb]iii. Assume that a bank discloses at account opening on
January 1 of year one that interest on purchases will be deferred for
one year, although interest will accrue on purchases during that year
at a non-variable rate of 20%. The bank further discloses that, if all
purchases made during year one are not paid in full by the end of that
year, the bank will begin charging interest on the purchase balance and
new purchases at 20% and will retroactively charge interest on the
purchase balance at a rate of 20% starting on the date of each purchase
made during year one. On January 1 of year one, the consumer makes a
purchase of $1,500. No other transactions are made on the account. On
January 1 of year two, $500 of the $1,500 purchase remains unpaid.
Section 227.24 does not permit the bank to reach back to charge
interest on the $1,500 purchase from January 1 through December 31 of
year one. However, the bank may apply the previously-disclosed 20% rate
to the $500 purchase balance beginning on January 1 of year two
(pursuant to Sec. 227.24(b)(1)).[rsqbb]
[lsqbb]2. Loss of grace period. Nothing in Sec. 227.24 prohibits a
bank from assessing interest due to the loss of a grace period to the
extent consistent with Sec. 227.25.[rsqbb]
[[Page 20818]]
[rtrif]2.[ltrif] [lsqbb]3.[rsqbb] Application of rate that is lower
than disclosed rate. Section Sec. 227.24(b)(1) permits an increase in
the annual percentage rate for a category of transactions to a rate
disclosed at account opening upon expiration of a period of time that
was also disclosed at account opening. Nothing in Sec. 227.24
prohibits a bank from applying a rate that is lower than
[rtrif]a[ltrif] [lsqbb]the[rsqbb] disclosed rate [rtrif]either during
or[ltrif] upon expiration of the period. However, [rtrif]once
the[ltrif] [lsqbb]if a[rsqbb] lower rate is applied to an existing
balance, the bank cannot subsequently increase the rate on that balance
unless it [lsqbb]has[rsqbb] provided the consumer with advance notice
of the increase pursuant to 12 CFR 226.9[rtrif](b)[ltrif] or (c).
[rtrif]This notice must state the period of time during which the lower
rate will apply and the rate that will apply after expiration of that
period.[ltrif] Furthermore, [rtrif]a bank that applies a lower rate to
transactions that occurred during the first year after account opening
may not subsequently increase the rate that applies to those
transactions to a rate that is higher than the increased rate disclosed
at account opening[ltrif] [lsqbb]the bank cannot increase the rate on
that existing balance to a rate that is higher than the increased rate
disclosed at account opening[rsqbb]. The following [rtrif]examples
illustrate[ltrif] [lsqbb]example illustrates[rsqbb] the application of
[rtrif]the[ltrif] [lsqbb]this[rsqbb] rule:
* * * * *
[rtrif]ii. Assume that a bank discloses at account opening on
January 1 of year one that a non-variable annual percentage rate of 15%
will apply to purchases for one year, after which that rate will
increase to a non-variable rate of 18%. The bank also discloses that,
to the extent consistent with Sec. 227.24 and other applicable law, a
non-variable penalty rate of 30% may apply if the consumer's required
minimum periodic payment is received after the payment due date, which
is the tenth of the month. The required minimum periodic payments are
applied to accrued interest and fees but do not reduce the purchase
balance.
A. On September 30 of year one, the account has a purchase balance
of $1,400 at the 15% rate. On October 1, the bank provides a notice
pursuant to 12 CFR 226.9(c) informing the consumer that the rate for
new purchases will decrease to a non-variable rate of 10% for six
months (from October 1 through March 31 of year two) and that,
beginning on April 1 of year two, the rate for purchases will increase
to a non-variable rate of 20%. The bank does not apply the 10% rate to
the $1,400 purchase balance. On October 15 of year one, the consumer
makes a $300 purchase at the 10% rate. On January 1 of year two, the
bank may begin accruing interest on the $1,400 purchase balance at 18%
(as disclosed at account opening). On January 15 of year two, the
consumer makes a $150 purchase at the 10% rate. On April 1 of year two,
the 10% rate that applies to the $300 purchase and the $150 purchase
expires. The bank may begin accruing interest on the $150 purchase at
20% (as disclosed in the 12 CFR 226.9(c) notice). Because, however, the
$300 purchase occurred during the first year after account opening, the
bank cannot increase the rate that applies to that purchase to a rate
that is higher than the 18% rate disclosed at account opening.
B. Same facts as above except that the required minimum periodic
payment due on November 10 of year one is not received until November
15. Section 227.24(b)(1) does not permit the bank to increase any
annual percentage rate on the account at this time. The bank may,
however, apply the 30% penalty rate to new transactions beginning on
January 1 of year two pursuant to Sec. 227.24(b)(3) by providing a 12
CFR 226.9(g) notice informing the consumer of this increase no later
than November 16 of year one. On January 1 of year two, Sec.
227.24(b)(1) permits the bank to begin accruing interest on the $1,400
purchase balance at 18% (as disclosed at account opening). If the
consumer makes the $150 purchase on January 15 of year two, Sec.
227.24(b)(3) would permit the bank to apply the 30% rate to that
purchase. On April 1 of year two, the 10% rate that applies to the $300
purchase expires. Because this purchase occurred during the first year
after account opening, the bank cannot increase the rate that applies
to that purchase to a rate that is higher than the 18% rate disclosed
at account opening.[ltrif]
24(b)(2) Variable Rate Exception
* * * * *
5. Changing a variable [lsqbb]annual percentage[rsqbb] rate to a
non-variable [lsqbb]annual percentage[rsqbb] rate. * * *
* * * * *
24(b)(3) Advance Notice Exception
* * * * *
2. Transactions that [rtrif]occurred prior to provision of notice
or within seven days after provision of notice[ltrif] [lsqbb]occur more
than seven days after notice provided[rsqbb]. [rtrif]Section
227.24(b)(3) generally permits a bank to apply an increased rate to
transactions that occur after provision of a 12 CFR 226.9(b) notice or
more than seven days after provision of a 12 CFR 226.9(c) or (g)
notice. If a rate increase is disclosed pursuant to both 12 CFR
226.9(b) and 12 CFR 226.9(c), that rate may only be applied to
transactions that occur more than seven days after provision of the 12
CFR 226.9(c) notice. Section 227.24(b)(3) does not permit a bank to
reach back to days before the effective date of the rate increase under
12 CFR 226.9(c) or (g) when calculating interest charges. See comment
24(b)(3)-3.[ltrif] [lsqbb]Section 227.24(b)(3) generally prohibits a
bank from applying an increased rate to transactions that occur within
seven days after provision of the 12 CFR 226.9 (c) or (g)
notice.[rsqbb] [rtrif]Whether a transaction occurred prior to provision
of a notice or within seven days after provision of a notice is
determined by the date of the transaction. In some cases, however, a
merchant may place a ``hold'' on the available credit on an account for
an estimated transaction amount when the actual transaction amount will
not be known until a later date. In these circumstances, the date of
the transaction for purposes of Sec. 227.24(b)(3) is the date on which
the merchant determines the actual transaction amount. For example,
assume that, when a consumer uses a credit card account to check into a
hotel on July 1, the hotel obtains authorization for a $750 hold on the
account to ensure there is adequate available credit to cover the
anticipated cost of the stay. When the consumer checks out on July 4,
the actual cost of the stay is $850 because of additional incidental
costs, and the hotel charges this amount to the account. For purposes
of Sec. 227.24(b)(3), the transaction occurred on July 4.[ltrif]
[lsqbb]This prohibition does not, however, apply to transactions that
are authorized within seven days after provision of the 12 CFR 226.9
(c) or (g) notice but are settled more than seven days after the notice
was provided.[rsqbb]
3. Examples.
i. Assume that a consumer credit card account is opened on January
1 of year one. On March 14 of year two, the account has a purchase
balance of $2,000 at a non-variable annual percentage rate of 15%. On
March 15, the bank provides a notice pursuant to 12 CFR 226.9(c)
informing the consumer that the rate for new purchases will increase to
a non-variable rate of 18% on May 1. The notice further states that the
18% rate will apply for six months (until November 1) and states that
thereafter the bank will apply a variable rate that is currently 22%
and is determined by adding a margin of 12 percentage points to a
publicly-available index that is not under the bank's
[[Page 20819]]
control. The seventh day after provision of the notice is March 22 and,
on that date, the consumer makes a $200 purchase. On March 24, the
consumer makes a $1,000 purchase. On May 1, Sec. 227.24(b)(3) permits
the bank to begin accruing interest at 18% on the $1,000 purchase made
on March 24. The bank is not permitted to apply the 18% rate to the
$2,200 purchase balance as of March 22. After six months (November 2),
the bank may begin accruing interest on any remaining portion of the
$1,000 purchase at the previously-disclosed variable rate determined
using the 12-point margin.
[lsqbb]ii. Same facts as above except that the $200 purchase is
authorized by the bank on March 22 but is not settled until March 23.
On May 1, Sec. 227.24(b)(3) permits the bank to start charging
interest at 18% on both the $200 purchase and the $1,000 purchase. The
bank is not permitted to apply the 18% rate to the $2,000 purchase
balance as of March 22.[rsqbb]
[rtrif]ii.[ltrif] [lsqbb]iii.[rsqbb] Same facts as [lsqbb]in
paragraph i.[rsqbb] above except that on September 17 of year two
(which is 45 days before expiration of the 18% non-variable rate), the
bank provides a notice pursuant to 12 CFR 226.9(c) informing the
consumer that, on November 2, a new variable rate will apply to new
purchases and any remaining portion of the $1,000 balance (calculated
by using the same index and a reduced margin of 10 percentage points).
The notice further states that, on May 1 of year three, the margin will
increase to the margin disclosed [rtrif]in the March 15 notice[ltrif]
[lsqbb]at account opening[rsqbb] (12 percentage points). On May 1 of
year three, Sec. 227.24(b)(3) permits the bank to increase the margin
used to determine the variable rate that applies to new purchases to 12
percentage points and to apply that rate to any remaining portion of
the $1,000 purchase as well as to new purchases. [lsqbb]See comment
24(b)(1)-3.[rsqbb] The bank is not permitted to apply this rate to any
remaining portion of the $2,200 purchase balance as of March 22.
[rtrif]4. Application of a lower rate. Nothing in Sec. 227.24
prohibits a bank from lowering the annual percentage rate that applies
to an existing balance or to new transactions. However, once the lower
rate is applied to an existing balance, the bank cannot subsequently
increase the rate on that balance unless it provided the consumer with
advance notice of the increase pursuant to 12 CFR 226.9(b) or (c). This
notice must state the period of time during which the lower rate will
apply and the rate that will apply after expiration of that period.
Furthermore, a bank that applies a decreased rate to transactions that
occurred prior to provision of the notice--or, in the case of a 12 CFR
226.9(c) or (g) notice, transactions that occurred within seven days
after provision of the notice--may not subsequently increase the rate
that applies to those transactions to a rate that is higher than the
rate that applied prior to the decrease. The following examples
illustrate the application of the rule:
i. Assume that a bank discloses at account opening on January 1 of
year one that a non-variable annual percentage rate of 10% will apply
to purchases for one year, after which that rate will increase to a
non-variable rate of 15%. The bank also discloses that, to the extent
consistent with Sec. 227.24 and other applicable law, a non-variable
penalty rate of 30% may apply if the consumer's required minimum
periodic payment is received after the payment due date, which is the
tenth of the month. The required minimum periodic payments are applied
to accrued interest and fees but do not reduce the purchase balance. On
June 30 of year two, the account has a purchase balance of $1,000 at
the 15% rate. On July 1, the bank provides a notice pursuant to 12 CFR
226.9(c) informing the consumer that the rate for new purchases will
decrease to a non-variable rate of 5% for six months (from July 1
through December 31 of year two) and that, beginning on January 1 of
year three, the rate for purchases will increase to a non-variable rate
of 17%. On July 8 of year two, the consumer makes a $200 purchase. On
July 9, the consumer makes a $100 purchase. On January 1 of year three,
Sec. 227.24(b)(3) permits the bank to begin accruing interest on the
$100 purchase at 17%. The bank may not apply the 17% rate to the $200
purchase because that transaction occurred within seven days after
provision of the 12 CFR 226.9(c) notice. If the bank applied the 5%
rate to the $1,000 purchase balance and the $200 purchase, the bank may
not increase the rate that applies to those amounts to a rate that is
higher than 15% on January 1 of year three.
ii. Same facts as above except that the required minimum periodic
payment due on September 10 of year two is not received until September
15 of year two. On September 15 of year two, the bank provides a notice
pursuant to 12 CFR 226.9(g) informing the consumer that the rate for
new purchases will increase to the 30% penalty rate on October 31. On
October 31, Sec. 227.23(b)(3) permits the bank to begin accruing
interest at 30% on any purchase made on or after September 23. The bank
may not, however, apply the 30% rate to the $1,300 in purchases.
Instead, the bank must continue to apply the 5% rate to the $100
purchase until at least January 1 of year three when Sec. 227.24(b)(3)
permits the bank to begin accruing interest on that purchase at 17%.
Similarly, if the bank applied the 5% rate to the $1,000 purchase
balance and the $200 purchase, the bank may begin accruing interest on
those amounts at 15% on January 1 of year three.
iii. Assume that a bank discloses at account opening on January 1
of year one that the rate that applies to purchases is a variable
annual percentage rate that is currently 18% and will be adjusted
quarterly by adding a margin of 8 percentage points to a publicly
available index not under the bank's control. The bank also discloses
that, to the extent consistent with Sec. 227.24 and other applicable
law, a non-variable penalty rate of 30% may apply if the consumer's
required minimum periodic payment is received after the payment due
date, which is the first of the month. On July 30 of year two, the
consumer uses the account for a $1,000 purchase in response to a
promotional offer. Under the terms of this offer, interest on purchases
made during the months of July through September will accrue at the
variable rate for purchases but the consumer will not be obligated to
pay that interest if all purchases made during that three-month period
are paid in full by December 31 of year two. The payment due on
September 1 of year two is not received until September 6. Section
227.24 does not permit the bank to deny the consumer the opportunity to
avoid interest charges on the $1,000 purchase by paying that purchase
in full on or before December 31 of year two. The bank may, however,
provide a notice pursuant to 12 CFR 226.9(g) on September 2 of year two
informing the consumer that the promotional offer does not apply to
purchases made on or after September 10 and that the rate for such
purchases will increase to the 30% penalty rate on October 18. On
December 31 of year two, the $1,000 purchase has been paid in full.
Under these circumstances, the bank may not charge any interest accrued
on the $1,000 purchase.
iv. Assume that a bank discloses at account opening on January 1 of
year one that the rate that applies to cash advances is a variable
annual percentage rate that is currently 24% and will be adjusted
quarterly by adding a margin of 14 percentage points to a publicly
available index not under the bank's control. On July 1 of year two,
the bank provides checks that access the account
[[Page 20820]]
and, pursuant to 12 CFR 226.9(b)(3)(A), discloses that a promotional
rate of 15% will apply to credit extended by use of the checks until
January 1 of year three, after which the cash advance rate determined
using the 14-point margin will apply. On July 15 of year two, the
consumer uses one of the checks to pay for a $500 transaction. On
January 1 of year three, Sec. 227.24(b)(3) permits the bank to apply
the cash advance rate determined using the 14-point margin to the $500
transaction.[ltrif]
24(b)(5) Workout [rtrif]and Temporary Hardship[ltrif] Arrangement
Exception
1. Scope of exception. Nothing in Sec. 227.24(b)(5) permits a bank
to alter the requirements of Sec. 227.24 pursuant to a workout
[rtrif]or temporary hardship[ltrif] arrangement between a consumer and
the bank. For example, a bank cannot increase an annual percentage rate
pursuant to a workout [rtrif]or temporary hardship[ltrif] arrangement
unless otherwise permitted by Sec. 227.24. In addition, a bank cannot
require the consumer to make payments with respect to a protected
balance that exceed the payments permitted under Sec. 227.24(c).
2. Variable [lsqbb]annual percentage[rsqbb] rates. If the annual
percentage rate that applied to a category of transactions prior to
commencement of the workout [rtrif]or temporary hardship[ltrif]
arrangement varied with an index consistent with Sec. 227.24(b)(2),
the rate applied to that category of transactions following an increase
pursuant to Sec. 227.24(b)(5) must be determined using the same
formula (index and margin).
3. Example[rtrif]s[ltrif].
[rtrif]i.[ltrif] Assume that, consistent with Sec. 227.24(b)(4),
the margin used to determine a variable annual percentage rate that
applies to a $5,000 balance is increased from 5 percentage points to 15
percentage points. Assume also that the bank and the consumer
subsequently agree to a workout arrangement that reduces the margin
back to 5 points on the condition that the consumer pay a specified
amount by the payment due date each month. If the consumer does not pay
the agreed-upon amount by the payment due date, the bank may increase
the margin for the variable rate that applies to the $5,000 balance up
to 15 percentage points. 12 CFR 226.9 does not require advance notice
of this type of increase.
[rtrif]ii. Assume that a consumer fails to make four consecutive
minimum payments totaling $480 on a consumer credit card account with a
balance of $6,000 and that, consistent with Sec. 227.24(b)(4), the
annual percentage rate that applies to that balance is increased from a
non-variable rate of 15% to a non-variable penalty rate of 30%. Assume
also that the bank and the consumer subsequently agree to a temporary
hardship arrangement that reduces all rates on the account to 0% on the
condition that the consumer pay an amount by the payment due date each
month that is sufficient to cure the $480 delinquency within six
months. If the consumer pays the agreed-upon amount by the payment due
date during the six-month period and cures the delinquency, the bank
may increase the rate that applies to any remaining portion of the
$6,000 balance to 15% or any other rate up to the 30% penalty
rate.[ltrif]
24(c) Treatment of Protected Balances
* * * * *
24(c)(1) Repayment
* * * * *
Paragraph 24(c)(1)(i)
* * * * *
2. Amortization when applicable [lsqbb]annual percentage[rsqbb]
rate is variable. * * *
* * * * *
24(c)(2) Fees and Charges
1. Fee or charge based solely on the protected balance. A bank is
prohibited from assessing a fee or charge based solely on balances to
which Sec. 227.24(c) applies. For example, a bank is prohibited from
assessing a monthly maintenance fee that would not be charged if the
account did not have a protected balance. A bank is not, however,
prohibited from [rtrif]continuing to assess a periodic fee that was
assessed before the account had a protected balance.[ltrif]
[rtrif]Similarly, a bank is not prohibited from[ltrif] assessing fees
such as late payment fees or fees for exceeding the credit limit even
if such fees are based in part on the protected balance [rtrif]or if
the only balance on the account is a protected balance[ltrif].
Sec. 227.25--Unfair Balance Computation Method
25(a) General Rule
* * * * *
[rtrif]3. Charging accrued interest at expiration of certain
promotional programs. When a bank offers a promotional program under
which a consumer will not be obligated to pay interest that accrues on
a balance if that balance is paid in full prior to a specified date or
expiration of a specified period of time, Sec. 227.25 does not
prohibit the bank from charging that accrued interest to the account if
the balance is not paid in full prior to the specified date (consistent
with applicable law and regulatory guidance).[ltrif]
* * * * *
Department of the Treasury
Office of Thrift Supervision
12 CFR Chapter V
Text of Proposed Revisions
Certain conventions have been used to highlight the proposed
revisions. New language is shown inside [rtrif]bold-type arrows[ltrif]
while language that would be deleted is set off with [lsqbb]bold-type
brackets[rsqbb].
Authority and Issuance
For the reasons discussed in the joint preamble, OTS proposes to
further amend 12 CFR part 535, as amended at 74 FR 5567, January 29,
2009, as set forth below:
PART 535--UNFAIR OR DECEPTIVE ACTS OR PRACTICES
1. Section 535.23 is revised to read as follows:
Sec. 535.23 Unfair allocation of payments.
When different annual percentage rates apply to different balances
on a consumer credit card account[rtrif]:
(a) General rule. Except as provided in paragraph (b) of this
section[ltrif], you must allocate any amount paid by the consumer in
excess of the required minimum periodic payment among the balances
using one of the following methods:
[rtrif](1)[ltrif] [lsqbb](a)[rsqbb] High-to-low method. The amount
paid by the consumer in excess of the required minimum periodic payment
is allocated first to the balance with the highest annual percentage
rate and any remaining portion to the other balances in descending
order based on the applicable annual percentage rate.
[rtrif](2)[ltrif] [lsqbb](b)[rsqbb] Pro rata method. The amount
paid by the consumer in excess of the required minimum periodic payment
is allocated among the balances in the same proportion as each balance
bears to the total balance.
[rtrif](b) Special rule for accounts subject to certain promotional
programs. When a promotional program provides that a consumer will not
be obligated to pay interest that accrues on a balance if that balance
is paid in full prior to the expiration of a specified period of time,
you must allocate amounts paid by the consumer in excess of the
required minimum periodic payment first to that balance during the two
billing cycles immediately preceding expiration of the specified period
and any remaining
[[Page 20821]]
portion to the other balances consistent with paragraph (a) of this
section.[ltrif]
2. Section 535.24 is amended by revising paragraph (b) to read as
follows:
Sec. 535.24 Unfair increases in annual percentage rates.
* * * * *
(b) Exceptions. The prohibition in paragraph (a) of this section on
increasing annual percentage rates does not apply where an annual
percentage rate may be increased pursuant to one of the exceptions in
this paragraph.
(1) Account opening disclosure exception. An annual percentage rate
for a category of transactions may be increased to [rtrif]an annual
percentage rate[ltrif] [lsqbb]a rate[rsqbb] disclosed at account
opening upon expiration of a period of time disclosed at account
opening. [rtrif]This exception does not permit application of an
increased annual percentage rate disclosed at account opening that is
contingent on a particular event or occurrence or that may be applied
at your discretion.[ltrif]
(2) Variable rate exception. An annual percentage rate for a
category of transactions that varies according to an index that is not
under your control and is available to the general public may be
increased due to an increase in the index.
(3) Advance notice exception. An annual percentage rate for a
category of transactions may be increased pursuant to a notice under 12
CFR 226.9[rtrif](b), (c), or (g)[ltrif] [lsqbb](c) or
(g)[rsqbb][rtrif], provided that:
(i) If you disclose the increased rate pursuant to 12 CFR 226.9(b),
that rate must not be applied to transactions that occurred prior to
provision of the notice;
(ii) If you disclose the increased rate pursuant to 12 CFR 226.9(c)
or (g), that rate must not be applied to transactions that occurred
within seven days after provision of the notice; and
(iii) This exception does not permit an increase in any annual
percentage rate during the first year after the account is
opened.[ltrif] [lsqbb]for transactions that occur more than seven days
after provision of the notice. This exception does not permit an
increase in any annual percentage rate during the first year after the
account is opened.[rsqbb]
(4) Delinquency exception. An annual percentage rate may be
increased due to your not receiving the consumer's required minimum
periodic payment within 30 days after the due date for that payment.
(5) Workout [rtrif]and temporary hardship[ltrif] arrangement
exception. An annual percentage rate may be increased due to the
consumer's [rtrif]completion of[ltrif] [lsqbb]failure to comply with
the terms of[rsqbb] a workout [rtrif]or temporary hardship[ltrif]
arrangement between you and the consumer [rtrif]or the consumer's
failure to comply with the terms of such an arrangement[ltrif],
provided that the annual percentage rate applicable to a category of
transactions following any such increase does not exceed the rate that
applied to that category of transactions prior to commencement of the
[lsqbb]workout[rsqbb] arrangement.
[rtrif](6) Servicemembers Civil Relief Act exception. An annual
percentage rate that has been decreased pursuant to 50 U.S.C. app. 527
may be increased once that provision no longer applies, provided that
the annual percentage rate applicable to a category of transactions
following any such increase does not exceed the rate that applied to
that category of transactions prior to the decrease.[ltrif]
* * * * *
3. In Appendix A to Part 535:
A. Add Section 535.21--Definitions.
B. Under Section 535.22--Unfair Acts or Practices Regarding Time to
Make Payment, under 22(b) Compliance with General Rule, paragraph 3. is
revised.
C. Under Section 535.23--Unfair Acts or Practices Regarding
Allocation of Payments:
(i) Paragraph 2., the heading of paragraph 3., and paragraphs 4.
and 6. are revised;
(ii) Redesignate 23(a) High-to-Low Method as 23(a)(1) High-to-Low
Method;
(iii) Under 23(a)(1) High-to-Low Method, paragraph 1.v. is added;
(iv) Redesignate 23(b) Pro Rata Method as 23(a)(2) Pro Rata Method;
(v) Under 23(a)(2) Pro Rata Method, paragraph 1. is revised; and
(vi) Add 23(b) Special Rule for Accounts Subject to Certain
Promotional Programs.
D. Under Section 535.24--Unfair Acts or Practices Regarding
Increases in Annual Percentage Rates:
(i) Paragraph 1. is revised;
(ii) Add paragraphs 2., 3., 4.;
(iii) Under 24(a) General Rule, paragraphs 1., 2.i. introductory
text, 2.iii. introductory text, and 2.iii.C. are revised, and paragraph
2.iv. is added;
(iv) Under 24(b) Exceptions, add paragraph 1.;
(v) Under 24(b)(1) Account Opening Disclosure Exception, paragraph
1. introductory text is revised, paragraph 1.iii. and paragraph 2. are
removed, paragraph 3. is redesignated as paragraph 2., the introductory
text of newly designated paragraph 2. is revised, and paragraph 2.ii.
is added;
(vi) Under 24(b)(2) Variable Rate Exception, the heading of
paragraph 5. is revised;
(vii) Under 24(b)(3) Advance Notice Exception, paragraphs 2. and 3.
are revised and paragraph 4. is added;
(viii) Revise 24(b)(5) Workout Arrangement Exception;
(ix) Under 24(c) Treatment of Protected Balances, under 24(c)(1)
Repayment, under Paragraph 24(c)(1)(i), the heading of paragraph 2. is
revised; and
(x) Under 24(c) Treatment of Protected Balances, under 24(c)(2)
Fees and Charges, paragraph 1. is revised.
E. Under Section 535.25--Unfair Balance Computation Method, under
25(a) General Rule, paragraph 3. is revised.
Appendix A to Part 535--Official Staff Commentary
* * * * *
Subpart C--Consumer Credit Card Account Practices
[rtrif]Sec. 535.21--Definitions
21(a) Annual Percentage Rate
1. Use of ``rate.'' For purposes of Subpart C, ``rate'' has the
same meaning as ``annual percentage rate'' unless otherwise
specified.
21(c) Consumer Credit Card Account
1. Closed accounts. If a consumer credit card account with an
outstanding balance is closed, the account continues to be the same
consumer credit card account for purposes of Subpart C with respect
to that balance. For example, if a savings association or a consumer
closes a consumer credit card account with an outstanding balance,
the savings association would still be prohibited from increasing
the annual percentage rate that applies to that balance unless
permitted by one of the exceptions in Sec. 535.24(b).
2. Acquired accounts. If, through merger or acquisition (for
example), a savings association acquires a consumer credit card
account with an outstanding balance, the account continues to be the
same consumer credit card account for purposes of Subpart C with
respect to that balance. For example, if a consumer credit card
account has a $1,000 purchase balance with an annual percentage rate
of 15% and the savings association that acquires that account
applies an 18% rate to purchases, the savings association would be
prohibited from applying the 18% rate to the $1,000 balance unless
permitted by one of the exceptions in Sec. 535.24(b).
3. Balance transfers.
i. Between accounts issued by the same savings association. If a
balance is transferred from a consumer credit card account issued by
a savings association to another credit account issued by the same
savings association or its affiliate or subsidiary, the account
continues to be the same consumer credit card account for purposes
of Subpart C with respect to that balance unless the account to
which the balance is transferred is an open-end credit plan secured
by the consumer's dwelling. For example, if a
[[Page 20822]]
consumer credit card account has a $2,000 purchase balance with an
annual percentage rate of 15% and that balance is transferred to
another consumer credit card account issued by the same savings
association that applies an 18% rate to purchases, the savings
association would be prohibited from applying the 18% rate to the
$2,000 balance unless permitted by one of the exceptions in Sec.
535.24(b). Additional circumstances in which a balance is considered
transferred for purposes of this comment include when:
A. A retail credit card with an outstanding balance is replaced
or substituted with a cobranded general purpose card that can be
used with a broader merchant base;
B. A credit card account with an outstanding balance is replaced
or substituted with another credit card account offering different
features;
C. A credit card account with an outstanding balance is
consolidated or combined with one or more other credit card accounts
into a single credit card account; and
D. A credit card account is replaced or substituted with a line
of credit that can be accessed solely by an account number.
ii. Between accounts issued by different institutions. If a
balance is transferred to a consumer credit card account issued by a
savings association from a credit account issued by a different
savings association or an institution that is not an affiliate or
subsidiary of the savings association that issued the consumer
credit card account, the provisions of Subpart C do not prohibit the
savings association to which the balance is transferred from
applying its account terms to that balance, provided that those
terms comply with Subpart C. For example, if a consumer credit card
account issued by savings association A has a $1,000 purchase
balance at an annual percentage rate of 15% and the consumer
transfers that balance to a consumer credit card account with a
purchase rate of 17% issued by savings association B, savings
association B may apply the 17% rate to the $1,000 balance. However,
savings association B may not subsequently increase the rate on that
balance unless permitted by one of the exceptions in Sec.
535.24(b).[ltrif]
Sec. 535.22--Unfair Time To Make Payment
* * * * *
22(b) Compliance With General Rule
* * * * *
3. Example of alternative method of compliance. Assume that, for
a particular type of consumer credit card account, a savings
association only provides periodic statements electronically and
only accepts payments electronically (consistent with applicable law
and regulatory guidance[rtrif], including the consumer notice and
consent procedures of the Electronic Signatures in Global and
National Commerce Act (E-Sign Act), 15 U.S.C. 7001 et seq.[ltrif]).
Under these circumstances, the savings association could comply with
Sec. 535.22(a) even if it does not provide periodic statements 21
days before the payment due date consistent with Sec. 535.22(b)(2).
Sec. 535.23--Unfair Allocation of Payments
* * * * *
2. Adjustments of one dollar or less permitted. When allocating
payments, the savings association may adjust amounts by one dollar
or less. For example, if a savings association is allocating $100
pursuant to Sec. 535.23[rtrif](a)(2)[ltrif][lsqbb](b)[rsqbb] among
balances of $1,000, $2,000, and $4,000, the savings association may
apply $14 to the $1,000 balance, $29 to the $2,000 balance, and $57
to the $4,000 balance.
3. Applicable balances and [annual percentage] rates. * * *
4. Use of permissible allocation methods. A savings association
is not prohibited from changing the allocation method for a consumer
credit card account or from using different allocation methods for
different consumer credit card accounts, so long as the methods used
are consistent with Sec. 535.23. For example, a savings association
may change from allocating to the highest rate balance first
pursuant to Sec. 535.23(a)[rtrif](1)[ltrif] to allocating pro rata
pursuant to Sec. 535.23[rtrif](a)(2)[ltrif][lsqbb](b)[rsqbb] or
vice versa. Similarly, a savings association may allocate to the
highest rate balance first pursuant to Sec.
535.23(a)[rtrif](1)[ltrif] on some of its accounts and allocate pro
rata pursuant to Sec. 535.23[rtrif](a)(2)[ltrif][lsqbb](b)[rsqbb]
on other accounts.
* * * * *
6. Balances with the same [annual percentage] rate. When the
same annual percentage rate applies to more than one balance on an
account and a different annual percentage rate applies to at least
one other balance on that account, Sec. 535.23
[rtrif]generally[ltrif] does not require that any particular method
be used when allocating among the balances with the same annual
percentage rate. Under these circumstances, a savings association
may treat the balances with the same rate as a single balance or
separate balances. See comments 23(a)[rtrif](1)[ltrif]-1.iv and
23[rtrif](a)(2)[ltrif][lsqbb](b)[rsqbb]-2.iv. [rtrif]However, when a
consumer will not be obligated to pay interest that accrues on a
balance if that balance is paid in full prior to the expiration of a
specified period of time, that balance must be treated as a balance
with an annual percentage rate of zero for purposes of Sec. 535.23
during that period of time. For example, if an account has a $1,000
purchase balance and a $2,000 balance on which the consumer will not
be obligated to pay interest if that balance is paid in full prior
to July 1 and a 15% annual percentage rate applies to both, the
balances must be treated as balances with different rates for
purposes of Sec. 535.23 until July 1. In addition, for purposes of
allocating pursuant to Sec. 535.23(a)(1), any amount paid by the
consumer in excess of the required minimum periodic payment must be
applied first to the $1,000 purchase balance except during the last
two billing cycles of the promotional period (when it must be
applied first to any remaining portion of the $2,000 balance). See
comment 23(a)(1)-1.v.[ltrif]
23(a)[rtrif](1)[ltrif] High-to-Low Method
1. * * *
[rtrif]v. Assume that on January 1 a consumer uses a credit card
account to make a $1,200 purchase subject to a promotional offer
under which interest accrues at an annual percentage rate of 15% but
the consumer will not be obligated to pay that interest if the
balance is paid in full on or before June 30. The billing cycles for
this account begin on the first day of the month and end on the last
day of the month. Each month from January through June, the consumer
uses the account to make $200 in purchases that are not subject to
the promotional offer but are subject to the 15% rate. Each month
from February through June, the consumer pays $400 in excess of the
required minimum periodic payment on the payment due date, which is
the twenty-fifth of the month. Any interest that accrues on the non-
promotional purchases is paid by the required minimum periodic
payment. A savings association using this method would allocate the
$400 excess payments received on February 25, March 25, and April 25
as follows: $200 to pay off the non-promotional balance (that is
subject to the 15% rate) and the remaining $200 to the promotional
balance (that is treated as a balance with a rate of zero). Section
535.23(b), however, requires the savings association to allocate the
entire $400 excess payment received on May 25 to the promotional
balance. Similarly, Sec. 535.23(b) requires the savings association
to allocate the $400 excess payment received on June 25 as follows:
$200 to the promotional balance (which pays that purchase in full)
and the remaining $200 to the non-promotional balance.[ltrif]
23[rtrif](a)(2)[ltrif][lsqbb](b)[rsqbb] Pro Rata Method
1. Total balance. A savings association may, but is not required
to, deduct amounts paid by the consumer's required minimum periodic
payment when calculating the total balance for purposes of Sec.
535.23[rtrif](a)(2)[ltrif][lsqbb](b)(3)[rsqbb]. See comment
23[rtrif](a)(2)[ltrif][lsqbb](b)[rsqbb]-2.iii.
* * * * *
[rtrif]23(b) Special Rule for Accounts Subject to Certain
Promotional Programs
1. Grace periods. Section 535.23(b) applies to promotional
programs under which the consumer is not obligated to pay interest
that accrues on a balance if that balance is paid in full prior to
the expiration of a specified period of time. A grace period during
which a consumer may repay one or more balances on a consumer credit
card account is not a ``promotional program'' for purposes of Sec.
535.23(b).[ltrif]
Sec. 535.24--Unfair Increases in Annual Percentage Rates
1. Relationship to Regulation Z, 12 CFR part 226. A savings
association that complies with the applicable disclosure
requirements in Regulation Z, 12 CFR part 226, has complied with the
disclosure requirements in Sec. 535.24. See 12 CFR 226.5a, 226.6,
226.9. For example, a savings association may comply with the
requirement in Sec. 535.24(a) to disclose at account opening the
annual percentage rates that will apply to each category of
transactions by complying with the disclosure requirements in 12 CFR
226.5a regarding applications and solicitations and the requirements
in 12 CFR 226.6 regarding account-opening disclosures. Similarly, in
[[Page 20823]]
order to increase an annual percentage rate on new transactions
pursuant to Sec. 535.24(b)(3), a savings association must comply
with the disclosure requirements in 12 CFR 226.9[rtrif](b), (c), or
(g)[ltrif][lsqbb](c) or (g)[rsqbb]. However, nothing in Sec. 535.24
alters the requirements in 12 CFR 226.9(c) and (g) that creditors
provide consumers with written notice at least 45 days prior to the
effective date of certain increases in the annual percentage rates
on open-end (not home-secured) credit plans.
[rtrif]2. Relationship to grace period. Nothing in Sec. 535.24
prohibits a savings association from assessing interest due to the
loss of a grace period to the extent consistent with Sec. 535.25.
In addition, a savings association has not reduced an annual
percentage rate on a consumer credit account for purposes of Sec.
535.24 if the savings association does not charge interest on a
balance when the consumer pays that balance in full prior to the
expiration of a grace period.
3. Category of transactions. For purposes of Sec. 535.24, a
``category of transactions'' is a type or group of transactions to
which an annual percentage rate applies that is different than the
annual percentage rate that applies to other transactions. For
example, purchase transactions, cash advance transactions, and
balance transfer transactions are separate categories of
transactions for purposes of Sec. 535.24 if a savings association
applies different annual percentage rates to each. Furthermore, if,
for example, the savings association applies different annual
percentage rates to different types of purchase transactions (such
as one rate for purchases of gasoline and a different rate for all
other purchases), each type constitutes a separate category of
transactions for purposes of Sec. 535.24.
4. Account opening.
i. Multiple accounts with same savings association. When a
consumer has a credit card account with a savings association and
the consumer opens a new credit card account with the same savings
association (or its affiliate or subsidiary), the opening of the new
account constitutes an ``account opening'' for purposes of Sec.
535.24 if, more than 15/30 days after the new account is opened, the
consumer has the ability to obtain additional extensions of credit
on each account. For example, assume that, on January 1 of year one,
a consumer opens a credit card account with a savings association.
On July 1 of year one, the consumer opens a second credit card
account with that savings association. On July 15, a $1,000 balance
is transferred from the first account to the second account. The
opening of the second account constitutes the opening of an account
for purposes of Sec. 535.24 so long as, on July 17/August 1, the
consumer can engage in transactions using either account. Under
these circumstances, the savings association could not increase an
annual percentage rate on the second account pursuant to Sec.
535.24(b)(3) until July 1 of year two (which is one year after the
second account was opened).
ii. Replacement or consolidation.
A. Generally. A consumer credit card account has not been opened
for purposes of Sec. 535.24 when a consumer credit card account
issued by a savings association is replaced or consolidated with
another consumer credit card account issued by the same savings
association (or its affiliate or subsidiary). Circumstances in which
a consumer credit card account has not been opened for purposes of
Sec. 535.24 include when:
(1) A retail credit card is replaced with a cobranded general
purpose card that can be used at a wider number of merchants;
(2) A credit card account is replaced with another consumer
credit card account offering different features;
(3) A credit card account is consolidated or combined with one
or more other credit card accounts into a single credit card
account; or
(4) A credit card account acquired through merger or acquisition
is replaced with a credit card account issued by the acquiring
institution.
B. Limitation. A savings association that replaces or
consolidates a consumer credit card account with another consumer
credit card account issued by the savings association (or its
affiliate or subsidiary) may not increase an annual percentage rate
in a manner otherwise prohibited by Sec. 535.24. For example,
assume that, on January 1 of year one, a consumer opens a consumer
credit card account with an annual percentage rate for purchases of
15%. On July 1 of year one, the account is replaced with a consumer
credit card account that offers different features (such as rewards
on purchases). Under these circumstances, the savings association
cannot increase the annual percentage rate for purchases to a rate
that is higher than 15% pursuant to Sec. 535.24(b)(3) until January
1 of year two (which is one year after the first account was
opened).[ltrif]
24(a) General Rule
1. Rates that will apply to each category of transactions.
Section 535.24(a) requires savings associations to disclose, at
account opening, the annual percentage rates that will apply to each
category of transactions on the account. A savings association
cannot satisfy this requirement by disclosing at account opening
only a range of rates or that a rate will be ``up to'' a particular
amount. [rtrif]The disclosure requirements in Sec. 535.24(a) do not
apply to annual percentage rates that are contingent on a particular
event or occurrence or may be applied at the savings association's
discretion (such as penalty rates) insofar as those rates may be
applied consistent with Sec. 535.24.[ltrif]
2. * * *
i. Assume that, at account opening on January 1 of year one, a
savings association discloses that the annual percentage rate for
purchases is a non-variable rate of 15% and will apply for six
months. The savings association also discloses that, after six
months, the annual percentage rate for purchases will be a variable
rate that is currently 18% and will be adjusted quarterly by adding
a margin of 8 percentage points to a publicly available index not
under the savings association's control. [rtrif]Furthermore,[ltrif]
[lsqbb]Finally,[rsqbb] the savings association discloses that the
annual percentage rate for cash advances is the same variable rate
that will apply to purchases after six months. [rtrif]Finally, the
savings association discloses that, to the extent consistent with
Sec. 535.24 and other applicable law, a non-variable penalty rate
of 30% may apply if the consumer makes a late payment.[ltrif] The
payment due date for the account is the twenty-fifth day of the
month and the required minimum periodic payments are applied to
accrued interest and fees but do not reduce the purchase and cash
advance balances.
* * * * *
iii. Assume that, at account opening on January 1 of year one, a
savings association discloses that the annual percentage rate for
purchases is a variable rate determined by adding a margin of 6
percentage points to a publicly-available index outside of the
savings association's control. The savings association also
discloses that, to the extent consistent with Sec. 535.24 and other
applicable law, a non-variable penalty rate of 28% may apply if the
consumer makes a late payment. The due date for the account is the
fifteenth of the month. On May 30 of year two, the account has a
purchase balance of $1,000. On May 31, the creditor provides a
notice pursuant to 12 CFR 226.9(c) informing the consumer of a new
variable rate that will apply on July 16 for all purchases made on
or after June 8 (calculated by using the same index and an increased
margin of 8 percentage points). On June 7, the consumer makes a $500
purchase. On June 8, the consumer makes a $200 purchase. On June 25,
the savings association has not received the payment due on June 15
and provides the consumer with a notice pursuant to 12 CFR 226.9(g)
stating that the penalty rate of 28% will apply as of August 9 to
all transactions made on or after July 3 [rtrif]and that, if the
consumer becomes more than 30 days late, the penalty rate will apply
to all balances on the account[ltrif]. On July 4, the consumer makes
a $300 purchase.
* * * * *
C. Same facts as paragraph A. above except the payment due on
June 15 of year two is received on July 20. Section 535.24(b)(4)
permits the savings association to apply the 28% penalty rate to all
balances on the account and to future transactions because it has
not received payment within 30 days after the due date. Because the
savings association provided a 12 CFR 226.9(g) notice on June
[rtrif]25[ltrif][lsqbb]24[rsqbb] stating the 28% penalty rate, the
savings association may apply the 28% penalty rate to all balances
on the account as well as any future transactions on August 9
without providing an additional notice pursuant to 12 CFR 226.9(g).
[rtrif]iv. Assume that, at account opening on January 1 of year
one, the savings association discloses a promotional program under
which interest on purchases made during January will accrue at a
non-variable rate of 20%, but the consumer will not be obligated to
pay that interest if those purchases are paid in full by December 31
of year one. On January 15, the consumer makes a purchase of $2,000.
No other transactions are made on the account. The payment due on
April 1 is not received until April 10. Section 535.24 does not
permit the savings association to deny the consumer the opportunity
to avoid interest charges on the $2,000 purchase by
[[Page 20824]]
paying that purchase in full on or before December 31 of year one.
If, however, the $2,000 purchase remains unpaid on January 1 of year
two, Sec. 535.24 does not prohibit the savings association from
charging the interest accrued on that purchase during year
one.[ltrif]
24(b) Exceptions
[rtrif]1. Delayed implementation of rate increase. If Sec.
535.24(b) permits a savings association to apply an increased annual
percentage rate on a date that is not the first day of a billing
cycle, the savings association may delay application of the
increased rate until the first day of the following billing cycle
without relinquishing the ability to apply that rate. For example,
assume that, at account opening on January 1, a savings association
discloses that a non-variable annual percentage rate of 10% will
apply to purchases for six months and a non-variable rate of 15%
will apply thereafter. The first day of the billing cycle for the
account is the fifteenth of the month. If the six-month period
expires on July 1, the savings association may delay application of
the 15% rate until July 15 without relinquishing its ability to
apply that rate under Sec. 535.24(b)(1).[ltrif]
24(b)(1) Account Opening Disclosure Exception
1. Prohibited increases in rate. Section Sec. 535.24(b)(1)
permits an increase in the annual percentage rate for a category of
transactions to a rate disclosed at account opening upon expiration
of a period of time that was also disclosed at account opening.
Section 535.24(b)(1) does not permit application of [rtrif]an
increased annual percentage rate[ltrif] [lsqbb]increased rates that
are[rsqbb] disclosed at account opening [rtrif]that is[ltrif]
[lsqbb]but are[rsqbb] contingent on a particular event or occurrence
or [rtrif]that[ltrif] may be applied at the savings association's
discretion. The following examples illustrate rate increases that
are not permitted by Sec. 535.24[lsqbb](a)[rsqbb]:
* * * * *
[lsqbb]iii. Assume that a savings association discloses at
account opening on January 1 of year one that interest on purchases
will be deferred for one year, although interest will accrue on
purchases during that year at a non-variable rate of 20%. The
savings association further discloses that, if all purchases made
during year one are not paid in full by the end of that year, the
savings association will begin charging interest on the purchase
balance and new purchases at 20% and will retroactively charge
interest on the purchase balance at a rate of 20% starting on the
date of each purchase made during year one. On January 1 of year
one, the consumer makes a purchase of $1,500. No other transactions
are made on the account. On January 1 of year two, $500 of the
$1,500 purchase remains unpaid. Section 535.24 does not permit the
savings association to reach back to charge interest on the $1,500
purchase from January 1 through December 31 of year one. However,
the savings association may apply the previously-disclosed 20% rate
to the $500 purchase balance beginning on January 1 of year two
(pursuant to Sec. 535.24(b)(1)).[rsqbb]
[lsqbb]2. Loss of grace period. Nothing in Sec. 535.24
prohibits a savings association from assessing interest due to the
loss of a grace period to the extent consistent with Sec.
535.25.[rsqbb]
[rtrif]2.[ltrif] [lsqbb]3.[rsqbb] Application of rate that is
lower than disclosed rate. Section Sec. 535.24(b)(1) permits an
increase in the annual percentage rate for a category of
transactions to a rate disclosed at account opening upon expiration
of a period of time that was also disclosed at account opening.
Nothing in Sec. 535.24 prohibits a savings association from
applying a rate that is lower than [rtrif]a[ltrif] [lsqbb]the[rsqbb]
disclosed rate [rtrif]either during or[ltrif] upon expiration of the
period. However, [rtrif]once the[ltrif] [lsqbb]if a[rsqbb] lower
rate is applied to an existing balance, the savings association
cannot subsequently increase the rate on that balance unless it
[lsqbb]has[rsqbb] provided the consumer with advance notice of the
increase pursuant to 12 CFR 226.9[rtrif](b)[ltrif] or (c).
[rtrif]This notice must state the period of time during which the
lower rate will apply and the rate that will apply after expiration
of that period.[ltrif] Furthermore, [rtrif]a savings association
that applies a lower rate to transactions that occurred during the
first year after account opening may not subsequently increase the
rate that applies to those transactions to a rate that is higher
than the increased rate disclosed at account opening[ltrif]
[lsqbb]the savings association cannot increase the rate on that
existing balance to a rate that is higher than the increased rate
disclosed at account opening[rsqbb]. The following [rtrif]examples
illustrate[ltrif] [lsqbb]example illustrates[rsqbb] the application
of [rtrif]the[ltrif] [lsqbb]this[rsqbb] rule:
* * * * *
[rtrif]ii. Assume that a savings association discloses at
account opening on January 1 of year one that a non-variable annual
percentage rate of 15% will apply to purchases for one year, after
which that rate will increase to a non-variable rate of 18%. The
savings association also discloses that, to the extent consistent
with Sec. 535.24 and other applicable law, a non-variable penalty
rate of 30% may apply if the consumer's required minimum periodic
payment is received after the payment due date, which is the tenth
of the month. The required minimum periodic payments are applied to
accrued interest and fees but do not reduce the purchase balance.
A. On September 30 of year one, the account has a purchase
balance of $1,400 at the 15% rate. On October 1, the savings
association provides a notice pursuant to 12 CFR 226.9(c) informing
the consumer that the rate for new purchases will decrease to a non-
variable rate of 10% for six months (from October 1 through March 31
of year two) and that, beginning on April 1 of year two, the rate
for purchases will increase to a non-variable rate of 20%. The
savings association does not apply the 10% rate to the $1,400
purchase balance. On October 15 of year one, the consumer makes a
$300 purchase at the 10% rate. On January 1 of year two, the savings
association may begin accruing interest on the $1,400 purchase
balance at 18% (as disclosed at account opening). On January 15 of
year two, the consumer makes a $150 purchase at the 10% rate. On
April 1 of year two, the 10% rate that applies to the $300 purchase
and the $150 purchase expires. The savings association may begin
accruing interest on the $150 purchase at 20% (as disclosed in the
12 CFR 226.9(c) notice). Because, however, the $300 purchase
occurred during the first year after account opening, the savings
association cannot increase the rate that applies to that purchase
to a rate that is higher than the 18% rate disclosed at account
opening.
B. Same facts as above except that the required minimum periodic
payment due on November 10 of year one is not received until
November 15. Section 535.24(b)(1) does not permit the savings
association to increase any annual percentage rate on the account at
this time. The savings association may, however, apply the 30%
penalty rate to new transactions beginning on January 1 of year two
pursuant to Sec. 535.24(b)(3) by providing a 12 CFR 226.9(g) notice
informing the consumer of this increase no later than November 16 of
year one. On January 1 of year two, Sec. 535.24(b)(1) permits the
savings association to begin accruing interest on the $1,400
purchase balance at 18% (as disclosed at account opening). If the
consumer makes the $150 purchase on January 15 of year two, Sec.
535.24(b)(3) would permit the savings association to apply the 30%
rate to that purchase. On April 1 of year two, the 10% rate that
applies to the $300 purchase expires. Because this purchase occurred
during the first year after account opening, the savings association
cannot increase the rate that applies to that purchase to a rate
that is higher than the 18% rate disclosed at account
opening.[ltrif]
24(b)(2) Variable Rate Exception
* * * * *
5. Changing a variable [lsqbb]annual percentage[rsqbb] rate to a
non-variable [lsqbb]annual percentage[rsqbb] rate. * * *
* * * * *
24(b)(3) Advance Notice Exception
* * * * *
2. Transactions that [rtrif]occurred prior to provision of
notice or within seven days after provision of notice[ltrif]
[lsqbb]occur more than seven days after notice provided[rsqbb].
[rtrif]Section 535.24(b)(3) generally permits a savings association
to apply an increased rate to transactions that occur after
provision of a 12 CFR 226.9(b) notice or more than seven days after
provision of a 12 CFR 226.9(c) or (g) notice. If a rate increase is
disclosed pursuant to both 12 CFR 226.9(b) and 12 CFR 226.9(c), that
rate may only be applied to transactions that occur more than seven
days after provision of the 12 CFR 226.9(c) notice. Section
535.24(b)(3) does not permit a savings association to reach back to
days before the effective date of the rate increase under 12 CFR
226.9(c) or (g) when calculating interest charges. See comment
24(b)(3)-3.[ltrif] [lsqbb]Section 535.24(b)(3) generally prohibits a
savings association from applying an increased rate to transactions
that occur within seven days after provision of the 12 CFR 226.9 (c)
or (g) notice.[rsqbb] [rtrif]Whether a transaction occurred prior to
provision of a notice or within seven days after provision of a
notice is determined by the date of the transaction. In some cases,
however, a merchant may place a ``hold'' on the available credit on
an account for an
[[Page 20825]]
estimated transaction amount when the actual transaction amount will
not be known until a later date. In these circumstances, the date of
the transaction for purposes of Sec. 535.24(b)(3) is the date on
which the merchant determines the actual transaction amount. For
example, assume that, when a consumer uses a credit card account to
check into a hotel on July 1, the hotel obtains authorization for a
$750 hold on the account to ensure there is adequate available
credit to cover the anticipated cost of the stay. When the consumer
checks out on July 4, the actual cost of the stay is $850 because of
additional incidental costs, and the hotel charges this amount to
the account. For purposes of Sec. 535.24(b)(3), the transaction
occurred on July 4.[ltrif] [lsqbb]This prohibition does not,
however, apply to transactions that are authorized within seven days
after provision of the 12 CFR 226.9 (c) or (g) notice but are
settled more than seven days after the notice was provided.[rsqbb]
3. Examples.
i. Assume that a consumer credit card account is opened on
January 1 of year one. On March 14 of year two, the account has a
purchase balance of $2,000 at a non-variable annual percentage rate
of 15%. On March 15, the savings association provides a notice
pursuant to 12 CFR 226.9(c) informing the consumer that the rate for
new purchases will increase to a non-variable rate of 18% on May 1.
The notice further states that the 18% rate will apply for six
months (until November 1) and states that thereafter the savings
association will apply a variable rate that is currently 22% and is
determined by adding a margin of 12 percentage points to a publicly-
available index that is not under the savings association's control.
The seventh day after provision of the notice is March 22 and, on
that date, the consumer makes a $200 purchase. On March 24, the
consumer makes a $1,000 purchase. On May 1, Sec. 535.24(b)(3)
permits the savings association to begin accruing interest at 18% on
the $1,000 purchase made on March 24. The savings association is not
permitted to apply the 18% rate to the $2,200 purchase balance as of
March 22. After six months (November 2), the savings association may
begin accruing interest on any remaining portion of the $1,000
purchase at the previously-disclosed variable rate determined using
the 12-point margin.
[lsqbb]ii. Same facts as above except that the $200 purchase is
authorized by the savings association on March 22 but is not settled
until March 23. On May 1, Sec. 535.24(b)(3) permits the savings
association to start charging interest at 18% on both the $200
purchase and the $1,000 purchase. The savings association is not
permitted to apply the 18% rate to the $2,000 purchase balance as of
March 22.[rsqbb]
[rtrif]ii.[ltrif] [lsqbb]iii.[rsqbb] Same facts as [lsqbb]in
paragraph i.[rsqbb] above except that on September 17 of year two
(which is 45 days before expiration of the 18% non-variable rate),
the savings association provides a notice pursuant to 12 CFR
226.9(c) informing the consumer that, on November 2, a new variable
rate will apply to new purchases and any remaining portion of the
$1,000 balance (calculated by using the same index and a reduced
margin of 10 percentage points). The notice further states that, on
May 1 of year three, the margin will increase to the margin
disclosed [rtrif]in the March 15 notice[ltrif] [lsqbb]at account
opening[rsqbb] (12 percentage points). On May 1 of year three, Sec.
535.24(b)(3) permits the savings association to increase the margin
used to determine the variable rate that applies to new purchases to
12 percentage points and to apply that rate to any remaining portion
of the $1,000 purchase as well as to new purchases. [lsqbb]See
comment 24(b)(1)-3.[rsqbb] The savings association is not permitted
to apply this rate to any remaining portion of the $2,200 purchase
balance as of March 22.
[rtrif]4. Application of a lower rate. Nothing in Sec. 535.24
prohibits a savings association from lowering the annual percentage
rate that applies to an existing balance or to new transactions.
However, once the lower rate is applied to an existing balance, the
savings association cannot subsequently increase the rate on that
balance unless it provided the consumer with advance notice of the
increase pursuant to 12 CFR 226.9(b) or (c). This notice must state
the period of time during which the lower rate will apply and the
rate that will apply after expiration of that period. Furthermore, a
savings association that applies a decreased rate to transactions
that occurred prior to provision of the notice--or, in the case of a
12 CFR 226.9(c) or (g) notice, transactions that occurred within
seven days after provision of the notice--may not subsequently
increase the rate that applies to those transactions to a rate that
is higher than the rate that applied prior to the decrease. The
following examples illustrate the application of the rule:
i. Assume that a savings association discloses at account
opening on January 1 of year one that a non-variable annual
percentage rate of 10% will apply to purchases for one year, after
which that rate will increase to a non-variable rate of 15%. The
savings association also discloses that, to the extent consistent
with Sec. 535.24 and other applicable law, a non-variable penalty
rate of 30% may apply if the consumer's required minimum periodic
payment is received after the payment due date, which is the tenth
of the month. The required minimum periodic payments are applied to
accrued interest and fees but do not reduce the purchase balance. On
June 30 of year two, the account has a purchase balance of $1,000 at
the 15% rate. On July 1, the savings association provides a notice
pursuant to 12 CFR 226.9(c) informing the consumer that the rate for
new purchases will decrease to a non-variable rate of 5% for six
months (from July 1 through December 31 of year two) and that,
beginning on January 1 of year three, the rate for purchases will
increase to a non-variable rate of 17%. On July 8 of year two, the
consumer makes a $200 purchase. On July 9, the consumer makes a $100
purchase. On January 1 of year three, Sec. 535.24(b)(3) permits the
savings association to begin accruing interest on the $100 purchase
at 17%. The savings association may not apply the 17% rate to the
$200 purchase because that transaction occurred within seven days
after provision of the 12 CFR 226.9(c) notice. If the savings
association applied the 5% rate to the $1,000 purchase balance and
the $200 purchase, the savings association may not increase the rate
that applies to those amounts to a rate that is higher than 15% on
January 1 of year three.
ii. Same facts as above except that the required minimum
periodic payment due on September 10 of year two is not received
until September 15 of year two. On September 15 of year two, the
savings association provides a notice pursuant to 12 CFR 226.9(g)
informing the consumer that the rate for new purchases will increase
to the 30% penalty rate on October 31. On October 31, Sec.
535.23(b)(3) permits the savings association to begin accruing
interest at 30% on any purchase made on or after September 23. The
savings association may not, however, apply the 30% rate to the
$1,300 in purchases. Instead, the savings association must continue
to apply the 5% rate to the $100 purchase until at least January 1
of year three when Sec. 535.24(b)(3) permits the savings
association to begin accruing interest on that purchase at 17%.
Similarly, if the savings association applied the 5% rate to the
$1,000 purchase balance and the $200 purchase, the savings
association may begin accruing interest on those amounts at 15% on
January 1 of year three.
iii. Assume that a savings association discloses at account
opening on January 1 of year one that the rate that applies to
purchases is a variable annual percentage rate that is currently 18%
and will be adjusted quarterly by adding a margin of 8 percentage
points to a publicly available index not under the savings
association's control. The savings association also discloses that,
to the extent consistent with Sec. 535.24 and other applicable law,
a non-variable penalty rate of 30% may apply if the consumer's
required minimum periodic payment is received after the payment due
date, which is the first of the month. On July 30 of year two, the
consumer uses the account for a $1,000 purchase in response to a
promotional offer. Under the terms of this offer, interest on
purchases made during the months of July through September will
accrue at the variable rate for purchases but the consumer will not
be obligated to pay that interest if all purchases made during that
three-month period are paid in full by December 31 of year two. The
payment due on September 1 of year two is not received until
September 6. Section 535.24 does not permit the savings association
to deny the consumer the opportunity to avoid interest charges on
the $1,000 purchase by paying that purchase in full on or before
December 31 of year two. The savings association may, however,
provide a notice pursuant to 12 CFR 226.9(g) on September 2 of year
two informing the consumer that the promotional offer does not apply
to purchases made on or after September 10 and that the rate for
such purchases will increase to the 30% penalty rate on October 18.
On December 31 of year two, the $1,000 purchase has been paid in
full. Under these circumstances, the savings association may not
charge any interest accrued on the $1,000 purchase.
iv. Assume that a savings association discloses at account
opening on January 1 of year one that the rate that applies to cash
advances is a variable annual percentage rate
[[Page 20826]]
that is currently 24% and will be adjusted quarterly by adding a
margin of 14 percentage points to a publicly available index not
under the savings association's control. On July 1 of year two, the
savings association provides checks that access the account and,
pursuant to 12 CFR 226.9(b)(3)(A), discloses that a promotional rate
of 15% will apply to credit extended by use of the checks until
January 1 of year three, after which the cash advance rate
determined using the 14-point margin will apply. On July 15 of year
two, the consumer uses one of the checks to pay for a $500
transaction. On January 1 of year three, Sec. 535.24(b)(3) permits
the savings association to apply the cash advance rate determined
using the 14-point margin to the $500 transaction.[ltrif]
24(b)(5) Workout [rtrif]and Temporary Hardship[ltrif] Arrangement
Exception
1. Scope of exception. Nothing in Sec. 535.24(b)(5) permits a
savings association to alter the requirements of Sec. 535.24
pursuant to a workout [rtrif]or temporary hardship[ltrif]
arrangement between a consumer and the savings association. For
example, a savings association cannot increase an annual percentage
rate pursuant to a workout [rtrif]or temporary hardship[ltrif]
arrangement unless otherwise permitted by Sec. 535.24. In addition,
a savings association cannot require the consumer to make payments
with respect to a protected balance that exceed the payments
permitted under Sec. 535.24(c).
2. Variable [lsqbb]annual percentage[rsqbb] rates. If the annual
percentage rate that applied to a category of transactions prior to
commencement of the workout [rtrif]or temporary hardship[ltrif]
arrangement varied with an index consistent with Sec. 535.24(b)(2),
the rate applied to that category of transactions following an
increase pursuant to Sec. 535.24(b)(5) must be determined using the
same formula (index and margin).
3. Example [rtrif]s[ltrif].
[rtrif]i.[ltrif] Assume that, consistent with Sec.
535.24(b)(4), the margin used to determine a variable annual
percentage rate that applies to a $5,000 balance is increased from 5
percentage points to 15 percentage points. Assume also that the
savings association and the consumer subsequently agree to a workout
arrangement that reduces the margin back to 5 points on the
condition that the consumer pay a specified amount by the payment
due date each month. If the consumer does not pay the agreed-upon
amount by the payment due date, the savings association may increase
the margin for the variable rate that applies to the $5,000 balance
up to 15 percentage points. 12 CFR 226.9 does not require advance
notice of this type of increase.
[rtrif]ii. Assume that a consumer fails to make four consecutive
minimum payments totaling $480 on a consumer credit card account
with a balance of $6,000 and that, consistent with Sec.
535.24(b)(4), the annual percentage rate that applies to that
balance is increased from a non-variable rate of 15% to a non-
variable penalty rate of 30%. Assume also that the savings
association and the consumer subsequently agree to a temporary
hardship arrangement that reduces all rates on the account to 0% on
the condition that the consumer pay an amount by the payment due
date each month that is sufficient to cure the $480 delinquency
within six months. If the consumer pays the agreed-upon amount by
the payment due date during the six-month period and cures the
delinquency, the savings association may increase the rate that
applies to any remaining portion of the $6,000 balance to 15% or any
other rate up to the 30% penalty rate.[ltrif]
24(c) Treatment of Protected Balances
* * * * *
24(c)(1) Repayment
* * * * *
Paragraph 24(c)(1)(i)
* * * * *
2. Amortization when applicable [lsqbb]annual percentage[rsqbb]
rate is variable. * * *
* * * * *
24(c)(2) Fees and Charges
1. Fee or charge based solely on the protected balance. A
savings association is prohibited from assessing a fee or charge
based solely on balances to which Sec. 535.24(c) applies. For
example, a savings association is prohibited from assessing a
monthly maintenance fee that would not be charged if the account did
not have a protected balance. A savings association is not, however,
prohibited from [rtrif]continuing to assess a periodic fee that was
assessed before the account had a protected balance.[ltrif]
[rtrif]Similarly, a savings association is not prohibited
from[ltrif] assessing fees such as late payment fees or fees for
exceeding the credit limit even if such fees are based in part on
the protected balance [rtrif]or if the only balance on the account
is a protected balance[ltrif].
Sec. 535.25--Unfair Balance Computation Method
25(a) General Rule
* * * * *
[rtrif]3. Charging accrued interest at expiration of certain
promotional programs. When a savings association offers a
promotional program under which a consumer will not be obligated to
pay interest that accrues on a balance if that balance is paid in
full prior to a specified date or expiration of a specified period
of time, Sec. 535.25 does not prohibit the savings association from
charging that accrued interest to the account if the balance is not
paid in full prior to the specified date (consistent with applicable
law and regulatory guidance).[ltrif]
* * * * *
National Credit Union Administration
For the reasons discussed in the joint preamble, the NCUA Board
proposes to further amend 12 CFR Part 706, as amended at 74 FR 5575,
January 29, 2009, as set forth below:
PART 706--UNFAIR OR DECEPTIVE ACTS OR PRACTICES
1. The authority citation for part 706 continues to read as
follows:
Authority: 15 U.S.C. 57a.
2. Revise Sec. 706.23 as follows:
Sec. 706.23 Unfair allocation of payments.
When different annual percentage rates apply to different balances
on a consumer credit card account:
(a) General rule. Except as provided in paragraph (b) of this
section, a federal credit union must allocate any amount paid by a
member in excess of the required minimum periodic payment among the
balances using one of the following methods:
(1) High-to-low method. The amount paid by a member in excess of
the required minimum periodic payment is allocated first to the balance
with the highest annual percentage rate and any remaining portion to
the other balances in descending order based on the applicable annual
percentage rate.
(2) Pro rata method. The amount paid by a member in excess of the
required minimum periodic payment is allocated among the balances in
the same proportion as each balance bears to the total balance.
(b) Special rule for accounts subject to certain promotional
programs. When a promotional program provides that a member will not be
obligated to pay interest that accrues on a balance if that balance is
paid in full prior to the expiration of a specified period of time, a
federal credit union must allocate amounts paid by a member in excess
of the required minimum periodic payment first to that balance during
the two billing cycles immediately preceding expiration of the
specified period and any remaining portion to the other balances
consistent with paragraph (a) of this section.
3. Amend Sec. 706.24 by revising paragraphs (b)(1) through (b)(5)
and adding paragraph (b)(6) to read as follows:
Sec. 706.24 Unfair increases in annual percentage rates.
* * * * *
(b) * * *
(1) Account opening disclosure exception. An annual percentage rate
for a category of transactions may be increased to an annual percentage
rate disclosed at account opening upon expiration of a period of time
disclosed at account opening. This exception does not permit
application of an increased annual percentage rate disclosed at account
opening that is contingent on a particular event or occurrence or that
may be applied at the federal credit union's discretion.
(2) Variable rate exception. An annual percentage rate for a
category of transactions that varies according to an
[[Page 20827]]
index that is not under the federal credit union's control and is
available to the general public may be increased due to an increase in
the index.
(3) Advance notice exception. An annual percentage rate for a
category of transactions may be increased pursuant to a notice under 12
CFR 226.9(b), (c), or (g), provided that:
(i) If the federal credit union discloses the increased rate
pursuant to 12 CFR 226.9(b), that rate must not be applied to
transactions that occurred prior to provision of the notice;
(ii) If the federal credit union discloses the increased rate
pursuant to 12 CFR 226.9(c) or (g), that rate must not be applied to
transactions that occurred within seven days after provision of the
notice; and
(iii) This exception does not permit an increase in any annual
percentage rate during the first year after an account is opened.
(4) Delinquency exception. An annual percentage rate may be
increased due to the federal credit union not receiving a member's
required minimum periodic payment within 30 days after the due date for
that payment.
(5) Workout and temporary hardship arrangement exception. An annual
percentage rate may be increased due to a member's completion of a
workout or temporary hardship arrangement between a federal credit
union and the member or a member's failure to comply with the terms of
such an arrangement, provided that the annual percentage rate
applicable to a category of transactions following any such increase
does not exceed the rate that applied to that category of transactions
prior to commencement of the arrangement.
(6) Servicemembers Civil Relief Act exception. An annual percentage
rate that has been decreased pursuant to 50 U.S.C. app. 527 may be
increased once that provision no longer applies, provided that the
annual percentage rate applicable to a category of transactions
following any such increase does not exceed the rate that applied to
that category of transactions prior to the decrease.
* * * * *
4. In Appendix A to Part 706:
A. Add Section 706.21--Definitions.
B. Under Section 706.22--Unfair Acts or Practices Regarding Time To
Make Payment, under 22(b) Compliance with General Rule, paragraph 3. is
revised.
C. Under Section 706.23--Unfair Acts or Practices Regarding
Allocation of Payments:
(i) Paragraph 2., the heading of paragraph 3., and paragraphs 4.
and 6. are revised;
(ii) Redesignate 23(a) High-to-Low Method as 23(a)(1) High-to-Low
Method;
(iii) Under 23(a)(1) High-to-Low Method, paragraph 1.v. is added;
(iv) Redesignate 23(b) Pro Rata Method as 23(a)(2) Pro Rata Method;
(v) Under 23(a)(2) Pro Rata Method, paragraph 1. is revised; and
(vi) Add 23(b) Special Rule for Accounts Subject to Certain
Promotional Programs.
D. Under Section 706.24--Unfair Acts or Practices Regarding
Increases in Annual Percentage Rates:
(i) Paragraph 1. is revised;
(ii) Add paragraphs 2., 3., 4.;
(iii) Under 24(a) General Rule, paragraphs 1., 2.i. introductory
text, 2.iii. introductory text, and 2.iii.C. are revised, and paragraph
2.iv. is added;
(iv) Under 24(b) Exceptions, add paragraph 1.;
(v) Under 24(b)(1) Account Opening Disclosure Exception, paragraph
1. introductory text is revised, paragraph 1.iii. and paragraph 2. are
removed, paragraph 3. is redesignated as paragraph 2., the introductory
text of newly designated paragraph 2. is revised, and paragraph 2.ii.
is added;
(vi) Under 24(b)(2) Variable Rate Exception, the heading of
paragraph 5. is revised;
(vii) Under 24(b)(3) Advance Notice Exception, paragraphs 2. and 3.
are revised and paragraph 4. is added;
(viii) Revise 24(b)(5) Workout Arrangement Exception;
(ix) Under 24(c) Treatment of Protected Balances, under 24(c)(1)
Repayment, under Paragraph 24(c)(1)(i), the heading of paragraph 2. is
revised; and
(x) Under 24(c) Treatment of Protected Balances, under 24(c)(2)
Fees and Charges, paragraph 1. is revised.
E. Under Section 706.25--Unfair Balance Computation Method, under
25(a) General Rule, paragraph 3. is revised.
Appendix A to Part 706--Official Staff Commentary
* * * * *
Subpart C--Consumer Credit Card Account Practices Rule
Sec. 706.21--Definitions
21(a) Annual Percentage Rate
1. Use of ``rate.'' For purposes of Subpart C, ``rate'' has the
same meaning as ``annual percentage rate'' unless otherwise
specified.
21(c) Consumer Credit Card Account
1. Closed accounts. If a consumer credit card account with an
outstanding balance is closed, the account continues to be the same
consumer credit card account for purposes of Subpart C with respect
to that balance. For example, if a federal credit union or a member
closes a consumer credit card account with an outstanding balance,
the federal credit union would still be prohibited from increasing
the annual percentage rate that applies to that balance unless
permitted by one of the exceptions in Sec. 706.24(b).
2. Acquired accounts. If, through merger or acquisition, for
example, a federal credit union acquires a consumer credit card
account with an outstanding balance, the account continues to be the
same consumer credit card account for purposes of Subpart C with
respect to that balance. For example, if a consumer credit card
account has a $1,000 purchase balance with an annual percentage rate
of 12% and the federal credit union that acquires that account
applies a 15% rate to purchases, the federal credit union would be
prohibited from applying the 15% rate to the $1,000 balance unless
permitted by one of the exceptions in Sec. 706.24(b).
3. Balance transfers.
i. Between accounts issued by the same federal credit union. If
a balance is transferred from a consumer credit card account issued
by a federal credit union to another credit account issued by the
same federal credit union, the account continues to be the same
consumer credit card account for purposes of Subpart C with respect
to that balance unless the account to which the balance is
transferred is an open-end credit plan secured by a member's
dwelling. For example, if a consumer credit card account has a
$2,000 purchase balance with an annual percentage rate of 12% and
that balance is transferred to another consumer credit card account
issued by the same federal credit union that applies a 15% rate to
purchases, the federal credit union would be prohibited from
applying the 15% rate to the $2,000 balance unless permitted by one
of the exceptions in Sec. 706.24(b). Additional circumstances in
which a balance is considered transferred for purposes of this
comment include when:
A. A retail credit card with an outstanding balance is replaced
or substituted with a cobranded general purpose card that can be
used with a broader merchant base;
B. A credit card account with an outstanding balance is replaced
or substituted with another credit card account offering different
features;
C. A credit card account with an outstanding balance is
consolidated or combined with one or more other credit card accounts
into a single credit card account; and
D. A credit card account is replaced or substituted with a line
of credit that can be accessed solely by an account number.
ii. Between accounts issued by different federal credit unions.
If a balance is transferred to a consumer credit card account issued
by a federal credit union from a consumer credit card account issued
by a different financial institution that is not an affiliate or
subsidiary of the federal credit union that issued the consumer
credit card account, the account is not the same consumer credit
card account for purposes of Subpart C with respect to that balance.
Thus,
[[Page 20828]]
the provisions of Subpart C do not prohibit the federal credit union
to which the balance is transferred from applying its account terms
to that balance, provided that those terms comply with Subpart C.
For example, if a consumer credit card account issued by federal
credit union A has a $1,000 purchase balance at an annual percentage
rate of 13% and a member transfers that balance to a consumer credit
card account with a purchase rate of 15% issued by federal credit
union B, federal credit union B may apply the 15% rate to the $1,000
balance. However, federal credit union B may not subsequently
increase the rate on that balance unless permitted by one of the
exceptions in Sec. 706.24(b).
706.22--Unfair Time To Make Payment
* * * * *
22(b) Compliance With General Rule
* * * * *
3. Example of alternative method of compliance. Assume that, for
a particular type of consumer credit card account, a federal credit
union only provides periodic statements electronically and only
accepts payments electronically (consistent with applicable law and
regulatory guidance, including the consumer notice and consent
procedures of the Electronic Signatures in Global and National
Commerce Act (E-Sign Act), 15 U.S.C. 7001 et seq.). Under these
circumstances, the federal credit union could comply with Sec.
706.22(a) even if it does not provide periodic statements 21 days
before the payment due date consistent with Sec. 706.22(b)(2).
* * * * *
Sec. 706.23--Unfair Acts or Practices Regarding Allocation of
Payments
* * * * *
2. Adjustments of one dollar or less permitted. When allocating
payments, the federal credit union may adjust amounts by one dollar
or less. For example, if a federal credit union is allocating $100
pursuant to Sec. 706.23(a)(2) among balances of $1,000, $2,000, and
$4,000, the federal credit union may apply $14 to the $1,000
balance, $29 to the $2,000 balance, and $57 to the $4,000 balance.
3. Applicable balances and rates. * * *
4. Use of permissible allocation methods. A federal credit union
is not prohibited from changing the allocation method for a consumer
credit card account or from using different allocation methods for
different consumer credit card accounts, so long as the methods used
are consistent with Sec. 706.23. For example, a federal credit
union may change from allocating to the highest rate balance first
pursuant to Sec. 706.23(a)(1) to allocating pro rata pursuant to
Sec. 706.23(a)(2) or vice versa. Similarly, a federal credit union
may allocate to the highest rate balance first pursuant to Sec.
706.23(a)(1) on some of its accounts and allocate pro rata pursuant
to Sec. 706.23(a)(2) on other accounts.
* * * * *
6. Balances with the same rate. When the same annual percentage
rate applies to more than one balance on an account and a different
annual percentage rate applies to at least one other balance on that
account, Sec. 706.23 generally does not require that any particular
method be used when allocating among the balances with the same
annual percentage rate. Under these circumstances, a federal credit
union may treat the balances with the same rate as a single balance
or separate balances. See comments 23(a)(1)-1.iv and 23(a)(2)-2.iv.
However, when a member will not be obligated to pay interest that
accrues on a balance if that balance is paid in full prior to the
expiration of a specified period of time, that balance must be
treated as a balance with an annual percentage rate of zero for
purposes of Sec. 706.23 during that period of time. For example, if
an account has a $1,000 purchase balance and a $2,000 balance on
which the member will not be obligated to pay interest if that
balance is paid in full prior to July 1 and a 15% annual percentage
rate applies to both, the balances must be treated as balances with
different rates for purposes of Sec. 706.23 until July 1. In
addition, for purposes of allocating pursuant to Sec. 706.23(a)(1),
any amount paid by the member in excess of the required minimum
periodic payment must be applied first to the $1,000 purchase
balance except during the last two billing cycles of the promotional
period (when it must be applied first to any remaining portion of
the $2,000 balance). See comment 23(a)(1)-1.v.
23(a)(1) High-to-Low Method
1. * * *
v. Assume that on January 1 a member uses a credit card account
to make a $1,200 purchase subject to a promotional offer under which
interest accrues at an annual percentage rate of 15% but the member
will not be obligated to pay that interest if the balance is paid in
full on or before June 30. The billing cycles for this account begin
on the first day of the month and end on the last day of the month.
Each month from January through June, the member uses the account to
make $200 in purchases that are not subject to the promotional offer
but are subject to the 15% rate. Each month from February through
June, the member pays $400 in excess of the required minimum
periodic payment on the payment due date, which is the twenty-fifth
of the month. Any interest that accrues on the non-promotional
purchases is paid by the required minimum periodic payment. A
federal credit union using this method would allocate the $400
excess payments received on February 25, March 25, and April 25 as
follows: $200 to pay off the non-promotional balance (that is
subject to the 15% rate) and the remaining $200 to the promotional
balance (that is treated as a balance with a rate of zero). Section
706.23(b), however, requires the federal credit union to allocate
the entire $400 excess payment received on May 25 to the promotional
balance. Similarly, Sec. 706.23(b) requires the federal credit
union to allocate the $400 excess payment received on June 25 as
follows: $200 to the promotional balance (which pays that purchase
in full) and the remaining $200 to the non-promotional balance.
23(a)(2) Pro Rata Method
1. Total balance. A federal credit union may, but is not
required to, deduct amounts paid by the member's required minimum
periodic payment when calculating the total balance for purposes of
Sec. 706.23(a)(2). See comment 23(a)(2)-2.iii.
* * * * *
23(b) Special Rule for Accounts Subject to Certain Promotional
Programs
1. Grace periods. Section 706.23(b) applies to promotional
programs under which the member is not obligated to pay interest
that accrues on a balance if that balance is paid in full prior to
the expiration of a specified period of time. A grace period during
which a member may repay one or more balances on a consumer credit
card account is not a ``promotional program'' for purposes of Sec.
706.23(b).
* * * * *
Sec. 706.24--Unfair Increases in Annual Percentage Rates
1. Relationship to Regulation Z, 12 CFR part 226. A federal
credit union that complies with the applicable disclosure
requirements in Regulation Z, 12 CFR part 226, has complied with the
disclosure requirements in Sec. 706.24. See 12 CFR 226.5a, 226.6,
226.9. For example, a federal credit union may comply with the
requirement in Sec. 706.24(a) to disclose at account opening the
annual percentage rates that will apply to each category of
transactions by complying with the disclosure requirements in 12 CFR
226.5a regarding applications and solicitations and the requirements
in 12 CFR 226.6 regarding account-opening disclosures. Similarly, in
order to increase an annual percentage rate on new transactions
pursuant to Sec. 706.24(b)(3), a federal credit union must comply
with the disclosure requirements in 12 CFR 226.9(b), (c), or (g).
However, nothing in Sec. 706.24 alters the requirements in 12 CFR
226.9(c) and (g) that creditors provide consumers with written
notice at least 45 days prior to the effective date of certain
increases in the annual percentage rates on open-end (not home-
secured) credit plans.
2. Relationship to grace period. Nothing in Sec. 706.24
prohibits a federal credit union from assessing interest due to the
loss of a grace period to the extent consistent with Sec. 706.25.
Additionally, a federal credit union has not reduced an annual
percentage rate on a consumer credit account for purposes of Sec.
706.24 if the federal credit union does not charge interest on a
balance when the member pays that balance in full prior to the
expiration of a grace period.
3. Category of transactions. For purposes of Sec. 706.24, a
``category of transactions'' is a type or group of transactions to
which an annual percentage rate applies that is different than the
annual percentage rate that applies to other transactions. For
example, purchase transactions, cash advance transactions, and
balance transfer transactions are separate categories of
transactions for purposes of Sec. 706.24 if a federal credit union
applies different annual percentage rates to each. Furthermore, if,
for example, the federal credit union applies
[[Page 20829]]
different annual percentage rates to different types of purchase
transactions (such as one rate for purchases of gasoline and a
different rate for all other purchases), each type constitutes a
separate category of transactions for purposes of Sec. 706.24.
4. Account opening.
i. Multiple accounts with same federal credit union. When a
member has a credit card account with a federal credit union and the
member opens a new credit card account with the same federal credit
union (or its affiliate or subsidiary), the opening of the new
account constitutes an ``account opening'' for purposes of Sec.
706.24 if, more than 15/30 days after the new account is opened, the
member has the ability to obtain additional extensions of credit on
each account. For example, assume that, on January 1 of year one, a
member opens a credit card account with a federal credit union. On
July 1 of year one, the member opens a second credit card account
with that federal credit union. On July 15, a $1,000 balance is
transferred from the first account to the second account. The
opening of the second account constitutes the opening of an account
for purposes of Sec. 706.24 so long as, on July 17/August 1, the
member can engage in transactions using either account. Under these
circumstances, the bank could not increase an annual percentage rate
on the second account pursuant to Sec. 706.24(b)(3) until July 1 of
year two (which is one year after the second account was opened).
ii. Replacement or consolidation.
A. Generally. A consumer credit card account has not been opened
for purposes of Sec. 227.24 when a consumer credit card account
issued by a bank is replaced or consolidated with another consumer
credit card account issued by the same bank (or its affiliate or
subsidiary). Circumstances in which a consumer credit card account
has not been opened for purposes of Sec. 227.24 include when:
(1) A retail credit card is replaced with a cobranded general
purpose card that can be used at a wider number of merchants;
(2) A credit card account is replaced with another consumer
credit card account offering different features;
(3) A credit card account is consolidated or combined with one
or more other credit card accounts into a single credit card
account; or
(4) A credit card account acquired through merger or acquisition
is replaced with a credit card account issued by the acquiring
federal credit union.
B. Limitation. A bank that replaces or consolidates a consumer
credit card account with another consumer credit card account issued
by the bank (or its affiliate or subsidiary) may not increase an
annual percentage rate in a manner otherwise prohibited by Sec.
227.24. For example, assume that, on January 1 of year one, a
consumer opens a consumer credit card account with an annual
percentage rate for purchases of 15%. On July 1 of year one, the
account is replaced with a consumer credit card account that offers
different features (such as rewards on purchases). Under these
circumstances, the bank cannot increase the annual percentage rate
for purchases to a rate that is higher than 15% pursuant to Sec.
227.24(b)(3) until January 1 of year two (which is one year after
the first account was opened).
24(a) General Rule
1. Rates that will apply to each category of transactions.
Section 706.24(a) requires federal credit unions to disclose, at
account opening, the annual percentage rates that will apply to each
category of transactions on the account. A federal credit union
cannot satisfy this requirement by disclosing at account opening
only a range of rates or that a rate will be ``up to'' a particular
amount. The disclosure requirements in Sec. 706.24(a) do not apply
to annual percentage rates that are contingent on a particular event
or occurrence or may be applied at the federal credit union's
discretion (such as penalty rates) insofar as those rates may be
applied consistent with Sec. 706.24.
2. * * *
i. Assume that, at account opening on January 1 of year one, a
federal credit union discloses that the annual percentage rate for
purchases is a non-variable rate of 5% and will apply for six
months. The federal credit union also discloses that, after six
months, the annual percentage rate for purchases will be a variable
rate that is currently 9% and will be adjusted quarterly by adding a
margin of 3 percentage points to a publicly available index not
under the federal credit union's control. Furthermore, the federal
credit union discloses that the annual percentage rate for cash
advances is the same variable rate that will apply to purchases
after six months. Finally, the federal credit union discloses that,
to the extent consistent with Sec. 706.24 and other applicable law,
a non-variable penalty rate of 15% may apply if a member makes a
late payment. The payment due date for the account is the twenty-
fifth day of the month and the required minimum periodic payments
are applied to accrued interest and fees but do not reduce the
purchase and cash advance balances.
* * * * *
iii. Assume that, at account opening on January 1 of year one, a
federal credit union discloses that the annual percentage rate for
purchases is a variable rate determined by adding a margin of 2
percentage points to a publicly-available index outside of the
federal credit union's control. The federal credit union also
discloses that, to the extent consistent with Sec. 706.24 and other
applicable law, a non-variable penalty rate of 15% may apply if a
member makes a late payment. The due date for the account is the
fifteenth of the month. On May 30 of year two, the account has a
purchase balance of $1,000. On May 31, the federal credit union
provides a notice pursuant to 12 CFR 226.9(c) informing the member
of a new variable rate that will apply on July 16 for all purchases
made on or after June 8 (calculated by using the same index and an
increased margin of 8 percentage points). On June 7, the member
makes a $500 purchase. On June 8, the member makes a $200 purchase.
On June 25, the federal credit union has not received the payment
due on June 15 and provides the member with a notice pursuant to 12
CFR 226.9(g) stating that the penalty rate of 15% will apply as of
August 9 to all transactions made on or after July 3 and that, if
the member becomes more than 30 days late, the penalty rate will
apply to all balances on the account. On July 4, the member makes a
$300 purchase.
* * * * *
C. Same facts as paragraph A. above except the payment due on
June 15 of year two is received on July 20. Section 706.24(b)(4)
permits the federal credit union to apply the 15% penalty rate to
all balances on the account and to future transactions because it
has not received payment within 30 days after the due date. Because
the federal credit union provided a 12 CFR 226.9(g) notice on June
25 stating the 15% penalty rate, the federal credit union may apply
the 15% penalty rate to all balances on the account as well as any
future transactions on August 9 without providing an additional
notice pursuant to 12 CFR 226.9(g).
iv. Assume that, at account opening on January 1 of year one,
the federal credit union discloses a promotional program under which
interest on purchases made during January will accrue at a non-
variable rate of 10%, but the member will not be obligated to pay
that interest if those purchases are paid in full by December 31 of
year one. On January 15, the member makes a purchase of $2,000. No
other transactions are made on the account. The payment due on April
1 is not received until April 10. Section 706.24 does not permit the
federal credit union to deny the member the opportunity to avoid
interest charges on the $2,000 purchase by paying that purchase in
full on or before December 31 of year one. If, however, the $2,000
purchase remains unpaid on January 1 of year two, Sec. 706.24 does
not prohibit the federal credit union from charging the interest
accrued on that purchase during year one.
24(b) Exceptions
1. Delayed implementation of rate increase. If Sec. 706.24(b)
permits a federal credit union to apply an increased annual
percentage rate on a date that is not the first day of a billing
cycle, the federal credit union may delay application of the
increased rate until the first day of the following billing cycle
without relinquishing the ability to apply that rate. For example,
assume that, at account opening on January 1, a federal credit union
discloses that a non-variable annual percentage rate of 10% will
apply to purchases for six months and a non-variable rate of 15%
will apply thereafter. The first day of the billing cycle for the
account is the fifteenth of the month. If the six-month period
expires on July 1, the federal credit union may delay application of
the 15% rate until July 15 without relinquishing its ability to
apply that rate under Sec. 706.24(b)(1).
24(b)(1) Account Opening Disclosure Exception
1. Prohibited increases in rate. Section Sec. 706.24(b)(1)
permits an increase in the annual percentage rate for a category of
transactions to a rate disclosed at account opening upon expiration
of a period of time that was also disclosed at account opening.
Section 706.24(b)(1) does not permit application of an increased
annual percentage rate disclosed at account opening that is
contingent on a particular event or
[[Page 20830]]
occurrence or may be applied at the federal credit union's
discretion. The following examples illustrate rate increases that
are not permitted by Sec. 706.24:
* * * * *
2. Application of rate that is lower than disclosed rate.
Section Sec. 706.24(b)(1) permits an increase in the annual
percentage rate for a category of transactions to a rate disclosed
at account opening upon expiration of a period of time that was also
disclosed at account opening. Nothing in Sec. 706.24 prohibits a
federal credit union from applying a rate that is lower than a
disclosed rate either during or upon expiration of the period.
However, once the lower rate is applied to an existing balance, the
federal credit union cannot subsequently increase the rate on that
balance unless it provided the member with advance notice of the
increase pursuant to 12 CFR 226.9(b) or (c). This notice must state
the period of time during which the lower rate will apply and the
rate that will apply after expiration of that period. Furthermore, a
federal credit union that applies a lower rate to transactions that
occurred during the first year after account opening may not
subsequently increase the rate that applies to those transactions to
a rate that is higher than the increased rate disclosed at account
opening. The following examples illustrate the application of the
rule:
* * * * *
ii. Assume that a federal credit union discloses at account
opening on January 1 of year one that a non-variable annual
percentage rate of 10% will apply to purchases for one year, after
which that rate will increase to a non-variable rate of 12%. The
federal credit union also discloses that, to the extent consistent
with Sec. 706.24 and other applicable law, a non-variable penalty
rate of 15% may apply if the member's required minimum periodic
payment is received after the payment due date, which is the tenth
of the month. The required minimum periodic payments are applied to
accrued interest and fees but do not reduce the purchase balance.
A. On September 30 of year one, the account has a purchase
balance of $1,400 at the 10% rate. On October 1, the federal credit
union provides a notice pursuant to 12 CFR 226.9(c) informing the
member that the rate for new purchases will decrease to a non-
variable rate of 7% for six months (from October 1 through March 31
of year two) and that, beginning on April 1 of year two, the rate
for purchases will increase to a non-variable rate of 13%. The
federal credit union does not apply the 7% rate to the $1,400
purchase balance. On October 15 of year one, the member makes a $300
purchase at the 7% rate. On January 1 of year two, the federal
credit union may begin accruing interest on the $1,400 purchase
balance at 12% (as disclosed at account opening). On January 15 of
year two, the member makes a $150 purchase at the 7% rate. On April
1 of year two, the 7% rate that applies to the $300 purchase and the
$150 purchase expires. The federal credit union may begin accruing
interest on the $150 purchase at 13% (as disclosed in the 12 CFR
226.9(c) notice). Because, however, the $300 purchase occurred
during the first year after account opening, the federal credit
union cannot increase the rate that applies to that purchase to a
rate that is higher than the 12% rate disclosed at account opening.
B. Same facts as above except that the required minimum periodic
payment due on November 10 of year one is not received until
November 15. Section 706.24(b)(1) does not permit the federal credit
union to increase any annual percentage rate on the account at this
time. The federal credit union may, however, apply the 15% penalty
rate to new transactions beginning on January 1 of year two pursuant
to Sec. 706.24(b)(3) by providing a 12 CFR 226.9(g) notice
informing the member of this increase no later than November 16 of
year one. On January 1 of year two, Sec. 706.24(b)(1) permits the
federal credit union to begin accruing interest on the $1,400
purchase balance at 12% (as disclosed at account opening). If the
member makes the $150 purchase on January 15 of year two, Sec.
706.24(b)(3) would permit the federal credit union to apply the 15%
rate to that purchase. On April 1 of year two, the 7% rate that
applies to the $300 purchase expires. Because this purchase occurred
during the first year after account opening, the federal credit
union cannot increase the rate that applies to that purchase to a
rate that is higher than the 12% rate disclosed at account opening.
24(b)(2) Variable Rate Exception
* * * * *
5. Changing a variable rate to a non-variable rate. * * *
* * * * *
24(b)(3) Advance Notice Exception
* * * * *
2. Transactions that occurred prior to provision of notice or
within seven days after provision of notice. Section 706.24(b)(3)
generally permits a federal credit union to apply an increased rate
to transactions that occur after provision of a 12 CFR 226.9(b)
notice or more than seven days after provision of a 12 CFR 226.9(c)
or (g) notice. If a rate increase is disclosed pursuant to both 12
CFR 226.9(b) and 12 CFR 226.9(c), that rate may only be applied to
transactions that occur more than seven days after provision of the
12 CFR 226.9(c) notice. Section 706.24(b)(3) does not permit a
federal credit union to reach back to days before the effective date
of the rate increase under 12 CFR 226.9(c) or (g) when calculating
interest charges. See comment 24(b)(3)-3. Whether a transaction
occurred prior to provision of a notice or within seven days after
provision of a notice is determined by the date of the transaction.
In some cases, however, a merchant may place a ``hold'' on the
available credit on an account for an estimated transaction amount
when the actual transaction amount will not be known until a later
date. In these circumstances, the date of the transaction for
purposes of Sec. 706.24(b)(3) is the date on which the merchant
determines the actual transaction amount. For example, assume that,
when a member uses a credit card account to check into a hotel on
July 1, the hotel obtains authorization for a $750 hold on the
account to ensure there is adequate available credit to cover the
anticipated cost of the stay. When the member checks out on July 4,
the actual cost of the stay is $850 because of additional incidental
costs, and the hotel charges this amount to the account. For
purposes of Sec. 706.24(b)(3), the transaction occurred on July 4.
3. Examples.
i. Assume that a consumer credit card account is opened on
January 1 of year one. On March 14 of year two, the account has a
purchase balance of $2,000 at a non-variable annual percentage rate
of 5%. On March 15, the federal credit union provides a notice
pursuant to 12 CFR 226.9(c) informing a member that the rate for new
purchases will increase to a non-variable rate of 8% on May 1. The
notice further states that the 8% rate will apply for six months
(until November 1) and states that thereafter the federal credit
union will apply a variable rate that is currently 9% and is
determined by adding a margin of 5 percentage points to a publicly-
available index that is not under the federal credit union's
control. The seventh day after provision of the notice is March 22
and, on that date, the member makes a $200 purchase. On March 24,
the member makes a $1,000 purchase. On May 1, Sec. 706.24(b)(3)
permits the federal credit union to begin accruing interest at 8% on
the $1,000 purchase made on March 24. The federal credit union is
not permitted to apply the 8% rate to the $2,200 purchase balance as
of March 22. After six months (November 2), the federal credit union
may begin accruing interest on any remaining portion of the $1,000
purchase at the previously-disclosed variable rate determined using
the 3-point margin.
ii. Same facts as above except that on September 17 of year two
(which is 45 days before expiration of the 8% non-variable rate),
the federal credit union provides a notice pursuant to 12 CFR
226.9(c) informing the member that, on November 2, a new variable
rate will apply to new purchases and any remaining portion of the
$1,000 balance (calculated by using the same index and a reduced
margin of 3 percentage points). The notice further states that, on
May 1 of year three, the margin will increase to the margin
disclosed in the March 15 notice (6 percentage points). On May 1 of
year three, Sec. 706.24(b)(3) permits the federal credit union to
increase the margin used to determine the variable rate that applies
to new purchases to 5 percentage points and to apply that rate to
any remaining portion of the $1,000 purchase as well as to new
purchases. The federal credit union is not permitted to apply this
rate to any remaining portion of the $2,200 purchase balance as of
March 22.
4. Application of a lower rate. Nothing in Sec. 706.24
prohibits a federal credit union from lowering the annual percentage
rate that applies to an existing balance or to new transactions.
However, once the lower rate is applied to an existing balance, the
federal credit union cannot subsequently increase the rate on that
balance unless it provided a member with advance notice of the
increase pursuant to 12 CFR 226.9(b) or (c). This notice must state
the period of time during
[[Page 20831]]
which the lower rate will apply and the rate that will apply after
expiration of that period. Furthermore, a federal credit union that
applies a decreased rate to transactions that occurred prior to
provision of the notice--or, in the case of a 12 CFR 226.9(c) or (g)
notice, transactions that occurred within seven days after provision
of the notice--may not subsequently increase the rate that applies
to those transactions to a rate that is higher than the rate that
applied prior to the decrease. The following examples illustrate the
application of the rule:
i. Assume that a federal credit union discloses at account
opening on January 1 of year one that a non-variable annual
percentage rate of 7% will apply to purchases for one year, after
which that rate will increase to a non-variable rate of 9%. The
federal credit union also discloses that, to the extent consistent
with Sec. 706.24 and other applicable law, a non-variable penalty
rate of 15% may apply if the member's required minimum periodic
payment is received after the payment due date, which is the tenth
of the month. The required minimum periodic payments are applied to
accrued interest and fees but do not reduce the purchase balance. On
June 30 of year two, the account has a purchase balance of $1,000 at
the 9% rate. On July 1, the federal credit union provides a notice
pursuant to 12 CFR 226.9(c) informing the consumer that the rate for
new purchases will decrease to a non-variable rate of 5% for six
months (from July 1 through December 31 of year two) and that,
beginning on January 1 of year three, the rate for purchases will
increase to a non-variable rate of 10%. On July 8 of year two, the
member makes a $200 purchase. On July 9, the member makes a $100
purchase. On January 1 of year three, Sec. 706.24(b)(3) permits the
federal credit union to begin accruing interest on the $100 purchase
at 10%. The federal credit union may not apply the 10% rate to the
$200 purchase because that transaction occurred within seven days
after provision of the 12 CFR 226.9(c) notice. If the federal credit
union applied the 5% rate to the $1,000 purchase balance and the
$200 purchase, the federal credit union may not increase the rate
that applies to those amounts to a rate that is higher than 9% on
January 1 of year three.
ii. Same facts as above except that the required minimum
periodic payment due on September 10 of year two is not received
until September 15 of year two. On September 15 of year two, the
federal credit union provides a notice pursuant to 12 CFR 226.9(g)
informing the member that the rate for new purchases will increase
to the 15% penalty rate on October 31. On October 31, Sec.
706.23(b)(3) permits the federal credit union to begin accruing
interest at 15% on any purchase made on or after September 23. The
federal credit union may not, however, apply the 15% rate to the
$1,300 in purchases. Instead, the federal credit union must continue
to apply the 5% rate to the $100 purchase until at least January 1
of year three when Sec. 706.24(b)(3) permits the federal credit
union to begin accruing interest on that purchase at 10%. Similarly,
if the federal credit union applied the 5% rate to the $1,000
purchase balance and the $200 purchase, the federal credit union may
begin accruing interest on those amounts at 9% on January 1 of year
three.
iii. Assume that a federal credit union discloses at account
opening on January 1 of year one that the rate that applies to
purchases is a variable annual percentage rate that is currently 7%
and will be adjusted quarterly by adding a margin of 3 percentage
points to a publicly available index not under the federal credit
union's control. The federal credit union also discloses that, to
the extent consistent with Sec. 706.24 and other applicable law, a
non-variable penalty rate of 15% may apply if the member's required
minimum periodic payment is received after the payment due date,
which is the first of the month. On July 30 of year two, the member
uses the account for a $1,000 purchase in response to a promotional
offer. Under the terms of this offer, interest on purchases made
during the months of July through September will accrue at the
variable rate for purchases but the member will not be obligated to
pay that interest if all purchases made during that three-month
period are paid in full by December 31 of year two. The payment due
on September 1 of year two is not received until September 6.
Section 706.24 does not permit the federal credit union to deny the
member the opportunity to avoid interest charges on the $1,000
purchase by paying that purchase in full on or before December 31 of
year two. The federal credit union may, however, provide a notice
pursuant to 12 CFR 226.9(g) on September 2 of year two informing the
member that the promotional offer does not apply to purchases made
on or after September 10 and that the rate for such purchases will
increase to the 15% penalty rate on October 18. On December 31 of
year two, the $1,000 purchase has been paid in full. Under these
circumstances, the federal credit union may not charge any interest
accrued on the $1,000 purchase.
iv. Assume that a federal credit union discloses at account
opening on January 1 of year one that the rate that applies to cash
advances is a variable annual percentage rate that is currently 9%
and will be adjusted quarterly by adding a margin of 3 percentage
points to a publicly available index not under the federal credit
union's control. On July 1 of year two, the federal credit union
provides checks that access the account and, pursuant to 12 CFR
226.9(b)(3)(A), discloses that a promotional rate of 5% will apply
to credit extended by use of the checks until January 1 of year
three, after which the cash advance rate determined using the 3-
point margin will apply. On July 15 of year two, the member uses one
of the checks to pay for a $500 transaction. On January 1 of year
three, Sec. 706.24(b)(3) permits the federal credit union to apply
the cash advance rate determined using the 3-point margin to the
$500 transaction.
24(b)(5) Workout and Temporary Hardship Arrangement Exception
1. Scope of exception. Nothing in Sec. 706.24(b)(5) permits a
federal credit union to alter the requirements of Sec. 706.24
pursuant to a workout or temporary hardship arrangement between a
member and the federal credit union. For example, a federal credit
union cannot increase an annual percentage rate pursuant to a
workout or temporary hardship arrangement unless otherwise permitted
by Sec. 706.24. In addition, a federal credit union cannot require
the member to make payments with respect to a protected balance that
exceeds the payments permitted under Sec. 706.24(c).
2. Variable rates. If the annual percentage rate that applied to
a category of transactions prior to commencement of the workout or
temporary hardship arrangement varied with an index consistent with
Sec. 706.24(b)(2), the rate applied to that category of
transactions following an increase pursuant to Sec. 706.24(b)(5)
must be determined using the same formula (index and margin).
3. Examples.
i. Assume that, consistent with Sec. 706.24(b)(4), the margin
used to determine a variable annual percentage rate that applies to
a $5,000 balance is increased from 3 percentage points to 5
percentage points. Assume also that the federal credit union and the
member subsequently agree to a workout arrangement that reduces the
margin back to 3 points on the condition that the member pay a
specified amount by the payment due date each month. If the member
does not pay the agreed-upon amount by the payment due date, the
federal credit union may increase the margin for the variable rate
that applies to the $5,000 balance up to 5 percentage points. 12 CFR
226.9 does not require advance notice of this type of increase.
ii. Assume that a member fails to make four consecutive minimum
payments totaling $480 on a consumer credit card account with a
balance of $6,000 and that, consistent with Sec. 706.24(b)(4), the
annual percentage rate that applies to that balance is increased
from a non-variable rate of 5% to a non-variable penalty rate of
15%. Assume also that the federal credit union and the member
subsequently agree to a temporary hardship arrangement that reduces
all rates on the account to 0% on the condition that the member pay
an amount by the payment due date each month that is sufficient to
cure the $480 delinquency within six months. If the member pays the
agreed-upon amount by the payment due date during the six-month
period and cures the delinquency, the federal credit union may
increase the rate that applies to any remaining portion of the
$6,000 balance to 5% or any other rate up to the 15% penalty rate.
24(c) Treatment of Protected Balances
* * * * *
24(c)(1) Repayment
* * * * *
Paragraph 24(c)(1)(i)
* * * * *
2. Amortization when applicable rate is variable. * * *
* * * * *
24(c)(2) Fees and Charges
1. Fee or charge based solely on the protected balance. A
federal credit union is prohibited from assessing a fee or charge
based solely on balances to which Sec. 706.24(c) applies. For
example, a federal credit union
[[Page 20832]]
is prohibited from assessing a monthly maintenance fee that would
not be charged if the account did not have a protected balance. A
federal credit union is not, however, prohibited from continuing to
assess a periodic fee that was assessed before the account had a
protected balance. Similarly, a federal credit union is not
prohibited from assessing fees such as late payment fees or fees for
exceeding the credit limit even if such fees are based in part on
the protected balance or if the only balance on the account is a
protected balance.
Sec. 706.25--Unfair Balance Computation Method
25(a) General Rule
* * * * *
3. Charging accrued interest at expiration of certain
promotional programs. When a federal credit union offers a
promotional program under which a member will not be obligated to
pay interest that accrues on a balance if that balance is paid in
full prior to a specified date or expiration of a specified period
of time, Sec. 706.25 does not prohibit the federal credit union
from charging that accrued interest to the account if the balance is
not paid in full prior to the specified date (consistent with
applicable law and regulatory guidance).
* * * * *
By order of the Board of Governors of the Federal Reserve
System, April 24, 2009.
Jennifer J. Johnson,
Secretary of the Board.
Dated: April 17, 2009.
By the Office of Thrift Supervision.
John E. Bowman,
Acting Director.
By the National Credit Union Administration Board, on April 24,
2009.
Mary F. Rupp,
Secretary of the Board.
[FR Doc. E9-9861 Filed 5-4-09; 8:45 am]
BILLING CODE 6210-01-P, 6720-01-P, 7535-01-P